Q4 2023 Calfrac Well Services Ltd Earnings Call
Speaker 2: This is a limited 4th quarter 2022 earnings release and conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Thursday, March 16, 2023.
Speaker 2: I would now like to turn the conference over to Mike Olenek. Please go ahead.
Speaker 3: Thank you, Joelle. Good morning and welcome to our discussion of CalFRC Well Services fourth quarter 2022 results.
Speaker 3: Joining me on the call today is Pat Powell, CAFRAC CEO .
Speaker 3: This morning's conference call will be conducted as follows.
Speaker 3: Pat will provide some opening commentary, after which I will summarize the financial position and performance of the company.
Speaker 3: Pat will then provide an outlook for CalFRAX business and some closing remarks.
Speaker 3: After the completion of our prepared remarks, we will open the conference call to questions.
Speaker 3: In a news release issued earlier today, CalFRC reported its fourth quarter 2022 results.
Speaker 3: Please note that all financial figures are in Canadian dollars unless otherwise indicated.
Speaker 3: Some of our comments today will refer to non-IFRS measures such as adjusted EBITDA.
Speaker 3: Please see our news release for additional disclosure on these financial measures.
Speaker 3: Our comments today will also include forward-looking statements regarding CalFrax future results and prospects.
Speaker 3: 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.
Speaker 3: Please see this morning's news release and CalFRAX CDER filings, including our 2022 Annual Information Form, for more information on forward-looking statements and these risk factors. Lastly, as we disclosed during the first quarter earnings release, the
Speaker 3: 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 the financial statements.
Speaker 3: Calfrak is continuing to make progress to complete this transaction as soon as possible while complying with all applicable laws and sanctions.
Speaker 3: The focus of the remainder of this call will be on CalFrax continuing operations unless otherwise specified.
Speaker 4: Pat, over to you.
Speaker 5: Thanks Mike. Good morning and thank you everyone for joining the call today.
Speaker 5: Before Mike provides the financial highlights of the fourth quarter that he talked about, I will offer some opening remarks.
Speaker 5: This past year was one of the most successful years in the company's history. I am proud of our financial and operational accomplishments.
Speaker 5: and I am impressed by our team's commitment and resilience as they overcame adversity during the first half of the year to capitalize on an improving market during the second half of 2022.
Speaker 5: Shortly after joining the company, approximately nine months ago,
Speaker 5: I set three strategic priorities for the organization.
Speaker 5: The first was to maximize consolidated net income and free cash flow through a disciplined return on invested capital focused pricing strategy.
Speaker 5: combined with the stringent focus on the management of all operating and overhead costs.
Speaker 5: Number two was to dedicate all free cash flow to reducing the company's long-term debt and evaluate additional strategies to improve its capital structure.
Speaker 5: And third was we would invest in technologies that enhance our service deliverability in the field.
Speaker 5: and that also drives improved profitability into the future.
Speaker 5: Over the last two quarters, CalFRC has made considerable progress on each of these priorities.
Speaker 5: Firstly, the company delivered its best third quarter financial performance since 2012.
Speaker 5: and generated strong financial results in the fourth quarter, despite the impact of intense winter storms in December that affected our utilization in the U.S. for approximately 10 days.
Speaker 5: We exited the year with a total of 14 active frack fleets in North America and are currently operating 15 spreads in the field today.
Speaker 5: In Argentina, we have one large fleet servicing the Vacuumerata shale play and six smaller fleets that are active in the conventional basins of southern Argentina.
Speaker 5: We also took the opportunity to align the company's executive team and corporate organizational structure over the past several months.
Speaker 5: so that we can more effectively support our North American and Argentinian communities.
Speaker 5: Argentina operating divisions.
Speaker 5: in this extremely competitive oilfield services market.
Speaker 5: We are driving continued improvement throughout all levels of the company by seeking out opportunities to streamline our processes and procedures across North America and Argentina.
Speaker 5: Our goal is to harmonize the company's best practices.
Speaker 5: and to make small changes that can have significant impacts to our overall safety, service quality and financial performance.
Speaker 5: Since the end of the second quarter, Cal-Frac has made substantial headway with respect reducing its long-term debt.
Speaker 5: In December 22, the company completed its 1.5 lean note conversion program, which reduced the principal amount of the notes outstanding to approximately $2.6 million at year end, as compared to approximately $57.4 million.
Speaker 5: at the end of June . In addition,
Speaker 5: To the one and a half lanes, the company generated significant free cash flow during the second half of 2022, which resulted in a $30 million repayment of its revolving credit facilities since June 30, 2022.
Speaker 5: as the company
Speaker 5: is now expecting an inflection point with respect to its working capital requirements after the first quarter of this year.
Speaker 5: We are targeting an accelerated paydown of the company's revolving credit facilities beginning in the second quarter of 2023.
Speaker 5: Lastly, the company recently announced a multi-year fracturing fleet modernization program which will commence with the conversion of 50 Tier II pumping units into Tier IV dual fuel capable pumping units. This asset enhancement program will serve to increase
Speaker 5: Cal-Frac service quality to its customers and supplements the delivery of nine Tier IV pumping units which were previously committed to.
Speaker 5: Four of these units will be going into service next week.
Speaker 5: Three more before the end of the quarter.
Speaker 5: and the last two falling closely behind. The company is also upgrading its operating technology which will allow for better real-time access to job data and serve to drive better fracturing performance in the field for our class.
Speaker 5: I am looking forward to building on the momentum of the last couple of quarters. And as the largest Canadian headquartered pressure pumping company, I feel that Cal Frax geological footprint leaves us well positioned to advance our strategic priorities during 2023.
Speaker 5: I will now pass the call over to Mike who will present an overview of our quarterly financial report.
Speaker 3: Thank you, Pat. CalFRC's revenue from continuing operations during the fourth quarter of 2022 was 447.8 million or 95% higher than the same period in 2021. With a full year, revenue totaled 1.5 billion or 70% higher than last year.
Speaker 3: Adjusted EBITDA during the fourth quarter of 2022 increased to 76 million versus 8.4 million in the comparable quarter in 2021.
Speaker 3: As Pat mentioned, the financial results during the fourth quarter were achieved despite the company's operations in the United States being impacted by severe winter storms in December , which caused work stoppages for our crews in the Rockies Region for approximately 10 days.
Speaker 3: For the full year, CalFRAC generated adjusted EBITDA of $233.7 million, an increase of $182.1 million from the prior year.
Speaker 3: This significant improvement in financial performance was primarily due to better utilization and pricing for the company's fracturing fleets.
Speaker 3: combined with a larger operating footprint in North America.
Speaker 3: CalFRAC recorded net income from continuing operations during the fourth quarter of $14.8 million and $35.3 million for the year-end of December 31, 2022.
Speaker 3: These results included an impairment of property plant equipment of 10.7 million in the United States.
to permanently retire 54 obsolete fracturing pumps.
and an impairment of inventory of 8.5 million in North America to write down spare parts and product inventory to their net realizable value.
Calfract spent a total of $35.8 million on capital expenditures from continuing operations in the fourth quarter, compared to $14.9 million in the same period of 2021.
These expenditures were primarily related to maintenance and sustaining capital to support the company's fracturing operations.
as well as $8.3 million of reactivation costs related to CalFRAX United States Division.
and $3.5 million related to the Tier IV Fleet Modernization Program.
In 2022, the company spent $87.9 million as compared to $66.6 million in the prior year, primarily due to higher maintenance capital required to support improved activity levels in North America.
Calfract's Board of Directors recently approved the company's 2023 capital budget of approximately 155 million.
which consists primarily of maintenance capital, exclusive of fluid ends,
as well as the Fleet Modernization Program. Effective January 1, 2023, CalFRAQ will expense all fluid ends and they will be reported as a component of operating expenses on a go-forward basis.
During the fourth quarter of 2022, the company completed the early conversion of its 1.5 lien notes.
As a result, 44.8 million notes were converted into common shares at a price of approximately $1.33 per share.
At the end of the year, the outstanding principal amount of 1.5 lean notes was 2.6 million.
As a result of this program, the company issued 33.6 million new common shares and paid $2.3 million in interest as an early conversion fee.
To summarize the balance sheet at the end of the fourth quarter.
The company had working capital of $183.6 million from continuing operations.
including $8.5 million in cash. During the fourth quarter, the company repaid $30 million on its revolving credit facilities and exited the year with $170 million of borrowings under those facilities.
leaving approximately 80 million in available borrowing capacity at the end of 2022. Before I turn the call back to PAD, I want to highlight the change in CalFRAC's organizational structure that was disclosed in the other development section of the news release.
As part of CalFRAX's strategy to realign and streamline its structure,
The company has decided to report the financial and operating performance for the United States and Canada under a single North America division, beginning with the interim financial statements and MD&A for the first quarter of 2023.
Now, I'll turn the call back to Pat to provide our outlook.
Thanks, Mike.
Our operations in North America produced significant year-over-year improvement in financial results during the first quarter.
This momentum has carried into the first quarter and visibility into the second quarter is still very strong.
We expect the pressure pumping market to remain fairly tight throughout 2023.
Everything is a bit up in the air today with the recent bank issues and the drop in commodity prices, but we are confident that we can manage our way through.
Our customers continue to demand more intense completion designs, and Calfract meets these challenges by providing best-in-class operating performance and highlights our operational, technical and supply chain expertise.
In the US, we leveraged our asset base with efficient job execution to generate superior adjusted EBITDA per fleet versus the fourth quarter of last year, despite intense winter storms.
that significantly reduced activity in the Rockies during December .
For 2023, we are anticipating steady demand for our 10 fracturing fleets in the United States.
as we continually monitor market opportunities to optimize our crew scheduling.
In Canada, the fourth quarter was impacted by weather and customer budget exhaustion.
With exception of the normal seasonal slowdown in the second quarter, we expect consistent utilization for our five large fleets.
and six squirrel tubing units into the second half of 2023.
Like our competitors, we view the supply chain networks at near full capacity, especially as it relates to sand transportation and equipment rentals.
As a result, we continue to experience input cost inflation, but not at the rates witnessed earlier in 2022. However, we continue to communicate with our supply chain partners to understand the timing and drivers of these increases, and where possible, work to develop more cost-competitive solutions.
and or negotiate price increases on our fracturing projects with up-to-date cost estimates. I want to commend our supply chain teams for mitigating any potential disruptions to our fracturing operations thus far in 2023.
We have not experienced any sand supply shortfalls in a busy start to the new year in North America.
So
Make no mistake, sand is a continuing worry to us. But so far, our guys are doing a great job. We're also looking forward to deploying our new Tier 4 units into the field.
as well as updating our fracturing operating system technology in North America during the first six months of the year, which will enhance our data capabilities and drive better decision making on location.
I'll now turn to TELFRAC's Argentina operations.
Cal-FAC's operations in Argentina generated improved year-over-year financial performance and we expect this to continue into 2023 as higher utilization combined with improved pricing for our services.
is anticipated to produce enhanced financial returns.
As the North American fracturing market transitions to
Tier 4 or electric fleets, CalFrax present in Argentina provides it with a potential strategic opportunity to deploy good excess Tier 2 pumping equipment from North America into that country.
to generate incremental return on invested capital.
To do this, we will not only need a formal contractual commitment from an oil company in Argentina, but we will also...
need a change to the existing foreign currency.
Restrictions in Argentina before this equipment would be transferred from North America.
So as we enter 2023, I believe that CalPRAAC is well positioned to take advantage of the strong business outlook in North America.
and Argentina, while our operating and support teams will continue to make progress on our three strategic priorities.
Firstly, we will leverage our geographical footprint and remain disciplined in our capital allocation approach to prioritize financial returns over market share gains.
Next, we will dedicate all free cash flow to strengthen the company's balance sheet.
And lastly, we will seek to improve Cal-FRAX asset quality through timely targeted investments
in next generation technology that will enhance our service quality and drive improved profitability into the future.
So back to you, Mike.
So back to you Mike. Thank you Pat.
I'll now turn the call back to our 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 star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Did you wish to decline from the polling process, please press the star.
Followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Keith McKay with RBC Capital Markets. Please go ahead.
Hi, good morning and thanks for taking my questions. Maybe just wanted to start out on the fluid ends, understand the new accounting treatment. Can you discuss what you might expect to spend on fluid ends through 2023?
Good morning Keith. Our annual lifespan just given the footprint we have in North America and Argentina is around 30 million a year.
So that's, I would say, a good proxy for an estimate for this year, provided everything stays as it is right now in the field. Thanks, Mike. And just on the natural gas.
I know there was some commentary in the release about that. Can you just kind of run through what your FRAQ fleet footprint is through the U.S. Northeast? Have you seen any customer attrition yet? Just really what underpins the confidence you have.
in being able to redeploy or reduce your footprint for if you do see some turnover in that demand.
Yeah, I would say of our footprint in the U.S., a minor portion is really dedicated to the Marcellus area.
So, you know, as we walk through the year, the dry gas side obviously has been impacted on a commodity price. We've all seen that in the last number of months. It's certainly well off the highs.
through the year. The dry gas side obviously has been impacted on a commodity price. We've all seen that in the last number of months. It's certainly well off the highs that we had last year.
And so we're very mindful of that and then we'll allocate our capital accordingly. So, you know, our limited fleet footprint there doesn't have a lot of exposure, I think, on an overall top line or EBITDA expectation for 2023. But right now we are still active in that area.
We have a dedicated customer through the middle of the year, and we're working towards solidifying that customer throughout the remainder of the year. So I think on our side, that's really the pure dry gas. We do have some operations in Colorado that are levered to the Piance Basin. That is also dry gas.
curious for some more detail on what you're seeing in the sand market. How tight is the supply demand equation? Where, you know, what markets are seeing the most tightness and what are you experiencing roughly in terms of tonnage pricing for sand?
So the, you know, the sound has got multiple issues. One is the...
the appetite for the different grades of sand changes.
So, you know, where 40-70 was what everybody wanted. A while ago today they wanted 100 mesh, so that caused some troubles at the sand mines themselves. I believe there's still lots of sand. It's just getting the grades that the customer wants.
So, you know, where 4070 was what everybody wanted. A while ago today they want 100 mesh. So that caused some troubles at the sand mines themselves. I believe there's still lots of sand. It's just getting the grades that the customer wants. And sometimes he has to switch.
from what you actually want to a different grade.
So that's an issue. The sand mines only have so much of each grade.
We're anticipating to...
We're anticipating to probably pump a...
I'd say off the top of my head another
25% more sand.
in 2023 than we did in 2022 just because of our first half of the year is quite a bit busier than it was last year. So that's where we would be at it.
Then of course there's rail availability that can cause issues. So sound is a big part of our business. So there's a bit of worry there.
I'll leave it there. Thanks very much. Thanks. Thanks, Keith. Thanks, Keith.
Your next question comes from Cole Pereira with Stiefel. Please go ahead. Morning all. Just to build on Keith's question a little bit, can you talk about what you're seeing on the ground with regards to supply and demand fundamentals in the US? Are you seeing many excess fleets around looking to perhaps a bid price a bit lower? We're not seeing that today.
Got it. And on the Canadian side, can you talk about what, you know, that fifth fleet, how utilized was that in Q1 and are you, do you kind of have a flexible approach to that fleet in the back half of the year just given some of the uncertainty?
The fleet that we'd moved down to the US brought back to Canada.
The fleet that we'd moved down to the U.S., brought back to Canada, has been
100% basically utilized since we put it in the field.
And, you know, it was parked against the fence and if you go back against the fence again.
it was parked against the fence and it could go back against the fence again. Got it.
Yeah, that's great, thanks. And you know, in Canada are you seeing much in the way of, you know, customers talking about, you know, Blueberry or LNG related development for the back half of the year? You know, I think it's a little slower than what I anticipated it might be.
But I was in conversations with a fellow the other day, and that company said they planned to be very busy in that Fort St. John area.
So that I mean that take it for what it's worth, but it was a pretty good sign to me So I would I would I would think we'll see some improvement there Which maybe you'll take up some of the slack if we do get slack in our traditional pumping areas
Got it. And then on the re-segmentation, can obviously understand there's an administrative cost savings element, but can you just give some more details on the rationale? I mean, they're pretty distinct markets, both of which are material, pretty distinct drivers, etc.
Yeah, Cole, I think really where it is, is a focus internally on our North American business. I think prior to that our leadership was focused more on a geographic basis. I think the way that Pat has viewed the business since he got here is that we're a North American business and there's a border in between.
And so, you know, from our perspective on performance, we're looking like we've got 15 fracturing fleets in North America that can be allocated in either market, understanding there's supply-demand dynamics. I would say right now, the financial metrics around those markets.
are relatively similar. And so it just felt like a good time to make that change at the start of this year. Got it. So that's all for me. Thanks, I'll turn it back.
Your next question comes from Waqar Said with ATB Capital Markets. Please go ahead.
Thank you for taking my question. Pat, could you quantify the weather impact in terms of days that you've seen in Q1 in your US operations and how does that weather impact compare to the days you experienced in Q4?
Q1, I would say we had a question.
Mike, what would you say? Roughly the same or a little less?
I would say that we have had approximately 10 days thus far in the quarter, very similar. It's not all been in one month. It's been kind of shared between.
January and February and unfortunately when you look at the weather forecast for March there's more storms blowing into our areas in Wyoming and North Dakota.
that have been principally impacted by some of this weather. So I would say it's going to be probably a bit more pronounced than it was in Kew-
Q4 just because it was only limited to one month. You know, to take that one step farther, there can still be some major snow events in April .
in that North Dakota, Wyoming area. So we're hoping it's behind us and it should be, but.
There's no guarantees with the weather. That is a little bit out of our control.
Now, in terms of pricing, did you get any pick up in pricing Q1 versus Q4 for your North Malcolm fleet? Not really. You know, and of course with what we've got going on today.
in the market. I was hoping to get some pricing in Q1, but it's probably going to be a difficult push today.
Okay. So, just to understand the pricing dynamics, so far you haven't seen any declines in pricing. Is that fair? Yes.
Yeah, no decline and improved utilization.
Yeah, no decline and improved utilization.
Utilization is really just as important to us as pricing. So if you're looking at profitability, quarter over quarter profitability in the U.S. operations, you'll have maybe a slightly higher
Fleet count, maybe 10 versus 9.5 or something in Q4. And then relatively similar number of days down. So you expect that to be relatively flat in the US.
What of a quarter? Yeah, relatively flat. I mean again, it will ultimately depend on utilization in March, but the trend that we're seeing thus far is pretty close to that.
Okay, and then on the Canadian side, you will have an extra fleet and obviously better utilization otherwise as well. So the pickup, any quarter of a quarter change in the company level would primarily be driven by Canada.za Standard
Yeah, certainly there's a, I would say, a systemic change in our utilization between Q4 and Q1 in Canada, which is going to drive better results. I would say, you know, secondarily to that, I think we've got more consistent utilization as well in Argentina that will, I think, be a driver of quarter over quarter sequential growth.
So then, if I look at the consensus estimates right now for Q1, it's about $93 million. How comfortable are you with that number out there relative to that?
Q4 was around 76 million. Yeah, I mean we can talk more after the call, but I would say that the weather challenges that we had in the US that impacted us in Q4, we've talked about that already impacting Q1. So I would suggest that the estimates are, I would say above what we think we can deliver, but.
it's a function again of utilization. But I would say though on a sequential basis, it's our estimates are that we're gonna have sequential improvement, but not to the degree that's in the estimates today.
Okay, fair enough. Now you are introducing new Tier 4 systems into the field. There will be significant savings for the customer on the fuel side. Now how would that translate to your own IBDAP or crew type improvement? Yes, there are first mechanisms.
replacing
very experienced, close to end of life equipment with new equipment. So, you know, I mean just your breakdowns and your, for the first, you know, probably three years, those, that equipment once we get it in the field and get a few of the...
new bugs that you usually have with new equipment out of it, it should run very cost-effectively for the first three or four years before it comes up to kind of midlife repairs. We should see a major drop in our R&M on every pump that gets replaced.
Fair enough, but in terms of pricing, do you see any pickup? And let me just throw out some numbers here that we're seeing for the U.S. companies, we see a bid-up per crew in that 24 to maybe $28 million per crew, analyzed in the U.S. for tier 4 type equipment versus closer to...
maybe $15 to $18 million for tier two dual fuel and tier two diesel type equipment. So would you, would we start to think about like your VDAPO crew for those tier four fleets going closer to that maybe $25 million US number?
They're certainly going to gravitate higher EBITDA per fleet once we get to some level of scale. I think when you're dealing with nine pumps that we're putting in the field here in the next.
few months. I would say that's more of a realistic expectation coming out of 2023 into 2024, but you're not wrong. There's going to be incremental improvement.
stepping through the year as we activate those crews. Okay, and then just one final question. Are there any cost benefits of this single reporting for North America?
Yes, there are. I mean, I think there's some synergies around that. And it's another reason why we're looking at our business that way, but it's primarily driven by operations. But yes, there's an administrative, I would say, synergy associated with that change.
Well, thank you very much. I appreciate the color. Thanks, Vikhar. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one.
There are no further questions at this time.
There are no further questions at this time. Please proceed. At this time, please proceed.
I think there's one more in the queue, Joelle, that we would like to take.
I think there's one more in the queue, Joelle, that we would like to take, please. Okay. Okay.
Your next question comes from John Daniel with Daniel Energy Partners. I just want to go back to the sand question. Is that the challenges? Is that limited to one basin? Is that broad based? Is that limited to one basin?
And then the follow up on that is are you seeing more of your customers trying to self source the sand or are you taking on more of that process? Yes to all. I guess it's kind of in all basins a little bit depending on where we're at. A lot of the US is in the US.
They've been kind of switching to just domestic sand, which has helped down there a little more than say Canada.
So that's a bit of an issue. And the. DNP.
are taking on in some places more and more sand, but that'll probably switch as supplies get tighter and they'll leave it up to us I would think, but we'll see what happens.
But to date, we have not ran out of sand. And this isn't something that I think is imminent, but it's something that has certainly been brought to my attention that...
you know, we're getting by but we don't have excess so Fair enough. And then one of the refrains you hear from the EMP community is
You know oil and gas prices are lower, but my service costs are really high Therefore, you know I need as an operator relief And I'm curious as they deliver that message to you all and obviously they're your customers so you listen
Does the negotiation lend itself well to, okay, we can give some relief today, but you know, oh, by the way, if oil goes back to 85, 90 WTI, we immediately reestablish the price. If you can just elaborate on.
their willingness to give it back to you if the excuse is they got to get a discount because price commodities have gone lower.
Well, we first off we haven't in this cycle we haven't
really seen too much of it. I mean, they're kicking the ball around a little bit like they always do. I mean, they're always trying to get pricing out of us. I would think that'll intensify here going forward. But you know, in reality, frackers on a whole.
You know, we just kind of got back to a sustainable pricing level, so it's going to be a pretty big push. You know, a company like Calfract, you know, we...
We have the ability to put stuff back on the fence, probably more so than we had in the past, just because of our debt levels.
And, you know, at the end of the day, I mean, we're in a capital intensive business that this stuff wears out. And, you know, we just, we have this tier four conversion to meet the, you know, the climate change requirements of ourselves, of course, and our customers.
You know, that all comes at a cost, so I don't think it's going to be a push. It'll be a battle. But we're kind of expecting it.
Okay, well thank you for letting me chime in some questions. I appreciate it.
Yeah, thank you. Thanks, John .
There are no further questions at this time. Please proceed. Thanks Joelle. Well, thank you to everyone for joining our call today and we look forward to hosting our first quarter earnings call in early May. Thanks very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.