CALGARY, ALBERTA--(Marketwire - Nov. 5, 2012) - Overall, a decrease in industry activity and demand in Canada led to a decrease in utilization, revenue, operating margins and EBITDAS in Q3 2012 compared to Q3 2011. Activity levels in Canada, particularly in drilling and completions, were sharply reduced compared to 2011, and demonstrated a much higher level of decline than in the U.S., Savanna's (TSX:SVY) other primary market. Reduced demand for all of Savanna's service lines in Canada negatively affected Q3 results, despite increases in both the U.S. and Australia.
Financial Highlights
The following is a summary of selected financial information of the Company:
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30 | 2012 | 2011 | Change | 2012 | 2011 | Change | ||||||
| (Stated in thousands of dollars, except per share amounts) | $ | $ | $ | $ | ||||||||
| OPERATING RESULTS | ||||||||||||
| Revenue | 154,300 | 166,127 | (7 | %) | 501,079 | 429,257 | 17 | % | ||||
| Operating expenses | 108,445 | 115,298 | (6 | %) | 345,974 | 306,452 | 13 | % | ||||
| Operating margin(1) | 45,855 | 50,829 | (10 | %) | 155,105 | 122,805 | 26 | % | ||||
| Operating margin %(1) | 30 | % | 31 | % | 31 | % | 29 | % | ||||
| EBITDAS(1) | 34,853 | 39,387 | (12 | %) | 121,649 | 92,773 | 31 | % | ||||
| Per share: basic | 0.41 | 0.47 | (13 | %) | 1.43 | 1.14 | 25 | % | ||||
| Per share: diluted | 0.41 | 0.46 | (11 | %) | 1.42 | 1.13 | 26 | % | ||||
| Net earnings | 6,915 | 14,363 | (52 | %) | 34,350 | 28,982 | 19 | % | ||||
| Per share: basic | 0.08 | 0.17 | (53 | %) | 0.40 | 0.36 | 11 | % | ||||
| Per share: diluted | 0.08 | 0.17 | (53 | %) | 0.40 | 0.35 | 14 | % | ||||
| CASH FLOWS | ||||||||||||
| Operating cash flows(1) | 32,982 | 39,826 | (17 | %) | 112,055 | 96,380 | 16 | % | ||||
| Per diluted share | 0.38 | 0.47 | (19 | %) | 1.31 | 1.18 | 11 | % | ||||
| Acquisition of capital assets(1) | 42,040 | 91,099 | (54 | %) | 140,148 | 218,023 | (36 | %) | ||||
| Dividends paid | 5,862 | - | 100 | % | 10,085 | - | 100 | % | ||||
| FINANCIAL POSITION | Sep. 30 2012 | Dec. 31 2011 | Change | |||||||||
| $ | $ | |||||||||||
| Working capital(1) | 78,783 | 99,587 | (21 | %) | ||||||||
| Capital assets(1) | 1,091,751 | 1,033,241 | 6 | % | ||||||||
| Total assets | 1,264,845 | 1,233,700 | 3 | % | ||||||||
| Long-term debt | 214,623 | 207,637 | 3 | % | ||||||||
NOTES:
- Operating margin, operating margin percentage, 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, capital assets, working capital, and net debt are not recognized measures under IFRS; however, management believes that these measures are useful as they provide an indication of the Company's liquidity, leverage and investment in operating assets.
- 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, amortization and share-based compensation and excludes other expenses.
- Operating cash flows are defined as cash flows from operating activities before changes in non-cash working capital.
- Capital assets are defined as property, equipment and intangible assets.
- The acquisition of capital assets includes the purchase of property, equipment and intangible assets, capital assets acquired through business acquisitions and non-cash capital asset additions.
- Working capital is defined as total current assets less total current liabilities excluding the current portions of long-term debt.
- Net debt is defined as long-term debt, including the current portions thereof and excluding unamortized debt issue costs, less working capital as defined above.
- 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 its operational drilling rigs and excludes 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.
- Savanna reports its service rig utilization for its operational service rigs based on standard hours of 3,650 per rig per year. Reliable industry average utilization figures, specific to well servicing, are not available.
The third quarter of 2012 began with wet conditions limiting activity in Canada, but as field conditions improved demand remained muted as customers pulled back on their Q3 projects. This resulted in an overall decrease in revenue compared to Q3 2011 and reduced Savanna's Q3 2012 EBITDAS(1) by $4.5 million to $34.9 million from $39.4 million in Q3 2011. Savanna's net earnings decreased further compared to Q3 2011, and at $6.9 million for Q3 2012 were $7.5 million lower than the comparative quarter. The decrease was a result of higher share-based compensation expense based on mark-to-market adjustments on the Company's deferred share units, higher depreciation and amortization expenses based on an increased capital asset cost base, higher finance expenses, and foreign exchange losses compared to gains in Q3 2011.
On a year-to-date basis, the strong demand for drilling, completion and maintenance services in the first part of 2012, backed by relatively high oil prices and sustained activity levels in liquids-rich natural gas and unconventional oil plays, coupled with improved operating performance resulted in Savanna generating significantly higher revenue, operating margins, EBITDAS, net earnings, and operating cash flows compared to the first nine months of 2011. These increases from Q1 2012 have held despite the negative effects of an extended spring break-up in Canada, prolonged periods of wet weather and a reduction in overall industry demand in the last six months. Total EBITDAS(1) for the nine months ended September 30, 2012, was $121.6 million which represents an increase of $28.9 million or 31% from the nine months ended September 30, 2011. Net earnings on a year-to-date basis have increased by $5.4 million to $34.4 million; a 19% increase from the $29 million in net earnings to the end of September 2011, despite a $4.8 million impairment charge in Q2 2012.
CONTRACT DRILLING
The decrease in industry activity and demand in Canada led to significantly lower operating days in Q3 2012 compared to Q3 2011. Conversely, both the U.S. and Australian divisions achieved more days in Q3 this year versus last year based on larger drilling rig fleets in each respective region. Overall, the drilling division achieved 8% fewer operating days in Q3 2012 compared to Q3 2011. However, a 3% increase in average day rates over the same time frame and 8% lower per day operating costs resulted in a $0.5 million or 1% increase in operating margins in Q3 2012 compared to Q3 2011 despite the lower activity.
Based on year-to-date increases in operating days and day rates, together with overall improved operating margin performance, operating margins in the first nine months of 2012 increased by $32.3 million or 36% from the first nine months of 2011. In aggregate, for the nine months ended September 30, 2012, drilling revenue was $367.1 million, which is up significantly from $321.3 million for the same period in 2011. Operating margins in the first nine months of 2012 were $121.9 million (33% of revenue) compared to the same period in 2011 when operating margins were $89.6 million (28% of revenue).
The Canadian long-reach drilling rigs were able to maintain operating margin percentages in Q3 2012 compared to Q3 2011 despite the decrease in utilization that led to a 20% decrease in operating margins in the same respective periods. In the first part of 2012, the Canadian industry was highly focused on developing oil and liquids-rich prospects. Savanna was well positioned within these activity areas, and as a result demand for Savanna's primarily deep fleet of drilling rigs in Canada was particularly strong. Despite a decrease in overall demand in Q3 2012, Savanna's long-reach horizontal drilling rigs have consistently achieved utilization rates higher than industry averages (in the same depth categories) and day rates above those of 2011. These factors have led to a $9.7 million increase in operating margins, compared to the first nine months of 2011, for the Canadian long-reach horizontal drilling fleet, which contributed 45% of Savanna's overall operating margin to the end of September, 2012.
Savanna's fleet of shallow rigs in Canada was the most negatively impacted by the decrease in industry demand in Q3 2012. These shallow rigs in Canada were not able to generate sufficient revenues to cover fixed operating costs in the third quarter this year. These rigs were also the most significantly impacted by the extended break-up conditions in Q2 2012 as the conventional shallow drilling market has been virtually non-existent throughout 2012. However, Savanna's shallow CT-1500 fleet found a niche in Q1 2012 performing coring work for oil sands customers, and achieved significant increases in utilization, day rates and operating margins in that quarter compared to the same period in 2011. The gains achieved in Q1 have held despite very poor utilization over the last six months and operating margins remain $1.8 million ahead of the first nine months of 2011. The Company does expect to see a marginal increase in activity for the shallow fleet in Q4 2012 and expects the rigs to be highly utilized performing coring work in Q1 2013.
Backed by strong contract positions and operating in high activity areas, the Company's U.S. drilling fleet did not face the same demand pressures as in Canada, and the fleet continued to achieve high utilization rates. Revenue for Savanna's U.S. drilling operations was 12% higher in Q3 2012 compared to Q3 2011, and 21% higher on a year-to-date basis, as a result of more rigs, more operating days and higher day rates. Operating margin performance in the U.S. has improved dramatically in 2012 as footage-based contracts in place in 2011 were converted to day work terms. As a result, operating margins increased by 82% in Q3 2012 from Q3 2011 and operating margin percentages increased by 11 percentage points. The Q3 2012 increase in operating margins brings the year-over-year increase for the first nine months of 2012 to $17.1 million or 81% from the first nine months of 2011 with operating margin percentages ten percentage points higher this year compared to last.
In Australia, more of the fleet worked throughout Q3 2012 generating solid operating margins on a rig-by-rig basis. This resulted in Australia contributing more than its share of overall drilling operating margins in the quarter on a rig-by-rig basis. In Q3 2011, the first of the four drilling rigs only began working in the last part of the quarter. As the fleet begins working more consistently and achieves higher utilization rates the Company expects operating margin contributions to continue to improve.
OILFIELD SERVICES
Savanna's oilfield services division generated lower revenues based on a decrease in operating hours in Q3 2012 compared to Q3 2011. In Canada, wet conditions limited activity early in Q3 2012, but as field conditions improved demand remained muted and operating hours were significantly lower compared to Q3 2011. In Australia, customer delays continued to negatively affect utilization, and operating hours were lower in Q3 2012 versus Q3 2011 despite having one additional service rig available this year. The U.S. services rigs were the only Savanna rigs in the oilfield services division to increase hours compared to Q3 2011 as demand held strong in the areas where these rigs were deployed. Overall, operating hours decreased by 23% in Q3 2012 compared to Q3 2011, resulting in a $5.5 million operating margin decrease compared to Q3 2011.
On a year-to-date basis, the negative impact of an extended spring break-up in Canada in Q2 2012, and a reduction in overall industry demand in Q3 2012 resulted in lower year-over-year utilization. As a result, operating margins have remained flat despite more operating hours and higher revenue this year compared to last. Overall for the nine months ended September 30, 2012, oilfield services revenue was up $25.8 million to $136.2 million from $110.4 million for the same period in 2011. Aggregate operating margins were basically unchanged at $32.6 million for the first nine months of 2012 compared to $32.7 million for the same period in 2011; however, operating margin percentages are six percentage points lower this year compared to last.
Savanna's Canadian service rig fleet increased by nearly 50% through two acquisitions in the summer of 2011. This growth contributed to an increase in operating hours and, combined with higher hourly rates, overall revenues and operating margins increased in Q1 2012 relative to Q1 2011. While hourly rates for well servicing have remained higher throughout 2012 versus 2011, utilization of the much larger fleet in the last six months has lagged that of the same period in 2011. With a higher labour and fixed cost base driven by its larger scale, this negatively affected operating margins in the second and third quarters of 2012. Savanna still expects a secular increase in well servicing activity over the medium-term and has been upgrading and re-certifying its fleet and improving recruiting and training capabilities in anticipation of this expected demand increase.
In contrast, the U.S. well servicing division did not see any decrease in demand and had strong utilization rates throughout Q3 2012. The U.S. operation clearly continued to benefit from a larger service rig fleet, increasing operating margins by 36% in Q3 2012 compared to Q3 2011. On a year-to-date basis, operating margins were 61% higher in the first nine months of 2012 compared to the same period in 2011.
In Australia, the service rigs and rental equipment generated higher revenues in Q3 2012 compared to Q3 2011 based on more equipment this year versus last. However, lower than expected service rig utilization and resulting crew retention costs led to operating margins just slightly ahead of breakeven for Q3 2012, which is consistent with those in Q3 2011. The Company expects to have more of the fleet working throughout Q4 2012 which should result in improved operating margin contributions.
BALANCE SHEET
Savanna's working capital at September 30, 2012, was $78.8 million and its net debt(1) position was $135.8 million. The amount owing on its revolving credit facility was $84.1 million and Savanna's total long-term debt outstanding, excluding unamortized debt issue costs, was $214.6 million. As of the date of this release, $85.0 million was drawn on Savanna's available revolving credit facility of $180 million, and $3.6 million was drawn on Savanna's available operating facility of $20 million. Savanna's current financial position provides the Company with considerable flexibility for the remainder of 2012 and beyond.
DIVIDEND
In total for Q3 2012, Savanna declared dividends of $7.7 million or $0.09 per share.
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 Ended | Nine Months Ended | |||||||||||||||
| September 30 | 2012 | 2011 | Change | 2012 | 2011 | Change | ||||||||||
| Revenue | $ | 110,839 | $ | 117,120 | (5 | %) | $ | 367,054 | $ | 321,346 | 14 | % | ||||
| Operating expenses | $ | 75,869 | $ | 82,632 | (8 | %) | $ | 245,157 | $ | 231,743 | 6 | % | ||||
| Operating margin(1) | $ | 34,970 | $ | 34,488 | 1 | % | $ | 121,897 | $ | 89,603 | 36 | % | ||||
| Operating margin %(1) | 32 | % | 29 | % | 33 | % | 28 | % | ||||||||
| Operating days(2) | 5,221 | 5,705 | (8 | %) | 15,967 | 15,566 | 3 | % | ||||||||
| Revenue per operating day | $ | 21,229 | $ | 20,529 | 3 | % | $ | 22,988 | $ | 20,644 | 11 | % | ||||
| Spud to release days(2) | 4,522 | 5,034 | (10 | %) | 14,020 | 13,724 | 2 | % | ||||||||
| Wells drilled(2) | 547 | 538 | 2 | % | 1,684 | 1,692 | 0 | % | ||||||||
| Total meters drilled(2) | 1,031,310 | 1,015,903 | 2 | % | 2,862,593 | 2,646,920 | 8 | % | ||||||||
The following summarizes the operating results for the three and nine months ended September 30, 2012 and 2011 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 | U.S. and | ||||||
| Three months ended September 30, 2012 | Canada | Canada | International | Total | ||||
| $ | $ | $ | $ | |||||
| Revenue | 56,865 | 2,703 | 51,271 | 110,839 | ||||
| Operating margin(1) | 21,521 | (797 | ) | 14,246 | 34,970 | |||
| Operating margin %(1) | 38 | % | (29 | %) | 28 | % | 32 | % |
| Revenue excluding cost recoveries | 51,813 | 2,539 | 50,477 | 104,829 | ||||
| Operating margin(1) | 21,521 | (797 | ) | 14,246 | 34,970 | |||
| Operating margin %(1) | 42 | % | (31 | %) | 28 | % | 33 | % |
| Average number of net rigs deployed | 43 | 20 | 30 | 93 | ||||
| Utilization %(2) | 56 | % | 8 | % | 79 | % | 53 | % |
| (Stated in thousands of dollars) | Long-reach | Shallow | Drilling | |||||
| Drilling | Drilling | U.S. and | ||||||
| Three months ended September 30, 2011 | Canada | Canada | International | Total | ||||
| $ | $ | $ | $ | |||||
| Revenue | 70,282 | 9,598 | 37,240 | 117,120 | ||||
| Operating margin(1) | 27,048 | 707 | 6,733 | 34,488 | ||||
| Operating margin %(1) | 38 | % | 7 | % | 18 | % | 29 | % |
| Revenue excluding cost recoveries | 63,675 | 9,107 | 35,524 | 108,306 | ||||
| Operating margin(1) | 27,048 | 707 | 6,733 | 34,488 | ||||
| Operating margin %(1) | 42 | % | 8 | % | 19 | % | 32 | % |
| Average number of net rigs deployed | 38 | 25 | 25 | 88 | ||||
| Utilization %(2) | 81 | % | 21 | % | 74 | % | 62 | % |
| (Stated in thousands of dollars) | Long-reach | Shallow | Drilling | |||||
| Drilling | Drilling | U.S. and | ||||||
| Nine months ended September 30, 2012 | Canada | Canada | International | Total | ||||
| $ | $ | $ | $ | |||||
| Revenue | 184,442 | 35,531 | 147,081 | 367,054 | ||||
| Operating margin(1) | 69,968 | 10,457 | 41,472 | 121,897 | ||||
| Operating margin %(1) | 38 | % | 29 | % | 28 | % | 33 | % |
| Revenue excluding cost recoveries | 165,947 | 33,999 | 142,547 | 342,493 | ||||
| Operating margin(1) | 69,968 | 10,457 | 41,472 | 121,897 | ||||
| Operating margin %(1) | 42 | % | 31 | % | 29 | % | 36 | % |
| Average number of net rigs deployed | 41 | 21 | 29 | 91 | ||||
| Utilization %(2) | 56 | % | 24 | % | 79 | % | 56 | % |
| (Stated in thousands of dollars) | Long-reach | Shallow | Drilling | |||||
| Drilling | Drilling | U.S. and | ||||||
| Nine months ended September 30, 2011 | Canada | Canada | International | Total | ||||
| $ | $ | $ | $ | |||||
| Revenue | 174,443 | 42,864 | 104,039 | 321,346 | ||||
| Operating margin(1) | 60,228 | 8,704 | 20,671 | 89,603 | ||||
| Operating margin %(1) | 35 | % | 20 | % | 20 | % | 28 | % |
| Revenue excluding cost recoveries | 152,102 | 40,770 | 98,111 | 290,983 | ||||
| Operating margin(1) | 60,228 | 8,704 | 20,671 | 89,603 | ||||
| Operating margin %(1) | 40 | % | 21 | % | 21 | % | 31 | % |
| Average number of net rigs deployed | 37 | 28 | 24 | 89 | ||||
| Utilization %(2) | 67 | % | 25 | % | 75 | % | 56 | % |
In the contract drilling segment, significant costs are incurred and passed through to customers with little or no markup. For the three and nine months ended September 30, 2012 these costs aggregated $6 million and $24.6 million respectively. In the same respective periods in 2011 these costs amounted to $8.8 million and $30.4 million. Savanna's accounting policy with respect to cost recoveries billed to customers is to include them as both revenue and operating expenses rather than net them. Although Savanna believes this most appropriately reflects the substance of the underlying transactions, the accounting treatment of cost recoveries varies in the oilfield services industry. There is no effect on overall operating margins whether cost recoveries are netted or not; however, the different treatments do result in different operating margin percentages as the same dollar margin is factored against lower revenue when cost recoveries are netted. As a result Savanna believes it is useful to provide revenue excluding cost recoveries and the resulting operating margin percentages for comparative purposes.
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 Ended | Nine Months Ended | |||||||||||||||
| September 30 | 2012 | 2011 | Change | 2012 | 2011 | Change | ||||||||||
| Revenue | $ | 43,957 | $ | 49,818 | (12 | %) | $ | 136,151 | $ | 110,364 | 23 | % | ||||
| Operating expenses | $ | 33,242 | $ | 33,639 | (1 | %) | $ | 103,521 | $ | 77,650 | 33 | % | ||||
| Operating margin(1) | $ | 10,715 | $ | 16,179 | (34 | %) | $ | 32,630 | $ | 32,714 | 0 | % | ||||
| Operating margin %(1) | 24 | % | 32 | % | 24 | % | 30 | % | ||||||||
| Operating hours(2) | 42,286 | 54,705 | (23 | %) | 129,878 | 118,429 | 10 | % | ||||||||
| Revenue per hour | $ | 842 | $ | 758 | 11 | % | $ | 863 | $ | 749 | 15 | % | ||||
The following summarizes the operating results for the oilfield services segment by geographic area for the three and nine months ended September 30, 2012 and 2011:
| (Stated in thousands of dollars) | ||||||
| Three months ended September 30, 2012 | Canada | U.S. and International | Total | |||
| Revenue | 29,965 | 13,992 | 43,957 | |||
| Operating margin(1) | 7,807 | 2,908 | 10,715 | |||
| Operating margin %(1) | 26 | % | 21 | % | 24 | % |
| Utilization %(2) | 41 | % | 64 | % |
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