CALGARY, ALBERTA–(Marketwired – March 8, 2017) – Savanna Energy Services Corp. (TSX:SVY) –
Fourth Quarter Results
Savanna generated revenue of $104.2 million, EBITDAS of $12.2 million and a net loss, attributable to shareholders of the Company, of $18.9 million or $0.20 per share in the fourth quarter of 2016, compared to revenue of $100.8 million, EBITDAS of $22 million and a net loss, attributable to shareholders of the Company, of $162.7 million or $1.80 per share in Q4 2015. Improving industry sentiment in Q4 2016 did result in improving activity levels relative to Q4 2015. However, overall increases in Q4 activity levels were not enough to overcome the pricing decreases realized throughout 2016, and resulted in the lower overall operating margin and EBITDAS amounts in Q4 2016, relative to Q4 2015.
The impact of the 2016 pricing decreases on Savanna’s EBITDAS in Q4 2016 was partially mitigated by lower costs throughout the organization, which were a function of the significant restructuring efforts undertaken in 2015 and continuing cost control initiatives in 2016. These restructuring and cost control efforts reduced field office and general and administrative costs by $3.5 million, or 21%, in Q4 2016 relative to Q4 2015.
Despite significant year-over-year pricing declines in North America, having fewer rigs on contract in the U.S. and Australia, and operating costs associated with reestablishing a more significant operation in the Permian basin, Savanna generated positive operating margin in each of the countries in which it operates in Q4 2016. In Canada, revenues increased by $1.3 million and operating margin declined by $4.7 million relative to Q4 2015. In the U.S., compared to Q4 2015, revenues increased by $3.4 million and operating margin declined by $7.7 million, due in part to $1.6 million of expensed rig reactivation costs on the Company’s Permian based drilling rigs. In Australia, revenues were $1.4 million lower and operating margin was flat relative to Q4 2015. Savanna’s overall operating margin in Q4 2016 was $12.4 million lower relative to Q4 2015, and operating margin percentages were 13 percentage points lower. General and administrative expenses declined from $8.3 million in Q4 2015 to $5.7 million in Q4 2016. As a result, EBITDAS was $9.8 million lower than in Q4 2015.
In Canada, long-reach drilling and well servicing both experienced activity increases relative to Q4 2015, that were more than offset by year-over-year pricing decreases, and resulted in lower operating margins in Q4 2016 compared to Q4 2015. Utilization rates for both drilling and well servicing in Canada were ahead of industry averages in Q4 2016, as operating hours increased by 10% in well servicing and operating days in long-reach drilling increased by 34% compared to Q4 2015. However, pricing decreases of 12% in well servicing and day rate decreases of 19% in long-reach drilling resulted in decreased operating margins despite improved activity levels. Overall in Canada in Q4 2016, Savanna generated $4.6 million in operating margin on $41.8 million of revenue, compared to $9.3 million in operating margin on $40.5 million of revenue in Q4 2015. Sequentially, operating margins increased compared to the $3.5 million generated on $25.5 million of revenue in Canada in Q3 2016. The increase sequentially was based on seasonal increases in activity in Canada. In Q4 in Canada, activity and rates typically increase each year, however, much of the rate increases in 2016 were for seasonal items and increased fuel usage, which attract little or no margin. In addition, based on a tightening labour market, Savanna increased wages in its well servicing division in Q4 2016, and combined with the low-margin seasonal rate increases described above, operating margin percentages decreased relative to Q3 2016.
In the U.S., overall Q4 2016 operating margin was just above break-even as the operating margin generated in well servicing was offset by negative operating margin in U.S. drilling. Savanna generated $0.1 million in operating margin on $22.3 million of revenue in the U.S. in Q4 2016, compared to $2.3 million in operating margin on $17.2 million of revenue in Q3 2016 and $7.8 million in operating margin on $18.8 million of revenue in Q4 2015. The U.S. drilling operation generated negative operating margin in Q4 2016 despite an 82% increase in billable days compared to Q4 2015, as a result of relatively high operating costs in West Texas in the quarter. These operating costs included costs to reactivate drilling rigs, build a new management team with adequate support staff, and meet the operational challenges in reactivating rigs after being stacked for an extended period of time. In addition, average day rates in U.S. drilling were 29% lower in Q4 2016 compared to Q4 2015. The decrease in day rates was based on contract roll overs on two of Savanna’s three Velox triple drilling rigs in 2016, with Q4 2016 rates approximately $10,000 U.S. dollars per day lower than in Q4 2015, and changes in rig mix based on the six rigs upgraded and reactivated in the Permian basin in the second half of 2016. In U.S. well servicing, revenue and operating margins were marginally lower relative to Q4 2015, as a 3% increase in activity was more than offset by a 13% decrease in per hour revenue. Sequentially, the effect of an early Q4 2016 contract expiry on a Velox triple drilling rig, which was re-contracted at a significantly lower rate, as well as the effects of increased rig reactivation costs and Q4 2016 operational challenges on rigs that were reactivated, resulted in lower operating margin compared to Q3 2016. Despite realizing negative operating margins in the Company’s West Texas operation in Q4 2016, Savanna’s strategic decision to reactivate drilling rigs in the Permian basin is expected to yield positive results as this market continues to improve.
In Australia, revenue and operating margins remained relatively flat despite decreases in billable days/hours, with fewer rigs under contract. This was achieved as a result of an increase in per day/hour revenue and a decrease in field office costs in Australia in Q4 2016 relative to Q4 2015. The increase in per day/hour revenue in Australia in Q4 2016 compared to Q4 2015, was based on Savanna’s new performance-based pricing model on its drilling rigs and a greater proportion of operating hours versus stand-by hours in well servicing. Savanna generated $13.2 million in operating margin on $40.1 million of revenue in Australia in Q4 2016, compared to $13.2 million in operating margin on $41.5 million of revenue in Q4 2015. Sequentially, operating margin increased from the $10.8 million generated on $28.4 million of revenue in Australia in Q3 2016. The increase in operating margin sequentially was primarily a result of an increase in billable drilling days in the quarter and increases in trucking activity.
Although general and administrative expenses were lower in Q4 2016 compared to Q4 2015, the overall decrease in operating margin resulted in a 45% decrease in EBITDAS relative to Q4 2015. Despite the decrease in EBITDAS, the overall net loss in Q4 2016 was lower than in Q4 2015, primarily as a result of Q4 2015 impairment losses of $135.1 million and the effect of a $64.8 million write-down against deferred tax assets in Q4 2015. The Q4 2016 net loss attributable to the shareholders of the Company was $18.9 million, or $0.20 per share, compared to a net loss attributable to the shareholders of the Company of $162.7 million or $1.80 per share, in Q4 2015. Sequentially, Savanna’s net loss increased from the Q3 2016 net loss attributable to the shareholders of the Company of $11.1 million, or $0.16 per share. The sequential increase in net loss was primarily as a result of a $2.9 million increase in in share-based compensation expense, a loss on the repurchase of senior unsecured notes compared to a gain in Q3 2016, foreign exchange losses versus gains in Q3 2016, $0.8 million in expenses incurred with respect to the unsolicited take-over bid by Total Energy Services Inc., and a $4.3 million write-down against deferred tax assets. The increase in share-based compensation expense compared to Q3 2016, was a result of the increase in Savanna’s share price during Q4 2016 and the effect the share price increase had on the mark-to-market adjustments of the Company’s share based rewards, as well as an increase in the number of share-based rewards expected to vest during the periods. The write-down against deferred tax assets related to foreign tax credits and non-capital losses in Canada, the ultimate realization of which was determined to be uncertain.
Annual Results
Amidst a persistently challenging oil and natural gas industry backdrop, marked by low activity levels, decreasing rates, and fewer contracts, Savanna generated positive EBITDAS in each of the countries in which it operated in 2016. Savanna’s ability to achieve this was in large part a result of the fundamental structural changes made to the Company in 2015 and continued cost control initiatives in 2016.
Long-reach drilling, well servicing and rentals in Canada all experienced significant activity and pricing declines in 2016, which resulted in lower revenue and operating margins compared to 2015. The significant restructuring and cost control efforts undertaken by Savanna in 2015 and 2016 limited the corresponding decrease in operating margin percentages to ten percentage points, relative to 2015. Overall, the decreased activity and pricing resulted in a $65.2 million, or 35%, decrease in revenue and a $28.7 million, or 61%, decrease in operating margins in Canada.
Savanna’s U.S. drilling and well servicing divisions also experienced activity and pricing declines relative to 2015, and coupled with fewer rigs on contract this year versus last resulted in lower year-over-year revenue. In addition, operating costs associated with reestablishing a more significant operation in the Permian basin, including costs associated with reactivating drilling rigs, building a new management team and operating challenges, also negatively affected operating margins in the second half of 2016. Cost control and restructuring efforts throughout 2015 and 2016, partially mitigated the decrease in revenue and operating margin compared to 2015. Overall, operating margins in the U.S. decreased by $29.1 million, or 69%, compared to 2015, while year-over-year revenue decreased $36.8 million, or 34%.
In Australia, Savanna had fewer rigs on contract in 2016, relative to 2015. This resulted in lower revenue and operating margins in Savanna’s drilling and well servicing divisions relative to 2015. Additionally, the declines in both well servicing and drilling activity for Savanna in Australia also resulted in a decrease in activity, revenue and operating margin for trucking in Australia. As in North America, cost control and restructuring efforts partially mitigated the impact of the revenue and activity declines in Australia, and Savanna was able to maintain operating margin percentages in Australia despite the decrease in revenue. Overall, revenue in Australia decreased by $20 million, or 13%, and operating margins decreased by $8.6 million, or 16%, relative to 2015.
Overall, for 2016, EBITDAS decreased by 47% relative to 2015, as a result of significant activity and pricing decreases in North American drilling and oilfield services, combined with the decrease in the number of rigs under contract in the U.S. and Australia. Despite the decrease in EBITDAS, the cost control and restructuring initiatives of 2015 and 2016, together with the decrease in severance costs, limited the decrease in EBITDAS as a percentage of revenue to eight percentage points in 2016 relative to 2015. Severance costs aggregated $2 million this year versus $10.3 million in 2015. Despite the decrease in EBITDAS, the overall net loss in 2016 was lower than in 2015, primarily as a result of 2015 impairment losses of $135.1 million and the effect of the $64.8 million write-down against deferred tax assets in 2015.
Balance Sheet
Savanna’s working capital at December 31, 2016, was $42.8 million, which included $19 million in cash and is net of the $4.4 million drawn on its Canadian operating facility. Savanna’s total long-term debt outstanding on December 31, 2016, excluding unamortized debt issue costs, was $249.7 million, compared to $277.1 million outstanding at December 31, 2015. The December 31, 2016 total long-term debt amount included $4.7 million in gross partnership debt, of which Savanna’s proportionate share is approximately 50%.
In November 2016, Savanna secured a $17 million mortgage with the Business Development Bank of Canada on Savanna’s operating facility in Leduc, which matures on December 31, 2041 and bears interest at 4.95%.
In December 2016, Savanna secured a five-year, 7.15%, $200 million second lien senior secured term loan and completed a private placement of 13 million common shares of Savanna for gross proceeds of $18.9 million with Alberta Investment Management Corporation. Concurrently, Savanna also completed a bought deal offering of 15 million common shares of Savanna for gross proceeds of $21.7 million.
The initial $105 million draw on the second lien term loan, together with the mortgage proceeds and the net proceeds of the private placement and bought deal financings were used to repurchase $62.5 million of Savanna’s senior unsecured notes due in May 2018 and repay amounts outstanding on the Company’s revolving credit facility. The remaining $107.1 million of senior unsecured notes are expected to be repurchased once redeemable at par, in May 2017, primarily through the second draw of $95 million on the second lien term loan.
These 2016 financings reduced Savanna’s overall debt levels and de-risked the May 2018 maturity of its senior unsecured notes, while still retaining ample availability under the revolving credit facility for the foreseeable future. Savanna’s total debt position at December 31, 2016, net of cash, was $235.1 million compared to $275 million at December 31, 2015.
Outlook
For the first time in two years, there were positive undertones with respect to the oil and natural gas industry in Q4 2016. The prospect of stabilizing or even increasing commodity prices were driven by the nomination to the U.S. cabinet of strong energy industry proponents, the approval of two new Canadian oil export pipelines, and agreements by OPEC members and certain non-OPEC producers to curb production for the first time in eight years. This was clearly evident throughout Savanna’s operations, where operating days or hours in each of Canada, the U.S. and Australia reached their highest levels of 2016 in the fourth quarter. To date in the first quarter of 2017, utilization is tracking in-line with expectations, which in North America is significantly higher than in Q1 2016. Pricing in Q1 2017 does remain relatively low after decreasing significantly throughout 2015 and 2016. However, based on the increasing activity and a tightening labour market, Savanna expects pricing levels to begin to improve into the second half of 2017. With the significant reduction to Savanna’s field office and general and administrative costs, from the restructuring and cost control initiatives of 2015 and 2016, combined with the expected efficiencies to be gained from the implementation of the new global enterprise resource planning system, Savanna expects to benefit considerably as activity and pricing levels increase from the low’s experienced in 2016.
In Canada, activity levels increased in Q4 2016, after several consecutive quarters of significant decreases, and are expected to increase again in Q1 2017, relative to Q1 2016. Savanna’s customers in Canada have started making enquires for post spring break-up and Savanna expects activity to continue improving for the remainder of 2017 relative to 2016. Pricing has remained competitive to start 2017, which will likely translate into lower operating margins in the first half of 2017, relative to the first half of 2016. Savanna does expect pricing to begin to improve into the second half of 2017 in Canada.
In the U.S., utilization in Q1 2017 is tracking in-line with expectations and will be considerably higher than in Q1 2016, based on the number of drilling rigs that have been reactivated in the Permian basin, and with the first of two drilling rigs commencing work on 18 month contracts in the Marcellus. Savanna expects operating margins to begin improving in 2017, relative to 2016, and has budgeted for three incremental drilling rig reactivations in the Permian basin in 2017. Rates, particularly with respect to Savanna’s Velox AC triple drilling rigs, are also beginning to show signs of upward momentum. Day rates for the two Velox triple drilling rigs not under long-term contract are expected to increase by 10% to 15% from the lows reached in 2016, in the second quarter of 2017. Savanna’s third Velox triple drilling rig has a little less than two years remaining on its original contract.
In Australia, Q1 2017 activity levels are also tracking in-line with expectations. In the second half of 2017, Savanna’s seven original new-build contracts still in place in Australia, begin to expire. The Company was successful in 2016, and to date in 2017, in re-contracting or extending expiring contracts for certain of its drilling and service rigs as their contracts expired. Savanna continues to negotiate new contracts with its customers in Australia and expects to be successful in doing so outside of the formal tender process. Ultimately, Savanna believes its built-for-purpose drilling and service rigs, as well as its operational and safety performance in Australia, puts the Company in a strong competitive position to re-contract all of its drilling and service rigs in the region, although new contracts are likely to be shorter in term than the Company’s original contracts in Australia.
See “Cautionary Statement Regarding Forward-Looking Information and Statements”.
Financial Highlights
The following is a summary of selected financial information of the Company:
| (Stated in thousands of dollars, except per share amounts) | Three months ended | Twelve months ended | |||||||||||||||||
| December 31 | 2016 | 2015 | Change | 2016 | 2015 | Change | |||||||||||||
| OPERATING RESULTS | |||||||||||||||||||
| Revenue | 104,195 | 100,810 | 3 | % | 323,900 | 446,100 | (27 | %) | |||||||||||
| Operating expenses | 86,299 | 70,463 | 22 | % | 246,843 | 302,593 | (18 | %) | |||||||||||
| Operating margin(1) | 17,896 | 30,347 | (41 | %) | 77,057 | 143,507 | (46 | %) | |||||||||||
| Operating margin %(1) | 17 | % | 30 | % | 24 | % | 32 | % | |||||||||||
| EBITDAS(1) | 12,154 | 22,024 | (45 | %) | 52,696 | 100,143 | (47 | %) | |||||||||||
| Attributable to shareholders of the Company | 12,068 | 21,893 | (45 | %) | 52,051 | 98,709 | (47 | %) | |||||||||||
| Per share: basic | 0.13 | 0.24 | (46 | %) | 0.57 | 1.09 | (48 | %) | |||||||||||
| Adjusted EBITDAS(1) | 12,164 | 22,553 | (46 | %) | 54,708 | 110,981 | (51 | %) | |||||||||||
| Attributable to shareholders of the Company | 12,078 | 22,422 | (46 | %) | 54,063 | 109,547 | (51 | %) | |||||||||||
| Per share: basic | 0.13 | 0.25 | (48 | %) | 0.59 | 1.21 | (51 | %) | |||||||||||
| Impairment losses, net of taxes(1) | – | (94,185 | ) | * | – | (94,185 | ) | * | |||||||||||
| Per share: basic | – | (1.04 | ) | * | – | (1.04 | ) | * | |||||||||||
| Net loss | (19,538 | ) | (168,864 | ) | * | (58,255 | ) | (180,131 | ) | * | |||||||||
| Attributable to shareholders of the Company | (18,869 | ) | (162,658 | ) | * | (56,004 | ) | (171,950 | ) | * | |||||||||
| Per share: basic | (0.20 | ) | (1.80 | ) | * | (0.61 | ) | (1.91 | ) | * | |||||||||
| Basic weighted average shares outstanding (000s) | 95,783 | 90,251 | 6 | % | 91,630 | 90,245 | 2 | % | |||||||||||
| Diluted weighted average shares outstanding (000s) | 95,783 | 90,251 | 6 | % | 91,630 | 90,245 | 2 | % | |||||||||||
| CASH FLOWS | |||||||||||||||||||
| Operating cash flows(1) | 3,187 | 14,185 | (78 | %) | 34,230 | 84,750 | (60 | %) | |||||||||||
| Per share: basic | 0.03 | 0.16 | (81 | %) | 0.37 | 0.94 | (61 | %) | |||||||||||
| Acquisition of property and equipment(1) | 14,388 | 3,049 | 372 | % | 26,757 | 57,769 | (54 | %) | |||||||||||
| Proceeds on disposal of assets | 1,750 | 15,310 | (89 | %) | 10,543 | 31,593 | (67 | %) | |||||||||||
| Dividends paid | – | – | – | – | 4,951 | * | |||||||||||||
| Per share: basic | – | – | – | – | 0.03 | * | |||||||||||||
| FINANCIAL POSITION AT | Dec. 31 | Dec. 31 | |||||||||||||||||
| 2016 | 2015 | ||||||||||||||||||
| Working capital(1) | 42,811 | 35,691 | 20 | % | |||||||||||||||
| Capital assets(1) | 692,164 | 776,574 | (11 | %) | |||||||||||||||
| Total assets | 813,876 | 879,146 | (7 | %) | |||||||||||||||
| Total debt, net of cash(1) | 235,113 | 275,020 | (15 | %) | |||||||||||||||
| * Calculation not meaningful | |||||||||||||||||||
NOTES:
- Operating margin, operating margin percentage, EBITDAS, adjusted EBITDAS operating cash flows, and impairment losses, net of tax 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, working capital and total debt, net of cash are not recognized measures under IFRS; however, management believes that these measures are useful as they provide an indication of the Company’s liquidity.
- Operating margin is defined as revenue less operating expenses.
- Operating margin percentage is defined as revenue less operating expenses divided by revenue.
- EBITDAS is defined as earnings before finance expenses, income taxes, depreciation and share-based compensation and excludes other expenses (income).
- Adjusted EBITDAS is defined as EBITDAS before severance costs.
- Operating cash flows are defined as cash flows from operating activities before changes in non-cash working capital.
- Impairment losses, net of tax are defined as impairment losses net of the deferred tax effect thereon. The tax effect is determined based on the change in the temporary differences between the carrying amount of the impaired asset and its tax base, at the effective tax rate for the tax jurisdiction in which the assets resides.
- Working capital is defined as total current assets less total current liabilities excluding the current portions of long-term debt.
- Total debt, net of cash is defined as total long-term debt, including the current portion thereof but excluding unamortized debt issue costs, plus bank indebtedness, net of cash.
- Certain industry related terms used in this press release are defined or clarified as follows:
- Savanna reports its drilling rig utilization based on spud to release time for its operational drilling rigs and excludes stand-by, moving, rig up and tear down time, even though revenue may be earned during this time. Source of Canadian industry average utilization figures: Canadian Association of Oilwell Drilling Contractors. Industry utilization figures are calculated in the same manner as the Company. To segregate industry utilization by rig type, industry totals by well depth range are used.
- Savanna reports its service rig utilization for its operational service rigs in North America based on standard operating hours of 3,650 per rig per year. Utilization for Savanna’s service rigs in Australia is calculated based on standard operating hours of 8,760 per rig per year to reflect 24 hour operating conditions in that country and excludes stand-by time, even though revenue may be earned during this time. Reliable industry average utilization figures, specific to well servicing, are not available.
Segmented Results – Contract Drilling
The following is a summary of selected financial and operating information of the Company’s contract drilling segment:
| (Stated in thousands of dollars, except revenue per day) | Three Months Ended | Twelve Months Ended | ||||||||||||||||||||
| December 31 | 2016 | 2015 | Change | 2016 | 2015 | Change | ||||||||||||||||
| Revenue | $ | 60,372 | $ | 55,175 | 9 | % | $ | 173,348 | $ | 262,257 | (34 | %) | ||||||||||
| Operating expenses | $ | 54,371 | $ | 39,014 | 39 | % | $ | 142,156 | $ | 176,916 | (20 | %) | ||||||||||
| Operating margin(1) | $ | 6,001 | $ | 16,161 | (63 | %) | $ | 31,192 | $ | 85,341 | (63 | %) | ||||||||||
| Operating margin % | 10 | % | 29 | % | 18 | % | 33 | % | ||||||||||||||
| Billable days | 2,881 | 2,165 | 33 | % | 7,646 | 10,395 | (26 | %) | ||||||||||||||
| Revenue per billable day | $ | 20,955 | $ | 25,485 | (18 | %) | $ | 22,672 | $ | 25,229 | (10 | %) | ||||||||||
| Operating (spud to release) days | 2,484 | 1,841 | 35 | % | 6,467 | 8,253 | (22 | %) | ||||||||||||||
| Wells drilled | 439 | 347 | 27 | % | 1,281 | 1,281 | 0 | % | ||||||||||||||
| Meters drilled | 809,758 | 620,304 | 31 | % | 2,165,353 | 2,377,397 | (9 | %) | ||||||||||||||
| Meters drilled per well | 1,845 | 1,788 | 3 | % | 1,690 | 1,856 | (9 | %) | ||||||||||||||
FOURTH QUARTER RESULTS
Overall contract drilling revenue increased relative to Q4 2015, as a result of higher activity levels in Canada and the U.S., and despite lower day rates. In Canadian long-reach drilling, billable days increased by 34% while day rates were 19% lower compared to Q4 2015. Competitive pressures in Canada held day rates lower in the quarter which was the primary driver for the decrease operating margins in Canada relative to Q4 2015. Savanna increased market share in Canada in Q4 2016, despite the effects of wet weather through the start of the quarter and having only one drilling rig on a long-term contract in Canada. Billable days in the U.S. increased 82%, based on more rigs working, relative to Q4 2015, while average day rates were 29% lower. The decrease in day rates in the U.S. were based on contract roll overs on two of Savanna’s three Velox triple drilling rigs with Q4 2016 rates approximately $10,000 U.S. dollars per day lower than in Q4 2015, and changes in rig mix, as six rigs were upgraded and reactivated in the Permian basin in the second half of 2016. The operating costs associated with reactivating these rigs, combined with an increase in field office costs and operational challenges in West Texas in Q4 2016, resulted in negative operating margins in the U.S. in the quarter. In Australia, revenue was relatively flat compared to Q4 2015, as a 12% decrease in activity was offset by an 8% increase in revenue per day. Per day revenue in Australia increased, in the same respective periods, based on the Company’s new performance-based pricing model on its drilling rigs there and despite a 42% decrease in third party revenue. The increased pricing, including the effect of lower third party revenue, combined with a $0.5 million decrease in field office costs resulted in an increase in operating margin and operating margin percentages in Australia drilling in Q4 2016, compared to Q4 2015.
| (Stated in thousands of dollars) | Long-reach | Shallow | |||||||||||||
| Drilling | Drilling | Drilling | Drilling | ||||||||||||
| Q4 2016 | Canada | Canada | U.S. | Australia | Total | ||||||||||
| Revenue | 28,412 | 1,525 | 17,754 | 12,681 | 60,372 | ||||||||||
| Operating margin(1) | 3,440 | (587 | ) | (1,261 | ) | 4,409 | 6,001 | ||||||||
| Operating margin %(1) | 12 | % | * | * | 35 | % | 10 | % | |||||||
| Revenue excluding cost recoveries | 24,354 | 1,471 | 16,455 | 12,256 | 54,536 | ||||||||||
| Operating margin(1) | 3,440 | (587 | ) | (1,261 | ) | 4,409 | 6,001 | ||||||||
| Operating margin %(1) | 14 | % | * | * | 36 | % | 11 | % | |||||||
| Average number of rigs deployed | 52 | 16 | 28 | 5 | 101 | ||||||||||
| Utilization %(2) | 32 | % | 4 | % | 26 | % | 46 | % | 27 | % | |||||
| * Calculation not meaningful | |||||||||||||||
| (Stated in thousands of dollars) | Long-reach | Shallow | |||||||||||||
| Drilling | Drilling | Drilling | Drilling | ||||||||||||
| Q4 2015 | Canada | Canada | U.S. | Australia | Total | ||||||||||
| Revenue | 26,322 | 1,781 | 13,786 | 13,286 | 55,175 | ||||||||||
| Operating margin(1) | 7,168 | (106 | ) | 6,119 | 2,980 | 16,161 | |||||||||
| Operating margin %(1) | 27 | % | * | 44 | % | 22 | % | 29 | % | ||||||
| Revenue excluding cost recoveries | 22,879 | 1,735 | 12,842 | 12,219 | 49,675 | ||||||||||
| Operating margin(1) | 7,168 | (106 | ) | 6,119 | 2,980 | 16,161 | |||||||||
| Operating margin %(1) | 31 | % | * | 48 | % | 24 | % | 33 | % | ||||||
| Average number of rigs deployed | 52 | 16 | 28 | 5 | 101 | ||||||||||
| Utilization %(2) | 24 | % | 5 | % | 12 | % | 63 | % | 20 | % | |||||
| * Calculation not meaningful | |||||||||||||||
ANNUAL RESULTS
Contract drilling revenue decreased in 2016 relative to 2015, as a result of: a 14% decrease in billable days and a 24% decrease in day rates in long-reach drilling in Canada; a 51% decrease in days and an 18% decrease in rates related to Q1 coring activity in Canada; a 37% decrease in billable days in U.S. drilling; and a 34% decrease in billable days in Australia drilling. These decreases were driven by the low oil and natural gas prices that persisted throughout 2015 and 2016, and the resulting decline in overall industry drilling activity. Based on the low activity levels, the Company has continued to focus on cost control after undergoing a significant restructuring in 2015. Field office costs were $4.9 million lower compared to 2015, while severance costs decreased to $0.9 million in 2016, compared to $2 million in 2015. The lower field office and severance costs partially mitigated the overall decrease in operating margin percentages relative to 2015.
| (Stated in thousands of dollars) | Long-reach | Shallow | |||||||||||||
| Drilling | Drilling | Drilling | Drilling | ||||||||||||
| 2016 Annual | Canada | Canada | U.S. | Australia | Total | ||||||||||
| Revenue | 71,125 | 10,601 | 52,357 | 39,265 | 173,348 | ||||||||||
| Operating margin(1) | 10,067 | 2,339 | 7,383 | 11,403 | 31,192 | ||||||||||
| Operating margin %(1) | 14 | % | 22 | % | 14 | % | 29 | % | 18 | % | |||||
| Revenue excluding cost recoveries | 62,561 | 10,299 | 47,295 | 36,887 | 157,042 | ||||||||||
| Operating margin(1) | 10,067 | 2,339 | 7,383 | 11,403 | 31,192 | ||||||||||
| Operating margin %(1) | 16 | % | 23 | % | 16 | % | 31 | % | 20 | % | |||||
| Average number of rigs deployed | 52 | 16 | 28 | 5 | 101 | ||||||||||
| Utilization %(2) | 20 | % | 8 | % | 16 | % | 35 | % | 17 | % | |||||
| (Stated in thousands of dollars) | Long-reach | Shallow | |||||||||||||
| Drilling | Drilling | Drilling | Drilling | ||||||||||||
| 2015 Annual | Canada | Canada | U.S. | Australia | Total | ||||||||||
| Revenue | 108,972 | 23,423 | 82,386 | 47,476 | 262,257 | ||||||||||
| Operating margin(1) | 30,498 | 9,161 | 32,715 | 12,967 | 85,341 | ||||||||||
| Operating margin %(1) | 28 | % | 39 | % | 40 | % | 27 | % | 33 | % | |||||
| Revenue excluding cost recoveries | 96,031 | 23,145 | 76,931 | 44,454 | 240,561 | ||||||||||
| Operating margin(1) | 30,498 | 9,161 | 32,715 | 12,967 | 85,341 | ||||||||||
| Operating margin %(1) | 32 | % | 40 | % | 43 | % | 29 | % | 35 | % | |||||
| Average number of rigs deployed | 52 | 16 | 28 | 5 | 101 | ||||||||||
| Utilization %(2) | 23 | % | 13 | % | 23 | % | 40 | % | 22 | % | |||||
Segmented Results – Oilfield Services
The following is a summary of selected financial and operating information of the Company’s oilfield services segment:
| (Stated in thousands of dollars, except revenue per hour) | Three Months Ended | Twelve Months Ended | ||||||||||||||||||||
| December 31 | 2016 | 2015 | Change | 2016 | 2015 | Change | ||||||||||||||||
| Revenue | $ | 44,200 | $ | 45,981 | (4 | %) | $ | 152,206 | $ | 185,504 | (18 | %) | ||||||||||
| Operating expenses | $ | 32,305 | $ | 31,795 | 2 | % | $ | 106,341 | $ | 127,449 | (17 | %) | ||||||||||
| Operating margin(1) | $ | 11,895 | $ | 14,186 | (16 | %) | $ | 45,865 | $ | 58,055 | (21 | %) | ||||||||||
| Operating margin % | 27 | % | 31 | % | 30 | % | 31 | % | ||||||||||||||
| Billable hours – well servicing | 42,883 | 46,179 | (7 | %) | 152,904 | 181,546 | (16 | %) | ||||||||||||||
| Revenue per billable hour – well servicing | $ | 896 | $ | 839 | 7 | % | $ | 873 | $ | 856 | 2 | % | ||||||||||
| Operating hours – well servicing | 37,188 | 34,347 | 8 | % | 118,674 | 131,620 | (10 | %) | ||||||||||||||
FOURTH QUARTER RESULTS
Operating margin for Savanna’s oilfield services division in Q4 2016 decreased relative to Q4 2015, based primarily on a decrease in billable hours in Australia in the same respective periods. In Canada, revenue in Q4 2016 was down slightly compared to Q4 2015 as a 10% increase in operating hours was more than offset by a 12% decrease in per hour revenue in Canadian well servicing and a 10% decrease in Canadian rental revenue. In U.S. well servicing, revenue was also marginally lower relative to Q4 2015 as a 3% increase in activity was more than offset by a 13% decrease in per hour revenue. The revenue decreases in Australia in Q4 2016 compared to Q4 2015 were also not significant. The 23% decrease in billable hours in Australia well servicing, as a result of having two fewer service rigs and one less flush-by unit on contract, were partially offset by higher rates, which were based on a greater proportion of operating hours versus stand-by hours in Q4 2016 relative to Q4 2015. The decrease in billable hours did negatively affect Australian operating margin in Q4 2016 as per hour margins were relatively flat compared to Q4 2015. In Canada and the U.S., the decreases in pricing in Q4 2016 are reflective of competitive pressures in the industry, as a result of the significant decline in oil and natural gas prices throughout 2015 and 2016, and resulted in lower overall operating margins being generated by the Company in North America as well.
| (Stated in thousands of dollars) | ||||||||||||
| Q4 2016 | Canada | U.S. | Australia | Total | ||||||||
| Revenue | 12,239 | 4,502 | 27,459 | 44,200 | ||||||||
| Operating margin(1) | 1,756 | 1,354 | 8,785 | 11,895 | ||||||||
| Operating margin %(1) | 14 | % | 30 | % | 32 | % | 27 | % | ||||
| Average number of rigs deployed – well servicing | 57 | 18 | 12 | 87 | ||||||||
| Utilization % – well servicing(2) | 36 | % | 40 | % | 66 | % | 41 | % | ||||
| (Stated in thousands of dollars) | ||||||||||||
| Q4 2015 | Canada | U.S. | Australia | Total | ||||||||
| Revenue | 12,703 | 5,027 | 28,251 | 45,981 | ||||||||
| Operating margin(1) | 2,203 | 1,713 | 10,270 | 14,186 | ||||||||
| Operating margin %(1) | 17 | % | 34 | % | 36 | % | 31 | % | ||||
| Average number of rigs deployed – well servicing | 65 | 18 | 12 | 95 | ||||||||
| Utilization % – well servicing(2) | 29 | % | 39 | % | 41 | % | 32 | % | ||||
ANNUAL RESULTS
Revenue and operating margin for Savanna’s oilfield services division decreased in 2016 compared to 2015, based on decreases in activity and pricing in the same respective periods. In North America, pricing decreased throughout 2016, while activity began to rebound in the second half of the year, after significant decreases in the first half of the year, compared to the same periods in 2015. In Australia, the decrease in activity occurred post Q1 2016, as rigs came off contract. Based on the low activity levels, the Company continued to focus on cost control after undergoing a significant restructuring in 2015, which resulted in a $5.2 million decrease in field office costs compared to 2015. A decrease in severance costs also partially mitigated the decrease in overall oilfield services operating margin relative to 2015. Severance costs related to oilfield services totaled $0.9 million in 2016, compared to $2.9 million in 2015. The field office and severance cost decreases, combined with decreases in rig operating costs, partially mitigated the decreases in activity and pricing and overall operating margin percentages for oilfield services remained relatively flat year-over-year.
| (Stated in thousands of dollars) | ||||||||||||
| 2016 Annual | Canada | U.S. | Australia | Total | ||||||||
| Revenue | 38,385 | 17,932 | 95,889 | 152,206 | ||||||||
| Operating margin(1) | 6,312 | 5,523 | 34,030 | 45,865 | ||||||||
| Operating margin %(1) | 16 | % | 31 | % | 35 | % | 30 | % | ||||
| Average number of rigs deployed – well servicing | 57 | 18 | 12 | 87 | ||||||||
| Utilization % – well servicing(2) | 27 | % | 39 | % | 68 | % | 35 | % | ||||
| (Stated in thousands of dollars) | ||||||||||||
| 2015 Annual | Canada | U.S. | Australia | Total | ||||||||
| Revenue | 52,921 | 24,725 | 107,858 | 185,504 | ||||||||
| Operating margin(1) | 7,622 | 9,321 | 41,112 | 58,055 | ||||||||
| Operating margin %(1) | 14 | % | 38 | % | 38 | % | 31 | % | ||||
| Average number of rigs deployed – well servicing | 65 | 18 | 12 | 95 | ||||||||
| Utilization % – well servicing(2) | 26 | % | 46 | % | 37 | % | 31 | % | ||||
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 yielding positive results on drilling rigs reactivated in the Permian basin as that market continues to improve, the expectation of repurchasing the remaining outstanding senior unsecured notes in May 2017, primarily through the second draw of the second lien term loan, the expectation that there is ample availability of funds for the foreseeable future under the senior secured revolving credit facility, expectations of improving pricing levels into the second half of 2017, the expectation that Savanna will benefit considerably as activity and pricing levels increase from the low commodity pricing experienced in 2016, the expectation that efficiencies will be gained from the implementation of the new global enterprise resource planning system, expectations that pricing and activity levels in Canada and the U.S. will continue improving in 2017 from those in 2016, the expectation of lower operating margins in Canada in the first half of 2017 relative to the first half of 2016, the expectation that pricing will begin to improve into the second half of 2017 in Canada, the expectation that operating margins in the Permian basin will begin to improve in 2017 relative to 2016, the expectation of day rate increases for the Velox triple drilling rigs in 2017, the expectation that the Company will be successful in negotiating contracts with its customers outside of the formal tender process, the belief that the Company is in a strong competitive position to re-contract its drilling and service rigs in Australia and that any such contracts are likely to be shorter in term than previously, 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 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 yielding positive results on drilling rigs reactivated in the Permian basin as that market continues to improve, expectations of improving pricing levels into the second half of 2017, the expectation that Savanna will benefit considerably as activity and pricing levels increase from the low commodity pricing experienced in 2016, expectations that pricing and activity levels in Canada and the U.S. will continue improving in 2017 from those in 2016, the expectation of lower operating margins in Canada in the first half of 2017, relative to the first half of 2016, and the expectation that operating margins in the Permian basin will begin improve in 2017 relative to 2016, are premised on industry and commodity price estimates, actual results experienced to date in 2017, customer contracts and commitments, the Company’s expectations for its customers’ capital budgets, the status of current negotiations with its customers, current industry rig counts and industry rig utilization levels in North America, current pricing levels in Canada relative to those in the first half of 2016, and the costs incurred in the Permian basin in Q4 2016 with respect to reactivating drilling rigs, the nature of the work performed in the Permian basin in Q4 2016 and the operating challenges faced related thereto. The Company’s expectation of repurchasing the remaining outstanding senior unsecured notes in May 2017, primarily through the second draw of the second lien term loan, is premised on the reduction in the redemption price on the senior unsecured notes to par in May 2017, and required use of proceeds of the second lien term loan.
The Company’s expectation that there is ample availability of funds for the foreseeable future under the senior secured revolving credit facility is premised on the total amount currently drawn on the facility relative to amount available and the Company’s expected use of the facility relative to current budgets and forecasts. The Company’s expectation that efficiencies will be gained from the implementation of the new global enterprise resource planning system is premised on the number of disparate legacy systems and processes and the amount of manual intervention required to effectively run those systems and processes based on current and historical rig counts and the current status, budgets and forecasts with respect to the project. The Company’s expectation that it will be successful in negotiating contracts with its customers outside of the formal tender process and its belief that it is in a strong competitive position to re-contract its drilling and service rigs in Australia are premised on current negotiations and discussions with, and commitments from, its customers and potential new customers. 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; unexpected equipment maintenance and replacement; 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.
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 management’s discussion and analysis and audited consolidated financial statements for the year ended December 31, 2016 will be made available on Savanna’s website (www.savannaenergy.com) under the investor relations section and have also been filed on SEDAR at www.sedar.com.
As a result of Savanna’s ongoing strategic alternatives process and the outstanding hostile takeover bid from Total Energy Services Inc. for all of the common shares of Savanna, a conference call with respect to the Company’s year-end results will not be held.
Savanna is a leading North American and Australian contract drilling and oilfield services company providing a broad range of drilling, well servicing and related services with a focus on fit for purpose technologies and industry-leading Aboriginal relationships.
Chris Strong
President and Chief Executive Officer
(403) 503-9990
Savanna Energy Services Corp.
Dwayne LaMontagne
Executive Vice President and Chief Financial Officer
(403) 503-9990