Calfrac Well Services Ltd. Q1 2023 Earnings Call

Okay.

Good day, and thank you for standing by welcome to the Cal Frac well services first quarter 2023 earnings release and conference call.

At this time all participants are in a listen only mode.

After the presentation, there will be a question and answer session.

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To withdraw your question. Please press star one one again.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Michael Olynyk, Chief Financial Officer. Please go ahead.

Thank you Liz.

Good morning, and welcome to our discussion of Cal Frac water services first quarter 2023 results joining me on the call today is Paul Cal Fracs Chief Executive Officer.

This mornings conference call will be conducted as follows.

Pat will provide some opening commentary after which I will summarize the financial position and performance of the company.

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.

In our news release issued earlier today <unk> reported its first quarter 2023 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.

See our news release for additional disclosure on these financial measures.

Yes.

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.

Fracs SEDAR filings, including our 2022 annual information form for.

For more information on forward looking statements and these risk factors.

Lastly, as we have previously disclosed 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.

Cal Frac is continuing to make progress 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.

And thank everybody for joining our call today.

Before Mike provides the financial highlights of the first quarter I'll offer some opening remarks.

Cal Frac executed on our on our brand promise during the first quarter as we overcame adverse weather conditions and delivered significant year over year financial improvement.

In addition to increased utilization across our existing equipment and all operating divisions, we re activated one large frac fleet.

One coil tubing unit.

In North America.

Safety is not matching first and our brand promise by accident, we know that an excellent safety.

Track record is paramount to being a high quality service company and as such we appreciate that we must continually work to improve our safety performance across all locations.

We ended the year with a rolling trip up 1.19.

We improved a 1.13 in this quarter and look to continue that trend throughout the year.

Another example of our safety centered cultures at one of our operational districts has gone almost four years without.

Osha recordable incident.

We understand that a strong safety record that allows us to maintain our long term customer relationships and successfully serve our clients across all business cycles.

Our fleet modernization program is progressing on schedule and we have started to deploy our initial tier four DGB pumps and expect to have seven re powered and two new units rolled out onto location before the end of the quarter.

We have five of those seven in the field today.

Our long term goal is to continue to be a best in class.

Service company. So the current fleet modernization program is simply another step towards that objective.

I am proud of what the Cal Frac team has been able to accomplish so far.

I'm excited about building upon it through the rest of this year and the strong.

Financial and operational results have given us a solid start to the three priorities priorities established for the company this year.

Which are maximizing consolidated net income and free cash flow through a disciplined returns focused pricing strategy and stringent cost management.

Second one is to.

Dedicating all free cash flow to reducing the company's long term debt and evaluating additional strategies to improve its capital structure.

Thirdly, investing in new technologies, and enhanced Cal Frac service deliverability in the field and drive improved profitability into the future.

I look forward to updating everybody on our progress of these objectives throughout the year and has the largest Canadian headquartered pressure Pumper company I think that we are uniquely positioned to leverage our operating scale to accomplish our objectives in 2023.

I'll now pass the call back to Mike.

Who will present the financials.

Thank you Pat.

As we disclosed on the last earnings call. The company has decided to report the financial and operating performance for the United States and Canada.

There are single North American Division.

Beginning with the financial results discussed during this call.

<unk> revenue from continuing operations during the first quarter of 2023.

$493 3 million or.

Or 67% higher than the same period in 2022.

Adjusted EBITDA during the first quarter of 2023 increased to $83 8 million versus $22 $8 million in the comparable quarter in 2022.

The financial results during the first quarter were achieved despite the company's operations in the United States being impacted by severe winter storms.

Which caused work stoppages in the broader Rockies region for approximately 54 days.

This tremendous improvement in financial performance was primarily due to strong net pricing gains.

And a dedicated focus on cost control across both operating divisions.

Combined with a larger operating footprint in North America.

Yes.

Cal Frac recorded net income from continuing operations during the first quarter.

Totaling $36 3 million versus a net loss of $18 million in the comparable quarter of 2022.

<unk> also spent.

$34 5 million on capital expenditures from continuing operations in the first quarter compared to $12 1 million in the same period of 2022.

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

As well as $17 3 million related to the tier four fleet modernization program.

To summarize the balance sheet at the end of the first quarter. The company had working capital of $232 4 million from continuing operations.

Including $23 2 million in cash.

During the first quarter. The company had used $3 5 million of its credit facilities for letters of credit.

And had $180 million of borrowings under its revolving term loan facility.

Leaving approximately $66 5 million in available credit.

Cal Frac exited the quarter with net debt to adjusted EBITDA of approximately one two times as compared to approximately one five times at year end.

And the company expects to continue to make significant progress on reducing its leverage profile throughout the remainder of the year.

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

Thanks, Mike.

I will now present, an outlook for <unk> continuing operations across our geographic footprint.

Our operations in North America, and Argentina produced significant year over year improvement in financial results during.

During the first quarter as customers sought out high quality service providers to execute on our redevelopment plans.

We expect to leverage our operational expertise across all our operating areas for this year to maximize returns for our shareholders.

Yeah.

In North America, despite losing six operational days per fleet in the United States due to adverse weather.

We generated the highest first quarter adjusted EBITDA margins on a total company basis since 2012.

And look to continue that momentum through the rest of the year as we expect full utilization for our 15 dedicated large frac fleets.

And our six coil tubing units.

As a reminder, we recently streamlined our organizational structure and combined our United States and Canada operations into one reportable Division.

To better leverage.

Our operating scale to allow us to reposition.

Our assets if needed to earn the highest return for our shareholders regardless of the country.

I'll now turn to.

Argentina Cal.

<unk> operations in Argentina generated improved year over year financial performance in the first quarter. We expect this momentum to continue through the rest of this year as the increased utilization combined with dedicated.

Contract work across all service lines has MTS is anticipated to produce enhanced financial returns.

I would like to thank the entire <unk> team for executing on our brand promise.

And providing high quality service to our customers in the first quarter.

I believe that the future is bright for the company.

As it is strategically well positioned to capitalize on the multiyear up cycle and continue to make progress on our three strategic priorities.

They are as follows.

Firstly, we will maximize consolidated net income and free cash flow through a disciplined returns focused pricing strategy and stringent cost management.

Next we'll dedicate all free cash flow to reducing the company's long term debt and evaluate additional strategies to improve its capital structure.

Lastly.

We will invest in new technologies and projects that enhance Cal Frac service deliver deliver ability in the field and drive improved profitability into the future.

Yes.

Back to Mike.

Thank you Pat.

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

As a reminder.

Wonder if you'd like to ask a question at this time. Please press star one one on your telephone and wait for your name to be announced to withdraw your question.

Weston Please press star one again.

Please standby, while we compile the Q&A roster.

Okay.

Yes.

Our first question comes from the line of Keith Mackey with RBC capital markets.

Okay.

Yeah.

Just wanted to start out with.

What youre seeing on the pricing front and maybe it's different in both Canada and the U S.

But I guess the release talked about steady pricing in that in North America. So.

As far as.

You know you should we be thinking about that as profitability per fleet.

As roughly flat throughout the rest of the year, maybe save Q2 in Canada or is there a different differ.

<unk> better way to think about it.

No I think you've you've.

Pretty close.

We're <unk>.

Predominantly we're kind of oil or liquid rich, where we where we are so we're I think we're a little bit insulated from the pricing that's going on.

Out in the Permian Haynesville.

No.

From what we from what we're seeing I mean.

There is a chance there'll be some.

Underutilized.

Fleets from our competitors are looking for a home, which might put a little bit of pressure on pricing, but we're well established with our customer base.

Feel fairly confident that.

That the pricing will stay at.

At least flat.

Got it okay. Okay. Thanks for that and just a follow up.

On the Alberta wildfires can you just run through any exposure you might have an update there to the best as you know right now.

Okay. So what we know right now is we have three three fleets operating in Canada.

They're all.

Subject to the fires for sure.

You have one fleet shut down.

Today.

Has been for a couple of days and the other two are still working.

I expect that that the fleet the shutdown should be back to work within a week.

It's pretty hard to gauge the weather and fires, but that's what we're expecting anyway. So it's it's certainly going to have an effect but.

All it does is push the work later, which might cause us.

The utilization problems down.

In the months to come but right now, it's I think it'll be fairly minimal.

For the company.

Got it okay I'll leave it there thanks very much.

Thanks Keith.

Okay.

Our next question comes from coal Pereira with Stifel.

Turning all was wondering if you could just start on talking.

Talking about what Youre seeing in terms of Frac equipment supply and demand in Canada for the second half of the year and then obviously, how you see pricing.

In Canada, specifically evolving as a follow on of that.

We are.

Uh huh.

But from what we see today, we're pretty much fully booked.

And you know the pricing is.

I don't I don't I don't think there'll be much of a pricing issue in Canada.

I'm, a little more I would say that in a little more concerned in the U S.

But Canada I believe will stay fairly fairly steady.

Got it and then just going back to Keith's question on EBITDA per fleet.

I mean, you obviously you had some weather issues in Q1 that would have degraded that metric a little bit or are you kind of.

Thinking that maybe you'll see some improvements across the board, but then you might see some.

Weaker utilization in the next few quarters as a result that kind of impacts that or how should we be seeing that trend higher how should we think about that.

Hi call its Mike.

As we look at the EBITDA per fleet in North America, Youre going to have some utilization issues.

North of the.

North of the border in Canada, as you know for the seasonal downturn.

But once we resume I think normal operations in Canada, and I think we're hitting a much better weather pattern in the Rockies area of the U S. I think youre going to see EBITDA per fleet creep up towards the end of Q2, and I would say the third quarter will be our best in that regard.

And then there's always a bit of a tick downward in the fourth quarter, but we're looking to see some improvement here in Q2 in Q3 versus what we actually generated in Q1 in the U S. So overall I think we've got good visibility with our customers in North America. So other than this fire situation in Cana.

And the normal breakup I think we're seeing things remain.

Quite resilient despite some of the turmoil in commodity markets.

And just to add a little bit to that just to add a little bit of that I'd expect to see.

Sub marginal.

Increased EBITDA as we rollout.

These new tier four pumps.

There'll be some there'll be some startup costs of course, a little bit of learning.

With our crews on how to operate these pumps, but.

We expect to have.

The bulk of those pumps.

Out in the field before the end of the year. So I would I would expect we'll see some.

Additional EBITDA from just new equipment in the field.

Okay got it thanks, and then just sort of following on that out of curiosity. What's the lead time right now on tier four pumps between you know putting in the order and getting them active in the field.

I would.

I would say by the time you order your pump till it Didnt field Youre, probably 18 months.

Maybe a little less maybe a little less than that because we'll have these pumps will be.

No it will be about a <unk>.

Year, and I expect that.

That gap to close a little bit so so, let's just say a year.

Okay.

Perfect. That's all from me, Thanks, I'll turn it back.

Okay.

Thanks, Paul.

As a reminder, that is star one one to ask a question.

Our next question comes from Waqar, Syed with ATB capital markets.

Hello.

Hi, Waqar.

Hi.

Yes, Bill Cup here.

Just a couple of questions first of all on the tier four DGB upgrades.

And in the.

News release mentioned that seven repurpose tier four DGB and two new tier four DGB.

So first of all what's the difference between the two.

And then do you mean by the units nine pumps.

I was going to be in the field soon or what exactly do you mean by the <unk>.

So how do you define them.

Okay. So a refurb basically we we might.

Keep the transmission or we might keep the pump depending on the unit. The Amgen of course is gone and the carrier that would be that would be a refurb.

A refurb could be all youre, keeping as a carrier could be that youre going to keep the pump it could be the pumping of transmission. The engine has gone for sure because its tier two.

And you add in the radiator will be gone and that's kind of the major four components to it.

<unk>.

Two a pump.

And then on a new pump, it's just everything is new.

So that's the difference so it would be probably $300000 savings on a refurb to a brand new.

Sure.

Yes.

And then.

When you say goodness.

Tom sorry individual pump.

Pumping units is that what you mean, so you've got 99 units.

We will have nine will have we will have seven that we've referred to we've taken our old pumps.

And refurb them. So that they are I mean, they are basically a brand new pump.

And we have two that were brand new that we built in Argentina.

That are in the field today.

So five of those nine are working today than the other.

<unk> will be.

We're just in the process of putting.

Idle reduction technology on these pumps.

Cast it out for our fleet going forward.

If it if it pans out.

The way that.

The way that it's been.

Advertised to US we will have idle.

Trolls on all of our pumps.

Are you considering electrical.

Blenders and others as well.

Other equipment the website based on electrical technology is rather that's not in the books right now.

That wouldn't be of course for 2023, but it certainly is on the table for 2024.

And we're just starting down that path.

Right now.

So.

As you go towards your goal of about 65.

Units.

By the end of the year, maybe sometimes early next year, how many fleets would these units.

<unk> distributed into what.

How would you distribute them how many fleets would be affected.

Well, it's 50 50, not 65, okay. Okay pumps.

And.

Yeah.

We would probably.

I would say it'll affect five fleets.

Well, we'd probably put can tier four pumps on five different fleets.

So a third a third of our fleet would be predominantly tier four.

Okay great.

Usually one.

Usually one heart pump hardwood pulp with 10, 12 pumps, and we had three or four spares.

Alright.

No.

In terms of your fluid end.

In fact, I can obviously you've changed your methodology.

What was the impact on Opex from that accounting change in Q1.

And if you could also give a number for <unk>.

2022.

Well Waqar I think I referenced on the on the last call of kind of the.

The full year impact being about $30 million for that change.

I think we're right on the stream of that here in Q1 on a quarterly basis.

I continue to think it's about the same impact for this year.

Okay.

Great Thats all I have thank you very much.

Thank you yes. Thanks.

Thanks.

Okay.

I'm showing no further questions in queue at this time I'd like to turn the call back to Michael <unk> for closing remarks.

Thanks, very much Liz.

I'd like to thank everybody for joining us for today's call and we look forward to presenting our results for the second quarter in early August . Thanks.

Thanks, everybody and have a good day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Okay.