Q3 2021 Trican Well Service Ltd Earnings Call

Thank you for standing by this is the conference operator, welcome to the Tri can well serve US third quarter results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation. There will be an opportunity to ask questions to join the question queue you May press.

Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star zero.

I would now like to turn the conference over to Brad Fedora, President and Chief Executive Officer. Please go ahead.

Thank you very much good morning, ladies and gentlemen, I would like to thank you for attending the <unk> Conference call with me today is Scott Mattson, our CFO and Todd <unk> our CFO.

Please refer you to our website www <unk> com and on that website, you will find the disclaimer that we'd like you to read in conjunction with this call.

First Scott Madsen, our Chief Financial Officer will give an overview of the quarterly results I will then address issues pertaining to current operating conditions and near term outlook. We then open the call for questions and the three of US will be available here to answer any questions that anybody may house I'd now like to turn the call over to Scott.

Thanks, Brad So again, just before we begin I'll point out that this conference call may contain some forward looking statements and other information based on current expectations or results for the company certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward looking information section of our Q3 2021 M D N a.

Number of business risks and uncertainties could cause actual results to differ materially from these forward looking statements and our financial outlook. Some of these risks and uncertainties may be further amplified due to the ongoing effects of the COVID-19 pandemic.

And please refer to our 2021 annual information form and the business risks section of our MD&A for the quarter ended September 32021 for a more complete description of the business risks and uncertainties facing try can.

So during this call. We'll also refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our quarterly MD&A.

And as Brad noted our quarterly results were released after market closed yesterday and are available both on SEDAR and our website.

So with that we will talk a little bit about the quarter. Most of my comments will draw comparisons to the third quarter of last year and I'll also provide a bit of commentary with respect to our results on a sequential basis as compared to Q2 of 2021.

The quarter started off strong with positive momentum and momentum continuing out of a very solid Q2 with a generally positive Q3 with continued strong commodity prices driving improved activity levels across all of our service offerings revenue for the quarter was 164 and a half million dollars a step change up sequentially from Q2 levels as we moved out of.

[noise] breakup and into the back half of the year and up more than double compared to the $74 $1 million. We saw in Q3 of last year.

W. Ti averaged just over $70 per barrel during the quarter up sequentially from an average of about $66 a barrel through Q2 and up significantly from an average of around $40 a barrel in Q3 of 2020.

Nico gas pricing averaged about $3 39 per Mcf for the quarter, which was also up sequentially from Q2 levels and quite a bit stronger than the $2 14 per Mcf. We saw this period last year.

Continued strength in commodity prices resulted in an average western Canadian rig count of approximately 160 during the quarter up compared both to Q2 of this year and to the same period of last year. The rig count through October has continued to climb a bit and we do expect it to continue to pace higher as we move through the remainder of this year and into what looks like a very strong winter drilling season.

These factors led to higher activity levels across most of our service lines compared to the same period of last year and as compared to Q1 of this year.

Q2 of this year continued stronger activity ongoing improvements in the efficiency of our operations and continued focus on profitability, including the structural fixed cost improvements we've implemented over the last 12 to 18 months have led to significant improvements in all key financial categories as compared to Q3 of last year.

Fracturing operations were up sequentially from Q2 of 2021 and significantly busier as compared to the same period of last year.

Pumped was up 84% as compared to Q2 of 2021 and nearly triple as compared to last year's Q3.

We maintained six fracturing crews throughout the quarter with utilization increasing to 85% for the for Q3 of 2021 compared to 42% in Q2 of 2021, as we came out of breakup and into a period of much higher activity.

Operations continue to be heavily focused on pad based locations, which helps minimize both downtime and travel time between jobs and improves our overall efficiencies fracturing margins remained healthy through the quarter and were a significant factor in the strong financial performance of the company for the third quarter.

Our cementing division also had a good third quarter strong activity driven by the overall increase in rig count with activity skewed towards larger jobs, resulting from primary work in the Montney and deep basin areas.

Coiled tubing activity was down a bit sequentially, but utilization was backstopped by a number of core customers.

So as expected with continued increasing activity levels, we are seeing inflationary pressures on all sides costs for our key inputs such as fuel cement chemical and sand have all seen increases in the past few months and the pressure is constant our supply chain group has done a great job in getting ahead of this and managing these trends, but they continue.

To come at Us on a daily basis, our focus remains on controlling costs and passing along these increases as much as possible to help preserve our margins.

Adjusted EBITDA came in at $31 2 million a significant improvement over Q3 of 2020 and just over double our EBITDA from Q2 of 2021, it's important to note that our adjusted EBITDA calculation does not add back cash settled stock comp expense, which was $1 $1 million for the quarter. This expense.

Fluctuate along with the movement in the company's share price, which saw an appreciation of just under 11% over the term of the quarter.

It also includes expenditures related to fluid end replacements, which totaled $2 $3 million during the quarter and were expensed in the period.

Also of note this quarter contained virtually no contributions from the Canadian emergency wage subsidy programs as compared to the prior two quarters, which saw significant contributions from those programs.

On a consolidated basis, we generated profit from continuing operations of just over $9 million in the quarter or four cents a share and we're very pleased to show positive earnings on a year to date basis.

We generated cash flows from operations of about $8 8 million for the quarter following strong operational performance.

But did see an expected increase in working capital through the quarter as our activity levels increased capital expenditures amounted to $10 6 million, which was split between our capitalized maintenance and our ongoing capital projects.

The company's full year 2021 capital budget remains at $58 million with approximately $20 million of that allocated to maintenance and infrastructure capital requirements and 38 million allocated to growth capital.

The growth capital amount is primarily related to our previously announced program to upgrade conventionally powered diesel bumpers with cats tier four dynamic gas blending engines.

These engines can displace up to 85% of the diesel fuel required with cleaner burning natural gas, thereby reducing carbon dioxide and particulate matter emissions.

These upgrades are a key part of <unk> overall, ESG strategy and a prime way of supporting our customers in meeting their individual ESG goals as well.

We exited the quarter with $37 6 million in cash and cash equivalents on hand positive noncash working capital of $66 5 million and no drawn bank debt.

Finally, with respect to our normal course issuer bid program, we were quite active in the market during the third quarter and repurchased and canceled just over 7 million shares at an average price of about $2 60, a share and we continue to view share repurchases as a good long term investment opportunity for a portion of our capital in the context of returning capital to our.

<unk>.

So with that I'll turn things back over to Brad who will walk us through his views on operating conditions and a bit of our strategic outlook. Okay. Thanks, Scott I'm going to make some general commentary and I'll try to keep my comments short as possible, but give you a bit of a flavor of the marketplace that we're working in today Q3 was a really strong quarter in the.

Context of what's happening out there we started very strong in July and we were very active with a core group of customers and we were on large pads that enabled us to work efficiently through most of the quarter.

The quarter began with about 140 rigs running and we average just under 100 660 rigs for the quarter peaked at about 172 at the end of September and we are currently back down to about 165 rigs and we seem to be sort of maintaining that level now for the last month or so and just in general when you think about.

The rig count.

And Frac demand I mean generally what you want to do is deduct the heavy oil rigs from the rig count and then divide the remaining number by about five and so theres no theres roughly five conventional rigs per frac crew and so that gets us to two about 'twenty six 'twenty seven crews today, which is in fact, what we have so the market.

It's generally quite balanced.

We maintained really good market share in our cementing group Rob.

Roughly 30, 35% to 40% over the market and our cementing is very much focused in the deep basin in the Montney in both BC and Alberta.

Covid did have an impact on the quarter, even though it was a good quarter, we actually had expected it to be better.

And we had rigs down in the second half of the quarter you know starting in sort of late August and throughout September there was definitely reduced activity levels, just due to the sort of the COVID-19.

Case, the case spike that Alberta experienced it took rigs down and of course that means there is less demand for frac crews, we did have our own COVID-19 issues in the field that made some of our operations slightly less sufficient although we have we do have enough staff that we can respond very quickly.

Any issues that we may encounter and the delays in our operations are theyre extremely short lift.

But even the delay to the office by the by the office staff in Calgary.

Did think actually impacted the quarter.

Throughout the quarter, we pumped about 480000 tonnes of sand 277000, or those were internally sourced meaning that the customer supplied the rest in general that's that's not really a negative but it certainly isn't the positive trend, we do typically charge corkage for customer supplied sand.

We do want to keep an eye on that and we want to make sure that we don't reduce our opportunities to make a profit and so we generally try to gravitate toward customers that allow us to provide sand and chemicals about 60% of the proppant that was pumped in Canada was auto all white versus the domestic source sand and auto Huawei.

<unk> almost variably comes from the U S.

We continue to see increases in the ton of sand pumped per well.

Customers remain focused on on these resource plays and placing more sand on a per meter basis to get as much.

As much gas lowest possible and we get asked a lot what inning are we in with respect to sand sand tonnage per well and the answer is we really don't know, but we do think we're sort of in the seventh eighth or ninth inning of how much sand goes into a well and what we're seeing now is theres still everybody is still gravitating towards that.

Standard tried and true methods, but there is a lot of experimentation with respect to less or more sand on a per well basis or just even the spacing. So it's always very difficult to.

To tell you what inning, we're in with respect, but it's in general it's a positive trend in.

Generally means more revenue per well for us our areas of focus have not changed we're very focused in the BC and Alberta, Montney and deep basin, where we are active throughout the basin, but certainly 80 plus percent of our revenues would come from the from the deep basin in the Montney play in general and.

Even though commodity prices or gas prices ever really spike obviously solar is oil and so activity has picked up in all areas of the basin, but we remain focused with the Montney and deep basin from.

From a crude from a crude perspective nothing has changed we we ran with six frac crews throughout the quarter about 17 cement crews and about six six coil crews and in fact, we still sit there today.

On the pricing side.

We've been really vocal about the need for price increases since early spring I think it was year end 2020, and after Q1 of 2021 I I was quite vocal about the need for price increases.

And generally I would I was regrettably I would say achieving those price increases were much harder than we expected. We just did not get any support from our competitors.

We're still even to this day seeing some stink bid that would absolutely shocked you in the context of what's happening E&P cash flows are at record highs. So our strategy hasn't changed with respect to moving prices up we're just trying to run a sustainable business.

And I think actually the customers.

<unk> the need for a price increase more than our competitors do.

Because they know we're not gouging them. We're just we're just trying to run a sustainable business.

Definitely prices need to go higher.

Fortunately, we didn't we didn't necessarily get the price increases we did we were looking for but we did get them.

So we did offset more than offset inflation.

And the customers were very receptive to us passing on any inflationary cost increases that we were we were experiencing.

Late in the quarter. We we did we did talk about price increases again, and we have had price increases recently in all of our service lines, particularly fracturing in cement.

As we're basically operating at full capacity as an industry. We expect inflationary cost to continue theres not that's certainly not going away and we will stay diligent on on sort of informing our customers about those costs and making sure that we can recover those costs to avoid any kind of margin erosion.

On the cost side.

I'm happy to report that we've kept our G&A and our fixed costs constant.

Even reduce them in certain areas so as the activity in their revenues have gone up.

We are diligent about making sure we keep our costs down we've implemented lots of initiatives throughout the company over the last few years and we're continuously looking for new ways to manage our company more efficiently and what this means is as obviously as cost.

Stay constant as revenues going up.

That ratio gets better and that's what operating Leverages and Thats the great thing about the pressure pumping business.

In an up cycle, it's it's fairly exciting and theres lots of operating leverage.

Because we kept our our cost our cost constant and our increasing market. We did have good EBITDA and free cash flow in the quarter and I really want to focus I want to try to focus the conversation around free cash flow just given given the age of the fleet, whether it's in Canada. The U S doesn't matter, but just given the age of the fleet.

Maintenance, whether it's expensed or capitalized or it doesn't matter how you treat G&A.

Whether it's on the income statement or it's in the divisions I want to make sure that we talk less about EBITDA and more about free cash flow because of course, that's all that matters and free cash flow sort of catches everything and so I think we need to sort of get away from focusing on EBITDA and talk more about free cash flow just to just to account for all the difference.

This is how people how people treat maintenance and G&A.

Now on the supply chain and on the supply chain side I mean, it's certainly an area of concern.

It's been a major issue in managing our bis our business throughout these higher activity levels, we've done a very our group.

I'd like to thank our group continuously because they've done a fantastic job of managing our supply chain and making sure that we have products on a timely basis at good prices.

The entire supply chain industry wide, whether it's parts chemicals sand doesn't matter at all.

All starting to feel stress and as we know they are better at passing on price increases and we are.

So we're actively working with our suppliers to ensure that we not only have good prices.

And we have long term relationships, making sure we actually have the products when they're needed.

And we had as expected we had inflation across the entire supply chain in the last sort of six months, especially although I have to say the inflation was less than we expected.

Things like <unk>.

Diesel, obviously floats with oil price, but third party trucking and logistics.

The demand for those those goods and services are much higher than the supply.

On the SaaS side tier one suppliers out of the U S are basically operating at capacity because it's not just what the mine can produce but it's how much of that sand can you put in a railcar.

Only so many so many railcars available so many rail lines are.

Operating in Canada, and so that system feels fairly stressed.

The increased sand volumes that we're that we're pumping is putting a strain on our logistics and <unk>.

We've now sort of had to focus on making sure that we have access to trans load facilities, particularly in northeast BC, but again are our supply chain group has done a fantastic job at making sure that this has been generally seamless through.

What has been a very sort of stressed inflationary environment on.

On the chemical side, we've all seen what's happened to.

Shipping cost and container availability a lot of the core the core.

Chemicals that make up the fluids that we or the fluid systems that we sell they do come from China, and the U S and so we've anticipated the delays that we have.

I've actually been experiencing.

And we're always looking for substitution and working with our suppliers to make sure that we have the supply that we need at a at a reasonable price and again I think we've done a really good job of that on the cement side, we experienced lots of cementing product issues, but the summer construction season is over now so we should be good for the winter.

Even things like hotel cost just due to COVID-19 with the labor shortages that we're experiencing.

In the hospitality sector.

Everything has been affected and it just all that happens is you have to make sure youre doing a much better job at managing that and the companies that manage it well and.

We will be rewarded.

So the outlook for the rest of the year and into 2022, I mean, we have fairly good visibility I would say until breakup and in our schedule is very busy until breakup E&P cash flows are at near all time highs almost.

There are wells that theyre drilling are paying off and in a matter of months not a matter of years and that's a good thing, we certainly need our customers to make money. So that the industry can be healthy and as a result, we've had a really good start to Q4 October is very busy we shouldnt be busy right up until Christmas December is always a bit of.

It is.

It's unpredictable just because you have winter weather and its hard to know when the when the seasonal shutdown around Christmas but the.

The indications we're getting from customers is that.

We're going to start up immediately after Christmas and by the time Q1 starts we should be running almost full blocks. So we're looking forward to a good Q4 and are in a really good Q1.

The basin and are certainly are our service remained very focused on sort of gas plays both obviously gas prices and condensate prices are extremely high and so we're seeing lots of activity there, but even the oil plays at these levels are very attractive and so the whole basin is busy units, it's really stressing the system.

Generally is a good thing.

The rig counts have stayed steady.

It will stay steady for the rest of the quarter and it will obviously slow down for Christmas, but we expect that it's going to immediately pick up.

Regardless of what Youre hearing we do expect that 2022 will be a busier year than 2021, I mean, how much is very customer dependent.

But certainly our customers are signaling to us that to expect busier and busier activity levels.

And that's a great thing is as I was saying, where we're basically theres 27, frac crews in the basin and all of those or are being used today and so any increases in activity levels, which were expecting starting early in Q1 will require more frac crews on the road.

And that's going to stress the system that will drive prices higher.

No matter what are.

Our customers are obviously very very focused on returning capital to shareholders, but.

Certainly at these commodity price levels, they are going to be busy year for next year, and that's going to be good for both activity and for pricing.

Yeah.

Because of all of that we are expecting price increase in early Q1.

Both just to offset inflation and to return our business to some sort of reasonable sustainable level. So that we're able to actually generate earnings and reinvest in our equipment in and as <unk> discussed.

As discussed before the Frac fleet in Canada is old.

Our most recent Frac fleet delivered to Canada was the spring of 2016, and so the equipment has been used heart pumping times are long and.

It wasn't that long ago, when pumping times were $14 15 hours a day and now they are they are almost expected to be 20 to 23 hours a day. So the equipment's been used heart, which means it's going to need a lot of capital reinvestment to keep the equipment that's running today.

Continuing to run and if we want to pull equipment off the fence its going to take time and money to make that.

Equipment useful in the field so because of all of this we are expecting a price increase in.

In Q1, and certainly will be at the very least passing on any inflationary costs that we get.

From a crew size perspective.

Like I say, we've kept our crews pretty constant and we will keep them constant for the remaining of the year at six Frac crews in particular, we were always monitoring this but.

I'm going to use this opportunity to talk about the people issues that we're experiencing that people will be the biggest bottleneck for crew activations for the next year minimum and it is different this time, you've never seen this kind of market, where the number of people wanting to work in the oil patch and the demand for those people.

They are completely separate it and certainly we expect this to loosen up when some of these these government programs are shut down and just the travel restrictions are loosened and with respect to the to Covid.

But there is literally every company in the oilfield services space is looking to add people and at the same time, so are the safeways and Wal marts and hotels and restaurants. So we really need the government to shut these government subsidies down to get people back to work.

Because the oil patch pays very well.

And so once once we get people wanting to go back to work, we can start recruiting across the country.

And we will attract people back to this industry, but it will be tough and we expect that this is probably a permanent change in the way we do our business now we don't take for granted that we can just hire people when we need them. What we found we've been actively trying to hire now since Q2, and it's been a lot harder than we expected we've been fortunate we have hired.

We're up over 130 people on a net basis, but we still have more to go.

And.

As I'm going to talk a bit to talk about in a bit.

Order to bring more equipment into the field, we do need more people and that that is a challenge in and what that means is when you are planning sort of equipment reactivation.

Whether it's parts or people that cycle of bringing equipment off the fence is certainly going to be longer this time than it has in the past.

It will be measured in terms of months.

Not weeks by all means.

And I do it's probably a good point for me to talk about the basin in general when we talk about increasing activity levels. The market is sort of perfectly balanced.

Our supply and demand perspective today, and we expect that that balance to get out of to get out of whack here in 2022, Theres about $1 8 million horsepower operating in are available and in Canada, We're operating about $1 2 million.

But it's I want to stress that out of the 600000 extra horsepower or our idle capacity that exists today tracon owns about half of it.

So when we think about upside in the fracturing or the pressure pumping space basically half of that upside is going to come to our company from just purely from an equipment perspective. So we're really excited about 2022 and 2023, we think we're extremely well positioned to capitalize on any incremental growth in activity in this basin.

On the technology and ESG side.

We're always looking at technology advances within our industry, particularly the digitization of data and that data collection that we can use to be more efficient in how we operate our assets.

We'll be focused on this over the next few years.

Particularly in the AI space.

To reduce our maintenance costs it's.

Maintenance is one of our biggest costs between capitalized and expense maintenance, it's quite substantial so any anything we can do in that space to reduce those costs or even just to reduce the downtime is extremely helpful. So we'll be we'll be very focused on the digitization of data in the next in the next few years will be very real.

<unk> released our inaugural 2020 sustainability report that report can be found on our website.

Been very well received it's a start and it's certainly not where we're ending up with we.

Just permanently we just hired a permanent ESG person too to really heard the cats within our company and take on strategic initiatives in the ESG space and in general.

Our industry has done a very good job of ESG over the years, but we need to use this sort of investor and public demand for more focus on the east ESG as a platform to the showcase all of the things that we've done.

And to sort of publish and edberg measure and publish what we've done and get those out into the public because we really have sold their salt ourselves short as an industry in the ESG space over the next over the last five or 10 years, and so I think thats sort of focus on ESG is a good thing.

Not just for us, but for our industry and we're really I think we're taking the lead on that and we're allocating resources internally to make sure that we get this right and hopefully it becomes a competitive advantage for us.

We have a very obviously very healthy balance sheet no debt, we have a cash balance and so we have the flexibility to look at anything.

And whether it's ESG technology et cetera, we're in a very fortunate position to be able to look at anything and if it makes sense from a returns perspective, we will pull the trigger and make those investments.

Our customers are very interested in new technologies and in general I would say they understand that some of that technology needs to come with a price premium so we.

We've had great conversations with our customers over the last six to nine months and we will continue to do so we've done a great job on the environment side with reducing emissions, particularly with a new tier four pumps.

Reduction technology, and just even our fluid systems to reduce the amount of fresh water that we use but we've also done a good job on the governance side and do you drive that.

The woman that we've hired she is going to make sure that we up our game on the social side. So the <unk> component of the ESG.

We're going to make that part of the company's culture going forward and that hopefully will distinguish us in the marketplace.

So just I'm going to make some comments, so I'm not going to talk about the capital in detail. We are happy to take questions on that but I'm going to talk about the tier four engine upgrades that we've been doing and so we will be activating the first tier four fracturing fleet in Canada and that will be coming. This November the pumps are now going into the field as we speak.

We're extremely excited about this and proud to be the first company to rollout a low emissions fleet in Canada. We expect that this will be the standard in the next few years.

We have had some delays in manufacturing, but nothing significant and an actual fully functioning spread with a 100% DGB engine. We should have in the field operating by November and of course that fleet is going to terminally.

So previously we had said that that will be our seventh frac crew and actually we have changed our mind on that we are going to stay at six frac crews and we just don't have the people to put a seventh frac crew on the road right now and so this new tier four.

Gas engine.

Frac pumps will displace the old tier two diesel equipment that we've been using and so we are expecting that we're going to get our staff in place.

To call this a seventh spread for sort of January one.

And certainly we seem to be on schedule for that.

And we haven't had any cost overruns initial reports from the field on on this on the on the few pumps that are out there already have been really good we've been getting great gas substitution, which of course is the idea behind this technology, we get up to 85% diesel displacement, which is a big cost savings for the customer and just as.

<unk>.

It's helping reducing emissions from diesel and from methane slip.

So we're very happy with all the equipment has performed to date.

It is important to note that this equipment is priced at a premium.

I want to make sure that our that our shareholders understand that of course, we're not investing 20 plus million to upgrade equipment and not expecting a return on that investment. So the customers have been have been receptive to that they understand that the cost savings that they're experiencing from a fuel perspective is a positive thing and the emission reductions as part.

The thing that we need to share in that as well and so we've had lots of great conversations, particularly with term lean on on getting this equipment to work, but we.

We are charging a premium price for this equipment.

Manufacturing on the second tier four DGB spread has has restarted and it will continue to unfold over Q4, and Q1 and so we will have our second.

Tier four natural gas fleet available probably early Q2 of next year at the latest.

And we expect as I said, we expect this technology will become a standard in the next few years on the M&A side very quickly.

We remain focused on getting our existing equipment that we own into the field. That's by far the most profitable thing that we can do in our company is set up to operate the top rate a much larger fleet.

So anytime we bring our fleet off the fence and put it into the field all of that field margin of that contribution margin go straight to our bottom line and so by far that is our best investments.

When we were buying shares back at book or even sub Booker slightly above book, obviously, it was a very attractive investment as well so on the M&A side, we're always open for the right transactions and we were always looking.

But our focus is differentiating ourselves from an equipment perspective, and getting our idle equipment to work.

We're always we're always looking we're always available to the right deal but.

We're trying to do what makes the most financial sense for our investors.

I think I'll start the call there and I'll hand, the call over to the operator, so thanks for listening and it will take questions from here.

Thank you.

We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear Tom acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

Our first question comes from Andrew Bradford of Raymond James. Please go ahead.

Thank you good morning, guys.

Brad I wanted to thanks for the.

For the comprehensive overview that was really good really good update.

A couple of questions here I wanted to start maybe with the tier four equipment. So.

Because I understand what you just said.

You changed your mind Youre not expanding this to a seventh crew, but that's that is what your plan is.

In January so as it comes out in the field, it's simply displacing equipment that was already there is that what I'm understanding you to say.

Yes, correct.

So it's not so you didn't change your Mod, we didn't change our mind, we just.

Under estimated the dip the difficulty in getting people and so weak.

Couldnt staff to seventh crew today.

Right and but you anticipate that you will be staffing the seventh crew.

In the first quarter is that yes, we are.

Or at least sort of halfway there already.

So it is good it allows us to.

We haven't had any issues with COVID-19 or holidays are.

The hunting season, we're able to.

To operate sort of uninterrupted.

Because we do have some extra people in so we're about halfway done on our seventh crew. So we're feeling confident that we should be good to go by Jan one.

And just on that.

Labour issue so.

You know as you describe some COVID-19 related issues lately.

In the third quarter, I guess, maybe even beginning early in the fourth.

Maybe could you describe what kind of protocols you've put into sort of.

Mitigate this impact on yourselves going forward and then like as you do that maybe describe what kind of impact that's having on your labor shortage issue because even if we look just at the health care industry.

You might expect that that would be a fairly easy slam dunk in terms of implementing vaccination protocols, but still we're hearing that.

People are being dismissed from their jobs and stuff.

I wonder if what youre seeing on the in the oil patch now.

Yes.

<unk> October 15th so roughly a month ago, we put in a new policy.

In response to things are somewhat getting out of hand from a COVID-19 positive.

This perspective in Alberta.

And we were seeing it impacting our field operations. Luckily, we were able to get through it no problem, but I think we took the lead in the pressure pumping space in about a month ago, We said that effective October 15th.

Either have to be fully vaccinated like two two vaccinations, we don't care, which ones they are.

We have to be fully vaccinated or you have to provide a test.

Before you show up for your shift if you work in the field.

On your own dime and did you have to take the test on your own time, and if you work in the office you have to provide a.

A test result.

Every every wednesday or something like that but I mean, the point of this was theres lots of testing happening.

On customer locations, but we were having the issue of people, we're showing up getting on a crew then and by the time they got to the customer location. We found out well some of them are testing positive, but now it's too late they've been in the CRU bandwidth 20 people or so right and so we want to make sure that before you even show up to our base your COVID-19 free and that.

It will allow us to plan and deal with logistics way better.

And we had lots of lots of Griping about it but I can tell you it didn't last long and many many people in the organization actually sent US a note, saying youll. Thanks, right like everybody has their issues whether it's.

Grandparents are children that they feel are exposed they don't want to go to work and get Covid right and so they were happy to happy to have us for sort of lower the lower the hammer on making sure that we do whatever we can to make sure that when you come to work one of your safety concerns is not getting COVID-19 from one of your coworkers.

So we didn't have any problems with it at all we have literally only lost one person yet.

Yet as refusing testing and refusing vaccines, we have 950 people. So we will be just fine.

Okay. That's good to hear thank you.

And like.

Yeah.

From your from your discussion.

You said that your clients are.

Your customers are telling you to expect more demand you spoke a bit about reactivating spreads.

Do you have of the spreads that are available to be reactivated half of them belong to you and that this will all require some costs and I think it would be helpful. If you could just sort of maybe just.

Grabbed out a bit more.

No.

You are going to have a certain spread working in the first quarter and it sounds like youre going to have an eight much larger spread.

In the by the second quarter.

Does that sort of fulfill the incremental demand that you're imagining or that youre.

Youre talking about or do you think it's going to be further reactivation is beyond that.

Yes, the demand if you think about 200 drilling rigs.

You take out the heavy oil rigs.

And there's roughly five rigs per Frac crew like we need 35 ish crews.

We're not going to get there as an industry.

We have 2006 2007 today and as we're finding we couldnt even add one.

We never never experienced this in the past right like we were struggling to add one it can take six months to add a seventh group to our to our fleet. So there is no way, we're going to get there and Thats a good thing maybe finally get this price.

Up off the floor from Covid levels and have real businesses.

We're not at all concerned about the fact that we're adding two crews.

Dr stress comes from making sure we can get the people to add two crews. We're locked we're in where it was we're fortunate that we can afford all the investments that are required.

But as an industry there is significant capital investment to reactivate equipment and significant efforts to get the people to run that equipment.

And it's going to be very very difficult to get to 35 crews for.

For next year I Wonder if you could then maybe reconcile for me so.

This is my understanding as well, but I wonder if you could reconcile that with the idea that.

You are you are seeing your existing customers stink bid by competitors, which can only really happened I think if they have windows or if they're trying to secure a new anchor customer or something to that effect that must mean that they have available space and I'm trying to reconcile the tightness of the industry with.

These windows.

That must exist across the industry.

Think about that all the time.

Because we were having a hard time, making sense of exactly that I think what it is is maybe we just have more.

Predictability or.

Our customers are maybe.

We're lucky to have the customers that are giving us sort of.

Long term scheduling that we're we don't have a lot of angst over our schedule in January February already it's October and already where we're sort of booked for Q1.

As if you if you are a company that doesn't have long term customers of our customers that don't give you every month, you're fighting to fill your board even though the board gets filled every time theres still still anxious about that white space Thats, a few weeks out and then it just drives that kind of pricing behavior to make.

Sure that the board gets filled if they just had a bit of faith like do some basic math.

You may not see it today, but it will get built right.

We don't have the capacity to take on a bunch of work that we don't already have booked.

And so it's got to get done and so I think what's happening is just the anxiousness over the lack of predictability a couple of months out is driving that.

Pricing behavior.

That's I mean, that's the best I can do because we obviously think about this all the time.

Yes, okay.

Thank you for that last question here I promise.

So you have.

You are currently pushing this.

The tier four.

Equipment into the into the patch.

You'll have that Youll settle pharma seventh crew from the first quarter.

You'll have.

Another crew and other ESG crew in the second quarter. So and you also said, though this will become the industry standard. So for how long do you think that you have this first mover advantage, where a tier four crew is differentiated before it becomes before tier.

For crude just becomes called a crew.

And.

Probably know this better than I do a year 18 months.

18 months, Okay, I don't like.

I don't honestly know what our competitive you wanted to but let me ask it slightly differently. If you decided that a third crew was it was a good idea when would you anticipate being able to put that third crew into the field.

It would be late next year, if you had the foresight to planet with with the engine manufacturer.

Okay, but so start Werent happy, though if you ordered you weren't having those hedges with us.

Today, it would be the end of a year and a year from now is that correct.

At least.

Okay.

Okay. That's all for me. Thank you very much guys.

Thanks.

Our next question comes from Waqar Syed of ATB capital markets. Please go ahead.

Thank you for taking my question.

Brad.

Rising service intensity, what are you seeing on the maintenance capex per crew per horsepower any numbers that you can share with us.

Yes, I mean, it's generally going up Todd knows this stuff better than I do so I'll, maybe hand, it over to him.

It's just.

The run rate as a percentage of.

Expense has not increased substantially just in kind of.

It floats with the activity of the equipment and the hours that it's run so it's inching up slowly but not.

It has not taken at a giant step up.

Would it be something in the <unk>.

$10 million per CRO on an annual basis.

So what was that we didn't quite catch that.

Yes, what's the maintenance capex to be around two $5 million to $3 million annually.

Okay.

Higher higher than that probably a little higher than that marker.

Okay, and I was excluding fluid ends that you guys expense.

So.

More.

The $3 million to $5 million range.

I think I think that's probably right.

And just.

A lot of it is obviously dependent on the pressures that you are working on.

Certain whatever the customer base that you have right. So if you are youre doing low pressure oil it might be lower than that but if you're banging away in the montney.

70, NPA or something like that then it's going to be five and it also depends is that or was that pump build in 2009 or was it built in 2015.

So that's why we.

We're kind of flaky and our answer because there's so many variables that go into but it's.

If you had the model it is an industry average.

I think you are you're safe using five 5 million of crew per year.

Okay.

And then.

In the U S zip.

Facts are becoming fairly common and we also seeing assignment frac.

Are you seeing those trends develop in Canada as well.

That's not new.

I wouldn't say, it's common but it's.

Yes.

My understanding of what you are saying with the ZIP refractory or your fracturing two opposing well bores.

That's been happening for quite some time now.

Yes, so typically we would be I think here in the U S to say that gets you factor one in U plugging in perforating next one.

While the assignment of fact todays effecting both whether at the same time and then the two other wells that you are plugging in both rating.

At the same time, so everything is running yes that is common.

Youre plumbed in for lack of a better word to the pad as a whole and so your your operations are uninterrupted almost.

Alright.

So you're seeing that in Canada.

That would be the norm in the Montney.

Oh, okay well okay.

Okay. Good.

That's all I had thank you very much.

Thanks.

Our next question comes from Paul Pereira KOL Pereira of Stifel. Please go ahead.

Hey, good morning, guys.

You are very active with the buyback in the quarter and obviously you need to continue investing in the fleet.

But how do you think about other return of capital avenues, such as a dividend.

Yes, we're looking at that.

We do have a growing cash balance.

And we're happy to hold cash don't get me wrong.

But there's only so much cash that should be held.

And we're not going to discuss maybe the exact levels at this point, but we do feel we may exceed those sort of internally imposed thresholds.

By the end of next year, and so certainly dividend conversations have started to enter into board discussions, but there's not really anything more to report at this time.

There's many things to consider when you talk about dividends, but we're.

We're bullish for this industry for the next few years for sure.

Okay perfect that's helpful. Thanks.

Just wanted to confirm as well so for Q1, you do expect to generate true call. It net pricing and how confident are you that this doesn't get eroded by a further cost inflation somehow.

It will get eroded it's just a matter of how much but we do we do think.

Back to the supply and demand of the rig count versus the Frac crew count.

Thats going to get out of whack in Q1 and so.

Even the people that the companies that have no vision beyond the end of the week.

Even though I'll respond with pricing increases and so we will finally get would finally get these prices lifted off the COVID-19 floor and back to something more reasonable.

When you look at the pricing today versus even two three years ago. It's the amount of erosion thats taken place is incredible it's absolutely incredible and yet at the same time, the pumping efficiencies have greatly increased and so.

We just have to stop.

We need to start running a business properly here as an industry and I think that.

That will happen in Q1.

Okay, Great. That's all for me I'll turn it back thanks.

Our next question comes from Keith Mckey of RBC. Please go ahead.

Okay, Thanks, very much and good morning.

Just wanted to.

And maybe follow up on the comment you made about sand logistics being tight.

Brad.

Is there any more any more you can say about that like do you the.

The impact or expect sand availability, whether it's from transportation or or actual production two to impact operations over the next call. It couple of quarters or is or is it just a matter of managing the tighter logistics, but things should be okay.

The sand supply like Brad mentioned, the sand supply from out of the Idaho, Wisconsin and the U S is approaching maximum levels of what they can producers shipped to Canada.

Probably the planning and the logistics part of it and the Trans loading is an important piece to take out the the high demand cycles or tried to plan with your customers about reducing the high demand cycles, but.

There's a higher concentration of activity.

Into northeast BC. So there is some limitations to trans loads and then just theres only one one rail line going in there as well so.

Probably near term no shortage worries, but longer term definitely needs to be some.

Changes or increased to supply.

Logistics and transportation.

Yeah.

Got it okay. So is that just on the on the U S and or could it be substituted with.

With local sand as needed.

It certainly could be.

Sometimes that's a customer preference about whats, which sand type they would want to use in their in their treatment. So there is adequate.

Tier two sand supply in Western Canada.

And to fill the void. If there was one is transportation again because of the location of that has to come from central Alberta, mainly up into northeast BC Theyre again Thats requires.

Transportation, whether it's rail or trucking.

Got it okay.

And one more for me just.

Go back to pricing don't want to harp on it too hard but.

One of your peers hosted a call this morning and discuss.

Double digit pricing increases for next year call. It North America wide sounded like maybe Canada didn't dip as hard in the last couple of years in the U S. So may not increase quite as much.

Through the next year, but given the.

The shortage that you foresee in Q1, which made.

<unk> through the rest of the year.

Would you have a similar view of pricing where things will end up throughout next year beyond maybe just beyond.

Supply demand imbalance, we might see in Q1 or are you now more pessimistic or optimistic about about that level of pricing improvement.

Well I hope he actually opens up the books to us Canadian operation and has a look at is pricing.

Certainly needs double digit pricing increases to even compete with the rest of us.

So yeah.

But as an industry.

I would think double digit price increases are likely.

Bye.

Whether it's Q1 or Q3.

It's likely.

There is just this is not even a customer resistance issue like this this is a this is a frac company issue.

The price erosion thats occurred.

It's incredible.

It's 40% in the last couple of years so.

If.

If we can all just relax and.

And do some supply and demand work and get a get more comfortable with where we're going to be.

I think that those kind of price increases would be.

It would be totally reasonable.

Got it okay. That's good for me I'll turn it back thanks very much.

Once again, if you have a question. Please press Star then one.

Our next question comes from Josef Schachter of Schachter Energy Research. Please go ahead.

Good morning, Brad and Scott.

Bachelor should something that much improved quarter I have three questions first one going back to the dividend, which you said is something that you're contemplating with the board in 2022, we saw high Arctic do a special dividend because they didn't want to.

Handel our.

Commitment on a regular basis are you looking at special dividends. If you want to keep your cash balance or if theres any concern about prospects moving forward in the industry if competitors don't.

Given the pricing you need to justify spending more.

Yes.

Like dividend discussions our philosophical in nature, and we understand the issues with service companies paying dividends and we don't we don't want to put something in and then have to take it out in a couple of years and that's usually what happens.

So when we think about dividends, we think about really low base dividends or special dividends or maybe no dividends right. I mean, maybe we we up our NCI be activity in.

Our return of capital that comes in that form.

It's early early days and we're open to anything and we're not going to back ourselves into a corner by any means and get ourselves into a position where we have regrets over what we what we did in dividends our dividends to me whether their regular specialists.

Aye.

I'm I'm certainly a fan of the special dividends.

Just to maintain flexibility, but like I said, maybe.

Maybe we allocate the money via the NCI instead it.

Or maybe we find a great deal to do next year, and we don't do any kind of dividends or in CIB like.

We're evaluating all of our options.

<unk>.

We'll do a thorough analysis and be very thoughtful about what we're going to do.

And I can assure you that whatever we decide to do we we won't have regrets over in and we will do whatever is best for our returns and what's best for the shareholders.

Second question on the <unk>.

Crew Frac crew.

For the.

But you are bringing on in the spring of 2022.

You've announced the terminal with the customer and for the first fleet.

Is there one customer for that second fleet or is it two or three companies that have done it in a consortium to tie it up between them.

Yes, we're still.

I don't like to talk about the customers unless we have specific specific permission from them to discuss it so.

I don't I don't really want to talk more about that but.

The equipment would be.

For our core customer base.

Okay.

And.

Just like a terminally and thought it was something too.

Inform the street about because of the ESG improvement do you think at some point these customers would be wanting to also disclose.

And you're just waiting to do that.

I don't I don't want to speak for them, but.

Okay, just one for me.

You've mentioned.

There might be something that could be an acquisition.

On slide three of your new presentation, you'll go through the four quadrants drilling cycle completion cycle production cycle full cycle technical expertise are you looking at acquisitions to add on top of your three basic businesses right now or are you looking to grow the three basic businesses.

Yes, we are open to any any of that.

<unk>.

When you sort of look at our board of acquisition opportunities and it's all of the above right. There is there is there are things you'd like to do within each division and there is new divisions to add.

So we're not like there's so many things that go into.

The evaluation, but first and foremost it's return on that investment.

So we're open to any of them.

Okay, and if youre looking at acquisitions would it be also to grab manpower would that be something where if the equipment was decent and you were able to get the manpower given the manpower shortage on the question about adding a third.

Here, our tier four unit would that be something that would fit in the equation.

Yes, absolutely.

Yes, absolutely I mean, it's.

Whether it's.

Consolidation for cost efficiencies used to be the sort of the main motivator and now it.

Not only do you get consolidated cost efficiencies from the consolidation.

Getting crews as a material issue now.

And as long as the equipments model modeled entire did something for sure we'd look at.

That's it for me thank you very much.

Thanks.

Our next question comes from Aaron Macneil of TD Securities. Please go ahead.

Good morning, guys. Thanks for taking my questions. It's.

It's growing a little late today, Brad just more of a high level question for you.

In the past you're one of the early adopters.

Variable salaries and other sort of small things that make big differences to kind of the resiliency of the business.

I guess im wondering at a very high level and with consolidation among your customers is there.

Anything you can do it.

Yes.

In terms of contract structures and things that kind of.

Yes.

Improved the stability of pricing through the cycles.

I wish.

Our best opportunity is things like the tier four engine technology.

Where you are truly adding.

Valued service that nobody else can add.

And.

The customers understand that it's not it's not commonplace.

At this stage and they understand the value of the service that debt.

Youre, providing and so.

Given that.

They know what we know which is this industry has had no investment.

And it's been it's been written hard and put away wet now for seven years.

And so when something good comes along you better grab it.

And you better hold onto it.

Because yes.

As we all know.

LNG prices around the world are looking pretty attractive.

And if you actually care about the environment, you would encourage us much Canadian natural gas activity as possible.

So we're really bullish on this industry in Canada for the for the long term and I think our customers.

They understand that we're at and we're at an odd point right, which is all the equipment.

At the beginning of what is going to be very very increased demand and so we're using new technologies as a way of changing that contract structure and for the most part.

It hasnt been easy.

Old habits die hard as we all know rates so.

Maybe having to move up the chain a little bit to get people to understand the value and long term securing equipment long term.

So.

The short answer is.

On a general scale no but on.

Certain assets, yes, we.

We're trying to we're trying to do our best to get away from this.

Sort of.

You're only as good as your last well kind of mentality.

Understood.

Other questions have been answered thanks.

Thanks.

This concludes the question and answer session I would like to turn the conference back over to Mr. Fedora for any closing remarks.

Okay. Thanks, everyone. We appreciate your time and we appreciate you dialed in to listen to us.

I'll wrap the call up now, but certainly Tod, Scott and I are available for questions throughout today and tomorrow.

Everybody knows how to get a hold of us and we will do our best to make ourselves available. Thanks again.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

Yes.

Sure.

Yes.

Okay.

Okay.

Yes.

Yes.

Yes.

Yes.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Yes.

Yes.