Q3 2021 Calfrac Well Services Ltd Earnings Call
Good day, and welcome to the Khalsa, well services L. P D third quarter 2021 earnings release and conference call.
Today's conference is being recorded at this time I would like to turn the conference over to Michael <unk> Chief Financial Officer. Please go ahead.
Thank you Madison.
Good morning, and welcome to our discussion of Cal Frac, well services third quarter 2021 results.
Joining me on the call today is Lindsay link <unk>, President and Chief operating Officer.
This mornings conference call will be conducted as follows.
Lindsay will provide some open opening commentary after which I will summarize the financial position and performance of the company.
Lindsay will then provide an outlook for <unk> business and some closing remarks.
After the completion of our prepared remarks, we will open the conference call to questions.
And the news release issued earlier today.
<unk> reported unaudited third 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.
Please see this mornings news release, and Cal Frac SEDAR filings, including our 2020 annual report for more information on forward looking statements and these risk factors.
Lindsay already.
Thanks, Mike Good morning, and thank every thank you everyone for joining our call today before Mike provides the financial highlights of the third quarter.
I'll offer a few opening remarks.
You have seen our third quarter results were strong.
Driven by increased utilization in all our operating divisions.
In the United States. The third quarter is typically a strong quarter and this year was no exception.
Canada improved from the second quarter seasonal slowdown despite weather disruptions in central and northern Alberta that affected fracturing crew utilization during September.
Fracturing and coiled tubing activity also improved in Argentina, and Russia on a sequential basis.
But in this third quarter utilization growth into perspective when.
When we compare it to the same period last year, our North American active fracturing fleet count has increased over 60%.
Well fracturing job count has more than doubled.
On a company wide basis active fracturing fleet count has increased by almost 50%.
Fracturing job count has increased over 130%.
Coiled tubing jobs have also increased 80% year over year.
These results have been because of the hard work of all of our teams at Cal Frac and I believe that our all of our operations are positioned for a relatively strong fourth quarter and even stronger 2022.
Our customers continue to show fiscal discipline as commodity prices have risen during 2021 by opting to return excess cash flow to shareholders and pay down debt instead of reinvesting in.
It for production growth.
We anticipate that capital spending in 2022 will increase year over year in North America in order to keep oil and gas production near current levels.
As the quarter progresses, our clarity for next year increases and Cal Frac will be ready to respond to market conditions as they evolve.
With the same focus on safety and service quality.
That is the cornerstone of our business.
Before I pass the call to Mike I'm excited to highlight some recent company technology and ESG initiatives to better understand.
To better understand the recent equipment emission developments, we're performing the study to determine the actual G. H G impact from current pressure pumping technologies in the market.
This fact based study will assist in the reduction of Cal Fracs current and future G. H G emissions footprint and will incorporate a thorough analysis of all available options. After consideration of the often competing objectives of reducing G. H G emissions versus a here.
<unk> to tier four specifications.
And Argentina, Cal practice deploying our proprietary friction control technology to further optimize chemistry and reduce fuel consumption by significantly lowering pressure during pumping operations.
Lastly, Cal Frac is continuing to execute on its status strategy through its recent investments in equipment analytics technology that is providing actionable preventative maintenance insight in order to reduce unscheduled downtime and lower operating costs.
Now I will pass the call over to Mike Hoover's entered overview of our quarterly financial performance.
Thank you Lindsay.
Our third quarter results showed a significant improvement from the second quarter due to strong equipment utilization and a disciplined focus on cost control.
Consolidated revenue in the third quarter increased by 131% year over year to $295 8 million.
The improved revenue was mainly due to the fracturing job count increasing by 132%.
Resulting primarily from higher activity in all operating divisions.
Adjusted EBITDA reported for the quarter was $35 6 million compared to $8 5 million a year ago.
Operating income also increased by 345% to $35 6 million from.
From operating income of $8 million in 2020.
This improvement in profitability was largely due to better utilization and all of its operating divisions.
The net loss for the quarter was $1 5 million compared to a net loss of $50 million in the same quarter of 2020.
The higher operating results combined with lower interest expense and a deferred tax recovery, partially offset by higher depreciation in the third quarter of 2021 contributed to the improvement in the Companys reported net loss.
For the three months ended September 30 of 2021 depreciation expense increase from the corresponding quarter of 2020.
By $1 5 million to $33 2 million.
The increase in third quarter depreciation expense was primarily due to the year over year increase in capital expenditures relating to major component purchases, which have a shorter useful life and a corresponding higher rate of depreciation.
Interest expense during the third quarter of 2021 decreased by $9 9 million from the same period in the prior year.
Due to the significant reduction in long term debt that resulted from the company's recapitalization transaction that was completed in the fourth quarter of 2020.
Cal Frac spent a total of $25 2 million on capital expenditures in the third quarter compared to $2 8 million in the same period of 2020.
This increase was due primarily to the change in the amount of active equipment between the two periods.
<unk> Board of directors increased as 2021 capital budget by $5 5 million to approximately $61 million.
In order to support our preexisting equipment build commitment in Argentina.
And acquire a fracturing assets in that country at a significant discount to replacement cost from a competitor that was exiting that market.
An outflow of $40 3 million during the third quarter for working capital requirements was largely driven by higher accounts receivable, resulting from the significant increase in activity from the second quarter.
Both North America and Argentina.
During the third quarter of $2021 3 million of the one and a half lien notes were converted into common shares.
And an immaterial quantity of warrants were exercised.
Also.
The company opted to pay at September 15th 2021 interest payment on the one five lien notes in cash.
Rather than utilizing the payment in kind option.
To summarize the balance sheet as at the end of the third quarter.
The company had working capital of $179 5 million, including $6 million in cash.
At September 32021, the company had used <unk> $9 million of its credit facilities for letters of credit and had $180 million of borrowings under its credit facilities, leaving $44 1 million in potential borrowing capacity at the end of the third quarter.
As at September 30th Cal Frac 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'll turn the call back to Lindsay to provide our outlook.
Thanks, Mike.
Now presented outlook for Cal Frac operations across our geographical footprint.
We think that the current market for our services is strong and strengthening everyday however, as evidenced by the temporary rig count in the United States. The oilfield service recovery will.
It will be a more gradual journey than in past cycles.
We're continuing to see cost pressures that are in lock step with frac pricing escalation that is making tangible net profit increases difficult to achieve over the longer term.
In our U S Division our franchise delivered strong improvement during the third quarter and is well positioned to deliver through the fourth quarter with nine active fleets.
We think that our existing footprint is sufficient to supply our long standing clients, but still gives us optionality to access incremental work.
<unk> will continue to examine opportunities to take advantage of any improvement in.
And spot market pricing.
The fourth quarter is expected to out perform the same period in 2020.
But the operating and financial results will be impacted by a slowdown of activity in December resulting from the exhaustion of capital by some of Cal Fracs core clients.
In Canada, the third quarter unfolded with a fast start in July but lower activity in September due to weather related issues impacted the overall performance.
Well rig and Frac activity in Canada accelerated in the third quarter is it it is expected to slow down towards year end as customer capital budgets are exhausted.
However, we expect.
The recent strength in commodity prices will help tighten the western Canada fracturing market in 2022.
Spot market pricing has improved in recent months, but we are committed to operating for fracturing fleets in Canada until financial returns improve significantly to justify additional allocations of capital.
I'll now turn to Cal practice International operations.
The third quarter represented the sixth consecutive strong quarter in the company's Russia Division.
The driver of the improvement came in the second quarter came from larger fracturing stages and cost control discipline.
As is typical for the fourth quarter, we anticipate that the onset of winter was slow down activity due to weather related while access issues.
As a result operating margins will be affected by higher usage of diesel fuel and the shift to usage of Arctic fuel.
Cal Frac continues to proceed with the extension of its existing fracturing in coiled tubing contracts and expect that these contracts will be renewed before the end of the year.
Our operations in Argentina improved significantly from the second quarter, primarily due to increased utilization and the great work done in the Vaca <unk> shale play.
During the quarter, we acquired fracturing equipment from a competitor exiting the market at a significant discount and have already put it to work.
We expect the demand for our services in this market to remain strong for the remainder of the year and into 2022.
There is increased optimism for 2022 as the rebound in oil and natural gas prices continue.
I'd like to thank all of our team for their efforts I'm proud to be part of this team as we move forward.
Madison Please open the line for questions.
Thank you if you would like to ask a question. Please taken by pressing star one on your telephone keypad.
We are using a speaker phone. Please make sure. Your mute function is turned off July your signal to reach our equipment.
Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to ask for questions.
And we'll go ahead and take our first question from Waqar Syed with ATB capital markets. Please go ahead.
Thank you for taking the question.
Let's see.
In the Canadian market.
If pricing starts to move in line with what your expectations are.
When you add the sips crew on January one are the labor or other issues may prevent that from happening.
Good morning like our.
We have made the decision not to add that fleet January one it probably has a three month start date labor.
The additions would make it to make it a difficult start and as we put forward you know the quality of our service and the safety that we provide.
Provide a wood.
What would make it difficult a good portion of the Q1 activity is already scheduled.
Where where it stands.
So Mike if you wanted to add something on that.
Good morning, Waqar good question.
Where we stand on the Canadian fleet and any changes to that fleet.
We're really looking as a leader in the marketplace here to lead by example.
So I think where we're at is certainly filling out the work look with the our current complement of four large crews are we think that's a good footprint for Q1, just based on visibility.
Certainly looking where we can to add fleet capacity should returns I think come more in line with where we think they need to be on a longer term perspective, and so really from a Q1 start perspective that's.
That's really not in our active plans to date.
The labor challenges in Canada are certainly had been talked about a lot I think the labor market is still continuing to be very tight and its definitely a factor.
Proven though that you know that's something that we can overcome but really what we're looking at from an allocation of capital perspective, what car is that Cal Frac is going to maintain its current footprint until we see pricing I think upwards and chief financial returns back to where we want them to be for our shareholders.
Great.
And then just from a activity perspective in the first quarter and as you do you ever get to bed in first quarter 'twenty to 'twenty two.
Fleet count is not changing.
From a utilization perspective.
Relative to this year's first quarter do you think you can get more I'll just it seemed for fleets.
Yeah, I mean, what car I think where we're at right now with four large fleets I think we can get more utilization.
Last year started off a bit slow and we started really with three fleets now we have the ability to toggle up to four so we do see a upward potential in our revenue for Q1 of 2022, just based on four large fleet.
Yeah great.
Great and then just a quick question on Argentina, you quite.
You know some some assets there.
Are these complete.
Crews or is it just you know you're going to use them as spare parts for your fleets are you know does euro size of your fleet at all seeing actually increased in Argentina with this acquisition.
No they were a complete fleet.
Fleets in Argentina in the south the whereas most of this equipment was acquired.
Is it are relatively small footprint frac fleets, but they were complete.
And we are putting them together there was additional horsepower that could augment.
<unk> pumped down services there were a.
Blenders and hydration units also included in the in the fleet it was.
A very I think are hard to pass up offering.
Yeah, It makes sense so.
This acquisition I think in the past they've been some talk about that you made divest show interest in Argentina.
With this acquisition should be now assume that that's not happening or is that still something that could be a possibility.
Waqar I mean, I think the optionality around international operations always exists, but it's obviously a market dependent exercise.
What we thought from.
From a strategic point of view on capitalizing on this asset purchase was really to build out our footprint down south.
Able to improve our market share in that market of Argentina.
So we think it's very accretive than certainly we thought the the actual price of the equipment given its age was a was a very good opportunity for California.
Yeah, and just one last question.
And in the third quarter.
Working capital.
Was.
Big consumer of cash close to almost $40 million.
What's your expectations for Q4 working capital.
And for our free cash flow.
Yeah, I mean, I think there's a couple of things that play around.
Around that number certainly in Q3, I think our working capital build exceeded our expectations and that really was a function of just timing of accounts receivable collections.
And so our belief is topline revenue in North America will likely drop with the seasonal downturn in activity.
So ultimately I think you know from a working capital perspective, it will move to being a cash inflow from an outflow that are experienced in Q3, I think as we look at free cash flow as a number of moving parts with respect to that it's obviously a our capital.
<unk> expenditures.
Also our working capital as you mentioned as an inflow and then obviously our operating cash flow income out of the operations, which should drop down with the with the topline revenue dropping but ultimately I think we're targeting a breakeven kind of position maybe a slight a slight modest.
Negative.
Okay.
Thank you very much.
Thanks Waqar.
Alright, again that is star one to ask a question as you signed your question has been answered you may remove yourself from the queue by pressing star Q.
Go ahead and take our next question from the call Pereira with Stifel. Please go ahead.
Hey morning, guys. Thanks for taking my question.
Are your peers highlighted in Canada that it hasnt really recognized any material net pricing increases, but expects to do so in 2022 as the market tightens I mean is that fairly consistent with your expectations for Q1 and are you able to quantify how much you think net pricing would need to move up before you would think about activate.
Another crew.
Good morning Cole.
So on the on the first question as far as net pricing and where we see that trending going for Q1 is our belief is that.
The supply demand balance in Canada is going to be extremely tight in the first quarter on.
That I think in and of itself should justify I think I'm movement upward as far as net pricing.
We're not going to talk about I.
I think specific.
All percentages on where net pricing will go where it needs to go.
Other than to say we believe.
The supply demand balance has it's probably going to be the tightest that we've seen in a number of years and as a result, that's usually bodes well as far as pressure.
Pressure pumping returns so we see that certainly moving in the right direction.
I think coal.
Well it is net pricing is definitely an important factor. It also is the amount of white space. So activating a fleet that is 50% utilized with a even a 20% price increase may not be.
Financially our appealing.
But activating our fleet with with maybe an 80% utilization and a 10% price increase might be attractive. So there still is utilization has been very very important for us.
As we indicated earlier.
We're going to have four large fleets, which is a large improvement year on year for us from from.
From last year.
And that allows us the steps of the fifth fleet.
Much more orderly fashion.
Okay, great Yeah, that's super helpful. Thanks, and so I mean in the U S. It sounds like while the market not might not be as tight in Canada. It sounds like it continues to improve I guess can you talk about maybe the line of sight for for net pricing increases into Q4 and Q1 2022.
Yeah, I think coal our commentary on the U S market is very similar to the Canadian market on net pricing.
Our sales group has a hard enough time trying to you know.
Get net pricing I'm not going to talk specifics on the call I think what we're seeing though is that the market is tightening in some of the markets that were a part of in the U S. I think we've got a very strong customer base continuing to expand that customer base and so yeah, I think where we're seeing net pricing.
Improvements are.
I think that will be realized in the U S. As well I think it really as an industry I think it needs to go up significantly from where it is to really justify.
Unappropriate full cycle return in the pressure pumping industry and I think we're seeing steps towards that in the spot market today, where we're gaining some momentum, but ultimately you know input cost increases are offsetting that almost in a real time basis.
So I think really where we're seeing.
Improvements and.
And we do believe we're going to get those improvements. It is a step function as we work through a year just as it always is in our market, but certainly I think all the market signals are there to see that we get improved returns you saw the benefit of improved utilization out of the U S business in the third quarter.
I think we'll see a bit of a pause in that in the fourth quarter, but certainly a strong start to the year and I think a strong book of work in 2022 as the year evolves.
Yeah, well I mean I think.
Again, a twofold to answer you can get the initial price.
The improvement it obviously is a net price improvement, but as Mike indicated.
There are cost pressures so it will be.
Maintaining that net price.
<unk> over the course of the year, which probably isn't isn't likely its going to youre going to get the net price improvement, it's going to degrade and then youre going to go back and seek another price are in there as small costs improved not just large input costs like like a products in la.
<unk>.
Okay, Great I appreciate the color that's all for me I'll turn it back thanks.
Thanks Cool Mexico.
All right. We'll go ahead and take our next question from Keith Mackey with RBC. Please go ahead.
Great. Thanks, and good morning, and thanks for putting me on the call today.
Yeah.
Just wanted to first start up by asking in the U S. Can you just maybe run through what your effective.
Utilization was on those nine fleets just curious as to how close to flat out you were running with those fleets and absent any price increases or act or new fleets. How much more do you think you could you could get out of your current active footprint.
I think we our preference that we had nine fleets running probably eight fleets being fully utilized so if you do that kind of math that's.
Around we still have 15% to 20%.
White space that we could have a we've put it stepped up.
On there there are there are still a number of days of that took place either due to weather or some I'll call. It almost startup operations that that affected the quarter.
Got it okay.
Okay.
Sure.
I was just asking if there was more to the through the through the answer but I think that was that's why we had we still expect that if we could have we could have stepped up significantly and of course that step up would it fall through significantly as well.
I see got it.
Can you give us maybe any color on your current positioning as your fleets in the U S.
Yeah.
Yes, Keith I mean, I think really where our focus has been and we re pivoted here late in the second quarter. It was really to focus on areas in the northern U S that we felt that we have a strong market share presence in so we're not going to work on specific fleet count as far as you know we're really.
Okay did but its areas of strength that we would've had in the past around the Bakken Marcellus and Colorado place.
Got it thank you and one last one for me you did mention early early on in the prepared remarks about your analysis on on ESG fuel type options and and equipment just curious what types of the options you're considering.
And how might your thoughts be different from from some of your competitors, where the market seems to be going to tier four dual fuel or electric. So maybe if you could just kind of elaborate on how youre thinking about the market in and where you may be thinking about it differently than a lot of your peers.
Wow.
Keith It's a great question, it's a very long question to try and get through on a on a conference call happy to to give more color. After the call on it. The answer is you know we're looking that at electric at the turbine direct drive and.
Traditional diesel or diesel dual fuel.
You know theres almost as many questions that get raised.
With the with each of the of the technologies a lot of people.
Often talk about tier four and G HG and interchange the what they actually mean and of course, there. They are much different in there and their answers and.
<unk> take a lot of a lot of input in there we are concerned with the amount of cost that you are talking about reinvesting.
Into.
Trac op operation.
And then what do you get out and does the customer actually the end customer actually.
I appreciate what you're actually delivering to.
Two of them.
So you know as you know I mean, there are a number of papers, there's a number of marketing blurbs on who has.
The best and then when you actually do the deep dive into it it turns out it depends on what kind of gas you use whether it's field gas, whether it's compressed gas as to whether it's economical.
And then you know the one that's making a lot of news in the press today and yesterday is regarding <unk>.
And methane slippage that is occurring as far as a greenhouse gas. So those have to be taken into account as well so while it may not.
Seem like the person is doing lots, we are generating just a.
Enormous amount of detail.
That is making what you used to think it was a pretty straightforward easy.
Answer.
Answer and to actually have more.
Hum.
More I almost a holistic approach to what is the right answer to get to I do want to do I will say this.
Tier two diesel is still a very.
Fishing way of working from a greenhouse gas perspective.
And so Keith I'll add onto that question or that response really from a financial perspective, I think we're a cal frac is aligning itself with its customers as we're certainly willing to look at new equipment choices that align with our customers our values around green.
<unk> gas emissions and limiting knows.
But financially we're also looking for commitments from our customers on that and new investment because.
Like anything else, that's a I think a fairly.
Significant decision for the enterprise and we have to manage through evaluating our.
Our positions on reinvestment.
Looking at the financial returns on the other side of it so.
Ultimately.
Contractor support by our customer to that investment would be something we would be looking into as well.
Perfect I appreciate.
The detailed answer and that's it for me I'll turn it back thank you.
Thank you.
As a reminder that is star one to ask a question. We'll go ahead and take our next question from John Gibson with BMO capital markets. Please go ahead.
Good morning, all thanks for taking my questions. Most of my stuff has been answered, but I had to sort of follow ons versus just more for clarification. So you had eight fleets running in the U S.
But nicely exactly but I'm just wondering is the night sleep good to go or could we see some maybe some follow on costs in Q4 as that fleet starts up again.
So I may have confused the the answer we had nine fleets working in in the quarter, but with white space and and that it effectively ended up being that you had eight fleets.
Working at all times so.
<unk> eight fleets working one down for one week due to due to maybe weather.
That's where I'm getting the eight eight fleets the nine fleets is operational.
Okay got you and then just kind of.
A corresponding to the release.
Do you expect that sort of more active work on all nine fleets or.
Should it be sort of similar utilization compared to this quarter.
We were active very active in October and expect to be active in November.
As you know the.
The Christmas season, combined with budget exhaustion.
Does typically make December a.
Less active month.
That's actually where we were going with that.
Those statements.
Okay got you and lesson for me just in terms of labor in the US are you seeing challenges across.
All regions or are there pockets of areas that are maybe a little bit easier to staff fleets as you see increased demand.
No I don't think it's ever easy.
John I think there are more difficult areas to more remote you are are you. You know you have people that have to move in and as a person who has went cross border at least two dozen times over the last year, it's not the most pleasant task to be.
Doing air travel anywhere, whether it's the U S or Canada. So.
Do are probably a little more resistant to to rotating.
As they have been but I think you know we're still a great industry. It's a great team environment, we've managed to to.
Give back a lot of the.
The salary and incentives that we've had in the past. So I think we're slowly actually turning the corner on on getting our.
Are you getting the new employees the desire to come work for us.
It has been difficult, but but we are in active training program and while there is a lot of movement. I think everyone has has a red you know about the the great resignation on there we're not immune to that but we're still a very good industry to work and I think we just need.
To get the active recruiting machine back up and running.
For that.
But by no means will it ever be easy.
Got it thanks, a lot I'll turn it back.
Thanks Frank.
It appears there are no further questions at this time, Mr. <unk> I would like to turn.
Turn the conference back to you for any additional or closing remarks.
Thanks, very much yeah, just wanted to thank everyone for joining us for the call today and look forward to our call.
In in Q1.
To talk about our Q4 results, thanks, very much and have a good day.
This concludes today's call. Thank you all for your participation you may now disconnect.
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