Savanna Energy Services Corp.
TSX : SVY

Savanna Energy Services Corp.

August 11, 2011 19:35 ET

Savanna Energy Services Corp. Announces Q2 2011 Results and Appointment of New Chief Operating Officer

CALGARY, ALBERTA--(Marketwire - Aug. 11, 2011) - Savanna Energy Services Corp. (TSX:SVY)

Overall, the first half of 2011 was a period of markedly improving oilfield service industry fundamentals. Strong oil prices and increased activity in liquids-rich and/or unconventional oil plays created more demand for drilling, completion and maintenance services throughout North America compared to the same period in 2010. These factors led to an increase in operating days, hours and rates in the Company's drilling and oilfield services divisions and significantly increased revenues and operating margins in each of the operating divisions compared to Q2 2010 despite an extended spring break-up in Canada. At the same time, Savanna's concentrated efforts at repositioning its fleet over the last several quarters are clearly beginning to pay dividends.

Operating cash flows in Q2 2011 more than tripled compared to Q2 2010 to $13 million and its net loss decreased by $6.2 million to a loss of $1.0 million or $0.01 per diluted share in Q2 2011 from a loss of $7.2 million or $0.09 per diluted share in Q2 2010. Savanna's Q2 2011 earnings were its highest second quarter earnings since 2006. For the six months ended June 30, 2011, operating cash flows were $58.1 million and net earnings were $14.6 million or $0.18 per diluted share. These year-to-date figures represent an increase of $23.9 million or 70% in operating cash flows and an increase of $11.2 million or $0.14 per share in net earnings from the comparable period in 2010, an increase of 330%.

The drilling division achieved a 23% increase in the number of operating days with virtually the same sized drilling rig fleet in the second quarter of 2011 compared to the same period in 2010. Additionally, average day rates increased 10% over the same time frame which, coupled with the increase in operating days, led to a 35% increase in revenues and a $9.1 million increase in operating margins in Q2 2011 compared to Q2 2010. Overall drilling revenue was $70.4 million for Q2 2011, bringing the segment's revenue to $204.2 million to the end of June, both of which are up from the $52.0 million and $159.5 million in revenues in the same respective periods in 2010. Operating margins were $17.0 million and $55.1 million respectively for the three and six months ended June 30, 2011 compared to the same periods in 2010 when operating margins were $7.9 million for the quarter and $37.2 million to the end of June. Increases in operating days, revenue and operating margins were achieved by both hybrid and conventional drilling rigs in both Canada and the United States relative to Q2 2010. However, wet weather coupled with the normal effects of spring break-up had a more negative effect on Savanna's more mobile hybrid division compared to the conventional divisions in Canada and the United States, both of which achieved strong utilization rates and operating margins in Q2 2011.

The oilfield services division realized a 24% increase in operating hours, and operating margins increased by $2.2 million to $5.0 million in the second quarter of 2011 relative to 2010 with only a slightly larger average fleet size. To the end of June operating margins were $16.5 million compared to $9.5 million for the comparable period in 2010, an increase of 74%. Furthermore, operating margin percentages were higher in Q2 2011 compared to Q2 2010. Overall revenue for the oilfield services division was $24.5 million for Q2 2011 compared to $16.1 million in Q2 2010, an increase of 52%. To the end of June 2011, revenue for the segment was $60.5 million which is also up from the $39.8 million in the comparable period in 2010. Savanna's Canadian well servicing division's Q2 2011 utilization of 35% was its highest second quarter utilization since 2006. Additionally, both the U.S. well servicing division and oilfield rentals division achieved higher activity levels and operating results compared to Q2 2010. Savanna also had revenues from its Australia operations in the quarter, with both Australian service rigs working nearly 24 hours a day by the end of June 2011. With both service rigs operating in the quarter, operating margins turned positive in Australia in Q2 2011 and the Company expects more meaningful margin contributions next quarter to lead to positive cash flows in Australia in Q3 2011.

Savanna's President and Chief Executive Officer, Ken Mullen, stated; "The second quarter of 2011 was a strong quarter for Savanna in almost every regard, leading to our highest Q2 earnings since 2006."

"Some key accomplishments in the quarter include the following: Acquisition of Performance Well Servicing and an agreement to acquire Silverstar Well Servicing, adding almost 60% to our Canadian well servicing fleet. Completion of $125 million seven-year note offering, solidifying Savanna's debt structure to better match our capital deployment strategy, and improving liquidity and ability of Savanna to take advantage of market opportunities. Completion and commissioning of an additional hybrid drilling rig in Australia and confirming the delivery of a total of four hybrid drilling rigs to Australia by the end of 2011. Commitment to retrofit an additional two hybrid drillings rigs to TDS-3000(TM) for 2011, bringing the expected total year-end 2011 TDS-3000(TM) fleet to ten rigs. Achieving the highest Q2 hybrid drilling rig utilization since 2006 and achieving utilization rates within the conventional drilling fleet fifteen basis points higher than the industry average. Securing term contracts for eight additional drilling rigs in Canada and the United States, bringing the long-term contracted drilling rig ratio to approximately 30% of our total drilling rig fleet. Securing a contract in Australia with a new customer to provide a high-specification, high-capacity service rig on a three year term contract for delivery in 2012. Increasing revenue from rentals by almost 111% versus Q2, 2010 and increasing EBITDAS for this group by nearly seven times."

"Savanna remains very well positioned to fund the remainder of the 2011 capital program, and based on customer contracts and commitments is anticipating strong utilization and pricing fundamentals in all of its operating segments"

"Savanna possesses one of the most modern large fleets of drilling and well servicing rigs in North America. We balance the security of long-term contracts on our equipment with the opportunity to realize improving margins in rising markets, and the stability of cash flows to support expansion in targeted growth markets. We are focused on continuing to enhance the high level of competency of our field and operations management, and in expanding the skills and opportunities for our administrative and field personnel. We continue to invest substantial effort in improving our safety of operations through equipment design, formal and on-the-job training, and retention of core experienced personnel."

"To balance our strong Canadian base, Savanna remains keenly directed at expanding our United States operating bases, and to expanding out international exposure as well. Our five-year target to disproportionately grow our non-Canadian revenue base, while at the same time continuing to expand Canadian operations, is on track. It is a tall order, but all indications are that our people are executing on this plan in a consistent, progressive manner. With a strong liquidity base, and substantial cash flow-generating capacity from our existing asset base, the opportunities for Savanna to grow organically and through targeted acquisitions are substantial."

Subsequent to the end of the quarter, John Cooper was appointed Vice-President Operations and Chief Operating Officer of Savanna. Mr. Cooper brings broad experience in leading organizations and building operating teams in diverse business environments from both an operational and executive perspective, with a strong commitment to values-based leadership. With growing domestic and international operations, and a strong acquisition focus at Savanna, John's abilities will provide tremendous support to the rest of the executive team.

Effective January 1, 2011, the Company prepares its interim consolidated financial statements in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with IAS 34, Interim Financial Reporting. Certain 2010 comparative figures included in this MD&A have been restated as part of the Company's transition to international financial reporting standards ("IFRS"). The Company's condensed interim consolidated financial statements for the periods ending March 31, 2011 and June 30, 2011, present detailed reconciliations between Savanna's 2010 consolidated financial statements under GAAP and IFRS, including the opening IFRS balance sheet at January 1, 2010, differences in accounting policies and exemptions taken on transition to IFRS.


FINANCIAL HIGHLIGHTS
The following is a summary of selected financial information of the Company:

                         Three Months                   Six Months          
                                Ended                        Ended          
June 30                 2011     2010   Change       2011     2010   Change 
----------------------------------------------------------------------------
(Stated in thousands                                                        
 of dollars, except                                                         
 per share amounts)        $        $                   $        $          
----------------------------------------------------------------------------
OPERATING RESULTS                                                           
Revenue               94,544   67,862       39%   263,130  197,930       33%
Operating expenses    72,346   56,914       27%   191,154  150,964       27%
Operating margin(1)   22,198   10,948      103%    71,976   46,966       53%
Net earnings (loss)     (956)  (7,195)   delta     14,619    3,370      334%
Per share: basic       (0.01)   (0.09)   delta       0.18     0.04      350%
Per share: diluted     (0.01)   (0.09)   delta       0.18     0.04      350%

                     -------------------------------------------------------
CASH FLOWS                                                                  
Operating cash                                                              
 flows(1)             13,168    4,219      212%    58,137   34,231       70%
Per diluted share       0.16     0.05      220%      0.72     0.43       67%
Purchase of capital                                                         
 assets(1)           (49,356) (24,915)      98%   (92,090) (41,944)     120%

                     -------------------------------------------------------
                                                   Jun-30   Dec-31          
FINANCIAL POSITION                                   2011     2010   Change 
----------------------------------------------------------------------------
                                                        $        $          
----------------------------------------------------------------------------
Working capital(1)                                 82,166   78,873        4%
Capital assets(1)                                 929,786  840,702       11%
Total assets                                    1,091,302  996,143       10%
Long-term debt                                    155,875  112,802       38%
                                                ----------------------------
delta    Calculation not meaningful

Summary of Quarterly 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                      Six Months          
                             Ended                           Ended          
----------------------------------------------------------------------------
June 30             2011      2010  Change        2011        2010  Change  
----------------------------------------------------------------------------
Revenue         $ 70,371  $ 52,008      35% $  204,226  $  159,472      28% 
Operating                                                                   
 expenses       $ 53,382  $ 44,084      21% $  149,111  $  122,289      22% 
Operating                                                                   
 margin(1)      $ 16,989  $  7,924     114% $   55,115  $   37,183      48% 
Operating                                                                   
 margin %(1)          24%       15%                 27%         23%         
Operating                                                                   
 days(2)           3,521     2,869      23%      9,862       8,385      18% 
Revenue per                                                                 
 operating day  $ 19,986  $ 18,128      10% $   20,708  $   19,019       9% 
Spud to release                                                             
 days(2)           3,122     2,471      26%      8,690       7,194      21% 
Wells                                                                       
 drilled(2)          303       186      63%      1,154         994      16% 
Total meters                                                                
 drilled(2)      608,459   471,695      29%  1,631,017   1,417,677      15% 
Utilization -                                                               
 Canada(2)            23%       17%     35%         43%         54%    (20%)
Utilization -                                                               
 U.S.(2)              83%       66%     26%         83%         60%     38% 
Utilization -                                                               
 International                                                              
 (2)                   -        70%   (100%)         -          74%   (100%)
Canadian                                                                    
 industry                                                                   
 average                                                                    
 utilization(2)       23%       20%     15%         44%         36%     22% 
                ------------------------------------------------------------

Summary of Quarterly 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                   Six Months          
                                Ended                        Ended          
----------------------------------------------------------------------------
June 30                2011      2010   Change      2011      2010   Change 
----------------------------------------------------------------------------
Revenue            $ 24,477  $ 16,104       52% $ 60,545  $ 39,845       52%
Operating expenses $ 19,431  $ 13,227       47% $ 44,011  $ 30,347       45%
Operating                                                                   
 margin(1)         $  5,046  $  2,877       75% $ 16,534  $  9,498       74%
Operating margin                                                            
 %(1)                    21%       18%                27%       24%         
Operating hours(2)   27,300    21,992       24%   63,724    52,270       22%
Revenue per hour   $    714  $    624       14% $    741  $    633       17%
Utilization -                                                               
 Canada(2)               35%       33%       6%       48%       41%      17%
Utilization -                                                               
 U.S.(2)                 69%       69%       0%       68%       65%       5%
Utilization -                                                               
 International(2)       122%        -    delta        77%        -    delta 
                   ---------------------------------------------------------
delta    Calculation not meaningful

EQUIPMENT FLEET AND CAPITAL PROGRAM

While the number of rigs in Savanna's overall drilling rig fleet remained unchanged, the effective fleet increased based on the completion of the retrofit of an additional two hybrid drilling rigs as TDS-3000(TM) drilling rigs in the quarter. Savanna's service rig fleet increased more dramatically after adding 16 mobile free-standing service rigs on June 1, 2011 through the acquisition of Performance Services Ltd. and one new flush-by service rig, from Savanna's capital program. Another 17 service rigs were added subsequent to the end of the quarter as Savanna completed the acquisition of Silverstar Well Servicing Ltd. All of the rigs acquired are operating in Western Canada and the average age of the rigs is less than five years.

Savanna's previously announced and expanded 2011 capital program, as well as the carry-over of outstanding projects from the Company's 2010 capital program, continued in Q2 2011.

The retrofit of two additional hybrid drilling rigs for Australia is nearing completion, as is the construction of a third service rig for Australia. These three rigs are expected to be available for the Australian market by Q4 2011.

Two TDS-3000(TM) drilling rig conversions were completed in the quarter and the first six of these rigs have already been contracted. There is also significant interest in the remaining TDS-3000(TM) rigs being retrofitted and Savanna expects to have all ten of these rigs under contract before they are field ready.

The two new high specification deep double drilling rigs, as previously announced, are contracted and are expected to be deployed to the United States in Q3 2011.

Projects under the recently announced expansion to Savanna's 2011 capital program have also been initiated. The construction of three new service rigs, the retrofit of one conventional double drilling rig and three service rigs, and expansion of the rental fleet, portable top drive fleet, support equipment, drill pipe and a field shop are all expected to be completed in 2011 or early 2012.

Subsequent to the end of the quarter, the Company entered into an agreement to dispose of its Blackfalds, Alberta field office for proceeds of approximately $4.1 million. The sale, should it close based on the current agreement, would result in a gain of approximately $0.7 million. Rigs operating from this location will be deployed to Savanna's Nisku, Alberta facility as well as through an expansion to its Medicine Hat, Alberta facility.

FINANCIAL CONDITION AND LIQUIDITY

On May 25, 2011, Savanna completed its offering of $125 million aggregate principal amount of 7.0% senior unsecured notes, due May 25, 2018, pursuant to a private placement in Canada. Interest will be paid semi-annually and the debt issue costs of $2.5 million with respect to this transaction are expensed over the term of the loan as finance expenses. The proceeds were used to pay down the Company's revolving credit facility which was also restructured in Q2 2011. The total available amount under the restructured facility was reduced to $135 million from $155 million and is for a committed four-year term, due May 25, 2015; however, the Company has the option to extend the term of the loan annually. Of that amount $15 million is committed to the Canadian operating facility. Previously, the facility was renewed annually and if not renewed would revert to a two-year term loan with a three-year amortization.

Savanna's net debt(1) position at June 30, 2011, was $73.7 million; the amount owing on its revolving credit facility was $28.9 million and Savanna's total long-term debt outstanding was $155.9 million. As of the date of this release, $54.6 million was drawn on Savanna's revolving credit facility.

Notes:


1.  Operating margin, operating margin percent, operating cash flows,
    capital assets, working capital, and net debt are not recognized
    measures under GAAP, 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 prior to consideration of how those
    activities are financed and how the results are taxed in various
    jurisdictions. 

--  Operating margin is defined as revenue less operating expenses.  
--  Operating margin percent is defined as revenue less operating expenses
    divided by revenue. 
--  Operating cash flows are defined as cash flows from operating activities
    less: changes in non-cash working capital, income taxes paid or received
    and interest paid or received.  
--  Capital assets are defined as property, equipment and intangible assets.
--  Working capital is defined as total current assets less total current
    liabilities excluding the current portions of long-term debt. 
--  EBITDAS is defined as earnings before interest, income taxes,
    depreciation, amortization and stock-based compensation. 
--  Net debt is defined as long-term debt, including the current portions
    thereof, less working capital as defined above. 

2.  Certain industry related terms used in this press release are defined or
    clarified as follows: 

--  The number of operating days, spud to release days and operating hours
    are all on a net basis which means only Savanna's proportionate share of
    any rigs held in 50/50 limited partnerships have been included.  
--  Savanna reports its drilling rig utilization based on spud to release
    time for the rigs and excludes moving, rig up and tear down time, even
    though revenue may be earned during this time. Savanna's rig
    utilization, spud to release days, wells drilled and total meters
    drilled exclude coring rigs as the operating environment is not
    comparable to the Company's other drilling rigs, nor to industry
    utilization drivers. However, these rigs are included in total fleet
    numbers. Source of Canadian industry average utilization figures:
    Canadian Association of Oilwell Drilling Contractors ("CAODC"). 
--  Savanna reports its well servicing rig utilization based on standard
    hours of 3,650 per rig per year. The comparative utilization rates
    exclude the coiled tubing service units since these units are not
    comparable in size or operations to the division's service rigs.
    Reliable industry average utilization figures, specific to well
    servicing, are not available. 

Cautionary Statement Regarding Forward-Looking Information and Statements

Certain statements and information contained in this press release including statements related to the Company's 2011 capital expenditures, international and other long-term growth opportunities, the conversion of hybrid drilling rigs to TDS-3000(TM) rigs, the timing of completion of capital program initiatives and related rig deployments, the expectation of strong rig utilization and pricing fundamentals, industry labour constraints and their effect on Savanna, 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 expectations the timing of completion of capital program initiatives and related rig deployments and the conversion of hybrid drilling rigs to TDS-3000(TM) rigs are premised on the Company's expectations for its customers' capital budgets and geographical areas of focus, the status of current negotiations with its customers, the focus of its customers on oil directed drilling opportunities in the current natural gas pricing environment in North America and the effect unconventional gas projects have had on supply and demand fundamentals for natural gas. The Company's expectation of strong rig utilization and pricing fundamentals is premised on customer contracts and commitments, negotiations with its customers and overall demand increases based on current commodity prices and industry activity. Similarly, the Company's expectation of increased activity levels and growth opportunities in Australia is premised on the current level of tender activity in the Australian market which in turn is based on the general expectation that coal seam gas activity will increase in that country as plans for liquid natural gas plants move forward. The Company's expectation that industry labour constraints will not meaningfully impact deployment and utilization of its equipment is premised on expanded recruiting and training programs and current increases in utilization rates which indicate greater job security for current and potential employees. 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 and contract drilling; the effects of weather conditions on operations and facilities; the existence of competitive operating risks inherent in well servicing 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 Q2 2011 report, including its management's discussion and analysis and condensed interim 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 Friday August 12, 2011, at 9:00 a.m. Mountain Time (11:00 a.m. Eastern Time) to discuss the Company's second quarter results. The call will be hosted by Ken Mullen, Savanna's President and Chief Executive Officer and Darcy Draudson, 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 August 19, 2011 by dialing 1-800-937-6305 and entering passcode 972099.

Savanna is a Canadian-based drilling and well servicing provider with operations in Canada, the United States and Australia focused on providing fit for purpose equipment and technologies.

Contact Information

  • Savanna Energy Services Corp.
    Ken Mullen
    President and Chief Executive Officer
    (403) 503-9990
    (403) 267-6749 (FAX)

    Savanna Energy Services Corp.
    Darcy Draudson
    Vice President Finance and Chief Financial Officer
    (403) 503-9990
    (403) 267-6749 (FAX)
    www.savannaenergy.com