Savanna Energy Services Corp. Announces First Quarter 2017 Results and Temporary Waiver Amendment and Extension from Syndicated Credit Facility Lenders
Savanna (TSX:SVY) generated revenue of $117.3 million, EBITDAS of $10.8 million and a net loss, attributable to shareholders of the Company, of $19.8 million or $0.17 per share in the first quarter of 2017, compared to revenue of $93.7 million, EBITDAS of $20.3 million and a net loss, attributable to shareholders of the Company, of $10.1 million or $0.11 per share in Q1 2016. Improving industry sentiment in late 2016 and into 2017, resulted in increased activity levels throughout Savanna's business lines in Canada and drilling activity in the U.S. The increased activity in Canada resulted in revenue and operating margin increases in Canadian drilling, well servicing and rentals compared to Q1 2016, despite lower year-over-year pricing. However, lower utilization and operating margins in Savanna's Australian divisions, combined with the effect of 2016 contract rollovers and negative operating margins realized in the Company's U.S. drilling division, resulted in lower overall operating margin and EBITDAS in Q1 2017 compared to Q1 2016. Savanna's negative operating margins in U.S. drilling resulted from increased operating costs associated with reestablishing a more significant operation in the Permian basin.
In Canada, revenues increased by $25.8 million and operating margin increased by $2.5 million relative to Q1 2016. In the U.S., compared to Q1 2016, revenues increased by $4 million while operating margin declined by $8.7 million. In Australia, revenues were $6.2 million lower and operating margin was $3.8 million lower compared to Q1 2016. Savanna's overall operating margin in Q1 2017 was $10 million lower relative to Q1 2016, and operating margin percentages were 15 percentage points lower. General and administrative expenses declined from $7.8 million in Q1 2016 to $7.3 million in Q1 2017. As a result, EBITDAS was $9.5 million lower than in Q1 2016.
Long-reach drilling, shallow drilling, well servicing and rentals in Canada all experienced increases in utilization and activity, which resulted in higher revenue and operating margins compared to Q1 2016, despite year-over-year pricing decreases. Billable days in long-reach drilling increased by 123% relative to Q1 2016, while average day rates were 11% lower. The shallow drilling fleet achieved a 51% increase in billable days with average day rates 16% lower relative to Q1 2016. Activity in well servicing increased by 47%, while pricing remained relatively flat compared to Q1 2016, after increasing from Q4 2016 levels to cover higher labour costs. Other than labour costs in Canadian well servicing, per day/hour rig costs and field office costs were relatively in-line with Q1 2016, in each of Savanna's Canadian operating divisions. Overall in Canada during Q1 2017, Savanna generated $11.5 million in operating margin on $63.8 million of revenue, compared to $9 million in operating margin on $38 million of revenue in Q1 2016. Sequentially, operating margins increased compared to the $4.6 million generated on $41.8 million of revenue in Canada in Q4 2016 as a result of a seasonal increase in activity levels.
In the U.S., increases in drilling activity were driven by a larger number of drilling rigs working in the quarter, which resulted in increased revenue in Q1 2017, relative to Q1 2016, despite a 31% decrease in average day rates. The decrease in day rates in the U.S. were based on 2016 contract roll overs on two of Savanna's three Velox triple drilling rigs with Q1 2017 rates approximately $10,000 U.S. dollars per day lower than in Q1 2016, and changes in rig mix, as seven rigs were upgraded and reactivated in the Permian basin in the second half of 2016. A delay in the commencement of work under the two new Marcellus contracts, as well as crew retention, rig move, and repairs and maintenance costs associated with those two rigs and the rigs recently reactivated in West Texas, combined with an increase in field office costs and operational challenges in the region in Q1 2017, resulted in negative operating margins in Savanna's U.S. drilling division in the quarter. In Savanna's U.S. well servicing division, both utilization and pricing decreased in Q1 2017, relative to Q1 2016, which resulted in decreases in revenue and operating margin. Overall in the U.S., Savanna generated negative $1.9 million in operating margin on $21 million of revenue in Q1 2017, compared to $0.1 million in operating margin on $22.3 million of revenue in Q4 2016 and $6.8 million in operating margin on $17 million of revenue in Q1 2016.
Negative operating margins have been realized in the Company's West Texas operation in the last two quarters and management is focused on improving results in the region. Savanna's strategic decision to reactivate drilling rigs in the Permian basin is expected to yield positive results as this market continues to improve and efforts to improve the efficiency of operations take effect.
In Australia, Savanna's drilling, well servicing and trucking divisions experienced activity and revenue declines relative to Q1 2016. The decreases were driven by fewer rigs under contract and a decrease in trucking activity related to lower well servicing and drilling activity. Operating margin percentages also decreased in the quarter based on a greater proportion of operating versus stand-by activity in Q1 2017 relative to Q1 2016. Savanna generated $8.4 million in operating margin on $32.5 million of revenue in Australia in Q1 2017, compared to $12.3 million in operating margin on $38.7 million of revenue in Q1 2016. Sequentially, operating margin decreased from the $13.2 million generated on $40.1 million of revenue in Australia in Q4 2016. The decrease in operating margin sequentially was a result of decreases in drilling, well servicing and trucking activity in the quarter.
Overall for the quarter, lower utilization and operating margins in Savanna's Australian divisions and U.S. well servicing division, combined with the negative operating margins realized in the Company's U.S. drilling division, resulted in a 47% decrease in EBITDAS, compared to Q1 2016. Additionally in Q1 2017, Savanna incurred $8.8 million of expenses with respect to Total Energy Services Inc.'s ("Total") take-over bid and Savanna's strategic review process undertaken in response thereto. The expenses incurred include financial and advisory costs, severance and other change of control costs, as well as legal and other professional fees. The acquisition by Total of more than 50% of the outstanding common shares of Savanna also triggered accelerated vesting provisions with respect to all of Savanna's share-based rewards, which resulted in a $2.2 million increase in share-based compensation expense. The decrease in EBITDAS, combined with the take-over bid related costs and increase in share-based compensation expense, resulted in a $9.5 million, or 94%, increase in the Company's net loss, compared to Q1 2016. Sequentially, Savanna's overall EBITDAS decreased from the $12.2 million generated in Q4 2016, in part due to increases in general and administrative expenses. Compared to Q4 2016 general and administrative expenses increased in Q1 2017, as a result of salary and wage roll back reversals, a reduction in the amount of salaries and wages capitalized toward Savanna's enterprise resource planning system upgrades, fees related to the audit of the Company's annual financial statements, and bad debt expenses. Savanna's net loss attributable to the shareholders of the Company increased from the Q4 2016 net loss attributable to the shareholders of the Company of $18.9 million, or $0.20 per share. The sequential increase in net loss was primarily a result of lower EBITDAS and the take-over bid and strategic review expenses outlined above, partially offset by an increase in deferred income tax recoveries due to a $4.3 million write-down against deferred tax assets in Q4 2016.
Savanna's working capital(1) at March 31, 2017, was $61.8 million, which included $25.4 million in cash. Savanna's total long-term debt outstanding on March 31, 2017, excluding unamortized debt issue costs, was $281.7 million, compared to $249.7 million outstanding at December 31, 2016. The March 31, 2017 total long-term debt amount included $4.2 million in gross partnership debt, of which Savanna's proportionate share is approximately 50%. Savanna's total debt position at March 31, 2017, net of cash, was $256.2 million compared to $235.1 million at December 31, 2016. Savanna's total debt, net of cash increased from the end of the year based on working capital requirements in the first quarter.
The acquisition by Total of more than 50% of the outstanding common shares of Savanna was an event of default under Savanna's syndicated credit facility, second lien senior secured term loan, and mortgage. After evaluating its options and consulting with Total, Savanna determined to issue a change of control offer to repurchase the outstanding principal of senior unsecured notes at a price of 101% of the principal amount thereof. A holder of $60 million aggregate principal amount of senior unsecured notes agreed that it will not tender to the change of control offer, which expires on June 22, 2017. As a result of the defaults and change of control offer, all of the amounts under the syndicated credit facility, second lien senior secured term loan, and mortgage, and $47.1 million of the senior unsecured notes have been classified as a current liability on the Company's balance sheet at March 31, 2017.
Savanna has engaged with Total who currently owns approximately 86% of the outstanding common shares of Savanna, and expects that any refinancing required with respect to its syndicated credit facility, second lien senior secured term loan, mortgage, and/or senior unsecured notes will be available to Savanna on a timely basis.
On April 21, 2017, Savanna entered into a temporary waiver agreement with the lenders of its syndicated credit facility. In May 2017, Savanna also received a waiver in respect of its mortgage.
On May 12, 2017, Savanna entered into an amended and restated temporary waiver agreement (the "Waiver") with the lenders of its syndicated credit facility. Pursuant to the Waiver, such lenders have: (a) acknowledged certain defaults under the syndicated credit facility that have occurred as a result of the acquisition by Total of more than 50% of the outstanding common shares of Savanna and the previously announced demand for payment pursuant to Savanna's second lien credit facility; and (b) waived such defaults until the earliest to occur of: (i) 2 business days immediately preceding the date of any repayment or redemption of Savanna's senior unsecured notes, (ii) the occurrence of any other default or event of default under the syndicated credit facility or other credit document, (iii) 2 business days immediately following the date upon which Savanna becomes a wholly owned subsidiary of Total, and (iv) June 30, 2017.
The positive oil and natural gas industry sentiment entering 2017, contributed to significant improvement in North American industry activity in Q1 2017. In Canada, activity levels increased significantly in Q1 2017 relative to Q1 2016, however meaningful price increases did not materialize. Based on current stated customer intentions, Savanna expects activity to continue improving for the remainder of 2017 relative to 2016. With continued increases in activity, Savanna expects pricing will begin to improve gradually into the second half of 2017 in Canada.
In the U.S., Savanna currently has two AC double drilling rigs and one Velox AC triple drilling rig under contract throughout 2017 and most of 2018 in the Marcellus. Rates, particularly with respect to Savanna's Velox AC triple drilling rigs, are beginning to show signs of upward momentum. In Q2 2017, Savanna signed a two-year contract on its Velox AC triple drilling rig in West Texas with a day rate over 30% higher compared to the lows reached in 2016. Savanna's third Velox triple drilling rig, not under long-term contract, is currently working at rates 15% higher than the lows reached in 2016. With respect to the drilling rigs reactivated in the Permian basis in the second half of 2016, Savanna expects operating margins on these rigs to begin improving later in the quarter and through the remainder of 2017, relative to the negative margins realized over the last two quarters. Additional drilling rig reactivations in the Permian basin, will be deferred until profitability in the region improves.
In Australia, Savanna expects to have a new contract with an existing customer finalized in Q2 2017. The terms of the new contract have been agreed to outside of the formal tender process, which will cover one drilling rig, five service rigs and two flush-by units. All of these rigs are currently working for the same customer under various contacts. The drilling rig will begin working under the new contract once finalized, while the seven original new-build contracts still in place in Australia will move onto the new contract as the original ones expire throughout the second half of 2017. The Company also has two other service rigs and one drilling rig on contract with a second customer and expects a third drilling rig to begin work with a third customer later in Q2 2017.
Savanna believes its built-for-purpose drilling and service rigs, as well as its operational and safety performance, puts the Company in a strong competitive position to re-contract all of its drilling and service rigs in Australia.
On April 5, 2017 the Board of Directors of Savanna was reconstituted and Daniel Halyk was appointed President and CEO of Savanna. Following this reconstitution, Savanna began the process of engagement with Total to formulate a business integration plan. Such plan will be premised on the primary objective of improving the financial performance of the combined entity by achieving revenue synergies and realizing operational and administrative efficiencies and cost savings. Execution of such plan will be completed as soon as reasonable practicable following completion of the acquisition of Savanna by Total, which is expected to occur prior to June 30, 2017.
Savanna's full Q1 2017 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 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.
SOURCE: Savanna Energy Services Corp.
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