Q2 2020 Calfrac Well Services Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Callback well Services Ltd second quarter 2020 earnings release and conference call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
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I'd now like to hand, the conference over to your Speaker today, Scott Treadwell, Vice President capital markets and strategy you may begin.
Thanks, Wendy good morning, and welcome to our discussion of Cal Frac Wells services second quarter 2020 results also on the call today, our Lindsay link Gulf Fracs, President and Chief operating Officer, and Mike Olympic Our Chief Financial Officer.
Morning's conference call will be conducted as follows Lindsay will provide some introductory remarks, after which Mike will provide an overview of the financial performance of the company Lindsay will then close the presentation with an outlook for contracts business. After the presentation, we will open the call to questions.
In a news release issued earlier today Gulf rack reported second quarter 2020 results.
Please note that all financial figures are in Canadian dollars unless otherwise indicated.
Some of our comments today, we'll refer to non I FRS 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 Cal 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 expectations.
Please see our news release and other regulatory filings, including our 2019 annual report and items related to our announced recapitalization process for more information on forward looking statements and these risk factors.
Finally information on Cal Fracs current recapitalization process can be found on our Investor Relations Web page under recapitalization transaction information Mindy over do you think.
Thanks, Scott Good morning, and thank you for joining our call today before my comments on financial matters I'd like to offer a few opening remarks.
As we've all seen the second quarter of 2020 showed not only how abrupt fundamentals can change in our industry, but also how skilled our industry has become at adopting to rapidly changing market.
For Cal Frac the departure of so many <unk> value team members meant a number about days for us, but with improved activity over the last two months our work to rightsize Cal Fracs cost base and footprint has in my view put the company in a strong position in these uncertain times.
No matter how busy we are in all of our operating areas our focus will remain steady.
To deliver on our brown promise to their do which they safely to do it better to do it on time.
Well cuts in capital spending and cost structure have been implemented nobody at Cal Frac will put costs before people.
We have worked too hard over 21 years to let our reputation for safety and strong execution in the field deteriorate in challenging times.
Those efforts don't come from me or my executive team.
Delivering on our brand promise depends on hard work and leadership on the part of our teammates in the field I want to thank everyone at Cal Frac, including our farmer team members for everything they have done for the company.
Our efforts to recapitalized, our balance sheet are focused on delivering a positive outcome for all stakeholders and when completed it will allow the strength of cow frac to shine through namely the quality and safety of our operations in the field in all four of our operating divisions.
Now our 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.
Given the volatility seen during the second quarter I will focus primarily on the company's consolidated financial performance.
And we'll also provide additional detail on the trends in our cash flows.
Consolidated revenue in the second quarter decreased by 79% year over year to 91.4 million.
Largely due to material slowdown in the United States, Canada and Argentina.
Along with a more modest reduction in Russia.
Adjusted EBITDA reported for the quarter was a loss of 5.2 million compared to 45.1 million a year ago.
Operating income was down 118% negative 7.3 million from 41.1 million in 2019.
These weaker results were driven by lower activity and pricing in all operating areas.
As well as 2.4 million of restructuring costs that were recorded during the quarter.
The net loss for the quarter was 277.3 million.
Which includes an impairment at pp any and inventory up 201.6 million across all of contracts operating divisions.
For the three months ended June Thirtyth 2020.
Depreciation expense decreased by 15.3 million to 46.2 million.
From 61.5 million in the corresponding quarter of 29 team.
This decrease was driven primarily by a 53.5 million impairment to pp any in the first quarter of 2020.
As well as lower levels of capital spending on capital items with shorter useful lives.
Corresponding higher depreciation rates.
The recorded impairment during the second quarter of 201.6 million consisted of up any impairment to the seed U.S, and Canada, Argentina, and Russia totaling 173.7 million.
And then impairment of inventory related to obsolete inventory items in Canada, United States in Argentina totaling 27.9 million.
In January 2020 contracts Board of directors approved the company's 2020 capital budget of 100 million.
In light of the significant changes to industry activity.
Capital budget was reduced to 55 million late in the first quarter and will be adjusted as required in response to market conditions and economics.
As I spoke to on the first quarter call working capital was a significant source of cash during the second quarter and with the primary reason for the company meaningfully growing its cash balance.
To summarize the balance sheet at June Thirtyth, The company had working capital of 157.2 million, including 87.9 million in cash.
At June Thirtyth 2020, the company had used point 9 million of its credit facilities for letters of credit and had a 170 million of borrowings under its credit facilities.
Leaving 204.1 million in potential borrowing capacity at the end of the second quarter.
As at June Thirtyth 2020, the company was in full compliance with its financial covenants.
While progress continues to be made on contracts recapitalization process, we cannot provide any further detail at this time other none other than what has already been publicly disclosed.
We're striving to deliver an outcome that will be acceptable to all stakeholders and we expect to report more on this process in the coming weeks.
I'd now like to turn the call back to ready to provide our outlook.
Thanks, Mike.
I will now present, an outlook for Cal Fracs operations across our geographical footprint in the month since we reported our first quarter results. There has been relatively little change in commodity prices globally.
Oil remains near $40 per barrel.
Likely incentivize the Rhys restoration of some.
But in production and modest completion activities on uncompleted wells.
In large part we believe that many of our clients will want to focus capital spending with the aim of maintaining the reserves, which underpin their credit agreements and secondarily to maintain production levels and compliance with midstream and other commitments.
All of this will take place in the context of living within cash flow by managing costs and hedging profiles as sustainably as possible.
For Cal track, our focus on executing safe and efficient operations in the field will not change.
As well our technical support groups are working with clients with the aim of solving an equation with multiple variables.
Solutions will not single single handedly form the basis of sustainable activity in the long run.
But we believe that these approaches will enable many of our clients to execute larger programs in 2021 and beyond.
Our continuous drive to improve productivity in the field goes alongside our quest to find cost savings in our operations. Our lab group continues to test chemical solutions that can consistently deliver the performance required at a lower cost.
Likewise, our field and sales group continue to work with clients to improve field productivity. We have delivered a number of pads ahead of schedule due to process efficiency and equipment reliability in recent cases, reducing time between zones in multi well completions to as little as two to three minutes down.
From up to an hour as recently as last year.
It is this continuous drive for improvement when coupled with increasingly granularity on operational data from our equipment that will lead to improved performance in the field and better cash flows.
And returns for our company.
Our operations in United States saw significant slowdown in the second quarter as programs were stopped on very short notice.
Our team did a great job and reacting to this change and have repositioned our cost structure to focus on these areas.
Where we believe steady levels of activity at an acceptable pricing are possible.
During the quarter, we retired a number of pumps from service from our us operations. These.
These were pumps out of Pacific configuration, and specification that were more costly to operate and maintain a no longer made sense to carry as active equipment.
Any components of value will be removed spares before.
The remaining equipment to scrapped.
Currently we are operating three fleets in the United States.
And we expect that number to vary between two and five in the months ahead activity will likely be focused in the Bakken and Marseilles plays although we do expect to execute some work in Texas in the third and fourth quarters.
Pricing remains challenge in the U.S market.
We have not witness further deterioration in the last few weeks, we do do not expect pricing to improve materially in the near term.
And as such have no plans to add equipment to our operating fleet.
In Canada, the restart up activity in June has continued.
Based on conversations with clients, we expect that our operating footprint in Canada will be relatively well utilize throughout the remainder of the year.
At this point, we expect a more balanced activity levels than was observed in the second quarter as light oil activity is expected to increase in the near term.
We believe the potential exit of a U.S. competitor will improve Canadian market fundamentals modestly and rig count has begun to increase which should result in higher demand for completion services later in the summer and into the fourth quarter. At this point, we did not have enough clarity on.
Programs to understand how seasonal slowdown may impact our fourth quarter activity.
Now a few words on Cal Fracs International operations, as we expected operations and results in Russia improved materially on a sequential basis in the second quarter. Our main customer raised activity levels and operations were executed smoothly with a smaller.
Equipment footprint, resulting in improved profit levels.
Our activity levels are expected to rate remain near current levels through the summer months, which should deliver further improvement from second quarter results.
Operations in Argentina, where shutdown in late March by the government decree and did not re commence until the middle of June this restart only generated revenue in the southern areas of the country, where job sizes are typically smaller.
I read commencement of activity in new can also occurred but no large fracturing work was completed in the quarter.
Operations in Argentina continue to accelerate although well below pre shutdown levels. The addition of larger frac jobs along with the.
Quarter of activity in the southern area will drive improved.
Total revenue.
However, many costs remain in place do too complex negotiations and as such profitability is forecast to be near breakeven levels for the third quarter.
In terms of Ari recapitalizing.
Recapitalization process, while progress continues to be made there's very little that we can provide in terms of details outside of our public disclosures to this point.
Our aim is to deliver an outcome acceptable to all stakeholders and position Cal Frac for ongoing operational and financial success based on our outstanding.
Operational culture, as well as our footprint in multiple jurisdictions excellent customers and most of all our strong and committed team I'd like to thank all of our employees again for their efforts to maintain our safety infill perform.
Since two through this historic period in our business I'd also like to thank everyone for joining US today I will now turn the call back to the operator for questions.
At this time, if you'd like to ask your question. Please press Star then the number one on your telephone keypad, well pause for just a moment's compiled acuity roster.
Hi, Ken that is star one on your telephone if you would like to ask a question.
Thanks.
And we do you have a question from railcars sad from ATP capital markets. Your line is now open.
Thanks.
Taking my question.
In terms just.
Argentina.
Activity levels.
You gave some some guidance but.
Three months out how do you see that kind of developing and.
In terms of for Rightsizing, the company and employee base, how are the discussion is coming along and.
When you think there could be some resolution there.
Hey, what cards, it's Scott in terms of activity.
I certainly wouldn't expect a step function I think it's going to be.
Sort of slow and steady the issue around new can obviously is how many people are on a frac job and there's obviously sensitivity with.
The co bid situation that having not many people around increases risk and so I think thats going to be sort of the slow and steady part of it.
Two to three months, so can we get back to activity levels as we saw at the beginning of the year I think the challenge is likely going to be then more focused on the cash flow of of the customers.
And that really is going to depend on a number of things that we really don't see today.
And then finally on the cost side, you know we talked about it it's complex multiparty discussion.
Obviously resolution sooner would be better, but we can't really handicap, how long that's going to take but.
Suffice to say, if we have the opportunity to deploy the right footprint, even at lower activity, we still think Argentina can be a strong contributors.
Free cash flow perspective.
I might just add.
The other part of Argentina, the different call to courses there their own the countries on.
Capitalization and and that is having an effect on the national oil company that they have there.
They are.
Streamlines slow rate at the moment, so it's kind of a twofold.
Affect both the coal bed and then also the financial.
Structure of of the actual country itself.
And then shifting to Russia.
As you look forward you mentioned.
Thanks, just picked up but is there any concerns.
Plus statistics instead of the meeting in place that.
Activity remains depressed for the coming 612 months.
No I think we've done a really good job or the team in Russia has done a really good job of positioning our footprint there appropriately.
Obviously, the the customer list.
Is dominated by the National oil company there.
But I think even just geographically, we kind of stuck to our knitting.
We've we talked about it in the press release, we've we've done some work in a new field.
And we think the potential impact to activity levels specific to Cal Frac.
Isn't as big as it might be two other producers or other fields within the country. So I think we feel pretty good about the near term, but certainly that confidence wouldn't extend.
12 months 18 months out it.
I have a quarter to time is about the visibility you might get.
We are waqar I, just wanted to add on to that working on some of the winter projects. Some of the winter projects are a little bit smaller in scope than they have been in the past and so we're trying to work with a few of the customers to see if we can combine their work scopes generally speaking, it's an all in contract.
But there isn't enough work to tie you for the whole winter season. So so we are trying to work with the customers to put together a package of work that would be sufficient for us to too.
Work in the northern.
Areas when when winter comes on.
Great and then.
In the us.
Certainly we've seen a pickup in completion activity overall based on some of the data points from primary vision and others.
What's your sense so.
Cool downs could be overall for the industry to the ended the year end do you think that got effect will be able to maintain the market share in that.
Yes, I mean, I think our view would be that if this $40 oil price holds in you should see some steady growth in activity.
We talked about I think at this point, you're seeing a lot of producers focused on maintaining the reserves that underpin their credit facility as kind of a primary aim of their field activity and then outside of that looking at midstream commitments and hedging commitments things like that.
But I think if you can hedge 40 and maybe your 21 is a little better you can see some incremental growth.
Again, I don't think the visibility would extend out far enough to to make an intelligent are informed comment out there, but we I think we still see sort of slow and steady growth.
Through the rest of this summer and into the fall again, what Q4 looks like from seasonality.
I don't know that I'd use past history is an indicator, we'll have to play that by year, but.
Small positives from here on out, but I don't know how far that would extend with any confidence.
You have a fairly industrial.
You competitively competitively well positioned in North Dakota, and inflation as well.
The overall, HCA again and that they ship but.
It feels like.
Maybe some of the incremental activity initially at least and then maybe later as well maybe more Texas based.
If that is the case.
Do you think that you'll be able to participate in that growth as well.
You know isn't the activity thats taken place so far.
Has has been very very price competitive.
Some of our clients that that we were working for prior to the.
Co grid outbreak.
Have have secured pricing that we have found how it wasnt justifiable on on there and some of the people who were successful in that work were effectively starting up their first or second fleet. So maybe they had a different motivation on there but from our perspective.
We are still.
On the that we are we're we're not going to work or.
Loss.
On our on a project and and while we do try to and have caught a lot of our cost out.
It seems like that.
In the North Delaware affair, we are very additive positioned in the rocker and we we just.
The pricing Wasnt <unk> wasnt something that we could come back to meet at this time, we are going to start up though.
This Saturday for our customer in in West Texas.
Interesting and just one question, yes does it.
I was just going to say I think what underpins that is we've always to approach the us as as basins, but basins with flexibility, so whether its equipment or cruise.
We've got an ability to redeploy.
The resources and we've done it successfully a number of times in the past. So if it's a short term job and if the pricing works, we can redeploy assets as we need to tip to not have to fully restart of fleet and fully rehire a full crew for a short term job. So we've got that ability and flow.
Its ability that that allows us to stay to sort of present from a commercial basis in all the basins, but you're right I think our commercial strength is definitely up north where we're a bigger piece of the market and have maybe longer history there.
Just one final question Mike.
Obviously, you generated a 157 into additional working capital a pretty pretty strong cash inflows. How do you see the second half kind of play out now in terms of.
Cash management.
Yes, Theres a couple of factors at play obviously scotton Lindsay at both spoke to our cost structure and the changes. We've made so we think at much lower levels of revenue that we can generate positive operating income. So I think from that aspect I think we see that visibility going forward, we're still very focused on managing.
Our capex as tight as possible. So we're looking at that in conjunction with obviously reactivations of equipment and such and so really the biggest factored that play is what the growth in the revenue his experience and obviously that will have a working capital.
Packed in the other direction going forward because rid of obviously, a very low trough activity in the second quarter as you saw with the obviously very significant inflow of cash so from that point, we obviously think from.
Operating cash flow less capex to be as close to breakeven as possible and then obviously working capital over and above that is likely to be a drag but still manageable within though liquidity. We have their bank facility. So trying to manage as best we can in a very challenging environment.
Thanks So.
Appreciate that.
Thank you.
There are no further questions in queue at this time I'll turn the call back over to Scott Trevor for closing comments.
Thanks, Lindsay thanks, everybody for joining us today.
The management team will be around if theres any follow ups.
<unk> required otherwise will.
Talk to you if not before then at November when we report our Q3 results. Thanks everybody.
This concludes today's conference call you may now disconnect.
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