Q4 2021 Trican Well Service Ltd Earnings Call
Good morning, ladies and gentlemen, welcome to the Tri Kettlebell service fourth quarter 2021, the earnings results Conference call and webcast. As a reminder, this conference call is being recorded.
I would now like to turn the meeting over to Mr. Brad Fedora, President and Chief Executive Officer of Tri Kanwal Service. Please go ahead.
Thank you good morning, good morning, everyone I'd like to thank you for attending the <unk>.
Conference call with me today is Scott Mattson, our CFO , Todd <unk>, our Chief operating officer, Chico and wake way, our VP legal and Daniel Operation Ski RVP plan.
Planning and analysis.
Brief outline of how we conduct a call on how we plan on conducting the calls first Scott will.
Given overview of the quarterly results I will then address issues pertaining to the current operating conditions and near term outlook and then we'll take questions at the end.
I'd now like to turn over the call to Scott to start things off alright, Thanks, Brad and good morning, everyone and before we begin I'd just like to remind everyone that this conference call may contain forward looking statements and other information based on current expectations. Our results for the company certain material factors or assumptions that were applied in drawing conclusions or making.
<unk> are reflected in the forward looking information section of our 2021 annual MD&A.
<unk> business risks and uncertainties could cause actual results to differ materially from these forward looking statements and our financial outlook. Please refer to our 2021 annual information form and the business risks section of our MD&A for the year ended December 31 2021.
More complete description of business risks and uncertainties facing try can these documents are available both on our website and on SEDAR.
During the course of this call we will refer to several common industry terms, we will use certain non-GAAP measures and those are more fully described in our annual MD&A as well.
And our quarterly and annual results were released after close of market last night and again, both are available on SEDAR and on our website.
So with that I'll give a very brief overview of our results for the quarter. Most of my comments will draw comparisons to the two.
The fourth quarter of last year, but I'll also make some commentary with respect to our results on a sequential basis.
The quarter started off reasonably strong positive momentum continuing out of Q3 revenue for the quarter was $156 4 million, which is 52% higher than what we experienced in Q4 of 2020 activity levels across the board were generally higher year over year, following improved commodity pricing and the significantly stronger general industry environment.
<unk> to this time last year.
W. T. I was just over $71 a barrel during the quarter up slightly from an average of 70 and a half per barrel during Q3 and up significantly from the average of about $42 70, a barrel last year at this time.
Gas was about $4 50, an mcf for the quarter, which was also up sequentially from Q3, and again quite a bit stronger than the $2 52 per Mcf, we saw in Q4 of last year.
So strong commodity prices resulted in an average western Canadian rig count climbing and averaging approximately 176% during the quarter moving up slightly from Q3 of 2021 on an average basis and again quite a bit stronger than what we saw in Q4 of 2020.
Those factors led to strong activity levels and combined with continued improvement in the efficiency of our operations and sharp focus on profitability.
Significant improvements in all key financial categories as compared to Q4 of last year.
Fracturing operations were down a bit sequentially from Q3, 2021, but we're significantly busier as compared to the same period of last year activity in the fourth quarter slightly lower than third quarter as our customers exhausting their capital budgets and we saw the usual Christmas slowdown in the second half of December .
Maintained six fracturing crews throughout the period with utilization remaining steady at around 86%.
Operations continue to be heavily focused on pad based locations, which helped to minimize both downtime and travel time between our jobs and helps improve our overall efficiencies.
Factory margins remained reasonably healthy through the quarter and were a significant factor in the strong financial performance as we move through Q4.
Our cementing division remained busy during the quarter activity a bit more skewed towards smaller surface level work versus primary cementing work.
In our coiled tubing activity was up a bit sequentially driven by first call work for a number of our key and core customers.
Inflationary pressures continue to be a major issue across the board costs for our key inputs like fuel cement chemical and sand have all seen multiple increases in the past few months and the pressure doesn't show any signs of abating at this time, our supply chain team remains and continues to do a great job in staying ahead of and managing these.
Trends in our focus remains on controlling costs and passing along increases as much as possible to help preserve our margins.
So with that adjusted EBITDA came in at $28 million for the quarter, a significant improvement over the $16 1 million. We saw in Q4 of 2020.
Again important to note that our adjusted EBITDA calculation does not add back cash settled stock based comp amounts, which were actually a gain of $5 million in the quarter that item typically fluctuates along with movement in the company's share price, which dipped slightly at year end compared to the close of Q3.
It also includes expenditures related to fluid end replacements, which totaled $1 3 million in the quarter, which were expense during the period.
The quarter also included approximately $1 1 million from the Canadian emergency wage and rent subsidy programs, which we expect to be the final contributions that we will see from these programs.
On a consolidated basis, we generated positive earnings of $9 7 million in the quarter or roughly <unk> <unk> per share and we're very pleased to show positive earnings on a year to date basis as we move forward.
We generated cash flows from operations of $20 5 million for the quarter following strong operational performance.
Offset somewhat by a bit of an increase in our working capital as we move through the end of the year.
Capital expenditures for the quarter were $26 2 million split between our on capitalized maintenance programs and our ongoing capital refurbishment program.
This is our previously announced program to upgrade a portion of our conventionally powered diesel pumper with cat tier four dynamic gas blending engines.
That brought our full year capital spending at about $54 million with approximately $22 million in maintenance and refurbishment capital and $31 million related to our tier four fleet upgrades.
Of that 31 million spent in 2021 about 20 of it related to our first tier four fleet, which was completed and in service at the end of the year and $11 million of that related to our second tier four fleet upgrade which is expected to be completed and in service mid 2022.
The remainder of that $17 million related to that second spread is expected to flow through in the first half of 2022.
So with that we exited the quarter with about $30 million in cash and cash equivalents positive working capital of $74 2 million and no drawn bank debt.
With respect to our normal course issuer bid program. We remained active in the market during the fourth quarter and repurchased and canceled approximately two 2 million shares at an average price of about $3 per share.
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 shareholders.
So with that I'll turn things back over to Brad and he'll provide some more comments on our operating conditions and our outlook next year. Okay. Thanks, Scott I'm going to provide more general comments and Scott.
You can find in my in my comments over the next few minutes is theres going to be sort of a mix of good and bad but.
Overall, our our long term perspective.
On this industry and certainly in the next couple of years is overwhelmingly positive. We're very excited about what is coming our way in the second half of 2022 and 2023. So I'll just start by making some general comments Scott was saying.
Q4 was characterized as front end loaded with a busy October November and then and then we had a pretty significant slowdown in December .
And even though we were generally active with a core group of customers as we are fortunate to have long.
Long term active customer base.
Quarter overall was a little choppy.
What we haven't planned for Q4 was that as things slowed down in December .
We saw again this complete reversal of pricing and we just refuse to go there and so we had a lot of white space on our board in Q4 and were totally comfortable with that.
There is no way, we were going to reverse the pricing gains that we had made throughout the year and some desperate attempt to fill in.
Few days here and there that makes absolutely no sense.
We maintained a good market share in all of our divisions and we continue to grow our market share in coil, which is really encouraging.
On the spot.
On the cement side, we maintain our sort of 35% to 40% market share in our areas of focus are the montney.
In the deep basin, and so until the rig.
It's tough to really grow our market share beyond that but as the rig count grows so will our cement crews and so we'll just stay focused on providing good service and we're known as the technical leader in that space and so that will just be a continued growth area for us as well and so we expect all three of our divisions to grow.
As the industry heats up.
And we're not going to say, we're going to capture incremental market share because we're only prepared to take on market share that's profitable.
So we're not overly concerned with market share, we're mostly just concerned with rigs or our returns.
Covid did impact us and continues to impact us, but it's not overly significant.
More of what it does to the industry broadly.
Rigs get shutdown, we lose the odd cement crew or coiled crew or Frac crew here and there.
Our customers are not in the office like this should be.
And so it just generally interrupt the business in the oil patch.
So they are not significant but they are sort of more annoying and nagging interruptions and.
And our day to day operations.
We continue to see Fracs develop the number of stages per wells continues to grow the amount of sand continues to grow.
So generally the long term trends for this for this industry are all are all positive.
We're very we're very focused on the BC montney and deep basin.
We are starting to start seeing our operations expand in some of the lighter oil plays.
Which we were historically active in but it had sort of pulled back from.
Our cement, our cementing, especially as more active now in southeast Saskatchewan, and we expect activity to improve in all areas, we've got $4 gas.
Really high oil prices I'm, not even sure what to call them now but.
There are over 90 anyway, we've got condensate pricing at over 115 Canadian.
Our customers' wells are paying out in a matter of months, so thats really encouraging and of course.
What's most important for our industry is that our customers are making money and that allows us to expand in and returned to profitability.
The number of crews are running really hasnt changed.
In Q4, we ran six Frac crews 17 cement crews and six coil crews and that's inched up a little bit we sort of have six slash seven frac crews today and we've added a few more coil units as <unk> becomes more active again and cementing kind of fluctuates day to day, but.
We're generally going to stay fairly.
Resistant to adding crews unless we get significant pricing improvements.
We've done a lot of work in the company for the last few years on getting costs down and so Fortunately.
We are starting to see operating leverage really kick in as revenues expand and that will continue to just get better is as our revenue expands in the second half of this year and next year.
We had decent EBITDA and cash flow in Q4, and ensure we could have been better if we had been prepared to cut prices to to fill in white space on our on our dispatch board, but again, we don't think long term that's the answer and we're an unfortunate position, where we don't have any debt with no balance sheet issues and so.
We're not in a position where we have to take on work and so we didn't.
We had great free cash flow in 2021, and we expect it's going to get even better.
This year.
Overall now I'll talk about pricing is probably why everybody's dialed in.
Overall, the pricing environment has been a little frustrating.
And the last three quarters of 2021 and even in even in Q1 of 2022.
We've been we've been very vocal about the need for price increases throughout 2021 going back almost a year now.
And we're not wavering on that in fact, given that inflation really hit us hard in Q4, where we're waiting waiting waiting for it throughout the year and we almost got completion, because it really didn't show up in any with any significance until the fourth quarter.
It's even more urgent now that we get pricing because we did get we actually did get reasonable price increases throughout 2021, and our customers were very receptive to.
Giving us price increases as our costs increased.
And most of our customers were more than willing to work with us, but inflation ate at all and so we really did not gain any net.
Price increases at all.
We still even even as recently as January we are still getting stink bids from some of the competitors in the space.
Which is odd.
But.
Fortunately that has really subsided and we really haven't seen any any crazy pricing behavior now for probably almost a month so.
We're just going to continue to work with our customers informed them as as our as our cost increase.
There are very inquisitive as to our management of the supply chain, which is which is helpful. Because.
We're able to communicate with them on a more day to day basis as to how our costs are increasing and so they've been they've.
They've actually been quite receptive to working with us on getting our getting our prices up second half I think we'll see significant significant price increases in the second half of the year and part of the part of the issuer. We didn't we've had price increases in Q1, they haven't been as high as I would've thought and it was kind of an odd quarter in that there is lots of drill.
Activity in the first six weeks of the quarter, but not.
Not the corresponding completions activities that we you would have expected given the rig count for our customers at least anyway, and so everything has been lots of drilling in the first half of the quarter and a lot of the completions activity has been pushed into the second half and so it is we're now going into March which there is no way we can get all the work done in a lot of that work will.
Pushed into Q2, which will make for make for a good Q2, but it really alleviated the pricing pressure in the first half of the quarter.
And so what we're seeing is pricing is probably going to remain stable now until June and then.
Then we will see significant price increases.
As breakup ends and so I think Q3 will be the first quarter rolls actually see margin expansion in Q3 historically.
I Shouldnt say historically, historically Q1 is the busiest quarter of the year.
In the last few years, it's proven that Q3 is our busiest quarter and so as.
As Q3, and Q4 budgets I think get expanded.
We will see we will finally capture some of the pricing increases that we've been waiting for.
So on the supply chain side. This is a never ending grind. We're very fortunate that our group has done a really good job of this.
And whether it's sand logistics chemicals.
Any input that that's required on the cementing coil or fracturing side needs to be actively managed and our group is actively working with our suppliers to ensure that we have the products needed, especially in a rising market here in 2022, and 2023 and again as we expected we experienced lots of inflation and throughout our.
Our entire supply chain.
In fact.
The price increases were less than we had expected for the first nine months of 2021, and then actually were more than we expected in the in the last quarter of the year and it's.
There are no exceptions diesel which is linked to oil price third party trucking, which obviously relies heavily on diesel and labor those rates have gone up significantly.
And by the time, it gets delivered to to northwest, Alberta, and northeast BC Sandeep, 70% of the cost of sand is is logistics transportation so of course.
Diesel costs labor costs impact that significantly on the chemical side.
Many of the components that go into R. R.
Our chemical products come from China, and the U S.
We need to expect delays and increased costs, but we're and we're always looking for substitution and our suppliers are creative and proactive in making sure we get supply, but we have to expect that theres going to be cost pressures, there and even things like hotels with reduced staff count certainly reduced staff available.
The hotel costs inefficiencies of the costs have gone up and in.
In many cases the service availability has gone down because they just can't get the staff. So overall, we expect cost to go up in our industry just like in just in all parts of the economy.
And I think Western Canada is also additionally, stressed by the fact that we have a fairly finite labor force and so.
We're going to expect sort of cost increases in the supply chain limitations for the next 18 months.
So outlook for the remainder of the year.
I think everybody is obviously knows E&P cash flows are at all time highs and vendor and wells are paying off in extremely short periods of time, that's great news right. We've had a we've.
We've had a we had a good 2021 and we expect that we're going to have we're going to have a good 2022 and a good 2023.
We are going to continue to have sort of COVID-19 interruptions, but nothing too significant we always have weather, we always have weather events in in the winter and certainly so far in Q1 that there is no exceptions.
But you have to plan for those as they happen every year.
The basin remains very natural gas focused.
Natural gas prices and the strip is strong and so we expect again that the rig count the rig count will increase as the year unfolds.
<unk>.
We're currently at about 230 rigs and we expect that to go up in Q3 and based on conversations with our clients and equity analysts were all they're all telling us that.
Budgets are going to slowly creep up as as we go in as strong commodity prices invariably will eventually lead to increased activity and better.
We will drive our should drive better margins and earnings growth for <unk>.
And we do know that debt repayment and returned to shareholders are a focus for our customers but.
But balance sheets have been largely repair it, especially with our customer base over the last 18 months and so we do expect that our clients will start to shift some of this this free cash flow into the projects that have really good economics and quick paybacks.
Some of our clients and some of the people working in the drilling completion groups have never seen returns. This good in there at any time in their career.
When we talk to the drilling rig contractors, there theyre backing all of this up with.
With their expectations at Q3 will be will be busier than Q1 on the rig count.
There is currently about 29 Frac crews operating in Canada today, and we estimate that we're going to need.
At least 35 in Q3 and so on.
Starting in March actually and in Q3. So again, it's just math at the end of the day and so we will finally get the net price increases we've been waiting for.
And because we're not going to get all of Q1's work done just because it was so backend loaded it looks like we're going to have a really good Q2 again this year.
Last year was our best Q2 ever and I expect this year will be similar.
On the crew size, we get asked a lot or we can act are we going to continue to activate additional crews in and as Scott was saying we are adding our second tier four spread and whether that's an incremental.
Crew at or replacement crew ad.
We don't know yet and.
And we'll see we'll see what happens this summer, but generally we're not going to activate more equipment unless there's a return there.
And when we activate it at today's pricing probably not.
Given the difficulty of getting additional labor and in the amount of inflation that we've experienced I'm not sure pricing today would justify an additional crew at but we will monitor that on a week to week basis and based on the conversations with our customers, we'll make those decisions.
No.
The good news on that is because labor is so tight we will continue to see labor availability is a very significant bottleneck and crew additions, whether it's within the fracturing industry or the drilling industry.
And so I think the industry overall will be sort of operating at its Max.
Capacity from a people perspective.
And whether there is discipline or not probably won't matter because people just won't be able to add equipment like they used to.
It just takes so much time now to get to to get additional people and I think we've communicated this many times before but we did add crews crew seven on our fracturing division it took over six months to get the people.
To add that grew and so we don't expect that's going to change.
Going forward.
And we do expect labor.
Constraints to be alleviated, a little bit as sort of Covid runs its course and people feel comfortable flying from the east to the west and they are confident that theyre going to make it home for days off.
And so once that once people get more comfort with that you will you will see more people on the move from the east, which we have historically relied on fairly significantly and so once once those people come back to work will alleviate some of the labor issues, where we are.
Dealing with but in the long term, we expect the labor labor constraints will be permanent and there'll be more challenging in the future and so we will need to do better to refine our strategy on how we're going to attract labor to this industry.
And this is an issue for everybody.
I just want to highlight before we before we wrap up that it was about $1 2 million horsepower operating in Canada out of a total fleet of about $1 8 million. So that of course leaves sort of 600000 of excess horsepower thats currently parked which could eventually come to work with significant.
Retrofits and people additions, but it's important to note that we control about half of that we own about half of that park capacity.
And we will make sure that it's brought back into the industry.
In a disciplined and responsible way.
We won't do so without making sure that there's a return there.
<unk> technology on the technology and ESG side technique.
Technology has always been a big driver of efficiencies in the oil patch I don't think that's that's going to change anytime soon we continue to stay really well informed on all the technological advances that are happening, whether it's engines or pumps or transmissions or where software packages.
Maintenance program is et cetera, and we're not married to any we're completely agnostic, we're not married to any technology.
As an example, even though we've adopted the tier four engines, which we're really happy with.
We will we will continue to look at all the different options available and we wouldn't hesitate to adopt new technologies.
We're fortunate to have the balance sheet to be able to make those moves.
But we won't do so unless they provide us with a return I think theres too much discussion in our industry about technology without a corresponding discussion about is it economically viable to implement those technologies.
And hope is not a strategy as we know and so.
The cost of some of the new especially on the electric side the cost of some of this great technologies, just there's just no way to ever get a return on the on the investment and so we.
We will make sure that whatever technologies, we adopt.
We're able to get a financial return on them as well and then of course, that's what our customers want they want us to be healthy and in this game for the long term.
I think in the fall, we released our inaugural 2020 sustainability report.
It can be found on our website and our next report should come out. This late in Q2 of this year and your ESG will be will continue to be a focus for <unk> and as it is a focus for our customers.
We're using lots of technology based initiatives on the east side of it to provide solutions.
But we're also focusing.
Significantly on the <unk> and the <unk> side of ESG as well.
We've done a great job, especially on the governance side and we continue to pursue initiatives to make sure that we're a good corporate citizen in the communities in which we operate.
And we're going to continue to build out on the on the <unk> side is as the year unfolds.
Just I'm just going to wrap up with with the tier four upgrades.
I think Scott mentioned, it but generally generally we've only been running those now for about two months. They arrived in late Q4.
We get our second tier four spread this summer.
And again I want to stress that the equipment will only go to work for premium pricing as it provides cost and operating efficiencies for our customers.
But we're extremely pleased with how this equipment has performed in the field, we still have some bugs to work out in the extreme cold.
But overall, the equipment's performing as well or better than expected.
The natural gas substitution has been high.
This is a trend that we think is going to become.
<unk> is going to continue in this technology will become a standard in Canada I think in the next in the next few years.
On the growth in acquisitions, we're very our primary focus remains on just getting our existing equipment to work.
Getting our equipment off defense eventually if we can make it if we can make it profitable we have a very we have a clean balance sheet. We had a cash balance provides us with the financial flexibility to look at any type of transaction that looks attractive, whether it's organic growth or M&A growth.
And we're always looking for the right deal, but right now.
We think our best investment is on the NCI B share buybacks, we've been active in the NCI beam last few years.
We plan on being more active in the in CIB in the next few months.
We view that as one of our best investment opportunities. When you just look at the at the price that we're buying our own horsepower at versus what we would have to pay in the market.
You look at the EBITDA multiples of each other oilfield services companies that may be available for us to purchase.
It's really hard to deviate from this NCI would be at this point.
And it's just such a good investment for us.
So I think I'll stop there.
Thank you everyone for your interest and your time.
Why don't I turn this call back to the operator for questions.
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 Youll hear tone acknowledging your request.
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Our first question comes from coal Pereira Stifel. Please go ahead.
Hi, good morning, everyone.
It sounds like activity for Q1 is a little bit more backend loaded I mean I'm just curious.
On it a little bit but is it you know try can specific customer program do you think it slow DUC inventories across the base and then as well you know it sounds like your seventh fleet, maybe had some white space. Just curious if you got the sense. There was much of idle capacity in the market outside of that from your competitors.
Yeah.
No I don't think theres any idle capacity.
And don't get me wrong sequentially, our Q1 is better than our Q4 and it's better than last year's Q1 knows that's not an issue.
I just given the rig count I would have expected higher prices and yeah, Theres always white space.
There always is and what do we have full time work for our seventh crude no no we don't.
Until March and so.
There's always there's always white space, but I think.
We were a little surprised that we didn't get more pricing pressure.
And I think it's just because it's a lot of the work not just with our customers, but with other with other customers.
I think a lot of the work the water drilling in the first month and a lot of the completions work got pushed to the second half and so.
Anytime breakup is looming theres, a hesitation to increase prices and it's really the only time of year, where theres any significant ducks in Canada is after Q1.
And I think that's why we've seen the last few years Q2 seems to be getting getting almost to be a normal quarter.
So it just the problem with this time of years.
Q1 work gets spread out over six months.
There's still drilling in Q2, but its greatly reduce but and so that just hasnt, that's sort of let the steam out of the kettle on the pricing side I hope that's what you are asking.
No yeah, that's a that's perfect.
And I guess, you kind of touched on it a little bit earlier, but can you talk about Q1 net pricing relative to Q4, I mean is it slightly better is it about the same or is it worse.
No no.
Sorry are you asking me so pricing did go up in all of our divisions on Jan one on a net basis not nothing really changed.
I guess the inflation just kept on going.
Okay, No that's fair.
And then so as you touched on I mean, you have to make investments in your fleet are working.
Working capital you got $30 million of cash on hand, you touched on the share buyback a little bit, but you know some of your peers and a lot of the e&ps have committed to a set percentage of free cash flow that they're returning to shareholders. I mean do you think that's something we could see from try can here over the next couple of months.
<unk>.
It's more informal than that I mean, we definitely have a percentage in mind.
But it's given we're in the service industry and our.
Our cash flows are a little more unpredictable and volatile from quarter to quarter.
We don't we don't disclose sort of what that percentage is and certainly would never be prepared to stick to it.
But yes, generally we sort of have a dollar amount in mind on them on a monthly basis going forward.
That that number will go up and down as as our views on the future change.
Okay perfect. That's all for me, Thanks, I'll turn it back.
Thanks.
Our next question comes from Keith Mckey of RBC. Please go ahead.
Hi, good morning, and thanks for taking my question.
You mentioned that customers are keen to secure equipment for the second half of the year and.
So can we just maybe think about how that has impacted.
Or not.
The amount of contracting we've been able to do for your forecast second second tier four DGB fleet that you expect to come in in the summer.
It does not really much I can say about that.
All I can really tell you is that the equipment will go to work for premium prices.
Got it got it fair enough.
And.
On the on the two fleets you have got.
<unk>.
In flight and in progress.
It looks like you've kind of been able to upgrade those at about $570 a horsepower how close would subsequent fleet b to that same efficiency given some of the equipment you've got on defense.
Maybe can you talk about your appetite to do that.
Pricing goes up every time, you dig deeper into the inventory.
Just because the equipment is not in great shape, or you might need a pump replacement or a transmission replacement versus an upgrade.
And it's probably more segmented than that it's more like we need to complete fluid power and replacement versus an upgrade or so yes make your instincts are absolutely correct. The deeper you go into the inventory the higher the prices go but.
At this stage the percentage change if we were to do the next session.
I'll be 10%, 10% more.
Got it got it okay and as far as that sort of next generation type equipment.
You saw one announcement from a from a competitor on that have you seen have you had any other.
I would say competition for this type of equipment in tenders or or as you've been negotiating your contracts.
Okay.
I think.
You are asking is there what's the interest level.
First levels are very high for for the tier four equipment.
Right and and there is still is there any I guess outside competition for tier four equipment that you've been say bidding against or is it really.
New deciding how much to releases equipment for sure. Yes. There is there is there is talk of the one of the U S firms, bringing a tier four spread to Canada.
Lots of empty promises I think get made and along those lines, but there is no actual competing equipment on.
On the street at the spot at this point.
One of our competitors does have a tier four a single tier four pumper.
But not a not a fleet.
And so really our main competition at this stage would be.
We are competing against sort of the tier two tier two dual fuel fleets that we all have.
And what we're finding is with the tier four equipment is the substitution is of course higher <unk>.
It reduces costs in the pumps and the transmissions have been upgraded and so it's a more powerful and efficient pump and we're seeing but what we're seeing is they are the engines are.
They are much more efficient at burning natural gas and so there is there is there is.
Almost no matting slip and with tier two dual fuels there is methane slip and so from an emissions perspective.
Tier fours are significantly better than the tier twos.
Okay.
Got it okay I'll leave it there thanks very much quicker.
Thanks.
Our next question comes from Josef Schachter of Schachter Energy Research. Please go ahead.
Good morning, guys and thanks for taking my call.
Three quick ones from me.
First are you seeing companies wanting to tie down equipment for longer periods of time with pricing adjusting based on market conditions.
Theres lots of desire for long term.
Partnerships.
From an access to equipment perspective, but there is historically, we havent had very.
<unk> success, tying pricing to current operating conditions.
Commodity prices and so that's not really an avenue we pursue.
More of what we've been doing is just explaining to our and our customers' they've got their own problems, they're not they don't they don't sit around worrying about us.
So.
We're doing a better job of just explaining to them just the.
The significance of the inflation and the need for there to be a return on invested capital given the age of the fleet given that there is.
Given the reliance on fracturing as part of an overall well construction.
And the complete lack of investment by our industry in the last seven years, just because the money just wasn't there.
The sophisticated customers they get it right they understand if they want a healthy fracturing industry prices have to go higher.
Luckily.
Have the cash flows to absorb those.
Our price increases are insignificant in the overall scheme of things so.
It's more informal than that.
I'd like to say there is long term contracts with pricing escalators, but that has never been the case and it likely won't be the case anytime soon.
And the odd exception here and there.
Okay and for example diesel costs how often.
Is there like a monthly adjustment in terms of pricing for some of the big escalation in near term costs or is this something that happens.
Over more of a quarterly basis, just to get an idea of you know I don't.
You mentioned, the inflation pressure versus the pricing pressure given.
Given the last few weeks I think diesel costs have gone up a lot. How quickly do you have to wait before you can pass those through regarding the pressure on your margins again.
Well the diesel break you said Joseph diesel prices do change weekly if not daily but.
<unk>.
Our pass through approach, we've been able to pass it through not immediately but say within a 30 day period, 15% to 30 day period.
And to our customers but.
Just to recapture the cost of the fuel inflation.
Yes.
Okay.
Lastly, you mentioned M&A and growth opportunities are you looking just in the business lines you're in today or are you looking at complementary lines and I know you can't go into specifics, but.
How far did.
In terms of just general commentary of what business lines.
Might fit.
Graphic.
Extension of what Youre doing right now.
Yeah, I mean again keep our comments fairly high level I mean.
As Brad mentioned, we're looking at we look at everything.
Our primary focus is does it make sense could we change the business and extract additional return out of it and we're not going to be looking too far fields other than our core business or something thats fairly easily tangential to it.
But yes, I, probably wouldnt go much deeper than that.
Okay Super Thank you very much for answering my question I appreciate it.
Thank you.
Our next question comes from Waqar Syed of ATB capital markets. Please go ahead.
Thank you for taking my question Scott I have quite a couple of modeling questions could you provide some guidance on DD&A G&A and tax rate for 2022.
Sure.
So from a tax perspective, I mean, we're effectively we've got a significant portion of Canadian pool, So I wouldn't expect anything meaningful from that perspective.
From a depreciation perspective, maybe on an annual basis, probably slightly downwards ranked us as we grind through some of our older equipment, but we are replacing and upgrading our fleet as we go along so.
Be down marginally, but I wouldn't expect it to dropped significantly from there and then G&A I think Q4 was probably a bit light rate just with the amount of skus that flowed through there et cetera.
So if you kind of looked at Q3 and Q4, that's probably a decent run rate going forward. So I wouldn't expect a significant change certainly to the upside on on that.
Okay.
And.
Brad you did mentioned that you expected Q1 revenues to be higher.
And then on.
The net pricing did not improve but overall price net pricing relatively flat. So just because of higher revenues you expect margins to improve EBITDA margins Q1 versus Q4.
Do you are you talking percentages or absolute.
Absolute and both yeah.
Percentages to remain very similar the dollar amounts will go up of course, just because of the.
It was a busier quarter percentage percentage margins won't change much.
Yeah.
And then do you expect Q2 to be relatively similar to Q2 of last year.
Yeah.
Right now that's certainly our view.
I, probably should stress that.
March April May June .
It's very very weather dependent.
Over that four months span the gross amount of work doesn't or the aggregate amount of work probably doesn't change, but the month in which it may get done certainly can change and.
And as everybody hopefully knows where coming into breakup so the.
As the winter thaws.
Roads become susceptible to damage with heavy equipment, and so that really slows things down.
So any kind of.
Predictions that are on the board, even though <unk> booked in scheduled <unk>.
Will change with weather so.
Okay.
That's all very helpful. Thank you very much.
Thank you.
Our next question comes from Andrew Bradford of Raymond James. Please go ahead.
Good morning, guys. Thanks for taking my call here.
My questions Robert outside.
I would say that outside the new engines.
Are you running any pure purely diesel spreads today.
And are we.
And then do you think that.
Your competitors that have sort of the same sort of profile is.
Yourselves and the ones that we can maybe see quite as easily.
Yes, we do work.
There is a place for it.
Pure diesel spread.
And it's costly because diesel is a lot more expensive natural gas, but from an emissions perspective.
Tier two diesel engines performed pretty well.
So there is there is there is always a place for those spreads.
On a percentage of total equipment basis, we would have the highest.
Of the.
Are the lowest I guess of the diesel pure diesel spreads.
Only two of our spreads today are diesel.
And I would think our peers, it's probably a higher percentage than that.
Does that kind of where you tend to work.
Good.
<unk> it would be a function of where we are working and our ability to.
And also our financial ability to invest in the tier four technology.
And the tier two dual fuels over the last few years.
Okay.
That's right.
Right.
Yes, it's a long winded way of saying I'm not sure yeah.
But maybe maybe just on <unk>.
You say you are half of the parked equipment.
The serviceable parked equipment in the basin. So then.
What's the percentage of dual fuel versus diesel in that parking capacity.
Any different than what we're seeing running today I would expect so.
The parked capacity would be there'd be no dual fuel and the parked capacity today.
Okay.
So then that kind of brings me to the next question, which is when we talk about bringing capacity.
Off the fence so to speak.
The cost of doing I assume then that the cost of our debt.
Producers are probably from a cost perspective going to want dual fuel because of that it's not there.
Assumption.
Yes.
The deep operators are going to want to your floor.
Great.
So then the quad because of the issue so.
So then the cost to convert or the cost to actually bring.
The type of spread that the industry is probably going to want.
Going back to your comment that there are 29 today and.
Industry might have need for 35, so we're now looking for six.
Spreads of equipment.
That might be mismatched with the type of fuel they burn.
He used to be what the customer base wants is that <unk>.
Right and thinking in this way.
Absolutely unless we ended up with.
Really active shallow gas market or something like that okay.
Which would you add.
Which would use diesel but.
Okay. My last question then would be.
As we start to pull some of these spreads come off the fence then are they naturally going to be.
Is it your expectation that they are going to be converted to dual fuel and will it be some kind of a tier.
Tier two type of conversion or.
Alright, how would we think about that.
We would never Wow.
<unk> may be too strong at this stage, knowing what we know today, we would not bring a fleet off the fence without a tier four.
DGB upgrade.
And a pump upgrades for that matter alright.
We've been talking about this now for a year and.
I Hope the street is starting to understand that the state of this parked equipment is not good.
Right.
And again.
The question before you was.
The upgrades getting more expensive as you go deeper into the inventory and the answer is yes.
So it's we're spending 20 plus million dollars on a tier four DGB.
Upgrade which includes transmission and pumping upgrades as well or retrofits are significant parts replacement. So when these spreads hit the street I mean, they are the state of the art 3000 horsepower heavy duty continuous duty equipment.
But the parked gear that youre, starting with is not that.
So this is I mean, what youre getting out of course as this is not an exercise in all will just sort of spend sort of five or $6 million and then here. We got a spread that can go to work in the Montney.
Okay, maybe but not the kind of spread we would want to operate.
Okay.
Maybe maybe this will be my last question then.
That being the case do you think what do you think would be the cost the least cost like sase St. Perhaps one of your competitors.
Perhaps didn't have access to a tier board.
In the gas blending engine.
And wanted to do.
Wanted to do something that was relatively cost effective but also accomplish the goal of getting to market. What do you think that that.
<unk> would be on that spread.
You have a guess.
I'll give you.
Broad numbers, just because you know obviously I don't know what what's out there with other than our own equipment, but if you just wanted to.
Get it up and running in its current form whether it's a tier two diesel or whatever and you are happy with the 2500 horsepower pump.
Five to eight.
And then.
Wow, we need pump replacements, and we need this we need that and it's 10 to 12.
And then if you want a tier four DGB set up then it's 20 plus.
Yes.
And again.
If youre talking on a pump spread versus the 12 bumped spread the numbers change.
<unk>.
But.
When we think about pulling a spread off the fence. We think in terms of sort of 12 to 14 pumps.
Okay. Thanks, Thanks for taking my questions.
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. Thank you everyone. We appreciate your time.
We tried to keep it under an hour.
We are available.
Management team here at <unk> is available for questions. If anybody would like to follow up with us on a one to one basis and if not.
Im looking forward to our call in a few months. Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
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Okay.
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Yes.
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