FINANCIAL HIGHLIGHTS OPERATIONAL HIGHLIGHTS

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1 FINANCIAL HIGHLIGHTS (Stated in thousands of dollars, except per share amounts) Three Months Ended Six Months Ended June $ $ $ $ OPERATING RESULTS Revenue 67,862 27, , ,839 Operating margin (1) 10, ,526 23,651 Operating cash flows before changes in working capital (1) 2,579 (4,441) 30,788 12,327 Per diluted share 0.03 (0.07) Net earnings (7,742) (8,899) 1,855 (5,290) Per share: basic (0.10) (0.14) 0.02 (0.09) Per share: diluted (0.10) (0.14) 0.02 (0.09) OPERATIONAL HIGHLIGHTS Improvements in the North American oil and gas industry, coupled with ongoing efforts by Savanna to better position its oilfield equipment, had a positive effect on the Company s operations in Q The increase in demand for oilfield services led to an increase in operating days and hours in both the drilling and oilfield services divisions compared to Q Furthermore, the continued relative growth in Savanna s U.S. operations during the quarter compared to the prior year reduced the impact of Canadian spring break-up on the fleet. The drilling division tripled the number of operating days in the second quarter of 2010 versus the same period in 2009 with only a 4% increase in average fleet size. Additionally, while average day rates decreased 2% over the same time frame, the drilling division increased operating margins by $7.9 million in Q from Q The higher operating margin percentages for the three and six months ended June 30, 2010 have more than doubled year to date operating margins overall compared to the same periods ending June 30, The oilfield services division achieved a 92% increase in operating hours, and operating margins nearly tripled in the second quarter of 2010 relative to 2009 with virtually the same average fleet size from Q Furthermore, operating margin percentages are up 7% and 4% respectively for the three and six months ended June 30, 2010 compared to the same periods in In Q2 2010, 2 double drilling rigs were retrofitted and deployed to Texas from Alberta and 1 double drilling rig was deployed to Pennsylvania from Quebec. During the second quarter, the Company completed the sale of its remaining 5 coil tubing service units, resulting in a loss on disposal of $1.7 million (or $0.02 per share). Excluding this sale, the net loss for Q is $0.08 per share. Subsequent to the end of the quarter, the Company also disposed of 3 surface/coring rigs for aggregate proceeds of $3.0 million, reducing the surface/coring fleet to 6 rigs. No gain or loss arose on this disposition.

2 president s message The second quarter of 2010 reflects improving overall oilfield service industry fundamentals, continued expansion of Savanna s United States market position, and relocation of our hybrid drilling fleet. In Q2, Savanna s conventional drilling and well servicing fleets in Canada and the U.S. experienced utilization rates in excess of both Q and market averages. The CT-2200 hybrid drilling rigs also maintained relatively strong utilization within the shallow rig class. We expect the relative outperformance of all of these rig categories to continue into what we believe will be a busy second half of the year. Significant design and build progress has been achieved on the conversion of our first 2 hybrid rigs to TDS-3000 rigs, culminating in the contracting of the first of these rigs with a major Canadian customer and the expectation for contracting the second shortly. Additionally, we are experiencing very strong interest from other customers in both Canada and the United States for the TDS-3000 platform. This rig platform represents a very attractive retrofit to the CT-1500 platform, adding substantial depth, directional and horizontal capacity to these rigs, and opening up significant opportunities to deploy these rigs in most of the unconventional plays throughout North America. Most critically, this conversion can be accomplished at a fraction of new-build costs and puts an underutilized segment of our fleet back to work. Premised on converting existing customer interest in Canada and the United States into contracts, it is anticipated that Savanna will convert no less than 10 CT-1500 rigs to TDS-3000 rigs by the end of Our progress in Australia continues as well. Anchored by a five year take or pay contract for 2 drilling rigs and 2 service rigs with APLNG, Savanna continues to pursue additional opportunities in that market. The initial service rig under the APLNG contract should land in Australia in late Q3, to be followed by an additional service rig and the first 2 drilling rigs by mid Q4. The 2 additional drilling rigs and 1 additional service rig will arrive in Australia in late Q Customer contract options under the APLNG contract and/or pending tenders are expected to support these additional rigs in the Australian market, but this is by no means assured. Certainly overall activity in Australia is poised to grow significantly and Savanna is very focused on taking advantage of this opportunity. As is widely appreciated, drilling activity levels in Mexico have decreased substantially, and future levels are highly uncertain. Our customer in Mexico released 2 of our 4 high specification double rigs during the quarter. Both of the released rigs were mobilized out of Mexico into Texas at our customer s expense. One will be moved to Canada on a one year take-or-pay contract with its mobilization funded by the customer, while the second will be transferred to Pennsylvania. Additionally, the day rate on the new contract in Canada exceeds those we were previously experiencing in Mexico. The long-term status of the remaining 2 rigs in Mexico remains uncertain, although both rigs are currently working. In well servicing, we continue to experience a recovery in both hourly rates and utilization. During the quarter we completed the disposition of our remaining shallow coil tubing service units, allowing a focus on our core well servicing operations going forward. We continue to see gradual expansion opportunities in this business, albeit at a slower pace than drilling. Correspondingly, we continue to gradually expand our rental asset fleet, however that expansion will remain muted until the existing hybrid and conventional drilling opportunities are more fully accessed. Overall, Savanna is on track to cost-effectively revitalize our hybrid drilling fleet substantially by the end of 2011, and is executing on this plan. At the same time, our remaining business is well positioned operationally and geographically to generate the near term cash flows and long-term growth opportunities the Company expects. The overall North American market remains vulnerable to volatile activity levels, which impact all oilfield suppliers. Savanna is committed to ensuring that its personnel and equipment are developed and positioned to succeed in the face of this volatility, and to provide strong long-term returns for our stakeholders Respectfully submitted, Ken Mullen President and Chief Executive Officer August 12, 2010 Calgary, Alberta Savanna Energy Services Corp SECOND QUARTER REPORT p_2

3 management s discussion and analysis For the Three and Six Months Ended June 30, 2010 This discussion focuses on key items from the consolidated financial statements of Savanna Energy Services Corp. ( Savanna or the Company ) for the three and six month periods ended June 30, 2010 and 2009, which have been prepared by management in accordance with Canadian generally accepted accounting principles ( GAAP ). 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 annual audited consolidated financial statements and the related notes for the fiscal year ended December 31, 2009, the Management s Discussion and Analysis ( MD&A ) which appears in the Company s 2009 Annual Report, the interim financial statements for the three and six months ended June 30, 2009, as well as the Cautionary Statement Regarding Forward-Looking Information found at the end of this discussion. Additional information regarding the Company, including the Company s Annual Information Form, is available on SEDAR at This MD&A is dated August 12, Savanna is an oilfield services company operating throughout North America. The Company s overall business is conducted through two major divisions: contract drilling and oilfield services. 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 Six Months Ended June $ $ $ $ OPERATING RESULTS Revenue 67,862 27, , ,839 Operating expenses 57,672 26, ,404 97,188 Operating margin (1) 10, ,526 23,651 Net earnings (7,742) (8,899) 1,855 (5,290) Per share: basic (0.10) (0.14) 0.02 (0.09) Per share: diluted (0.10) (0.14) 0.02 (0.09) CASH FLOWS Operating cash flows before changes in working capital (1) 2,578 (4,441) 30,788 12,327 Cash paid on the purchase of property, equipment and other assets (24,915) (11,973) (41,944) (38,601) Dividends paid - (1,474) (1,977) (2,948) FINANCIAL POSITION AT Jun Dec $ $ Working capital (1) 56,508 51,016 Property and equipment 877, ,251 Total assets 996, ,159 Long-term debt 84,696 70,107 Savanna Energy Services Corp SECOND QUARTER REPORT p_3

4 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 its financial position, results of operations and cash flows (see Risks and Uncertainties in the Company s 2009 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. In Q2 2010, natural gas prices, which are a primary driver for Savanna s core market, have continued at the low levels seen earlier in the year. With North American storage levels at near record highs and strong production from unconventional plays, there remains uncertainty regarding the near term pricing of this commodity. However, demand for natural gas in North America has been significantly higher over the past several months and has, to date, largely offset the increased supply. How this balance settles will in large measure dictate natural gas supply and pricing. Recently, access to credit and capital has improved and, when coupled with strong oil prices, has resulted in Savanna s customers focusing drilling and completion programs on oil. As drilling for, and producing, natural gas remains a key driver for oilfield services activity, the timing of an overall recovery of the North American drilling and oilfield services markets remains unclear. As a result of the shift by Savanna s customers between natural gas drilling and oil drilling, as well as development of new core areas of activity, Savanna has redeployed large portions of its fleet to new areas. 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 and 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. Savanna continues to assess further expansion of its fleet both domestically and internationally, weighing the potential diversification and expansion benefits, for both oilfield services and drilling, against the inherent economic, political and operating risks. EQUIPMENT FLEET The following table outlines the Company s drilling and service rig fleet by type of rig: Jun-30 Dec Change DRILLING RIGS Heavy and ultra-heavy telescoping doubles Hybrid drilling Triples Pipe-arm single Surface/coring Total drilling rigs (gross) Total drilling rigs (net)* SERVICE RIGS Service rigs Coil tubing service units - 8 (8) Total service rigs (gross) (8) Total service rigs (net) * (8) * 8 drilling rigs and 4 service rigs were owned in 50/50 limited partnerships at June 30, 2010 and December 31, The Company also has a substantial inventory of drilling and well servicing-related rental assets and support equipment, as well as a machining and pipe-inspection facility. Savanna Energy Services Corp SECOND QUARTER REPORT p_4

5 During the first and second quarters of 2010, the Company sold its entire fleet of 8 coil tubing service units and related equipment for gross proceeds of $3.7 million which resulted in a loss of $1.7 million. This was a non-core business unit that was added as a result of the 2006 merger with Western Lakota Energy Services Inc. and had been under-utilized through most of 2009, which in turn led to impairment losses in Q Subsequent to the end of the quarter, the Company also disposed of 3 surface/coring rigs for aggregate proceeds of $3.0 million, reducing the surface/coring fleet to 6 rigs. Similar to the coil tubing service units, these rigs were part of a noncore business unit that was added as a result of the 2006 merger with Western Lakota Energy Services Inc. The surface/coring fleet had also been under-utilized through most of 2009 and incurred impairment losses in Q No gain or loss arose on this disposition. The following outlines the Company s deployment of its drilling and service rig fleet by geographic location: Jun-30 Dec Change DRILLING RIGS Canada (3) United States Mexico Total drilling rigs SERVICE RIGS Canada (8) United States Total service rigs (8) During Q2 2010, 3 drilling rigs were moved to the U.S. from Canada; 2 of the double drilling rigs were retrofitted as part of the Company s capital program and deployed to the Permian Basin in Texas and the other moved into the Marcellus shale play in Pennsylvania. Subsequent to the end of the quarter, the Company s customer in Mexico released 2 of Savanna s drilling rigs as a result of a decrease in the expected number of wells to be drilled under the contract pursuant to which Savanna s customer has been operating. In July 2010, the 2 rigs were moved to Texas at the Mexico customer s expense; from Texas one of the high specification conventional double drilling rigs will be moved to Canada under a term contract, at the expense of Savanna s new customer, and the other will be moved into the Marcellus shale play in Pennsylvania. Savanna s previously announced capital program continued in Q with approximately $41.9 million expended on the program in Although the overall 2010 capital budget has not changed, the Company has determined that some ancillary equipment, that was initially thought to be required for Australia, is no longer needed and will be replaced with the construction of an additional service rig for the Australian market. The Company s 2010 capital commitment is focused on sustaining, maintenance and incremental capital, including the capital required for the following: 3 new service rigs for deployment in Australia; retrofitting 4 hybrid drilling rigs for deployment in Australia; retrofitting 2 hybrid drilling rigs as automated Range III top drive singles ( TDS-3000 TM Singles ); retrofitting 2 conventional double drilling rigs for deployment in the United States completed; 2 new high specification conventional deep double drilling rigs; 4 new portable top drives; and 1 new flush-by service rig. Savanna Energy Services Corp SECOND QUARTER REPORT p_5

6 CONTRACT DRILLING (Stated in thousands of dollars, except revenue per hour) Three Months Ended Six Months Ended June Change Change Revenue $ 52,008 $ 17, % $ 159,472 $ 92,528 72% Operating expenses $ 44,842 $ 18, % $ 123,730 $ 74,946 65% Operating margin (1) $ 7,166 $ (765) $ 35,742 $ 17, % Operating margin % (1) 14% (4%) 22% 19% Number of operating days * 2, % 8,385 4,388 91% Revenue per operating day $ 18,128 $ 18,422 (2%) $ 19,019 $ 21,087 (10%) Number of spud to release days * 2, % 7,194 3,752 92% Wells drilled % % Total meters drilled 471, , % 1,417, ,847 42% Utilization - Canada 17% 5% 240% 35% 18% 94% Utilization - International 66% 37% 78% 65% 46% 41% Canadian industry average utilization ± 20% 11% 82% 36% 23% 57% * The number of operating days and number of spud to release days are all on a net basis which means only Savanna s proportionate share of any rigs held in 50/50 limited partnerships have been included. Savanna reports its rig utilization based on spud to release time for the rigs and excludes moving, rig up and tear down time, even though revenue may be earned during this time. Savanna s rig utilization, spud to release days, wells drilled and total meters drilled exclude coring rigs as the operating environment is not comparable to the Company s other drilling rigs, nor to industry utilization drivers. However, these rigs are included in total fleet numbers. ± Source of industry figures: Canadian Association of Oilwell Drilling Contractors ( CAODC ). Calculation not meaningful The second quarter is normally a period of low activity given that the majority of the Company s operations are carried out in regions of Canada that are affected by spring break-up. As the ground thaws in the spring, road bans are often placed on secondary roads to limit movement of heavy equipment until they are dry enough to support the equipment. However, overall improvements in the North American oil and gas industry in 2010 resulted in a significant increase in operating days, revenue and operating margins in Canada, the U.S. and Mexico this quarter compared to Q despite the usual effects of spring break-up. In Q2 2010, Savanna averaged a deployed fleet of 103 net rigs, 19 of which were in the U.S. and 4 of which were in Mexico, compared to Q when the Company operated an average fleet of 99 net rigs, 16 of which were in the U.S. and none of which were in Mexico. The increases in operating days and revenue were achieved by both hybrid and conventional drilling rigs; however, the conventional drilling rigs, in particular, showed the most significant increases in Q compared to the same period in Conventional drilling rigs achieved 91% of the operating days in the quarter (Q %). Operating costs per operating day were lower in Q compared to Q The primary reason for the improvement was the fixed portion of operating costs were distributed over a greater number of operating days in Q compared to Q when activity levels were significantly lower. On a year to date basis, the improvements in industry activity levels in 2010 resulted in a significant increase in operating days, revenue and operating margins in all areas in which Savanna operates for the six months ended June 30, 2010 compared to the same period in 2009, despite lower overall day rates year over year. As with the quarter ended June 30, 2010, in the first six months of 2010 the conventional drilling rigs, in particular, have showed the most significant increases in operating days and revenue; conventional drilling rigs achieved 72% of the operating days in the first half of 2010 ( %). The increases on the conventional drilling side are a result of the increased demand for deeper drilling compared to shallow drilling and is further evidenced by the number of days and meters per well drilled to date in 2010 compared the first six months of Savanna Energy Services Corp SECOND QUARTER REPORT p_6

7 Operating costs per operating day were lower in the first half of 2010 compared to the first half of The improvement is due in part to the fixed portion of operating costs being distributed over a greater number of operating days to the end of June In addition, decreased wage levels recommended by the CAODC for rig employees, became effective on May 1, However, the decrease in overall day rates in 2010 has somewhat offset the improvements in operating costs and operating margin percentages have only increased to 22% from 19% a year ago. OILFIELD SERVICES (Stated in thousands of dollars, except revenue per hour) Three Months Ended Six Months Ended June Change Change Revenue $ 16,104 $ 9,369 72% $ 39,845 $ 29,194 36% Operating expenses $ 13,227 $ 8,329 59% $ 30,346 $ 23,431 30% Operating margin (1) $ 2,877 $ 1, % $ 9,499 $ 5,763 65% Operating margin % (1) 18% 11% 24% 20% Number of operating hours * 21,992 11,470 92% 52,270 34,451 52% Revenue per hour $ 624 $ 639 (2%) $ 633 $ 694 (9%) Utilization - Canada 33% 15% 120% 41% 26% 58% Utilization - U.S. 69% 58% 19% 65% 55% 18% * The number of operating hours is on a net basis which means only Savanna s proportionate share of any rigs held in 50/50 limited partnerships has been included. Utilization is based on standard hours of 3,650 per rig per year. The utilization rate excludes the coiled tubing service units since these units are not comparable in size or operations to the division s service rigs. Reliable industry average utilization figures, specific to well servicing, are not available. As with the drilling division, improvements in the North American oil and gas industry in 2010 resulted in an increase in operating hours, revenue and operating margins in Q compared to Q2 2009, despite lower hourly rates. The increases were achieved in both Canada and the U.S. In Q2 2010, the oilfield services division s fleet size averaged 64 net service rigs, 3 coiled tubing service units and 34 boilers, compared to Q when the division operated an average of 64 net service rigs, 8 coiled tubing service units, and 34 boilers. The increase in margin percentages is due primarily to the decreased effect fixed operating costs have had on overall costs in Q compared to Q as a result of increased activity levels this year. The largest other cost decrease quarter over quarter was a reduction in wages for all rig personnel of approximately 6% compared to Q These differences resulted in lower per hour operating costs in Q compared to Q The improvements in industry activity levels in 2010 also resulted in a significant increase in operating hours, revenue and operating margins on a year to date basis, despite lower overall hourly rates year over year. Again the increases were achieved in both Canada and the U.S. Additionally, the Company s efforts to reduce operating costs in the latter part of 2009, including the 6% reduction in wages for all rig personnel, and the decrease in the per hour fixed portion of operating costs has had on overall operating costs at current higher activity levels, lowered per hour operating costs in the first half of 2010 compared to the same period in However, the decrease in overall hourly rates in 2010 has somewhat offset the improvements in operating costs and as a result operating margin percentages only increased to 24% from 20% in the same period in Included in revenue for the three and six months ended June 30, 2010, was $2.4 million and $6.7 million, respectively, from rental assets; in 2009 rental asset revenue was $2.0 million and $5.3 million in the same respective periods. The increase in rental asset revenue in each of the periods is due to the increase in overall industry activity. Of the rental revenue, $0.4 million for the three months ended June 30, 2010 ( $0.4 million) and $1.7 million for the six months ended June 30, 2010 ( $1.2 million), is eliminated on overall consolidation as inter-segment revenue. Rental asset revenue is excluded from the per hour revenue calculations above. Savanna Energy Services Corp SECOND QUARTER REPORT p_7

8 OTHER FINANCIAL INFORMATION (Stated in thousands of dollars) Three Months Ended Six Months Ended June Change Change $ $ $ $ General and administrative expenses 6,831 4,880 40% 12,558 10,274 22% as a % of revenue 10.1% 18.0% 6.3% 8.5% Stock-based compensation 994 1,236 (20%) 2,211 2,141 3% Depreciation and amortization 9,424 5,373 75% 22,841 15,481 48% Interest on long-term debt 1,508 1,330 13% 2,910 2,975 (2%) Other (income) expenses 1,265 (203) 1,418 (398) Income tax expense (2,090) (3,299) 1,733 (1,532) Effective income tax rate 26% 28% 26% 28% Calculation not meaningful The increase in general and administrative expenses for the three and six months ended June 30, 2010 compared with the same periods in 2009 reflects Savanna s expansion into new markets over the last twelve months, significant sales and marketing efforts in 2010 and the effect of salary and wage roll backs that were in place from April to December The decrease as a percentage of revenue in Q and for the year to date compared to 2009 is due primarily to the increase in revenues year over year in each respective period which is in part due to the sales and marketing efforts put forth this year. Stock-based compensation decreased in Q compared to Q primarily as a result of the mark-to-market adjustment on deferred share units during the quarter. The decrease in Savanna s share price from March 31, 2010 resulted in an expense recovery of $0.1 million on the outstanding deferred share units in Q compared to a $0.2 million expense in Q On a year to date basis stock-based compensation is relatively static compared to the first half of The overall increase in depreciation and amortization for the three and six months ended June 30, 2010, compared to the same periods in 2009 is primarily a result of the increase in activity, as a large portion of the Company s assets are depreciated based on operating days or hours. The increase in interest expense in Q is primarily a result of an increase in interest rates compared to Q For the six months ended June 30, 2010, the decrease in the average balances outstanding on the Company s committed revolving debt facility are somewhat offset by interest rate increases to the end of June 2010, resulting in a consistent interest expense compared to the six months ended June 30, The breakdown of other (income) expenses is as follows: (Stated in thousands of dollars) Three Months Ended Six Months Ended June $ $ $ $ Losses on disposal of assets 1, , Foreign exchange gains (356) (387) (57) (538) 1,265 (203) 1,418 (398) The increase in losses on asset disposals is primarily a result of the sale of Savanna s coil tubing service units described under Equipment Fleet in this MD&A. Foreign exchange gains and losses arise on the settlement of foreign currency 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 value of the U.S. dollar relative to the Canadian dollar in the respective periods. Savanna Energy Services Corp SECOND QUARTER REPORT p_8

9 The increase in income tax expense is primarily a result of the increase in activity levels and the resulting higher pre-tax earnings in the first half of 2010 compared to same period in 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. 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 Jun-30 Mar-31 Dec-31 Sep-30 Jun-30 Mar-31 Dec-31 Sep $ $ $ $ $ $ $ $ Revenue 67, ,069 85,430 50,350 27,045 93, , ,205 Operating expenses 57,672 94,732 61,611 40,208 26,627 70,561 98,152 84,207 Operating margin (1) 10,190 35,337 23,819 10, ,233 41,594 37,998 Operating margin % (1) 15% 27% 28% 20% 2% 25% 30% 31% Impairment loss - - (27,370) (319,365) - Per share: basic - - (0.35) (5.40) - Per share: diluted - - (0.35) (5.40) - Net earnings (loss) (7,742) 9,597 (18,055) (4,548) (8,899) 3,609 (310,980) 11,285 Per share: basic (0.10) 0.12 (0.23) (0.06) (0.14) 0.06 (5.26) 0.19 Per share: diluted (0.10) 0.12 (0.23) (0.06) (0.14) 0.06 (5.26) 0.19 Total assets 996,765 1,020, , , ,192 1,019,841 1,038,231 1,306,339 Long-term debt 84,696 98,386 70,107 57,263 50, , , ,301 Quarterly Financial Highlights ($ million) Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Revenue Operating Margin EBITDA(1) Savanna Energy Services Corp SECOND QUARTER REPORT p_9

10 FINANCIAL CONDITION AND LIQUIDITY The market risks outlined under Market Trends and under Risks and Uncertainties in this MD&A 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 continuing volatility in worldwide capital markets or in the energy related capital markets specifically. 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 Six Months Ended June Change Change $ $ $ $ Operating cash flows before changes in in working capital (1) 2,578 (4,441) 30,788 12, % Per diluted share 0.03 (0.07) % Increase in cash, net of bank indebtedness 9,787 12,307 (20%) 16,852 10,860 55% Calculation not meaningful 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 six months ended June 30, 2010, 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 increase in operating cash flows before changes in working capital for the three and six months ended June 30, 2010 compared to same periods in (Stated in thousands of dollars) Jun $ $ Dec Change Working capital held outside of partnerships 56,488 50,987 5,501 Working capital held in partnerships * (9) Working capital (1) 56,508 51,016 5,492 * 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 is primarily a result of the higher cash balance at June 30, 2010 compared to December The increase in cash is primarily due to collection of accounts and income taxes receivable since March 31, 2010; at that time the relatively high activity levels in Q and the timing of filing income tax returns led to higher balances of both accounts and income taxes receivable. Savanna s net debt (1) position at June 30, 2010, was $28.2 million (December 31, 2009 $19.1 million). Savanna Energy Services Corp SECOND QUARTER REPORT p_10

11 Investing Activities (Stated in thousands of dollars) Three Months Ended Six Months Ended June Change Change $ $ $ $ Purchase of property and equipment (23,394) (11,847) 97% (39,824) (37,574) 6% Purchase of other assets (1,521) (126) 1107% (2,120) (1,027) 106% (24,915) (11,973) 108% (41,944) (38,601) 9% The property and equipment purchases for the three and six months ended June 30, 2010, are primarily associated with expenditures under the Company s 2010 capital program as described under Equipment Fleet in this MD&A. The purchase of other assets relate entirely to rig re-certification costs incurred in the quarter, which are classified on the balance sheet as other assets. These rig re-certifications are also part of the Company s 2010 capital program. Financing Activities (Stated in thousands of dollars) Three Months Ended Six Months Ended June Change Change $ $ $ $ Proceeds from share issue, net of share issue costs - 120,223 (100%) - 120,223 (100%) Issuance of long-term debt % 30, % Repayment of long-term debt (15,491) (117,890) (87%) (15,971) (145,592) (89%) Dividends paid - (1,474) (100%) (1,977) (2,948) (33%) At the date of this report, the number of common shares outstanding was 79.1 million and the number of stock options outstanding was 4.7 million, the proceeds from which, if exercised, would be $60.7 million. Savanna had long-term debt outstanding of $62.2 million at June 30, 2010 (December 31, $62.6 million), excluding the $22.5 million (December 31, $7.5 million) current portion thereof. Collection of accounts and taxes receivable were used to pay down the Company s debt facilities in Q The funds drawn in Q were primarily used to fund working capital and the capital expenditures discussed above under the heading Investing Activities. At June 30, 2010, $Nil was drawn on the Company s swing-line operating facility and at the date of this report $0.5 million was drawn on the swing-line. At the date of this report, $81.7 million was drawn on the Company s committed term revolving credit facility. In March 2010 the Company declared and paid $2.0 million in dividends. Subsequent to the March 2010 distribution Savanna has suspended paying dividends on its common shares to free up cash flow to enable the Company to pursue its many strategic opportunities. The annualized savings from this decision will be approximately $8.0 million. Savanna Energy Services Corp SECOND QUARTER REPORT p_11

12 Contractual Obligations In the normal course of business, the Company incurs contractual obligations, primarily related to short-term and long-term indebtedness. The expected maturities of the Company s contractual obligations, including interest, are as follows: (Stated in thousands of dollars) For the period ended Dec-31 Jun-30 Jun-30 Jun-30 Jun Total $ $ $ $ $ $ Bank indebtedness Accounts payable and accrued liabilities 45, ,366 Long-term debt* 9,764 16,232 30,032 35,502-91,530 Operating leases 1,349 1,269 2, ,934 Construction commitments 48,074 5, , ,082 22,843 32,432 36, ,775 * Assumes the Company s term revolving credit facility is not renewed in Interest payments required on the term revolving credit facility are estimated based on an assumed static prime rate of interest of 2.5%. For the remainder of 2010 and the foreseeable future, the Company expects cash flow from operations, working capital and from its various sources of financing to be sufficient to meet its debt repayments and future obligations, and to fund anticipated capital expenditures. CONTINGENCIES The Company was subject to legal claims at June 30, 2010, and, although the outcome of these matters is not determinable at this time, the Company believes the claims will not have any material adverse effect on the Company s financial position or operating results. RELATED PARTY TRANSACTIONS During the three and six months ended June 30, 2010: Lease revenue, management fees and other fees in the amount of $0.32 million ( $0.08 million), net of intercompany eliminations, were earned from partnerships that are owned 50% by the Company bringing the total earned for the six months ended June 30, 2010 to $1.13 million ( $0.66 million). Lease amounts have been recorded as revenue and management and other fees have been recorded as a reduction of either operating expenses or general and administrative expenses in the consolidated statement of earnings. Savanna incurred lease fees in the amount of $0.53 million ( $0.01 million), net of inter-company eliminations, from partnerships that are owned 50% by the Company bringing the total incurred for the six months ended June 30, 2010 to $0.82 million ( $0.01 million). Lease fees have been recorded as operating expenses in the consolidated statement of earnings. Savanna advanced a total of $1.30 million in cash to two partnerships that are owned 50% by the Company in exchange for two promissory notes. Each of the notes bears interest at 7% and requires 48 equal monthly payments of $0.02 million. The advanced funds were used primarily to pay down current amounts owing by the partnerships to Savanna. To the end of June 2010, the Company had received $0.01 million in interest and $0.02 million had been applied to the principal owing to Savanna. These related party transactions were not in the normal course of operations and have been measured at the carrying amount of the assets. Revenue in the amount of $0.89 million ( $Nil) was earned from a customer that has a common director of the Company bringing the total earned for the six months ended June 30, 2010 to $1.42 million ( $Nil). Unless otherwise indicated, these transactions were in the normal course of operations and have been measured at the exchange amounts, which are the amounts of consideration established and agreed to by the related parties and which, in the opinion of management, are considered similar to those negotiable with third parties. Savanna Energy Services Corp SECOND QUARTER REPORT p_12

13 ACCOUNTING POLICIES The significant accounting policies are the same as those set out in the Company s most recent annual audited consolidated financial statements, other than as follows: Business Combinations Effective January 1, 2010, the Company elected to early adopt the Canadian Institute of Chartered Accountants ( CICA ) Handbook Section 1582, Business Combinations ; under the new section, the term business is more broadly defined than in the existing standard, most assets acquired and liabilities assumed are measured at fair value, any interest in an acquiree owned prior to obtaining control is remeasured at fair value at the acquisition date (eliminating the need for guidance on step acquisitions), a bargain purchase results in recognition of a gain, and acquisition costs are expensed. The adoption of this section had no effect on the Company s financial position or operating results. Consolidation Effective January 1, 2010, the Company elected to early adopt CICA Handbook Sections 1601, Consolidations and 1602 Non-controlling Interests. Section 1601 carries forward the requirements of Section 1600, Consolidated Financial Statements, other than those relating to non-controlling interests which would be covered in Section Under Section 1602, any non-controlling interest will be recognized as a separate component of shareholder s equity and net income will be calculated without deducting non-controlling interest and instead net income is allocated between the controlling and non-controlling interests. The adoption of these sections had no effect on the Company s financial position or operating results. RECENT ACCOUNTING PRONOUNCEMENTS The following are GAAP changes that have been issued by the CICA but are not yet effective: International Financial Reporting Standards ( IFRS ) The following are the key elements and timing of the Company s IFRS changeover plan: Key Activity Timing Current Status Financial reporting Identify differences in Canadian GAAP and IFRS and affect on current accounting policies Initial assessment completed; will be updated for changes up to Q Significant differences and accounting policy choices identified; see below for a summary of the significant areas expected to affect Savanna on conversion Determine which IFRS 1 exemptions will be relied upon Initial assessment completed; will be updated for changes up to Q Exemptions relevant to Savanna identified; see below for a summary of the significant exemptions Savanna intends to rely on Prepare accounting policies in accordance with IFRS To be completed by Q Policies with minimal differences have been conformed to IFRS; first draft of policies under IFRS completed and under review Create financial statements in accordance with IFRS To be completed by Q First draft of skeleton financial statements under IFRS completed and under review Quantify effects of adopting IFRS To be completed by Q for preparing IFRS 1 disclosures and 2010 comparative fiqures Quantification of certain retrospective adjustments has been completed (see below); quantification of other adjustments currently in progess. Savanna Energy Services Corp SECOND QUARTER REPORT p_13

14 Key Activity Timing Current Status Information systems Determine whether any process changes required Initial assessment completed; will be updated for changes up to Q No significant process changes identified Determine if software is IFRS compliant; identify any upgrades, changes or additions required Completed A fixed asset register that integrates with the accounting system has been purchased and is currently being implemented Assess whether any changes to the general ledger required To be completed by Q Analysis underway in conjunction with first draft of financial statements; proposed changes circulated for comment; module for the accounting system has been purchased to facilitate any changes Assess ability to gather data for ongoing disclosures To be completed by Q Application and development team within IT group has been assembled; certain reports in design and test modes and other requirements being identified Prepare first time adoption reconciliations required for IFRS 1 Business activities To be completed by Q Template designed for both internal and external uses; will be completed in conjunction with quantification of required adjustments Assess effect on financial covenants To be completed by Q Analysis underway, changes are not expected to have a significant effect Assess effect on budgeting and planning process To be completed by Q Analysis underway, changes are not expected to have a significant effect Assess effect on compensation plans To be completed by Q Analysis underway, changes are not determinable at this time Assess effect on customer and supplier contracts To be completed by Q Analysis underway, changes are not expected to have a significant effect Assess needs for IFRS related training To be completed by Q IFRS training delivered to IFRS convergence team and finance group Control environment Determine whether any changes required to internal controls over financial reporting for all accounting policy changes To be completed by Q Analysis underway, changes are not expected to have a significant effect Determine whether any changes required to disclosure controls and procedures for all accounting policy changes To be completed by Q Analysis underway, changes are not expected to have a significant effect Savanna Energy Services Corp SECOND QUARTER REPORT p_14

15 The following are the significant areas expected to change Savanna s current accounting policies on conversion to IFRS: Joint ventures Savanna has made assessments regarding its jointly-controlled partnerships based on the current International Accounting Standards Board exposure draft on joint arrangements. This exposure draft is expected to become an IFRS in Q Based on the changes the Company will no longer proportionately consolidate its jointly-controlled partnerships and will instead account for these joint ventures as equity investments. The change in accounting method will result in Savanna s financial statements decreasing by the amount shown for each of the line items in the table below and alternatively only Savanna s share of the income from the partnerships will appear in the statement of earnings and only Savanna s equity investment in the partnerships will appear on the balance sheet. The change will have no effect on net earnings. For the six months ended June $ Current assets 1,347 Property, equipment and other assets 20,177 Current liabilities 1,327 Long-term debt, including the current portion thereof 1,994 Revenue 8,194 Operating expenses 5,862 General and administrative expenses 639 Depreciation and amortization 725 Interest on long-term debt 104 Other (income) expenses 31 Componentization of property and equipment The significant components of the Company s property and equipment have been identified and a componentization model has been developed. Depreciation policies have been drafted according to each significant component which will likely increase depreciation expenses under IFRS; although the increases are not expected to be significant. Impairment of assets Savanna has identified its cash generating units to be used in assessing impairments under IFRS. These cash generating units are smaller than the operating segments that the Company uses to test for impairment under Canadian GAAP. Stock-based compensation There are no significant differences in how Savanna accounts for its stock options under Canadian GAAP and IFRS. However, there are differences in how the Company accounts for its deferred share units ( DSUs ). Currently DSU s are valued on a mark-to-market basis, which is also known as their intrinsic value. Under IFRS DSUs will be accounted for at fair value which considers both the intrinsic value and time value of the DSU. The fair value of the Company s DSU liabilities will be measured at each reporting period using an option pricing model until the DSU is settled; which differs from stock-options which are fair valued at their grant date only. The change is not expected to have a material effect on net earnings. The following are the optional exemptions from full retrospective application of IFRS allowed for under IFRS 1 that the Company expects to apply on conversion to IFRS: Business combinations This exemption allows for the Company to not apply IFRS 3 Business Combinations retrospectively to past business combinations. Accordingly, the carrying amounts of assets and liabilities arising on business combinations occurring before the conversion date will not be changed. Fair value or revaluation as deemed cost This exemption allows for the Company to use the fair value of a class of capital assets as the deemed cost of that asset on conversion. The Company will likely only apply this exemption to a very small portion of its capital assets; for most of Savanna s capital assets historical costs will be used. Savanna Energy Services Corp SECOND QUARTER REPORT p_15

16 DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING The Chief Executive Officer ( CEO ) and Chief Financial Officer ( CFO ) have designed or caused to be designed under their supervision, disclosure controls and procedures ( DC&P ) to provide reasonable assurance that: (i) material information relating to the Company, including its consolidated subsidiaries, is made known to the CEO and the CFO by others within those entities, particularly during the period in which the interim filings of the Company are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation. The CEO and CFO do not expect that the DC&P will prevent or detect all errors, misstatements and fraud but are designed to provide reasonable assurance of achieving their objectives. A control system, no matter how well designed or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. In addition to DC&P, the CEO and CFO have designed internal controls over financial reporting ( ICFR ), or caused them to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Company s ICFR may not prevent or detect all errors, misstatements and fraud. The design of internal controls must take into account cost-benefit constraints. A control system, no matter how well designed or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. While the Company is continually enhancing its ICFR, no material changes were made during the three months ended June 30, 2010, that have materially affected or are reasonably likely to materially affect the Company s ICFR. Savanna Energy Services Corp SECOND QUARTER REPORT p_16