Savanna Energy Services Corp. (TSX:SVY) ("Savanna" or "the Company") is pleased to announce the completion of its drilling rig retrofit program. This program involved the extensive retrofit of 15 CT-1500(TM) shallow hybrid drilling rigs to TDS-3000(TM) long reach conventional rigs. The last of the 15 rigs was commissioned in November and is currently in the field. Acceptance of the retrofitted platform has met all of Savanna's targeted capital, operating and cash flow expectations, and has enhanced the Company's ability to service the Canadian and United States long reach horizontal drilling markets. Currently, 12 of the TDS-3000 rigs operate in Canada, while the remainder are working in the United States. Savanna will average 8 operating TDS-3000 rigs in 2012 and operate all 15 rigs throughout 2013.
Drilling Rig Strategy
In anticipation of completing the TDS-3000 retrofit program Savanna has developed several new drilling rig designs to support future expansion. All the designs enhance the drilling depth focus of Savanna and incorporate highly-mobile, fully-automated AC platforms. These rigs are ideally suited for the current North American drilling market. Importantly, they position Savanna to capitalize on evolving downhole technologies that are increasingly reliant on AC control and capacity driving the drilling equipment, particularly on deeper double and triple capacity rigs. To sustain our long-term growth, Savanna is committed to providing these technologies on all of our new rigs in addition to upgrading our current fleet to improve their safety and capacity.
Asset Expansion in Rentals
The TDS-3000 program has absorbed a significant portion of Savanna's growth capital over the past 2 years, and we anticipate demonstrating the rigs' economic returns in the coming quarters. The Company is now focused on expanding our rental equipment and workover businesses in Canada, the United States and Australia. We recently acquired 208 oilfield accommodation buildings from a private company for $14 million in cash, and also taken delivery of 20 newly manufactured accommodation units for an additional $3 million cash. Virtually all of the accommodation units are booked for Q1, 2013, and it is our expectation the addition of this equipment will enhance the marketability of our drilling rigs and other rental assets. These expenditures are incremental to our previously announced capital plan for 2012, and brings Savanna's Q4 capital expenditure total to approximately $41 million.
The last of Savanna's initial 8 rig commitment has landed in Australia. This brings the rig complement in the region to 4 drilling and 4 workover rigs. All but one of these rigs is under term contract. The 4th drilling rig, which was previously on a short-term, 16-well test contract, has now been dedicated to a multi-year agreement with the same customer. The operating environment in Australia has improved over the past few months, and Savanna anticipates better rig utilization in 2013. Demand for drilling and workover equipment in the region continues to increase, and new customer tender activity is accelerating.
Consistent with 2012, Savanna is initiating a conservative 2013 capital expenditure plan. While commitments for Q1, 2013 are currently comparable to 2012, we remain cautious about North American activity levels for the remainder of 2013. We believe our Australian and United States expansions, with their strong contract positions, should support solid activity levels for 2013. In Canada, both PSAC (Petroleum Services Association of Canada) and the CAODC (Canadian Association of Oilwell Drilling Contractors) are predicting 2013 activity levels equal to or lower than 2012. Balancing this cautious outlook with strong commitments in Canada in Q1, and solid demand in Australia and the United States, Savanna has established the following conservative capital budget for 2013:
Maintenance capital, recertification's and upgrades 40,000
Spare equipment and drillpipe 20,000
Long lead items for drilling rigs 26,000
Workover rigs for North Dakota (3) 4,000
Expansion capital for rentals and oilfield services 17,000
The details regarding these capital items include the following:
Maintenance, Recertification and Upgrades
Savanna operates a modern drilling and workover fleet. In addition to required maintenance and recertification expenses, Savanna has been investing capital to enhance the capacity of some of its drilling rigs to satisfy market demand. Over the past 3 years, Savanna has continually upgraded its fleet of deeper drilling rigs, enabling them to compete in the horizontal drilling markets for wells with total measured depth in excess of 5000 metres. This process has included enhancing the AC capabilities of our fleet. At $40 million, our maintenance expenses are below the industry average, reflecting the age and quality of Savanna's fleet.
Spare Equipment and Drillpipe
High utilization of our drilling fleet in recent years has increased the wear and tear on our drillpipe. Additionally, our expanded and more geographically dispersed fleet has increased our requirement for spare equipment to ensure uninterrupted operations. While Savanna boasts a highly homogenous fleet, proximity to spare equipment is essential for efficient operations. To address these factors, Savanna has approved $20 million for drillpipe and spare equipment.
Long Lead Items
Savanna is focused on adding ultra-deep double and triple rigs to our drilling fleet. Our investment in unique AC rig platforms for this market is expected to form the foundation for our organic growth for the next several years. Our primary focus is North America, with a bias towards our existing U.S. operating areas. Additionally, we anticipate further demand for both drilling and workover rigs from Australia but we will only add to our fleet against contracts. Fortunately, based on Savanna's drive toward utilizing consistent key components in our deeper rigs, the breadth of long lead items is reasonably narrow. By ordering long lead items ahead of manufacture we can reduce customer delivery times. Savanna is currently pursuing double and triple contracts to support the manufacture of drilling rigs during 2013 and has approved a budget of $26 million for long lead items in 2013.
North Dakota Workover Rigs
Savanna has achieved strong operating results in our North Dakota workover operations over the past 3 years. This success has been driven by the high level of completion activity for new wells, and increasingly by maintenance of existing production. In light of the increased focus on oil-based activity in the region, the level of maintenance on existing wells continues to grow. This growth matches Savanna's long term expectation for all oil-focused areas throughout North America, with the earlier increase in drilling in North Dakota simply providing support for this market growth outlook. Our expectations for a similar trend in Canada remain high. It is expected that increases in workover activity will cushion our business against temporary slowdowns in drilling activity. In 2013 Savanna has committed to build an additional 3 workover rigs for North Dakota with an aggregate budget of $4 million. This build program will be expanded if market demand dictates.
Rentals and Oilfield Services
Savanna's strategy is expected to be the expansion of our rental and support operations in every geographic region in which the Company operates in support of our drilling and workover activities. The $20 million in capital approved for 2013 for expansion of rental and oilfield services is expected to be directed primarily at Canada and Australia, however, the recent acquisition of accommodation buildings provides asset expansion in both Canada and the United States. Rental asset expansion is expected to continue to be focused on assets running in tandem with our drilling and workover equipment, and be primarily directed to surface support and well control equipment. This expansion capital is directly supportive of Savanna's strategy to capitalize on our existing drilling and workover sales, field and operating infrastructure.
2013 Market Expectations
With the exception of the long lead items for drilling rigs and the 3 workover rigs for North Dakota, the remaining capital program is scalable to market activity. In Canada, both PSAC and the CAODC are forecasting 2013 activity levels to be slightly lower than 2012. Savanna is still dependent on activity levels in Canada to drive our overall results. With the completion of our TDS-3000 retrofit program, Savanna believes it now has a more marketable drilling rig fleet. Beyond Q1, 2013 the level of activity in Canada is less certain, but Savanna believes our retrofitted fleet is well positioned to capitalize on whatever activity arises. In the United States, Savanna has over 90% of its rigs under term contract, which should provide a cushion against further drilling market deterioration. Additionally, Savanna's U.S. fleet is positioned in markets where activity is expected to remain stronger. Finally, Savanna has established sufficient scale in Australia to take advantage of the expected sharp increase of activity levels in that country. With 8 rigs operating in the country, and 7 under contract, Savanna is positioned to generate strong EBIDTA returns from this division.
Savanna is committed to increasing its drilling rig depth and operating capacity in order to align our service offerings with our customers' future needs. The Company will design, commission and operate equipment aligned to our position as a sustainable, profitable oilfield service provider. In the context of an uncertain North American market for the drilling and workover services, we have approved a capital budget providing for growth and expansion in our key markets, recognizing the potential risks to activity levels in the near term. Our capital plans reflect Savanna's commitment to sustain and grow our current monthly dividend. The Board of Directors reviews our dividend policy quarterly, and is satisfied with current dividend levels.
Savanna is a Canadian-based drilling and oilfield services provider with operations in Canada, the United States and Australia, focused on providing fit for purpose equipment and technologies.
Cautionary Statement Regarding Forward-Looking Information and Statements
Certain statements and information contained in this press release 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. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends", "might" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this press release contains forward-looking information and statements pertaining to the following: the demonstration of TDS-3000 economic returns in 2013; that evolving downhole technologies are increasingly reliant on AC control; the effectiveness of new technology on our rigs and the economic returns on same; the addition of rental equipment and accommodation units enhancing the marketability of drilling rigs; anticipated increased rig utilization in Australia; expected activity levels in Australia, the U.S. and Canada in 2013; the securing of new contracts with economics supporting new rig builds in 2013; the continued maintenance of existing wells in North Dakota and the increase of workover activity in the area going forward; and the sustainability of the Company's current monthly dividend in the future.
These statements are based on certain assumptions and analysis made by Savanna in light of its experience as well as other factors it believes are appropriate in the circumstances including, without limitation: the status of current negotiations with its customers, the progress of Savanna's current capital projects and current customer advice on deployment for specific customer programs. However, whether actual results or events will conform to Savanna's expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results and events to differ materially from Savanna's expectations including, without limitation: 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 Savanna's Annual Report and under the heading "Risk Factors" in Savanna's Annual Information Form; and other unforeseen conditions.
In addition, the amount of future cash dividends, if any, will be subject to the discretion of the Board of Directors and may vary depending on a variety of factors, including fluctuations in operating costs and earnings, working capital and capital expenditure requirements, debt service requirements, foreign exchange rates, the satisfaction of solvency tests imposed by the Business Corporations Act (Alberta) for the declaration and payment of dividends and other conditions existing from time to time.
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 events anticipated by Savanna will be realized or, even if substantially realized, that they will have the expected effects on Savanna or its business or operations. Except as may be required by law, Savanna assumes no obligation to update publicly any such forward looking information and statements, whether as a result of new information, future events, or otherwise.
Included in this press release is an estimate of Savanna's 2013 capital expenditure plan. To the extent such estimate constitutes future oriented financial information or a financial outlook (as defined by applicable securities legislation), such future oriented financial information or financial outlook was approved by management on December 5, 2012 and is included herein to provide readers with an understanding of the Company's anticipated capital expenditures for 2013. Readers are cautioned that the information may not be appropriate for other purpose.
Savanna Energy Services Corp.
President and CEO
(403) 267-6749 (FAX)
Savanna Energy Services Corp.
Vice-President, Finance and CFO
(403) 267-6749 (FAX)