Q4 2022 Calfrac Well Services Ltd Earnings Call
Good day and welcome to the Cal Frac, well services Ltd fourth quarter 2021 earnings release and conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Mike <unk> Chief Financial Officer. Please go ahead Sir.
Thank you Jenny.
Good morning, and welcome to our discussion of Cal Frac, well services fourth 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 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.
In our news release issued earlier today <unk> reported its fourth quarter and full year 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.
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 morning's news release, and Cal Frac SEDAR filings, including our 2020 annual report.
For more information on forward looking statements and these risk factors.
Z over to you.
Thanks, Mike Good morning.
Thank you everyone for joining our call today.
Mike provides the financial highlights of the fourth quarter I will offer a few opening remarks.
The fourth quarter was consistent with our expectations activity weakened due to customer capital discipline that resulted in a slower back half of the quarter.
At the beginning of the new year was strong for the Canadian Division. However, a delayed start for our U S operations combined with significant cost pressures in both divisions will likely impact our first quarter results.
The rate of change in inflationary costs gives us the opportunity to have frequent conversations with our customers and adjust the pricing.
Over the past month these conversations with our customers have been resolved much faster than in prior cycles.
As we settle into 2022, our operations are building momentum and I believe that we are well positioned for a continuation of improving results due in large part to our commitment to.
Quality job execution, and our safety first culture.
North American activities look to be improving year over year and pricing continues to move up but the pace of cost inflation remains a factor.
The recent rise in energy prices has had a significant impact on the operating cost structure of pressure pumping companies.
As a result.
Pricing for services needs to increase significantly to compensate for this rising cost as well as provide a sustainable return.
Last year, our safety centric culture fostered one of the lowest incident rates in <unk> history, despite increasing head count throughout the year.
We are proud of our license to operate as we meet or exceed our nonproductive time targets, allowing us to pump more hours every day in North America, we routinely pump more than 20 hours a day and we have approached pumping 24 straight hours numerous times.
Our ability to consistently pump a longtime depends on a few factors.
In addition to well maintained equipment. It also requires coordination with our customers and suppliers.
To ensure that resources and materials are on location in time.
Now I will pass the call over to Mike, who will present, an overview of our quarterly financial performance.
Thank you Lindsay.
Consolidated revenue in the fourth quarter increased by 43% year over year to $257 8 million.
The improved revenue was mainly due to the fracturing job count increasing by 34%.
Resulting primarily from higher activity in all operating divisions.
Adjusted EBITDA reported for the quarter was $9 5 million compared to $13 7 million a year ago.
Operating income decreased by 42% to $9 1 million.
It was $15 6 million in 2020.
Due to lower than expected fracturing equipment utilization in Russia.
Due to the inability of the customer to supply proppant for 11 days in December .
And lower operating margins in Canada.
Resulting mainly from the reactivation of our fourth fracturing fleet.
In anticipation of an active first quarter of 2022.
Combined with higher fuel and product costs.
This decrease was partially offset by higher equipment utilization in the United States and Argentina.
The net loss for the quarter was $28 3 million versus net income of $125 9 million in the same quarter of 2020.
That included the gain on settlement of debt from the company's recapitalization transaction that was completed in the fourth quarter of the previous year.
Net of deferred income tax expense.
Interest expense during the fourth quarter of 2021 decreased by $15 3 million from the same period in the prior year.
Due to the significant reduction in long term debt, resulting from the Companys recapitalization transaction.
<unk> spent a total of $15 8 million on capital expenditures in the fourth quarter compared to $6 5 million in the same period of 2020.
These expenditures were predominantly related to maintenance capital.
And the increase was due primarily to the change in the amount of active equipment in North America between the two periods.
In 2021, the company's capital expenditures were $70 7 million of which $5 2 million related to carryover capital from the previous year.
Given the significant improvement in the company's operations in North America that is forecasted for 2022.
Cal Frac successfully negotiated additional amendments to its revolving credit facilities.
And secured a bridge financing loan in order to provide the necessary liquidity to <unk>.
The anticipated increase in working capital requirements for its operations moving forward.
To summarize the balance sheet as at the end of the fourth quarter. The company had working capital of $170 7 million.
At December 31, 2021, the company had used <unk> 9 million of its credit facilities for letters of credit.
$190 million of borrowings under its credit facilities and $1 4 million of bank overdrafts.
I'll now turn the call back to Lindsay to provide our outlook.
Okay.
Thanks.
Mike I will now present, an outlook for Cal Fracs operations across our geographical footprint.
We're continuing to see the North American service market tightened.
With the help of a few catalysts first is an increase in the amount of horsepower required on location.
Which reduces the available idle capacity the second catalyst is the equipment and commodity supply chain constraints.
And while the third is the relentless labor shortage.
All these factors are not permanent they limit the speed at which additional fleets can be deployed but will help build improved pricing dynamics.
In the U S Division, our fourth quarter results exceeded last year's same quarter.
We believe the first quarter will be a success sequential improvement as well.
As expected the United States operations experienced a delayed start in 2022.
But we have built momentum in the quarter and we look to extend it throughout the rest of the year.
Two I'll highlight how quickly activity has ramped up we exited 2021 with four operating fleets and then double of our active fleet count to eight by the end of January .
And we continue to maintain that seat count today.
We intend to operate nine active fleets in the second quarter.
And hold that level through the end of the year to support our strategic partners.
We are confident that we can achieve full utilization and considerably outperformed last year's financial results with that footprint among our operating districts.
Because of the incremental maintenance required to activate our idle equipment, we would need to see a significant step up in our return on investment in order to activate additional fleets.
In conjunction with higher utilization.
We faced rising input costs. So we have we are having.
Conversations with our suppliers and customers to share the inflationary impact.
Pricing adjustments due to cost inflation is achievable with our customers.
But the more difficult situation is the increasing cadence in which we need to have these conversations.
With a much stronger commodity prices combined with increasing activity, we are starting to recognize some net pricing improvement.
Which is a welcome development from the severe fall in profitability that occurred during the past two years.
In Canada, the fourth quarter profitability was below the same period in 2020.
Due to lower utilization in the back half of the quarter combined with the expire Asian of the wage subsidy.
As well as increased costs, primarily due to reactivating, our fracturing fleet and coiled tubing unit, which were deployed in an active.
First quarter.
First quarter started off strong and we anticipate the existing western Canadian fracturing market tightness to continue into the second half of the year.
We expect to have a relatively strong first quarter with four fracturing fleets.
All significantly outperforming the fourth quarter of 2021.
The labor shortage is the primary constraint on growth in the Canadian market and retaining people in the industry is difficult.
<unk> maintains an active and robust recruiting and training program and anticipates operating for fracturing fleets for the remainder of the year.
Similar to the U S Division.
Cost inflation has been a significant headwind.
For the most part we have been successful in passing through cost increases, but it is a continual process due to the velocity at which they are occurring.
Since the Canadian.
Canadian pressure pumping market is not as fragmented as the U S market prices for our services did not fall as low as in the U S. But further recovery is still required to sustain the industry.
I'll now turn to <unk> International operations.
Our operations in Argentina have continued their impressive steady performance and improved from the third quarter as well as year over year.
Due to the exceptional work performed by our employees in the Vaca <unk> shale.
The first quarter is progressing according to plan. Despite earlier weather impacts our operating efficiencies are improving as we progress through the quarter. For example, we recently pump 11 fracturing stages in one day, and we expect consistent utilization with our contracted work to continue.
Through the rest of 2022.
The fourth quarter in the company's Russia Division was down sequentially and year over year due to a lower than expected fracturing utilization, resulting from our customers and procurement interruptions in December .
As we have outlined in our press release the situation in Ukraine has added a level of risk and uncertainty around our Russian operations and.
And we are evaluating our options and we'll have more to discuss when we report our first quarter results.
We are optimistic for a continuing strengthening oilfield services market in 2022.
I'd like to thank all of our team for their efforts in helping us.
I am proud to be part of this team as we move forward back to you Mike.
Yes.
Alright, Thanks, Lindsay we can journey, we can open up the call to questions. If there are any.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad and if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Wanted to ask a question, we'll pause just a moment to allow everyone an opportunity to signal for questions.
And we'll go to our first question from Colby <unk> of Stifel.
Hi, good morning, everyone.
I just wanted to start with Canada can you share any observations if you've seen any predatory pricing at all in the quarter and if youre seeing any spare capacity in the market right now.
Hi, Good morning call Youre talking about the first quarter I assume.
And I believe in the first quarter, we we havent.
Seeing as much predatory pricing if the because.
The activity is such that I think everyone is quite busy.
Okay perfect that's helpful. Thanks.
Moving on to Russia. So I mean, I think it's fairly well known that Youre working for one of the state owned entities there and as you said you are continuing to evaluate your presence, but is maybe part of the rationale to have not yet made the decision to suspend operations due in part to some what could.
Some balance sheet and financial risk to Cal Frac, if you were to do so.
Cole good morning, it's Mike here.
As we've stated really the ongoing conflict in the Ukraine has certainly added a level of risks and uncertainty around the company's operations in Russia.
You can certainly appreciate it's a very dynamic situation right now and so we're evaluating our options in the country. So really we'll have more to discuss as we report our first quarter in may.
Okay, Great just wanted to go to the U S business as well.
So obviously there are some headwinds in Q4 and continue to some extent Q1 I mean, if we go back to Q3 2021 operating income was 14 million I mean, as we think about maybe into Q2 some of the weather headwinds subsist as it kind of reasonable. Thank you could get back or maybe exceed that level from <unk>.
Q2 forward.
Yes, cool certainly I think our fleet of operating equipment in the U. S is are about the same but I think what we're gonna be seeing I think in 2022 as a general theme as we get out of Q1 here is really very limited white.
Bass for any of the crews that we have going forward. So it's more akin to some of the better years that we would have seen back in 2017 or 2018 in that respect and so yeah. When you get to that level of utilization and as we mentioned, we're starting to see net price improvements here as well that outpaced the cost inflation.
We certainly see the ability to do better than our Q3 as we move forward here outside of Q1.
Paul if I can just add just a bit more color on on the activity that.
The slow start kind of masked the expectation.
For I'll say for Q2, and it's it's a it's very busy down there right at the moment and we expect it to get busier.
Okay, Great and then maybe just quickly on.
On the labor shortage front are you able to differentiate between Canada, and the U S and whether it's better or worse in either jurisdiction.
I think it's tight in both areas in some ways I think our U S. Recruiting has been more successful it's a larger pool and I think you know the pressure pumping market still offers.
A lot for our for our employees.
In Canada, it's a it's a much more of a focused market.
I'm going to say a good portion of our employees, we require them to have CDL licenses.
And I think given just the overall.
Youre Agra fee of Canada. These this category of person is.
And greater demand with a limited population. So it just takes us a longer period of time to do the the recruitment to staff our fleet than it does in the U S.
Okay, Great Yeah, that's all for me, Thanks, I'll turn it back.
Thanks Cole.
Well go to our next question from Keith Mackey of RBC capital markets.
Hi, good morning.
Good morning, Keith.
Just wanted to maybe start out in Canada on the on the pricing dynamics, if you were to break down how pricing.
Progressed in Canada from the first half of 2021 call. It to the second half of 2021 on a gross basis. So forgetting about inflation, how much would you say pricing improved in Canada during that time.
So so Keith I really if we're looking kind of each one if I understand you H one of 'twenty, one through <unk> to 'twenty one how pricing progressed is that is that your question Sir.
That's correct yeah.
Yeah, so really it it certainly did move up I would say as we exited Q2 structurally probably on a gross basis is that 10, 10% to 15%.
Certainly.
Now as we compare that to the U S. It did not fall as much now some of the drivers of those increases were related to costs related elements, though.
Okay.
Got it Okay and then as you go from.
Our Q1.
And winter of 2022 to the second half of 2022, how do you see that.
That pricing dynamic playing out do you think it's likely another 10% to 15%.
With within you know inflation coming in as it does or or how are you thinking about the progression of pricing through the second half of the year, because I did noticed youre looking.
A little your commentary in the press release, there's a little bit more constructive than that I would say it was last year. This time. So what are you thinking in terms of those of those numbers.
Yeah, I think the constructive comments really come around with our discussions with our key clients in Canada and their plans for this year versus maybe a year ago, where they were a little more tentative coming out of the Covid pandemic.
So there's I think structurally they're a little more visibility on utilization and then over and above that I mean, I think the cost realities are certainly coming to the forefront here in our business.
And structurally having those conversations as Lindsey mentioned on a fairly regular basis here, we get the opportunity to you know.
Derive how we're going to move pricing up further so I think you know, we constructively think that 10% to 15% is probably on the low end just because I think the cost inflation. This year is probably higher than it was a year ago, but on the net side I think there's a inability here because I think the tightness in the market is certainly much different than <unk>.
Better in 2022 than it was a year ago.
Got it got it that makes sense and you continue to run four fleets in Canada.
If you were to achieve that level of pricing that you just talked about Mike.
What is the prospect of adding a fifth fleet to the market.
Yeah, No I think those are opportunities that we're certainly willing to look into.
I think we're being patient in the sense that we'd like to see that.
Core clients that would be demanding that because it's obviously looking at what level of utilization youre going to have on that fleet and we're certainly wanting to see the pricing dynamics in the basin continue to improve so it's one of those things that were certainly evaluating and we will do it for the for the right customers at the right price, but we're we're liking the momentum that we're.
Getting on price and wanted to see the net pricing continued to improve before we make that decision.
Thank you just just to add on that.
We definitely have the capability to to add the fifth fleet, though.
If the dynamics work in our favor.
Got it thanks for the color and just one final one sticking with Canada on the labor side.
Is there anything that has structurally changed about the labor market to make it so tight.
And do you see that sort of changing changing back through the second half of 2022.
Well.
Yeah.
It's a great question Keith.
Tough and answered to totally figure figure out, but I do believe the as we all drive on the roads. There is just more.
Large vehicles on the road than what they used to be and that's a good portion of our of our labor.
It's a skill set that we require.
And so I think that's.
Really the dynamic that has changed the most and then of course, the the relentless spikes and then the cliffs that have taken place with the with the last few years.
Our industry, especially the services industry.
It makes it hard to to to talk about long term with some of your new recruits are on on there. So.
Really we're in a in a cycle that has a steady upturn.
And people can see that it has a steady upturn in and that are the oil and gas industry as a as a necessary part of of our society and that weekend.
<unk> people back into our industry I think it's getting them back in as opposed to just what we have.
Currently working for us.
Got it I appreciate the comments I'll leave it there.
Thanks, Keith Thanks, Keith.
And we'll go next to Waqar Sayed ATB capital markets.
Thank you for taking my questions.
Couple of questions here first on the U S margin side, you mentioned that margins are a profitability of business looks to be similar to maybe 2017 18.
Now back in 17 18, your EBITDA margins in the U S. We're in the mid teens to as much as high as 25% do you see that happening as we go to like what are you going to do.
So I was good morning, Waqar, it's Mike here, Yeah, we certainly are seeing the progression in operating margins.
I think beyond a trajectory similar to 2017, which we did not certainly accomplished last year, we did see net margin improvement between H, one and H two.
But what we're what we're projecting for 2022 or something.
I would not say that's at 2018 levels, but it's certainly starting to approach those levels.
And more akin to how the market was evolving in 2017 in the U S side.
Yeah, Waqar you you know.
We didn't have quite the inflationary pressure that we had.
With that we have now that we had.
Back in that time, so it is a little bit of how fast we can catch the.
Price and see how long it is before it gets eroded from.
Our cost perspective.
Okay.
And then.
The Russian ruble has depreciated quite significantly.
And so you know as we look into Q1 should we just take down our revenues and EBITDAR.
Opex in asset values by about 35% or so.
What car you know.
The the actual advent of the Ukraine conflict happened at the end of February So things would have been probably a little bit more normal for most of the quarter or at least that's what we've seen I mean past that obviously, yeah. The ruble decline is going to impact reported revenue.
Revenue and profitability and in Russia going forward.
And so and what kind of write downs you know he is a possible.
In Q1, any any guidance on that.
As I mentioned before earlier on the call you know really there's a lot of uncertainty around the company's operations in Russia. At this point and are you know you can clearly appreciate its a very dynamic situation and so at this point, we're just going to have to wait until we have more to report here.
At the end of <unk> early in May with our first quarter results.
Okay.
And then in terms of Capex for 2022 I'm not sure if you've already announced that are reported that an artifact. If you have I may have missed it.
No we have not reported that officially waqar, but I would say you know given you know the uptick in North America, and the fact that we did about $70 million of Capex, that's going to be north of that number next year, just based on a constant fleet of active equipment.
Operating you know that 14th fleet or 13 fleet sort of range in North America. So it will definitely be higher than that I would I would suggest a range is certainly between 85 and $95 million kind of on a full year basis.
Okay.
And what's your current liquidity level right now and any any guidance of what the free cash flow picture looks like for Q1.
Yeah, you know what car I mean, that's really a good launching point to as to what we accomplished here in March with our lending syndicate and the bridge loan that we secured.
We're very happy with what we've done there as far as solidifying the company's liquidity profile for what we think are they gonna be expected working capital demands Youre moving forward.
Youre talking free cash flow on a full year basis I mean, it was obviously negative in a rebuilding year like 2021, and where we see that going on a full year basis. This year is to being positive, albeit obviously, you know probably neutral to slightly positive just as we are building.
Our operations up in North America considerably in 2022 from last year.
And working capital last year was like a cash outflow of $50 million and your revenues are going up this year quite a bit.
Working capital again be a source of cash outflow by significant amount.
Yeah, No working capital, obviously on a full year basis.
Oh, an outflow it won't be anywhere near as high as the 50 million that we had to incur this year, but it's probably going to be about half that number waqar.
Okay.
Great. Thank you very much those are my questions.
Alright, thanks very much.
And as a reminder, you May press star one on your telephone keypad. If you have a question. We will go next to John Gibson of BMO capital markets.
Good morning, all.
Just narrowing and specifically for Q1 in the U S. Given.
Laura utilization has started the year, but a stronger finish again sort of the reverse of what happened in Q4.
Flex margins to normalize back to maybe in Q3 levels or given some pricing improvements or could you see.
You need margin compression similar to Q4.
Good morning, John .
Yes.
As we not so much for the quarter, but for the exited into March that I expect to be approaching those levels.
Slow start always gives you a hard time, especially in the U S because of white space in that.
<unk> itself doesn't give you any margin. So so January was hard for those guys but.
They are.
Have have improved night and day from.
From performance in March or for March that we expect.
So John I guess.
Yes.
Sorry, just on our expectations here, we think.
Sequentially. The U S revenue is going to be up probably 10% to 15% from Q4.
And so with that and the better utilization of those crews, albeit it was a obviously a delayed start in one of our operating areas.
Operating income should also be a improved from where it was in Q4 on a percentage basis on a dollar basis.
Okay. Yeah. That's that's what I was trying to get up there any specific reactivation cost me suspect and and Q1 in the U S.
No.
Okay.
And then last one from me.
I'm just wondering how customer conversations are going regarding the second half and Janet I mean, we've heard from some of your competitors.
There could be or there is demand for incremental crews starting in Q3, just wondering what your take on this just in terms of how discussions with customers have gone so far.
Hi.
John .
Ongoing conversations obviously first two to capture.
The cost increases and the likely continuation of those cost increases and that really.
That's the conversation as to whether or not you would have additional capacity.
To do their work because.
The last thing you want to do is has come through the last couple of years of what I would call.
Not not sustainable economics, and then just continue that process down into Q3 by adding I'll call it excess capacity in the us.
Sub due to pricing so so we need to see the you know the.
Pricing for their return on that investment to make it worthwhile for all the fleets not just for the next fleet.
Great I appreciate the color or colored alternate back thanks.
Thanks, Jonathan Thanks, John .
And with no other questions in queue I would now like to turn the call back over to Lindsay link President and Chief operating officer for any additional or closing comments.
Thanks, Jenny. Thank you all for joining our call today, we look forward to talking to you in may.
Okay.
Okay.
And so this concludes today's call. Thank you for your participation you may now disconnect.
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