Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Calstock well surfaces limited fourth quarter, 2019th earnings release in conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be a question answer session ask the question. During this session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further system. Please press star zero.
I like to hand, the conference over to your Speaker today, Scott Trudell, Vice President of capital markets and strategy. Thank you. Please go ahead Sir.
Thanks, Julien good morning, and welcome to our discussion of calibrate well services fourth quarter and full year 2019 results also on the call today, our Lindsay linked to tell Fracs, President and Chief operating officer, and Michael winning our Chief Financial Officer.
This morning's conference call will be conducted as follows.
Andy will provide some introductory remarks, after which Mike will provide an overview the financial performance of the company.
He will then close the presentation with an outlook for count Fracs business.
Through the presentation, we will open the call to questions.
In a news release issued earlier today, you calibrate reported its fourth quarter and full year 2019 results. Please note that all financial figures are in Canadian dollars unless otherwise indicated.
Our comments today, we'll refer to non IRS financial measures such as adjusted EBITDA and operating income. Please see our news release for additional disclosure on these financial measures.
Our comments today will also include forward looking statements regarding count Fracs future results and prospects. We caution you that these forward looking statements are subject to a number of known and unknown risks and uncertainties that could cause our results to differ materially from our expectations.
We see our news release and other regulatory filings, including our 2018 annual report for more information on forward looking statements and these risk factors Wendy over to you.
Thank you Scott.
Good morning, Thank you for joining our call today before Mike summarizes the financial performance in the quarter I'd like to offer a few opening remarks.
As we expected the fourth quarter was characterized by a further slowdown in producer activity across all of our operating area.
In North America program completion, and whether we're primarily responsible for the slowdown.
Well, whether in Russia, and the change of government in Argentina drove changes in activity.
In those countries.
Tell product sales and marketing teams, we're busy securing work programs for 2020 in the fourth quarter.
And although industry pricing needs to increase from the low level that it has fallen to I'm pleased overall with our results in securing work across the platform for the equipment that we have elected to actively market.
One point I'd like to emphasize is Cal Fracs safety performance, we take our commitment to safety seriously. It is a promise to our employees and their families that everyone goes home safely after work.
In 2019 contract was able to deliver outstanding safety performance globally with significant improvement in our North American operations, resulting in all time record performance measured in recordable and lost time injuries.
There's always room to improve and count Frac will never except injuries at the cost of doing business.
But I want to use this platform to not only broadcast our success in this regard.
But to personally thank everyone at Cal Frac for their efforts in achieving an outstanding result.
Now I will pass the call over to Mike who are present, an overview of our quarterly financial performance.
Thank you Lindsay and thank you everyone for joining us for today's call.
Before covering our fourth quarter financial performance I would like to summarize our recently closed exchange offering.
Due in part to significantly discounted trading prices for contracts unsecured bonds.
The company Opportunistically launched an exchange offering in February which allowed unsecured note holders to tender into a Dutch auction within a range between 55 and 60% of the face value of their unsecured bonds into new secured notes.
These new notes bear coupon of 10, and seven 8% amateur in March 2026.
We were very pleased with the results and the company upsize the offering from a maximum of 100 U.S. hundred million U.S. dollars to 120 million us dollars.
At that level, the offering was more than three times oversubscribed at an exchange ratio of 55%.
As a result contracts debt load was reduced by over 130 million.
With the reduction in annual interest costs of over 7 million.
I would like to thank all of the contract team as well as our advisors that were involved with this successful transaction.
But as we move forward, we remain focused on further debt reduction between now and the refinancing of our nodes that are due in 2026.
Consolidated revenue in the fourth quarter decreased by 36% year over year.
Primarily due to lower activity levels and pricing across all are operating divisions.
Magnified by year end slowdowns in North America.
Adjusted EBITDA reported for the quarter was 26.9 million compared to 62.9 billion a year ago.
Operating income was down 66% to 21 million.
From 62 million in 2018.
These weaker results were mainly driven by lower activity and pricing in North America.
As well as reece restructuring costs booked in the quarter.
Offsetting these items was 10.9 million of 2019 operating expenses that were reclassified to capital expenditures due to a change in capitalization thresholds as well as 5.2 million in lower overhead costs.
In Canada fourth quarter revenue was down 50% from the same quarter in 2018 due to a smaller operating footprint and lower pricing for Cal Frac services.
Contracts Canadian operations had a total of 236000 active horsepower and 11 coil tubing units in its operations in the fourth quarter.
Down, 18% and flat respectively from the prior year.
Operating income in Canada during the fourth quarter decreased by 79%.
3.4 million and this decline was primarily due to lower pricing and activity as well as the incurrence of point 7 million in restructuring charges.
This decrease was offset by point 7 million of operating expenses that were reclassified to capital expenditures.
And 1.1 million and lower divisional overhead costs.
In the United States fracturing job count was up 8% from the prior year, although lower pricing and a change in supply of sending chemicals more than offset the higher activity levels.
Leading to a 33% decline in revenue from the fourth quarter of 2018.
The company's United States operations generated operating income of 23.6 million during the fourth quarter of 2019 versus 51.5 million in the same period in 2018.
This 54% decrease in operating income was mainly due to lower pricing and lower fixed cost absorption offset by 10.2 million of operating expenses that were reclassified to capital expenditures and point 6 million and lower divisional overhead cost.
Despite average restructuring charge a point $8 million recorded during the quarter.
Revenue from contracts Russian operations of 24.2 million was 3% lower than the corresponding period of 2018.
This decrease in revenue was largely driven by lower field activity as the onset of winter weather slowed equipment utilization rates.
The operating loss for contracts Russian operations during the fourth quarter was 2.1 million as weather disruptions and higher winter operating costs impaired profitability.
Contracts Argentinian operations generated revenue of 32.1 million during the fourth quarter of 2019, a decrease of 35% from the prior year.
This decrease is primarily due to year end slowdowns combined with uncertainty surrounding the change in government that occurred in December.
The company's operations in Argentina reported operating income of 5.8 million compared to 4.4 million in the fourth quarter of 2018.
This result was aided by a 3 million reversal of accrued stem taxes associated with previously terminated work agreements, which decreased divisional overhead costs.
The company's corporate Division recorded total cost of 9.7 million during the fourth quarter, a decrease of point 6 million from the prior year.
This decrease was primarily due to lower compensation expenses.
Offset by 1.9 million of restructuring costs that were recorded in the fourth quarter.
The company also recorded interest expense of 21.5 million during the quarter, which was point $5 million above the prior year due to the adoption of IRS 16.
For the three months ended December 30, Onest 2019, depreciation expense increased by 20.4 million to 68.9 million from 48.5 million in the corresponding quarter of 2018.
This increase was primarily due to depreciation on assets placed into service in the United States.
The adoption of IRS 16 at the beginning of 2019.
And the revision to the company's capitalization thresholds in the fourth quarter of 2019.
In January 2020, Count Fracs Board of Directors approved the company's 2020 capital budget of 100 million.
This capital budget reflects the reduced footprint of contracts operations in North America.
Along with sustaining capital for the company's international divisions.
To summarize the balance sheet. The company had working capital up 248.8 million at December 30 Onest.
Which included approximately 42.6 million of cash.
In addition contracted use point 8 million of its credit facilities for letters of credit and had borrowings of 148 million on its credit facilities.
Leaving approximately 226 million in potential borrowing capacity at the end of the fourth quarter.
As at December 31st 2019, the company, who is in full compliance with its financial covenants.
I'd now like to turn the call back to Lindsay to provide our outlook.
Thanks, Mike.
I will now present and outlook for at Cal Fracs operations across.
Our geographical footprint, given our footprint in the United States Winter weather impacts our pace of operations more than most in the first quarter almost half of our operations take place in areas where conditions can.
Slow operations in the first quarter with some customers not ramping up activity until late February or early March.
That has been the phase to date in the first quarter and while it will impact results. We expect the exit rate for United States Division to be more reflective of good utilization of the 14 fleets we're marketing today.
Natural gas markets in the lower 48 have deteriorated since the latter part of 2019 and as a result, calpine because redeployed one fleet out of Pennsylvania to support operations in Texas.
Well work volumes appears solid on the remaining fleets, we continue to stay in close contact with our clients and we'll respond as conditions evolve.
We've seen further retirements of equipment in the us pressure pumping market, a development, which is both overdue and prudent however from our perspective much of the departed equipment was no longer capable of performing services due to operating and maintenance practices while the.
The exit of name plate capacity helps sentiment an increase in activity is needed to fully tightened the supply demand balance given.
The recent headlines and oil price response, we do not expect that increase to occur in the near term.
In Canada, I described market conditions as stable.
But with both upside and downside potential to the upside improved natural gas fundamentals should reduce risk for gas producers and could potentially spur a substantial increase in activity.
To the downside global macro headlines and current oil prices may influence produces spending patterns in the month ahead.
Having reduced our footprint to five fleets from eight in early 2019.
Phil our operation in Canada is right size and well positioned.
However, we continue to communicate with our clients to ensure the industry navigates this period of uncertainty together.
Activity in the fourth quarter was broadly in line with our expectations with a small amount of work either deferred or removed from the schedule.
To date.
In the first quarter, we've seen both high levels of demand as well as some project delays due to weather conditions. Our calendar remains fall through the ended the quarter. However, with the onset of road bans.
This will impact.
Programs in the southern basin.
Our second quarter programs are also a strong with a focus in the Grand Prairie area through April and made before the summer programs commenced likely in the first part of June.
We have visibility on a number of programs through the summer and beyond and expect utilization to remain strong on our marketed assets and we will seek opportunities to increase pricing in order to improve returns if conditions are supportive.
Now a few words on Cal Frac International operations.
In Russia, the fourth quarter was below our expectations as weather conditions impacted the timing of the switch from pontoon bridges to ice bridges in our main operating area.
Delay, which further impact first quarter operations.
Typical of winter in Siberia.
Our Russian footprint has been temporary reduced to manage current activity levels, but we continue forecast strong activity levels in the second and third quarters.
Our results in Argentina, whereas expected, especially in light of the uncertainty that accompanied the election and resulting change in government.
With no major policy changes seeing activity levels have improved through the first quarter and outside of client and program specific schedules, we did not expect utilization to be meaningful difference than in 2019.
To wrap up our fourth quarter results were once again, an accurate reflection of the state of north of the North American energy markets.
We continue to see pricing industry pricing at levels that cannot sustain the investments.
Required to provide the pressure pumping services that are integral to north American exploration and production.
Well the service sector is only part of the industry.
It is vital image search for in the safe responsible and efficient development of the resources.
Thank you all for very much for joining us today I will now turn the call back to the operator for questions.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile the K roster.
Your first question comes from car sales from Altacorp capital. Your line is open.
Thank you for taking my question.
Just some housekeeping.
Housekeeping.
First the most of 14 fees that you have in the us.
How did you exactly.
Additions in the different basins.
Hi, recurrence, it's Scott so the way it shakes out today is that we've got three operating in Pennsylvania, We have five operating in North Dakota.
Two operating in southern Colorado, and then last four in Texas.
Okay, Great and then as we look into the first quarter.
For Canada.
You expect EBITDA.
The.
You should be higher than what we saw in the first quarter of love to you.
Well, we don't talk specifically about numbers, what I would say, though is that the activity levels seem to be in that same kind of ballpark. Obviously, we've still got few weeks left in March and this is when weather can can really do some damage programs, but certainly the book looks pretty similar to where we were last year and obviously pricing has moved in our footprint has changed so.
There's lots of moving parts before you get the EBITDA, but from a high level, there's not a lot of difference.
Okay, and then just on.
I think VP touched on the impact of growing a lot is but have the discussions now with the S&P companies changed at all is it's still too early in terms of.
Activity for the second half in Canada, our ongoing activity in the U.S., owing to the recent developments with oil prices.
I think it's a bit too soon.
We've had a few conversations Walker and its Lindsay and while we've also had our own internal.
Plan for how to deal with the Corona viruses.
The risks that might be associated with it they are just starting to come in.
As to as to what you may see as a.
Potential risks both on location and probably off I think you know as you note.
Working in the field isn't isn't actually a high risk we were lots of pp a neat but.
In the office.
Spread pretty quickly we're not we're taking all steps that we tend to have to ensure that we are as preferred as people can be and as industry can be.
And you hit enough any supply chain issues with with the.
Products that you buy all those are consumed in the wells.
That being impacted because of some of the shutdowns in China.
No not at this time I mean, we have a very robust.
Robust supply chain and we are in contact with especially with our Chinese and Indian type.
Suppliers.
And right now we are we have not seen an impact the to date.
Not yet.
Great. Thank you very much appreciate dances.
Okay. Thank you Kurt.
Once again, if you'd like to ask questions. Please press Star One. Your next question comes from Anthony Winton from National Bank. Your line is open.
Hey, good morning, guys and thanks for taking my questions.
I guess just first it looks like you guys moved some horsepower out of Canada and to the us in the quarter could you provide some color on what drove that decision to move the fleets down.
Specialty release it sounds like you guys are seeing Undersupply in Canada.
Yes look I think the borders relatively transparent for Cal Frac for our equipment I mean people are always a little more challenging to move in some cases, but equipment for us it can move back and forth relatively easily there's certainly some advantages in the U.S. to making sure each basin each district has.
More homogenous equipment fleet, and sometimes that might mean tiki something out of Canada and replacing it later, we've got repair facility down in BB that can can do some major work at at lower costs than we would get third parties and so when we've got some idle equipment. It's really just about making the best use of it whether its operational or on the meat.
And side, so I certainly wouldn't read anything into it if market conditions improved in Canada to the point, where pricing moved higher and then that led to a discussion around reactivating equipment.
Driving the equipment from Texas to read your is the least of our worries in doing that.
Okay got it I guess you kind of touched on my next question there.
With the Undersupplied market in Canada, our U.S are you seeing any pricing increases.
I think there has been certainly some chatter around it and you're always trying to keep your ear to the ground. We've said this a few times, we won't go and negotiate in public with their customers I think we've got very good relationships with that group certainly the ones we service.
Theres going to be some programs, where because of timing and has to happen at a certain point and the market is just really tight and there maybe opportunities through pricing there may be other ones, where it's more of a scheduling thing and you can level loading keep pricing. The same so I wouldn't paint with a broad brush, but certainly lindsey's comments of we're certainly going to keep an eye on it.
We said pretty consistently the returns in our business aren't sustainable and so part of that has to be looking at pricing for our services and when the opportunities there.
Certainly look at it.
Okay Gotcha.
On the liquidity side under the borrowing base, we've seen decreases the last two quarters is that all from a are coming down or is there something else driving that.
Yes, it's Mike here principally that.
That is shrinkage in the our balanced for sure yes.
Okay got it and then just moving through 2020 or you kind of expecting that to stay level or do you is there going to be some seasonality there.
Overall, it will be fairly level, but your point on seasonality as well taken especially as we enter into Q2 in Canada, there could be some.
Small reductions as we get into that quarter, but overall.
I think the largest step down and I mentioned in a bit in my call notes is that the change in San and chemical being provided by clients in the U.S.
It was a big factor here in the fourth quarter and I think thats stabilized now going forward, but that is also one of the reasons for the decline in they are.
Okay Gotcha, and then just one last one for me the $11 million impact from the accounting change does that sort of the run rate. We should we thinking about moving forward and then because that's going over on the Capex does that built into that $100 million capex budget or is it going to be over and above that.
The 100 million capital budget certainly incorporates this accounting change. So yes, we don't expect any sort of change to the announced capital budget as a result to that and the run rate should be fairly clear. If you analyze annualize that 10 million over the course of four quarters.
Okay got it thats it for me thanks, guys.
Thanks Anthony.
Your next question comes from Skim Gillies from Stifel. Your line is open.
Good morning, everyone.
Morning.
Following on I guess.
The theme I mean outside of asset sales and you talk about working capital management, but is there much in the way with respect to Capex have you been able to identify any.
Any way to maybe flex that number down or make it a smaller percentage of revenue moving forward.
Yes, I think we've talked about.
The flexibility with our capital budget as market conditions change, both up and down and so.
We're constantly looking at what we can do to to manage capital as best we can given the outlook for cash flow in the business.
So we certainly are cognizant and focused on that I mean, we've got supply chain that is obviously focused on trying to get us lower costs for each of our key components. So theres. Many things that we can do and we're certainly looking at that is one way to kind of walk the changes in cash flow up or down.
Okay.
In Canada, I mean, you highlighted.
So the expectation for strong activity levels.
Through the second quarter and can you maybe just highlight how you're intending to manage out from an operational perspective and get set up on lease sites just in the event that maybe it comes early and so on and so forth.
Yes, I mean look the nice thing about Canada in Q2 is when you're working on pads.
The road bans become less of an impact because you travel so much less during the quarter. It can impact your hauling of sand and chemicals, but.
I think I can speak that our operations group, our supply chain and our transport group as well as third parties deep done this for a while the new water run with half loads and make sure that they can get Sam where it needs to go in extremists, you can pre spots and or.
Add some storage where you're off of back roads that are band.
But I don't think theres anything that that our team in Canada can handle so I think it's pretty normal course, and certainly compared to the last couple of years I think the preponderance of pad, where it makes it if anything a little bit easier than than years past now obviously weather can make tools that have all of us. So we'll see honestly, though but yes. The pads do take a lot of stress off the operation.
And maybe and I can.
The.
Scott did a very good job about talking about gel frac side, but the customer base that we have.
In Q2 is also very well familiar with working within spring break up. So this is nothing unusual for them as well. So we work very much in partnership with the with these.
Major geographies to to ensure the ongoing.
Sure and of course these.
Well only really makes sense when you're very efficient so both the customer end ourselves are working about way even in Q2.
Okay. Thanks, very much I'll turn the call back or.
Thank you.
We have no further questions to turn the call back over to the presenters for closing remarks.
Okay.
Thanks, very much everybody for your interest in time. This morning, and we look forward to catch up with you. The early part of me.
The management team will be around for the day, if theres any follow up questions that anyone has thanks very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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