TSX - SVY
CALGARY, May 8 /CNW/ - Savanna is pleased to report record results for
its first quarter ended March 31, 2007.Financial Highlights
(Stated in thousands of dollars, except per share amounts)
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Three Months Ended
March 31
2007 2006 % Change
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Operating results
Revenue $ 135,614 $ 63,099 115%
Operating margin(1) $ 62,417 $ 26,953 132%
Net earnings from continuing operations $ 31,580 $ 12,021 163%
Per share: basic $ 0.54 $ 0.41 32%
Per share: diluted $ 0.54 $ 0.40 35%
Net earnings from discontinued
operations, net of tax $ 330 $ 7,938 (96%)
Per share: basic $ 0.01 $ 0.27 (96%)
Per share: diluted $ 0.01 $ 0.27 (96%)
Gain on sale of discontinued operations,
net of tax $ 140,582 $ - -
Per share: basic $ 2.41 $ - -
Per share: diluted $ 2.40 $ - -
Net earnings $ 172,492 $ 19,959 764%
Per share: basic $ 2.95 $ 0.69 328%
Per share: diluted $ 2.94 $ 0.67 339%
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Operational Highlights
- Effective January 31, 2007, the Company closed the sale of its
wireline division, Ultraline Services Corporation ("Ultraline"), for
net proceeds of $209 million including a working capital adjustment.
The net book value of Savanna's interest in Ultraline and the related
assets that were sold on January 31, 2007 was $36.7 million, resulting
in a gain of $172 million ($141 million net of tax). This transaction
represented a tremendous financial metric on this division's asset and
profitability base, and allowed Savanna to eliminate 85% of its
long-term debt outstanding at December 31, 2006.
- On February 16, 2007, Savanna purchased the assets of Accell Well
Services Ltd. ("Accell") and all of the outstanding shares of
Bear Steam Ltd. ("Bear Steam") for total consideration of
$67.9 million. Total consideration was comprised of $50.8 million of
cash and 920 thousand common shares of Savanna priced at $18.47 per
share, net of acquisition costs of $0.1 million. The acquisition added
an additional 20 service rigs and 22 boilers to Savanna's well
servicing fleet.
- During the quarter, Savanna operated five drilling rigs, including one
hybrid drilling rig, in the United States.
- Savanna exited the first quarter with 84 drilling rigs and 44 service
rigs.
- The well servicing division achieved a 63% increase in revenues in the
first quarter of 2007 as a result of an 89% increase in fleet size and
a 5% increase in hourly rates over 2006 levels. These factors more
than offset the reduction in utilization rates experienced by the
division and the oil and gas industry overall. The well servicing
division increased the average number of rigs in service from 18 to
34 during the quarter and exited the quarter with 44 rigs.
- The drilling division achieved utilization rates that were 6% higher
than industry average and increased aggregate revenue by 127% and
operating margins by 150% relative to 2006 due to an increase in
drilling day rates and an increase in the average number of rigs
deployed during the quarter from 31 to 79 (net), exiting the quarter
with 84 rigs.These transactions and events leave Savanna well positioned to continue
enhancing its presence in the North American marketplace in all of its
business lines, and given its now larger size and scale, in assessing
potential opportunities outside North America as well.
Management's Discussion and Analysis ("MD&A")
Three Months Ended March 31, 2007
This discussion focuses on key items from the unaudited, consolidated
financial statements of Savanna for the periods ending March 31, 2007 and
2006, 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 annual audited consolidated financial
statements and the related notes of the Company for the fiscal year ended
December 31, 2006 as well as the MD&A which appears in the 2006 Annual Report,
and with the interim financial statements for the quarter ended March 31,
2006. Additional information regarding the Company is available on SEDAR at
www.sedar.com. This MD&A is dated May 7, 2007.
Savanna is an oilfield services company operating in Western Canada. Our
overall business is conducted through two major segments: contract drilling
and well servicing.
FINANCIAL HIGHLIGHTS
The merger between Savanna and Western Lakota, completed on August 25,
2006, and the recent acquisitions of Accell and Bear Steam account for a
substantial portion of the increase in revenues for the three months ended
March 31, 2007 compared to the same period in 2006, with the expansion of
Savanna's pre-existing fleet through construction accounting for the
remainder. Earnings for the current period include the results of operations
for Accell and Bear Steam from the date of acquisition, February 16, 2007.
Earnings for Ultraline for the one month ending January 31, 2007, have
been included in net earnings from discontinued operations in the consolidated
statement of earnings. For comparative purposes, the net earnings for the
three month period ending March 31, 2006 have been restated to reflect the
discontinuation of this division and the assets and liabilities relating to
Ultraline at December 31, 2006 have been shown as assets and liabilities held
for sale.
The following is a summary of selected financial information of the
Company. Amounts shown for comparative purposes have been restated to reflect
the discontinuation of Ultraline operations.(Stated in thousands of dollars, except per share amounts)
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Three Months Ended
March 31
2007 2006 % Change
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Operating results
Revenue $ 135,614 $ 63,099 115%
Operating expenses $ 73,197 $ 36,146 103%
Operating margin(1) $ 62,417 $ 26,953 132%
Operating margin %(1) 46% 43% 7%
Earnings from continuing operations(1) $ 47,516 $ 20,787 129%
Per share: basic $ 0.81 $ 0.71 14%
Per share: diluted $ 0.81 $ 0.70 16%
Earnings from continuing operations
before stock compensation expense(1) $ 48,612 $ 21,653 125%
Per share: basic $ 0.83 $ 0.74 12%
Per share: diluted $ 0.83 $ 0.73 14%
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(Stated in thousands of dollars, except per share amounts)
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Three Months Ended
March 31
2007 2006 % Change
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Net earnings from continuing operations $ 31,580 $ 12,021 163%
Per share: basic $ 0.54 $ 0.41 32%
Per share: diluted $ 0.54 $ 0.40 35%
Net earnings from discontinued
operations, net of tax $ 330 $ 7,938 (96%)
Per share: basic $ 0.01 $ 0.27 (96%)
Per share: diluted $ 0.01 $ 0.27 (96%)
Gain on sale of discontinued operations,
net of tax $ 140,582 $ - -
Per share: basic $ 2.41 $ - -
Per share: diluted $ 2.40 $ - -
Net earnings $ 172,492 $ 19,959 764%
Per share: basic $ 2.95 $ 0.69 328%
Per share: diluted $ 2.94 $ 0.67 339%
Cash Flows
Operating cashflows from continuing
operations before changes in working
capital(1) $ 49,076 $ 21,388 129%
Capital expenditures from continuing
operations $ 43,202 $ 23,130 87%
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March 31 December 31
2007 2006 % Change
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Financial Position
Working capital(1) $ 41,467 $ 36,531 14%
Capital assets $ 678,753 $ 590,132 15%
Total assets $1,290,303 $1,205,939 7%
Long-term debt(*) $ 34,527 $ 155,052 (78%)
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(*) Total long-term debt including capital leases, and the current
portions thereof.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 our
financial position, results of operations and cash flows.
Due to extreme fluctuations in the commodity prices for both oil and
natural gas, the oil and gas industry has been subject to significant
volatility in recent years. The prices of natural gas and oil have held at
historically high levels throughout the past three years due to a number of
domestic and international factors. This has resulted in historically high
drilling and completion activity throughout the Canadian basin as well.
Natural gas prices, after weakening over the last few quarters have
strengthened somewhat over the last few months. As a result of varying
commodity prices for both oil and natural gas there have been shifts by
Savanna customers between natural gas drilling and oil drilling, however there
remains significant uncertainty expressed by exploration and development
companies, juniors through seniors, regarding their drilling and completion
budgets. To date, Savanna has not faced any meaningful project cancellations,
or any significant reductions in service fees. In the medium and long term,
the Company remains confident that demand for all of its services will be
sustained.
Savanna has expanded its U.S. presence over the past year, and is
continuing to assess further expansion of both our conventional and hybrid
drilling rig fleet in various U.S. basins.
BUSINESS ACQUISITIONS
On February 16, 2007, Savanna purchased the assets of Accell Well
Services Ltd. for total consideration of $61.8 million. Total consideration
was comprised of $46.3 million of cash and 839,000 common shares of Savanna
priced at $18.47 per share, net of acquisition costs of $0.1 million.
Also, on February 16, 2007, Savanna completed the acquisition of all the
outstanding shares of Bear Steam Ltd. for total consideration of $6 million.
The acquisition was funded with $4.5 million of cash and 81,000 common shares
of Savanna priced at $18.47 per share.
Both acquisitions have been accounted for using the purchase method with
the results of operations of Accell and Bear Steam being included in the
consolidated financial statements from the date of acquisition. The Savanna
shares issued on both acquisitions were valued at $18.47, being the average
closing price of Savanna shares for the period February 9 to February 15, 2007
which was the five day period before the closing date of the acquisitions.
The purchase price allocations may be subject to change as the Company
awaits information that could impact the allocations among the assets and
liabilities of Accell and Bear Steam. The preliminary purchase allocations are
as follows:(Stated in thousands of dollars) Accell Bear Steam Total
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Net assets acquired:
Cash $ - $ 160 $ 160
Non-cash working capital $ - $ (160) $ (160)
Capital assets $ 51,020 $ 2,865 $ 53,885
Intangibles $ 4,821 $ 1,558 $ 6,379
Goodwill $ 6,053 $ 2,067 $ 8,120
Future income taxes $ - $ (490) $ (490)
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$ 61,894 $ 6,000 $ 67,894
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Consideration
Common shares issued $ 15,500 $ 1,500 $ 17,000
Cash $ 46,300 $ 4,500 $ 50,800
Payable subsequent to closing $ 94 $ - $ 94
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Total consideration $ 61,894 $ 6,000 $ 67,894
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EQUIPMENT FLEET
Savanna's equipment fleet has grown substantially from the prior year
through internal growth as well as through mergers and acquisitions.
As At Committed
March 31 New
2007 Equipment Total
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Drilling Rigs
Heavy and ultra-heavy telescoping doubles 37 5 42
Hybrid drilling 39 7 46
Pipe-arm single 1 - 1
Conventional shallow/surface/coring 10 1 11
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Total drilling rigs (gross) 87 13 100
Total drilling rigs (net)(*) 82.5 12.5 95
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Service Rigs
Service rigs 44 8 52
Coil tubing service units (gross) 8 - 8
Coil tubing service units (net)(xx) 5.5 - 5.5
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(*) 9 drilling rigs are held in 50/50 limited partnerships and a 50%
interest in 1 rig currently under construction has been included in
inventory since it is being held for resale.
(xx) 5 coil tubing service units are held in 50/50 limited partnerships.
CONTRACT DRILLING
Savanna provides proprietary hybrid drilling rigs, telescoping double
drilling rigs, a pipe arm single drilling rig and coring delineation rigs
through Trailblazer Drilling Corp. ("Trailblazer"), Western Lakota Energy
Services Inc. ("Western Lakota") and Akuna Drilling Limited Partnership
("Akuna").
(Stated in thousands of dollars, except revenue per operating day)
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Three Months Ended
March 31
2007 2006 % Change
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Revenue $ 114,455 $ 50,524 127%
Operating expenses $ 61,711 $ 29,399 110%
Operating margin(1) $ 52,744 $ 21,125 150%
Number of operating days(*) 4,979 2,464 102%
Revenue per operating day $ 22,988 $ 20,505 12%
Number of spud to release days(*)(xx) 3,954 1,988 99%
Wells drilled 1,707 1,128 51%
Total meters drilled 1,333,005 848,606 57%
Utilization(xx) 64% 71% (10%)
Industry average utilization(+/-) 58% 81% (28%)
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(*) The number of operating days and number of spud to release days are
all on a net basis, which means we have only included Savanna's
proportionate share of any rigs held in limited partnerships.
(xx) 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 is earned during this time. Savanna's rig
utilization and spud to release days exclude Akuna drilling rigs as
the operating environment is not comparable to Trailblazer's and
Western Lakota's rigs. However, the Akuna rigs are included in
total fleet numbers.
(+/-) Source of industry figures: Canadian Association of Oilwell
Drilling Contractors (CAODC).The decrease in utilization experienced by the drilling division was more
than offset by the effect of a larger fleet and an increase in day rates,
creating an overall increase in revenues and operating margin for the three
month period ending, March 31, 2007, as compared to the same period in 2006.
The drilling division was able to increase its share of the market as
evidenced by a higher than industry average utilization rate for the first
three months of 2007.
During the first quarter of 2007, Savanna averaged a deployed fleet of
79 net rigs (2006 - 31) and exited the quarter operating a fleet of 82.5 net
rigs (2006 - 33 rigs).
WELL SERVICING
Savanna provides well servicing throughout Western Canada through Great
Plains Well Servicing Corp. ("Great Plains") and Accell Well Services Ltd.
("Accell"), operating double and single well servicing rigs, and through
Command Coil Services Inc. ("Command"), operating coil service units.(Stated in thousands of dollars, except revenue per hour)
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Three Months Ended
March 31
2007 2006 % Change
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Revenue $ 20,459 $ 12,575 63%
Operating expenses $ 11,486 $ 6,747 70%
Operating margin(1) $ 8,973 $ 5,828 54%
Number of hours 23,515 15,140 55%
Revenue per hour $ 870 $ 831 5%
Utilization(*)(xx) 76% 92% (17%)
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(*) Utilization is based on standard hours of 3,650 per rig per year.
Industry average utilization figures, specific to well servicing,
are not available.
(xx) The utilization rate excludes the coil service units operated
through Command since these units are not comparable in size or
operations to the division's service rigs.The increase in revenue and operating margin for the three month period
ending March 31, 2007, as compared to the same period in the prior year, was a
result of an increase in fleet size due to the acquisition of Accell and
higher day rates, offset somewhat by a decrease in utilization. Compared to
2006, the utilization rate for the first quarter in 2007 was lower because of
much weaker market conditions.
During the first quarter of 2007, the well servicing division operated an
average of 34 service rigs, 5.5 coil service trucks and 23 boilers compared to
the same period in 2006 where the division operated an average of 18 service
rigs and 12 boilers.
The well servicing division exited the current quarter with 44 service
rigs, 5.5 coil service trucks, and 34 boilers.
DISCONTINUED OPERATIONS
Effective January 31, 2007, the Company closed the sale of its wireline
division, Ultraline Services Corporation ("Ultraline") for net proceeds of
$208 million plus a working capital adjustment of $1.3 million.
Immediately prior to the sale, Ultraline declared and paid a dividend of
$5.5 million to Savanna as contemplated under the purchase and sale agreement
which has been eliminated upon consolidation of the financial statements for
the current period. Also, included in the sale were specific real estate
assets and office equipment owned by Savanna.(Stated in thousands of dollars)
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Three Months Ended
March 31
2007 2006 % Change
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From discontinued operations:
Revenue $ 6,011 $ 25,003 (76%)
Net earnings, net of tax $ 330 $ 7,938 (96%)
Gain on sale, net of tax $ 140,582 $ - -
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The decrease in revenue and net earnings from discontinued operations in
2006 is largely due to the fact that the 2007 results only include one month
of Ultraline earnings whereas 2006 includes three months of operations based
on the effective closing date of January 31, 2007.
Stock compensation expense of $665,000 (2006 - $66,000) has been included
in net earnings from discontinued operations for the current period and
relates primarily to the remaining unamortized portion of stock compensation
relating to options held by Ultraline employees.
The gain on sale of discontinued operations was based on net proceeds of
$209 million net of $0.1 million in legal and property tax expenses. The net
book value of Savanna's interest in Ultraline and the related assets that were
sold on January 31, 2007 was $36.7 million, resulting in a gain of
$172 million ($141 million net of tax).
OTHER FINANCIAL INFORMATION
(Stated in thousands of dollars)
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Three Months Ended
March 31
2007 2006 % Change
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From continuing operations:
General and administrative expenses $ 4,548 $ 1,907 138%
General and administrative expenses
(as a % of revenue) 3% 3% -
Depreciation and amortization $ 9,257 $ 3,393 173%
Interest expense $ 1,320 $ 682 94%
Income tax expense $ 14,022 $ 8,057 74%
Effective income tax rate 30% 40% (24%)
-------------------------------------------------------------------------The increase in general and administrative expenses and depreciation
expense reflects the increased scale of operations and expanding capital asset
base of the Company. Administrative expenses as a percentage of revenue
remained consistent with the prior year.
Included in depreciation and amortization expense is the amortization of
intangible assets. Intangible assets are amortized over their expected period
of benefit. The increase in depreciation and amortization is a result of the
significant increase in capital assets from the prior year due to the merger
with Western Lakota and the acquisitions of Accell and Bear Steam.
The increase in interest expense is a direct result of the long-term debt
acquired on the Western Lakota transaction creating a higher debt position at
March 31, 2007 relative to the prior year.
The reduction in the Company's effective income tax rate from the prior
year is primarily a result of Canadian tax rate reductions and expected
reductions in future income tax rates. Increases in overall tax expense from
2006 are a result of higher income from operations; in addition, as the
Company utilizes its tax pools, the percentage of current versus future taxes
also increases. 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.
FINANCIAL CONDITION AND LIQUIDITY
Savanna's aggressive capital expansion, coupled with the market risks
outlined previously can significantly affect the financial condition and
liquidity of the Company. Savanna's ability to access its debt facilities is
directly dependent, among other factors, on our total debt to equity ratios
and trailing cash flows. Additionally, the ability of Savanna to raise capital
through the issuance of equity would likely be restricted in the face of an
existing or anticipated reduction in oilfield service demand. 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 between maximizing returns for our shareholders
over both the short and long term activity levels in the oil and gas services
business.
WORKING CAPITAL AND CASH PROVIDED BY OPERATIONS(Stated in thousands of dollars, except per share data)
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Three Months Ended
March 31
2007 2006 % Change
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Operating cashflows from continuing
operations before changes in working
capital(1) $ 49,076 $ 21,388 129%
Per diluted share $ 0.84 $ 0.72 17%
Change in cash (net of bank indebtedness) $ 18,049 $ 4,692 285%
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The increase in operating cash flows before changes in working capital is
a direct result of the Company's expanding capital base through internal
growth as well as through the merger with Western Lakota and acquisitions of
Accell and Bear Steam.
The increase in cash position for the current quarter is primarily due to
the net funds received on the sale of Ultraline ($208 million) which were used
to repay long-term debt ($125 million) and used to partially fund the
acquisitions of Accell and Bear Steam ($50.7 million).
(Stated in thousands of dollars)
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As At
March 31 December 31
2007 2006 Change
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Working capital held outside of
partnerships $ 26,831 $ 28,242 $ (1,411)
Working capital held in partnerships(*) $ 14,636 $ 8,289 $ 6,347
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Working capital(1) $ 41,467 $ 36,531 $ 4,936
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(*) Working capital held in limited partnerships is owned 50% by the
Company. The amount presented is the Company's proportionate share.
The increase in working capital from amounts at December 31, 2006, is a
result of the increase in cash position from the sale of Ultraline described
above plus the result of the Company's larger equipment base which was able to
generate higher levels of cash and receivables relative to current
liabilities.
At March 31, 2007, there was $243 million available for use on the
Company's term revolving loan.
INVESTING ACTIVITIES
(Stated in thousands of dollars)
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Three Months Ended
March 31
2007 2006 % Change
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From continuing operations:
Capital asset additions $ (43,202) $ (23,130) 87%
Cash paid on acquisitions,
net of cash acquired $ (50,734) $ - -
Cash received on sale of discontinued
operations, net of costs $ 207,899 $ - -
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The majority of the 2007 capital expenditures relate to costs associated
with the manufacture of drilling rigs for use in the contract drilling
division.
As described previously, the $50.1 million paid on acquisitions relates to
the Accell and Bear Steam purchases.
The cash received on the sale of discontinued operations relates to the
disposition of the Company's wireline division also described previously in
the MD&A.
FINANCING ACTIVITIES
(Stated in thousands of dollars)
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Three Months Ended
March 31
2007 2006 % Change
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From continuing operations:
Repayment of long-term debt $(127,164) $ (9,240) 1276%
Repayment of capital lease obligations $ (908) $ (171) 431%
Issuance of long-term debt $ 7,250 $ 15,000 (52%)
Proceeds from stock options exercised $ 615 $ 487 26%
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- Savanna had capital lease obligations and long term debt outstanding
of $22.7 million (December 31, 2006 - $136.3 million) at March 31,
2007, excluding the $11.9 million (December 31, 2006 - $18.8 million)
current portions thereof.
- At the date of this report, no amounts were drawn on the Company's
$250 million committed revolving debt facility.
- The average price of the stock options exercised in the first quarter
of 2007 was $9.21 (2006 - $3.43) per share.
- At the date of this report, the number of common shares outstanding
was 59.0 million and the number of stock options outstanding was
2.5 million, the proceeds from which, if exercised, would be
$46.2 million.
- The Company issued 920 thousand shares at $18.47 as part of the
consideration in the acquisitions of Accell and Bear Steam. These were
non-cash transactions and have been excluded from the statement of
cash flows for the period ending March 31, 2007.
- For the remainder of 2007 and the foreseeable future, the Company
expects cash flow from operations and from its various sources of
financing to be sufficient to meet its debt repayments and future
obligations, and to fund anticipated capital expenditures.RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2007, management and other fees
in the amount of $0.8 million, net of inter-company eliminations were received
from partnerships that are owned 50% by the Company. The amounts have been
recorded as a reduction of either operating expenses or general and
administrative expenses in the consolidated statement of earnings. The related
party 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.
Also during the quarter ended March 31, 2007, a limited partnership owned
50% by Western Lakota entered into a loan agreement for $2.2 million with a
financial institution that has a common director of the Company.
QUARTERLY RESULTS
The quarterly results of Savanna are markedly affected by weather
patterns throughout our operating area in Canada. Historically, the first
quarter of the calendar year is very active followed by a much slower second
quarter. Because the timing of the slower period is directly dependent on
weather, the timing of the slow period could fall partially in the first or
second quarter, or be completely contained within either of these quarters
each year. As a result of this, the variation on a quarterly basis,
particularly in the first and second quarters can be dramatic year over year
independent of other demand factors. The following is a summary of selected
financial information of the Company for the last eight completed quarters.
All prior period amounts have been restated to reflect the discontinuation of
Ultraline operations.(Stated in thousands of dollars, except per share amounts)
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Three Months Ended
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Mar-31 Dec-31 Sept-30 Jun-30
2007 2006 2006 2006
$ $ $ $
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Revenue 135,614 93,875 70,042 20,066
Operating expenses 73,197 54,885 41,476 16,180
Operating margin(1) 62,417 38,990 28,566 3,886
Operating margin %(1) 46% 42% 41% 19%
Net earnings from
continuing operations 31,580 18,138 12,466 (1,015)
Per diluted share 0.54 0.31 0.30 (0.03)
Net earnings 172,492 19,812 14,825 2
Per diluted share 2.94 0.34 0.36 0.00
Total assets 1,290,303 1,205,939 1,156,048 307,114
Long-term debt(*) 34,527 155,052 126,051 62,106
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Three Months Ended
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Mar-31 Dec-31 Sept-30 Jun-30
2006 2005 2005 2005
$ $ $ $
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Revenue 63,099 45,951 33,316 17,831
Operating expenses 36,146 27,314 20,914 12,707
Operating margin(1) 26,953 18,637 12,402 5,124
Operating margin %(1) 43% 41% 37% 29%
Net earnings from
continuing operations 12,021 7,453 4,694 492
Per diluted share 0.40 0.25 0.16 0.02
Net earnings 19,959 13,138 7,676 1,107
Per diluted share 0.67 0.44 0.26 0.04
Total assets 310,494 277,329 241,928 216,319
Long-term debt(*) 55,217 49,505 42,562 37,954
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(*) Total long-term debt including capital leases, and current portions
thereof.
RISKS AND UNCERTAINTIES
The Company's primary activity is the provision of contract drilling and
oilfield services to the oil and gas industry in Western Canada. The demand,
price and terms of contract drilling services are dependent on the level of
activity in this industry, which in turn depends on several factors including:
- Crude oil, natural gas and other commodity prices, markets and storage
levels
- Expected rates of production and production declines
- Discovery of new oil and natural gas reserves
- Availability of capital and financing
- Exploration and production costs
- Pipeline capacity and availability, and
- Manufacturing capacity and availability of supplies for rig
construction.Other risk factors that affect the oil and gas industry and the Company
are as follows:
CREDIT RISK
As outlined above, lower commodity prices have a direct impact on our
customers' ability to generate cash flows, which in turn directly impacts the
demand for our services. These factors are clearly beyond the control of
Savanna, and therefore represent significant uncertainty for the Company
overall. Savanna has been very proactive in its approach to credit management
and has specific policies and procedures to mitigate credit risk.
INTEREST RATE RISK
We are exposed to fluctuations in short-term interest rates from our
floating-rate debt as their market value is sensitive to interest rate
fluctuations.
At March 31, 2007, approximately 80% (December 31, 2006 - 24%) of
operating loans, long-term debt and obligations under capital leases were
subject to fixed rates and 20% (December 31, 2006 - 76%) were subject to
variable rates.
WEATHER
The ability to move and operate drilling equipment is often dependent on
weather conditions. As warm weather arrives in the spring and the frost begins
leaving the ground, many secondary roads become too soft to support heavy
equipment until they are completely dry. The inability to move equipment
during this period (spring break-up) can have a direct effect on operations
and can result in a period when some or all of the drilling rigs may be
inactive. In addition, the ability to frequently move drilling equipment to
new locations is even more critical in the shallow drilling market because of
the speed and efficiency with which our rigs carry out this process. To
mitigate this risk, efforts are made to work with customers to position
drilling equipment before spring break-up so that it will be working as much
as possible during or immediately after this period.
WORKFORCE AVAILABILITY
The Company's ability to provide reliable and quality services is
dependent on its ability to hire and retain a dedicated and quality pool of
employees. The Aboriginal partnerships that the Company has formed through
Western Lakota have provided access to a large, capable workforce of
Aboriginal employees. The Company strives to retain employees by providing a
safe working environment, competitive wages and benefits, employee savings
plans and an atmosphere in which all employees are treated equally regarding
opportunities for advancement. Through Western Lakota, the Company also
operates an innovative drilling rig training program designed to provide
inexperienced individuals with the skills required for entry into the drilling
industry.
EQUIPMENT AND TECHNOLOGY
The ability of the Company to meet customer demands in respect of
performance and cost will depend upon continuous improvements in its drilling
rigs. The Company was founded on rigs designed and built internally and these
rigs continue to be among the newest and most efficient in the industry. The
experience of the Company's rig construction team and the knowledge gained in
the five years it has been building rigs has led to new and innovative
solutions to its customers' unique problems. The advancements the Company has
made since its beginnings have been an important part of its success, and the
Company will make every effort to continue employing high-quality people and
to work with its customers to remain on the leading edge of technology.
Savanna carries what it believes to be adequate property and
comprehensive public liability insurance to protect itself in the event of
destruction or damage to its property or equipment and to limit exposure in
the face of unforeseen incidents.
CONTINGENCIES
At March 31, 2007, the Company was subject to legal claims with respect
to the Company's patents. The outcome of these matters is not determinable at
this time.
CRITICAL ACCOUNTING ESTIMATES
This Management's Discussion and Analysis is based on the consolidated
financial statements which have been prepared in accordance with GAAP. The
preparation of the consolidated financial statements requires that certain
estimates and judgments be made with respect to the reported amounts of
revenues and expenses and the carrying amounts of assets and liabilities.
These estimates are based on historical experience and management judgment.
Anticipating future events involves uncertainty and consequently the estimates
used by management in the preparation of the consolidated financial statements
may change as future events unfold, additional experience is acquired or the
Company's operating environment changes. Management considers the following to
be the most significant of these estimates:
DEPRECIATION AND AMORTIZATION
The accounting estimate that has the greatest effect on the Company's
financial results is the depreciation of capital assets and asset impairment
write-downs, if any. Depreciation of capital assets is carried out on the
basis of the estimated useful lives of the related assets. Equipment under
construction is not depreciated until it is put into use. Included in capital
assets is equipment acquired under capital leases. All equipment is
depreciated based on the straight-line method, utilizing either years, in the
case of all non-drilling assets, or operating days, in the case of drilling
equipment. All equipment is depreciated net of expected residual values of
10% - 20%.
Assessing the reasonableness of the estimated useful lives of properties
requires judgment and is based on currently available information, including
periodic depreciation studies conducted by the Company. Additionally, the
Company canvasses its competitors to ensure it utilizes methodologies and
rates consistent with the remainder of the sector in which Savanna operates.
Changes in circumstances, such as technological advances, changes to the
Company's business strategy, changes in the Company's capital strategy or
changes in regulations may result in the actual useful lives differing from
the Company's estimates.
A change in the remaining useful life of a group of assets, or their
expected residual value, will affect the depreciation rate used to amortize
the group of assets and thus affect depreciation expense as reported in the
Company's results of operations. These changes are reported prospectively when
they occur.
STOCK-BASED COMPENSATION
Compensation expense associated with stock options granted is based on
various assumptions using the Black-Scholes option-pricing model to produce an
estimate of compensation. This estimate may vary due to changes in the
variables used in the model including interest rates, expected life, expected
volatility and shares prices.
Stock compensation expense also includes the value of deferred share
units ("DSU's) held by directors outside of the Company and outstanding at the
end of the year. DSU's are recognized when granted and valued on a mark to
market basis. DSU's will be settled in cash on the date the director ceases to
be a director of the Company.
GOODWILL
Goodwill is the amount that results when the cost of acquired assets
exceeds their fair values, at the date of acquisition. Goodwill is recorded at
cost, not amortized and tested at least annually for impairment. The
impairment test includes the application of a fair value test, with an
impairment loss recognized when the carrying amount of goodwill exceeds its
estimated fair value. Impairment provisions are not reversed if there is a
subsequent increase in the fair value of goodwill.
INTANGIBLE ASSETS
Intangible assets consist of the value attributed to customer
relationships, lease agreements, construction commitments, non-competition
agreements, and trade names acquired plus the costs associated with securing
the Company's intellectual property rights. The initial valuation of
intangibles at the closing date of any acquisitions, require judgment and
estimates by management with respect to identification, valuation and
determining expected periods of benefit. Valuations are based on discounted
expected future cash flows and other financial tools and models and are
amortized over their expected periods of benefit. Intangible assets are
reviewed annually with respect to their useful lives, or more frequently, if
events or changes in circumstances indicate that the assets might be impaired.
ACCOUNTING POLICIES
The significant accounting policies are the same as those set out in the
most recent annual financial statements, other than the following new
accounting standards issued by the Canadian Institute of Chartered Accountants
("CICA"). These accounting policy changes were adopted on a prospective basis
on January 1, 2007, with no restatement of prior period financial statements.
The new standards and accounting policy changes are as follows:
FINANCIAL INSTRUMENTS (CICA HANDBOOK SECTION 3855 and 3861)
In accordance with this new standard, all financial instruments must
initially be recognized at fair value on the balance sheet. The Company has
classified each financial instrument into the following categories: held for
trading financial assets and financial liabilities, loans or receivables, held
to maturity investments, available for sale financial assets, and other
financial liabilities. Subsequent measurement of the financial instruments is
based on their classification. Unrealized gains and losses on held for trading
financial instruments are recognized in earnings. Gains and losses on
available for sale financial assets are recognized in other comprehensive
income and are transferred to earnings when the instrument is settled. The
other categories of financial instruments are recognized at amortized cost
using the effective interest rate method. At January 1, 2007, all of the
Company's financial instruments were classified as either held for trading,
loans and receivables, and other financial liabilities. Any transaction costs
with respect to financial instruments are expensed in the period incurred.
Embedded derivatives are derivatives embedded in a host contract. They
are recorded separately from the host contract when their economic
characteristics and risks are not clearly and closely related to those of the
host contract, the terms of the embedded are the same as those of a
freestanding derivative and the combined contract is not classified as held
for trading or designated at fair value. At January 1, 2007 and for the three
month period ended March 31, 2007, the Company had no embedded derivatives
requiring separate recognition.
COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
(CICA HANDBOOK SECTIONS 1530 AND 3251)
Comprehensive income consists of net earnings and other comprehensive
income ("OCI"). OCI comprises the change in the fair value of the effective
portion of the derivatives used as hedging items in a cash flow hedge and the
change in fair value of any available for sale financial instruments. Amounts
included in OCI are shown net of tax. Accumulated other comprehensive income
is a new equity category comprised of the cumulative amounts of OCI. There
were no such components to be recognized in comprehensive income for the three
month period ending March 31, 2007.
HEDGES (CICA HANDBOOK SECTION 3865)
The new standard specifies the criteria under which hedge accounting can
be applied and how hedge accounting can be executed. The Company has not
designated any hedging relationships for the period ending March 31, 2007.
ACCOUNTING CHANGES (CICA HANDBOOK SECTION 1506)
The new recommendations permit voluntary changes in accounting policy
only if they result in financial statements which provide more reliable and
relevant information. Accounting policy changes are applied retrospectively
unless it is impractical to determine the period of cumulative impact of the
change. Corrections of prior period errors are applied retrospectively and
changes in accounting estimates are applied prospectively by including these
changes in earnings. The guidance was effective for all changes in accounting
policies, changes in accounting estimates and corrections of prior period
errors initiated in periods beginning on or after January 1, 2007.
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 to provide reasonable assurance that 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 annual filings of the Company are
being prepared, in an accurate and timely manner in order for the Company to
comply with its continuous disclosure and financial reporting obligations and
in order to safeguard assets. The CEO and CFO evaluated the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by the annual filings and have concluded that the Company's disclosure
controls and procedures, as of the end of the period covered by the annual
filings, are effective in providing reasonable assurance that material
information is accumulated and made known to them by others within the Company
and its consolidated subsidiaries. There have been no changes to disclosure
controls and procedures that occurred over the most recent interim period that
has materially affected or is likely to materially affect internal control
over financial reporting.
In addition to disclosure controls and procedures, the CEO and CFO are
responsible for designing internal controls over financial reporting or
causing 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 CEO and CFO have concluded that the Company's internal controls over
financial reporting, as of the end of the period covered by the annual
filings, are designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Canadian GAAP. There have been no
changes in internal control over financial reporting that occurred over the
most recent interim period that has materially affected or is likely to
materially affect internal control over financial reporting.
Consistent with the concept of reasonable assurance, the Company
recognizes that the relative cost of maintaining these controls and procedures
should not exceed their expected benefits. As such, the Company's disclosure
controls and procedures and internal controls over financial reporting can
only provide reasonable assurance, and not absolute assurance.
OUTLOOK- The Canadian Association of Oilwell Drilling Contractors ("CAODC")
expects 19,023 well completions for 2007, down 3,275 wells or 15% from
2006. The CAODC is also projecting an average drilling utilization
rate of 51%, down 11% from 2006 levels due to the weakening of prices
and the continued construction of additional rigs. Despite these
projections, Savanna expects to maintain higher than average
utilization rates and market share in both its drilling and well
servicing divisions.
- The Company and the industry in general expects activity levels in the
second quarter to be significantly less than 2006 due to reductions in
customer demand, a late spring thaw, and a longer road ban period
caused by a cold March and heavy snowfalls during the winter. Despite
this, Savanna expects its year over year financial results to be
higher due to the merger with Western Lakota late in 2006 and
Savanna's newly acquired well servicing companies in the first quarter
of 2007.
- The sale of Ultraline, the acquisitions of Accell and Bear Steam, and
the elimination of a significant portion of long-term debt during the
first quarter of 2007, provides Savanna with a healthy platform that
the Company can use to continue growing all of its divisions.OTHER
Savanna will host a conference call for analysts, investors and
interested parties on Wednesday, May 9th, 2007 at 9:00 a.m. Mountain Time
(11 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, 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 at least ten
minutes ahead of time.
A replay of the call will be available until May 16, 2007 by dialing
1-800-937-6305 and entering pass code 928956.-------------------------------------------------------------------------
This Report contains forward looking statements which reflect
management's expectations regarding the Company's future growth, results
of operations, performance and business prospects and opportunities.
Wherever possible, words such as "believe", "expect" and similar
expressions have been used to identify these forward looking statements.
The statements reflect management's current beliefs and are based on
information currently available to management. Forward looking statements
involve significant risk, uncertainties and assumptions. A number of
factors could cause actual results, performance or achievements to differ
materially from the results discussed or implied in the forward looking
statements. Although the forward looking statements contained in this
Report are based upon what management believes to be reasonable
assumptions, the Company cannot assure readers that actual results will
be consistent with these forward looking statements. These forward
looking statements are made as of the date hereof and the Company assumes
no obligation to update or revise them to reflect new events or
circumstances.
-------------------------------------------------------------------------
Notes:
(1) Earnings from continuing operations is defined as earnings before
interest, other income and taxes. Earnings from continuing operations
before stock compensation expense is calculated by adding stock
compensation expense to earnings from continuing operations.
Operating margin is defined as revenue less operating expenses.
Operating margin percentages are calculated by dividing operating
margins by revenue. Operating cash flows from continuing operations
before changes in working capital is defined as cash flows from
continuing operating activities before changes in non-cash working
capital. Working capital is defined as total current assets less
total current liabilities excluding the current portions of long-term
debt capital leases, and deferred drilling advances. Earnings from
continuing operations, net earnings from continuing operations before
stock compensation expense, operating margin, operating margin
percent, operating cash flows from continuing operations before
changes in non-cash working capital, and working capital are not
recognized measures under Canadian generally accepted accounting
principles (GAAP), 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 prior to consideration of how those
activities are financed and how the results are taxed in various
jurisdictions.
-------------------------------------------------------------------------
Consolidated Statement of Earnings and Comprehensive Income
For the Three Months Ended March 31, 2007 and 2006
(In thousands, except per share amounts) (Unaudited)
-------------------------------------------------------------------------
2007 2006
$ $
-------------------------------------------------------------------------
Revenue
Sales and services 135,614 63,099
-------------------------------------------------------------------------
Expenses
Operating 73,197 36,146
General and administrative 4,548 1,907
Stock-based compensation 1,096 866
Depreciation and amortization 9,257 3,393
-------------------------------------------------------------------------
88,098 42,312
-------------------------------------------------------------------------
Earnings from continuing operations 47,516 20,787
-------------------------------------------------------------------------
Interest on long-term debt and capital leases (1,320) (682)
Interest and other income (expense) 164 (27)
-------------------------------------------------------------------------
(1,156) (709)
-------------------------------------------------------------------------
Earnings from continuing operations before
income taxes 46,360 20,078
Income taxes, continuing operations
Current 7,597 2,907
Future 6,425 5,150
-------------------------------------------------------------------------
14,022 8,057
-------------------------------------------------------------------------
Net earnings from continuing operations before
non-controlling interest 32,338 12,021
Non-controlling interest (758) -
-------------------------------------------------------------------------
Net earnings from continuing operations 31,580 12,021
Net earnings and gain from discontinued
operations, net of tax (Note 13) 140,912 7,938
-------------------------------------------------------------------------
Net earnings and comprehensive income (Note 3(b)) 172,492 19,959
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per share (Note 8(f))
Basic - net earnings from continuing operations -
per share 0.54 0.41
Diluted - net earnings from continuing operations -
per share 0.54 0.40
Basic - net earnings and gain from discontinued
operations - per share 2.42 0.27
Diluted - net earnings and gain from discontinued
operations - per share 2.41 0.27
Basic - net earnings - per share 2.95 0.69
Diluted - net earnings - per share 2.94 0.67
Consolidated Statement of Retained Earnings
For the Three Months Ended March 31, 2007 and 2006
(In thousands) (Unaudited)
-------------------------------------------------------------------------
2007 2006
$ $
-------------------------------------------------------------------------
Retained earnings, beginning of period 114,765 60,167
Net earnings 172,492 19,959
-------------------------------------------------------------------------
Retained earnings, end of period 287,257 80,126
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Balance Sheet
(In thousands) (Unaudited)
-------------------------------------------------------------------------
March 31 December 31
2007 2006
$ $
-------------------------------------------------------------------------
ASSETS
Current
Cash 12,083 8,259
Accounts receivable 121,084 88,856
Inventory 5,652 4,783
Prepaid expenses and deposits 1,424 1,766
Current portion of notes receivable - 2,250
Current assets held for sale (Note 13) - 18,720
-------------------------------------------------------------------------
140,243 124,634
Notes receivable 6,575 6,575
Capital assets 678,753 590,132
Goodwill 432,122 424,003
Intangibles and other assets (Note 5) 32,610 26,856
Non-current assets held for sale (Note 13) - 33,739
-------------------------------------------------------------------------
1,290,303 1,205,939
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Bank indebtedness 11,035 25,260
Operating loans 486 337
Accounts payable and accrued liabilities 50,627 50,970
Income taxes payable 36,628 5,599
Current portion of deferred drilling advance
(Note 14) 2,264 1,127
Current portion of obligations under capital
leases 3,177 3,156
Current portion of long-term debt (Note 6) 8,689 15,615
Current liabilities held for sale (Note 13) - 5,937
-------------------------------------------------------------------------
112,906 108,001
Deferred drilling advance (Note 14) 2,197 3,333
Deferred net revenue 1,647 1,647
Obligations under capital leases 4,698 5,330
Long-term debt (Note 6) 17,963 130,951
Future income taxes 63,478 55,995
Non-current liabilities held for sale (Note 13) - 5,374
-------------------------------------------------------------------------
202,889 310,631
-------------------------------------------------------------------------
Non-controlling interest 3,972 3,214
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 8(b)) 789,110 771,495
Contributed surplus (Note 8(c)) 7,075 5,834
Retained earnings 287,257 114,765
Accumulated other comprehensive income
(Note 3(b)) - -
-------------------------------------------------------------------------
1,083,442 892,094
-------------------------------------------------------------------------
1,290,303 1,205,939
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2007 and 2006
(In thousands) (Unaudited)
-------------------------------------------------------------------------
2007 2006
$ $
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings from continuing operations 31,580 12,021
Items not affecting cash:
Depreciation 8,632 3,393
Amortization of intangible and other assets 625 23
Future income taxes 6,425 5,150
Stock-based compensation 1,096 866
Loss on disposal of assets (40) (65)
Non-controlling interest 758 -
-------------------------------------------------------------------------
49,076 21,388
Change in non-cash working capital from continued
operations (32,907) 578
-------------------------------------------------------------------------
Cash flows from continuing operations 16,169 21,966
-------------------------------------------------------------------------
Net earnings from discontinued operations 330 7,938
Items not affecting cash:
Depreciation 42 1,040
Future income taxes 588 66
Stock-based compensation 665 66
Gain on disposal of assets - (31)
-------------------------------------------------------------------------
1,625 9,079
Change in non-cash working capital from
discontinued operations 4,630 (9,922)
-------------------------------------------------------------------------
Cash flows from discontinued operations 6,255 (843)
-------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Shares issued on exercise of stock options
(Note 8(b)) 615 487
Advances on operating loans 149 -
Repayment of capital lease obligations (908) (171)
Issuance of long-term debt (Note 6(a)) 7,250 15,000
Repayment of long-term debt (Note 6(a)) (127,164) (9,240)
-------------------------------------------------------------------------
Cash flows from continuing financing activities (120,058) 6,076
-------------------------------------------------------------------------
Repayment of capital lease obligations - (344)
Cash paid on acquisition and cancellation of
options (Note 8(c)) (520) -
-------------------------------------------------------------------------
Cash flows from discontinued financing activities (520) (344)
-------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (43,202) (23,130)
Proceeds on disposal of assets 170 102
Cash paid on acquisitions, net of cash acquired
(Note 4) (50,734) -
Cash received on sale of discontinued operations,
net of costs (Note 13) 207,899 -
Change in working capital related to investing
activities 2,218 2,106
Purchase of other assets - (4)
-------------------------------------------------------------------------
Cash flows from continuing investing activities 116,351 (20,926)
-------------------------------------------------------------------------
Purchase of capital assets (148) (2,154)
Proceeds on disposal of assets - 181
Change in cash held for disposal - 736
-------------------------------------------------------------------------
Cash flows from discontinued investing activities (148) (1,237)
-------------------------------------------------------------------------
INCREASE IN CASH, NET OF BANK INDEBTEDNESS 18,049 4,692
CASH, NET OF BANK INDEBTEDNESS, BEGINNING OF PERIOD (17,001) (7,114)
-------------------------------------------------------------------------
CASH, NET OF BANK INDEBTEDNESS, END OF PERIOD 1,048 (2,422)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
For the Three Months Ended March 31, 2007 and 2006
(In thousands) (Unaudited)
-------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Savanna Energy Services Corp. (the "Company") was incorporated under the
Alberta Business Corporations Act on March 22, 2001, to provide a variety
of services in the oil and natural gas industry. Savanna primarily
operates through the following operating companies, all of which are 100%
owned subsidiaries of Savanna: Great Plains Well Servicing Corp. ("Great
Plains"), Accell Well Services ("Accell") (a division of Great
Plains), Trailblazer Drilling Corp. ("Trailblazer") and Western Lakota
Energy Services Inc. ("Western Lakota"). The Company's well servicing
division is operated through Great Plains and Accell and its drilling
division is operated through Trailblazer and Western Lakota. Western
Lakota operates through a number of subsidiaries and limited
partnerships.
2. BASIS OF PRESENTATION
The interim consolidated financial statements of Savanna have been
prepared by management in accordance with Canadian generally accepted
accounting principles ("GAAP"). The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates
and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ
from those estimates. In the opinion of management, the interim
consolidated financial statements contain all adjustments of a normal and
recurring nature necessary to present fairly the financial position as at
March 31, 2007 and the results of operations and the statement of cash
flows for the three month periods ended March 31, 2007 and 2006.
The results of operations and cash flows for the three month period
ending March 31, 2007 include the results of Accell and Bear Steam from
the date of acquisition, February 16, 2007 (Note 4). Financial results
and information for 2006 shown for comparative purposes are based on
Savanna's historical information which does not include Western Lakota,
Accell nor Bear Steam.
Earnings for Ultraline for the one month ending January 31, 2007, have
been included in net earnings from discontinued operations in the
consolidated statement of earnings (Note 13). For comparative purposes,
the net earnings for the three month period ending March 31, 2006 have
been restated to reflect the discontinuation of this division and the
assets and liabilities relating to Ultraline at December 31, 2006 have
been shown as assets and liabilities held for sale.
Certain information and disclosures normally required to be included in
notes to annual financial statements have been condensed or omitted and
as such these interim financial statements should be read in conjunction
with the most recent annual financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies are the same as those set out in the
most recent annual financial statements, other than the following new
accounting standards issued by the Canadian Institute of Chartered
Accountants ("CICA"). These accounting policy changes were adopted on a
prospective basis on January 1, 2007, with no restatement of prior period
financial statements. The new standards and accounting policy changes are
as follows:
a) FINANCIAL INSTRUMENTS (CICA HANDBOOK SECTION 3855 and 3861)
In accordance with this new standard, all financial instruments must
initially be recognized at fair value on the balance sheet. The Company
has classified each financial instrument into the following categories:
held for trading financial assets and financial liabilities, loans or
receivables, held to maturity investments, available for sale financial
assets, and other financial liabilities. Subsequent measurement of the
financial instruments is based on their classification. Unrealized gains
and losses on held for trading financial instruments are recognized in
earnings. Gains and losses on available for sale financial assets are
recognized in other comprehensive income and are transferred to earnings
when the instrument is settled. The other categories of financial
instruments are recognized at amortized cost using the effective interest
rate method. At January 1, 2007, all of the Company's financial
instruments were classified as either held for trading, loans and
receivables, and other financial liabilities. Any transaction costs with
respect to financial instruments are expensed in the period incurred.
Embedded derivatives are derivatives embedded in a host contract. They
are recorded separately from the host contract when their economic
characteristics and risks are not clearly and closely related to those of
the host contract, the terms of the embedded derivative are the same as
those of a freestanding derivative and the combined contract is not
classified as held for trading or designated at fair value. At January 1,
2007 and for the three month period ended March 31, 2007, the Company had
no embedded derivatives requiring separate recognition.
b) COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME (CICA
HANDBOOK SECTIONS 1530 AND 3251)
Comprehensive income consists of net earnings and other comprehensive
income ("OCI"). OCI comprises the change in the fair value of the
effective portion of the derivatives used as hedging items in a cash flow
hedge and the change in fair value of any available for sale financial
instruments. Amounts included in OCI are shown net of tax. Accumulated
other comprehensive income is a new equity category comprised of the
cumulative amounts of OCI. There were no such components to be recognized
in comprehensive income for the three month period ending March 31, 2007.
c) HEDGES (CICA HANDBOOK SECTION 3865)
The new standard specifies the criteria under which hedge accounting can
be applied and how hedge accounting can be executed. The Company has not
designated any hedging relationships for the period ending March 31,
2007.
d) ACCOUNTING CHANGES (CICA HANDBOOK SECTION 1506)
The new recommendations permit voluntary changes in accounting policy
only if they result in financial statements which provide more reliable
and relevant information. Accounting policy changes are applied
retrospectively unless it is impractical to determine the period of
cumulative impact of the change. Corrections of prior period errors are
applied retrospectively and changes in accounting estimates are applied
prospectively by including these changes in earnings. The guidance was
effective for all changes in accounting policies, changes in accounting
estimates and corrections of prior period errors initiated in periods
beginning on or after January 1, 2007.
4. BUSINESS ACQUISITIONS
a) On February 16, 2007, Savanna purchased the assets of Accell Well
Services Ltd. for total consideration of $61,894. Total consideration
was comprised of $46,300 of cash and 839 common shares of Savanna
priced at $18.47 per share, net of acquisition costs of $94.
b) On February 16, 2007, Savanna completed the acquisition of all the
outstanding shares of Bear Steam Ltd. for total consideration of
$6,000. The acquisition was funded with $4,500 of cash and 81 common
shares of Savanna priced at $18.47 per share.
Both acquisitions have been accounted for using the purchase method
with the results of operations of Accell and Bear Steam being
included in the consolidated financial statements from the date of
acquisition. The Savanna shares issued on both acquisitions were
valued at $18.47, being the average closing price of Savanna shares
for the period February 9 to February 15, 2007 which was the five day
period before the closing date of the acquisitions.
The purchase price allocations may be subject to change as the
Company awaits information that could impact the allocations among
the assets and liabilities of Accell and Bear Steam. The preliminary
purchase allocations are as follows:
-------------------------------------------------------------------------
Accell Bear Steam Total
$ $ $
-------------------------------------------------------------------------
Net assets acquired:
Cash - 160 160
Non-cash working capital - (160) (160)
Capital assets 51,020 2,865 53,885
Intangibles 4,821 1,558 6,379
Goodwill 6,053 2,067 8,120
Future income taxes - (490) (490)
-------------------------------------------------------------------------
61,894 6,000 67,894
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration
Common shares issued 15,500 1,500 17,000
Cash 46,300 4,500 50,800
Payable subsequent to closing 94 - 94
-------------------------------------------------------------------------
Total consideration 61,894 6,000 67,894
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. INTANGIBLES AND OTHER ASSETS
March 31, 2007 December 31, 2006
-------------------------------------------------------------------------
Accum- Accum-
ulated Net ulated Net
Amorti- Book Amorti- Book
Cost zation Value Cost zation Value
$ $ $ $ $ $
-------------------------------------------------------------------------
Intangible
assets 33,770 1,160 32,610 27,391 535 26,856
-------------------------------------------------------------------------
33,770 1,160 32,610 27,391 535 26,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in intangible assets at March 31, 2007, are $6,379 of
intangibles acquired as part of the Accell and Bear Steam business
acquisitions (Note 4).
6. LONG-TERM DEBT
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Monthly
Principal Out- Out-
Payments Interest Maturity Authorized standing standing
$ Rate Date $ $ $
-------------------------------------------------------------------------
Savanna
Term loans 80 L+2.75% Mar-07 - - 240
Term revolving
credit
facility (a) - P to P+0.75% (a) 250,000 5,000 125,000
Term non-
revolving May-09-
loans 519 6.0 to 6.56% Oct-09 14,030 14,030 15,534
Mortgage 7 6.0% Oct-09 935 935 955
-------------------------------------------------------------------------
264,965 19,965 141,729
-------------------------------------------------------------------------
Limited
partnership
facilities (b)
Term loans 86 4.7 to 7.25% Jul-08- 5,010 5,010 2,980
Feb-12
Term non-
revolving
loans 60 P+0.75% Aug-09 1,677 1,677 1,857
-------------------------------------------------------------------------
6,687 6,687 4,837
-------------------------------------------------------------------------
Total long-term debt 271,652 26,652 146,566
Current portion of long-term debt 8,689 15,615
-------------------------------------------------------------------------
17,963 130,951
-------------------------------------------------------------------------
-------------------------------------------------------------------------
"P" denotes prime rate, which was 6% at March 31, 2007 and December 31,
2006.
"L" denotes lenders' borrowing rate.
a) During the quarter, the $125,000 outstanding on the revolving
facility at December 31, 2006 was repaid and $5,000 was advanced on
the facility. The entire facility, which is with a syndicate of
banks, is renewed every 365 days at the bank's discretion; however,
if it is not renewed on the annual renewal date (September 29th), the
facility reverts to a three year term loan with a four year
amortization, requiring quarterly payments. Based on the balance
outstanding at March 31, 2007, the quarterly payments are $313
(December 31, 2006 - $7,812).
Included in the $250,000 facility is $10,000 which is committed to
the swing-line operating facility included in bank indebtedness in
the consolidated financial statements. At March 31, 2007, $2,156
(December 31, 2006 - $10,075) was drawn on the swing-line operating
facility.
The $10,000 interest rate swap included in the term revolving credit
facility at December 31, 2006 was unwound during the first quarter of
2007 and a charge of $34 has been included in interest on long-term
debt and capital leases.
b) During the quarter ending March 31, 2007, a limited partnership
entered into a loan agreement for $2,250 with a financial institution
that has a common director of the Company.
7. COMMITMENTS
The Company has commitments for office and shop premises and various
operating vehicles and equipment leases and purchases. As at March 31,
2007, the payments required in each of the next five years are as
follows:
$
---------------------------------
2008 23,289
2009 2,403
2010 616
2011 640
2012 and thereafer 271
---------------------------------
27,219
---------------------------------
---------------------------------
8. SHARE CAPITAL
a) AUTHORIZED
The Company has authorized an unlimited number of common shares, Class A
common shares, and preferred shares.
b) ISSUED
Number of
Shares $
-------------------------------------------------------------------------
Common shares
Balance December 31, 2006 57,919 771,495
Issued for cash on exercise of stock options 89 615
Shares issued on acquistions (Note 4) 920 17,000
-------------------------------------------------------------------------
Balance March 31, 2007 58,928 789,110
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has 5,404 (December 31, 2006 - 5,542) common shares reserved
for issue upon exercise of stock options.
c) CONTRIBUTED SURPLUS
$
-------------------------------------------------------------------------
Balance December 31, 2006 5,834
Stock-based compensation - continued operations 1,096
Stock-based compensation - discontinued operations (Note 13) 665
Repurchase and cancellation of options (520)
-------------------------------------------------------------------------
Balance March 31, 2007 7,075
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company paid $520 in cash for the purchase and cancellation of
Savanna options held by Ultraline employees (Note 13).
d) DEFERRED SHARE UNIT PLAN
In 2006, the Company implemented a deferred share unit ("DSU") plan for
directors outside of the Company. The DSU's are granted annually and
represent rights to share value based on the number of deferred share
units issued. Under the terms of the plan, DSU's awarded will vest
immediately and will be settled with cash in the amount equal to the
closing price of the Company's common shares on the date the director
ceases to be a director of the Company. No amounts have been recorded in
stock compensation expense relating to DSU's for the periods ending
March 31, 2006 and 2007. There were 20 units (2006 - nil) outstanding at
the end of the current period.
e) STOCK OPTION PLAN
The Company has a stock option plan for the purpose of developing the
interest of directors, officers, employees and consultants of the Company
and its subsidiaries in the growth and development of the Company by
providing them with the opportunity, through stock options, to acquire an
increased proprietary interest in the Company.
2007 2006
Weighted Weighted
Average Average
Exercise Exercise
Price Price
Share (per share) Share (per share)
Options $ Options $
-------------------------------------------------------------------------
Outstanding, beginning of period 1,946 17.41 1,659 11.67
Granted 950 18.88 316 24.80
Exercised (139) 9.21 (142) 3.43
Cancelled (159) 24.01 (6) 16.51
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Outstanding, end of period 2,598 17.98 1,827 14.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At March 31, 2007, 2,598 (2006 - 1,827) options were outstanding at
exercise prices between $3.00 and $28.60 per share. The options expire
from October 31, 2007 to August 10, 2011 and vest in equal amounts on
their anniversary over three to five years. At March 31, 2007, 642
(2006 - 703) options were exercisable at a weighted average exercise
price of $17.98. The following table summarizes these details:
At March 31, 2007
-------------------------------------------------------------------------
Number of Weighted Number of
Exercise Options Average Options
Price Out- Contractual Exerc-
(per share) standing Life (years) iseable
-------------------------------------------------------------------------
$3.00 - $4.50 130 0.5 130
$4.51 - $6.75 120 0.6 120
$6.76 - $10.00 120 1.0 24
$10.01 - $15.00 130 1.8 78
$15.01 - $22.50 1,499 3.4 168
$22.51 - $28.60 599 3.3 122
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2,598 2.9 642
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Compensation expense for stock options is recognized using the fair value
when the stock options are granted, and is amortized over the option's
vesting period. For options granted during the period ended March 31,
2007, the Company used the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 4.0% (2006 - 5.25%),
expected life of 3.5 years (2006 - 4.0 years), no annual dividends paid,
and expected volatility of 35% (2006 - 33%).
Compensation expense from continuing operations amounting to, $1,096
(2006 - $866) has been recognized in the consolidated statement of
earnings during the period. The weighted average fair value of stock
options granted during the period was $6.34 per share (2006 - $8.33) at
the date of grant.
f) RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
Number of Shares
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Basic weighted average shares outstanding 58,399 29,123
Effect of dilutive securities:
Stock options 280 670
-------------------------------------------------------------------------
Diluted weighted average shares outstanding 58,679 29,793
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The effect of dilutive securities with respect to stock options is that
875 options are assumed exercised (2006 - 1,827 options) and 595 shares
are assumed purchased (2006 - 1,157 shares).
9. SEGMENTED INFORMATION
The Company's reportable operating segments, as determined by management,
are strategic operating units that offer different products and services.
The Company has three reportable operating segments: corporate, service
rigs, and drilling.
The corporate segment provides management and administrative services to
all its subsidiaries and their respective operations.
The service rig segment provides well servicing services to the oil and
gas industry.
The drilling segment provides primarily contract drilling services to the
oil and gas industry through both conventional and hybrid drilling rigs.
2007
-------------------------------------------------------------------------
Service
Corporate Rigs Drilling Total
$ $ $ $
-------------------------------------------------------------------------
Revenue
Oilfield services - 20,459 114,455 134,914
Other 700 - - 700
-------------------------------------------------------------------------
700 20,459 114,455 135,614
-------------------------------------------------------------------------
Operating costs
Oilfield services - 11,486 61,711 73,197
-------------------------------------------------------------------------
- 11,486 61,711 73,197
-------------------------------------------------------------------------
Operating margin 700 8,973 52,744 62,417
--------------------------------------------------------------
Expenses
General and administrative 4,548
Stock-based compensation 1,096
Depreciation and amortization 9,257
----------
Earnings from continuing operations 47,516
----------
----------
Goodwill - 14,391 417,731 432,122
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital assets 7,992 107,747 563,014 678,753
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures 3,254 56,746 37,383 97,383
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006
-------------------------------------------------------------------------
Service
Corporate Rigs Drilling Total
$ $ $ $
-------------------------------------------------------------------------
Revenue
Oilfield services - 12,575 50,524 63,099
-------------------------------------------------------------------------
- 12,575 50,524 63,099
-------------------------------------------------------------------------
Operating costs
Oilfield services - 6,747 29,399 36,146
-------------------------------------------------------------------------
- 6,747 29,399 36,146
-------------------------------------------------------------------------
Operating margin - 5,828 21,125 26,953
--------------------------------------------------------------
Expenses
General and administrative 1,907
Stock-based compensation 866
Depreciation and amortization 3,393
----------
Earnings from continuing operations 20,787
----------
----------
Goodwill - 2,677 - 2,677
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital assets 3,863 35,764 168,681 208,308
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures 803 1,902 20,283 22,988
-------------------------------------------------------------------------
10. SEASONALITY OF OPERATIONS
The majority of the Company's operations are carried on in Canada. The
ability to move heavy equipment in the north often depends upon whether
the ground is frozen enough to support the equipment. Additionally, as
the ground thaws in the spring ("spring break-up"), road bans are often
placed on secondary roads to limit movement of heavy equipment until they
are dry enough to support the equipment. The timing of freeze-up and
spring break-up has an impact on the activity levels of the Company and
its operating results.
11. CONTINGENCIES
At March 31, 2007 the Company was subject to legal claims 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 results of its operations.
12. RELATED PARTY TRANSACTIONS
Except as disclosed elsewhere, during the period management and other
fees in the amount of $783 (2006 - $Nil), net of inter-company
eliminations were received from partnerships that are owned 50% by the
Company. The amounts have been recorded as a reduction of either
operating expenses or general and administrative expenses in the
consolidated statement of earnings. The related party 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.
13. DISCONTINUED OPERATIONS
Effective January 31, 2007, the Company closed the sale of its wireline
division, Ultraline Services Corporation ("Ultraline") for net proceeds
of $209,204.
Immediately prior to the sale, Ultraline declared and paid a dividend of
$5,500 to Savanna as contemplated under the purchase and sale agreement
which has been eliminated upon consolidation of the financial statements
for the current period. Also, included in the sale were specific real
estate assets and office equipment owned by Savanna.
Revenue from discontinued operations for the period ended March 31, 2007
was $6,011 (2006 - $25,003). Net earnings from discontinued operations
was $330 (2006 - $7,938) net of tax of $1,175 (2006 - $3,180). Stock
compensation expense of $665 (2006 - $66) has been included in net
earnings from discontinued operations for the current period and relates
primarily to the remaining unamortized portion of stock compensation
relating to options held by Ultraline employees (Note 8(c)).
The gain on sale of discontinued operations was based on net proceeds of
$209,204 comprised of $208,000 in cash and a working capital adjustment
of $1,305 net of $101 in legal and property tax expenses. The net book
value of Savanna's interest in Ultraline and the related assets that were
sold on January 31, 2007 was $36,606, resulting in a gain of $172,598
($140,582 net of tax). At March 31, 2007, the working capital adjustment
of $1,305 has been included in accounts receivable and income taxes on
the gain of $32,016 have been included in income taxes payable.
14. SUBSEQUENT EVENT
Subsequent to the end of the quarter, the Company settled the outstanding
balance of the deferred drilling advance of $4,461 for $2,264; the
difference will be recognized in the second quarter of 2007. The advance
was received from a customer and used to construct five drilling rigs
that are owned by the Company. These five rigs were to drill for this
customer under three year term contracts. By settling the outstanding
balance, these contracts have been considered cancelled.%SEDAR: 00019742E
For further information: Ken Mullen, President and Chief Executive
Officer, Telephone: (403) 267-6726; Darcy Draudson, Chief Financial Officer,
Telephone: (403 267-6727
