Q4 2021 Calfrac Well Services Ltd Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Cal Frac well services.

Ltd fourth quarter 2020 earnings release conference call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Well I ask a question during the session you will need to start one on your telephone please.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Mr. Scott Treadwell, Vice President of capital markets and strategy. Thank you. Please go ahead.

Thanks, Good morning, and welcome to our discussion of <unk>, well services fourth quarter and full year 2020 results also on the call today are Lindsay link <unk>, President and Chief operating Officer, and Michael <unk>, Our Chief Financial Officer.

This mornings conference call will be conducted as follows.

He 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 Cal for ex business. After the presentation, we will open the call the questions.

In our news release issued earlier today <unk> reported its audited fourth quarter and full year 2020 of results. Please note that all financial figures are in Canadian dollars unless otherwise indicated.

Some of our comments today will refer to non <unk> financial measures such as adjusted EBITDA and operating income please.

Please see our news release for additional disclosure on these financial measures.

Our comments today will also include forward looking statements regarding Cal for ex 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. Please see our news release and other regulatory filings, including our 2019 annual report.

And items related to our completed recapitalization process for the for more information on forward looking statements and these risk factors Lindsay over to you. Thanks.

Thanks, Scott Good morning, and thank you everyone for joining our call today before Mike summarizes our financial position and results I'd like to offer a few opening remarks as we expected the fourth quarter was the continuation of the improved activity levels seen in all our geographies from the third quarter specifically.

In Argentina, where a large.

Shale fracturing fleet went to work and added significant revenue stream to our business is there.

Outstanding performance continued in Russia, and we also saw a better performance in North America, including the addition of incremental fleet ahead of schedule in our United States operations of.

Along with a robust finish to the year in Canada.

At a corporate level, we successfully closed our recapitalization transaction in December and saw changes to our board of directors. This process has been very complex and lengthy and I'm proud of the work put in by our team and grateful for the assistance of our advisors and the support of our stakeholders.

Yes.

I want to also of specifically of knowledge our employees the.

Spike so many potential distractions over the course of 2020, our performance in the field continue to improve and as a result, Cal Frac achieved record safety performance for the second year in the rural and delivered further reductions in nonproductive time.

This excellent result is due to the hard work and dedication of our field employees and operations leadership and I can't say enough about the quality of our team.

The improvement in commodity prices over the latter part of 2020 enabled most producers to contemplate improved spending and activity levels for 2021.

While announced budgets do not indicate significant production growth even modest improvements in activity along with a return to more balanced pricing for our services should delivered a notable improvement in our financial results for the year ahead.

Now I will pass the call over to Mike, who will present, an overview of our quarterly financial performance.

Thank you Lindsay and thank you everyone for joining us for today's call.

Our fourth quarter results increased significantly as compared to the third quarter as activity improved in all of our operating areas.

These higher activity levels.

Particularly in Argentina also resulted in an increase in operating margin despite no change in pricing.

Consolidated revenue in the fourth quarter decreased by 43% year over year to $180 7 million.

Primarily due to lower activity in North America.

Offset modestly by a higher revenue per job in Canada due to the mix of work.

Adjusted EBITDA reported for the quarter was $13 7 million compared to $26 9 million a year ago.

Operating income was down 26% to $15 6 million from $21 million in 2019.

These weaker results were driven by lower activity and pricing in North America.

Although the significantly improved financial performance in Russia, partially offset this decrease.

The net income for the quarter was $125 9 million compared to a net loss of $49 4 million in the same period of 2019.

This change was driven primarily by a gain on the settlement of debt of $226 3 million.

Partially offset by of deferred income tax expense of $54 2 million.

Both the result of our recapitalization transaction, which closed in December.

For the three months ended December 31, 2020, depreciation expense decrease from the corresponding quarter of 2019 by $38 1 million to $30 8 million.

This decrease.

Was driven primarily by of $227 2 million impairment of PP&E that was recorded in the first half of 2020.

As well as lower levels of capital spending on items with shorter useful lives and corresponding higher depreciation rates.

<unk> spent a total of $44 6 million on capital expenditures in 2020.

Which also included a portion of carry forward from our 2019 capital budget.

In December 2020, <unk> Board of directors approved the company's 2021 capital budget of $55 million.

As always we will monitor industry conditions and adjust our capital spending as needed.

Working capital grew sequentially by $52 3 million.

Due to the significant increase in revenue seen over the third quarter.

This growth in working capital was the primary driver of the reduction in total cash on hand of $10 3 million.

But it was offset by improved operating cash flows and the cash impacts of our recapitalization transaction.

The final settlement of transaction costs related to the plan, which totaled $27 1 million also impacted consolidated cash balances.

As well as the $35 million reduction in credit facility borrowings.

<unk> completed recapitalization transaction significantly improves the company's financial position and lowers the debt service costs.

Total long term debt was reduced by over $550 million relative to the end of the third quarter.

As the company's senior unsecured notes were exchanged for common shares.

Based on the Cal price debt balances at the end of 2020 combined with our current forecast and expected the exchange rates.

<unk> cash interest costs are expected to total approximately $32 million in 2021.

It is important to highlight that this amount includes $6 million of interest expense related to our one five lien notes.

Can be paid in kind at the discretion of the board.

Concurrent with the closing of our recapitalization transactions a number of amendments to <unk> revolving credit facility were enacted.

The total of facility capacity was reduced from $375 million the two.

$290 million and the waiver from the funded debt to EBITDA Covenant was extended until the end of the second quarter of 2021 with.

With the relaxed covenant in place until.

We ended the year.

To summarize the balance sheet as at December 31.

The company on working capital of 128 million, including $29 8 million in cash.

At December 31, 2020 of the company had used <unk> 8 million of its credit facilities for letters of credit and had $130 million of borrowings under its credit facility.

Leaving $159 2 million in potential borrowing capacity at the end of the fourth quarter.

As of December 31, <unk> was in full compliance with all of the covenants that are currently enforced during the covenant relief period.

I would now like to turn the call back to Lindsay to provide our outlook.

Thanks, Mike.

Well now presented on outlook for <unk> operations across our geographical footprint as.

As expected <unk>.

<unk> oral supply over the second half of 2020 has significantly eroded surplus inventories with.

With accelerating vaccine rollout in most developed nations the prospect of normal normalized demand has shifted focus to inventory depletion.

And our need to reverse supply curtailments.

This is also caused oil prices to increase to levels that could support growth spending by many of our clients.

At this stage, we do not expect to see material upward revisions to existing budgets or significant growth in spending in North America.

The focus on capital discipline and free cash flow generation remains consistent in the producer community. However, I would expect to see inflation due to input costs as well as service pricing generally impact capital budgets as 2021 unfolds.

Natural gas fundamentals remain solid aided by the severe cold weather in February that drove significant withdrawals from storage in North America and resulted in price price spikes in a number of global natural gas hubs.

Given its energy density and impact on emissions relative to coal or other thermal energy sources. We believe natural gas can provide significant benefits to our society for decades, enabling developing nations to accelerate economic activity using low cost reliable energy well from.

<unk> a significant reduction in emissions intensity.

<unk> operations in Canada, and Argentina have significant exposure to natural gas activity and our flexible footprint in the United States and Russia permits us to deploy our assets to respond to shifts in market activity that may occur in the years ahead.

Much has been written and spoken about pricing in our industry and the fracturing sector specifically.

As the past is just that.

Signing blame us a bit pointless I prefer to focus on the future.

It is plain to see that pricing for our services remains unsustainable in any sense of the word.

Service companies have enacted significant cost reductions, but a number of those changes like benefit reductions cannot be maintained indefinitely.

The industry is also delivered significant improvements in productivity and partnered with our clients to better understand and develop resources the.

The value of our industry has never been higher in terms of what our customers receive and yet the pricing is still challenged.

Our core values at Cal Frac, our honesty commitment and resilience.

I'm being honest when I say that despite significant structural cost reductions in our industry current pricing does not permit long term investment.

And so it's continuation is not acceptable.

I am making the commitment to work with our clients to find pricing and service structures that recognize the financial realities of our industry by sharing both the risks and the rewards of what we do.

Finally, while I know many well have strong opinions on the economics of our industry I know of <unk> resilience will enable us to work with our partners to find the best possible solution.

And our U S division the quarter delivered ongoing improvement in activity. Our original projection was to return to seven active fleets by early in 2021. However.

However that plan was accelerated due to the needs of the number of key clients as a result, while activity in revenue exceeded our estimates margins were impacted by the restart of fleets during the quarter.

We are seeing continued interest from clients for further equipment within our U S operations, particularly in the oral focused areas at this point I do not expect to add significant equipment to our footprint as the economics did not support such steps if activity levels.

<unk> continued to increase I would expect incremental tightness in the U S marketplace.

Which should further improve pricing for our services at that point it may be prudent to consider targeted equipment reactivation, but our focus in the near term will remain on increased utilization and profitability of our current active asset base.

We expect to see operating levels near breakeven level in the first quarter as weather impacts in the United States were severe and most of our operating basins characterized by delays and unforeseen costs.

As well as fewer stages per day for periods of up to a week for several crews.

Based on our fleet disposition and Frac calendar I would expect profitability to improve beyond the first quarter.

In Canada, we saw a strong October followed by a weak November and a solid December this volatility impacted our results as our cost structure cannot respond effectively two months two months revenue changes that approach 50%.

However, our team performed well in managing this challenge and delivered good results overall.

As the fourth quarter completed.

We completed reactivation of the fourth crew for the busy winter period without significant cost to date operations in Canada have been strong through the first quarter. Despite some minor impact due to the extreme cold weather seen during February.

All four crews are fully booked through the end of March and into April.

And while we expect the slowdown in activity in the second quarter. Our expectation today is that Canada will remain profitable in the slower periods due to the work programs of some clients that focus on larger pad completions during breakup.

Our visibility remains limited for the second half of the year outside of our core clients.

But based on what we know and current commodity prices, we expect the activity levels to be strong through the summer and fall.

At the current time, we do not expect to add any fracturing capacity to the Canadian market as our current footprint is sufficient to service our long standing relationship customers and as part of spot market pricing does not currently compensate for the more variable utilization experienced in that market segment.

Our Canadian team will continue to monitor the marketplace and Cal Frac will as always be.

Be ready to deploy incremental assets should the right conditions appear.

I'll take a minute now to cover the <unk> International operations.

In the fourth quarter, our operations in Russia continued run of strong performance, although the onset of winter conditions did impact the results marginally.

Improved job mix and more consistent access to our clients' operating areas are the primary reasons for the improved results.

Although the prudent cost management of our team there is also worth noting.

When finished conditions have impacted our ability to operate in the first quarter with almost two weeks lost too cold temperatures to date.

While we expect revenue in Russia to be close to flat on a sequential basis. This cold weather will impact margin significantly relative to those posted in the fourth quarter.

Fight of the seasonal challenges, Russia should remain profitable during the first quarter and we expect.

C of return to stronger margins in the second and third quarters of the year as volumes are forecast to remain robust.

Yes.

Our operations in Argentina completed a full restart during the fourth quarter with our large shale of fracturing crews going back to work in new debt.

There are some remaining pieces of equipment that can go back to work, but for the most part of our operations in Argentina are back to full operating capacity.

Low incremental improvements will come from utilization and efficiencies.

Work volumes in the first quarter have been slightly below our expectations, but largely consistent with the fourth quarter.

The change in job mix and gaps in the schedule are also expected to impact profit levels. During the first quarter, but like Russia, we expect to deliver positive operating income in Argentina in the first quarter with further improvements in the remainder of the year.

The federal government in Argentina recently enacted policies designed to incentivize the development of natural gas resources in the back of Martha field.

These policies are expected to drive higher levels of activity then we witnessed in 2019, which should further improve the performance of Cal Frac operations in Argentina.

Yes.

As with other geographies, we do not expect to add significantly to our footprint in Argentina without appropriate risk adjusted returns.

There is also a good time to speak about Cal Frac how Cal.

<unk> is addressing ESG issues and how we plan to improve.

I want to make it clear that in our eyes ESG performance does not start or stop with C. O. Two emissions we have we.

We have and continue to invest in technologies that will improve our emissions profile.

But there's much more to our approach than the we.

We have materially improved our safety and operating performance. So that we are now of regularly achieving 98% operating efficiency, meaning our idle time and the emissions associated with it are reduced we continue to examine the new technology from power generation to pump design.

And exhilarated equipment with a view.

Two delivering a more capital efficient operations that delivers improved performance.

At a lower environmental impact.

One final word.

The greatest strength of Cal Frac is our people.

And from our pump operators to our support in the administration staff to our leadership team I'm consistently impressed by what we do and how we do it but most importantly, I am proud of who we are.

With that I will turn the call back to the operator for questions. Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

And your first question comes from the line of Taylor Zurcher from Tudor Pickering Holt Your line is open.

Alright, Thanks, and good morning, guys My first question's on Argentina.

Obviously, a really strong performance there in Q4 it sounded like the guidance you gave for Q1, you pointed to still positive operating income but.

If I heard you correctly there are some gaps in the schedule, which is again of dent the profitability of bit could you just provide a bit more color on what's going on there in Q1, and then more importantly for for kind of the Q2 Q3 period.

Do you expect to be able to sustain that mid teens level of operating income margins that you did in Q4 looking beyond some of this noise in Q1.

Good morning, Taylor, Thanks for the question.

The Q1 performance is really due to working for one client and then switching to.

Of two another client that is the full time fleet allocation clients and it just had some downtime during the switch as well as the startup of operations on these major <unk>.

Sales fleets. These are not from our side just the whole operations.

It's the same as of as an American operations, So very intense and you have to get all of the supply chain.

<unk> working there so a little bit of of.

GAAP that have occurred but we are now in the in full operational mode March should be an exceptional month for the Argentine.

Guys both in back of Martha and then in the South.

Scott I don't know if you wanted to answer the second part of the takeaways question, Yes sure of Taylor.

I think Linda you did a great job talking about Q1, as we see activity kind of normalized well, we don't provide any guidance, we don't see any big potholes in the road. So you would expect things to kind of normalize but.

Our business can be a bit of a surprise factory. So lots of stuff can change that but we're pretty happy with the operating footprint and the cost structure as it sits today.

Understood.

Follow up on the U S market Lindsay you talked about.

How pricing is obviously down on the dumps right now and you know one of your focuses is trying to work with your clients customers too.

On to figure out some new pricing structures that the help you both share in the risk and reward and it seems to be of refrain. We hear a lot during downturns, but you know coming out of these downturns nothing really seems to change. So I was just curious if you could help us think about what you're focused on when you're talking with customers around pricing and if theres any sort of creative structures that you're thinking of.

Or or hoping to implement moving forward.

It depends thanks again the Taylor.

Hands on.

What based on your in and what client tier.

With some are very straightforward pricing discussions and even improvements that we've had in the recent past.

The places where you've had.

Cost increases are quite.

They are quite straight forward to talk to the client and kind of show where you are and why you may need.

The pricing increase well.

You haven't seen though is where you haven't had that cost inflation, but yet the <unk>.

Margins arent satisfactory for long term.

<unk> of <unk>.

The operation.

But we've had good success with those guys, it's probably helps as well.

They are the have a significant.

Lift in their revenue.

And for the most part.

Because the service quality has been so well the the guys like who are working for we like they like us.

I think they've been received a lot more positive than maybe even in the past of 2017 day, where we had those kind of price increases the eye.

I think theres, the genuine acceptance that <unk>.

<unk>.

The <unk> cover for the pressure pumping business in order to to do what we do which is scale.

Think of one of the most important parts of the completion operations.

Got it and I'll sneak one more in for 2020 one.

In terms of your free cash flow outlook I know, there's a lot of moving pieces and certainly some utilization of noise in the first half of the year, but you've got about $30 million of interest expense of $55 million of Capex is the budget.

Under that sort of scenario do you expect to be able to generate some positive free cash flow in 2020, one I guess working capital would be the other variable getting you to the free cash flow number but do you think you can stay positive in 'twenty 'twenty, one or is it just a bit too soon to make that call.

Hi, Taylor, it's Mike.

The morning, Yeah as far as what we're modeling ahead for the year ahead well.

Certainly mindful of all of the cost drivers that you've talked about.

And I think given our present expectations, we're certainly driving towards positive free cash flow for the year.

No it's going to be something that we have to manage and really the biggest driver is the working capital and really how that fluctuates well.

Likely be the largest driver the other two I think safely, believing that we can manage through and generate positive cash flow, but the working capital might be the one outlier, but were hopefully to be neutral to positive as we are.

As we get through the year.

Understood. Thanks for the answers guys.

Thanks Taylor.

Your next question comes from the line of coal per year from Stifel. Your line is open.

Good morning, everyone.

So theres been a lot of commentary on pricing in Canada in Q1, largely just that it was flat sequentially.

I'm wondering if you're just able to comment on if it was flat as well in the U S or if it was maybe down a little of quarter over quarter acknowledging some of the messiness from out of the Texas storms.

Yes.

Uh huh.

Yes.

Good morning, Paul the the pricing on the on the U S side, we have had some price improvement it's late in the quarter I mean, we're already in March.

So so we do have some improvements taking place in there, but there is a lot of.

The noise I guess with the with the winter weather.

In addition, we're moving our fleet from the less profitable client up to what we believe as of as a more a better margin.

Area and so that will also have a little bit of cost impact without the and associated revenues. So well, we do have some some positive.

Improvements in there and Youre right on on Canada. Most of the work is pre call.

In the fourth quarter. So the first quarter is generally speaking flat.

Yes, Taylor the only thing I would.

Sorry, the only thing I would add to that goal would be debt.

Q1 was so fully booked for us.

Debt, we didn't have opportunities to step into the spot market to move pricing higher I know, we were certainly have been looking pricing where we can.

But as Lindsay said Youre of Q1 pricing was largely set.

In the fourth quarter.

And I think we did our best to hold the line and look for areas of improvement, but there really hasnt been much.

Would expect to see if pricing was going to move that it would do so coming out of spring breakup. Because you began you've largely got a lot of your work for the second quarter fixed.

For cost inflation, Thats, a different driver, but I think.

Kind of net pricing improvement is probably a back half.

Where it shows up in the results.

Okay got it that's helpful. Thanks.

Just wondering as well are you able to differentiate at all on the volume of customer inquiries youre seeing for bi fuel equipment between the U S and Canada.

Differentiate I'm not sure I fully understand what true.

Looking forward there is of Laurie.

I'm just wondering if youre seeing if youre seeing perhaps more biofuel inquiries in the United States versus Canada, or vice versa on a relative basis per year fleet size.

Okay.

In relative terms, we are more biofuel equipped in Canada than the U S. So we can handle a lot more inquiries for biofuel.

In the Canadian market, just because of a number of pumps that have already been converted or being converted.

In the U S of course, we have we have a lot more horsepower. So so we are operating are going to operate.

The biofuel fleet.

You know it depends on the.

For additional ones that really depends on the on the on the cost until it has a cost per area and of course you know.

Fueled by itself is only one answer there are places where the tier two diesel is actually on environmentally better footprint than even the even though the tier two diesel.

Biofuel pumps, so so different clients on different places will well be looking for or.

We're again different sets of equipment.

Okay got you that's helpful. Thanks, That's all from me I'll turn it back.

Thanks, Paul ex fuel.

Your next question comes from the line of Keith Mackey from RBC. Your line is open.

Hi, good morning, Thanks for taking my questions.

Even if we could just stay on that dual fuel line of questioning.

With the $5 million, you'll look to spend this year can you just give us some context on where in North America, you plan to utilize that.

And will this be for fleets that are currently operating in the field or will this be additions to the equipment that is not not operating.

Yeah.

Okay.

Thanks, Keith it's of Great question. Most of it is divided almost maybe two thirds in the U S. One third in Canada, it's on existing of.

Fleets.

To give them more ability to.

To deliver biofuel.

To date and of course.

No.

We've all seen.

This is on existing equipment because of the conversion for that amount of money I can do many pumps to make them biofuel, whereas on the tier four dual fuel.

Units that basically would get you to units. So so obviously, we can impact fleets with the.

With the conversion as opposed to buy new equipment.

Got it Okay and can you just remind us I guess of the amount of bi fuel horsepower you'll have available in total after you. After you do these upgrades.

Yeah Keith.

To get towards 75% of the Canadian fleet, So think of that as about 200000 horsepower, maybe a little bit less 175, it would be dual fuel capable.

In the U S. I think it would be just the three fleets. So maybe just a little over 150000.

Could reconfigure that if you had some some smaller and maybe get to four fleets, but really it would just be three of your fleet. So the way. It sits today call that about 40% of our operating capacity.

And again, we would continue to look at that the economics of it the.

The customers.

Particularly the logistics of it and see where it makes sense.

Think on the dual fuel side in the U S.

The because of the the.

Of the basins are so geographically separated <unk> had to rely on third party fuel delivery, which blends of lot of the cost savings of the natural gas can deliver to customers, but I think as that infrastructure grows for kind of infield gas treatment and potentially the use of field gas or.

Low processed gas theres definitely options for <unk>.

The fuel to be economics, not just for the client, but for the service company as well.

Got it thanks for that and one last question for clarification.

Lindsay when you said the breakeven operating income in Q1 that was specifically the U S right that's not.

That's not for the enterprise in total is that is that correct.

Yes that would be correct.

Okay got it thanks, that's it from me.

Thanks Keith.

Again, if you'd like to ask a question press the star one on your telephone.

Next question comes from the line of Waqar Sayed from <unk> capital markets. Your line is open.

Thanks for taking my question good morning.

I got cutoff in between so apologies if I ask the question that you may have already answered.

But.

First question do you think we've seen some consolidation amongst shelf.

And most of the E&P companies, both in Canada, and the U S.

How is that impacting GAAP track.

So all of it.

Hit on it in Canada, that's the easy one.

Ben of Universal positive, we're quite lucky that the history of our company has aligned us with a number of really high quality e&ps. They tend to have pretty smart capital allocation policies. They tend to have pretty good balance sheets and they tend to take a long view of our industry and so thats the resulted in them.

Being the acquirers in a number of of situations theres been a couple of <unk> been on kind of both sides of it.

I won't say that we have been the sole beneficiary by any means I think it's it's benefited the larger players as you would expect but it's definitely been of positive in the Canadian marketplace.

I think in the U S. It's probably still a bit more of a work in progress. Obviously, we're more focused in North Dakota, Pennsylvania, and then Texas, I guess would be we'd be up there as well.

I would say North Dakota, <unk> seen a little bit of a consolidation of our customers really haven't been involved in that too much but again, what I would say is consolidation is a net positive for the service space. If you are a better than average provider of kind of top quartile type provider and we certainly feel we are.

The Texas, we're a small player in that market. So I would say at this point consolidation. It's it's the only getting hit by lightning by any means but.

I don't think youre going to see consolidation materially affect on our operations in Texas relative to the larger market.

As I said, you may have a customer who we start to work for and they get bought in that doubles, our work volume or drops the work volume to zero, but it would be tough to kind of predict that today.

Okay great.

In the U S. What's your maintenance Capex.

The true running at right now.

True.

It would be I'm, just trying to read yet.

It would be around three lead of grant.

Ian.

That would be Canadian per year per fleet and that would be a little bit less than that in Canada, because really only about two thirds of your equipment is running in the high intensity areas, but obviously all of it can so that's probably a decent placeholder for the North American business call. It three to four.

And then the rest is a little comfort of kind of.

The model the international stuff.

So in the U S the $3 million to $4 million Canadian.

Does that include the fluid ends as well.

Outside of that number.

That includes fluid ends waqar.

Okay.

Alright that seems the.

Our weighted low number when we look to compare that to.

The industry in general.

What are you guys assuming that others are not that leads you to have well.

Below industry standard maintenance Capex because.

The Lewis we are seeing is about 3 million the U S dollars and that excludes.

The fluid ends.

Great.

I think what archives of done.

On exceptional drop in.

The holding back our capital expenditures on maintenance over the last three quarters and the fourth quarter.

It's okay, it's not as good as the last three quarters I'll definitely met that but they are they are.

Doing a much better job on major component failures.

In there some of that though probably is where we are working.

So if we're not at the very far end, our tight end of high end of of.

The capacity of the units.

It is having a positive positive effect so.

So.

Some of the Permian, especially some of the South Texas is pretty high rates.

The quite high pressures, which when.

When you have of failure is typically a catastrophic failure, which means you have of high expenditures. So I think it a little bit of it.

Our diligence I'm sure some of the guys would say it's there.

Have all to do with it but the other part is I think we're pumping and easier areas.

And then well card just to add to that I think part of it is a little bit of apples and oranges.

We do think about things in terms of <unk> R&M expense, and then capital outlay on components.

But given the way, we report and kind of construct our finances really the only thing that flows through capital or the pieces of iron the <unk> engines and.

Transmissions and power ends and fluid ends.

There is an ability in U S accounting to capitalize some of the associated expenses with those components, we don't do that and so as a result, you would see typically even if we spent the same dollars total on R&M debt, our capex would be lower but our maintenance cost maybe.

A little higher in the reserve as a result of your EBITDA might be a little lower so there is a little bit in there, but I would say the by far the biggest delta would just be we treat the pumps properly.

That makes sense. Thanks. Thank you for the answer and just one final question.

You mentioned that you saw a little bit of a price pick up in the U S.

On the pumping side now is that kind of net price increase or is it just pass through of some.

Input cost inflation.

It's a mixture of both but I would argue and I am sure Mike agrees with me, we're already eating the cost so.

And we typically are behind in our cost improvement.

The price improvement so therefore.

You would almost have to say, it's the net improvement because if the costs went up in January but I don't get the price improvement in until.

April.

Is that of net price improvement or not.

The net in that way, but I know what you're talking about.

That's what we're working for it is obviously net price.

The improvement.

Thank you very much Jeff Thanks for your answers.

Thanks, Scott Thanks for the car.

Your next question comes from the line of Jeff Fetterly from Peters <unk> Co. Your line is open.

Good morning, guys on that.

Hey, Jeff the Capex side the.

The 55 million budget announced does that contemplate or include any capital for additional.

Crew reactivation.

Yes, Jeff there's a little bit.

In there so.

If you had a large pickup in activity in the fourth quarter. It is possible with us the capex would increase.

In there, but but we can handle what we've budgeted for inside our capital budget.

And so what would the approximate costs be if you were to reactivate an eighth ninth.

That's true in the U S.

Okay.

The cost.

Great now I mean, it does depend on a little bit of where it is because of this time when we are.

Idled equipment, we idled in the basins.

The large extent, so some equipment will cost more than others, but on an average probably a million dollars is a reasonable number it is possible that it could go up to a million in the half.

With about a 50 50 split between.

Between R&M and capital.

Just to do Cvs are.

Oil changes some holes the hose.

And that's all R&M.

But it's a lot right. When you start talking 20, Frac pumps, and probably 20 other pieces of the kit and tractors. So you get a large maintenance hit and then and then you have the.

Potential for some.

Some capital loss of patent as well.

That's without making it a biofuel right.

Okay.

And the bi fuel upgrades that you're doing well.

Are they all tissue kits.

Yes, yes, yes right at the.

The moment.

It's very few tier fours that can be converted to biofuel because to touch of tier four you have to have 8000 hours on the according to the EPA right.

Okay.

Are you seeing any.

The pricing differentiation between diesel and biofuel either on the Canadian or U S. Sorry.

We haven't seen that in the past, we should see as though Jeff the bye bye right, it's the capital expenditure of theirs.

The savings on the input cost, which which is there but it is mainly in the low period of activity become on expectation rather than a.

On ability to improved pricing prior to the downturn when we did buy fuel we did see a pricing premium, but unfortunately, when you dropped 300 fleets in the U S debt.

That the.

Benefit went away, but but it's.

It's a cost that's part of that structure that I'm talking about the.

The money, we spend has to be recovered some somehow in whatever your.

Spending.

It has to have at least an acceptable level of.

The return.

On the U S side, what do you need to see to be comfortable reactivating additional equivalent either from a pricing standpoint.

Or from the utilization components.

Jeff I think you hit the point.

We need to see it well utilized we don't like activating on the spot spot market in the in the U S. It hasn't worked well for us in the past maybe it works for some other people.

So we want length of time.

Where you've got a couple of thousand stages that youre going to be doing.

And then we.

We would expect to see obviously from especially from.

Our fourth quarter results, we need margin improvement.

And there it's not that you need it all at one time, but you have to have the expectation of one that there's the step up and then that there there may be of benefit.

Further on.

The client also has a lot to do with it right on.

Efficient client cash.

Make your profitability night and day, much like what well probably see with some of the well.

The weather related the downturns.

Downturns cost the service company.

Lot of money you've got.

Whatever 60 to 70 people tied up that really arent on.

Earning revenue.

And the.

On inefficient client will also have that same effect on it. So so we look at that as well.

Thanks, I appreciate the color.

Thanks, Jeff.

Your next question comes from the line of John Gibson from BMO Capital markets. Your line is open.

Good morning, Thanks for taking my call.

First one in Argentina, I'm wondering if you could give a magnitude of onetime reactivation costs in the quarter.

For like fourth quarter.

Yes.

For the complete that went back to work.

Yes, it wasn't the.

It wasn't the terrible it's a little bit.

All of a different than in our other areas because we were shut down for almost the.

Six or seven months in Argentina.

The startup went.

Went very well the the guys have a very reasonable set of equipment, especially in the in the.

The back of more to field the the south is relatively small and those startups are.

Our very nice to have because the same.

The.

The start and they start working on and the improvement is seen right away, but on the on the crew on the biggest the largest startup cost was probably bringing on.

People and getting them familiar with actually working shifts in seven days of week.

But I don't have a hell of a great handle on it I think it probably would have amounted to maybe.

10% of the revenue that would have been kind of eaten up well, we wouldn't have been a as the efficient right. So the I'm going that we're much more efficient now we know that because of the number of stages that we are pumping. So so today, we're probably 30% more efficient than we were in the fourth quarter.

Okay great.

Turning to Canada, specifically pricing.

Some of your peers have noted on expectation that pricing could increase in the back half of the year I'm. Just wondering if you share of these thoughts and if so will this be dependent on the operators holding the line in terms of activating additional fleets.

Yes, I think that's exactly right like you've got.

The customers for the last I would say.

Three to four years really haven't had to adapt plans or change their plans based on the availability of equipment in the services space on that that's not just fracturing that's pretty much everywhere.

If customers if <unk> is sold out because we decided to hold the line and don't reactivate anything more than the customers know that there's one or two other.

Providers that do have some spare equipment, even if they're not their primary provider of preferred provider, they're going to use that in the discussion and some of the may go to that person with spare capacity.

Some of the Mi stick with you and try to work and get something.

Have you or find the on your calendar.

But I think as in the industry, we need debt to hold that discipline like our customers are doing I mean, you've seen our customers.

GAAP very quickly to this new reality of focusing on returns developing your inventory at a reasonable pace and generating free cash flow to the operations. It is not a complicated recipe and I just think that the service base needs to essentially copy it.

If we get too far in front of activity by by having equipment ready to go which Cal Frac and everybody has been guilty of in the past, we blunt the argument of needing to get higher pricing for equipment and for our services.

It's not a it's a fine line and it is something that you have to balance because <unk> got relationship clients. The quite rightly expect you to be there for them as a partner and then you've got clients that are maybe more transactional and then it's a bit more of a spot market conversation. So it's not one size fits all but at the core of it has to be disciplined.

Okay, Great I appreciate that last one from me just staying in Canada can you talk about your revenue split between the higher and testing Montney duvernay areas versus the Cardium Bakken both specific to Q4 as well as as we look out to 2021.

Thanks.

Yes.

The montney for us.

Is very important so probably into the.

The 70%.

Range I think as of.

Good good number to use obviously of changes from month to month or quarter to quarter, but.

It is the it is the the big heavyweight in it for sure.

Yeah, and I wouldn't expect that the change here in the first quarter. We went through the fourth fleet, which was really dedicated to focus on the sort of Cardium Viking type areas. So if you did the math that's kind of 70 525.

And then as you get into the second quarter of probably moves a little higher because obviously during breakup youre not going to be doing much on pad work there'll be the odd single well here and there but through the second quarter, it's probably more like 85% of 90% Montney Duvernay.

The intensity based on type stuff.

Okay great.

I'll turn it back congrats on the strong quarter.

Thanks, Sean Thanks.

And we have reached the end of our question and answer session. Just Scott Treadwell I turn the call back over to you from closing remarks.

Thanks, Rob and thanks, everyone for joining us today and for your questions. We look forward to updating you at the beginning of May when we report our first quarter results just as a reminder, the management team here in Calgary will all be around today. So if there are follow ups.

The analysts or investors need to rent the ground. Please feel free to reach out thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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