Savanna Energy Services Corp.
TSX : SVY

Savanna Energy Services Corp.

November 08, 2016 17:50 ET

Savanna Energy Services Corp. Announces 3rd Quarter 2016 Results and Reactivation of Drilling Rigs in the Permian Basin

CALGARY, ALBERTA--(Marketwired - Nov. 8, 2016) - Savanna Energy Services Corp. (TSX:SVY)

Third Quarter Results

Savanna generated revenue of $71.1 million, adjusted EBITDAS of $11.2 million and a net loss, attributable to shareholders of the Company, of $11.1 million or $0.12 per share in the third quarter of 2016, compared to revenue of $98 million, adjusted EBITDAS of $25.3 million and a net loss, attributable to shareholders of the Company, of $8.8 million or $0.10 per share in Q3 2015. Prevailing low oil and natural gas prices and industry activity, wet weather in Canada, increasing competitive pressures on pricing, and having fewer rigs on contract in the U.S. and Australia, resulted in the lower overall revenue, operating margin and adjusted EBITDAS amounts in Q3 2016, relative to Q3 2015.

In the first nine months of 2016, the Company's total debt, net of cash declined by $27.8 million to $247.2 million.

The impact of the industry activity and commodity price declines on Savanna in Q3 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 $4.9 million, or 28%, in Q3 2016 relative to Q3 2015.

Despite the significant year-over-year pricing declines in North America, wet weather in Canada and having fewer rigs on contract in the U.S. and Australia, lower costs throughout the organization allowed Savanna to generate positive EBITDAS in each of the countries in which it operates in Q3 2016. In Canada, revenues declined by $10.3 million and operating margin declined by $5.2 million relative to Q3 2015. In the U.S., compared to Q3 2015, revenues declined by $6.3 million and operating margin declined by $7.5 million, due in part to $1 million of expensed rig reactivation costs on the Company's Permian based drilling rigs. In Australia, revenues were $10 million lower and operating margin was $3.7 million lower than in Q3 2015. Savanna's overall operating margin in Q3 2016 was $16.3 million lower relative to Q3 2015, and operating margin percentages were 11 percentage points lower. General and administrative expenses declined from $8.8 million in Q3 2015 to $5.6 million in Q3 2016. As a result, EBITDAS was $13.1 million lower than in Q3 2015.

In Canada, long-reach drilling and well servicing both experienced activity and pricing declines, which resulted in lower revenue and operating margins compared to Q3 2015, with the year-over-year pricing decreases more pronounced than the activity decreases. Pricing in well servicing decreased 24% relative to Q3 2015, while average day rates in long-reach drilling were 25% lower. In addition, due to the wet weather during Q3 2016, anywhere from four to eight drilling rigs and up to five service rigs per day had confirmed work but were unable to move based on ground conditions. Despite the effect of wet weather, utilization rates for both drilling and well servicing in Canada were ahead of industry averages in Q3 2016. The significant restructuring and cost control efforts undertaken by Savanna in 2015 and 2016 partially mitigated the corresponding decrease in operating margins and operating margin percentages in each of Savanna's Canadian operating divisions, relative to Q3 2015. Amidst the decreased activity and pricing environment in Canada, in Q3 2016 Savanna generated $3.5 million in operating margin on $25.5 million of revenue, compared to $8.7 million in operating margin on $35.8 million of revenue in Q3 2015. Sequentially, operating margins increased compared to the $1.5 million generated on $13.4 million of revenue in Canada in Q2 2016. The increase sequentially was based on seasonal increases in activity in Canadian long-reach drilling, well servicing, and rentals. However, the seasonal activity increases were negatively affected by a 19% decrease in average day rates in Canadian long-reach drilling relative to Q2 2016.

Similarly, in the U.S., lower rates and fewer drilling rigs on contract resulted in lower revenue and operating margins in Q3 2016, relative to Q3 2015. However, Savanna's U.S. well servicing division achieved higher utilization in Q3 2016 than in Q3 2015, and Savanna began reactivating and upgrading drilling rigs in the Permian basin. During the quarter, Savanna put three drilling rigs back to work in the Permian basin, which had been stacked for over a year, under a combination of day work and turnkey contracts. The costs to reactivate these rigs included a combination of upgrade and maintenance capital expenditures, as well as operating expenses, the latter of which negatively impacted Q3 2016 operating margins by $1 million. Additionally, $1.8 million of contracted standby revenue with nominal associated costs in Q3 2015, also negatively affected revenue and operating margins in the U.S. this year versus last. Sequentially, the effect of a Q2 2016 contract expiry on a Velox triple drilling rig, which was re-contracted at a significantly lower rate, as well as the effects of rig reactivation costs in Q3 2016, resulted in lower operating margin compared to Q2 2016. Savanna generated $2.3 million in operating margin on $17.2 million of revenue in the U.S. in Q3 2016, compared to $3.7 million in operating margin on $13.8 million of revenue in Q2 2016 and $9.8 million in operating margin on $23.5 million of revenue in Q3 2015.

In Australia, Savanna's drilling, well servicing and trucking divisions also experienced significant activity and revenue declines relative to Q3 2015. The decreases were driven by fewer rigs under contract and a decrease in trucking activity related to lower well servicing and drilling activity for Savanna in Australia. Savanna generated $10.8 million in operating margin on $28.4 million of revenue in Australia in Q3 2016, which represented a $10 million, or 27%, decrease in revenue and a $3.7 million, or 25%, decrease in operating margin in Q3 2016 compared to Q3 2015. As in North America, cost control and restructuring efforts partially mitigated the impact of the revenue and activity declines in Australia. Sequentially, operating margin increased from the $9.2 million generated on $27.7 million of revenue in Australia in Q2 2016. The increase in operating margin sequentially was a result of an increase in billable drilling days in the quarter and increases in trucking activity.

Overall for the quarter, the year-over-year decrease in industry activity levels and pricing, combined with the decrease in the number of rigs Savanna had under contract in the U.S. and Australia, resulted in a 54% decrease in EBITDAS and a 17% increase in the Company's net loss, compared to Q3 2015. The decrease in EBITDAS was partially offset by a decrease in depreciation expense relative to Q3 2015 based on the effect 2015 impairment losses had on the remaining net book value of the Company's depreciable assets. The Q3 2016 net loss attributable to the shareholders of the Company was $11.1 million, or $0.12 per share, compared to a net loss attributable to the shareholders of the Company of $8.8 million or $0.10 per share, in Q3 2015. Compared to Q2 2016, Savanna's net loss decreased primarily as a result of an increase in EBITDAS, combined with a decrease in share-based compensation and a decrease in losses on asset disposals. The Q2 2016 net loss attributable to the shareholders of the Company was $16 million, or $0.18 per share.

Year-to-date Results

Persistent low oil and natural gas prices during the first nine months of 2016, and the resulting decrease in industry activity and rates, as well as having fewer rigs on contract in the U.S. and Australia, negatively affected overall revenue, operating margin and EBITDAS relative to the first nine months of 2015. The impact of the industry activity and commodity price declines on Savanna was mitigated by the twelve contracted new-build rigs added in late 2014 and early 2015, cost control initiatives, and the significant restructuring efforts in 2015 and 2016. EBITDAS before severance costs was $42.5 million in the first nine months of 2016, which is a 52% reduction from 2015, while revenues decreased by 36% in the same respective periods.

Long-reach drilling, well servicing and rentals in Canada all experienced significant activity and pricing declines, which resulted in lower revenue and operating margins compared to the first nine months of 2015. The significant restructuring and cost control efforts undertaken by Savanna in 2015 and 2016 limited the corresponding decrease in operating margin percentages to eight percentage points, relative to the first nine months of 2015. Overall, the decreased activity resulted in a $66.6 million, or 46%, decrease in revenue and a $24 million, or 63%, decrease in operating margins in Canada.

Savanna's U.S. drilling and well servicing divisions also experienced activity and pricing declines relative to the first nine months of 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 reactivating drilling rigs in the Permian basin also negatively affect operating margins in Q3 2016. Cost control and restructuring efforts, and an appreciation in the value of the U.S. dollar relative to the Canadian dollar in the first nine months of 2016, partially mitigated the decrease in revenue and operating margin compared to the first nine months of 2015. Overall, operating margins in the U.S. decreased by $21.4 million, or 63%, compared to the first nine months of 2015, while year-over-year revenue decreased $40.3 million, or 46%.

In Australia, Savanna had fewer rigs on contract in the first nine months of 2016, relative to the first nine months of 2015. This resulted in lower revenue and operating margins in Savanna's drilling and well servicing divisions relative to the first nine months of 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, limiting the decrease in operating margin percentages to two percentage points. Overall, revenue in Australia decreased by $18.8 million, or 17%, and operating margins decreased by $8.6 million, or 21%, relative to the first nine months of 2015.

Overall, for the first nine months of 2016, EBITDAS decreased by 48% relative to the first nine months of 2015, as a result of significant activity, pricing, revenue and operating margin 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 four percentage points in the first nine months of 2016 relative to the first nine months of 2015. Severance costs aggregated $2 million this year versus $10.3 million in the first nine months of 2015. The decrease in EBITDAS was also the primary driver for the increase in the overall net loss in the first nine months of 2016, compared to the first nine months of 2015.

Balance Sheet

Savanna's working capital at September 30, 2016, was $23.2 million, which includes $6.4 million in cash and is net of the $1.9 million drawn on its Canadian operating facility.

Savanna's total long-term debt outstanding on September 30, 2016, excluding unamortized debt issue costs, was $251.6 million, compared to $277.1 million outstanding at December 31, 2015. The September 30, 2016 total long-term debt amount includes $9.4 million of unrealized foreign exchange on U.S. dollar denominated debt as well as $5.1 million in gross partnership debt, of which Savanna's proportionate share is approximately 50%.

In Q3 2016, Savanna acquired and cancelled $5.4 million face value of its senior unsecured senior notes for $4.9 million. The note repurchases resulted in a gain of $0.5 million.

Savanna's total debt position at September 30, 2016, net of cash, was $247.2 million compared to $275 million at December 31, 2015.

Outlook

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 Q3 2016, despite significant revenue and activity declines. Savanna's ability to achieve this is in large part a result of the fundamental structural changes made to the Company in 2015 and continuing cost control initiatives in 2016. Savanna has continued to reduce costs in 2016 and has better aligned its business with the variable nature of the oilfield services industry. Annualized field office and general and administrative cost savings from Savanna's cost control and restructuring efforts are expected to be over $70 million relative to the Company's 2014 exit run-rate.

Looking forward, the remainder of 2016 and into 2017 will continue to be challenging for Savanna and the oilfield services industry as a whole, based on the volatility of oil and natural gas prices, and the uncertain duration of the current low price environment. Although commodity prices have improved compared to earlier in 2016, both oil and natural gas prices remain relatively low and unpredictable. Despite the continuing headwinds, more encouraging signs for activity levels emerged both during and subsequent to Q3 2016.

In Canada, activity levels showed some resilience in Q3 2016, after several consecutive quarters of significant decreases, despite wet weather through most of the quarter. The wet weather, which has continued through the start of Q4 2016, negatively affects ground conditions and limits the ability for rigs to move to new locations. Both during and subsequent to Q3 2016, anywhere from four to ten drilling rigs and five to seven service rigs per day had confirmed work but were unable to move due to ground conditions. Savanna's customers in Canada have started making additional enquires, and in some cases commitments, for winter work and Savanna expects activity to continue improving for the remainder of 2016 and into 2017. However, pricing is expected to remain competitive in the near-term which will likely translate into lower operating margins in Q4 2016 and through the first half of 2017, relative to those in Q4 2015 and the first half of 2016.

In the U.S., well servicing utilization improved in Q3 2016, relative to Q3 2015, and Savanna expects activity levels to continue improving in the coming quarters. In addition, during Q3 2016, Savanna began upgrading and reactivating drilling rigs in the Permian basin, putting three drilling rigs back to work that had been stacked for over a year. Savanna expects to upgrade and reactivate an additional four drilling rigs in the Permian basin before the end of the year, one of which has already commenced operations. The Company has also received additional enquiries in other previously active drilling regions, such as the Marcellus. However, similar to in Canada, Savanna expects pricing to remain competitive in the U.S. in the near-term, as evidenced by the short-term work secured for the second expired Velox triple drilling rig contract in early Q4 2016. Consistent with the first Velox triple drilling rig contract expiry in Q2 2016, prevailing day rates for AC triple drilling rigs are $10,000 U.S. dollars a day lower than the original new-build contracts for Savanna's Velox rigs. Savanna's two Velox triple drilling rigs without long-term contracts are now both experiencing this magnitude of day rate decrease. Savanna's third Velox triple drilling rig has over two years remaining on its original contract.

The Australian liquefied natural gas industry has likewise not been immune to global commodity price pressures; and although Savanna's take or pay contract status on the majority of its rigs in Australia have helped mitigate the impact of North American activity reductions in 2016, certain of these contracts began rolling over earlier in the year. In Q1 2016, Savanna had 15 of 17 rigs earning revenue under contract in Australia and that number decreased to 11 on average in Q2 and will remain at that level for the remainder of 2016. Savanna's seven original new-build contracts still in place in Australia, begin to expire in the second half of 2017. The Company has also received indications from a customer that an additional drilling rig could be utilized in Q4 2016. The Company has been negotiating with its customers in Australia to re-contract its drilling and service rigs outside of the formal tender process. Ultimately, Savanna believes it is in a strong competitive position to re-contract its drilling and service rigs in Australia, although new contracts are likely to be shorter in term than the Company's previous contracts in Australia.

Overall, management believes that the structural changes Savanna underwent in 2015, and the reduced overall cost structure have the Company positioned to manage through reduced pricing and/or activity levels for the remainder of 2016 and beyond. In addition, the amendments to its key financial covenants related to its senior secured revolving credit facility negotiated in March 2016, provide Savanna with increased financial flexibility through to the end of 2017. The Company is also closely monitoring capital markets for alternatives in refinancing its $170 million of senior unsecured notes, ahead of their maturity in mid-2018.

Savanna remains committed to its shareholders and debtholders, with a focus on managing its balance sheet and costs in all aspects of its business and leveraging its assets to maintain and gain market share. As a result of the measures already undertaken and others currently in progress, Savanna believes that it has taken the steps necessary to navigate through the current downturn. When industry conditions improve, management believes that Savanna will be in an excellent position to capitalize on a recovery utilizing its competitive cost structure, experienced management team, and its proven ability to quickly adapt to changing circumstances. These core competencies will be deployed utilizing the Company's significant footprint in three countries that should have strong participation in an eventual recovery of oil and gas market fundamentals.

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 Nine months ended
September 30 2016 2015 Change 2016 2015 Change
OPERATING RESULTS
Revenue 71,063 98,011 (27%) 219,705 345,290 (36%)
Operating expenses 54,385 64,986 (16%) 160,544 232,131 (31%)
Operating margin(1) 16,678 33,025 (49%) 59,161 113,159 (48%)
Operating margin %(1) 23% 34% 27% 33%
EBITDAS(1) 11,128 24,236 (54%) 40,542 78,118 (48%)
Attributable to shareholders of the Company 11,090 24,160 (54%) 39,982 76,815 (48%)
Per share: basic 0.12 0.27 (56%) 0.44 0.85 (48%)
Adjusted EBITDAS(1) 11,224 25,272 (56%) 42,526 88,427 (52%)
Attributable to shareholders of the Company 11,186 25,196 (56%) 41,966 87,124 (52%)
Per share: basic 0.12 0.28 (57%) 0.46 0.97 (53%)
Net loss (11,935) (10,187) (17%) (38,717) (11,267) *
Attributable to shareholders of the Company (11,065) (8,755) (26%) (37,136) (9,249) *
Per share: basic (0.12) (0.10) (20%) (0.41) (0.10) *
Basic weighted average shares outstanding (000s) 90,251 90,251 0% 90,251 90,243 0%
Diluted weighted average shares outstanding (000s) 90,251 90,251 0% 90,251 90,243 0%
CASH FLOWS
Operating cash flows(1) 10,231 27,255 (62%) 31,042 70,565 (56%)
Per share: basic 0.11 0.30 (63%) 0.34 0.78 (56%)
Acquisition of property and equipment(1) 7,172 6,205 16% 12,369 54,720 (77%)
Proceeds on disposal of assets 1,249 1,070 17% 8,793 16,283 (46%)
Dividends paid - - * - 4,951 *
FINANCIAL POSITION AT Sep. 30 Dec. 31
2016 2015
Working capital(1) 23,210 35,691 (35%)
Capital assets(1) 703,698 776,574 (9%)
Total assets 787,841 879,146 (10%)
Total debt, net of cash(1) 247,155 275,020 (10%)

* Calculation not meaningful

NOTES:

  1. Operating margin, operating margin percentage, EBITDAS, adjusted 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, 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.
  • 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.
  1. 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 Nine Months Ended
September 30 2016 2015 Change 2016 2015 Change
Revenue $ 36,817 $ 54,965 (33%) $ 112,976 $ 207,082 (45%)
Operating expenses $ 31,857 $ 37,044 (14%) $ 87,785 $ 137,903 (36%)
Operating margin(1) $ 4,960 $ 17,921 (72%) $ 25,191 $ 69,179 (64%)
Operating margin % 13% 33% 22% 33%
Billable days 1,789 2,225 (20%) 4,765 8,231 (42%)
Revenue per billable day $ 20,580 $ 24,703 (17%) $ 23,710 $ 25,159 (6%)
Operating (spud to release) days 1,517 1,766 (14%) 3,983 6,412 (38%)
Wells drilled 304 253 20% 842 934 (10%)
Meters drilled 544,601 581,604 (6%) 1,355,595 1,757,093 (23%)
Meters drilled per well 1,791 2,299 (22%) 1,610 1,881 (14%)

THIRD QUARTER RESULTS

Overall contract drilling revenue and operating margins decreased relative to Q3 2015, as a result of lower activity levels in Canada, the U.S. and Australia, lower day rates in Canada, and a combination of lower day rates and rig reactivation costs in the U.S. In Canadian long-reach drilling, billable days were down 10% while day rates were 25% lower compared to Q3 2015. Competitive pressures in Canada drove day rates lower in the quarter, however Savanna was able to increase market share in Q3 2016, despite the effects of wet weather in the quarter and having only one drilling rig on a long-term contract in Canada. Billable days in the U.S. decreased 26% compared to Q3 2015, while average day rates were 8% lower based on changes in rig mix as three rigs were upgraded and reactivated in the Permian basin in Q3 2016. The operating costs associated with reactivating these rigs, combined with an increase in field office costs in West Texas in Q3 2016, and the effect of $1.8 million of standby revenue with nominal associated costs in Q3 2015, negatively affected year-over-year operating margins in the U.S. In Australia, billable days decreased 48% relative to Q3 2015, with fewer rigs under contract this year versus last. However, per day revenue in Australia increased, in the same respective periods, based on the Company's new performance-related pricing model on its drilling rigs there. For the segment as a whole, the overall decreases in activity and pricing is reflective of the low oil and natural gas prices that have persisted throughout 2015 and 2016, and the resulting decrease in customer drilling activity. Given the activity and pricing declines, cost control continues to be a major focus of the Company. Field office costs, excluding severance costs, were $0.7 million lower in Q3 2016, compared to Q3 2015.

The following summarizes the operating results in the third quarter of 2016 and 2015 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.

(Stated in thousands of dollars) Long-reach Shallow
Drilling Drilling Drilling Drilling
Q3 2016 Canada Canada U.S. Australia Total
Revenue 16,351 511 12,617 7,338 36,817
Operating margin(1) 2,132 (301) 771 2,358 4,960
Operating margin %(1) 13% * 6% 32% 13%
Revenue excluding cost recoveries 14,677 511 11,648 7,124 33,960
Operating margin(1) 2,132 (301) 771 2,358 4,960
Operating margin %(1) 15% * 7% 33% 15%
Average number of rigs deployed 52 16 28 5 101
Utilization %(2) 20% 3% 16% 19% 16%

* Calculation not meaningful

(Stated in thousands of dollars) Long-reach Shallow
Drilling Drilling Drilling Drilling
Q3 2015 Canada Canada U.S. Australia Total
Revenue 24,296 257 18,341 12,071 54,965
Operating margin(1) 6,596 (310) 8,153 3,482 17,921
Operating margin %(1) 27% * 44% 29% 33%
Revenue excluding cost recoveries 21,494 276 17,439 10,780 49,989
Operating margin(1) 6,596 (310) 8,153 3,482 17,921
Operating margin %(1) 31% * 47% 32% 36%
Average number of rigs deployed 52 16 28 5 101
Utilization %(2) 23% 1% 19% 40% 19%

* Calculation not meaningful

YEAR-TO-DATE RESULTS

Contract drilling revenue decreased in the first nine months of 2016 relative to the first nine months of 2015, as a result of: a 32% 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 56% decrease in billable days in U.S. drilling; and a 41% decrease in billable days in Australia drilling. These decreases were driven by the low oil and natural gas prices that have 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 $4.8 million lower compared to the first nine months of 2015, while severance costs decreased to $0.9 million in the first nine months of 2016, compared to $1.4 million in the first nine months of 2015. The lower field office and severance costs partially mitigated the overall decrease in operating margin percentages relative to the first nine months of 2015.

The following summarizes the operating results in the first nine months of 2016 and 2015 by type of rig or geographic area.

(Stated in thousands of dollars) Long-reach Shallow
Drilling Drilling Drilling Drilling
YTD 2016 Canada Canada U.S. Australia Total
Revenue 42,713 9,076 34,603 26,584 112,976
Operating margin(1) 6,625 2,926 8,645 6,995 25,191
Operating margin %(1) 16% 32% 25% 26% 22%
Revenue excluding cost recoveries 38,207 8,827 30,840 24,631 102,505
Operating margin(1) 6,625 2,926 8,645 6,995 25,191
Operating margin %(1) 17% 33% 28% 28% 25%
Average number of rigs deployed 52 16 28 5 101
Utilization %(2) 16% 9% 12% 31% 14%
(Stated in thousands of dollars) Long-reach Shallow
Drilling Drilling Drilling Drilling
YTD 2015 Canada Canada U.S. Australia Total
Revenue 82,650 21,642 68,600 34,190 207,082
Operating margin(1) 23,330 9,267 26,596 9,986 69,179
Operating margin %(1) 28% 43% 39% 29% 33%
Revenue excluding cost recoveries 73,152 21,409 64,089 32,234 190,884
Operating margin(1) 23,330 9,267 26,596 9,986 69,179
Operating margin %(1) 32% 43% 41% 31% 36%
Average number of rigs deployed 52 16 28 5 101
Utilization %(2) 23% 16% 27% 33% 23%

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 Nine Months Ended
September 30 2016 2015 Change 2016 2015 Change
Revenue $ 34,606 $ 43,489 (20%) $ 108,006 $ 139,523 (23%)
Operating expenses $ 22,888 $ 28,401 (19%) $ 74,036 $ 95,654 (23%)
Operating margin(1) $ 11,718 $ 15,088 (22%) $ 33,970 $ 43,869 (23%)
Operating margin % 34% 35% 31% 31%
Billable hours - well servicing 37,290 43,767 (15%) 110,021 135,368 (19%)
Revenue per billable hour - well servicing $ 822 $ 836 (2%) $ 864 $ 862 0%
Operating hours - well servicing 27,434 29,999 (9%) 81,486 97,274 (16%)

THIRD QUARTER RESULTS

Operating margin for Savanna's oilfield services division in Q3 2016 decreased relative to Q3 2015, based on decreases in revenue in the same respective periods. The revenue decrease was driven by: a 4% decrease in operating hours and a 24% decrease in per hour revenue in Canadian well servicing; a 16% decrease in per hour revenue in U.S. well servicing; a 27% decrease in billable hours in Australia well servicing; and a 53% decrease in trucking revenue in Australia. The revenue decreases in Australia in Q3 2016 compared to Q3 2015, were a result of having three fewer service rigs on contract and decreases in trucking requirements stemming from decreases in both well servicing and drilling activity for Savanna in Australia. In Canada and the U.S., the decreases in activity and pricing are reflective of the significant decline in oil and natural gas prices throughout 2015 and 2016, as well as the effect of wet weather in Q3 2016, and resulted in lower overall operating margins being generated by the Company in North America as well.

The following summarizes the operating results by geographic area:

(Stated in thousands of dollars)
Q3 2016 Canada U.S. Australia Total
Revenue 8,969 4,539 21,098 34,606
Operating margin(1) 1,712 1,562 8,444 11,718
Operating margin %(1) 19% 34% 40% 34%
Average number of rigs deployed - well servicing 57 18 12 87
Utilization % - well servicing(2) 26% 41% 27% 29%
(Stated in thousands of dollars)
Q3 2015 Canada U.S. Australia Total
Revenue 11,639 5,134 26,716 43,489
Operating margin(1) 2,414 1,660 11,014 15,088
Operating margin %(1) 21% 32% 41% 35%
Average number of rigs deployed - well servicing 65 18 12 95
Utilization % - well servicing(2) 24% 39% 35% 34%

YEAR-TO-DATE RESULTS

Revenue and operating margin for Savanna's oilfield services division decreased in the first nine months of 2016 compared to the first nine months of 2015, based on decreases in activity and pricing in the same respective periods. In North America, the decreases in both activity and pricing occurred primarily in the first half of the year, while 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 $4.3 million decrease in field office costs compared to the first nine months of 2015. A decrease in severance costs also partially mitigated the decrease in overall oilfield services operating margin relative to the first nine months of 2015. Severance costs related to oilfield services totaled $0.9 million in the first nine months of 2016, compared to $2.9 million in the first nine months of 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.

The following summarizes the operating results by geographic area:

(Stated in thousands of dollars)
YTD 2016 Canada U.S. Australia Total
Revenue 26,146 13,430 68,430 108,006
Operating margin(1) 4,556 4,169 25,245 33,970
Operating margin %(1) 17% 31% 37% 31%
Average number of rigs deployed - well servicing 57 18 12 87
Utilization % - well servicing(2) 24% 39% 32% 28%
(Stated in thousands of dollars)
YTD 2015 Canada U.S. Australia Total
Revenue 40,218 19,697 79,608 139,523
Operating margin(1) 5,418 7,608 30,843 43,869
Operating margin %(1) 13% 39% 39% 31%
Average number of rigs deployed - well servicing 65 18 12 95
Utilization % - well servicing(2) 25% 49% 36% 38%

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 that annualized field office and general and administrative cost savings will be over $70 million relative to the Company's 2014 exit run-rate, expectations of relatively low and volatile oil and natural gas prices for the remainder of 2016 and into 2017 and its effect on the oilfield services industry and Savanna, expectations that activity levels in Canada and the U.S. will continue improving from those in Q3 2016, for the remainder of 2016 and into 2017, the expectation that pricing in Canada will remain competitive in the near-term translating into lower operating margins in Q4 2016 and through the first half of 2017, relative to those in Q4 2015 and the first half of 2016, the expectation that the Company will upgrade and reactivate an additional four drilling rigs in the Permian basin before the end of the year, the expectation that the number of the Company's rigs earning revenue under contract in Australia will remain at 11 for the remainder of 2016, expectations of an additional drilling rig in Australia being utilized in Q4 2016, 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, the impact of the structural changes undertaken by Savanna in 2015 and the continued cost control initiatives in 2016, the expectation that the Company has taken the steps necessary to navigate through the current downturn and its ability to capitalize on an eventual improvement oil and gas industry conditions, 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 that annualized field office and general and administrative cost savings will be over $70 million relative to the Company's 2014 exit run-rate is premised on the Company's actual Q3 2016 field office and general and administrative costs relative to that in Q4 2014.
The Company's expectation of relatively low and volatile oil and natural gas prices for the remainder of 2016 and into 2017 and its effect on the oilfield services industry and Savanna, expectations that activity levels in Canada and the U.S. will continue improving from those in Q3 2016, for the remainder of 2016 and into 2017, and the expectation that pricing in Canada will remain competitive in the near-term translating into lower operating margins in Q4 2016 and through the first half of 2017, relative to those in Q4 2015 and the first half of 2016 are premised on industry and commodity price estimates, actual results experienced to date in 2016, 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, and current pricing levels in Canada relative to those in Q4 2015 and the first half of 2016. The Company's expectation that it will upgrade and reactivate an additional four drilling rigs in the Permian basin before the end of the year is premised on the progression of work related to upgrading and reactivating these four rigs to date. The Company's expectation that the number of the rigs earning revenue under contract in Australia will remain at 11 for the remainder of 2016, its expectation of an additional drilling rig in Australia being utilized in Q4 2016, 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. The Company's expectation of the impact of the structural changes undertaken by Savanna in 2015 and the continued cost control initiatives in 2016, is premised on cost reductions realized to date related thereto.
The Company's expectation that it has taken the steps necessary to navigate through the current downturn and its ability to capitalize on an eventual improvement oil and gas industry conditions is premised on operational improvements and cost and debt reductions realized in 2015 and to date in 2016. 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.

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 Q3 2016 report, including its management's discussion and analysis and condensed consolidated financial statements, is available on Savanna's website (www.savannaenergy.com) under the investor relations section and has also been filed on SEDAR at www.sedar.com.

Savanna will host a conference call for analysts, investors and interested parties on Wednesday, November 9, 2016 at 9:00 a.m. Mountain Time (11:00 a.m. Eastern Time) to discuss the Company's third quarter 2016 results. The call will be hosted by Chris Strong, Savanna's President and Chief Executive Officer and Dwayne LaMontagne, Executive Vice President and Chief Financial Officer.

If you wish to participate in this conference call, please call 1-888-892-3255 (please call 10 minutes ahead of time). A replay of the call will be available until November 16, 2016 by dialing 1-800-937-6305 and entering passcode 635506.

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.

Contact Information

  • Savanna Energy Services Corp.
    Chris Strong
    President and Chief Executive Officer
    Telephone: (403) 503-9990

    Dwayne LaMontagne
    Executive Vice President and Chief Financial Officer
    Telephone: (403) 503-9990
    Website: www.savannaenergy.com