Savanna Announces Q2 2014 Results and New Triple Drilling Rig Contract

Press Release –

Calgary, Alberta
August 5, 2014
TSX – SVY

Second Quarter Results

Savanna Energy Services Corp. (“Savanna” or “the Company”) generated EBITDAS of $14.4 million on $148.9 million of revenue in Q2 2014, an increase of 42% from EBITDAS of $10.1 million on $112.1 million of revenue in Q2 2013. The increases were primarily a result of higher activity levels and average day rates in Canadian long-reach drilling and U.S. well servicing and improved utilization in Australia. These increases were somewhat offset by higher per day operating costs in Savanna’s U.S. drilling operation.

Increases in Savanna’s long-reach drilling utilization and average day rates in Canada in Q2 2014 resulted in a significant increase in operating margins for the geographic segment compared to Q2 2013. Savanna generated $9.9 million in operating margins on $64.1 million of revenue in Canada in Q2 2014, compared to $2.7 million in operating margins on $40 million of revenue in Q2 2013. Virtually all of the $7.2 million increase in operating margins in Canada relative to Q2 2013 was achieved by the long-reach drilling rig fleet. Savanna’s shallow drilling, well servicing, and rentals fleets in Canada also realized activity increases in Q2 2014 compared to Q2 2013; however, year-over-year operating margins remained relatively flat for these business units compared to Q2 2013.

In Australia, improved utilization, and operating an additional drilling rig, resulted in operating margin increases in the quarter relative to Q2 2013. Overall operating margins from Australia totaled $6.2 million in Q2 2014, up 20% from the $5.1 million generated in Q1 2014, and 10% higher than the $5.6 million in operating margins in Q2 2013. Activity levels continue to ramp up in Australia and Savanna’s position within the Australian market is expanding along with them. An additional five workover rigs and three flush-by units are under construction and are expected to commence operations in Australia in Q4 2014. Including the Company’s fifth drilling rig added in December 2013, Savanna will be more than doubling its fleet in the region in less than twelve months.

In the U.S., operating margins decreased in Q2 2014, despite higher revenue compared to Q2 2013. The majority of the revenue increase was a result of an appreciation in the value of the U.S. dollar relative to the Canadian dollar and from the retrofit and transfer of idle service rigs from Canada to the U.S. In Savanna’s U.S. well servicing division, operating hours and revenue increased based on more active rigs relative to Q2 2013, and combined with higher year-over-year pricing, resulted in a 77% increase in operating margins compared to Q2 2013. Conversely, in U.S. drilling, higher per day operating costs on relatively flat utilization resulted in a 32% decrease in operating margins. Savanna generated $11.7 million in operating margins on $50.2 million of revenue in the U.S. in Q2 2014, compared to $14.3 million in operating margins on $43.8 million of revenue in Q2 2013. These cost increases are expected to be addressed in the next few quarters and Savanna expects per day operating costs to decrease beginning in Q3 2014 and going forward. Savanna also remains focused on improving day rates, including revenue on pass through costs. Savanna’s U.S. drilling contract status overall should ensure the Company is able to maintain above industry utilization.

Savanna’s Q2 2014 net loss attributable to the shareholders of the Company widened to $12 million, or $0.13 per share, from a net loss of $8.6 million, or $0.10 per share, in Q2 2013. The decrease in earnings occurred despite the overall increase in EBITDAS as a result of the following: higher depreciation, based on higher activity levels and an increase in the value of assets depreciated on a straight-line basis; higher share-based compensation, based on mark-to-market adjustments on higher share prices; higher finance expenses, based on an increase in outstanding debt; and losses versus gains on both foreign exchange and asset disposals in 2013.

Year-to-Date Results

On a year-to-date basis, higher utilization for Savanna’s long-reach drilling fleet in Canada resulted in a $6.6 million increase in operating margins relative to the first half of 2013, despite lower average day rates in Q1 2014. However, a decrease in Q1 coring activity and day rates for Savanna’s shallow drilling fleet in Canada, combined with lower activity and rates in Canadian well servicing and rentals more than offset these improvements. As a result, overall operating margins in Canada decreased by 3% compared to the first half of 2013.

Savanna’s Australian operations achieved improved utilization in the first half of 2014 relative to the first half of 2013, and operated an additional drilling rig. The higher utilization and additional drilling rig resulted in a 19% increase in revenue and a 15% increase in operating margins from Australia in the first half of 2014 compared to the first half of 2013.

In the U.S., Savanna’s well servicing division, increased operating hours and revenue based on operating an average of five additional service rigs relative to the first half of 2013, and combined with higher year-over-year pricing, resulted in an 81% increase in operating margins. In contrast, in U.S. drilling, lower Q1 utilization and higher per day operating costs resulted in a 25% decrease in operating margins.

Overall for the first half of 2014, operating margin increases in Canadian long-reach drilling, U.S. well servicing, and Australia were more than offset by utilization and rate decreases in Canadian shallow drilling, Canadian well servicing, and Canadian rentals, and cost increases in U.S. drilling. This resulted in a 4% overall decrease in EBITDAS relative to the first half of 2013. To date in 2014, Savanna also realized: higher depreciation, share-based compensation, finance expenses, and foreign exchange and asset disposal losses versus gains in 2013. These factors, combined with lower year-over-year EBITDAS, resulted in a decrease in net earnings in the first half of 2014 compared to the first half of 2013.

New Triple Drilling Rig Contract

Savanna is pleased to announce that it has secured a multi-year contract for its third new-build triple drilling rig. The rig is anticipated to commence field operations in the U.S. starting in Q1 2015. This contract represents the third triple drilling rig contract secured in 2014, and results in Savanna’s entire current 12 rig new-build program being contracted on a multi-year, take or pay, basis. A number of the 12 rigs under this build program will begin contributing to Savanna’s operating results in Q4 2014, and all will generate meaningful incremental revenue and operating margin contributions in 2015 and beyond.

In light of these contract successes, Savanna is now focused on firming up its 2015 rig-build program. Additional 2015 rig-builds will be in line with Savanna’s express strategies of enhancing its presence in deeper drilling markets in North America and expanding its presence in Australia. As in 2014, priority will be given to projects backed by long-term contracts.

Ken Mullen, Savanna’s President and CEO stated:

“We are extremely pleased with the endorsement that our recent contract awards provide for our ultra-deep double and triple rig designs. While we remain focused on improving returns on our existing fleet, the combined growth profile from these builds, coupled with anticipated incremental opportunities to expand our position in Australia, provides substantial growth and diversification potential to our platform.”

Read more: http://www.savannaenergy.com/docs/news-releases/press%20release.svy.q2.2014.results.aug.5.2014.pdf

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