Operational Highlights
The downturn in the North American oil and gas industry resulted in the lowest first quarter utilization rates for the company. The decrease in demand for oilfield services led to a decrease in operating days and hours in the drilling and oilfield services divisions respectively.
Previously announced salary and wage roll backs for all non-rig related employees in the organization were implemented on April 1, 2009; the roll backs range from 2% to 26% depending on the employees’ level of earnings and result in an average 12% reduction. This better aligns the company’s fixed operating and administrative costs with the activity decreases and difficult operating conditions that the oilfield services industry is likely to face through the remainder of 2009. Additionally, the company has reduced its salaried workforce by 20% since January 1, 2009. The re-branding and combining of Trailblazer Drilling Corp., Lakota Drilling Corp. and Akuna Drilling Trust under the banner of Savanna Energy Services Drilling has commenced. Effective April 1, 2009 all drilling equipment operated by the company will operate under the Savanna Energy Services’ drilling banner, both domestically and outside Canada.
During the first quarter, the construction of a service rig was completed and deployed in Saskatchewan increasing the number of service rigs in that province to 17.
The drilling division’s revenue and operating days decreased in the first three months of 2009 compared to the same period in 2008, despite a larger and more geographically diverse fleet, as a result of a downturn in the North American oil and gas industry. In first quarter 2009 Savanna Energy Services averaged a deployed fleet of 99 net rigs and exited the quarter with the same number compared to first quarter 2008 when the company operated an average fleet of 93 net rigs, exiting that quarter with 95 net rigs. However, during this difficult period Savanna Energy Services was able to maintain its market share of the oilfield services industry. In the first three months of 2009 operating costs continued at levels seen through the second half of 2008. During this period in 2008 operating costs rose as a result of labor cost increases, fuel cost increases and increases in the cost of materials and other consumables used in running and maintaining the drilling rigs. In addition, due to an early spring breakup in first quarter 2009, costs were incurred in racking rigs in first quarter instead of second quarter. As a result first quarter margins were considerably lower compared to the first quarter of 2008.
The downturn in the North American oil and gas industry also resulted in a decrease in the oilfield services division’s revenue and operating hours for the first three months of 2009 compared to the same period in 2008. The decrease in demand for oilfield services is reflected in the lower number of hours and lower hourly rate compared to first quarter 2008.
Included in the revenue is $2.5 million related to the rental assets acquired late in third quarter 2008.
As with the drilling division, the increased operating costs are primarily a result of increases in the costs of labor, fuel and other materials and consumables; the costs of which trended upward in the later part of 2008 and for the most part held constant in first quarter 2009. In addition, an early spring breakup led to costs being incurred on idle rigs being racked in first quarter instead of second quarter. Coupled with downward pricing pressure in the first three months of 2009, margins decreased significantly compared to the first quarter of 2008.
In first quarter 2009 the oilfield services division’s fleet size averaged 66 (64 net) service rigs, 8 coiled tubing service units and 34 boilers, compared to first quarter 2008 when the division operated an average of 56 (53.5 net) service rigs, eight coiled tubing service units, and 34 boilers. The oilfield services division exited the quarter with 67 (65 net) service rigs, eight coiled tubing service units, and 34 boilers.
The increase in general and administrative expenses in first quarter 2009 compared with first quarter 2008 reflects Savanna Energy Services’ expansion into new markets over the last twelve months. Despite the large discrepancy when comparing quarter over quarter, if compared to fourth quarter 2008 the general and administrative expenses in the first three months of 2009 are fairly consistent (excluding bad debt and other non-recurring expenses of $7.5 million incurred in fourth quarter 2008). The increase as a percentage of revenue in the first quarter of 2009 compared to first quarter 2008 is due to both the increase in general and administrative expenses and the decrease in revenues year over year.
Effective January 1, 2009, depreciation of well servicing rigs was changed to reflect an estimated useful life of 24,000 operating hours and a 20% salvage value. These rigs were previously depreciated on a straight-line basis over 10 to 15 years with a 20% salvage value. The change, while not material, has been accounted for on a retrospective basis and more closely aligns the depreciation policies with those of the company’s drilling rigs which are depreciated based on operating days. The effect of the change on individual financial line items is detailed in Note 2 later in this press release. Therefore, the overall decrease in depreciation and amortization in first quarter 2009 compared to first quarter 2008 is primarily a result of the decrease in activity, as a large portion of the company’s assets are depreciated based on operating days or hours.
Outlook
Although the industry is uncertain with respect to the demand and prices of oil and gas for the remainder of 2009, and Savanna Energy Services is certainly not immune to pricing or utilization pressures caused by the industry slow-down, Savanna Energy Services believes it is well positioned with its high quality people and equipment, leading-edge technology and First Nations partnerships to manage the variable conditions facing the oilfield services industry.
The company does however remain cautious regarding the impact of the current global economic uncertainty. In order to maintain its balance sheet strength during this period the company has also taken measures to align its fixed operating and administrative costs with the activity decreases and difficult operating conditions that the company is likely to face through the remainder of 2009. The previously announced salary and wage roll backs for all non-rig related employees in the organization were implemented on April 1, 2009; the roll backs range from 2% to 26% depending on the employees’ level of earnings. This will allow the company to retain its personnel at a reasonable cost during a difficult period and at the same time keep people in place for the eventual return to more favorable operating conditions.
In addition, the industry has also taken measures to align wages for rig employees with the decreased operating activity. Effective May 1, 2009, the CAODC decreased recommended wage levels on average by about 15%. The change should have a positive effect on margins for the remainder of 2009 as direct labor is the company’s largest operating expense. The company’s previously announced project to re-brand and combine Trailblazer Drilling Corp., Lakota Drilling Corp. and Akuna Drilling Trust under the banner of Savanna Energy Services’ drilling is under way and should for the most part be finalized in second quarter 2009.
Combining these entities will streamline operations and will provide advantages in purchasing power, recruitment, employee mobility, and ancillary equipment utilization as well as provide greater name recognition between Savanna Energy Services as a whole and its different operating divisions.
