Q2 2021 Calfrac Well Services Ltd Earnings Call
Good day, and thank you for standing by welcome to the call Frac well services L. D. The second quarter 2021 earnings release and conference call at this time all participants are.
Only mode. After the speaker presentation, there will be a question and answer session to ask the question. During the session you will need to press star 1 and your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and whatnot.
I'd like to hand, the conference over to your Speaker today, Scott trip well. Please go ahead.
And.
Harsha and thank you everyone for joining us this morning, and welcome to our discussion of Cal Frac, well services second quarter 2021 results.
Also on the call today are Lindsay link Cal <unk>, President and Chief operating Officer and.
And Michael and it our Chief Financial Officer.
This mornings conference call will be conducted as follows Lindsay will provide some opening remarks, after which Mike will summarize the financial position and performance of the company. Lindsay will then provide an outlook for Cal Frac business and closing remarks. After the prepared remarks, we will open the call to questions.
And of news release issued earlier today accounts rock reported its unaudited second quarter of 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.
And all of 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.
Please see.
For additional news release, <unk> SEDAR filings, including our 2020 annual report 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 provides the financial highlights of the second quarter of.
I'll offer a few opening remarks.
As you have seen our results in the second quarter were behind both of those posted in Q1 and our expectations due in large part to operational disruptions and fleet changes in the United States, Although operations in both our international divisions.
And Thats more long and are expected to continue that trend.
Despite the spring breakup in Canada, our operations here delivered very good results and I believe that all of our operations are positioned for a strong second half of the year.
To all our staff no matter, where you work I'd like to thank you all for the hard work.
<unk> and dedication that you bring every day.
And the United States I can tell you that through the first half of the year, our capacity to generate revenue and cash flow has been masked by external issues like weather and client schedules.
As these issues move into the rear view mirror, we expect significant.
Improvement south of the border.
I will provide some incremental detail on the second quarter and the United States and.
On short notice 3 of our operating fleets were impacted by scheduled changes and June due to a number of issues. These issues are unfortunately of normal part of our business but.
But to have nearly.
Our operating fleet impacted at the same time is not difficult.
Not only do these changes removed revenue and profit from our results, but we cannot simply stopped paying our field staff or cancel repairs as all of these fleets went back to work before the end of June and are expected to.
The half menu through the months ahead. Additionally, we shifted 1 fleet between basins, which drove some incremental costs. Finally, we accelerated the reactivation of our eighth and ninth fleets incurring cost to prepare the equipment and the people.
The timing of the scheduled.
<unk> continues was magnified by the reactivation and the redeployment, but results in July have validated the moves we've made to strengthen and focus our franchise.
In general the outlook for our industry has continued to improve over the last few months with oil and gas prices reaching levels that appear.
Ish signal the need for further increases in drilling and completion activity in North America.
Our customers have rightly not chase these increases in commodity price.
Preferring to make smaller adjustments to programs now in anticipation of a more significant increase in capital spending in 2020.
2.
Our customers cash flows have accelerated meaningfully yet we do not expect to see that incremental cash go into development programs. We believe that the <unk> been shown by our clients underpins of rationality to supply that has not been evident in global oil.
Oil markets for many years.
While we expect to see increased demand for our services Cal Frac well like our clients not simply chase the market, having moved to 9 active fleets and the United States I believe our footprint is now sufficient to supplier of long standing clients, but retain some optionality to access.
<unk> incremental work.
The current economics of spot market work and North America do not support adding equipment to this segment and so Cal Frac will continue to focus our best and closest partners, while examining opportunities to take advantage of any improvement and spot market pricing.
We.
We're still a few months away from having real clarity on 2022 plans, so rather and procrastinate I will simply say that <unk> will be ready to respond to market conditions as they evolve.
And with the same focus on safety and service quality that is the cornerstone of our business now.
Of 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 on today's call.
Our second quarter results show the deterioration from the first quarter.
Due to the seasonal slowdown and Canada, along with unplanned.
Unplanned scheduled gaps and reactivation costs and the United States.
Yes.
Consolidated revenue and the second quarter increased by 127% year over year to $207.3 million.
With all operating areas showing significant improvement due to higher utilization levels.
Adjusted EBITDA reported for the quarter was $4.4 million compared to a loss of $5.2 million a year ago.
Operating income also increased by 183% to $6 million.
From a loss of $7.3.002 million 20.
This improvement and profitability is large.
To the increased revenue generated by all of the Companys operating divisions.
Offset partially by approximately $4 million and reactivation and redeployment and expenses and the U S.
As well as the impacts of unplanned gaps and our schedule during June.
The net loss for the quarter was $30.5 million.
Compared to a net loss of $277.3 million and the same quarter of 2020.
During the second quarter of 2020, the company recorded and impairment of $173.7 million, the PP&E and $27.9 million impairment of inventory.
In addition.
The lower depreciation and interest expense and the second quarter of 2021 also contributed to the improvement and the Companys reported net loss.
For the 3 months ended June 30 of 2021.
Depreciation expense decrease from the corresponding quarter of 2020 by $14.8 million.
1.4 million.
This decrease was driven primarily by the $227 million impairment to PP&E that was recorded and the first half of 2020.
As well as lower levels of capital spending and items with shorter useful lives.
And corresponding higher depreciation rates.
Interest expense during the second quarter of 2021 decreased by $11.4 million from the same period and the prior year.
Due to the due to the significant reduction and long term debt.
And that resulted from the company's recapitalization transaction.
Capex spent a total of $14.6 million.
And on capital expenditures and the second quarter compared to $10.2 million and the same period of 2020.
This increase was due primarily to the change and the amount of active equipment between the 2 periods.
<unk> 2021 capital budget remains at $55 million.
And the company will monitor market conditions.
And adjust spending as required.
Working capital provided a cash inflow of $15.8 million largely driven by the timing of payments and receipts.
During the quarter of the company completed the rescission of approximately $1 million of its 1.5 lien notes.
And.
<unk> material quantity of warrants were exercised.
Subsequent to the quarter of the company converted approximately <unk> 3 million of face value of 1.5 lien notes into shares.
To summarize the balance sheet as at the end of the second quarter.
The company and working capital of 100.
$52.2 million, including $20.7 million and cash.
At June 32021, the company had used <unk> 8 million of its credit facilities for letters of credit and had $155 million of borrowings under its credit facility.
Leaving $69.2 million and potential borrowing capacity.
At the end of the second quarter.
As at June 30, <unk> was in full compliance with all covenants under its credit agreement during the covenant relief period and under the indentures covering the 1.5 lien and second lien notes.
I'll now turn the call back to Lindsay to provide our outlook.
<unk>.
I will now present and outlook for Cal Frac operations across our geographical footprint.
In general it appears that the commodity markets globally are signalling ongoing tightness in the physical market along with concern for the long term supply demand balance as of chronic underinvest.
The men and and ongoing ongoing.
Economic recovery have become the focus of market participants.
It appears the maturity of the North American oil and gas industry has firmly taken cold.
Clearly producers have shifted their collective approach to.
The focus on returns over growth. Additionally, the mature Asian of the reservoirs is a never ending.
Is never ending with most observers of green that the industry is no longer capable of producing the level of multi year production growth delivered over the last 10 years and.
I believe that resources are getting more valuable.
And the reaction to that change in value is far more rational than in the past.
Well, we may not see the rapid and massive activity gains of the past I do believe that our industry is entering a phase of sustained value creation.
<unk> and our U S Division I've spoken about the issues that impacted the second quarter and noted that I feel of our franchise is well positioned to deliver meaningful improvement and the results through the second half with 9 active fleets.
The third quarter is expected to show a significant improvement over even the best.
The first half of the year based on improved and more consistent utilization better pricing and improved fixed cost absorption.
Recent improvement and natural gas pricing and the northeast has shifted our outlook for that region to 1 of cautious optimism and we're looking for opportunities to.
Add clients in that region.
Spec debt as the summer concludes we will see elevated bid activity supporting 2022 programs and all areas of the United States and well have much more clarity on the final months of the year at that time.
And Canada, the second quarter unfolded.
Months of we expected with lower activity in April.
And early May and giving our people and equipment of chance to recharge after a busy first quarter.
2 of the final weeks of the quarter activity rebounded significantly with June producing results in line with the first quarter.
And this rapid restart.
And of activity signals to me that the demand for our services will be robust through the second half of this year and our Frac calendar supports that view.
We expect activity levels in the remainder of the third quarter to resemble the first quarter and continue at that level into the fourth quarter.
We will market for fracturing crews through the remainder of 2021 based.
Based on current Frac dates from our major clients for 2022, we currently expect to deploy a fifth fracturing fleet as well as the fourth coil tubing crew and we'll finalize those plans by October.
The incremental frac capacity will be required to service.
Communicated activity increases from our major clients with the coiled tubing addition, and plan to focus on callout work.
Pricing in the Canadian market has begin to move.
Upwards.
As I've previously stated inflation has driven almost all of the increase to date.
There is simply too much equipment in the spot market and well and increased activity will serve to bring balance to the segment producers are not communicating a high level of concern around frac crew availability.
But at a near term.
I do expect that further tightness in the Canadian market will serve to push net pricing higher but I do not believe that well have a material impact on the profitability of the Canadian pumping space until 2022.
I'll now turn to Cal practice internationally.
City and operations and the second quarter, our operations and Russia improved significantly over the prior period as the transition to non winter operations was completed as expected well.
Volumes remained robust during the quarter with job mix and cost management driving a large improvement in profitability.
National of the third quarter is typically the busiest and Russia and work schedules indicate a similar trend this year.
The pricing changes are only seen during contract renewal work volumes and efficiencies should support further margin improvement in Q3.
Our operations and.
<unk> and Tina showed modest modest improvement sequentially.
In the second quarter as work programs continued while operations and nuc and are by far the largest our operations in the southern part of the country continued to deliver excellent operating results and returns on a relatively modest.
And origin asset base.
And I expect activity levels to trend higher through the remainder of 2021 with higher oil prices, providing a significant economic tailwind to operations and the southern part of of Argentina in particular.
Demand for shale fracturing services.
Is it remains strong and <unk> position in this segment should provide us opportunities to grow our footprint and.
And cash flows in the near to medium term the.
The last 15 months have been full of challenge for our industry and our company.
I'd like to thank all of our team for their efforts.
Services and helping us through.
This period.
It truly does look like better days are ahead and I'm proud to be part of this team as we move forward.
Back to you Scott.
Thanks Lindsay this concludes the prepared remarks, operator, well turn it back to you to manage the Q&A.
Yes.
And ladies and gentlemen, as a reminder, and ask a question you will need to press star 1 of your telephone keypad well pause for just a moment the Q&A roster again Thats star 1.
Yes.
Question is from the line of coal per year with Stifel.
Hey, good morning, everyone.
Just wanted to start.
The commentary about the Canadian Fleet addition, and 2022. So obviously the market is still slightly oversupplied now, but demand should take the step higher next year. However.
Yes, hi share obviously also of risks that too many.
Fleet additions could cut into pricing. So I guess you know are you are you fairly confident at this point that even with that addition, you can still get higher pricing for that fleet in the 2022 as well as the rest of the year operations.
Yeah, Cole I think kind of important and differential.
Frenchie debt the fleet, we're contemplating adding for 2022 is only designed to service existing clients who've talked to us about increased programs for next year. So in terms of the overall market, yes, there'll be higher demand and obviously from our position higher supply but in terms of.
And what market, which is really where pricing turns and the Canadian market at least and are in a functioning market.
The planned addition of a fifth leads can have no impact on that so we don't anticipate it creating any headwinds for our ability to move pricing and a constructive market and if the market changes between now.
And let's say the fourth quarter, and and we don't need to add that fit fleet and can still support our major clients then that the decision will kind of take at that time I think we wanted to be clear that that's not written in stone and certainly looks like that's the way the cards are going to fall here in 2022, but it's not it's certainly not set in stone, but if nothing.
Of the sponges on our client side, that's the way it will play out for us.
Okay got it.
Just a follow Agua and <unk>.
And the Scotts comment that fifth fleet of actually a relatively modest the.
The reactivation costs on it so.
It won't take us very long to either stop or start the <unk>.
Fleet based upon the coming months of activity.
Okay got it that's helpful. Thanks and.
For the fourth spread that you're reactivating per this quarter I mean earlier.
Nothing genome and hit you thought.
Utilization would be quite spotty, but obviously you know activity is kind of surprise the upside. So can you just commented all on what you expect the utilization for the fourth spread to be into the back half of the year.
We don't we don't give guidance, so I won't be too specific but I can.
There you see of 2 points first and foremost we wouldnt go back to that force spread unless there was.
The demand the we Couldnt service any other way and we look at the business from the core clients outwards, and so with our core clients.
Programs for the second half of the year some of them are.
Get more of kind of Q1 Q3 weighted.
And so you get back to kind of that Q1 footprint, where we were running 4 crews.
And it's really more of a return to that kind of level and so again I don't think you would see us run of fourth crew, if we're expecting it to be 50% utilized.
We're a little market has never been a big piece of our Canadian business and I don't think Youll see that and it's certainly not the plan for 2021, if the spot market pricing was 10 or 15% higher than it was that might be a different answer we might have a bit of speculation and are in our footprint, but it's just not it doesn't make economic sense to have that much capacity and our.
And the speculative market segment and so it's it's really all spoken for.
Okay, great. Thanks, and so I mean for the quarter U S. EBITDA was negative $3 million, but obviously a lot of onetime items solicit, let's call it $5 million on a normalized basis. I mean is this kind of a reasonable baseline going forward.
And of spend maybe there is the buy side from the debt.
And the near term fleet additions of hushed or are there other factors, we should kind of think about.
Yes, again I won't speak specifically about numbers I think maybe what you are adding back might be a little light I think there is the impact of that schedule disruption was.
<unk> was pretty significant and honestly it would probably take some forensic accounting to get the exact number but I think the U S. On a quarterly basis, even if you ex out those items, it's probably.
I think we'd be the.
The expecting that is an absolute minimum and likely something much better.
Other than that.
And on monthly basis, we've seen the us perform at a level that would support something better than that obviously I'm not going to give you that kind of detail, but I think we've got some confidence that the U S can improve over even a normalized Q2 level not just from the addition of the 2 incremental fleets and the removal of kind of onetime items.
Items, but just.
The more consistent utilization and.
Hopefully it looks like some some pricing moving to the upside as well.
Okay got it and I guess, maybe on that note and.
And you just give some color around how pricing conversations have been going for the next few quarters and the U S.
Hi.
I think well.
And what ill say is we won't I won't comment too specifically on pricing, we try not to negotiate pricing in public.
And that to be and general kind of counterproductive I would say generally all of the conversations have been collegial.
Joel and understanding and moving and the right direction.
But I don't want to give the impression that you just knock on a customer's door and they give you more money.
And they've got shareholders that they are accountable to as well and so they have to make sure. They are doing due diligence if they have to spend more money they need to know why and part of that.
We don't make enough money, it's the service industry to support.
The investment and our assets over the long term.
But part of it is also around inflation, so I would say its multi.
<unk> from that perspective, but it's been relatively positive and I think if the macro doesn't change you will continue to see those positive conversations unfold.
But I want to be very clear you have to bring value to the table, if youre going to move pricing higher on a net basis.
Unless youre going to just lag everybody. So that's that's.
And that's where we're really focused is making sure we've got something and you bring to our customer if we're talking about trying to move price higher.
The net price net price.
That is absolutely the Scott.
<unk> coal.
Cost pricing is.
A relatively quick discussion on there, but that the to just to be expected. When you are running small margins out of it is the.
No 1 can really argue that if you have a cost increase.
And yet you need to capture that back because of those.
There isn't the margin to absorb the cost.
Okay got it that's helpful. Thanks, That's all from me I'll turn it back.
Thanks, Paul.
Your next question is from the line of John Gibson with BMO capital markets.
<unk>.
Good morning, guys.
Well I'll start and and Argentina, I'm, just wondering and I apologize if I missed this and have operations largely resumed and the qunar or you still see and some issues with the customer there.
No we had a little bit of disruption during the quarter with some labor issues, but by and large field.
Operations are pretty much back to pre pandemic levels, yes, there still is some COVID-19 impact the individual cruise or maybe a redeployment of of cruise the pace on Argentina.
The country is still battling the pandemic.
And a pretty earners the way.
Sorry, I was more referencing and the release you talked about well bore issue of the customer and I'm just wondering if thats largely been sorted out.
Those things tend to be days or weeks.
And at the end of the day you move on to another.
Pat.
They can't resolve it and and so that's definitely in the rearview mirror.
And when you're thinking about Q3, Q4, that's absolutely volume as well.
Okay Gotcha.
Also and you at least you spoke of Q3 and Q4 trend and the direction of Q1, this year and Canada, Obviously, you had some weather issues during the quarter and.
And Q1 just wondering.
If we could assume some modestly higher margin and Canada going forward relative to Q1, obviously pending better quarters. It's just in terms of weather.
I'd be a little bit careful I think we've been relatively clear the net pricing and Canada does not and.
And I'd say positive development through the first half of the year of I don't want to say it was not there at all.
But there is definitely not as much positive pricing movement, and Canada as their house and the U S, albeit U S from a lower level.
You can probably get some margin improvement from consistent utilization and efficiency.
But that's that's typically measured in maybe a couple of hundred basis points, if you're talking about getting.
And for a 5% margin improvement you really need pricing to come in and you know, let's let's remember.
And summer there's a lot of demand for labor there is a lot of demand for fuel there is demand for steel.
<unk>.
So I would kind of caution about getting too aggressive on margins moving up.
Not that we know anything today, but there's probably some inflationary pressures that we don't see that will pop up at some point before the end of September.
Okay, and maybe ill.
Add on to that the labor question.
Steve and reactivated a bunch of equipment in North America to start the year just.
Wondering if youre seeing issues on the labor side of where you're able to stop the incremental fleets relatively easily.
I mean, nothing is easy, but we have a very active recruiting and.
Training program.
Had the.
And for sort of probably he started out of the company.
Okay.
We can do and intake of new personnel and and the at least give them a good chance unfilled readiness the.
And a relatively short period of time, but without a doubt what other.
Other companies have said and I think we've said.
It is a challenge or the right at the moment of 2 to <unk>.
Especially certain kinds of.
And experience.
CDL license. The employees are are in high demand from a number of different sectors and.
So.
It does make it the challenge, but the date we are.
Meeting that that the demand.
On there and we continue to evaluate the the marketplace, but we are we are very aggressive and.
And the hiring market using all the different.
Forms of technology to make that happen.
Have you seen some cost inflation in order to to do so just on the labor side.
No I mean, the there well.
Were keeping costs relatively consistent with the with where.
They.
Have have been where the employees I think are are are seeing the benefit is in again higher utilization, so either and overtime of bonuses, depending on which country you're in from a 4.
For an increase but relatively.
2 of the stage count that that doesn't change the number of whole lot.
And John I think from and up labor inflation perspective.
What we would do and I think probably most of the industry would do is if we were raising labor rates to attract people. The first thing you would do would be to pay your people that work for you today.
<unk> more and then potentially have a hiring incentives and things like that as well to to kind of Sweden and for the people who work for you today and then not obviously leads to.
Higher wages, when they come and the door, but you certainly wouldn't.
Raise rates for new employees without considering what's going on with our.
Our existing employees.
Okay got it thanks.
Lots of them from me, we're hearing from your peers and.
Incremental equipment, and Canada will require upgrades to the.
Dual fuel tier 4 just wondering where you parked equipment and Canada sits in terms of dual fuel capabilities and always spoke to and minimal minimal.
Operating requirements of our activation capex for free that fleet.
And are you seeing demand for upgraded equipment and tier 4 status as we move forward here.
Okay, there's a couple of parts and.
I think we are satisfied with our level of of dual fuel.
Deploy.
<unk> in Canada.
So I don't think that for the next fleet that we would be talking about it's going to be of dual fuel.
4.4 of tier 4 and and that well, there's always demand from our clients to have us add.
More horsepower into the marketplace, which would again probably seem to keep pricing and and a depressed level. I think everyone has also been pretty cautious on redeploying more capital to do that.
Of that level the.
The tier 4 is of great.
The great.
Movement from the on the offering that's out there, but you know it is basically a million dollars to upgrade a frac pump on each of those so it does make.
It does make it a challenge to get that to get that cost recovery and the.
There is some substitution and benefits than maybe.
There's limited the.
The environmental benefits on on there, especially and in remote areas. So so we are evaluating we are we have a.
A small amount under construction not here in Canada, but.
It's a well proven technology.
But we're still waiting.
We haven't seen the demand to justify a full fleet conversions.
Got it I appreciate the responses I'll turn it back.
Thanks, Sean.
Ladies and gentlemen, and as a reminder.
This concludes the question. Please first of all.
And the number 1.
And your telephone keypad.
And again Thats Star 1.
Yeah.
I think so.
At this time, there and no further questions and I would like to turn the call.
And for any closing remarks.
Thanks Pasha, Thanks, everybody for your interest today and the management team will be around if you have any follow ups and we look forward to speaking to you when we release our Q3 results later this year. Thank you very much.
Thank you, ladies and gentlemen, and does.
Right well day conference call and thank you for participating and epic day now disconnect.
Okay.
Okay.
[music].
And then.
And then.
[music].
It concludes.
[music] book.
Growth in fee.
Okay.
And the research.
And as well.
Okay.
Yeah.
And then.
And then.
[music].