Q3 2022 Calfrac Well Services Ltd Earnings Call

Okay.

Good afternoon, ladies and gentlemen, and welcome to Cal Frac, well Services Ltd third quarter 2022 earnings release Conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.

But any time during this call you require immediate assistance. Please press star zero for the operator. This call is being recorded on Wednesday November 7th 2022, I'd now like to turn the conference over to Mike <unk> Chief Financial Officer. Please go ahead Sir.

Thank you David.

Good morning, and welcome to our discussion of Capex Cal Frac, well services third quarter 2022 results.

Joining me on the call today are Pat Powell.

<unk>, Chief Executive Officer, and Lindsay link <unk>, President and C O L.

This mornings conference call will be conducted as follows.

Pat will provide some opening commentary after which I will summarize our financial position and performance.

Yes.

Pat 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 2022 results.

Please note that all financial figures are in Canadian dollars unless otherwise indicated.

Some of our comments today will refer to non <unk> measures.

Such as adjusted EBITDA.

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 <unk> theater filings.

Including our 2021 annual report for more information on forward looking statements and these risk factors.

Lastly, as we disclosed during the first quarter earnings release.

The company is committed to a plan to sell its Russian division.

And has designated the assets liabilities and operations in Russia as held for sale and discontinued operations in our financial statements.

The company has made progress with relation to the sale of its Russian subsidiary and.

It seeks to complete this transaction as soon as possible, while complying with all applicable laws and sanctions.

The focus of the remainder of this call will be on <unk>, continuing operations unless otherwise specified.

Pat over to you.

Thanks, Mike.

Good morning, and thanks to everybody for joining our call today.

Before Mike provides the financial highlights of the third quarter I'll offer a few opening remarks.

Cal Frac achieved the best quarter from an EBITDA percentage basis since 2012.

This was possible first because of the present market and secondly, because of the right execution and commitment to our brand promise.

I am proud of what the entire team as our COO.

Complex, so far this year and I'm looking forward to continuing down this path through 2023.

As North America continues to play an important role in worldwide energy production Cal Frac is positioning itself to be a key long term contributor.

One of the ways that Cal Frac will remain a top service provider of choice.

And better serve our customers ESG objectives is true practical investments in our business.

We're excited to begin the.

Transition of the company to nexgen equipment by converting existing two tier two pumps.

To like new tier four.

Dual gas units.

We will rollout the first rebuilt pumps into our United States divisions to an existing customer before year end and plan to convert additional pumps for deployment next year.

We feel by making the right operational decisions each day, while never losing sight of our balance sheet and by investing in projects with the highest expected deal.

We will safely exceed our customers' expectations and continued to generate increased financial performance to.

Produce sustainable returns for our shareholders.

With that said I'll pass the call over to Mike who.

Who will present, an overview of our.

What we think are very good quarterly financial performance.

Thank you Pat.

Yes.

<unk> revenue from continuing operations during the third quarter of 2022.

Was $438 3 million or 67% higher than the same period in 2021.

Adjusted EBITDA increased to $91 $3 million during the third quarter of 2022.

From $29 $8 million in the comparable quarter in 2021, which resulted in a corresponding $52 $4 million year over year increase in net income from continuing operations.

This significant improvement in financial performance was primarily due to more consistent utilization for the company's 13 fracturing fleets that were operating during the quarter in North America.

As well as an expansion and pricing to address the significant input cost inflation that was experienced over the past few quarters.

On a consolidated basis, the company had an outflow of $57 9 million from changes in working capital during the third quarter.

Versus $40 3 million in the comparative quarter in 2021.

This change was largely driven by the significant quarter over quarter increase in revenue.

<unk> spent a total of $24 7 million on capital expenditures from continuing operations in the third quarter compared to $24 1 million in the same period of 2021.

These expenditures were primarily related to maintenance and sustaining capital to support the Companys fracturing operations.

As well as $4 $5 million of reactivation costs related to <unk>, United States Division.

During the third quarter of 2022 cash proceeds of <unk> 6 million were received from the exercise of warrants and stock options.

Subsequent to the end of the third quarter $8 6 million of <unk>. One five lien notes were converted into common shares.

Following this conversion the remaining principal amount outstanding was $47 4 million a decrease of $12 6 million from the original issuance amount of $60 million.

To summarize the balance sheet at the end of the third quarter. The company had working capital of $208 million from continuing operations <unk>.

Including the $11 9 million in cash.

As the company's previously announced as the company previously announced in an earlier press release <unk>.

<unk> amended and restated its credit agreement, which included an extension of the maturity date to July one 2024.

At September 32022, the company had used $1 million of its credit facilities for letters of credit.

It had $200 million of borrowings under its credit facilities, leaving $49 million in available borrowing capacity at the end of the third quarter.

The company was in full compliance with its financial covenants associated with its credit facilities at the end of the quarter.

I'll turn the call back to Pat to provide our outlook.

Thanks, Mike.

I will present, the outlook for Cal Frac, continuing operations cost across our geographic footprint.

Our operations in North America produced significant year over year financial results in the third quarter.

And we anticipate this momentum to carry through next year as we expect demand to continue to exceed supply.

In the United States Cal Frac group.

Fleet profitability throughout the third quarter with an average adjusted EBITDA per fleet that more than tripled the same period last year.

The company drove these strong results through job execution.

And effective scheduling court court.

And effective scheduling coordination across its nine fleets.

We anticipate steady demand through next year and are currently working with our customers to optimize the fracturing schedule for our operating crews.

To capitalize on the demand for company's services in the U S. Cal practice made the strategic decision to reactivate a 10 fleet.

Which has recently commenced operations.

In Canada.

Steady utilization of our four large fleets and five coil tubing units as well as consistent price increases drove the strong year over year third quarter financial results.

As a market leader, we expect to build upon the momentum through next year as customers pursue Cal frac to execute their completion schedules.

We will continue to evaluate equipment expansion options and will activate a dip additional fleet, if and when it makes sense for Cal Frac.

Yes.

Capex operations in Argentina generated improved financial performance as the new contract for the dedicated Frac fracturing fleet and coiled tubing unit and the vacuum or out of shale play took effect.

The outlook remains strong in Argentina, and Cal Frac safe excellent delivery of services, we expect steady utilization through the rest of this year to produce solid financial returns.

Yes.

I would like to end the call with a few takeaways first we are excited about the financial results this quarter and have made a positive outlook.

On the remainder of this year and through 2023.

We expect that the fracking market will remain tight.

Secondly, we are looking forward to beginning the transition to next generation equipment by leveraging tier four technology to meet growing customer demand and expand margins.

And most importantly, we are confident that our strategy of practical capital investment combined with the right decisions will maximize operating cash flow regardless of the business cycle to put Cal frac in the best position possible going forward.

Back to you.

Thank you Tom.

I'll now turn the call back to the operator for the Q&A portion of today's call.

Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star key followed by the number one on your telephone keypad Youll hear at retail and prompt acknowledging your request questions will be taken in the order. They are received should you wish to withdraw your request simply press star key followed by the number.

<unk> two <unk>.

A speaker phone please lift your handset before pressing any keys, we'll pause for just a moment to assemble the queue.

We'll take our first question from Nicole <unk> with Stifel. Your line is now open.

Hi, Good morning, everyone just on the additional activation front I assume prices no longer to eliminate factor, particularly particularly in the U S. So I mean is it just a question of customers fragrance firming up their plan to needing more visibility on Q1 warehouses, how should we think about that.

While pricing is still fairly Fairmont for Cal Frac we.

<unk>.

We won't put up.

Our fleet to work.

At at any pricing less than what we're receiving today.

Does that answer your question.

Sure.

On the on the U S business front. So EBITDA per fleet was very strong I mean, obviously your business in the U S. Obviously has some seasonality typically.

Can you just give any guide post how we should be thinking about that metric over the next few quarters.

And at a high level, what can that metric get to without any additional increases in frac pricing ie just from improved utilization.

Well good morning, Cole, it's Mike here as.

As far as the EBITDA per fleet in the third quarter I think what Youre seeing there is I think high high utilization for our nine fleets I would say you know we're as close to nine fleets.

Of activation is you can get practically speaking because theres always going to be some downtime. So that third quarter is likely the high watermark as far as utilization.

So using that benchmark as you move forward I think.

Youre at that 20% to $25 million EBITDA per fleet moving forward, if youre not going to adjust for any sort of net pricing gains.

So I think from that aspect, that's really I think where we're at and so maybe.

Add to the earlier comment from Pat on where we see the visibility in the U S.

We have a strong franchise in the broader Rockies region up and down stretching from the Bakken into Colorado.

So we have ability there through our customer base to certainly look to leverage more growth in market share.

But that's really going to be a factor to pat's point around the economics and the visibility on utilization of that crew, whether we would actually spend the money to reactivate or not we also have optionality in the Marcellus as well as it comes to expansion. So we do have opportunities down there and you're right on the profitability, but the market.

Is very very tight and we would look to deploy that equipment only if it makes sense on a longer term basis.

Got it so I guess, maybe at a high level.

Call it more bullish environment you had maybe.

Look to reactivate one or two fleets into 2023.

Yes, I mean, I think at the top end it would probably be too.

At least at this point, but it certainly would obviously be dependent as I mentioned before on on the quality of the customer and the visibility of work and the economics associated with that project.

Got it that makes sense. Thanks.

Just quickly can you just provide some commentary on where cost inflation has been in Q3 relative to Q2, and how you see that evolving over the rest of the year and into next.

Yes, the cost inflation I think hit us.

Very hard in the front half of the year I think to some degree it abated.

There is certainly always going to be cost pressures throughout all of the operating cost drivers call but.

The main drivers I think we saw the significant step up in cost in the front half and saw that trimmed.

Trimmed down a little bit, but there's always going to be inflation as we move forward.

Got it.

Thats all from me, Thanks, I'll turn it back.

Alright, Thanks Cole.

Next we'll go to Keith Mackey with RBC capital markets. Your line is open.

Hi, Thanks for taking my questions can you just maybe just.

Potentially in Q4 and in 2023 can you maybe just talk about how many pumps you expected due over that time, how much horsepower and then and then any capital or the capital associated with it.

I'm, sorry, Keith I'm going to have to ask you to repeat your question you cut out on our end here just a little bit.

Yes so.

Our replacement, how many pumps or how many horsepower and capital associated.

We can say is with that.

I think as far as.

What we've got in the queue today is we've got.

Four pumps that were expecting to get delivered here before the end of the year.

In North America, and another couple coming out of Latin America.

We're really in the process I think of evaluating how far we get too in our next year's planning we're right in the planning cycle for 2023 Capex at this point.

Maybe Pat if you wanted to.

Add to that.

Well just just from.

Sheer math just the hours that we're putting on our engines, we would expect to.

Two.

Rebuild 65 engines next year, just on a normal normal cycle.

And.

A lot of these engines.

As we can.

Get engines and the timing is right. We would we will be doing a switch.

Switching nodes to tier four engines at that time.

But as Mike alluded to we're not quite there yet we are just going to work.

Going to start putting a pencil to all of US here in the next week or two so.

Got it okay. Appreciate the I appreciate the commentary.

Maybe just on on Canada can you talk about the state of the market. There how things are looking heading into heading into and through tendering season for 2023 activity because certainly we have seen a pretty big ramp up in the rig count some of that is of course heavy oil and whatnot.

Can you maybe just run through how tight do you expect the Canadian market to be true.

The rest of the fall and into the winter for up to Canada.

Maybe.

I think our utilization might be a little lighter in December .

Fourth quarter, then then we're going to see in the U S. But we're expecting a V.

Robust.

2023.

Anything we do.

We hear from our customers.

We're pretty excited about 2023 right now.

Got it. Thank you that's it for me.

Thanks Keith.

Okay next we will go to Waqar Syed with <unk> capital markets. Your line is open.

Sure.

Thank you.

Actually just touched upon it but.

So you don't expect any seasonality in the U S. In Q4. This is this year.

Or you do expect some seasonality and that's being offset by kind of.

Two months of.

But from the from the 10th crew.

Good morning, Waqar, it's Mike.

Yes.

Sure.

As we operate in the northern areas of the U S. Predominantly we're going to have some seasonality and some issues as far as whether that always occurs.

Where this is maybe a little different than a year ago as the visible gaps and worked with our client base I think we see a pretty steady workload for the 10 fleets that we're going to have operating as we exit the year.

So there is likely to be gaps there always is but I think we're going to see more consistent utilization than a year ago.

So it is a bit different in that respect, but I think there's.

Theres always going to be scheduling and movement and those kinds of things, but it won't be anywhere near as pronounced as it was a year ago.

Okay.

And then.

In terms of the tier four upgrades batch you mentioned that maybe like 65 engines that are due to be rebuilt.

Do you think if you were to rebuild all 65 next year.

Given the supply chain constraints.

Do you think you'll be able to place an order and have them delivered in 2023.

Yes, we've we're already in talks.

<unk>.

We have we have the right amount of engines.

Tied up we just haven't pulled the trigger on them yet.

Okay.

What's kind of the.

Cost of these upgrades.

Bump our fleet if you could maybe provide some color there.

We'll be about $1 3 million too.

Two.

We build.

And refurbish.

Tier two.

Pump to a tier four pump, which will which gives us.

Basically.

New unit.

We'll reuse of pump.

And the carrier.

Sure.

One 3 million is.

Is in U S dollars.

Yes.

Okay.

That makes sense.

And could you just talk about the pricing trends that you're seeing in the U S and Canadian markets are you seeing the leading edge.

Continue to move higher.

Have you seen some stabilization.

Now in those two markets.

Pricing or pricing or pricing cost to us.

No the pricing that you are charging to your customer and then the.

First of all of that.

We're always pushing for increased pricing.

Okay.

They still getting that traction.

We probably won't get the big gains we've seen.

What we really needed to mean not wasn't that was just.

A catch up.

But the.

Yes.

As our costs go up we sit in front of our customers and try to negotiate.

That we cover our costs.

Yes.

If you look at the margins in North America, now for you materially higher than in Argentina.

Do you see Argentina margins kind of going up as well through the course of.

<unk> thousand 33.

Is there any.

Structural reason why there couldnt get to that 20% kind of range.

We see the margin going up there we added contracts that.

That has expired and we have entered into a new contract.

Our margins will be much closer to North America going forward.

Great Wonderful news thank you Sir.

Thanks Waqar.

And next we'll go to John Gibson with BMO capital markets. Your line is open.

Good morning, most of my questions have been answered, but I did.

I did want to poke.

<unk> on the tier four upgrades I'm wondering if you had any desire to upgrade.

The DGB engines in Canada or is it mostly be us youre focusing on.

Yes, no we will be doing Canada also.

We have we have some mainland into queue for Canada, Australia.

Yes.

A view of new tier four is levered to the U S. But we're certainly as we look into next year's capital planning John .

We will be doing the same in Canada to a certain extent.

Okay, Great just last one for me.

With regards to pricing some of your peers.

<unk> spoken to modest net pricing gains in Q3 in Canada.

Was this the case and if so could you maybe talk about more specifics in terms of percentage gains.

Yeah.

Yes, I mean, I think we have to be mindful that for US we came off a fairly low activity or low utilization quarter and Q2 in Canada and I think our crews were very active in the third quarter ended did a great job for our client base.

In conjunction with that the sales group had had worked on.

On negotiating net price gains as well, but I think it really is a focus of very strong execution and I think better pricing. So I think it's one of those things where it's both factors really equated to why we had such strong performance in the quarter.

Got it congrats on the great quarter, and I'll turn it back.

Thanks, John .

That concludes today's question and answer session I would now like to turn it back over to the presenters for any closing or additional remarks.

Thanks, David.

Eight two.

Yes, close off the call here.

As we announced this is part of the press release today Lindsay link will be retiring from Cal Frac early in the new year.

I just want to thank Lindsay for his significant contributions to Cal frac over his 10 plus years or nine plus years with the company and thank you very much and looking forward to releasing our Q4 earnings in March so thanks, very much for everybody and good.

Good day.

Yes.

Ladies and gentlemen that concludes the conference call for today, we thank you for your participating you may now disconnect.

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