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Press release from Marketwire

Savanna Energy Services Corp. Announces Q3 2010 Results

Wednesday, November 10, 2010

Savanna Energy Services Corp. Announces Q3 2010 Results05:00 EST Wednesday, November 10, 2010CALGARY, ALBERTA--(Marketwire - Nov. 10, 2010) - Savanna Energy Services Corp. (TSX:SVY) ("Savanna" or "the Company") is an oilfield services company operating throughout North America and is in the process of expanding its operations into Australia. The Company's overall business is conducted through two major divisions: contract drilling and oilfield services.FINANCIAL HIGHLIGHTSThe following is a summary of selected financial information of the Company:(Stated in thousands of dollars, except per share amounts) Three Months Ended Nine Months EndedSeptember 30 2010 2009 2010 2009---------------------------------------------------------------------------- $ $ $ $OPERATING RESULTSRevenue 104,787 50,350 302,717 171,189Operating expenses 80,516 40,208 232,920 137,397Operating margin(1) 24,271 10,142 69,797 33,792Net earnings 1,211 (4,548) 3,066 (9,839) Per share: basic 0.02 (0.06) 0.04 (0.15) Per share: diluted 0.02 (0.06) 0.04 (0.15) --------------------------------------- ---------------------------------------CASH FLOWSOperating cash flows(1) 16,363 4,588 47,152 16,914 Per diluted share 0.21 0.06 0.60 0.25Cash paid on the purchase of capital assets(1) (34,379) (18,809) (76,325) (57,409)Dividends paid - (1,977) (1,977) (4,924) --------------------------------------- --------------------------------------- Sep-30 Dec-31FINANCIAL POSITION AT 2010 2009---------------------------------------------------------------------------- $ $----------------------------------------------------------------------------Working capital(1) 48,950 51,016Capital assets(1) 898,425 869,411Total assets 1,019,149 977,159Long-term debt 93,601 70,107 ------------------- -------------------OPERATIONAL HIGHLIGHTSThe year over year improvements in the North American oil and gas industry in 2010 continued to have a positive effect on the Company's operations in Q3. The increase in demand for oilfield services led to an increase in operating days and hours in both the drilling and oilfield services divisions compared to Q3 2009.Savanna's ongoing efforts to better position its oilfield equipment also continued in Q3 2010. The costs associated with repositioning the Company's fleet have had a negative effect on operating margins and in particular operating margin percentages in the three and nine month periods ended September 30, 2010. However, the process of re-deploying these assets will position Savanna for better operating potential going forward.The drilling division more than doubled the number of operating days in the third quarter of 2010 versus the same period in 2009 with virtually the same drilling rig fleet. Additionally, while average day rates only increased 3% over the same time frame, the drilling division increased operating margins by $11 million in Q3 2010 from Q3 2009. The increase in activity to date in 2010 has more than doubled year-to-date operating margins overall compared to 2009.The oilfield services division achieved a 71% increase in operating hours, and operating margins nearly doubled in the third quarter of 2010 relative to 2009 with virtually the same average fleet size from Q3 2009. Furthermore, operating margin percentages are higher in the three and nine month periods ended September 30, 2010 compared to the same periods in 2009.EQUIPMENT FLEETThe following table outlines the Company's drilling and service rig fleetby type of rig: Sep-30 Dec-31 2010 2009 Change----------------------------------------------------------------------------DRILLING RIGSHeavy and ultra-heavy telescoping doubles 49 49 -Hybrid drilling 46 46 -Triples 2 2 -Pipe-arm single 1 1 -Surface/ coring 6 9 (3) ----------------------------------Total drilling rigs (gross) 104 107 (3)Total drilling rigs (net)(i) 100 103 (3) ---------------------------------- ----------------------------------SERVICE RIGSService rigs 66 66 -Coil tubing service units - 8 (8) ----------------------------------Total service rigs (gross) 66 74 (8)Total service rigs (net) (i) 64 72 (8) ---------------------------------- ----------------------------------(i) 8 drilling rigs and 4 service rigs were owned in 50/50 limited partnerships at September 30, 2010 and December 31, 2009.The Company also has a substantial inventory of drilling and well servicing-related rental assets and support equipment.During the first and second quarters of 2010, the Company sold its entire fleet of 8 coil tubing service units and related equipment for gross proceeds of $3.7 million which resulted in a loss of $1.7 million. This was a non-core business unit that was added as a result of the 2006 merger with Western Lakota Energy Services Inc. and had been under-utilized through most of 2009, which in turn led to impairment losses in Q4 2009.In the third quarter, the Company also disposed of 3 surface-setting rigs for aggregate proceeds of $3.0 million, reducing the surface/coring fleet to 6 rigs. Similar to the coil tubing service units, these rigs were part of a non-core business unit that was added as a result of the 2006 merger with Western Lakota Energy Services Inc. The surface/coring fleet had also been under-utilized through most of 2009 and incurred impairment losses in Q4 2009. No gain or loss arose on this disposition.The following outlines the Company's deployment of its drilling and service rig fleet by geographic location: Sep-30 Dec-31 2010 2009 Change----------------------------------------------------------------------------DRILLING RIGSCanada 82 86 (4)United States 22 17 5Mexico - 4 (4) ----------------------Total drilling rigs 104 107 (3) ---------------------- ----------------------SERVICE RIGSCanada 58 66 (8)United States 8 8 - ----------------------Total service rigs 66 74 (8) ---------------------- ----------------------During Q2 2010, 3 drilling rigs were moved to the U.S. from Canada; 2 of the double drilling rigs were retrofitted as part of the Company's capital program and deployed to the Permian Basin in Texas and the other moved into the Marcellus shale play in Pennsylvania. In Q3 2010, a CT-2200 hybrid drilling rig was moved from the U.S. to Canada to meet contract commitments in Canada.In addition, during Q3 2010, the Company's customer in Mexico released all 4 of Savanna's drilling rigs as a result of a suspension in drilling under the contract pursuant to which Savanna's customer had been operating. The rigs were moved from location in Mexico to Texas at the Mexico customer's expense. From Texas, one of the high specification conventional double drilling rigs moved to Canada, another moved into the Marcellus shale play in Pennsylvania and the other 2 have moved to the Permian Basin in Texas. The 4 rigs are all under term contracts and the mobilization costs were paid for by the new customers.The construction of the 2 new service rigs for Australia was completed in Q3 2010 and they are currently being rigged up and commissioned in Savanna's yard in Toowoomba, Queensland. These rigs are expected to start 24-hour operations in the near future and will be added to the fleet totals in the tables above in Q4 2010. Subsequent to the end of the quarter, the retrofit of the 2 hybrid drilling rigs for operations under the five year contract in Australia was also completed. They are currently being prepared for shipment to Australia. Savanna expects these rigs to start operations in Q1 2011. Two additional hybrid drilling rigs are being retrofitted and are expected to be available for the Australian market in Q2 2011. A third Australian service rig is also currently under construction and is expected to be available for work in Q2 2011.In anticipation of these rigs arriving, the ramp up of Savanna's Australian operations began in Q3 2010 and includes an office in Brisbane and an office, shop and yard in Toowoomba. The infrastructure that is being set up is to accommodate the 4 drilling rigs and 3 service rigs described above as well as future anticipated expansion. As a result, included in the Company's Q3 2010 results are expenses of $1.1 million associated with the negotiation of the contracts and the set up of infrastructure in Australia; $0.6 million is included in operating expenses and $0.5 million is included in general and administration expenses. Startup costs will continue into Q4 2010, albeit at a lower pace, and their impact is expected to be reduced as the Australian operations begin generating revenues later in the fourth quarter.Savanna's previously announced capital program for 2010 continued in Q3; approximately $76 million has been expended on the program in 2010. Subsequent to the end of the quarter, Savanna also announced its 2011 capital program of $89 million. The Company's 2010 and 2011 capital commitments are focused on sustaining the existing fleet and adding to its capabilities through rig upgrades and new rig additions. The capital is being used for the following:- 3 new service rigs for deployment in Australia - 2 completed;- retrofitting 4 hybrid drilling rigs for deployment in Australia - 2 completed;- retrofitting 8 hybrid drilling rigs as automated Range III top drive singles ("TDS-3000(TM) Singles") - 1 completed;- retrofitting 2 conventional double drilling rigs for deployment in the United States - completed;- retrofitting 3 service rigs for deployment in the United States;- 2 new high specification conventional deep double drilling rigs;- 8 new portable top drives - 2 completed;- 1 new flush-by service rig; and- expansion of the rental fleet.In addition to the rigs contracted for work in Australia, 2 TDS-3000(TM) singles and the 2 new high specification deep double drilling rigs have been contracted under initial three-year terms.CONTRACT DRILLING(Stated in thousands of dollars, except revenue per hour) Three Months Ended Nine Months Ended----------------------------------------------------------------------------September 30 2010 2009 Change 2010 2009 Change----------------------------------------------------------------------------Revenue $ 81,969 $ 38,172 115% $ 241,441 $ 130,737 85%Operating expenses $ 64,511 $ 31,719 103% $ 188,232 $ 106,666 76%Operating margin(1) $ 17,458 $ 6,453 171% $ 53,209 $ 24,071 121%Operating margin %(1) 21% 17% 22% 18%Number of operating days(i) 4,674 2,245 108% 13,059 6,633 97%Revenue per operating day $ 17,537 $ 17,003 3% $ 18,488 $ 19,710 (6%)Number of spud to release days (i)(ii) 4,047 1,974 105% 11,241 5,726 96%Wells drilled (ii) 578 306 89% 1,572 1,285 22%Total meters drilled (ii) 862,713 468,602 84% 2,280,390 1,466,449 56%Utilization - Canada (ii) 39% 19% 105% 36% 19% 89%Utilization - International (ii) 72% 41% 76% 67% 44% 52%Canadian industry average utilization(iii) 40% 21% 90% 37% 22% 68% ------------------------------------------------------------ ------------------------------------------------------------(i) The number of operating days and number of spud to release days are all on a net basis which means only Savanna's proportionate share of any rigs held in 50/50 limited partnerships have been included.(ii) Savanna reports its rig utilization based on spud to release time for the rigs and excludes moving, rig up and tear down time, even though revenue may be earned during this time. Savanna's rig utilization, spud to release days, wells drilled and total meters drilled exclude coring rigs as the operating environment is not comparable to the Company's other drilling rigs, nor to industry utilization drivers. However, these rigs are included in total fleet numbers.(iii) Source of industry figures: Canadian Association of Oilwell Drilling Contractors ("CAODC").Wet weather late in the quarter tempered the activity levels in Canada in Q3 2010. However, overall improvements in the North American oil and gas industry in 2010 resulted in a significant increase in operating days, revenue and operating margins in Canada, the U.S. and Mexico this quarter compared to Q3 2009. In both Q3 2010 and Q3 2009, Savanna averaged a deployed fleet of 101 net rigs. In Q3 2010, an average 21 rigs were in the U.S. and an average of 2 rigs were in Mexico, compared to Q2 2009 when there was an average of 15 rigs in the U.S. and 3 in Mexico.The increases in operating days and revenue were achieved by both hybrid and conventional drilling rigs; however, the conventional drilling rigs, in particular, showed the most significant increases in Q3 2010 compared to the same period in 2009. Conventional drilling rigs achieved 80% of the operating days and contributed 95% of the overall operating margin in Q3 2010. In Q3 2009, conventional drilling rigs accounted for 78% of the operating days and 94% of operating margin.Operating costs per operating day were lower in Q3 2010 compared to Q2 2009. The primary reason for the improvement was the fixed portion of operating costs was distributed over a greater number of operating days in Q3 2010 compared to Q3 2009 when activity levels were significantly lower. Offsetting this improvement was an increase in labour costs as extra rig personnel were retained in Q3 2010, primarily on the hybrid rigs, in anticipation of a busy winter drilling season. The oilfield services industry is currently experiencing a shortage of qualified rig personnel and the Company felt it was necessary to retain key rig personnel in order to take advantage of what Savanna believes will be a very active Q4 2010 and Q1 2011.On a year to date basis, the improvements in industry activity levels in 2010 resulted in a significant increase in operating days, revenue and operating margins in all areas in which Savanna operates for the nine months ended September 30, 2010, compared to the same period in 2009, despite lower overall day rates year over year. As with the quarter ended September 30, 2010, in the first nine months of 2010 the conventional drilling rigs, in particular, have showed the most significant increases in operating days, revenue and operating margins; conventional drilling rigs achieved 75% of the operating days in the first nine months of 2010 (2009 - 65%) and 79% of the overall operating margin (2009 - 74%). The increases on the conventional drilling side are a result of the increased demand for deeper drilling compared to shallow drilling and is further evidenced by the number of days and meters per well drilled to date in 2010.Operating costs per operating day were lower in the first nine months of 2010 compared to the same period in 2009. The improvement is due in part to the fixed portion of operating costs being distributed over a greater number of operating days to the end of September 2010. In addition, decreased wage levels recommended by the CAODC for rig employees, became effective on May 1, 2009. The decrease in overall day rates in 2010 has somewhat offset the improvements in operating costs however, and operating margin percentages have only increased to 22% from 18% a year ago. Operating labour rates will be increasing by approximately 5% for Q4 2010 based on the CAODC's October 1, 2010 recommended wage increase and Savanna anticipates being able to pass these increases on to our customers.Also included in operating expenses for the three and nine months ended September 30, 2010 are the costs associated with deploying drilling rigs into different geographical areas. These costs have had a negative effect on operating margins and in particular operating margin percentages in the three and nine month periods ended September 30, 2010. A portion of these costs are recovered from our customers and are included in revenue. However, while a cost recovery has no effect on overall operating margins, operating margin percentages decrease. The following approximates the effect Savanna's fleet repositioning costs have had on operating margin and operating margin percentages:(Stated in thousands of dollars) Results excluding Repositioning costs and repositioning costs and recoveries recoveriesSeptember 30 Q3 2010 YTD 2010 Q3 2010 YTD 2010---------------------------------------------------------------------------- $ $ $ $----------------------------------------------------------------------------Revenue 1,204 1,526 80,765 239,915Operating expenses 2,029 2,587 62,482 185,645Operating margin(1) (825) (1,061) 18,283 54,270Operating margin %(1) (69%) (70%) 23% 23% --------------------------------------------- ---------------------------------------------The ultimate contributions of these re-deployed assets have and are expected to continue to outweigh the repositioning costs.OILFIELD SERVICES(Stated in thousands of dollars, except revenue per hour) Three Months Ended Nine Months Ended----------------------------------------------------------------------------September 30 2010 2009 Change 2010 2009 Change----------------------------------------------------------------------------Revenue $ 23,283 $ 12,887 81% $ 63,129 $ 42,094 50%Operating expenses $ 16,639 $ 9,338 78% $ 46,995 $ 32,769 43%Operating margin(1)$ 6,644 $ 3,549 87% $ 16,134 $ 9,325 73%Operating margin %(1) 29% 28% 26% 22%Number of operating hours(i) 29,650 17,345 71% 81,919 51,795 58%Revenue per hour $ 654 $ 622 5% $ 641 $ 670 (4%)Utilization - Canada (ii) 47% 26% 81% 43% 26% 65%Utilization - U.S. (ii) 75% 58% 29% 68% 56% 21% --------------------------------------------------------- ---------------------------------------------------------(i) The number of operating hours is on a net basis which means only Savanna's proportionate share of any rigs held in 50/50 limited partnerships has been included.(ii) Utilization is based on standard hours of 3,650 per rig per year. The utilization rate excludes the coiled tubing service units since these units are not comparable in size or operations to the division's service rigs. Reliable industry average utilization figures, specific to well servicing, are not available.As with the drilling division, wet weather late in the quarter tempered the activity levels in Canada in Q3 2010. However, improvements in the North American oil and gas industry in 2010 resulted in an increase in operating hours, revenue and operating margins in Q3 2010 compared to Q3 2009. The increases were achieved in both Canada and the U.S. In Q3 2010, the oilfield services division's fleet size averaged 64 net service rigs and 34 boilers, compared to Q3 2009 when the division operated an average of 64 net service rigs, 8 coiled tubing service units, and 34 boilers.The increase in margin percentages is due primarily to the decreased effect fixed operating costs have had on overall costs in Q3 2010 compared to Q3 2009 as a result of increased activity levels this year. Offsetting this improvement was an increase in labour costs as extra rig personnel were retained in Q3 2010 in anticipation of a busy winter drilling season. The oilfield services industry is currently experiencing a shortage of qualified rig personnel and the Company felt it was necessary to retain key rig personnel in order to take advantage of what Savanna believes will be a very active Q4 2010 and Q1 2011. Additionally, labour rates are expected to increase by approximately 5% going forward, however Savanna anticipates being able to at least recover these additional costs through increased hourly rates.The improvements in industry activity levels in 2010 also resulted in a significant increase in operating hours, revenue and operating margins on a year-to-date basis, despite lower overall hourly rates year over year. Again the increases were achieved in both Canada and the U.S. Additionally, the Company's efforts to reduce operating costs in the latter part of 2009, including a 6% reduction in wages for all rig personnel, that went into effect in Q3 2009, and the decrease in the per hour fixed portion of operating costs has had on overall operating costs at current higher activity levels, lowered per hour operating costs in the first nine months of 2010 compared to the same period in 2009. However, the decrease in overall hourly rates in 2010 has somewhat offset the improvements in operating costs and as a result operating margin percentages only increased to 26% from 22% in the same period in 2009.Included in revenue for the three and nine months ended September 30, 2010, was $3.9 million and $10.6 million, respectively, from rental assets; in 2009 rental asset revenue was $2.1 million and $7.4 million in the same respective periods. The increase in rental asset revenue in each of the periods is due to the increase in overall industry activity. Of the rental revenue, $0.6 million for the three months ended September 30, 2010 (2009 - $0.8 million) and $2.3 million for the nine months ended September 30, 2010 (2009 - $2.0 million), is eliminated on overall consolidation as inter-segment revenue. Rental asset revenue is excluded from the per hour revenue calculations above.OTHER FINANCIAL INFORMATION(Stated in thousands of dollars) Three Months Ended Nine Months EndedSeptember 30 2010 2009 Change 2010 2009 Change---------------------------------------------------------------------------- $ $ $ $----------------------------------------------------------------------------General and administrative expenses 7,293 4,785 52% 19,851 15,059 32% as a % of revenue 7.0% 9.5% 6.6% 8.8% ----------------------------------------------------- -----------------------------------------------------The increase in general and administrative expenses for the three and nine month periods ended September 30, 2010 compared with the same periods in 2009 reflects Savanna's expansion into new markets over the last twelve months, including startup operations in Australia, significant sales and marketing efforts in 2010 and the effect of the reversal of salary and wage roll backs in 2010 that were in place from April to December 2009. The decrease as a percentage of revenue in Q3 2010 and for the year to date compared to 2009 is due to the increase in revenues year over year in each respective period which is in part due to the sales and marketing efforts put forth this year.FINANCIAL CONDITION AND LIQUIDITYSavanna's net debt(1) position at September 30, 2010, was $44.7 million and the amount owing on its term revolving credit facility was $93.6 million. As of the date of this release, $110.3 million was drawn on Savanna's term revolving credit facility.QUARTERLY RESULTSIn addition to other market factors, quarterly results of Savanna are markedly affected by weather patterns throughout its operating areas in Canada, which still constitute the majority of Savanna's operations. Historically, the first quarter of the calendar year is very active, followed by a much slower second quarter. As a result of this, the variation in activity levels on a quarterly basis, particularly in the first and second quarters, can be dramatic year-over-year independent of other demand factors. As the Company continues to expand outside of Canada, the relative impact of Canadian seasonality will be reduced. The following is a summary of selected financial information of the Company for the last eight completed quarters.Summary of Quarterly Results(Stated in thousands of dollars, except per share amounts)Three Months Ended Sep-30 Jun-30 Mar-31 2010 2010 2010---------------------------------------------------------------------------- $ $ $----------------------------------------------------------------------------Revenue 104,787 67,862 130,069Operating expenses 80,516 57,672 94,732Operating margin(1) 24,271 10,190 35,337Operating margin %(1) 23% 15% 27%Impairment loss - - - Per share: basic - - - Per share: diluted - - -Net earnings (loss) 1,211 (7,742) 9,597 Per share: basic 0.02 (0.10) 0.12 Per share: diluted 0.02 (0.10) 0.12Total assets 1,019,149 996,765 1,020,981Long-term debt 93,601 84,696 98,386 --------------------------------------------------- ---------------------------------------------------Three Months Ended Dec-31 Sep-30 Jun-30 Mar-31 Dec-31 2009 2009 2009 2009 2008---------------------------------------------------------------------------- $ $ $ $ $----------------------------------------------------------------------------Revenue 85,430 50,350 27,045 93,794 139,746Operating expenses 61,611 40,208 26,627 70,561 98,152Operating margin(1) 23,819 10,142 418 23,233 41,594Operating margin %(1) 28% 20% 2% 25% 30%Impairment loss (27,370) - - - (319,365) Per share: basic (0.35) - - - (5.40) Per share: diluted (0.35) - - - (5.40)Net earnings (loss) (18,055) (4,548) (8,899) 3,609 (310,980) Per share: basic (0.23) (0.06) (0.14) 0.06 (5.26) Per share: diluted (0.23) (0.06) (0.14) 0.06 (5.26)Total assets 977,159 983,783 974,192 1,019,841 1,038,231Long-term debt 70,107 57,263 50,872 176,501 202,274 --------------------------------------------------- ---------------------------------------------------OUTLOOKBoth the CAODC and the Petroleum Services Association of Canada ("PSAC") anticipate stronger drilling activity in Canada in Q4 2010 and Q1 2011 compared to the prior year comparable periods. A significant portion of Savanna's drilling and service rig fleet is contracted or committed for winter work. With 88% of its well servicing fleet and 78% of its drilling fleet located in Canada, Savanna will benefit from any increased activity in Canada over the next six months.The oilfield services industry is currently experiencing a shortage of qualified rig personnel, and the Company is making efforts to retain key rig personnel in anticipation of an increase in activity levels. This is particularly the case on its hybrid drilling rigs. Additionally, the CAODC's recommended wage increase for Canadian rig personnel became effective on October 1, 2010. Savanna expects to recover the wage increases through increased pricing; however, there is generally a delay between the wage increases and corresponding rate increases.Although it was disappointing to have Savanna's 4 drilling rigs in Mexico released in the quarter, the fact that these rigs were contracted elsewhere so quickly speaks to the quality of the equipment and personnel Savanna employs. Each of these rigs received 30 days of stand-by revenue after being released and they were inactive for an additional 30-60 days while their relocations were completed. The mobilization of the 4 drilling rigs, funded in large measure by the new customers, has now been completed and they were all working as of the date of this release.The Australian portion of Savanna's capital program is also progressing; the required infrastructure to support this operation is substantially in place, and the first 2 service rigs have arrived in Toowoomba to begin work shortly. The first 2 hybrid drilling rigs should land in Australia soon and begin working in early 2011. The next 2 hybrids and third service rig are expected to arrive in Australia in Q2 2011.With the deployment of 4 hybrid drilling rigs to Australia and the committed conversion of 8 hybrid rigs to TDS-3000(TM) conventional singles, Savanna's strategic intent of reducing its domestic shallow drilling fleet exposure remains on track. Savanna has identified several other prospective international areas attractive for the hybrid and is continuing to work towards improving the application and utilization of the hybrid fleet domestically through improved directional and horizontal capabilities for the rigs and increased application of the rigs to shallow oil drilling, specifically heavy oil areas.While revitalization of the hybrid fleet is a priority, expansion of its deeper conventional fleet also remains a core growth driver for Savanna going forward. With the construction of 2 high specification conventional drilling rigs and the conversion of 8 of its hybrid rigs to deeper-oriented conventional rigs currently under way, Savanna is committed to increasing the number of drilling rigs capable of drilling to depths greater than 2,500 meters.Ultimately, despite much higher than historical oil-driven drilling demand, the level of activity in both Canada and the United States will not fully recover until a supply-demand balance for natural gas is achieved, and prices for the commodity recover. In the interim, Savanna will continue to aggressively monitor its cost structure and focus on best positioning itself to take advantage of the operating environment. Savanna believes it has the high quality people, equipment, leading-edge technology and First Nations partnerships to manage the challenging conditions affecting the oilfield services industry.Notes:(1) Operating margin, operating cash flows, working capital, and net debt are not recognized measures under 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.- Operating margin is defined as revenue less operating expenses.- Operating margin percent is defined as revenue less operating expenses divided by revenue.- Operating cash flows are defined as cash flows from operations less changes in non-cash working capital.- Capital assets are defined as property and equipment, intangibles, and other assets.- Working capital is defined as total current assets less total current liabilities excluding the current portions of long-term debt.- Net debt is defined as long-term debt, including the current portions thereof, less working capital.CONSOLIDATED STATEMENTS OF For the periods endedNET EARNINGS (LOSS) September 30 (Unaudited) (Stated in thousands of dollars, except per share amounts) Three months ended Nine months ended 2010 2009 2010 2009---------------------------------------------------------------------------- $ $ $ $----------------------------------------------------------------------------REVENUE Sales and services 104,787 50,350 302,717 171,189 ------------------------------------------------EXPENSES Operating 80,516 40,208 232,920 137,397 General and administrative 7,293 4,785 19,851 15,059 Stock-based compensation 1,440 1,470 3,651 3,611 Depreciation and amortization 12,510 8,118 35,351 23,600 Interest on long-term debt 1,683 855 4,593 3,829 Other (income) expenses (446) 609 972 211 ------------------------------------------------ 102,996 56,045 297,338 183,707 ------------------------------------------------EARNINGS (LOSS) BEFORE INCOME TAXES 1,791 (5,695) 5,379 (12,518) ------------------------------------------------INCOME TAXES Current (176) (23) 355 (310) Future 756 (1,124) 1,958 (2,369) ------------------------------------------------ 580 (1,147) 2,313 (2,679) ------------------------------------------------NET EARNINGS (LOSS) 1,211 (4,548) 3,066 (9,839) ------------------------------------------------ ------------------------------------------------NET EARNINGS (LOSS) PER SHARE Basic - net earnings (loss) 0.02 (0.06) 0.04 (0.15) Diluted - net earnings (loss) 0.02 (0.06) 0.04 (0.15) Weighted average number of shares outstanding (000s) 79,078 79,078 79,078 67,694 Diluted weighted average number of shares outstanding (000s) 79,078 79,078 79,078 67,694 ------------------------------------------------ ------------------------------------------------CONSOLIDATED STATEMENTS OF For the periods ended DEFICIT September 30 (Unaudited) (Stated in thousands of dollars) Three months ended Nine months ended 2010 2009 2010 2009---------------------------------------------------------------------------- $ $ $ $----------------------------------------------------------------------------Deficit, beginning of period (153,877) (127,198) (153,755) (118,960)Dividends declared - (1,977) (1,977) (4,924)Net earnings (loss) 1,211 (4,548) 3,066 (9,839) ------------------------------------------------Deficit, end of period (152,666) (133,723) (152,666) (133,723) ------------------------------------------------ ------------------------------------------------CONSOLIDATED BALANCE SHEETS (Stated in thousands of dollars) (Unaudited) Sep-30 Dec-31 2010 2009-------------------------------------------------------------------------------------------------------------------------------------------------------- $ $----------------------------------------------------------------------------ASSETSCurrent Cash 5,826 4,480 Accounts receivable 94,114 78,409 Income taxes receivable 3,228 9,065 Inventory 4,416 4,195 Prepaid expenses and deposits 1,880 1,969 -------------------------- -------------------------- 109,464 98,118Notes receivable 11,260 9,630Property and equipment 890,525 862,251Intangibles and other assets 7,900 7,160 -------------------------- -------------------------- 1,019,149 977,159 -------------------------- --------------------------LIABILITIESCurrent Bank indebtedness 11,428 11,228 Accounts payable and accrued liabilities 49,086 35,874 Current portion of long-term debt 1,750 7,512 -------------------------- -------------------------- 62,264 54,614Deferred net revenue 1,647 1,647Long-term debt 91,851 62,595Future income taxes 79,209 77,287 -------------------------- -------------------------- 234,971 196,143 --------------------------Commitments and contingenciesSHAREHOLDERS' EQUITYShare capital 911,764 911,764Contributed surplus 23,215 20,135Deficit (152,666) (153,755) -------------------------- 782,313 778,144Accumulated other comprehensive income 1,865 2,872 -------------------------- 784,178 781,016 -------------------------- -------------------------- 1,019,149 977,159 -------------------------- --------------------------CONSOLIDATED STATEMENTS OF CASH FLOWS For the periods endedSeptember 30 (Unaudited) (Stated in thousands of dollars) Three months ended Nine months ended 2010 2009 2010 2009---------------------------------------------------------------------------- $ $ $ $----------------------------------------------------------------------------CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) 1,211 (4,548) 3,066 (9,839) Items not affecting cash: Stock-based compensation 1,440 1,470 3,651 3,611 Depreciation and amortization 12,510 8,118 35,351 23,600 Amortization of other assets 801 594 2,242 1,690 Future income taxes 756 (1,124) 1,958 (2,369) Loss on disposal of assets (355) 78 884 221 --------------------------------------- --------------------------------------- 16,363 4,588 47,152 16,914 Change in non-cash working capital (11,108) (17,085) (220) 49,552 --------------------------------------- --------------------------------------- Cash flows from (used in) operations 5,255 (12,497) 46,932 66,466 --------------------------------------- ---------------------------------------CASH FLOWS FROM FINANCING ACTIVITIES Shares issued, net of share issue costs - (192) - 120,031 Issuance of long-term debt 10,670 10,000 40,670 10,000 Repayment of long-term debt (533) (813) (16,503) (146,406) Dividends paid - (1,977) (1,977) (4,924) Change in notes receivable (76) 210 (1,630) (72) --------------------------------------- --------------------------------------- Cash flows from (used in) financing activities 10,061 7,228 20,560 (21,371) --------------------------------------- ---------------------------------------CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (33,511) (18,569) (73,336) (56,143) Proceeds on disposal of assets 3,532 81 7,619 927 Purchase of other assets (868) (240) (2,989) (1,266) Change in working capital related to investing activities (175) 2,701 2,360 951 --------------------------------------- --------------------------------------- Cash flows used in investing activities (31,022) (16,027) (66,346) (55,531) --------------------------------------- ---------------------------------------INCREASE (DECREASE) IN CASH, NET OF BANK INDEBTEDNESS (15,706) (21,296) 1,146 (10,436)CASH, NET OF BANK INDEBTEDNESS, BEGINNING OF PERIOD 10,104 14,453 (6,748) 3,593 --------------------------------------- ---------------------------------------CASH, NET OF BANK INDEBTEDNESS, END OF PERIOD (5,602) (6,843) (5,602) (6,843) --------------------------------------- ---------------------------------------CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)For the periods endedSeptember 30 (Unaudited)(Stated in thousands of dollars) Three months ended Nine months ended 2010 2009 2010 2009---------------------------------------------------------------------------- $ $ $ $----------------------------------------------------------------------------NET EARNINGS (LOSS) 1,211 (4,548) 3,066 (9,839) --------------------------------------OTHER COMPREHENSIVE INCOME (LOSS) Foreign currency translation adjustment (5,059) (9,883) (1,591) (19,483) Unrealized foreign exchange gain on net investment hedge, net of tax of $87 1,072 2,404 584 7,401 --------------------------------------COMPREHENSIVE INCOME (LOSS) (2,776) (12,027) 2,059 (21,921) -------------------------------------- --------------------------------------CONSOLIDATED STATEMENTS OF ACCUMULATED For the periods endedOTHER COMPREHENSIVE INCOME September 30 (Unaudited) (Stated in thousands of dollars) Three months ended Nine months ended 2010 2009 2010 2009---------------------------------------------------------------------------- $ $ $ $----------------------------------------------------------------------------Accumulated other comprehensive income, beginning of period 5,852 16,707 2,872 21,310 Other comprehensive loss (3,987) (7,479) (1,007) (12,082) --------------------------------------Accumulated other comprehensive income, end of period 1,865 9,228 1,865 9,228 -------------------------------------- --------------------------------------SEGMENTED INFORMATIONThe 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, services, and drilling.The corporate segment provides management and administrative services to all its subsidiaries and their respective operations.The services segment provides well servicing services and rental equipment 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.Three months ended September Inter-segment 30, 2010 Corporate Services Drilling Eliminations Total---------------------------------------------------------------------------- $ $ $ $ $----------------------------------------------------------------------------REVENUEOilfield services - 23,283 81,969 (634) 104,618Other - 30 139 - 169 ---------------------------------------------------------- - 23,313 82,108 (634) 104,787 ----------------------------------------------------------OPERATING COSTSOilfield services - 16,639 64,511 (634) 80,516 ----------------------------------------------------------REVENUE LESS OPERATING COSTS - 6,674 17,597 - 24,271 ----------------------------------------------------------Depreciation and amortization 477 3,170 8,863 - 12,510Interest on long-term debt 1,630 13 40 - 1,683Earnings (loss) before income taxes (9,219) 2,993 8,017 - 1,791Total assets 36,888 182,573 799,688 - 1,019,149Capital assets(i) 24,288 163,774 710,363 - 898,425Capital expenditures(ii) 559 12,554 21,266 - 34,379 ---------------------------------------------------------- ----------------------------------------------------------Three months ended September Inter-segment 30, 2009 Corporate Services Drilling Eliminations Total---------------------------------------------------------------------------- $ $ $ $ $----------------------------------------------------------------------------REVENUEOilfield services - 12,887 38,172 (849) 50,210Other - 31 109 - 140 ---------------------------------------------------------- - 12,918 38,281 (849) 50,350 ----------------------------------------------------------OPERATING COSTSOilfield services - 9,338 31,719 (849) 40,208 ----------------------------------------------------------REVENUE LESS OPERATING COSTS - 3,580 6,562 - 10,142 ----------------------------------------------------------Depreciation and amortization 370 2,422 5,326 - 8,118Interest on long-term debt 775 24 56 - 855Earnings (loss) before income taxes (6,202) 697 (190) - (5,695)Total assets 27,833 180,819 775,131 - 983,783Capital assets(i) 22,385 164,955 721,956 - 909,296Capital expenditures(ii) 133 2,731 15,945 - 18,809 ---------------------------------------------------------- ----------------------------------------------------------(i) Capital assets include property and equipment, intangibles, and other assets.(ii) Capital expenditures include the purchase of property and equipment, intangibles, and other assets.Nine months ended September 30, Inter-segment 2010 Corporate Services Drilling Eliminations Total---------------------------------------------------------------------------- $ $ $ $ $----------------------------------------------------------------------------REVENUEOilfield services - 63,129 241,441 (2,307) 302,263Other - 89 365 - 454 ---------------------------------------------------------- - 63,218 241,806 (2,307) 302,717 ----------------------------------------------------------OPERATING COSTSOilfield services - 46,995 188,232 (2,307) 232,920 ----------------------------------------------------------REVENUE LESS OPERATING COSTS - 16,223 53,574 - 69,797 ----------------------------------------------------------Depreciation and amortization 1,245 8,931 25,175 - 35,351Interest on long-term debt 4,448 46 99 - 4,593Earnings (loss) before income taxes (25,248) 4,088 26,539 - 5,379Total assets 36,888 182,573 799,688 - 1,019,149Capital assets(i) 24,288 163,774 710,363 - 898,425Capital expenditures(ii) 1,533 20,946 53,846 - 76,325 ---------------------------------------------------------- ----------------------------------------------------------Nine months ended September 30, Inter-segment 2009 Corporate Services Drilling Eliminations Total---------------------------------------------------------------------------- $ $ $ $ $----------------------------------------------------------------------------REVENUEOilfield services - 42,094 130,737 (2,038) 170,793Other - 98 298 - 396 ---------------------------------------------------------- - 42,192 131,035 (2,038) 171,189 ----------------------------------------------------------OPERATING COSTSOilfield services - 32,769 106,666 (2,038) 137,397 ----------------------------------------------------------REVENUE LESS OPERATING COSTS - 9,423 24,369 - 33,792 ----------------------------------------------------------Depreciation and amortization 1,093 6,744 15,763 - 23,600Interest on long-term debt 3,452 132 245 - 3,829Earnings (loss) before income taxes (19,634) 1,237 5,879 - (12,518)Total assets 27,833 180,819 775,131 - 983,783Capital assets(i) 22,385 164,955 721,956 - 909,296Capital expenditures(ii) 2,754 5,119 49,536 - 57,409 ---------------------------------------------------------- ----------------------------------------------------------(i) Capital assets include property and equipment, intangibles, and other assets.(ii) Capital expenditures include the purchase of property and equipment, intangibles, and other assets.The Company operates in two different geographical areas, the breakdown ofwhich is as follows:Three months ended September 30 2010 Canada International(i) Total---------------------------------------------------------------------------- $ $ $----------------------------------------------------------------------------Revenue 69,781 35,006 104,787Total assets 790,147 229,002 1,019,149Capital assets(ii) 685,315 213,110 898,425 -------------------------------------Three months ended September 30 2009 Canada International(i) Total---------------------------------------------------------------------------- $ $ $----------------------------------------------------------------------------Revenue 33,411 16,939 50,350Total assets 768,581 215,202 983,783Capital assets(ii) 709,912 199,384 909,296 -------------------------------------Nine months ended September 30 2010 Canada International(i) Total---------------------------------------------------------------------------- $ $ $----------------------------------------------------------------------------Revenue 208,059 94,658 302,717Total assets 790,147 229,002 1,019,149Capital assets(ii) 685,315 213,110 898,425 -------------------------------------Nine months ended September 30 2009 Canada International(i) Total---------------------------------------------------------------------------- $ $ $----------------------------------------------------------------------------Revenue 121,085 50,104 171,189Total assets 768,581 215,202 983,783Capital assets(ii) 709,912 199,384 909,296 -------------------------------------(i) Includes U.S. and Mexico operations.(ii) Capital assets include property and equipment, intangibles, and other assets.Cautionary Statement Regarding Forward-Looking Information and StatementsCertain statements and information contained in this press release including statements related to the Company's 2010 and 2011 capital expenditures, international and other long-term growth opportunities, the potential for future rig construction, the conversion of hybrid drilling rigs to TDS-3000(TM) rigs, the timing of rig deployment in Australia, increased industry activity in Canada in Q4 2010 and Q1 2011, ultimate recovery of wage increases and rig repositioning costs, outlook for future natural gas demand and statements that contain words such as "could", "should", "can", "anticipate", "expect", "believe", "will", "may", "likely", "estimate", "predict", "potential", "continue", "maintain", "retain", "grow", and similar expressions and statements relating to matters that are not historical facts may constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995.These statements are based on certain assumptions and analysis made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. In particular, the Company's expectations of increased industry activity in Canada in Q4 2010 and Q1 2011, the ultimate recovery of wage increases and rig repositioning costs incurred in 2010, and the conversion of hybrid drilling rigs to TDS-3000(TM) rigs are premised on the Company's expectations for its customers' capital budgets and geographical areas of focus, the status of current negotiations with its customers, the focus of its customers on oil directed drilling opportunities in the current natural gas pricing environment in North America and the effect unconventional gas projects have had on supply and demand fundamentals for natural gas. Similarly, the Company's expectation of growth opportunities in Australia is premised on the current level of tender activity in the Australian market which in turn is based on the general expectation that coal seam gas activity will increase in that country as plans for liquid natural gas plants move forward. Whether actual results, performance or achievements will conform to the Company's expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from the Company's expectations. Such risks and uncertainties include, but are not limited to: fluctuations in the price and demand for oil and natural gas; fluctuations in the level of oil and natural gas exploration and development activities; fluctuations in the demand for well servicing and contract drilling; the effects of weather conditions on operations and facilities; the existence of competitive operating risks inherent in well servicing and contract drilling; general economic, market or business conditions; changes in laws or regulations, including taxation, environmental and currency regulations; the lack of availability of qualified personnel or management; the other risk factors set forth under the heading "Risks and Uncertainties" in the Company's 2009 Annual Report and under the heading "Risk Factors" in the Company's Annual Information Form; and other unforeseen conditions which could impact on the use of services supplied by the Company.Consequently, all of the forward-looking information and statements made in this press release are qualified by this cautionary statement and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business or operations. Except as may be required by law, the Company assumes no obligation to update publicly any such forward-looking information and statements, whether as a result of new information, future events, or otherwise.OTHERSavanna will host a conference call for analysts, investors and interested parties on Wednesday November 10, 2010, at 9:00 a.m. Mountain Time (11:00 a.m. Eastern Time) to discuss the Company's third quarter results. The call will be hosted by Ken Mullen, Savanna's President and Chief Executive Officer and Darcy Draudson, Vice President, Finance and Chief Financial Officer.If you wish to participate in this conference call, please call 1-888-892-3255 (for participants in North America). Please call at least 10 minutes ahead of time.A replay of the call will be available until November 17, 2010 by dialing 1-800-937-6305 and entering passcode 546406.Savanna is a Canadian-based drilling and well servicing provider with operations in Canada, the United States and Australia focused on providing fit for purpose equipment and technologies.FOR FURTHER INFORMATION PLEASE CONTACT: Ken MullenSavanna Energy Services Corp.President and Chief Executive Officer(403) 503-9990(403) 267-6749 (FAX)ORDarcy DraudsonSavanna Energy Services Corp.Vice President Finance and Chief Financial Officer(403) 503-9990(403) 267-6749 (FAX)www.savannaenergy.com