Q1 2021 Calfrac Well Services Ltd Earnings Call
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Hello, and thank you for standing by and welcome to Cal Frac well Services Ltd. First quarter 2021 earnings release and 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 to ask the question during the session.
Well need to press star one on your telephone if you require any further assistance. Please press star zero seems to be a bunch of today's conference is being recorded I would now like to hand, the conference over to your speaker today, Mr. Scott Treadwell.
Vice President of capital markets and strategy. Please go ahead.
Thank you.
Morning, and welcome to our discussion of <unk> well services first quarter 2021 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 Lindsay will provide some introductory remarks, after which Mike will provide an overview of the financial performance of the company.
Andy will then close the presentation with an outlook for <unk> business.
After the presentation, we will open the call to questions.
In the news release issued earlier today <unk> reported its unaudited first quarter 2021 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 see our news release for additional disclosure on these financial measures.
Our comments today will also include forward looking statements regarding <unk> 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 2020 annual report and items related to our recapitalization process for more information on forward looking statements and these risk factors Lindsay over to you.
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 and.
In general the first quarter showed more positives than negatives, but as ongoing evidence of the challenges facing our space.
Well activity either met or exceeded our expectations globally. It was impacted by weather in Canada, Russia, and the United States well.
We are used to weather impacting operations in Canada, and Russia. The February storm in the United States had a significant impact on that division.
Both in terms of lost revenue and profit due to slower operations and delayed as well as the number of unforeseen costs such as the diesel fuel increases as refineries curtailed operations.
As always our people and provide the adapted and overcame these challenges and delivered the safe and productive service that Cal Frac is known for.
Like to give my thanks to everyone in the field and our support personnel once again for a job well done.
As a general comment the improvement and relative stability in commodity prices is bright and the outlook for activity in the months ahead, but we continue to believe to believe that the rapid acceleration seen in 2017 is not going to happen in 2021.
Customers, where the private public or nationally owned have largely embraced the idea of allocating capital to generate excess returns rather than excess volumes.
As always we will see some producers grow faster than others, but we believe that at least the for the remainder of 2021 activity growth will be measured.
This approach will be a net benefit over the long term as it will help.
Right.
Foundation for sustainable operations.
But the discipline underpinning it.
It also be mirrored by oilfield service market participants.
Certainly import input cost inflation may impact capital spending in the latter part of the year, but I do not expect to see significant upward revisions to spending plans this year.
For 2022, I would expect more of a step function change in spending, but again set against the overarching theme of capital discipline.
Now I will pass the call over to Mike, who will present, an overview of our quarterly financial performance.
Thank you Lindsey.
And thank you everyone for joining us for today's call.
Our first quarter results showed further sequential improvement.
Given primarily by higher activity in North America, offset marginally by adverse winter storms that disrupted our operating cadence most notably in the in the United States.
Consolidated revenue in the first quarter decreased by 21% year over year to $241 6 million as lower activity in North America was partially offset by higher activity in <unk> International Division.
Adjusted EBITDA.
EBITDA reported for the quarter was $11 9 million compared to $6 8 million a year ago.
Operating income also increased by 127% to $12 9 million from $5 7 million in 2020.
This improvement in profitability is largely due to better utilization for Cal Forex operating fleets in Canada, Russia and Argentina.
Combined with cost reduction measures that were implemented across the company during 2020.
The net loss for the quarter was $22 4 million compared to a net loss of $122 9 million in the same quarter of 2020.
During the first quarter of 2020, the company recorded the debt exchange gain of $130 4 million, which was offset by a $114 million deferred tax expense.
That was related to the derecognize certain of the Companys deferred tax asset and of $54 million impairment of PP&E and other assets.
In addition, lower depreciation and interest expense in the first quarter of 2021 also contributed to the improvement in the Companys reported net loss.
For the three months ended March 31 2021.
Depreciation expense decrease from the corresponding quarter of 2020 by $31 7 million of $31 6 million.
This decrease was driven primarily by $227 2 million.
And impairments the PP&E that were recorded in the first half of 2020 as well as lower levels of capital spending on items with shorter useful life and corresponding higher depreciation rates.
Interest expense during the first quarter of 2021 decreased by $16 9 million from the same period in the prior year due to the significant reduction in long term debt. The resulted from the company's recently completed recapitalization transaction.
Cal Frac spent a total of $11 6 million on capital expenditures in the first quarter compared to $29 3 million in the same period of 2020.
This decrease was due primarily to the change in the amount of active equivalent between the two periods.
<unk> 2021 capital budget remains at $55 million and the company will monitor market conditions and adjust spending as required.
Working capital grew sequentially by $8 6 million.
Mainly as a result of higher revenue and all operating areas.
During the quarter of the company received approximately $1 $1 million from the exercise of warrants and.
Subsequent to the quarter the company completed the rescission of approximately 1 million of of 215 lien notes.
To summarize the balance sheet as at March 31.
The company had working capital of $170 1 million, including $14 million in cash.
At March 31, 2021, the company had used <unk> 8 million of its credit facilities for letters of credit and.
And had $150 million of borrowings under its credit facilities.
Leaving $139 2 million in potential borrowing capacity at the end of the first quarter.
As at March 31.
<unk> was in full compliance with all covenants under its credit agreement during the Covenant relief period.
And under the indentures covering the one five lien and second lien notes.
I'd like to I'd like to also remind our fellow shareholders. The <unk> annual General meeting will take place in a virtual format. This year.
The meeting will still take place on May 4th at 330 P. M Calgary time.
Our press release of April 19th and the Investor Relations section of our website contains the information required to attend this meeting.
I would now like to turn the call back to Lindsay to provide our outlook.
Thanks, Mike I will now present, an outlook for <unk> operations across our geographical footprint.
We see commodity markets cost between two of hosing and very impactful drivers first the rollout of vaccines has allowed some countries to return to more normal activities like driving and flying to see family.
This combined with unprecedented volume of stimulus spending has many observers expecting significant growth in demand for energy in the months ahead.
On the other hand other countries have struggled to rollout vaccines at scale and as a result have been hit by a third or fourth wave of infections, including Varian strength.
This has caused the tightening of restrictions in many areas and raised questions about the timing of the global returned to normal.
Add to this the lack of vaccines for developing nations and the timing of forecasted demand growth is more uncertain.
Our view is that the market is acting rationally to directionally align supply with demand, while continuing to return inventories to a more normal range.
I believe that the market will continue to see lumpy event, driven moves, but thats. The overall direction is positive.
And our U S Division operations experienced the general improvement in activity disrupted of course by the winter Storm in February This storm caused operations to slow in North Dakota, and Pennsylvania and resulted in significant delays in Colorado and Texas.
In addition, the price of fuel and availability of trucking were impacted.
<unk> in a significant erosion of field profitability.
Some of these cost increases can be recaptured as part of the normal course discussions with customers.
But that process is typically commenced at the end of each quarter.
Our U S operations saw stronger utilization and profitability in March and that trend bodes well for the second and third quarters.
Our Frac calendar continues to fill up and for the most part we expect all seven crews to work consistently over the summer.
It appears that in this.
I apologize.
Yes.
It appears that in this market segment.
Pricing remains well below what we feel is sustainable and appropriate.
Pricing does appear to be moving higher but so are a number of input costs. So we will continue to work hard to capture as much of the upside as we can I expect that the U S Division will generate positive operating income in the second quarter and net profitability should improve in the third quarter as well.
Visibility on activity levels into the end of the year is still murky, but I'll.
Ill reiterate my thoughts.
That I would expect to see more of a step function increase in activity as 2022 begins.
In Canada, the first quarter unfolded as we expected with mall, where the weather disruptions offsetting what was otherwise the quarter of nearly full utilization.
The financial performance was similarly strong and reflects the current state of the Canadian market.
The second quarter began very well with some first quarter work spilling into April and while the current activity levels are likely near the lowest for the quarter, we expect larger programs to pick up in the first half of May and continue through June.
Our visibility for second half activity has improved as expected and I believe that our utilization will remain high through a good portion of the remainder of the year.
We will manage our footprint between three to four crews as needed to give our field staff to work they need while efficiently servicing our core clients and realizing substantial.
Sustainable returns to do solar.
I spoke about pricing and the Canadian markets on our fourth quarter call and that commentary still stands. However, what is now an apparent to us is the.
That of number of service companies had equipment consistently sitting idle through much of the quarter and we're able to service work on a very short notice and did so without increasing price.
This is of particular concern given.
Current unsafe unsustainable pricing levels and oversupply of equipment in the busiest part of the year adds to the difficulty in moving pricing for our services much ahead of input cost inflation.
<unk> focus will remain on driving high utilization on whatever equipment is deployed rather than revenue growth of our market share.
Unless those results are accompanied by improved.
The profitability.
Let me be clear, we will provide the same excellent service to our clients as we always have but we will not.
The market equipment that we do not see being utilized consistently.
I'll now turn to <unk> International operations in the first quarter, our operations in Russia continued to build off the strong momentum seen in 2020.
Although severe cold in winter resulted in the loss of approximately 10 operating days during the quarter.
As the quarter progressed, our operations resumed and we maintained high utilization through the end of March.
The shift away from ice bridges, two barges in pontoon bridges is largely complete and we expect our operations in Russia to deliver strong performance through the second and third quarters the.
Ongoing shift to multi stage conventional wells, along with increasing overall field deficiency support the view that performance in Russia can continue to improve in future periods.
With the key to that success being <unk> proven ability to execute.
Our operations in Argentina continued to perform well during the first quarter with limited disruptions outside of a change in customer mix for our large shale fracturing crew.
Improving sales productivity and overall demand for services are the keys to deliver further improvement.
And I think <unk> will benefit from both in the quarters ahead.
We expect volumes to improve modestly in future periods, and we are seeing increased demand for smaller fracturing services as well as coiled tubing and cementing.
We have had discussions with clients about the possibility of deploying the second large fracturing spreads to the country, but I do not envision that is likely in 2021.
To wrap up I'd like to thank everyone at <unk> for their efforts in delivering a safe and efficient service to our clients and for being part of a great team.
Back to you Scott.
Thanks, Lindsey operator that concludes the formal part of the call well open it up to questions now.
Cash at this time, if anybody has a question. Please press star one on your telephone keypad.
I cannot with Vista, Glenn on your telephone keypad.
The first question comes from Macquarie.
From <unk> capital markets. Your line is open.
Thanks for taking the call.
So first of all of it.
And see what was kind of the run rate in March in the U S.
Revenue run rate versus like the average monthly run rate that you saw in the first quarter in the U S.
Waqar, it's Scott that the.
A little bit too granular in terms of where we exited but I can certainly tell you March was definitely the best month of the quarter, even normalizing for the weather impacts we saw in February.
Okay.
And then in terms of kind of margin.
In the U S like how do you.
We expect them to kind of trend going forward like incremental margins and overall margins any any guidance there.
But I wouldn't classify it as guidance, but I would say our U S business the U S marketplace the.
The way, we look at cost versus capital probably support something in the mid single digit range for EBITDA at this point in time and that doesn't contemplate any pricing increases and so obviously, there's not much difference between mid single digits and zero and so any change in utilization has a very significant.
<unk> in terms of what you deliver to the bottom line.
Sure no.
In the press release, there was a comment on Argentina that there was some of revenue that was.
From from your sub contracted the revenue is kind of showing up in your.
Financials could you maybe explain debt what's going on there.
Yes, so in Argentina, as well as in Russia, but Argentina is more of the subcontractor model, especially for large fracturing jobs. You are required to provide a number of services or you are responsible for those services.
In the large frac operations that would tend to be flow back in wireline would be the two big ones and so those go through our invoicing until they are recorded as revenue, but they're obviously subcontractors in that that's not really a significant change it may be a bit more significant than that we've had higher utilization for that part of the business, but there is no change to the model.
Sure Okay, great. Thank you very much.
Thanks Waqar.
And your next question will come from coal per ore from Stifel. Your line is open.
Good morning, everyone.
Some of the price some of the commentary on needing to see price increases to add additional red I mean, maybe just a few high level, but are you able to kind of quantify what you might need to see on the percentage basis in both Canada and the U S.
Well I'll give you kind of the the overall commentary and Linda you might be able to give you some more color, but we're certainly not going to discuss sort of detailed pricing.
In the public form that's something for our sales group to do with with our clients.
The way you would think about it structurally is that there is today.
The level of profitability for existing equipment and if it costs you more money to bring equipment back you can't use today's profitability to pay off tomorrow as capital investment there has to be an incremental return that makes that capital worthwhile because otherwise.
Well you've seen in certainly in Canada and in the U S is that it makes sense. If you look I can spend $2 million because of the fleet makes 5 million of year, but that any fleet. That's active would make 5 million of year, and so theres not much sense in and adding to what.
At best the balanced market, but likely a little oversupplied.
Just using today's economics, so that would be the structural way to think of it.
And I think.
The fleets of very efficient when they're when they're not impacted by by weather. So.
There's not lots of profitability to squeeze out of the efficiency anymore, because we're already very efficient. So we're really looking at net price increases increases.
Obviously the market is on a I'll call it as steady state <unk>.
<unk>. So these increases probably are not going to occur in one step change there there'll be gradual, but we're expecting them to be net increases of any cost inflation.
Okay got it that's helpful. Thanks.
Also wondering are you able to differentiate in the U S. If youre seeing kind of a wide dispersion in pricing between different basins.
Okay.
Okay.
I don't think there'd be significant.
Differences across basins, what I would say is between market segments dedicated versus spot.
What we've seen in.
This commentary applies to Canada as well when there's equipment that has a GAAP.
And there is a work program that fits that GAAP. The bidding is as aggressive as it has been in the last few years because.
You can kind of get the logic that the spread either doesn't work or it does work until I take less money to the to fill that hole.
And thats the logic, the kind of works against kind of getting any significant pricing increase.
As you move forward, but I don't know that Theres massive base of differences other than kind of job scope and preference for domestic or white.
Proppant and things like that.
Different models in terms of comp rentals versus the.
Our per stage pricing, but.
The the U S market is relatively efficient so if theres a pricing disruption in one area of it'll tend to cause ripples everywhere.
I think not so much in the basin by basin of the equipment rental model to a full service and product.
The fly.
Model does does it give you a difference in overall profitability that you've done.
You can extract and of course, when you were doing just a rental only model and we were in the I'll call. It the.
Low periods of activity that model gets very get squeezed really hard because the only source of.
Of the.
Revenue and profitability comes off of the equipment itself, yet youre fully set up to to run all of products in chemistry and stuff. So.
So definitely the rental model net.
As well.
A lot of ways to go for four of improving our profitability.
Okay got it and then just one last one from me.
So one of your Canadian competitors is talking about upgrading of fleet. The tier four engines. Just curious if this is something you could maybe see Cal frac do them over the medium term, whether it be in Canada or the U S.
Yes, I think it's the mainly on engine and <unk>.
Engines will swap out.
It's something we definitely have evaluated.
It's not a it's not cheap by any of any means based upon the overall cost of of Frac pump. It if the typically on the Canadian basis, it's probably a $1 million of.
The unit share American 800000 now.
And to go into a basically a two tier four.
Dual fuel pump.
As well.
A lot of expense I believe kind of.
Almost half of fleet thats been renovated of rejuvenated on on there.
And it comes down to.
Are you going to get the return for the effectively 10 million dollar investment from some of the of.
From the client the definitely can be.
The improvement in biofuel substitution with some of the new equipment.
And that benefit needs to go into paying for the for the capital expenditure on the.
On that unit, so if those things line up.
We can definitely.
Do that well.
Looked at it we have of the engineering drawings to do it and the.
Of the manufacturers or the rebuild facilities are.
Set to do it for you.
And Paul the only thing I'd, probably add to that is that as you look at new equipment.
You have the sort of differentiation between incremental improvement and sort of step change.
In design.
Obviously tier four DGB is an incremental improvement, but it's still a diesel engine driving.
Gearbox and the power and fluid ends so it's in general it's essentially the same as we've done for sort of 30 or 40 years.
But what I would say is that more critical or equally as critical I guess is the ESG considerations and the financial considerations is understanding the relevance of that equipment in the medium to long term.
The application is going to dictate a lot of how equipment evolved in our industry that is going to be the customer if they have natural gas and the debt.
The specs of that natural gas their infrastructure to deliver that they may have a preference for a certain kind of power generation.
And so I think you need to consider all of that before you would make a move because I think we've seen in the lot of industries in oilfield services. There are advances in technologies that look really promising but don't turn out to be the complete right answer and so I think theres still education to be done both for us.
And our industry and the customers to understand what outcomes, we're trying to get to and then understand the rate of engineering to get there. So as Lindsay said were I think absolutely.
Considering examining whatever word you want to use about these these new options, but I think our preference would be to make sure we get it done.
The first time.
And deliver some real.
GAAP change improvements not just to us, but to our customers and to.
Their returns and ESG impact.
Okay, Great. That's all from me I'll turn it back thanks, guys.
Thanks, Paul.
And if anybody would like to ask a question. Please press star one on your telephone keypad.
Next question comes from Keith Mackey from RBC. Your line is open.
First just wanted to start out with.
Your capital budget for this year of $55 million and I believe there was five in there for for dual fuel upgrade just curious if that's been done or out or if it's still in the works and <unk>.
Broadly speaking where might that equipment being deployed.
Good morning, yes, it absolutely is undergoing its being done we released some units we do them on a unit by unit basis, and the both being done in the U S and in Canada. So when it's released into Canada, I mean, it goes anywhere in the.
In the Canadian market and in the.
The U S. The side.
With that we have fleets.
In the Pennsylvania in Colorado.
The ability to do that in Texas. So we typically will well just put it where it needs to go I think we expect that by the end of this quarter all of the.
Conversions that we've.
That we've put forward to be done will be completed.
Perfect. Thanks for that.
Anil question is it looks like the.
The interest on the payment in kind notes was paid in cash. This go round was just curious if you could give us some insights into the board's thought process on making that decision and.
Whether its debt and safe to assume debt.
That's the the cash payment will be.
We will be used going forward.
Hey, Keith it's Mike here.
Yes, you are correct in the in the sense that we made the payment in cash here in the first quarter. So I think that decision is made.
On our visibility on cash flow and where we are from a liquidity standpoint in the discussion with the board and that will be made in advance of of every payment as we go forward here. So.
I think ultimately we understand the implications on other side and we think debt.
The financial stability of Cal Frac has certainly been greatly improved pass the recap transaction.
And well look to make those decisions on a quarter by quarter basis.
In the low base.
Got it okay perfect. That's it from me thanks very much.
Thanks Keith.
I have no further questions in queue I turn the call back on sort of the presenters for closing remarks.
Thanks, operator, thank you everybody for joining us today as you all know our AGM is next week, we look forward to talking with some of you then thank you.
Thank you everyone for joining us today, it's well conclude todays conference call you may now disconnect.
Okay.