SavannaEnergyServicesCorp.Q32 11

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1 SavannaEnergyServicesCorp.Q32 11 FINANCIAL HIGHLIGHTS Three Months Ended Nine Months Ended September (Stated in thousands of dollars, except per share amounts) $ $ $ $ Revenue 166, , , ,717 Operating margin (1) 50,829 25, ,805 72,038 Operating cash flows (1) 39,922 17,870 98,059 52,099 Per diluted share Net earnings 14,363 1,898 28,982 5,268 Per share: basic Per share: diluted OPERATIONAL HIGHLIGHTS The momentum from strong first and second quarters in 2011 continued into Q and Savanna achieved its highest overall third quarter earnings since 2006 and highest third quarter earnings per share since The increase in demand for oilfield services led to an increase in pricing, operating days and operating hours in both the drilling and oilfield services divisions compared to Q The drilling division achieved a 22% increase in the number of operating days with virtually the same sized drilling rig fleet in the third quarter of 2011 compared to the same period in Additionally, average day rates increased 17% over the same time frame, which coupled with the increase in operating days, led to a $16.2 million or 89% increase in operating margins in Q compared to Q The oilfield services division realized an 85% increase in operating hours and operating margins increased by $9.5 million or 144% in the third quarter of 2011 relative to Furthermore, operating margin percentages and utilization rates were higher in Q compared to Q On July 12, 2011, Savanna acquired of all the outstanding shares of Silverstar Well Servicing Ltd. which currently operates 17 mobile free-standing service rigs. This acquisition, together with the acquisition of Performance Services Ltd. in June 2011, increased Savanna s service rig fleet by nearly 50% with rigs similar to its pre-existing fleet. Additionally, the mix of single and double service rigs acquired in each acquisition was complementary; in total the acquisitions added 18 doubles and 15 singles. All of the rigs are operating in Western Canada and the average age of the rigs acquired is less than five years.

2 PRESIDENT S MESSAGE Operationally, financially and strategically, Q was a period of significant progress for Savanna, leading to our highest third quarter earnings in years. Specifically, the third quarter of 2011 represented a continuation of progress on a number of key initiatives at Savanna: Savanna s four operational TDS-3000 TM drilling rigs contributed materially to the overall drilling segment in the quarter. As additional TDS-3000 TM conversions are completed, Savanna s effective drilling fleet will increase and lead to incremental earnings at a relatively lower capital cost. The conversion of six additional TDS-3000 TM rigs for Q and Q remains on track and all but one are currently contracted. Two high-specification 1200 horsepower AC electric doubles were put to work during the quarter in the high-growth Marcellus play. These rigs represent the latest platform advance of high-mobility, high-capacity doubles by Savanna. The rigs incorporate an excellent balance of mobility and capacity, and represent a new standard of rigs for the core Marcellus play into which they have been contracted on a long-term basis. Savanna currently has approximately 1/3 of its fleet contracted for terms beyond one year, with a very good balance of terms from one to three years in that mix. Our goal for any new TDS-3000 TM conversions, AC electric double configurations or Australia drilling designs, is to have the additional rigs backed by long-term contracts before going to work in the field. Savanna secured a long-term contract for a high-capacity workover/drilling rig for a new Australian customer during the quarter and will increase our Australian fleet to four drilling and four workover rigs by Q This workover rig will be built based on Savanna s significant accumulated knowledge of the unique Australian import, transportation and operating regulations, and will have the versatility to provide drilling and workover services across a broad spectrum of wells in the targeted coal seam gas play in the Surat Basin in Queensland, Australia. During the quarter, our Canadian well servicing group successfully integrated the acquisition of both Performance Services Ltd. and Silverstar Well Servicing Ltd. under the Savanna brand. A substantial 58% increase in our Canadian well servicing capacity was accomplished very quickly, and the resulting operating management group has been successfully reorganized to take advantage of the strong management and operations personnel of each acquired entity. This places Savanna Well Servicing in an excellent equipment and personnel position to take advantage of solid Well Servicing demand fundamentals heading into 2012 and beyond. Savanna has taken delivery of six of the sixteen top drives announced in 2011 and, upon receipt of all of the remaining top drives by H Savanna s Canadian drilling fleet in Canada will consist of 100% top driven rigs. In addition to the obvious operating advantages this brings to our customers, the incremental revenue and margin capacity of the top drives will clearly be accretive in both high and low activity markets. In addition to the above, Savanna continues to achieve very strong utilization of its conventional fleet, both on an absolute basis as well as compared to its peers, in Canada and the United States. Independent of rigs already contracted, commitment levels remain strong for Q and Q as well. Looking forward further into 2012, industry activity levels in both Canada and the United States are uncertain. Access to capital by our customers, whether it be by equity or Savanna Energy Services Corp THIRD QUARTER REPORT 2

3 PRESIDENT S MESSAGE debt, has been muted in H relative to 2010, oil prices have decreased relative to their recent highs and pricing for both oil and natural gas remains volatile. This may reduce available capital as we progress into 2012, resulting in slower oilfield services activity. Although this risk exists, we have to date not been informed of any planned reductions in activity by any of our customers. In light of worldwide economic uncertainty and its potential impact on activity levels, we have taken a conservative approach to our capital program for Our 2012 capital commitments reflect measured, incremental investments. The capital plan reflects the inclusion of specific expansion initiatives, coupled with some allocation toward long-lead components. In this regard, we have committed in 2012 to the retrofit of a minimum of five additional TDS-3000 TM rigs, the construction of a workover/drilling rig for Australia, additional specific support equipment for our well servicing operations, nominal expansion capital for our oilfield rentals operation, and maintenance capital reflective of anticipated 2012 activity levels. Inclusive of deposits to be placed in 2011 in respect of the 2012 commitments, this reflects an aggregate base 2012 capital program of $104 million. Given Savanna s solid balance sheet, currently anticipated minimum 2012 activity levels, and our current equipment and contract positions, we believe this to be a responsible base program. As visibility regarding H and future activity levels improves, we may expand this capital program as appropriate. The pace of expansion of this base plan, if supported, will be facilitated by our commitment to long-lead construction components. Given the quality of Savanna s fleet, the experience and dedication of our personnel, the strength of our balance sheet, and the long-term fundamental demand for the commodities we help produce, we are confident of both Savanna s market positioning, as well as overall oilfield services market fundamentals. Savanna is very well positioned to meet whatever opportunities or challenges arise in 2012 and beyond. Respectfully submitted, Ken Mullen President and Chief Executive Officer November 9, 2011 Calgary, Alberta Certain statements and information contained in this interim report 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 See the Cautionary Statement Regarding Forward-Looking Information and Statements in the Company s Management s Discussion and Analysis. Savanna Energy Services Corp THIRD QUARTER REPORT 3

4 MANAGEMENT S DISCUSSION AND ANALYSIS For the Three and Nine Months Ended September 30, 2011 Savanna is a Canadian-based drilling and oilfield services company with operations in Canada, the United States and Australia, focused on providing equipment and technologies to effectively address its customers needs. Based in Calgary, Alberta and founded in 2001, Savanna 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 focus is strictly oilfield services and Savanna s fleet of drilling and well servicing rigs is among the newest and most technically advanced in the industry. Savanna s commitment to talent and technology has allowed for a strong foothold within Canada, enabling the Company to expand its customer base to international markets. The Company s overall business is conducted through two major divisions: contract drilling and oilfield services. This discussion focuses on key items from the condensed interim consolidated financial statements of Savanna Energy Services Corp. ( Savanna or the Company ) for the three and nine month periods ended September 30, 2011 and 2010, which have been prepared by management in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with IAS 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 discussion should be read in conjunction with the Company s unaudited condensed interim consolidated financial statements and the related notes for the periods ended September 30, 2011, June 30, 2011, and March 31, 2011, the annual audited consolidated financial statements and the related notes for the fiscal year ended December 31, 2010, the management s discussion and analysis ( MD&A ) which appears in the Company s 2010 annual report, the interim consolidated financial statements for the period ended September 30, 2010, as well as the Cautionary Statement Regarding Forward-Looking Information and Statements found at the end of this discussion. The Company s 2010 annual and interim consolidated financial statements were prepared in accordance with previous Canadian generally accepted accounting principles ( GAAP ). Certain 2010 comparative figures included in this MD&A have been restated as part of the Company s transition to international financial reporting standards ( IFRS ). Additional information regarding the Company, including the Company s Annual Information Form, is available on SEDAR at This MD&A is dated November 9, Savanna Energy Services Corp THIRD QUARTER REPORT 4

5 MANAGEMENT S DISCUSSION AND ANALYSIS FINANCIAL HIGHLIGHTS The following is a summary of selected financial information of the Company: Three Months Ended Nine Months Ended September Change Change (Stated in thousands of dollars, except per share amounts) $ $ $ $ OPERATING RESULTS Revenue 166, ,787 59% 429, ,717 42% Operating expenses 115,298 79,715 45% 306, ,679 33% Operating margin (1) 50,829 25, % 122,805 72,038 70% Net earnings 14,363 1, % 28,982 5, % Per share: basic % % Per share: diluted % % CASH FLOWS Operating cash flows (1) 39,922 17, % 98,059 52,099 88% Per diluted share % % Acquisition of capital assets (1) 91,099 34, % 218,023 76, % FINANCIAL POSITION Sep Dec Change $ $ Working capital (1) 95,095 78,873 21% Capital assets (1) 1,011, ,702 20% Total assets 1,219, ,143 22% Long-term debt 200, ,802 78% Financial Highlights Q Compared to Q Overall, 2011 has been a period of markedly improving oilfield service industry fundamentals. Strong oil prices and increased activity in liquids-rich natural gas and unconventional oil plays created more demand for drilling, completion and maintenance services throughout North America than in As a result of Savanna s continued retrofit of its hybrid drilling fleet to the TDS-3000 TM platform, the marketed fleet of drilling rigs was higher in Q compared to Q In addition, two timely acquisitions that occurred in late Q and early Q increased Savanna s Canadian service rig fleet by nearly 50% yet added little incremental overhead costs. All of these factors led to an increase in operating days, hours and rates in the Company s drilling and oilfield services divisions and significantly increased revenues and operating margins in each of the operating divisions compared to the three and nine month periods ended September 30, Savanna Energy Services Corp THIRD QUARTER REPORT 5

6 MANAGEMENT S DISCUSSION AND ANALYSIS MARKET TRENDS Savanna s business depends significantly on the level of spending by oil and gas companies for exploration, development, production, and abandonment activities. Sustained increases or decreases in the price of natural gas or oil could materially impact such activities, and thereby materially affect the Company s financial position, financial performance and cash flows (see Risks and Uncertainties in the Company s 2010 Annual Report and Risk Factors in the Company s Annual Information Form). Due to extreme 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, which have historically been a significant driver for Savanna s core market, have remained relatively low. North American storage levels for natural gas are still relatively high and, coupled with continued strong production from liquids rich and unconventional plays, there remains uncertainty regarding the nearterm pricing of this commodity. In contrast, oil prices have remained strong, generating a steady surge in oil-focused drilling, completion and maintenance activity, which has more than offset the activity void from reduced natural gas service demand. What is clear is that the focus remains very much on deep unconventional plays, while conventional and shallow drilling for natural gas remains muted. How this balance settles will in large measure dictate natural gas supply and pricing. Additionally, the recent heightened economic uncertainty in the U.S. and sovereign debt issues in Europe may further affect commodity prices and capital market liquidity in the near-term. As a result of the shift by Savanna s customers from natural gas drilling to oil and liquids-focused drilling, as well as development of new core areas of activity, Savanna has expended considerable effort on repositioning its Canadian-based drilling and well servicing fleet into more oil-focused regions and in increasing the average depth capacity of its drilling fleet through both retrofit of hybrid drilling rigs as well as building of new ultra-deep conventional doubles. This has correspondingly led to a reduced focus on historical core areas. 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 core areas 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 react to them. BUSINESS ACQUISITIONS On June 1, 2011, Savanna acquired all the outstanding shares of Performance Services Ltd. ( Performance ). Performance is a well servicing company operating 16 mobile free-standing service rigs throughout Alberta, British Columbia and Saskatchewan. The average age of the rigs acquired is less than five years and all are of similar design to the Company s current well servicing fleet. The rigs are being managed out of Savanna s current field locations and as a result the Company does not expect to incur any incremental overhead costs. The acquisition was funded through the issuance of 3.6 million common shares of Savanna. The value of Savanna s shares issued as consideration was determined based on the closing price of Savanna s shares on the acquisition date. On July 12, 2011, Savanna acquired of all the outstanding shares of Silverstar Well Servicing Ltd. ( Silverstar ). Silverstar is a well servicing company operating 13 Class III heavy-duty, mobile, free-standing double well servicing rigs and four freestanding single well servicing rigs throughout Alberta and British Columbia. The average age of the rigs acquired is less than five years and they are being managed out of Savanna s current field locations, which will limit any incremental overhead costs. This acquisition, together with the Performance acquisition, allowed Savanna to increase its service rig fleet by nearly 50% with rigs complementary to its pre-existing fleet. Additionally, the mix of single and double service rigs acquired through Silverstar complimented the five double rigs and 11 single rigs acquired through the Performance acquisition. The acquisition was funded through the issuance of 2.0 million common shares of Savanna and $19.8 million of cash. The value of Savanna s shares issued as consideration was determined based on the closing price of Savanna s shares on the acquisition date. The preliminary purchase price allocations are as follows: Savanna Energy Services Corp THIRD QUARTER REPORT 6

7 MANAGEMENT S DISCUSSION AND ANALYSIS (Stated in thousands of dollars) Performance Silverstar Total $ $ $ Net assets acquired: Cash, net of bank indebtedness (1,282) 731 (551) Non-cash working capital 2,664 2,340 5,004 Property and equipment 34,714 43,993 78,707 Intangibles assets 120 1,927 2,047 Goodwill 6,355 3,264 9,619 Long-term debt - (8,667) (8,667) Deferred income tax liability (6,263) (6,353) (12,616) 36,308 37,235 73,543 Consideration: Cash - 19,804 19,804 Common shares issued 36,308 17,431 53,739 36,308 37,235 73,543 EQUIPMENT FLEET AND CAPITAL PROGRAM The following table outlines the Company s drilling and service rig fleet by type of rig: Sep-30 Dec Change DRILLING RIGS Heavy and ultra-heavy telescoping doubles North American hybrid (2) International hybrid TDS-3000 TM Triples and singles Coring 4 5 (1) Total drilling rigs (gross) Total drilling rigs (net)* SERVICE RIGS Total service rigs (gross) Total service rigs (net) * * Eight drilling rigs and four service rigs were owned in 50/50 limited partnerships at September 30, 2011 and December 31, The increase in the service rig fleet is a result of the completion of one new flush-by service rig in Canada, one new service rig in the U.S., both from Savanna s capital program, and the acquisitions of Performance and Silverstar. For the drilling fleet, in Q2 2011, one of the Company s coring rigs was retrofitted as an 1800 meter single drilling rig and two hybrid drilling rigs were retrofitted as TDS-3000 TM drilling rigs. In Q3 2011, the construction of two new high specification deep double drilling rigs was completed and the rigs were deployed into the U.S. to begin work under a term contract. Savanna also has a substantial inventory of drilling and well servicing-related rental assets and support equipment. Two additional TDS-3000 TM drilling rigs were put into service in early Q The Company sold its machining and pipe inspection facility and a majority of the related assets for gross proceeds of $3.7 million in The assets sold were purchased with and operated as a non-core part of Savanna s rental business in the oilfield services segment. The Company also sold its Blackfalds, Alberta field office in Q for proceeds of approximately $3.9 million which resulted in a gain of $0.6 million. Rigs operating from this location were deployed to Savanna s existing Nisku, Alberta facility and its expanded Medicine Hat, Alberta facility. Savanna Energy Services Corp THIRD QUARTER REPORT 7

8 MANAGEMENT S DISCUSSION AND ANALYSIS The following outlines the Company s deployment of its drilling and service rig fleet by geographic location and excludes the Company s four coring rigs (December 31, five coring rigs) located in Canada: Sep-30 Dec Change DRILLING RIGS Canada United States Australia Total drilling rigs SERVICE RIGS Canada United States Australia Total service rigs Savanna s first Australian hybrid drilling rig commenced operations in Q The initial start up of the rig went well and in the 34 days the rig operated in the quarter, the number of wells drilled exceeded the expectations of Savanna s customer. The second Australian hybrid drilling rig is licensed and ready to start drilling as soon as the first location is ready. The customer has experienced some initial delays in their drilling program, which has delayed the start of this rig, however, standby fees are being charged effective October 1, 2011, as per the contract. The construction of the third and fourth Australian hybrid drilling rigs are nearing completion and are expected to be shipped and operational in Australia toward the end of the Q and the beginning of the Q After suffering extensive flooding damage in January 2011, Savanna s first service rig in Australia resumed working in March 2011 and the second rig resumed work in June The total cost for restoration and repairs to the rigs is expected to be covered by Savanna s insurance program, subject to the payment of a deductible of $0.5 million, which was accrued in Both rigs were working on a 24 hour basis for most of Q However, due to the delays Savanna s customer has experienced in their completion and workover programs one of the service rigs was stood down in September and is currently charging standby fees. The third service rig arrived in Australia at the end of Q and was licensed in 4 weeks. Several companies have expressed interest in this rig and it is expected to begin operations in December A fourth drilling/service rig for Australia is currently under construction in Canada and is expected to commence operations on a three year term contract in July The start-up delays in Australia are typical for the size and scale of the exploration and development activities under a larger, vertically integrated project. Savanna s intermediate view of the Australia opportunity for its drilling and workover services remains positive, Savanna s previously announced and expanded 2011 capital program, as well as the carry-over of outstanding projects from the Company s 2010 capital program, continued in Q In the first nine months of 2011, approximately $131 million, of the total $176 million Savanna anticipates expending on the program in 2011, was incurred on the following: construction of one new service rig for deployment in Australia completed; retrofit of two additional hybrid drilling rigs for deployment in Australia, expected completion Q4 2011; retrofit of five additional hybrid drilling rigs as TDS-3000 TM drilling rigs, expected completion Q two completed; retrofit of three additional hybrid drilling rigs as TDS-3000 TM drilling rigs for deployment in the U.S., expected completion Q4 2011; completion of construction of two new high specification deep double drilling rigs, initiated in 2010, for contracted deployment in the U.S. completed; purchase of 16 new portable top drives, expected completion 1H 2012 six completed; Savanna Energy Services Corp THIRD QUARTER REPORT 8

9 MANAGEMENT S DISCUSSION AND ANALYSIS construction of two new service rigs for deployment in the U.S., expected completion Q one completed; construction of one new service rig for deployment in the Canada expected completion Q4 2011; retrofit of one conventional double to 3600 meter capacity, expected completion Q4 2011; retrofit of one coring rig to a conventional 1800 meter single completed; retrofit of three service rigs, expected completion Q4 2011; and expansion of the rental fleet, support equipment, drill pipe and a field shop, expected completion Q All but one of the TDS-3000 TM drilling rigs, encompassed under the 2011 capital program, have already been contracted and a contract is pending on that rig as well. There are also customer commitments to fully utilize all of the top drives being ordered, with Savanna presently operating rental top drives to satisfy customer demand. Upon taking delivery of the new top drives, Savanna will have 100% of its Canadian drilling rig fleet so equipped. Subsequent to the end of the quarter, Savanna has also confirmed its base capital program for the upcoming year. The 2012, $104 million capital program includes the following: retrofit of five additional hybrid drilling rigs as TDS-3000 TM drilling rigs; construction of one new high-capacity workover/drilling rig for Australia; additional support equipment for drilling, well servicing and rentals including deposits on long lead items; and maintenance capital and rig re-certifications reflective of anticipated 2012 activity levels. CONTRACT DRILLING Savanna provides contract drilling services predominantly through its proprietary hybrid drilling rigs and telescoping double drilling rigs, virtually all of which were designed and built by the Company in the last ten years. Savanna also operates triple drilling rigs, single drilling rigs, coring rigs and newly designed TDS-3000 TM drilling rigs. In 2011, the drilling division operated in Canada, the United States and Australia; in 2010 the drilling division operated in Canada, the United States and Mexico. (Stated in thousands of dollars, except revenue per day) Three Months Ended Nine Months Ended September Change Change Revenue $ 117,120 $ 81,969 43% $ 321,346 $ 241,441 33% Operating expenses $ 82,632 $ 63,710 30% $ 231,743 $ 185,991 25% Operating margin (1) $ 34,488 $ 18,259 89% $ 89,603 $ 55,450 62% Operating margin % (1) 29% 22% 28% 23% Operating days (2) 5,705 4,674 22% 15,566 13,059 19% Revenue per operating day $ 20,529 $ 17,537 17% $ 20,644 $ 18,488 12% Spud to release days (2) 5,034 4,047 24% 13,724 11,241 22% Wells drilled (2) (7%) 1,692 1,572 8% Total meters drilled (2) 1,015, ,713 18% 2,646,920 2,280,390 16% Utilization - Canada (2) 52% 39% 33% 46% 36% 28% Utilization - U.S. (2) 79% 73% 8% 82% 67% 22% Utilization - International (2) 14% 63% (78%) 5% 71% (93%) Canadian industry average utilization (2) 55% 40% 38% 48% 37% 30% Savanna Energy Services Corp THIRD QUARTER REPORT 9

10 MANAGEMENT S DISCUSSION AND ANALYSIS Third Quarter Results The continuing strong demand for oilfield services in 2011 and improvements in overall oil and gas industry fundamentals resulted in increased operating days, day rates, revenue and operating margins in both Canada and the U.S. this quarter compared to Q Additionally, Savanna s Australian drilling operations commenced in the third quarter; its first rig to operate in the country contributed $1.1 million of revenue in its first month of operation. Of Savanna s average deployed fleet of 100 net rigs in Q3 2011, 75 were located in Canada, 23 were in the U.S. and the remaining two were in Australia. In Q3 2010, an average of 78 rigs were located in Canada, 21 rigs were in the U.S. and two were in Mexico. Increases in operating days, revenue and operating margins were achieved by both hybrid and conventional drilling rigs relative to Q Savanna s hybrid rigs increased operating margins by nearly 3.5 times based on utilization rates of 28% and achieved operating margin percentages of 20% compared to 6% in Q Savanna s Canadian conventional rigs more than doubled operating margins compared to Q achieving operating margin percentages of 40% compared to 28% in Q Savanna s TDS-3000 TM drilling rigs, which were not operational in Q3 2010, also achieved operating margin percentages of 40%. Q utilization rates of 81% for Savanna s conventional and TDS-3000 TM drilling rigs illustrates the continued strong demand for Savanna s high specification deep rated rigs. The demand for Savanna s deeper rated rigs was also evident outside of Canada based on utilization rates in the U.S. in Q Operating margin percentages for Savanna s U.S. drilling operations of 19% were consistent with those achieved in Q3 2010; however, as footage contracts begin to expire in Q margin percentages are expected to increase. In Australia, the drilling operation broke-even in its first month of activity with improvements to that performance expected in the upcoming quarter. The following outlines the amount of overall operating days and operating margin contributed by each type of rig and region that the drilling division operated in during Q3 2011: Canada Canada Canada U.S. Australia Hybrid Conventional TDS-3000 TM Conventional Hybrid Operating days contributed 20% 39% 6% 34% 1% Operating margin contributed 12% 60% 8% 20% 0% Variable operating costs per operating day were higher in Q compared to the same period in 2010 as a result of a 5% increase in labour costs compared to Q3 2010; Savanna was able to pass the labour cost increases on to its customers. Despite this increase, overall operating costs were lower as a percentage of revenue in Q compared to Q as the fixed portion of operating costs was distributed over a greater number of operating days. Year to Date Results Results for the first nine months of 2011 were driven by a longer than average winter drilling season in Canada, strong demand despite a wet second quarter culminating in continuing overall improvement in demand for oilfield services in Q The strong demand has resulted in increased operating days, day rates, revenue and operating margins compared to the nine months ended September 30, Increases in operating days, operating margins and revenue were achieved by both hybrid and conventional drilling rigs. The conventional drilling rigs in Canada, in particular, showed more of an increase in both operating days and day rates and to date has more than doubled operating margins compared to the same period in 2010 with operating margin percentages of 36%. Momentum from strong first and second quarters continued into the third quarter leading to a year-todate utilization rate 20 percentage points higher than the industry average in Canada. Similarly, the TDS-3000 TM drilling rigs have achieved year-to-date utilization rates of 68% and operating margin percentages of 35% despite two of the rigs not being available during Q The U.S. drilling operation also had strong utilization numbers in the first nine months of 2011 and despite a difficult first quarter overall operating margins are $7.1 million dollars higher in the nine months ended September 30, 2011 compared to the same period in Utilization rates for Savanna s Hybrid rigs have been at their highest levels since 2008 which has led to a year over year increase in operating margins of $5.9 million. The following outlines the contributions of each type of rig and region to overall operating days and operating margin for the nine months ended September 30, 2011: Savanna Energy Services Corp THIRD QUARTER REPORT 10

11 MANAGEMENT S DISCUSSION AND ANALYSIS Canada Canada Canada U.S. Australia Hybrid Conventional TDS-3000 TM Conventional Hybrid Operating days contributed 23% 36% 4% 37% 0% Operating margin contributed 18% 52% 6% 24% 0% Variable operating costs per operating day were higher in the first nine months of 2011 compared to the same period in 2010 primarily as a result of a 5% increase in labour costs compared to the same period in 2010; Savanna was able to pass the labour cost increases on to its customers. In addition, to date in 2011 Savanna has incurred higher retention costs compared to Labour availability remains a constraint to activity levels and the drilling division was not able to fully deploy all of its rigs in the quarter as a result. Despite increased labour costs, overall operating costs were lower as a percentage of revenue in the first nine months of 2011 compared to the same period in 2010 as the fixed portion of operating costs was distributed over a greater number of operating days. 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 double and single well servicing rigs, nearly all of which are free-standing, 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 $ 49,818 $ 23, % $ 110,364 $ 63,129 75% Operating expenses $ 33,639 $ 16, % $ 77,650 $ 46,995 65% Operating margin (1) $ 16,179 $ 6, % $ 32,714 $ 16, % Operating margin % (1) 32% 29% 30% 26% Operating hours (2) 54,705 29,650 85% 118,429 81,919 45% Revenue per hour $ 758 $ % $ 749 $ % Utilization - Canada (2) 56% 47% 19% 51% 43% 19% Utilization - U.S. (2) 72% 1 (4%) 69% 1 1% Third Quarter Results Continued improvements in the North American oil and gas industry along with the acquisition of 33 additional service rigs in June and July 2011 resulted in a significant increase in operating hours, pricing, revenue and operating margin in Q compared to Q During the quarter, Savanna averaged a deployed fleet of 98 net rigs, 86 of which operated in Canada, nine operated in the U.S. and the remaining two operated in Australia. This is a significant increase from Q3 2010, when Savanna averaged a deployed fleet of 64 net rigs, 56 of which were located in Canada with the other eight rigs operating in the U.S. More notably, the additional rigs in Canada did not dilute utilization rates. In fact, the Canadian well servicing division s Q utilization of 56% matched its Q utilization rate as the highest Q3 utilization since Additionally, both the U.S. well servicing division and oilfield rentals division achieved higher activity levels and operating results compared to Q With both Australian service rigs working nearly 24 hours a day for most of Q3 2011, these rigs generated $4.8 million in revenue and in total the oilfield services portion of this operation contributed 4% of the segments overall operating margin. Included in revenue for Q3 2011, was $8.4 million from oilfield rentals, a 115% increase from the $3.9 million in oilfield rentals revenue in Q The increase in oilfield rentals revenue is due to the increase in overall industry activity coupled with expansion of the rental fleet quarter over quarter. Of the Q rental revenue, $2.1 million was generated in Australia and $1.0 million ( $0.6 million) is eliminated on overall consolidation as inter-segment revenue. Oilfield rentals revenue is excluded from the per hour revenue calculations above. Savanna Energy Services Corp THIRD QUARTER REPORT 11

12 MANAGEMENT S DISCUSSION AND ANALYSIS The increase in margin percentages is due primarily to improved overall pricing quarter over quarter. However, increases in variable operating costs per operating hour somewhat offset these improvements. The increase in per hour operating costs was primarily a result of a 4% increase in labour rates, which went into effect in Q4 2010, and higher fuel prices. Savanna was able to recover some of the higher labour costs through increased hourly rates, although the pass through of these costs is not as direct as in the drilling division. In addition, overall operating costs were lower as a percentage of revenue in Q compared to Q as the fixed portion of operating costs was distributed over a greater number of operating hours. As with the drilling division, a shortage of labour did constrain utilization as some of the well servicing fleet in Canada was not deployed. Several recruiting and training undertakings should help alleviate this constraint in upcoming quarters. Year to Date Results Strong demand for oilfield services in 2011 coupled with a significant increase in the year over year average fleet size resulted in an increase in operating hours, pricing, revenue and operating margin in the first nine months of 2011 compared to the same period in To date in 2011, Savanna averaged a deployed fleet of 79 net rigs, 67 of which operated in Canada, nine operated in the U.S. and the remaining two were located in Australia. In the first nine months of 2010, 56 rigs were located in Canada and eight rigs were in the U.S. In Q1 2011, Savanna s Canadian well servicing division had its highest utilization quarter since Q1 2008, followed by its highest second quarter utilization since 2006 and Q3 utilization on par with Q and lower only to Q utilization. The U.S. well servicing division and oilfield rentals division also significantly improved year over year operating results compared to 2010 based on higher activity levels. In Australia, despite flooding delays through the first half of 2011, the oilfield services portion of this operation has generated positive operating margins in the nine months ended September 30, Included in revenue for the nine months ended September 30, 2011, was $21.7 million from oilfield rentals, a 104% increase from the $10.6 million in oilfield rentals revenue in the same period in The increase in oilfield rentals revenue is due to the increase in overall industry activity and expansion of the rental fleet. Of the 2011 rental revenue, $5.2 million was generated in Australia and $2.9 million ( $2.3 million) is eliminated on overall consolidation as inter-segment revenue. The increase in margin percentages is due primarily to improved overall pricing year over year and distributing fixed operating costs over higher activity levels. OTHER FINANCIAL INFORMATION (Stated in thousands of dollars) Three Months Ended Nine Months Ended September Change Change $ $ $ $ General and administrative expenses* 11,442 7,293 57% 30,032 19,851 51% as a % of revenue 6.9% 7.0% 7.0% 6.6% Stock-based compensation 1,277 1,440 (11%) 3,915 3,651 7% Depreciation and amortization 16,917 12,512 35% 44,036 34,631 27% Finance expenses 2,998 1,683 78% 7,013 4,593 53% Other (income) expenses (1,289) (576) 124% (1,257) 957 Income tax expense 5, % 10,084 3, % Effective income tax rate 25% 26% 25% 26% * General and administrative expenses above, differs from the amount reported in the consolidated statement of net earnings as it excludes the attributable amounts of stock-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. Savanna Energy Services Corp THIRD QUARTER REPORT 12

13 MANAGEMENT S DISCUSSION AND ANALYSIS The overall increase in general and administrative expenses for the three and nine month periods ended September 30, 2011, compared with the same periods in 2010, is primarily a result of upgrades to all of Savanna s support functions throughout the last 12 months. The upgrades included improving the capacity of the human resources, health safety and environment, finance and information technology departments as well as increases related to employee incentive programs in line with the improved financial performance of the Company overall. General and administrative expenses for 2011 also include costs related to the acquisitions of Performance and Silverstar. The increase in stock-based compensation for the nine months ended September 30, 2011, compared to the same period in 2010, is due primarily to the increase in the mark-to-market adjustment on deferred share units and performance share units. The overall increase in depreciation and amortization for the three and nine months ended September 30, 2011, compared to the same periods in 2010, is primarily due to increased activity levels, as most of the Company s assets are depreciated based on operating days or hours. The increase in finance expenses for the three and nine month periods ended September 30, 2011, compared with the same periods in 2010, is primarily a result of an increase in the Company s average long-term debt outstanding together with an increase in the effective interest rates on that debt. The breakdown of other (income) expenses is as follows: (Stated in thousands of dollars) Three months ended Nine months ended September $ $ Loss (gain) on disposal of assets (940) (485) (923) 1,182 Impairment of rigs damaged by flooding in Australia 186-4,952 - Insurance proceeds on repair of rigs damaged by flooding (186) - (4,952) - Foreign exchange gain (366) (47) (401) (87) Other 17 (44) 67 (138) (1,289) (576) (1,257) 957 The sale of the Company s Blackfalds, Alberta field office contributed to most of gain on asset disposals for both the three and nine months ended September 30, The flooding damage to Savanna s Australian service rigs is estimated to be $4,952 to the end of September 2011, which resulted in an impairment write-down on these rigs equal to that amount. Savanna expects to be fully reimbursed for all of the repair and related costs through its insurance program and has therefore accrued the related insurance proceeds. 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 ( OCI )); the change year over year is due primarily to the change in the values of the U.S. dollar and Australian dollar relative to the Canadian dollar in the respective periods. The increase in income tax expense for the three and nine months ended September 30, 2011, compared to the same periods in 2010 is primarily a result of the increase in activity levels and the resulting higher pre-tax earnings in 2011 compared to 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. Savanna Energy Services Corp THIRD QUARTER REPORT 13

14 MANAGEMENT S DISCUSSION AND ANALYSIS 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, followed by a much slower second quarter. As a result of this, the variation in activity levels on a quarterly basis, particularly in the first and second quarters, can be dramatic year-over-year independent of other demand factors. As the Company continues to expand outside of Canada, the relative impact of Canadian seasonality will be reduced. 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) Three Months Ended Sep-30 Jun-30 Mar-31 Dec-31 Sep-30 Jun-30 Mar-31 Dec * $ $ $ $ $ $ $ $ Revenue 166,127 94, , , ,787 67, ,069 85,430 Operating expenses 115,298 72, ,808 97,579 79,715 56,914 94,050 61,611 Operating margin (1) 50,829 22,198 49,778 38,099 25,072 10,948 36,019 23,819 Operating margin % (1) 31% 23% 30% 28% 24% 16% 28% 28% Net earnings (loss) 14,363 (956) 15,575 6,190 1,898 (7,195) 10,565 (18,055) Per share: basic 0.17 (0.01) (0.09) 0.13 (0.23) Per share: diluted 0.17 (0.01) (0.09) 0.13 (0.23) Total assets 1,219,620 1,091,302 1,060, , , , , ,159 Long-term debt 200, , , ,802 93,601 84,696 98,386 70,107 * Savanna s transition to IFRS was effective January 1, 2010, as a result 2009 comparative figures are those reported under GAAP. Quarterly Financial Highlights ($ million) Q109 Q110 Q111 Q209 Q210 Q211 Q309 Q310 Q311 Q409 Q410 Q411 Revenue Operating Margin EBITDAS(1) Savanna Energy Services Corp THIRD QUARTER REPORT 14

15 MANAGEMENT S DISCUSSION AND ANALYSIS Summary of Quarterly Results Contract Drilling (Stated in thousands of dollars, except revenue per day) Three Months Ended Sep-30 Jun-30 Mar-31 Dec-31 Sep-30 Jun-30 Mar-31 Dec * Revenue $ 117,120 $ 70,371 $ 133,855 $ 107,633 $ 81,969 $ 52,008 $ 107,464 $ 68,478 Operating expenses $ 82,632 $ 53,382 $ 95,728 $ 76,399 $ 63,709 $ 44,084 $ 78,205 $ 50,316 Operating margin (1) $ 34,488 $ 16,989 $ 38,127 $ 31,234 $ 18,260 $ 7,924 $ 29,259 $ 18,162 Operating margin % (1) 29% 24% 28% 29% 22% 15% 27% 27% Operating days (2) 5,705 3,521 6,341 5,313 4,674 2,869 5,517 3,704 Revenue per operating day $ 20,529 $ 19,986 $ 21,109 $ 20,258 $ 17,537 $ 18,128 $ 19,479 $ 18,488 Spud to release days (2) 5,034 3,122 5,568 4,676 4,047 2,471 4,724 3,096 Wells drilled (2) Total meters drilled (2) 1,015, ,459 1,022,558 1,115, , , , ,824 Utilization (2) Canada 52% 23% 62% 47% 39% 17% 54% 31% U.S. 79% 83% 83% 79% 73% 66% 60% 53% International 14% % 70% 74% 72% Canadian industry average 55% 23% 66% 49% 40% 20% 52% 31% * Savanna s transition to IFRS was effective January 1, 2010, as a result 2009 comparative figures are those reported under GAAP. Summary of Quarterly Results Oilfield Services (Stated in thousands of dollars, except revenue per hour) Three Months Ended Sep-30 Jun-30 Mar-31 Dec-31 Sep-30 Jun-30 Mar-31 Dec * Revenue $ 49,818 $ 24,477 $ 36,068 $ 28,231 $ 23,283 $ 16,104 $ 23,741 $ 17,447 Operating expenses $ 33,639 $ 19,431 $ 24,581 $ 21,531 $ 16,639 $ 13,227 $ 17,120 $ 11,928 Operating margin (1) $ 16,179 $ 5,046 $ 11,487 $ 6,700 $ 6,644 $ 2,877 $ 6,621 $ 5,519 Operating margin % (1) 32% 21% 32% 24% 29% 18% 28% 32% Operating hours (2) 54,705 27,300 36,425 34,354 29,650 21,992 30,278 24,011 Revenue per hour $ 758 $ 714 $ 761 $ 687 $ 654 $ 624 $ 640 $ 629 Utilization (2) Canada 56% 35% 62% 56% 47% 33% 49% 37% U.S. 72% 69% 66% 61% 75% 69% 60% 59% International 233% 122% 30% 59% * Savanna s transition to IFRS was effective January 1, 2010, as a result 2009 comparative figures are those reported under GAAP. Savanna Energy Services Corp THIRD QUARTER REPORT 15

16 MANAGEMENT S DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY The market risks outlined under Market Trends in this MD&A and under Risks and Uncertainties in the Company s 2010 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. This objective is 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) 39,922 17, % 98,059 52,099 88% Per diluted share % % Change in cash, net of bank indebtedness (31,122) (15,706) 98% 3,852 1, % The Company s operating cash flows are closely related to its operating margins and general and administrative expenses; consequently, the increases in operating cash flows for the three and nine months ended September 30, 2011, are directly related to the increases in operating margins less general and administrative expenses in the same respective periods. Therefore, increased activity levels led to an overall increase in operating cash flows for the three and nine month periods ended September 30, 2011, compared to the same periods in The decrease in cash, net of bank indebtedness for Q is due primarily to expenditures under the Company s capital program. (Stated in thousands of dollars) Sep-30 Dec Change $ $ Working capital held outside of partnerships 92,978 77,626 15,352 Working capital held in partnerships * 2,117 1, Working capital (1) 95,095 78,873 16,222 * Working capital held in limited partnerships owned 50% by the Company. The amount presented is the Company s proportionate share. The increase in working capital at September 30, 2011, compared to December 31, 2010, is primarily a result of an increase in accounts receivable as amounts increased in line with activity increases in Q Savanna s net debt (1) position at September 30, 2011, was $105.6 million (December 31, 2010 $33.9 million). Savanna Energy Services Corp THIRD QUARTER REPORT 16