Calgary, Alberta May 5, 2014 TSX SVY PRESS RELEASE FOR IMMEDIATE RELEASE Savanna Energy Services Corp. Announces First Quarter 2014 Results, New Triple Drilling Rig Contract, and Renewal and Expansion of Senior Secured Credit Facility First Quarter Results Savanna Energy Services Corp. ( Savanna or the Company ) generated EBITDAS of $59.4 million on $238 million of revenue in Q1 2014, a decrease of 13% from EBITDAS of $68 million on $236.9 million of revenue in Q1 2013. The decreases were primarily a result of lower activity levels in Canadian shallow drilling and Canadian oilfield services, combined with an increase in variable costs in Savanna s North American drilling divisions. Offsetting these decreases were increases in operating margin contributions from both Australia and U.S. well servicing, and utilization increases in long-reach drilling in Canada. Sequentially, revenue increased 34% from $177 million in Q4 2013, based primarily on seasonal increases in Savanna s operations in Canada, but also higher revenues in both Australia and the U.S. The revenue increases resulted in a 72% increase in EBITDAS from the $34.6 million generated in Q4 2013. In Australia, improved utilization and operating an additional drilling rig resulted in operating margin increases in the quarter relative to Q1 2013. Overall operating margins from Australia totaled $5.1 million in Q1 2014, down from the $5.4 million generated in Q4 2013, and 24% higher than the $4.1 million in operating margins in Q1 2013. The Q1 2014 operating margins were affected by both rain, which is normal in Q1 in Australia, and having a drilling rig idled for half of the quarter. The idled rig was released by one of Savanna s customers, but was contracted to another shortly after. Activity levels continue to ramp up in Australia and Savanna s position within the Australian market is expanding along with them. An additional five workover rigs and three flush-by units are under construction and are expected to commence operations in Australia in Q4 2014. Including the Company s fifth drilling rig added in December 2013, Savanna will be more than doubling its fleet in the region in less than twelve months. In the U.S., operating margins decreased in Q1 2014, despite higher revenue compared to Q1 2013. The retrofit and transfer of underutilized service rigs from Canada to the U.S. contributed positively to results in Q1 2014. In Savanna s U.S. well servicing division, operating hours and revenue increased based on more active rigs relative to Q1 2013, and combined with higher year-over-year pricing, resulted in an 86% increase in operating margins year-over-year. Conversely, lower utilization in U.S. drilling, as rigs idled in Q4 2013 only gradually returned to work in Q1 2014, coupled with higher variable per day costs, resulted in a 17% decrease in operating margins. The decrease in utilization in Savanna s U.S. drilling operation was offset by an appreciation in the value of the U.S. dollar relative to the Canadian dollar, which increased U.S. revenues overall on translation to the Company s presentation currency. Savanna generated $12.7 million in operating margins on $49 million of revenue in the U.S. in Q1 2014, compared to $13.3 million in operating margins on $45.1 million of revenue in Q1 2013, and $11.2 million in operating margins on $42.7 million of revenue in Q4 2013. The increase in revenue and operating margins
2 relative to Q4 2013 is a result of improved utilization in both U.S. well servicing and drilling, and an increase in the value of the U.S. dollar relative to the Canadian dollar. Operating margin percentages in the U.S. were flat relative to Q4 2013. All of the drilling rigs idled in Q4 2013, returned to work by the end of March 2014. In Canada, Savanna s long-reach drilling utilization increased in Q1 2014 compared to Q1 2013. However, lower average day rates and higher variable per day costs left operating margins relatively flat compared to Q1 2013. A decrease in shallow drilling utilization, as a result of drilling efficiencies and a decrease in oil sands activity overall, resulted in a $1.9 million, or 18%, decrease in operating margins in Q1 2014 relative to Q1 2013. Demand for Savanna s well servicing and rentals fleets was also lower in Q1 2014 compared to Q1 2013. Operating hours from the well servicing fleet in Canada decreased by 15% compared to Q1 2013 and rentals activity was also significantly lower. Combined with year-over-year pricing decreases, the lower activity levels resulted in a $6.8 million, or 36%, decrease in operating margins for oilfield services in Canada, compared to Q1 2013. Savanna generated $55.2 million in operating margins on $158.7 million of revenue in Canada in Q1 2014, compared to $64.3 million in operating margins on $167.1 million of revenue in Q1 2013, and $30.1 million in operating margins on $105.8 million of revenue in Q4 2013. The increase in revenues and operating margins compared to Q4 2013 was as a result of seasonal utilization and rate increases. Savanna s Q1 2014 net earnings attributable to the shareholders of the Company decreased to $18.3 million, or $0.21 per share, from $27.8 million, or $0.32 per share, in Q1 2013. The decrease was a result of lower overall operating margins, combined with higher depreciation, amortization and finance expenses, and an increase in earnings attributable to Savanna s Aboriginal partners. The increase in depreciation and amortization expenses compared to Q1 2013 was a result of higher utilization in the Company s contract drilling segment, an acceleration of depreciation on the shallow drilling rig fleet, and an increase in the value of assets depreciated on a straight-line basis. The increase in finance expenses compared to Q1 2013 was a result of an increase in the Company s average long-term debt outstanding and an increase in the average effective interest rates on that debt. In Q4 2013, Savanna s net earnings attributable to the shareholders of the Company was $4.4 million, or $0.05 per share. The increase in net earnings in Q1 2014 relative to Q4 2013 was primarily a result of seasonal increases in Savanna s operations in Canada. Senior Secured Credit Facility Savanna is pleased to announce that in May 2014, the Company renewed its senior secured revolving credit facility, increased the amount available, and extended the term of the loan by one year. The entire facility, which is with a syndicate of banks, is for a committed four-year term and, based on the renewal, all drawn amounts are now due in May 2018, or four months earlier if the Company s senior unsecured notes are not refinanced on terms acceptable to the lender. On renewal, the total amount available was increased to $250 million from the $200 million available at March 31, 2014 and December 31, 2013, while interest rates on the facility were unchanged. The renewed facility is comprised of a $220 million Canadian syndicated facility, a $10 million Australian facility, and a $20 million Canadian operating facility. In addition, as part of the renewal, Savanna retained an available $50 million accordion, which it can request as an increase to the total available facility. The expansion of the credit facility provides Savanna with ample liquidity to fund anticipated capital expenditures and dividends.
3 New Triple Drilling Rig Contract and Capital Program Update Savanna is also pleased to announce that it has secured a long-term contract to deliver a 1500 horsepower AC triple drilling rig to its U.S. drilling division in its Marcellus operating region by Q2 2015. It is anticipated that substantial payout of the capital cost of this rig will be achieved during the initial contract term. This rig complements the two 1200 horsepower AC ultraheavy doubles Savanna already operates in the region. This rig is in addition to the two 1500 horsepower AC triple drilling rigs that Savanna is currently building. Savanna remains confident that these rigs will be contracted prior to their delivery in Q4 2014, and is encouraged by indications that North American oil and gas industry activity levels are expected to improve in the second half of 2014. As a result, the Company has determined it will pursue construction of all three triple drilling rigs for a total 2014 capital commitment of approximately $57 million. A further $12 million on the newly-contracted triple drilling rig is expected to be incurred in the first half of 2015. An additional $7.9 million in rig upgrades and drill pipe has also been committed. Offsetting this, a portion of the capital expenditures related to the Company s new operating facility in Leduc, Alberta, is now expected to be incurred in 2015. The following summarizes the changes to the Company s 2014 capital program: (Stated in thousands of dollars) Previously Announced Revised Change Expansion capital and long-lead items 103,195 131,175 27,980 Upgrades, recertifications, maintenance, spare equipment, drill pipe, and infrastructure 56,650 64,595 7,945 Capital for new field operating facilities 23,540 10,570 (12,970) 183,385 206,340 22,955 Savanna s expansion capital for 2014 is focused on the following initiatives: construction of five service rigs, three flush-by units and related trucking equipment for Australia; construction of a contracted 1200 horsepower AC ultra-heavy double drilling rig for Canada; construction of three (one contracted) 1500 horsepower AC triple drilling rigs for North America; and rental equipment for the Fort McKay - Savanna Energy Services Limited Partnership.
4 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 March 31 2014 2013 Change OPERATING RESULTS Revenue 237,988 236,886 0% Operating expenses 165,067 155,168 6% Operating margin (1) 72,921 81,718 (11%) Operating margin % (1) 31% 34% EBITDAS (1) 59,417 67,987 (13%) Attributable to shareholders of the Company 55,826 65,709 (15%) Per share: diluted 0.63 0.76 (17%) Net earnings 21,175 29,619 (29%) Attributable to shareholders of the Company 18,330 27,767 (34%) Per share: diluted 0.21 0.32 (34%) Diluted weighted average shares outstanding (000s) 89,184 86,494 CASH FLOWS Operating cash flows (1) 57,412 66,283 (13%) Acquisition of capital assets (1) 42,061 24,536 71% Proceeds on disposal of capital assets 227 1,612 (86%) Dividends paid 5,689 5,589 2% FINANCIAL POSITION AT Mar. 31 2014 Dec. 31 2013 Working capital (1) 115,022 86,398 33% Capital assets (1) 1,217,699 1,186,252 3% Total assets 1,461,493 1,391,602 5% Long-term debt 266,546 246,568 8% NOTES: (1) Operating margin, operating margin percentage, EBITDAS, and operating cash flows are not recognized measures under IFRS, and are unlikely to be comparable to similar measures presented by other companies. Management believes that, in addition to net earnings, the measures described above are useful as they provide an indication of the results generated by the Company s principal business activities both prior to and after consideration of how those activities are financed, the effect of foreign exchange and how the results are taxed in various jurisdictions. Similarly, capital assets, working capital, and net debt are not recognized measures under IFRS; however, management believes that these measures are useful as they provide an indication of the Company s investment in operating assets, liquidity and leverage. Operating margin is defined as revenue less operating expenses. Operating margin percentage is defined as revenue less operating expenses divided by revenue. EBITDAS is defined as earnings before finance expenses, income taxes, depreciation, amortization and share-based compensation and excludes other expenses (income). Operating cash flows are defined as cash flows from operating activities before changes in non-cash working capital. Capital assets are defined as property, equipment and intangible assets. The acquisition of capital assets includes the purchase of property, equipment and intangible assets, capital assets acquired through business acquisitions and non-cash capital asset additions. Working capital is defined as total current assets less total current liabilities excluding the current portions of long-term debt. Net debt is defined as long-term debt, including the current portions thereof and excluding unamortized debt issue costs, less working capital as defined above.
5 (2) Certain industry related terms used in this press release are defined or clarified as follows: Savanna reports its drilling rig utilization based on spud to release time for its operational drilling rigs and excludes moving, rig up and tear down time, even though revenue may be earned during this time. Source of Canadian industry average utilization figures: Canadian Association of Oilwell Drilling Contractors. Industry utilization figures are calculated in the same manner as the Company. Savanna reports its service rig utilization for its operational service rigs in North America based on standard hours of 3,650 per rig per year. Utilization for Savanna s service rigs in Australia is calculated based on standard hours of 8,760 per rig per year to reflect 24 hour operating conditions in that country. Reliable industry average utilization figures, specific to well servicing, are not available. Segmented Results - Contract Drilling The following is a summary of selected financial and operating information of the Company s contract drilling segment: (Stated in thousands of dollars, except revenue per day) Three Months Ended March 31 2014 2013 Change Revenue $ 179,457 $ 173,680 3% Operating expenses $ 122,178 $ 112,316 9% Operating margin (1) $ 57,279 $ 61,364 (7%) Operating margin % (1) 32% 35% Operating days 7,218 7,106 2% Revenue per operating day $ 24,862 $ 24,441 2% Spud to release days 6,279 6,152 2% Wells drilled 766 786 (3%) Meters drilled 1,402,282 1,286,298 9% FIRST QUARTER RESULTS Overall contract drilling revenue increased relative to Q1 2013, as a result of an increase in operating days in both Australia and Canada. In addition, in the U.S., the effect of a decrease in operating days was more than offset by an appreciation in the value of the U.S. dollar relative to the Canadian dollar. However, a decrease in average day rates in Canada, combined with an increase in variable costs in both Canada and the U.S., resulted in a decrease in operating margins and lower operating margin percentages in Savanna s contract drilling segment compared to Q1 2013. The following summarizes the operating results in the first quarter of 2014 and 2013 by type of rig or geographic area. Longreach drilling in Canada includes the Company s telescoping double drilling rigs, TDS-3000 TM drilling rigs and TDS-2200 drilling rigs. (Stated in thousands of dollars) Long-reach Shallow Drilling Drilling Drilling U.S. and Q1 2014 Canada Canada Australia Total Revenue 101,468 21,367 56,622 179,457 Operating margin (1) 35,475 8,738 13,066 57,279 Operating margin % (1) 35% 41% 23% 32% Revenue excluding cost recoveries 89,217 21,125 53,591 163,933 Operating margin (1) 35,475 8,738 13,066 57,279 Operating margin % (1) 40% 41% 24% 35% Average number of rigs deployed 51 20 30 101 Utilization % (2) 77% 41% 75% 69%
6 (Stated in thousands of dollars) Long-reach Shallow Drilling Drilling Drilling U.S. and Q1 2013 Canada Canada Australia Total Revenue 95,236 25,002 53,442 173,680 Operating margin (1) 35,991 10,645 14,728 61,364 Operating margin % (1) 38% 43% 28% 35% Revenue excluding cost recoveries 83,703 24,201 51,255 159,159 Operating margin (1) 35,991 10,645 14,728 61,364 Operating margin % (1) 43% 44% 29% 39% Average number of rigs deployed 50 20 30 100 Utilization % (2) 72% 48% 77% 68% In the contract drilling segment, significant costs are incurred and passed through to customers with little or no markup. For Q1 2014 these costs aggregated $15.5 million (Q1 2013 - $14.5 million). Savanna s accounting policy with respect to cost recoveries billed to customers is to include them as both revenue and operating expenses rather than to net them. Although Savanna believes this most appropriately reflects the substance of the underlying transactions, the accounting treatment of cost recoveries varies in the oilfield services industry. There is no effect on overall operating margins whether cost recoveries are netted or not; however, the different treatments do result in different operating margin percentages, as the same dollar margin is factored against lower revenue when cost recoveries are netted. As a result, Savanna believes it is useful to provide revenue excluding cost recoveries and the resulting operating margin percentages for comparative purposes. The Canadian long-reach drilling rigs delivered improved utilization in Q1 2014 compared to Q1 2013. However, average day rates were below that of Q1 2013. Variable costs per day were higher than last year, primarily as a result of higher labour costs, pass through costs, and supply and repair costs. These factors resulted in flat year-over-year operating margins despite higher utilization and revenue compared to Q1 2013. The 77% utilization rate for Savanna s long-reach drilling rigs in Q1 2014 was above the Canadian industry utilization rates of 64% in the same depth categories. The Company s shallow drilling rig fleet achieved lower utilization, day rates and revenue in Q1 2014 relative to Q1 2013, as a result of drilling efficiencies and a decrease in overall oil sands coring activity. In addition, higher variable costs this year versus last resulted in lower operating margins and operating margin percentages compared to Q1 2013. Savanna s U.S. drilling operation generated higher revenues in Q1 2014 compared to Q1 2013 despite lower year-over-year utilization. Savanna had some of its drilling rigs idled in Q4 2013 due to early completion of drilling programs for certain of Savanna s customers. These rigs returned to work during the first quarter, and by the end of March 2014 the entire active drilling rig fleet in the U.S. was operating. Some re-commissioning costs were incurred in the quarter as a result. The lower utilization was more than offset by an appreciation in the value of the U.S. dollar relative to the Canadian dollar, which increased overall revenues on translation to the Company s presentation currency. Variable costs per day were higher than last year, primarily as a result of re-commissioning costs and higher pass through costs, supply costs, and repairs and maintenance costs. The higher costs and lower utilization resulted in a 17% decrease in operating margins compared to Q1 2013. In Australia, the Company s fifth drilling rig commenced operations in December 2013. Shortly after, another rig was released by one of Savanna s customers, due to cancellation of their programs, and remained idled until mid-february 2014. While idled, Savanna did receive stand-by revenue which covered crew retention costs during that period. An additional rig operating for half of the quarter resulted in an increase in days, which led to an 11% increase in operating margins for Savanna s drilling operations in Australia in Q1 2014 compared to Q1 2013.
7 Segmented Results - Oilfield Services The following is a summary of selected financial and operating information of the Company s oilfield services segment: (Stated in thousands of dollars, except revenue per hour) Three Months Ended March 31 2014 2013 Change Revenue $ 59,268 $ 64,743 (8%) Operating expenses $ 43,707 $ 44,488 (2%) Operating margin (1) $ 15,561 $ 20,255 (23%) Operating margin % (1) 26% 31% Operating hours - well servicing 48,325 51,250 (6%) Revenue per operating hour - well servicing $ 934 $ 949 (2%) FIRST QUARTER RESULTS Revenue for Savanna s oilfield services division decreased in Q1 2014 compared to Q1 2013, as decreases in Canada more than offset increases in both the U.S and Australia. Increased utilization in Australia, and four additional rigs operating in the U.S., resulted in 84% and 86% increases in operating margins in each respective operating area in Q1 2014 relative to Q1 2013. Unfortunately, decreases in operating margins in Canada relative to Q1 2013 more than offset the improvements in Australia and the U.S. Included in revenue for Q1 2014, was $14.1 million from oilfield rentals (Q1 2013 - $16.1 million). Of the Q1 2014 rental revenue, $5.2 million (Q1 2013 - $4.4 million) was generated in Australia and $0.8 million (Q1 2013 - $1.6 million) was eliminated on overall consolidation as inter-segment revenue. Oilfield rentals revenue is excluded from the per hour revenue calculations above. The following summarizes the operating results by geographic area: (Stated in thousands of dollars) U.S. and Q1 2014 Canada Australia Total Revenue 36,603 22,665 59,268 Operating margin (1) 10,796 4,765 15,561 Operating margin % (1) 29% 21% 26% Average number of rigs deployed - well servicing 73 18 91 Utilization % (2) - well servicing 52% 67% 59% (Stated in thousands of dollars) U.S. and Q1 2013 Canada Australia Total Revenue 46,786 17,957 64,743 Operating margin (1) 17,563 2,692 20,255 Operating margin % (1) 38% 15% 31% Average number of rigs deployed - well servicing 84 13 97 Utilization % (2) - well servicing 53% 68% 59% Continuing low demand in Canada resulted in lower activity levels and pricing in Savanna s well servicing operations in Q1 2014 compared to Q1 2013. The number of operating hours from the well servicing fleet in Canada decreased by 15% compared to Q1 2013, while average per hour revenue was 7% lower. Despite the decrease in operating hours, Q1 2014 utilization was fairly flat relative to Q1 2013 based on the number of operational rigs, which decreased compared to Q1 2013 as a result of rigs
8 transferred or pending transfer to North Dakota and rigs idled pending increased demand. Variable per hour costs in well servicing were flat year over year. Based on lower activity levels and pricing, operating margins in Canadian well servicing decreased by 36% in the quarter, compared to Q1 2013. For rentals, continuing low demand led to a dramatic decrease in activity in Q1 2014 compared to Q1 2013, and based on the primarily fixed cost structure of this business, a 41% decrease in operating margins resulted. Revenue for well servicing in the U.S. increased in Q1 2014 as a result of more operating hours, based on more active rigs, and higher pricing relative to Q1 2013. The increase in revenue resulted in an 86% increase in operating margins compared to Q1 2013, despite higher labour costs associated with crewing the last of the three rigs transferred from Canada during Q4 2013, and additional rigs expected to be transferred in 2014. Up to six additional rig transfers from Canada are planned for 2014, which should result in increasing operating margin contribution from Savanna s U.S. well servicing operations in future quarters. In Australia, revenue from service rigs and rental equipment increased by 13% and operating margins increased by 84% in Q1 2014 compared to Q1 2013. The increases are primarily a result of improved utilization. In Savanna s Australian operations, both per hour revenue and per hour costs are higher than in North America. Notwithstanding this, per hour operating margins are comparable in all three operating areas. Balance Sheet Savanna s working capital at March 31, 2014, was $115 million and its net debt position was $151.5 million, a decrease of $8.7 million, or 5%, from the Company s $160.2 million net debt position at December 31, 2013. Savanna s total long-term debt outstanding on March 31, 2014, excluding unamortized debt issue costs, was $266.5 million, compared to $246.6 million outstanding at December 31, 2013. In Q1 2014, Savanna secured $17 million in new financings in two separate limited partnerships partially owned by the Company. The financings consisted of a $14 million line of credit in the Company s partnership with Fort McKay First Nation and a $3 million term loan in another pre-existing partnership. As of March 31, 2014, $7 million of the new partnership financings had been drawn, the proceeds of which were paid to Savanna in exchange for amounts owing on equipment vended into these same partnerships. Subsequent to the end of the quarter, Savanna renewed its senior secured revolving credit facility, increased the amount available by $50 million, and extended the term of the loan by one year. The entire $250 million facility is for a committed four-year term. Savanna possesses ample liquidity, with approximately $76.7 million drawn on Savanna s total available credit facilities of $250 million, as of the date of this release. In addition, as part of its senior secured revolving credit facility, Savanna has an available $50 million accordion, which it can request as an increase to the total available facility. Dividend In Q1 2014, Savanna declared dividends totaling $8 million or $0.09 per share. Of the dividends declared, $2.3 million was reinvested in additional common shares through the Company s dividend reinvestment plan.
9 Outlook Underperformance in the Company s Canadian well servicing and rentals businesses, and a truncated coring season, due to customer program reductions and drilling efficiencies, negatively impacted Savanna s Q1 2014 results. The challenges in Canadian well servicing and rentals will likely take several quarters to resolve, however the coring underperformance is isolated to Q1 and will not negatively impact the remainder of 2014. Looking forward, Savanna s current strategic and rigbuild initiatives have the Company poised for significant growth in the next 12 to 18 months. In Australia, utilization and operating margins continue to improve every quarter. With the Company s fifth drilling rig commencing operations just a few months ago, and with a significant portion of Savanna s expansion capital dedicated to Australia, this trend is expected to continue in 2014 and beyond. Construction of five additional workover rigs and three new flush-by units for Australia are underway, all of which are contracted long-term. All of these rigs are expected to commence operations in Q4 2014. This growth leaves Savanna well positioned to continue generating increasing returns from this division, not only in 2014, but very meaningfully into 2015 and beyond. Savanna remains very optimistic on the ongoing prospects in Australia, and is pursuing further opportunities for adding equipment into the region. With liquefied natural gas delivery deadlines beginning in late 2014, activity levels continue to increase in the region overall and support a further rampup in activity, with resulting equipment and service requirements as well. Savanna s U.S. drilling and well servicing fleets are positioned in markets where activity is expected to remain robust, and Savanna believes it has strong operating positions in those markets. While the Company s Q1 2014 drilling utilization levels in the U.S. lagged its historical averages, this was solely due to customer budget constraints carrying over from Q4 2013, and is not expected to recur. Savanna s entire 25 rig drilling fleet in the U.S. is currently working under minimum one-year contracts, and as a result, historical, near 100%, utilization levels are expected for the remainder of the year. In addition, with a newlycontracted 1500 horsepower AC triple drilling rig slated for early Q2 2015 commissioning, and at least one of the two speculative triple drilling rigs currently under construction likely to be deployed into the U.S. in Q4 2014, Savanna s U.S. drilling fleet will increase by nearly 10% in the next 12 months. While the new rigs will not have a meaningful impact on 2014 results, they certainly will in 2015. In the Company s U.S. well servicing business there are five additional active rigs operating compared to this time last year. Savanna plans to transfer up to six more rigs from Canada to North Dakota in 2014, all of which are not currently being utilized. The first of these transfers is expected to begin operations in Q2 2014, depending on crew availability. Year-over-year growth in U.S. well servicing operating margins of 86% compared to Q1 2013 supports this strategy, and illustrates the operating margin improvements these transfers will contribute in the second half of 2014 and beyond. The Company has steadily increased its operations outside of Canada over the past four years. While Savanna is still highly dependent on activity levels in Canada to drive overall results and industry activity levels, this reliance continues to decrease on a relative basis. With virtually all of its drilling equipment operating outside of Canada subject to at least one-year contracts, and averaging closer to three years, Savanna has significant visibility regarding almost one-half of its activity levels. Canadian drilling activity and pricing will have a greater impact on Savanna s performance due to the relatively lower contract status on the Company s fleet in Canada; however, visibility on activity in Canada for 2014 is quite strong post Q2. Both the CAODC and the Petroleum Services Association of Canada are forecasting 2014 Canadian activity levels to be in-line with 2013. Utilization of Savanna s Canadian long-reach drilling fleet in Q1 2014 increased 5 percentage points over Q1 2013, compared to a 2 percentage point increase in industry utilization overall. This demonstrates the relevance of Savanna s deeper drilling rig fleet in the Canadian market. A key strategy for 2014 is to increase the number of rigs under contract in Canada to
10 approximately 50%, excluding shallow drilling rigs. Currently, the long-reach fleet is approximately 40% contracted beyond one year. During the quarter, Savanna entered into a long-term contract to supply a new-build 1200 horsepower ultra-heavy AC double drilling rig in Canada and, pending a contract, one of the 1500 horsepower AC triple drilling rigs currently under construction could also be deployed in Canada. While these rigs will not have a meaningful impact on 2014 results, they will in 2015. In addition, greater access for Savanna to the already active oil sands regions through its partnership with Fort McKay First Nation should also provide improved returns, specifically in regards to the Company s shallow drilling fleet. Commodity pricing, particularly for natural gas and heavy oil, and pipeline capacity issues in North America, continue to impact customer demand for services. There are indications that oil and gas industry activity in North America will improve later in 2014 and beyond, with strong activity growth already occurring in Australia. While prices for oil are expected to remain steady in 2014, gas prices have increased. While significant, the sustainability of this increase is at this point uncertain. Any positive announcements regarding pipeline infrastructure improvements and/or prospects for Canadian liquefied natural gas development could further support this pricing. Also, a lower Canadian dollar relative to the U.S. dollar will be beneficial to Savanna s customers in Canada, as their costs are primarily incurred in Canadian dollars while their revenues are primarily earned in U.S. dollars. In Australia, long-term prospects remain strong and Savanna s contract position in both Australia and the U.S. should result in stable activity in those markets. Savanna is confident in the long-term prospects for every region in which the Company operates, and in its ability to deliver the safest, most effective drilling, completion and workover services possible to its customers. Cautionary Statement Regarding Forward-Looking Information and Statements Certain statements and information contained in this press release including statements related to the Company s 2014 capital commitments and other strategic or rig-build initiatives, expectations of activity levels for Savanna in 2014, the expected timing for the commencement of operations of rigs currently under construction, where they will be deployed and the impact they will have on results, the expectation of transferring service rigs from Canada to North Dakota and the continuing increase of operating margin contributions from Savanna s U.S. well servicing operations, the expectation of increasing activity levels, utilization, operating margins, and returns from Savanna s Australian operations, the expectation of near 100% utilization levels in the Company s U.S. drilling division for the remainder of the year, the expectation that Savanna s partnership with Fort McKay First Nation should provide greater access to the already active oil sands regions and improved returns, the expectation of improving oil and gas industry activity in North American in 2014 and beyond, the expectation of increased demand and/or pricing for oilfield service equipment as liquefied natural gas development in Canada and/or pipeline infrastructure improvements move forward, the expectation that challenges in Canadian well servicing and rentals will take several quarters to resolve, and statements that contain words such as could, should, can, anticipate, expect, believe, will, may, likely, estimate, predict, potential, continue, maintain, retain, grow, and similar expressions and statements relating to matters that are not historical facts constitute forward-looking information within the meaning of applicable Canadian securities legislation and forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. These statements are based on certain assumptions and analysis made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. In particular, expectations of activity levels for Savanna in 2014 are premised on industry estimates, actual activity levels and utilization experienced to date in 2014, an increase in the number of rigs under contract,
11 and an increase in the number of rigs operating based on rigs currently under construction or being transferred to North Dakota. The expected timing for the commencement of operations of rigs currently under construction, where they will be deployed and the impact they will have on results is premised on Savanna s past experience in building and deploying rigs, the geographic specific designs of the rigs under construction, and customer contracts currently in place or being pursued. The Company s expectation of transferring service rigs from Canada to North Dakota is premised on the Company s expectation of utilization levels in North Dakota relative to Canada and the current number of rigs racked in Canada pending future upgrades. The Company s expectation of the continuing increase of operating margin contributions form Savanna s U.S. well servicing operations is premised on the Company s current outlook for industry activity in that region and the expected increase in the scale of those operations through rigs slated for transfer from Canada. The Company s expectation of increasing activity levels, utilization, operating margins, and returns from Savanna s Australian operations is premised on actual results experienced in 2013 and to date in 2014, the contracts currently in place, including those for five new-build workover rigs and three new-build flush-by units, communications with its customers in the region, and the general expectation that coal seam gas activity will increase in that country as the deliveries to, and plans for, liquefied natural gas plants progress. The Company s expectation of near 100% utilization levels in the Company s U.S. drilling division for the remainder of the year is premised on historical utilization levels and contracts currently in place. The Company s expectation that its partnership with Fort McKay First Nation should provide improved access to the already active oil sands regions and improved returns, is premised on agreements and relationships between Fort McKay First Nation and potential customers working in the oil sands and the exclusivity of the partnership to Savanna and Fort McKay First Nation in the Regional Municipality of Wood Buffalo. The Company s expectation of increased demand for oilfield service equipment as liquefied natural gas development in Canada and/or pipeline infrastructure improvements move forward, its expectation of improving oil and gas industry activity in North America in 2014 and beyond, and its expectation that challenges in Canadian well servicing and rentals will take several quarters to resolve are premised on actual results experienced to date in 2014, customer contracts and commitments, the Company s expectations for its customers capital budgets and geographical areas of focus, the status of current negotiations with its customers, the focus of its customers on oil directed drilling opportunities in the current natural gas pricing environment in North America, and regulatory approvals granted or pending for additional pipelines and liquefied natural gas export terminals in Canada. Whether actual results, performance or achievements will conform to the Company s expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from the Company s expectations. Such risks and uncertainties include, but are not limited to: fluctuations in the price and demand for oil and natural gas; fluctuations in the level of oil and natural gas exploration and development activities; fluctuations in the demand for well servicing, oilfield rentals and contract drilling; the effects of weather conditions on operations and facilities; the existence of competitive operating risks inherent in well servicing, oilfield rentals and contract drilling; general economic, market or business conditions; changes in laws or regulations, including taxation, environmental and currency regulations; the lack of availability of qualified personnel or management; the other risk factors set forth under the heading Risks and Uncertainties in the Company s Annual Report, and under the heading Risk Factors in the Company s Annual Information Form and other unforeseen conditions which could impact on the use of services supplied by the Company. Included herein is an estimate of cash capital expenditures for the remainder of 2014. To the extent such estimate constitutes future oriented financial information or a financial outlook, such future oriented financial information or financial outlook is included herein to provide readers with an understanding of the Company's anticipated capital expenditures for 2014. Readers are cautioned that the information may not be appropriate for other purposes.
12 All of the forward-looking information and statements made in this press release are qualified by this cautionary statement and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. Except as may be required by law, the Company assumes no obligation to update publicly any such forward-looking information and statements, whether as a result of new information, future events, or otherwise. Other Savanna s full Q1 2014 report, including its management s discussion and analysis and condensed consolidated financial statements, is available on Savanna s website (www.savannaenergy.com) under the investor relations section and has also been filed on SEDAR at www.sedar.com. Savanna will host a conference call for analysts, investors and interested parties on Tuesday, May 6, 2014 at 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time) to discuss the Company s first quarter results. The call will be hosted by Ken Mullen, Savanna s President and Chief Executive Officer and Darcy Draudson, Executive Vice President, Finance and Chief Financial Officer. If you wish to participate in this conference call, please call 1-888-892-3255 (for participants in North America). Please call 10 minutes ahead of time. A replay of the call will be available until May 14, 2014 by dialing 1-800-937-6305 and entering passcode 458133. Savanna is a Canadian-based drilling and oilfield services provider with operations in Canada, the United States and Australia, focused on providing fit for purpose equipment and technologies. FOR FURTHER INFORMATION PLEASE CONTACT: Ken Mullen President and Chief Executive Officer Darcy Draudson EVP Finance and Chief Financial Officer Telephone: (403) 503-9990; Website: www.savannaenergy.com