CALGARY, ALBERTA — (Marketwired) — 05/06/13 — Effective January 1, 2013, Savanna Energy Services Corp. (“Savanna” or “the Company”) (TSX: SVY) adopted International Financial Reporting Standard (“IFRS”) 10, Consolidated Financial Statements. Adoption of the standard changed how Savanna accounted for its partnerships with Aboriginal communities, from 50% proportionate consolidation to full consolidation. As a result, the comparative figures included in this press release, have been restated. The changes on adoption of the new standard are described in detail in the Company–s Q1 2013 management–s discussion and analysis, under the heading “Accounting Policies”, and in Note 4 of the Company–s condensed consolidated financial statements for the three months ended March 31, 2013.
Savanna had a positive first quarter of 2013, generating EBITDAS(1) of $68 million on $237.9 million of revenue, despite muted North American demand levels relative to Q1 2012. Revenue increased by $65.3 million, or 38%, from Q4 2012 and increased by $3.2 million (1%) from Q1 2012. EBITDAS(1) increased by $37.2 million, or 121%, from Q4 2012, but decreased by $7.1 million (9%) relative to Q1 2012. Net earnings attributable to the shareholders of the Company were $27.8 million, or $0.32 per share, in Q1 2013 which is up significantly from the $3.2 million ($0.04 per share) in Q4 2012, but down from the $35.2 million ($0.41 per share) in Q1 2012.
Oilfield service demand levels in North America were lower in Q1 2013 versus Q1 2012 as a result of overall economic uncertainty, lower relative oil commodity pricing in Canada and continuing low natural gas prices. The demand decreases led to lower relative utilization and decreased pricing in both drilling and well servicing in North America compared to Q1 2012. Offsetting this were, additional TDS-3000 drilling rigs in operation, substantial increases in revenue from Australia, and a significant increase in Canadian oilfield rentals revenue, all of which contributed to higher overall revenues in Q1 2013 compared to Q1 2012. Unfortunately, decreased day and hourly rates for Savanna–s services in North America magnified the impact of lower utilization on operating margins versus Q1 2012, despite higher overall revenue in the quarter. Higher operating expenses relative to Q1 2012, particularly labour costs in North America, also contributed to lower overall operating margins, EBITDAS(1) and net earnings compared to Q1 2012.
Compared to Q4 2012, utilization and pricing in Canada increased in Q1 2013 as customers executed on their winter programs. With the up-tick in activity Savanna benefited from the crew retention costs incurred in Q4 2012 by being able to crew rigs more quickly. In addition, the Company benefited from a full quarter of operations for the oilfield accommodation buildings acquired in December 2012. The number of revenue days in Australia increased from Q4 2012 as well, despite wet weather and cyclone activity in the quarter, which resulted in higher operating margins quarter-over-quarter. In the U.S., utilization and pricing in Q1 2013 remained flat relative to Q4 2012, however, variable costs per day decreased significantly in that same time period, improving overall operating margins quarter-over-quarter.
NOTES:
(1) Operating margin, operating margin percentage, EBITDAS, and operating cash flows are not recognized measures under IFRS, and are unlikely to be comparable to similar measures presented by other companies. Management believes that, in addition to net earnings, the measures described above are useful as they provide an indication of the results generated by the Company–s principal business activities both prior to and after consideration of how those activities are financed, the effect of foreign exchange and how the results are taxed in various jurisdictions. Similarly, capital assets, working capital, and net debt are not recognized measures under IFRS; however, management believes that these measures are useful as they provide an indication of the Company–s investment in operating assets, liquidity and leverage.
(2) Certain industry related terms used in this press release are defined or clarified as follows:
Savanna–s contract drilling segment achieved virtually the same number of operating days in Q1 2013 compared to Q1 2012. Having five additional rigs operating in the quarter offset lower overall industry demand levels and utilization. Despite similar activity levels, lower day rates, particularly on Savanna–s telescoping double drilling rigs in Canada, decreased revenue relative to Q1 2012. In addition, higher per day operating expenses relative to Q1 2012, primarily driven by higher labour costs in North America, increased repairs and maintenance, and increased pass through costs as a percentage of daily revenue, resulted in lower operating margin percentages and lower overall operating margins compared to Q1 2012.
The following summarizes the operating results for the quarter ended March 31, 2013 and 2012 by type of rig or geographic area. Long-reach drilling in Canada includes the Company–s telescoping double drilling rigs, TDS-3000 drilling rigs and TDS-2200 drilling rigs.
In the contract drilling segment, significant costs are incurred and passed through to customers with little or no markup. For the quarter ended March 31, 2013 these costs aggregated $14.5 million. In the comparative period in 2012 these costs amounted to $13 million. Savanna–s accounting policy with respect to cost recoveries billed to customers is to include them as both revenue and operating expenses rather than net them. Although Savanna believes this most appropriately reflects the substance of the underlying transactions, the accounting treatment of cost recoveries varies in the oilfield services industry. There is no effect on overall operating margins whether cost recoveries are netted or not; however, the different treatments do result in different operating margin percentages, as the same dollar margin is factored against lower revenue when cost recoveries are netted. As a result, Savanna believes it is useful to provide revenue excluding cost recoveries and the resulting operating margin percentages for comparative purposes.
The Canadian long-reach drilling rigs realized downward pricing pressure and lower utilization in Q1 2013 compared to Q1 2012. Variable costs per day were only slightly higher than last year as a result of labour cost increases that took effect in Q4 2012 and higher pass through costs. Despite operating additional TDS-3000 drilling rigs in the quarter, lower per day revenue, slightly higher costs and lower utilization led to a 13% decrease in operating margins compared to Q1 2012. The relatively low overall industry demand in Canada heading into the winter drilling season put pressure on day rates for Savanna–s spot market rigs. While lower overall demand levels led to lower utilization in Q1 2013, the 72% utilization rate for Savanna–s long-reach drilling rigs in 2013 still exceeded Canadian industry utilization rates of 62% in the same depth category.
In both Q1 2013 and 2012, Savanna–s shallow fleet performed coring work for oil sands customers. The CT-1500 hybrid drilling rigs have had considerable success in applying coil based drilling to coring, and the shallow fleet was able to maintain operating margin percentages comparable to Q1 2012 despite lower utilization this year versus last. The lower utilization is a result of lower overall industry demand levels, which resulted in a later start to coring work in January 2013, and Savanna–s inability to fully crew all of its shallow rigs. The seasonal nature and relatively short duration of coring work makes it more difficult to secure crews. Savanna incurred crew retention costs in Q4 2012 in anticipation of the winter work, and absent these costs a smaller number of the shallow rigs would have been fully crewed.
Revenue for Savanna–s U.S. drilling operations was slightly lower in Q1 2013 compared to Q1 2012, as a result of fewer operating days and lower day rates. Pricing pressure in the Permian basin in Texas resulted in a slight weakening in day rates. In addition, variable costs per day increased relative to Q1 2012 as a result of higher labour costs, repairs and maintenance and pass through costs in the quarter. Although repairs and maintenance costs were higher relative to Q1 2012, they were considerably lower than Q4 2012, and have been tracking in-line with the 2012 annual average. Overall for the quarter, lower revenue and higher costs led to a four percentage point decrease in operating margin percentages in the U.S. in Q1 2013 compared to Q1 2012.
In Australia, there were two additional rigs operating in Q1 2013 compared to Q1 2012 and both operating days and revenue more than doubled compared to Q1 2012. Four drilling rigs operating in Australia in Q1 2013 also reduced the impact of fixed costs on operating margins. Overall operating margins in that region increased to $3.1 million, nearly triple that of Q1 2012.
OILFIELD SERVICES
The following is a summary of selected financial and operating information of the Company–s oilfield services segment:
Savanna–s oilfield services division generated higher revenues, despite achieving fewer operating hours in Q1 2013 compared to Q1 2012, as a result of a $6.3 million increase in oilfield rentals revenue and higher overall per hour rates in well servicing. Overall, costs held in proportion to revenue, and Savanna was able to maintain operating margin percentages in Q1 2013 comparable to Q1 2012.
The following summarizes the operating results for the oilfield services segment by geographic area for the quarter ended March 31, 2013 and 2012:
In Canada, industry demand was lower than in Q1 2012, which led to lower utilization on Savanna–s well servicing fleet in Q1 2013. However, the decrease in well servicing revenue was offset by a 64% increase in rentals revenue. Of the increase in rentals revenue, $3.9 million was related to the Q4 2012 acquisition of oilfield accommodation buildings. Per hour costs in well servicing remained relatively flat from Q1 2012, and the increase in oilfield rental revenues led to a 14% increase in operating margins in Canada in Q1 2013 compared to Q1 2012. Operating margin percentages increased by five percentage points over that same period.
Savanna operated two fewer service rigs in the U.S. in Q1 2013 versus Q1 2012, as a result of equipment repairs and a rig retirement in early Q4 2012. Consequently, revenues and operating margins for well servicing in the U.S. decreased relative to Q1 2012. Construction of three new service rigs is underway for delivery beginning in Q2 2013.
In Australia, revenue and operating margins from service rigs and rental equipment more than doubled in Q1 2013 compared to Q1 2012 driven by a larger equipment base. That being said, Savanna expects operating margins to further improve for this operation as wet weather and cyclone activity in the quarter limited utilization on the service rigs and the trucking component of the rental division in Australia. Savanna expects its service rig and trucking utilization to increase significantly in coming quarters based on better operating conditions and stronger customer commitments.
Balance Sheet
Savanna–s working capital at March 31, 2013, was $140.9 million and its net debt(1) position was $121 million, a decrease of $35 million or 22% from the Company–s $156 million net debt(1) position at December 31, 2012. Savanna–s total long-term debt outstanding on March 31, 2013, excluding unamortized debt issue costs, was $261.9 million.
In May 2013, Savanna renewed its revolving credit facility, extending the term of the facility by one year so all drawn amounts are not due until May 2017. At March 31, 2013, the amount drawn on the Company–s revolving credit facility was $127.4 million and $3 million was drawn on the Company–s Canadian operating facility. As of the date of this release, $116.7 million was drawn on Savanna–s available revolving credit facility of $180 million, and $4 million was drawn on Savanna–s available operating facility of $20 million.
Dividend
In Q1 2013, Savanna declared dividends totaling $7.7 million or $0.09 per share. Of the dividends declared, $2.1 million was reinvested in additional common shares through the Company–s dividend reinvestment plan.
Outlook
There remains uncertainty with respect to Canadian activity levels for the remainder of 2013. Accordingly, Savanna is maintaining a cautious outlook for the remainder of the year for its operations in Canada. Although the Petroleum Services Association of Canada recently announced that it expects 2013 activity levels in Canada to be slightly higher than 2012, the CAODC is still forecasting 2013 activity levels to be slightly lower than 2012. Savanna is still highly dependent on activity levels in Canada to drive overall results. However, Savanna believes it has a more marketable Canadian drilling rig fleet this year compared to last. In addition, plans to maximize full-year profitability of the shallow drilling rig fleet being implemented, and the increased scale of the Company–s oilfield rentals business, should both provide improved returns. Savanna also continues to support its firm belief that North American well servicing is in the early stages of a long-term upturn.
In the U.S., the outlook for the remainder of the year also remains uncertain. Savanna has most of its drilling rigs under contract. While these contracts will expire over the next 18 months, they should mitigate any further drilling market deterioration. Additionally, Savanna–s U.S. drilling and well servicing fleets are positioned in markets where activity is expected to remain relatively stronger, and Savanna believes it has strong operating positions in those markets. As a result, Savanna does not expect to encounter any difficulties in utilizing the three additional North Dakota service rigs anticipated to be completed in Q2 and early Q3 2013. In fact, Savanna anticipates increasing its fleet in North Dakota further in 2013, beyond these three rigs.
Finally, in Australia, drilling utilization continues to improve and recent quarterly operating margins generated are expected to continue as well. Oilfield services activity in Australia sharply improved in Q1 2013 relative to prior quarters. However, wet weather in the quarter impacted these operations more than drilling. Savanna has now established sufficient scale in Australia to take advantage of the expected sharp increase of activity levels in that country. With eight rigs operating in Australia, all under long-term contract, Savanna is well positioned to continue generating improved returns from this division. Savanna remains very optimistic on the future prospects of Australia. With looming liquefied natural gas deliveries for 2014 in sight, activity levels continue to increase in the region overall and support a further ramp-up in activity, and resulting equipment and service requirements as well.
Savanna–s focus on right-sizing it–s operating and general and administrative costs, to better align with anticipated volatility and base levels of activity, is underway. It is anticipated that cost management will improve in forward quarters relative to Q1 2013 and Q4 2012.
The oilfield service market faces a high degree of uncertainty in the near-term. Commodity pricing, particularly heavy oil, and tight credit markets in North America are impacting customer demand for services, and this volatility has created significant uncertainty regarding activity levels for the remainder of 2013. In Australia, long-term prospects appear strong, however activity swings arising from weather and development have historically impacted short-term utilization, and initial start-up costs have impacted cash flows. Despite these factors, Savanna remains confident in the long-term prospects for every region in which the Company operates, and in Savanna–s ability to deliver the safest, most effective drilling, completion and workover services possible to its customers.
Cautionary Statement Regarding Forward-Looking Information and Statements
Certain statements and information contained in this press release including statements related to the Company–s expectation of the timing of delivery of new service rigs, the expectation of increasing the number of service rigs in North Dakota, the expectation of increased activity levels, increased utilization, improved operating margins, and improved returns from Savanna–s Australian operations, the expectation of overall cost management improvements, the expectation of continued uncertainty in North American activity levels and the Company–s ability to mitigate the effect of such, the expectation of a long-term increase in well servicing activity, and statements that contain words such as “could”, “should”, “can”, “anticipate”, “expect”, “believe”, “will”, “may”, “likely”, “estimate”, “predict”, “potential”, “continue”, “maintain”, “retain”, “grow”, and similar expressions and statements relating to matters that are not historical facts may constitute “forward-looking information” within the meaning of applicable Canadian securities legislation and “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995.
These statements are based on certain assumptions and analysis made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. In particular, the Company–s expectation of the timing of delivery of new service rigs is premised on current advice from its suppliers on the progress of the rig builds. The Company–s expectation of increasing the number of service rigs in North Dakota is premised on the Company–s current outlook for industry activity in that region. The Company–s expectation of increased activity levels, increased utilization, improved operating margins, and improved returns from Savanna–s Australian operations is premised on actual results experienced to date in 2013, the contracts in place and communications with its customers in the region, and the general expectation that coal seam gas activity will increase in that country as plans for liquefied natural gas plants move forward.
The Company–s expectation of overall cost management improvements, is premised on cost management and process improvement initiatives currently underway. The Company–s expectation of its ability to mitigate the effect of continued uncertainty in North American activity levels is premised on actual results experienced to date in 2013, customer contracts and commitments, the Company–s expectations for its customers– capital budgets and geographical areas of focus, the status of current negotiations with its customers, and the focus of its customers on oil directed drilling opportunities in the current natural gas pricing environment in North America. The Company–s expectation of a long-term increase in well servicing activity in North America is premised on the increase in the number of oil and gas liquids based wells that have been drilled over the last several years and the required maintenance through the life of such wells compared to natural gas wells. Whether actual results, performance or achievements will conform to the Company–s expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from the Company–s expectations. Such risks and uncertainties include, but are not limited to: fluctuations in the price and demand for oil and natural gas; fluctuations in the level of oil and natural gas exploration and development activities; fluctuations in the demand for well servicing, oilfield rentals and contract drilling; the effects of weather conditions on operations and facilities; the existence of competitive operating risks inherent in well servicing, oilfield rentals and contract drilling; general economic, market or business conditions; changes in laws or regulations, including taxation, environmental and currency regulations; the lack of availability of qualified personnel or management; the other risk factors set forth under the heading “Risks and Uncertainties” in the Company–s Annual Report and under the heading “Risk Factors” in the Company–s Annual Information Form; and other unforeseen conditions which could impact on the use of services supplied by the Company.
Consequently, all of the forward-looking information and statements made in this press release are qualified by this cautionary statement and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. Except as may be required by law, the Company assumes no obligation to update publicly any such forward-looking information and statements, whether as a result of new information, future events, or otherwise.
Other
Savanna–s full Q1 2013 report, including its management–s discussion and analysis and condensed consolidated financial statements, is available on Savanna–s website () under the investor relations section and has also been filed on SEDAR at .
Savanna will host a conference call for analysts, investors and interested parties on Tuesday, May 7, 2013 at 10:00 a.m. Mountain Time (12:00 p.m. Eastern Time) to discuss the Company–s first quarter results. The call will be hosted by Ken Mullen, Savanna–s President and Chief Executive Officer and Darcy Draudson, Executive Vice President, Finance and Chief Financial Officer.
If you wish to participate in this conference call, please call 1-888-892-3255 (for participants in North America). Please call 10 minutes ahead of time.
A replay of the call will be available until May 14, 2013 by dialing 1-800-937-6305 and entering passcode 436282.
Savanna is a Canadian-based drilling and oilfield services provider with operations in Canada, the United States and Australia, focused on providing fit for purpose equipment and technologies.
Contacts:
Savanna Energy Services Corp.
Ken Mullen
President and Chief Executive Officer
(403) 503-9990
Savanna Energy Services Corp.
Darcy Draudson
EVP Finance and Chief Financial Officer
(403) 503-9990