Savanna Energy Services Corp Third Quarter Report

Transcription

1 Savanna Energy Services Corp Third Quarter Report

2 Savanna Energy Services Corp. is a drilling, well servicing and oilfield rentals company with operations in Canada, the United States and Australia. Savanna is committed to providing equipment and technologies that anticipate and exceed its customers needs. Based in Calgary, Alberta, Savanna Energy Services Corp. ( Savanna or the Company ) also has corporate offices in Houston, Texas and Brisbane, Australia, as well as numerous field offices throughout Canada, the United States, and Australia. The Company s overall business is conducted through two major divisions: contract drilling and oilfield services. Savanna s equipment fleet is among the newest and most technically advanced in the industry and its commitment to talent and technology has enabled the Company to build a strong presence within the oilfield services sector in Canada. Savanna has also expanded its customer base to international markets, diversifying geographically into growing and emerging markets. Savanna operates through a number of wholly-owned subsidiaries and several partnerships with Aboriginal communities that are partially owned by the Company. Savanna s Aboriginal partnerships, community involvement and commitment to safety reflect the importance of its four values: Integrity, Relationships, Excellence and Sustainability. This management s discussion and analysis ( MD&A ) is dated November 6, Effective January 1, 2013, Savanna adopted International Financial Reporting Standard ( IFRS ) 10, Consolidated Financial Statements. Adoption of the standard changed how Savanna accounted for its partnerships with Aboriginal communities, from 50% proportionate consolidation to full consolidation. As a result, the comparative figures included in this MD&A, have been restated. The changes on adoption of the new standard were described in detail in the Company s Q MD&A under the heading Accounting Policies. This MD&A focuses on key items from the condensed consolidated financial statements of Savanna for the three and nine month periods ended September 30, 2013 and 2012, which have been prepared by management in accordance with International Accounting Standard 34, Interim Financial Reporting, and are presented in Canadian dollars. This discussion should not be considered all-inclusive as it excludes changes that may occur in general economic, political and environmental conditions. Additionally, other matters may occur which could affect the Company in the future. This MD&A should be read in conjunction with the Company s unaudited condensed consolidated financial statements and the related notes for the period ended September 30, 2013, the annual audited consolidated financial statements and the related notes for the year ended December 31, 2012, the MD&A which appears in the Company s 2012 Annual Report, the unaudited condensed consolidated financial statements for the periods ended March 31, 2013, June 30, 2013, and September 30, 2012, as well as the Cautionary Statement Regarding Forward-Looking Information and Statements found at the end of this MD&A. Additional information regarding the Company, including the Company s Annual Information Form, is available on SEDAR at 1

3 Financial Highlights The following is a summary of selected financial information of the Company: (Stated in thousands of dollars, except per share amounts) Three months ended Nine months ended September Change Change OPERATING RESULTS Revenue 170, ,748 7% 519, ,572 1% Operating expenses 119, ,086 8% 364, ,600 3% Operating margin (1) 50,623 47,662 6% 154, ,972 (4%) Operating margin % (1) 30% 30% 30% 31% EBITDAS (1) 38,182 36,398 5% 116, ,658 (8%) Attributable to shareholders of the Company 37,129 35,090 6% 113, ,430 (8%) Per share: diluted % (9%) Net earnings 7,338 7,991 (8%) 28,357 37,850 (25%) Attributable to shareholders of the Company 6,692 6,984 (4%) 25,815 34,620 (25%) Per share: diluted % (25%) CASH FLOWS Operating cash flows (1) 38,258 34,464 11% 108, ,886 (7%) Acquisition of capital assets (1) (26,692) (42,153) (37%) (75,266) (141,646) (47%) Proceeds on disposal of capital assets 268 8,829 (97%) 4,578 10,961 (58%) Dividends paid (5,548) (5,862) (5%) (17,070) (10,085) 69% FINANCIAL POSITION Sep Dec Working capital (1) 94,837 94,125 1% Capital assets (1) 1,154,062 1,145,554 1% Total assets 1,344,268 1,338,489 0% Long-term debt 237, ,939 (5%) NOTES: (1) 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 investment in operating assets, liquidity and leverage. 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, impairment losses and share-based compensation and excludes other expenses (income). 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. 2

4 (2) Certain industry related terms used in this MD&A are defined or clarified as follows: 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 ( CAODC ). Industry utilization figures are calculated in the same manner as the Company. Savanna reports its service rig utilization for its operational service rigs in North America based on standard hours of 3,650 per rig per year. Utilization for Savanna s service rigs in Australia is calculated based on standard hours of 8,760 per rig per year to reflect 24 hour operating conditions in that country. Reliable industry average utilization figures, specific to well servicing, are not available. The words single, double or triple, in reference to Savanna s drilling rigs or service rigs, are standard industry terms and are an indication of the size of the rig and its depth capacity. Specifically, these categories refer to the number of lengths of drill pipe that can stand in the rig s derrick which has a direct correlation to the depth of the well that a rig can drill or service. Generally, single rigs are smaller and drill or service relatively shallow wells, while double and triple rigs are larger and drill or service progressively deeper wells. Depth capacity is also directly impacted by the hook load, draw works, and pump capacity of the rigs, so designation as single, double or triple, while helpful in assessing depth capacity, is by no means determinative. FINANCIAL HIGHLIGHTS Q COMPARED TO Q Activity in Australia continued to accelerate through Q and improved utilization and operating margins from Savanna s Australian operations drove Savanna s overall operating margin increases in the quarter relative to Q Operating margins from Australia totaled $5.4 million in Q3 2013, which are in-line with Q operating margins and represent a 105% increase from Q In Canada, overall operating margins were fairly flat relative to Q3 2012, as improved utilization on a larger active drilling fleet offset decreased pricing, and lower well servicing activity was tempered by an improved fixed cost structure and increased revenue and operating margins from oilfield rentals. Operating margins in the U.S. also remained fairly flat compared to Q3 2012, as higher per day revenue offset lower activity levels. On a year-to-date basis, overall economic uncertainty, pipeline capacity constraints in Canada, and continuing low natural gas prices, have depressed oilfield service demand levels in North America in 2013 relative to This led to lower utilization in both drilling and well servicing in Canada and decreased pricing on Savanna s spot market drilling rigs. Despite these industry demand decreases, an increase in Savanna s overall active drilling rig fleet, driven by the refurbishment and retrofit initiatives of the last few years, and in Canadian oilfield rentals revenue, have partially mitigated the negative effect that the activity declines in North America have had on Savanna s overall operating margins. A sharp year-over-year increase in operating margin contributions from Savanna s Australian drilling and oilfield services operations has also offset much of the weakness in North American activity. In the first nine months of 2013, higher general and administrative expenses, higher depreciation expenses based on an increased capital asset cost base and higher activity in Australia, and higher finance expenses, also negatively impacted Savanna s net earnings compared to the same period in

5 PROGRESS ON KEY INITIATIVES Savanna s key 2013 initiatives were described in the 2012 MD&A, which appears in the Company s 2012 Annual Report. The following is an update on the progress of these initiatives to date in 2013: Operational Strategies Overall safety performance improved relative to 2012; Improved utilization and efficiency with respect to corporate support functions was achieved as the growth in assets and capacity exceeded increases in general and administrative expenses. Strong focus on field and administrative execution; Maintained contract status in the U.S. despite an overall slowdown in that market, and added to contracted fleet in both Canada and Australia; Participated in numerous contract tenders (many still pending award) in Canada, the U.S. and Australia. Achieved contract awards outside of tender process in Australia; Plan to enhance full-year profitability of the shallow drilling rig fleet being executed through improved utilization and cost management during the slower summer and fall periods; Plan to retrofit and transfer underutilized service rigs in Canada to North Dakota underway; Corporate standards for processes and functions being implemented to stabilize general and administrative expenses. Technology and Rig Build Strategies Construction of three additional service rigs for the U.S. completed; Long-term contracts entered into to deploy one new-build drilling rig and five new-build workover rigs to Australia; Land purchased in Leduc, Alberta for development of a new facility capable of more efficiently handling the combined demands of maintaining Savanna s expanded drilling and service rig fleets, as well as final assembly and commissioning of new rigs. People Strategies Expansion of current training and safety initiatives underway; Aboriginal Partnership Strategies Entered into partnership with Fort McKay First Nation. The Partnership currently has no assets but will be used to provide drilling, well servicing, and coring services, as well as rental equipment in the Regional Municipality of Wood Buffalo. The partnership is exclusive to Savanna and Fort McKay First Nation in this region; Customer awareness initiatives ongoing; continuing expansion opportunities for the program being pursued. Market Trends Savanna s business depends significantly on the level of spending by oil and gas companies for exploration, development, production, and abandonment activities. In addition to general economic conditions and expectations, sustained increases or decreases in the price of natural gas or oil materially impact such activities and could have a material effect on the Company's business, financial condition, results of operations and cash flows (see Risks and Uncertainties in the Company s Annual Report and Risk Factors in the Company s Annual Information Form). In recent years, pricing for both oil and natural gas has become more regional. As a result, the physical location of Savanna s assets can result in general commodity pricing trends having a greater or lesser impact on demand for the Company s services. Increasingly, technological and physical capacity and design of equipment is differentiating customer demand for drilling and oilfield services equipment as well. Due to fluctuations in the prices for both oil and natural gas, the oil and gas industry is subject to significant volatility. Over the last few years, natural gas prices have remained relatively low. North American natural gas production is still high and, coupled with continued strong production from liquids-rich and unconventional plays, there remains a cautious outlook regarding the near-term pricing of this commodity and the related oilfield services activity it drives. 4

6 In contrast, oil prices have remained relatively strong, generating a greater emphasis on oil-focused drilling, completion and maintenance activity, which has, until recently, more than offset the activity void from reduced natural gas service demand. Oil-focused activity in Canada slowed in the last few quarters as pipeline capacity issues further reduced local pricing relative to world commodity prices, particularly in respect to heavier crudes. Still, the focus remains very much on deep unconventional plays, while shallow drilling remains muted. Additionally, the continuing global economic uncertainty may further affect commodity prices and capital market liquidity in the near-term. Savanna s business depends heavily on the nature of wells drilled by its customers, as well as their geographic focus. Dramatic shifts in well depths or geographic regions can, despite the mobility of drilling and well servicing equipment, temporarily disrupt the demand for Savanna s services. These shifts can occur rapidly, requiring a corresponding shift in Savanna s asset or geographic focus. Savanna continuously attempts to anticipate these shifts and address them. As a result of the shift by Savanna s customers from natural gas drilling to oil and liquids-focused drilling over the past few years, as well as development of new core areas of activity, Savanna has expended considerable capital and effort on repositioning its drilling and well servicing fleet into more oil-focused regions and in increasing the average depth and operational capacity of its drilling fleet. Savanna s focus going forward, will be on new-build opportunities that will continue to increase the depth and capacity of its drilling fleet, including expanding the Company s offering of deep triple drilling rigs. The Company has invested significant effort into developing internal rig designs and rig-build management capacity to support this endeavor. Additionally, recognizing the highly seasonal and cyclical nature of the Canadian oilfield services market, Savanna continues to drive toward achieving a better balance between its Canadian business and operations in geographies outside of Canada. While Savanna will continue to expand inside Canada, it is keenly focused on disproportionately expanding its U.S. and Australian operations over the next several years. Low natural gas prices in North America present two key challenges to Savanna s business prospects in the near-term. First, low pricing in the natural gas market has substantially reduced drilling for dry natural gas throughout North America. While Savanna s focus has shifted to oil and natural gas liquids-rich areas, any reduction in oil or liquids driven activity could result in a temporary excess supply of rigs and equipment pursuing these markets, increasing competitive pressures. Secondly, low natural gas pricing reduces the cash flow that Savanna s customers generate to pursue other drilling and exploration programs. The degree of these potential challenges has been alleviated somewhat due to the increasing likelihood of liquefied natural gas export terminal projects going forward throughout North America, which should result in increased demand for oilfield service equipment. However, this market remains highly volatile. Savanna s current presence in oil and natural gas liquids-rich areas should continue to mitigate the impact of this slowdown. Long-term, a projected increase in the number of operating oil wells in both Canada and the U.S. should drive increases in the demand for well servicing. Savanna has spent several quarters both expanding and positioning its North American workover rig fleet in anticipation of this shift. 5

7 Equipment Fleet and Capital Program The following table outlines the Company s drilling rig fleet by type of rig and operational status. As of the date of this MD&A, Savanna s drilling rig fleet and its operational status remains unchanged from September 30, Sep. 30 Dec DRILLING RIGS - OPERATIONAL Long-reach horizontal drilling rigs Heavy and ultra-heavy telescoping doubles TDS-3000 TM TDS Triples Shallow drilling rigs North American hybrid - CT International hybrid 4 4 Single Total operational drilling rigs DRILLING RIGS - INACTIVE Racked - pipe-arm single TOTAL DRILLING RIGS The following table outlines the Company s service rig fleet by type of rig and operational status. As of the date of this MD&A, Savanna s service rig fleet and its operational status remains unchanged from September 30, Sep. 30 Dec SERVICE RIGS - OPERATIONAL Singles Doubles International service rigs 4 4 Flush-by unit SERVICE RIGS - INACTIVE Training rig 1 1 Racked pending future upgrades TOTAL SERVICE RIGS In June 2013, construction of two double service rigs was completed and a third was commissioned in July All three new service rigs were deployed to the Company s North Dakota base. 6

8 The following table outlines the deployment of Savanna s operational drilling and service rig fleets by geographic location. Sep. 30 Dec DRILLING RIGS - OPERATIONAL Canada United States Australia SERVICE RIGS - OPERATIONAL Canada United States 11 9 Australia * Included in the tables above are eight drilling rigs and six service rigs that are operated in limited partnerships partially owned by the Company. CAPITAL PROGRAM In August 2013, Savanna updated its 2013 capital program as outlined below. As disclosed in August, the remaining expansion capital will be directed to finalizing a new-build international specification hybrid drilling rig and two new-build international specification workover rigs, all of which are under contract in Australia, and ordering long-lead rig components related to tenders Savanna is currently participating in. The following summarizes the Company s revised capital program and amounts expended in the first nine months of 2013: (Stated in thousands of dollars) For the nine months ended September 30, 2013 Revised Capital Budget Incurred to date Estimated Remaining Maintenance, recertifications, upgrades, spare equipment, drill pipe, and infrastructure 69,500 45,757 23,743 Expansion capital and long-lead items 67,900 27,199 40,701 Carry-over from ,310 - Proceeds on disposal of assets - (4,578) - Net capital program spend 137,400 70,688 64,444 To date, capital expenditures have been tracking in accordance with budgeted amounts and expectations. Subsequent to the end of the quarter, Savanna committed to the manufacture of an additional three workover rigs for Australia, all of which are subject to long-term contracts. These rigs are expected to be delivered in Q2 and Q3 2014, with an aggregate capital commitment of $31 million. A portion of this capital cost will be spent in 2013, under Savanna s previously committed amount for long-lead items. 7

9 Contract Drilling Savanna provides contract drilling services through its long-reach horizontal telescoping double drilling rigs, newly designed TDS-3000 TM drilling rigs, triple drilling rigs and both deep-rated and shallow proprietary hybrid drilling rigs, virtually all of which were designed and built by the Company in the last ten years. In all periods presented, the drilling division operated in Canada, the United States and Australia. (Stated in thousands of dollars, except revenue per day) Three Months Ended Nine Months Ended September Change Change Revenue $ 123,507 $ 114,330 8% $ 374,214 $ 378,603 (1%) Operating expenses $ 85,156 $ 77,856 9% $ 256,052 $ 251,540 2% Operating margin (1) $ 38,351 $ 36,474 5% $ 118,162 $ 127,063 (7%) Operating margin % (1) 31% 32% 32% 34% Operating days 5,578 5,365 4% 16,148 16,424 (2%) Revenue per operating day $ 22,142 $ 21,310 4% $ 23,174 $ 23,052 1% Spud to release days 4,881 4,649 5% 14,012 14,428 (3%) Wells drilled % 1,870 1,705 10% Meters drilled 1,199,186 1,054,514 14% 3,237,187 2,935,982 10% THIRD QUARTER RESULTS Overall, improved utilization on a larger active drilling fleet in Canada, higher per day revenue in the U.S., and improved utilization in Australia in Q3 2013, resulted in more operating days and higher overall revenue and operating margins in Savanna s contract drilling segment compared to Q The following summarizes the operating results in the third quarter of 2013 and 2012 by type of rig or geographic area. Longreach drilling in Canada includes the Company s telescoping double drilling rigs, TDS-3000 TM drilling rigs and TDS-2200 drilling rigs. Long-reach Shallow Drilling (Stated in thousands of dollars) Drilling Drilling U.S. and Q Canada Canada International Total Revenue 67,125 3,881 52, ,507 Operating margin (1) 22,889 (557) 16,019 38,351 Operating margin % (1) 34% 31% 31% Revenue excluding cost recoveries 60,861 3,701 50, ,069 Operating margin (1) 22,889 (557) 16,019 38,351 Operating margin % (1) 38% 32% 33% Average number of rigs deployed Utilization % (2) 57% 12% 73% 53% Calculation not meaningful 8

10 Long-reach Shallow Drilling (Stated in thousands of dollars) Drilling Drilling U.S. and Q Canada Canada International Total Revenue 60,356 2,703 51, ,330 Operating margin (1) 23,025 (797) 14,246 36,474 Operating margin % (1) 38% 28% 32% Revenue excluding cost recoveries 54,932 2,539 50, ,948 Operating margin (1) 23,025 (797) 14,246 36,474 Operating margin % (1) 42% 28% 34% Average number of rigs deployed Utilization % (2) 54% 8% 79% 52% Calculation not meaningful In the contract drilling segment, significant costs are incurred and passed through to customers with little or no markup. For Q these costs aggregated $8.4 million (Q $6.4 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 to 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. The Canadian long-reach drilling rigs delivered improved utilization on a larger active drilling fleet in Q compared to Q In addition, as activity improved coming out of the second quarter, the prevailing downward pressure on day rates for Savanna s spot market rigs did subside somewhat; however, pricing is still below that of Q In addition, variable costs per day were slightly higher than last year, primarily as a result of labour cost increases that took effect in Q The lower per day revenue and higher per day costs were offset by an increase in operating days, and as a result, overall operating margins were flat relative to Q The 57% utilization rate for Savanna s long-reach drilling rigs in Q was above the Canadian industry utilization rates of 50% in the same depth categories. The Company s shallow drilling rig fleet achieved higher revenues and utilization in Q relative to Q The increase in revenues was not sufficient to cover fixed operating costs in Q3 2013, and the shallow drilling rig fleet contributed negatively to overall operating margins, although less so than in Q However, the higher utilization in Q should reduce the costs required to fully crew rigs for Q and Q Despite fewer operating days, Savanna s U.S. drilling operation increased operating margins in Q compared to Q Higher per day revenue and lower per day labour costs more than offset the decrease in operating days, and as a result, operating margin percentages for the quarter increased by three percentage points relative to Q In Australia, improved utilization in Q led to an increase in operating days, revenue, and operating margins compared to Q Operating margins for Savanna s drilling operations in Australia increased by 37% in Q compared to Q The improved utilization in Australia also drove average per day revenue up for the drilling segment as a whole as day rates are significantly higher in Australia than they are in North America. 9

11 YEAR-TO-DATE RESULTS To date in 2013, in Savanna s contract drilling segment, a significant increase in activity levels in Australia has partially offset operating day declines in the U.S. and Canada relative to the first nine months of A $6.3 million, or 194%, increase in operating margins from drilling in Australia, and having five more active rigs in the overall fleet to date in 2013 partially offset decreased demand levels and utilization in North America. Similarly, lower day rates in Canada, particularly on Savanna s telescoping double drilling rigs, were offset by higher per day rates in the U.S. and Australia. The following summarizes the operating results in the first nine months of 2013 and 2012 by type of rig or geographic area. Long-reach Shallow Drilling (Stated in thousands of dollars) Drilling Drilling U.S. and YTD 2013 Canada Canada International Total Revenue 186,028 29, , ,214 Operating margin (1) 62,626 8,887 46, ,162 Operating margin % (1) 34% 30% 29% 32% Revenue excluding cost recoveries 165,472 28, , ,884 Operating margin (1) 62,626 8,887 46, ,162 Operating margin % (1) 38% 31% 31% 34% Average number of rigs deployed Utilization % (2) 49% 20% 75% 51% Long-reach Shallow Drilling (Stated in thousands of dollars) Drilling Drilling U.S. and YTD 2012 Canada Canada International Total Revenue 195,991 35, , ,603 Operating margin (1) 75,134 10,457 41, ,063 Operating margin % (1) 38% 29% 28% 34% Revenue excluding cost recoveries 176,413 33, , ,959 Operating margin (1) 75,134 10,457 41, ,063 Operating margin % (1) 43% 31% 29% 36% Average number of rigs deployed Utilization % (2) 55% 24% 79% 55% In the first nine months of 2013 cost recoveries aggregated $27.3 million compared to $25.6 million in the same period in Lower day rates and lower utilization in the first nine months of 2013 resulted in decreased revenue for the Company s longreach drilling rigs in Canada compared to the same period in This lower revenue, coupled with higher per day pass through costs and the increased impact of fixed costs on lower activity levels, led to a 17% decrease in operating margins and lower operating margin percentages compared to the first nine months of The relatively low overall industry demand in Canada heading into the winter drilling season in 2012 put pressure on day rates for Savanna s spot market rigs in early While rates have now stabilized, they are still lower relative to this time last year. Although utilization in the first nine months of 2013 decreased compared to the same period in 2012, the 49% utilization rate for Savanna s long-reach drilling rigs in 2013 still exceeded Canadian industry utilization rates of 47% in the same depth categories. 10

12 The majority of the revenue and operating margins for Savanna s shallow fleet in the first nine months of both 2013 and 2012 was earned performing coring work for oil sands customers in the first quarter of each year. The CT-1500 hybrid drilling rigs have had considerable success in applying coil-based drilling to coring. In addition, as a result of improved utilization post Q1 and cost control initiatives to date in 2013, the shallow fleet improved operating margin percentages relative to the first nine months of 2012 despite lower activity this year versus last. Revenue and operating margins for Savanna s U.S. drilling operation were lower in the first nine months of 2013 compared to the same period in 2012, as a result of fewer operating days. Pricing pressure in the Permian basin in Texas, which began in Q3 2012, has leveled off and average per day revenue was actually higher in the first nine months of 2013 relative to the same period in The increase in per day revenue was offset by higher per day labour costs and operating margin percentages in the U.S. were flat relative to the first nine months of Although demand levels have decreased overall in the U.S., to date in 2013, Savanna has been able to maintain high utilization rates in the regions where its rigs are deployed. In Australia, operating days and revenue increased significantly in the first nine months of 2013 compared to the same period in 2012 as utilization improved on a larger rig fleet in the region. The larger fleet also reduced the impact of fixed costs on per day costs, and operating margins for Savanna s drilling operations in Australia increased to $9.5 million in the first nine months of 2013, which is more than three times higher than at this time last year. Oilfield Services Savanna provides well servicing and rental equipment to the oil and gas industry in Canada, the United States and Australia. The Company operates single and double service rigs, and a wide array of rental equipment. (Stated in thousands of dollars, except revenue per hour) Three Months Ended Nine Months Ended September Change Change Revenue $ 47,716 $ 44,978 6% $ 147,595 $ 139,347 6% Operating expenses $ 35,528 $ 33,896 5% $ 111,072 $ 105,764 5% Operating margin (1) $ 12,188 $ 11,082 10% $ 36,523 $ 33,583 9% Operating margin % (1) 26% 25% 25% 24% Operating hours - well servicing 41,824 43,598 (4%) 119, ,917 (11%) Revenue per operating hour - well servicing $ 879 $ 840 5% $ 934 $ 861 8% THIRD QUARTER RESULTS Despite a decline in operating hours, revenue for Savanna s oilfield services division increased in Q compared to Q3 2012, as a result of an increase in oilfield rentals revenue and higher overall per hour rates in well servicing. Increased utilization in Australia in the quarter, where per hour revenue is higher than in North America, contributed to the higher per hour revenue and the higher utilization also led to a significant increase in operating margins in Australia in Q relative to Q In addition, a restructured fixed cost base in Canadian well servicing resulted in higher operating margin percentages in Q3 2013, despite a decrease in operating hours and operating margins compared to Q Included in revenue for Q3 2013, was $10.9 million from oilfield rentals (Q $8.4 million). Of the Q rental revenue, $5.1 million (Q $3.9 million) was generated in Australia and $0.7 million (Q $0.7 million) is eliminated on overall consolidation as inter-segment revenue. Oilfield rentals revenue is excluded from the per hour revenue calculations above. 11

13 The following summarizes the operating results by geographic area: (Stated in thousands of dollars) U.S. and Q Canada International Total Revenue 27,679 20,037 47,716 Operating margin (1) 7,389 4,799 12,188 Operating margin % (1) 27% 24% 26% Average number of rigs deployed - well servicing Utilization % (2) - well servicing 36% 76% 46% (Stated in thousands of dollars) U.S. and Q Canada International Total Revenue 30,986 13,992 44,978 Operating margin (1) 8,174 2,908 11,082 Operating margin % (1) 26% 21% 25% Average number of rigs deployed - well servicing Utilization % (2) - well servicing 41% 64% 47% Lower industry demand in Canada resulted in lower activity levels for Savanna s well servicing operations in Q compared to Q The number of operating hours from the well servicing fleet in Canada decreased by 16% compared to Q Variable per hour costs in well servicing remained relatively flat from Q but overall fixed costs decreased as a result of a restructuring of the well servicing field operations in Canada. This led to a percentage point increase in operating margin percentages relative to Q3 2012, despite fewer hours. For rentals, revenues increased by 30% and operating margins increased by 24% in Q compared to Q3 2012, as a result of the December 2012 acquisition of oilfield accommodation buildings. Revenue for well servicing in the U.S. increased in Q as a result of more operating hours and higher pricing relative to Q The increase in revenue was offset by an increase in labour costs associated with crewing three additional rigs being transferred from Canada in Q4 of this year, and as a result operating margins remained flat compared to Q With the pending rig transfers from Canada in Q and the first half of 2014, operating margin contributions from Savanna s U.S. well servicing operations should increase in future quarters. In Australia, revenue from service rigs and rental equipment increased by 39% and operating margins increased by $1.9 million, or 332%, in Q compared to Q The increases are a result of improved utilization on a larger equipment base. YEAR-TO-DATE RESULTS Savanna s oilfield services division generated higher revenues, despite achieving fewer operating hours in the first nine months of 2013 compared to same period in The increase was a result of higher overall per hour rates in well servicing, due primarily to a larger contribution from Australia, and an $11.6 million increase in oilfield rentals revenue. Overall, operating margins increased by $2.9 million in the first nine months of 2013 and operating margin percentages increased by one percentage point. The operating margin increase was driven in large part by increases in Australia; operating margins from service rigs and rental equipment in Australia increased by $5.1 million, or 902%, in the first nine months of 2013 compared to the same period in

14 Included in revenue for the first nine months of 2013, was $35.7 million from oilfield rentals ( $24.1 million), a 48% increase from the same period in Of the year-to-date rental revenue in 2013, $15 million ( $9.9 million) was generated in Australia and $2.5 million ( $2.7 million) is eliminated on overall consolidation as inter-segment revenue. Oilfield rentals revenue is excluded from the per hour revenue calculations above. The following summarizes the operating results by geographic area: (Stated in thousands of dollars) U.S. and YTD 2013 Canada International Total Revenue 90,095 57, ,595 Operating margin (1) 25,018 11,505 36,523 Operating margin % (1) 28% 20% 25% Average number of rigs deployed - well servicing Utilization % (2) - well servicing 36% 71% 45% (Stated in thousands of dollars) U.S. and YTD 2012 Canada International Total Revenue 101,519 37, ,347 Operating margin (1) 25,635 7,948 33,583 Operating margin % (1) 25% 21% 24% Average number of rigs deployed - well servicing Utilization % (2) - well servicing 43% 62% 48% In Canada, industry demand was lower in the first nine months of 2013 compared to the same period in 2012, which led to lower utilization and revenue from Savanna s well servicing fleet. However, the decrease in well servicing revenue was partially offset by a 46% increase in rentals revenue related to the Q acquisition of oilfield accommodation buildings. In well servicing, revenue per hour remained relatively flat while both per hour variable costs and overall fixed costs were lower compared to the first nine months of Based on these factors, Savanna s oilfield services division in Canada was able to maintain operating margins and increase operating margin percentages despite a decrease in overall activity and revenue. In the U.S., Savanna operated two fewer service rigs on average in the first nine months of 2013 compared to the same period in Consequently, revenues and operating margins for well servicing in the U.S. decreased relative to the first nine months of In Australia, revenue from service rigs and rental equipment nearly doubled in the first nine months of 2013 compared to the first nine months of 2012 and operating margins increased by $5.1 million from $0.6 million in the same period in The increases were a result of a larger equipment base and significantly improved utilization. 13

15 Other Financial Information (Stated in thousands of dollars) Three Months Ended Nine Months Ended September Change Change General and administrative expenses* 12,441 11,264 10% 38,663 34,312 13% as a % of revenue 7.3% 7.1% 7.4% 6.7% Share-based compensation* 2,526 2,106 20% 4,777 5,585 (14%) Depreciation and amortization* 22,598 18,711 21% 63,701 54,842 16% Impairment losses (100%) - 5,655 (100%) Finance expenses 3,046 3,233 (6%) 10,533 9,630 9% Other (income) expenses (230) 621 (137%) (1,296) 158 (920%) Income tax expense 2,904 2,848 2% 10,229 12,940 (21%) Effective income tax rate 28% 26% 25% 25% * General and administrative expenses above, differs from the amount reported in the consolidated statement of net earnings as it excludes the attributable amounts of share-based compensation and depreciation and amortization. Those attributable amounts have been included under the applicable headings above. This presentation is consistent with how management reviews the information internally. The overall increase in general and administrative expenses for the three and nine months ended September 30, 2013 compared to the same periods in 2012, is primarily a result of upgrades to Savanna s support functions in the last 12 months in each of the Canadian, U.S., and Australian corporate offices. Over the last few years, Savanna has significantly improved the capacity of all of its support functions, including: engineering; procurement and inventory; human resources; health, safety and environment; finance; and information technology. The upgrades have and will continue to contribute to the execution of the Company s strategic plans. Savanna is continuing to review all of its processes and functions with the aim of improving consistency and efficiency and avoiding duplication, which should ultimately stabilize general and administrative expenses. In addition, in the first nine months of 2013, Savanna incurred $1.1 million in severance and bad debt expenses, approximately 60% of which is included in general and administrative expenses. The increase in share-based compensation for Q compared to Q is a result of mark-to-market adjustments on the Company s deferred share units, performance share units and recently introduced restricted share units. The decrease in sharebased compensation for the nine months ended September 30, 2013, compared to the same period in 2012, is primarily a result of a decrease in the number and average fair value of outstanding stock-options and option forfeitures to date in The overall increase in depreciation and amortization for the three and nine months ended September 30, 2013, compared to the same periods in 2012, is primarily a result of the increase in the Company s capital asset cost base through the execution of Savanna s capital programs and an increase in the amount of assets depreciated on a straight-line basis. The increase in finance expenses for the nine months ended September 30, 2013, compared to the same period in 2012, is primarily a result of an increase in the Company s average long-term debt outstanding over that period. The breakdown of other (income) expenses is as follows: (Stated in thousands of dollars) Three months ended Nine months ended September Gains on disposal of assets (214) (91) (1,175) (172) Foreign exchange losses (gains) (45) 723 (208) 499 Other 29 (11) 87 (169) (230) 621 (1,296)

16 In 2013, the gains on disposal of assets arose on the sale of end-of-life assets for total proceeds of $4.6 million. Foreign exchange gains and losses arise on the settlement of foreign currency monetary assets and liabilities (gains and losses on translation of foreign subsidiaries are included in other comprehensive income); the changes for the three and nine months ended September 30, 2013 are due to the change in the values of the U.S. dollar and Australian dollar relative to the Canadian dollar in the respective periods. The decrease in income tax expense for the nine months ended September 30, 2013, compared to the same period in 2012, is primarily a result of the overall decrease in pre-tax earnings in the same respective period. The Company s operations are complex and computation of the provision for income taxes involves tax interpretations, regulations and legislation that are continually changing. There are matters that have not yet been confirmed by taxation authorities; however, management believes the provision for income taxes is adequate. Aboriginal Partnerships Savanna conducts a portion of its operations in Canada through limited partnerships in which each of Savanna and an Aboriginal partner hold approximately half of the partnership interest. Savanna operates eight long-reach horizontal telescoping double drilling rigs and six service rigs through these limited partnerships. As a result of the adoption of IFRS 10 on January 1, 2013, the Company changed how it accounted for these limited partnerships from proportionate consolidation to full consolidation with non-controlling interests (see Accounting Policies in the Company s Q MD&A). The noncontrolling interests represent the portions of these partnerships owned by the nine separate Aboriginal communities. The following tables outline the Aboriginal communities share of the revenue and expenses included in the amounts reported in this MD&A, and their share of cash contributions to, and distributions from the limited partnerships. (Stated in thousands of dollars) Three months ended Nine months ended September Change Change OPERATING RESULTS - CONSOLIDATED Revenue 3,990 4,447 (10%) 11,944 14,492 (18%) Operating expenses 2,621 2,877 (9%) 7,925 9,407 (16%) Operating margin (1) 1,369 1,570 (13%) 4,019 5,085 (21%) EBITDAS (1) 1,053 1,308 (19%) 3,284 4,228 (22%) Net earnings 646 1,007 (36%) 2,542 3,230 (21%) OPERATING RESULTS - CONTRACT DRILLING Revenue 3,134 3,480 (10%) 8,818 11,510 (23%) Operating expenses 1,983 2,224 (11%) 5,666 7,164 (21%) Operating margin (1) 1,151 1,256 (8%) 3,152 4,346 (27%) OPERATING RESULTS - OILFIELD SERVICES Revenue (11%) 3,126 2,982 5% Operating expenses (2%) 2,259 2,243 1% Operating margin (1) (31%) % CASH FLOWS - CONSOLIDATED Partnership contributions (100%) - 1,776 (100%) Partnership distributions - (900) (100%) (2,900) (3,100) (6%) 15

17 Quarterly Results In addition to other market factors, quarterly results of Savanna are markedly affected by weather patterns throughout its operating areas in Canada, which still constitute the majority of Savanna s operations. Historically, the first quarter of the calendar year is very active in Canada, followed by a much slower second quarter. This variation in industry activity levels on a quarterly basis, particularly between the first and second quarters, can dramatically impact the activity levels of the Company and its operating results in Canada, independent of other demand factors. As the Company continues to expand outside of Canada, the relative impact of Canadian seasonality will be reduced. Specifically, as the Company s presence in Australia grows, the impact of a slower Q1 period there, due to weather, will impact revenue timing as well. The following is a summary of selected financial information of the Company for the last eight completed quarters. SUMMARY OF QUARTERLY RESULTS (Stated in thousands of dollars, except per share amounts) Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31 Three Months Ended Revenue 170, , , , , , , ,301 Operating expenses 119,988 89, , , ,086 97, , ,698 Operating margin (1) 50,623 22,624 81,718 41,839 47,662 25,682 87,628 56,603 Operating margin % (1) 30% 20% 34% 24% 30% 21% 37% 30% EBITDAS 38,182 10,133 67,987 30,765 36,398 15,193 75,067 45,738 Attr. to shareholders 37,129 10,179 65,709 29,594 35,090 14,652 72,688 43,503 Per share: diluted Net earnings (loss) 7,338 (8,600) 29,619 4,034 7,991 (7,164) 37,022 18,188 Attr. to shareholders 6,692 (8,644) 27,767 3,162 6,984 (7,559) 35,194 16,331 Per share: diluted 0.08 (0.10) (0.09) Total assets 1,344,268 1,321,193 1,407,130 1,338,489 1,294,759 1,279,077 1,321,652 1,258,428 Long-term debt 237, , , , , , , ,396 Quarterly Financial Highlights ($ million) 250 Revenue Operating Margin EBITDAS Q111 Q112 Q113 Q211 Q212 Q213 Q311 Q312 Q313 Q411 Q412 Q413 16

18 SUMMARY OF QUARTERLY RESULTS CONTRACT DRILLING (Stated in thousands of dollars, except revenue per day) Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31 Three Months Ended Revenue $ 123,507 $ 77,027 $ 173,680 $ 123,424 $ 114,330 $ 87,571 $ 176,702 $ 136,077 Operating expenses $ 85,156 $ 58,580 $ 112,316 $ 94,473 $ 77,856 $ 66,320 $ 107,364 $ 94,769 Operating margin (1) $ 38,351 $ 18,447 $ 61,364 $ 28,951 $ 36,474 $ 21,251 $ 69,338 $ 41,308 Operating margin % (1) 31% 24% 35% 23% 32% 24% 39% 30% Operating days 5,578 3,464 7,106 5,352 5,365 3,939 7,120 5,817 Revenue per operating day $ 22,142 $ 22,236 $ 24,441 $ 23,061 $ 21,310 $ 22,232 $ 24,818 $ 23,393 Spud to release days 4,881 2,980 6,152 4,630 4,649 3,416 6,363 5,205 Wells drilled Meters drilled 1,199, ,702 1,286,298 1,020,297 1,054, ,104 1,175,364 1,019,959 Utilization (2) Canada 45% 14% 65% 37% 40% 23% 70% 49% U.S. and international 73% 76% 77% 81% 79% 75% 83% 77% Canadian industry average 40% 18% 58% 40% 40% 21% 65% 54% SUMMARY OF QUARTERLY RESULTS OILFIELD SERVICES (Stated in thousands of dollars, except revenue per hour) Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31 Three Months Ended Revenue $ 47,716 $ 35,136 $ 64,743 $ 49,876 $ 44,978 $ 35,875 $ 58,494 $ 52,874 Operating expenses $ 35,528 $ 31,055 $ 44,488 $ 37,088 $ 33,895 $ 31,536 $ 40,332 $ 37,715 Operating margin (1) $ 12,188 $ 4,081 $ 20,255 $ 12,788 $ 11,083 $ 4,339 $ 18,162 $ 15,159 Operating margin % (1) 26% 12% 31% 26% 25% 12% 31% 29% Operating hours 41,824 26,751 51,250 44,719 43,598 35,227 55,092 53,302 Revenue per hour $ 879 $ 988 $ 949 $ 903 $ 840 $ 850 $ 884 $ 839 Utilization (2) Canada 36% 20% 53% 43% 41% 32% 57% 54% U.S. and international 76% 66% 68% 59% 64% 70% 69% 60% 17

19 Financial Condition and Liquidity The market risks outlined under Market Trends in this MD&A and under Risks and Uncertainties in the Company s 2012 Annual Report can significantly affect the financial condition and liquidity of the Company. Savanna s ability to access its debt facilities is directly dependent on, among other factors, its total debt to equity ratios and trailing cash flows. Additionally, the ability of Savanna to raise capital through the issuance of equity could be restricted in the face of volatility in worldwide capital markets or in the energy related capital markets. Savanna s primary objective in managing capital, given the cyclical nature of the oil and gas services business, is to preserve the Company s financial flexibility in order to benefit from potential opportunities as they arise and in turn maximize returns for Savanna shareholders. Management believes this objective will be achieved by: prudently managing the capital generated through internal growth; optimizing the use of lower cost capital; raising share capital when required to fund growth initiatives; and maintaining a conservative approach to safeguarding the Company s assets. Although Savanna cannot anticipate all eventualities in this regard, the Company maintains what it believes to be a conservatively leveraged balance sheet, and makes every effort to ensure a balance in maximizing returns for its shareholders over both short-term and long-term activity levels in the oil and gas services business. WORKING CAPITAL AND CASH PROVIDED BY OPERATIONS (Stated in thousands of dollars) Three Months Ended Nine Months Ended September Change Change Operating cash flows (1) 38,258 34,464 11% 108, ,886 (7%) Per diluted share % (9%) The Company s operating cash flows are closely related to its operating margins and general and administrative expenses; consequently, the increase in operating cash flows for Q compared to Q is directly related to the increase in operating margins net of general and administrative expenses in the same respective periods. Therefore, improved utilization and operating margins in Australia were the primary drivers for an overall increase in operating cash flows in Q relative to Q Additionally, in Q3 2013, the Company received $0.9 million more in income tax refunds than it paid, compared to Q when Savanna paid $0.3 million more in income taxes than it received in tax refunds. The Company also realized foreign exchange gains in Q versus losses in Q3 2012, which amounts to a difference of $0.8 million on a cash basis. Similarly, for the nine months ended September 30, 2013, the decrease in operating cash flows is directly related to the decrease in operating margins net of general and administrative expenses compared to the same respective period in Therefore, decreased pricing and lower utilization in Canada and lower activity levels in the U.S., were the primary drivers for an overall decrease in operating cash flows for the nine months ended September 30, (Stated in thousands of dollars) Sep Dec Change Working capital held outside of partnerships 88,538 84,583 3,955 Working capital held in partnerships owned 50% by the Company 6,299 9,542 (3,243) Working capital (1) 94,837 94, Savanna s net debt (1) position at September 30, 2013, was $142.4 million, a decrease of $13.4 million or 9% from the Company s $155.8 million net debt (1) position at December 31,