DBRS Morningstar Confirms Ratings on CES Energy Solutions Corp. at B (high) with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Notes (the Senior Notes) rating on CES Energy Solutions Corp. (CES or the Company) at B (high). All trends remain Stable and the recovery rating on the Notes remains at RR4. CES’s leading market position in Canada and its growing market position in the United States; continued growth in its more stable production and specialty chemical (PSC) segment; and robust credit metrics for the current ratings underpin the rating confirmation. The Stable trends reflect DBRS Morningstar’s view that CES’s key credit metrics will continue to support the ratings over the next 12 months.

The North American oilfield services segment faced a challenging operating environment in 2019. Market-access issues caused declining activity levels in Canada while oil and gas (O&G) producers in the U.S. have also cut back on capital expenditures (capex) in Q3 2019 as they focus on operating within cash flow. However, CES increased market share at its U.S. PSC and drilling fluid (DF) businesses and, while declining activity levels negatively affected its Canadian DF business, the Company’s relatively more stable PSC business in Canada gained market share. The Company also rationalized its cost structure, especially at its Canadian business. Consequently, CES generated similar operating cash flow (OCF) during the first nine months (9M) of 2019 as in 9M 2018, despite relatively flat service pricing and inflated input costs. The Company completed major expansion projects in 2018 and reduced working capital which, coupled with materially lower capex, allowed CES to generate a significant cash flow surplus. The Company used most of this surplus to reduce debt, which improved its key credit metrics.

DBRS Morningstar expects CES’s operating environment to remain challenging in 2020. DBRS Morningstar’s 2020 outlook for activity levels in Canada remains weak as O&G producers will likely not increase capital spending without greater clarity on market-access issues. DBRS Morningstar also expects O&G producers in the U.S. to exercise more capital discipline in 2020 and anticipates that lower activity levels and relatively flat service pricing will result in a marginal OCF reduction. However, the Company’s relatively low capex should allow it to generate a cash flow surplus. DBRS Morningstar expects CES’s key credit metrics to remain supportive of the ratings and notes that the Company’s overall financial risk profile improved over the last year with adequate headroom to withstand short-term weakness in activity levels.

DBRS Morningstar deems CES’s liquidity profile to be adequate with sufficient availability of $170.0 million and USD 50.0 million under its revolving credit facilities. DBRS Morningstar notes that, during a slowdown, the Company monetizes its working capital, which typically reduces the draws on the credit facilities and partially offsets the impact of lower cash flow on key credit metrics. While DBRS Morningstar does not expect any further rating action on CES over the next 12 months, DBRS Morningstar may consider a negative rating action if the Company’s key credit metrics deteriorate materially because of a sustained drop in activity levels.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries, DBRS Criteria: Guarantees and Other Forms of Support, DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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