Q2 2023 Calfrac Well Services Ltd Earnings Call
Yeah.
Good day, ladies and gentlemen, and thank you for standing by walking to the Cal Frac well services Ltd second quarter 2023 earnings release and conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press.
SAR one one on your telephone keypad.
At this time I would like to turn the conference over to Mr. Michael <unk>, Chief Financial Officer, Sir Please begin.
Thank you Howard.
Good morning, and welcome to our discussion of Cop Rock wallet services second quarter 2023 results joining.
Joining me on the call today is Pat Powell, 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 call to questions.
In our release issued earlier today <unk> reported its second 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.
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.
Could cause our results to differ materially from our expectations.
Please see this morning's news release, and Cal Frac SEDAR filings, including our 2022 annual information form.
For more information on forward looking statements and these risk factors.
Lastly, as we have disclosed previously the company is committed to a plan to sell its Russian division.
And it has designated these assets liabilities and operations in Russia, that's held for sale and discontinued operations in our financial statements.
Cal Frac is seeking to complete this transaction as soon as possible, while complying with all applicable laws and sanctions.
The focus on the remainder of this call will be on Cal Fracs, continuing operations unless otherwise specified.
Now I will pass the call over to Pat.
Thanks, Mike.
Good morning, and thank you everybody for joining our call today.
For Mike provides the financial highlights of the second quarter I will offer some opening remarks.
First I want to commend my operating teams in North America in Argentina for delivering on our brand promise.
And maintaining our stellar safety record.
Translated into record second quarter EBITDA from continuing operations of $87 8 million or 18, 8% of revenue.
I would like to also thank our long term customers and new customers, who continue to choose Cal frac to assist in bringing their wells into production.
Also our suppliers that enable us to provide our services in a safe and efficient manner.
Cal Frac is now showing significant financial approved improvement for the fourth consecutive quarter.
The performance during the second quarter is especially impressive is there.
The company achieved these results during a period of seasonal breakup in Western Canada, and North Dakota, as well as through an extremely challenging wildfire season in Canada.
Despite these strong operating and financial results Cal Frac remains focused on driving continued improvement on its returned to shareholders.
Through effective cost management, and maximizing our fracturing fleet utilization.
We continually analyze all aspects of our service offerings to create a best in class Oilfield service company.
I believe that we have made steady progress toward that objective during the first six months of the year.
I will now provide an update on Cal Fracs capital program.
Thus far in 'twenty three we have deployed the initial nine tier four DGB pumping units into our North American Division.
The performance of this new pumping equipment has met our expectations with diesel displacements rates that have exceeded 80% in your initial usage.
In the field.
Overall, the announced fleet investment plant remains on schedule as we expect to deploy.
Another four pumps in the next couple of weeks and the balance of the 50 tier four.
Units into North America by the end of the first quarter of 'twenty four.
This refurbishment will continue into the future as finances and the market dictate.
This program will play a significant role in Cal fracs ability to strengthen our balance sheet as we migrate to our operating fleet to next generation pumping equipment.
To help meet our customers' expectations and our ESG commitments.
I am very impressed with the strong execution of our operating teams at Cal Frac during the first half of the year.
And as the largest Canadian headquartered pressure pumping company.
We expect to leverage on our geographical footprint and build on that performance through the remainder of 'twenty three by capitalizing on the strong markets that we are currently enjoying.
Moving forward, we remain focused on our three strategic objectives.
We do it safely.
<unk> and profitably.
It only for Cal Frac, but for our shareholders employees customers and suppliers.
With that said I'll now pass the call over to Mike <unk>.
An overview of our quarterly financial performance.
Thank you Pat.
<unk> revenue from continuing operations during the second quarter.
$466 5 million or 46% higher than the same period in 2022.
Adjusted EBITDA during the second quarter of 2023 more than doubled to $87 8 million.
Versus $40 7 million in the comparable quarter in 2022.
The results in the second quarter of 2023.
Included fluid end expense of approximately 10 million as the company implemented a prospective change in accounting estimate for fluid ends at the beginning of the year to record those items as a component of arm R&M expense rather than as a capital expenditure.
Yes.
This significant improvement in financial performance was primarily due to higher fracturing fleet utilization and the addition of two large spreads operating in North America, combined with better overall pricing levels in Argentina.
Despite the year over year growth in utilization the second quarter was hampered by wildfires in British Columbia, and Alberta During April and May which resulted in several lost operating days.
However, most of these delayed work programs were completed in June .
Cal Frac grew net income from continuing operations by $57 3 million during the second quarter.
The $50 5 million compared to a net loss of $6 8 million in the comparable quarter of 2022.
Cal Frac incurred capital expenditures of $30 7 million during the second quarter versus $15 2 million in the same period of 2022.
Yeah.
The year over year increase in capital spending was primarily related to the company's previously announced tier four <unk>.
Fleet modernization program.
Which continues to progress in accordance with our planned deployment schedule.
The announced 5 million increase to <unk> 2023 capital budget was entirely related to Argentina.
To bolster our fracturing operations in the Vaca <unk> shale play.
These additional capital expenditures will be funded by the cash flow from operations generated in that country.
As part of <unk> efforts to rightsize its business and maximize returns for shareholders. The company sold certain non core assets located in North America for.
For net proceeds of approximately 20, 2020, 2022, 2 million, which were dedicated to the repayment of long term debt.
To summarize the balance sheet at the end of the second quarter. The company had working capital of $282 9 million from continuing operations.
During the second quarter. The company had used $3 4 million of its credit facilities for letters of credit and.
And had 175 million of borrowings under its revolving term loan facility, leaving.
Leaving approximately $72 million in available credits.
Cal Frac exited the quarter with net debt to adjusted EBITDA of approximately one times as compared to one five times at year end.
This leverage ratio is the lowest in recent history and the company expects to reduce long term debt by approximately $80 million by the end of this year.
It's working capital is no longer expected to be a material use of its cash flow from operations.
Now I will turn the call back to Pat to provide our outlook.
Thanks, Mike.
Yes.
So I'll present, an outlook on Cal Fracs, continuing operations across our geographic footprint.
In North America, despite losing a.
We've already mentioned.
Normal number of operational days due to factors outside our control.
Wildfires weather customer delays.
<unk> managed to generate its best second quarter profitability in its history, we anticipate that the strong operational momentum in the first half will continue throughout the remainder of the of this year.
And enable us to maximize returns for our shareholders.
In Argentina.
Cal Frac operations generated strong financial results for another quarter and has now produced operating profit in excess of capital expenditures for 10 of the last 11 quarters.
In addition to delivering consistent profit Cal Frac has a manufacturer in.
Alright.
Argentina has a manufacturer in country.
With the capabilities to build or refurbished existing equipment.
Locally using cash flow generated within Argentina.
This equipment could that'd be used in country are expect exports to North America.
Two of the nine pumps that we have deployed this year were built in.
Argentina.
Through the end of 'twenty, three we expect solid utilization by a dedicated card track work across all service lines.
Which is expected to produce strong financial returns in Argentina.
We've had a great start to the year and I think that we can accomplish leaving even more as we continue to make progress on our three strategic priorities, which are maximizing consolidated net income and free cash flow through a disciplined returns focused approach.
Number two is dedicating free cash flow to reducing the company's long term debt.
And three investing in new technologies will enhance Cal Frac service in Duluth deliver ability in the field.
I will now turn the call back to Mike to begin.
Q&A portion of the call.
Thanks Pat.
I would now like to turn the call back to Howard for the Q&A portion.
Ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone keypad.
If your question has been answered or you wish to remove yourself from the queue. Please press star one again.
Again, if you have a question or comment please press star one on your telephone keypad.
Please standby, while we compile the Q&A roster.
Our first question or comment comes from the line of KOL Pereira from Stifel. Your line is open.
Hi, good morning, everyone.
Obviously, the the North American business look quite strong can.
Can you just talk about how we should be thinking about your U S fleet utilization and economics into the second half relative to Q2.
We see it's Pat here, we see.
We see continued.
Steady.
I would say utilization going forward and in the second half.
We do have a little bit of.
White space I would call now but.
With the with the oil price.
And the gas price.
Stephanie up a bit.
I think that will probably fill some of those holes on the spot market, but.
So we're looking for I would just say steady.
Going forward.
Okay great.
Can you talk about.
What you've seen with pricing in the U S for your fleets.
Did you have much spot exposure or was it really kind of running on prior contracts.
I would say, it's a little bit of both we we we we we have our long term customers that.
We've worked for for a long time and we will.
Can you to work for them and we do always have some spot work, we like to have some spot work.
Because of the way the.
The work can get pushed and then we sometimes will have a fleet setting that just because of a well problem or something in that we can we can fill it in with some spot work.
Got it.
And on the on the balance sheet side.
Is there sort of a debt level that you're comfortable with I mean is it a function of EBITDA is that you know.
Working capital is at zero debt, how do you think about that.
Hi call its Mike.
Think.
Where we're heading is certainly the direction that patent I are driving to have debt <unk>.
Dramatically lower than we entered the year.
As I talked to you on my call notes, we're anticipating 80 million of debt reduction between now and the end of the year and we.
Can you do to make strides in an absolute debt level that are I would say is below $200 million.
But we know that that's going to be a number of quarters away, but we think we're going to make some good progress on that between now and year end.
Okay got it that's all for me, Thanks, I'll turn it back.
Thank you. Our next question or comment comes from the line of Keith Mackey from RBC capital markets. Mr. Matthew Your line is open good morning.
Hi, Thanks, and good morning, just wanted to start out with the the DGB upgrades it.
It sounds like you've got a few pumps coming out in the next few weeks, which.
I guess by my Count would leave you about 46 pumps to do between now and the end of Q1, which would be about seven months. So.
It comes out to around 6% to 70 pumps a month can you just speak to your confidence in <unk>.
In your ability to deliver on that plan and how much might depend on.
Third party lead times and things like that.
Well, we spent quite a bit of time on this Keith so the I mean, caterpillar assures us that the engine and transmissions won't be an issue.
And we have.
We have a number of.
Thompson.
We're doing this rebuild in Louisiana.
And we have.
We're pretty much darrel sole customer down there with the wood they have a production line, where we have eight.
Eight or nine pumps in production right now in different stages, plus six four that are going to be out in the next couple of weeks.
So.
I mean, we're as confident as our suppliers are telling us that we will we will have these 50 pumps.
In the field by the first quarter of early in the first quarter of 'twenty four sorry, so I'm fairly confident that's going to happen.
Got it got it thanks, Pat and and just Mike on capital allocation again, so 80.
$80 million of debt repayment.
This year.
What do you think about what to do next is that fair.
Further debt repayment.
The incremental Capex is it shareholder returns of some kind and what type of shareholder returns do you think yet.
Look at first or how would you frame that.
I think from our side. Our focus is is on debt repayment net at this time Keith.
As I mentioned I think we're making great progress on that certainly we're going to see that here in the second half.
And.
As we look into next year I think our focus is a mixture of debt repayment getting a sub 200 million as well as.
Investing in our equipment as we've done here in 2023.
Got it thanks very much Tiffany.
Thank you. Our next question or comment comes from the line of sorry eat Waqar from ATB capital markets. Mr. World for you. Your line is open. Thank you for taking my question and good morning.
My question relates to the working capital build certainly.
It was much larger than what we were expecting in your days receivable went up quite a bit could.
Could you maybe comment on that is it just a timing issue and it is going to come down.
Are those days receivable are likely to stay relatively steady.
And is that.
Receivable buildup in AR.
Geographically North America International could you maybe comment on that.
Yeah, where car I certainly can thanks for the question.
The buildup in working capital is really a function of two factors. One is really the cadence of work activity in the second quarter.
In North America. So we had a very strong second half of the second quarter. So.
Just with our normal DSO.
And <unk> levels that we have that is.
Pretty much on our run rate and then the other aspect is Argentina had a very strong quarter as well of their DSO.
Is considerably longer than North America, and so as a function on a consolidated or a continuing operations basis.
That.
That also plays a significant role in the build.
We certainly see that reversing here in the third quarter.
And certainly between now and year end, I think things will moderate quite well, but yes, it's a function of really timing of work activity in the second quarter, and where that work was actually taking place.
Do you expect working capital to be a source of cash in Q3.
Just maybe neutral.
Yeah, I think the way we're looking at it with steady activity in North America as Pat outlined we don't see the dramatic need to increase working capital and as I mentioned before I think Argentina hit a high point in the second quarter for revenue. So we're we're certainly going to see that is.
I'm going to be in <unk> and.
Inflow of cash by how much it'll depend again on activity, but I think the fourth quarter generally is a bit slower so youll see more of that recapture likely in that in the fourth quarter.
Okay, Great and then just on the Frac sand market, both in the U S and the Canadian market.
We've heard some comments about.
Tightness in supply.
Canadian side, and maybe loosening on the U S side.
Hum.
Could you maybe comment on the supply sand supply dynamics.
Yeah.
Youre talking sand recur, yes.
Frac sand.
Fracs that yes, we are.
In Canada, we are we.
We have a bit of a unique situation I believe with our we have our own staff.
Trans loads and we have.
A good working relationship with our sand suppliers out of.
Out of Wisconsin, So we're not seeing a Cal frac itself is not seeing.
Too many issues on on getting sand.
The United States as it can be a little bit tougher, but so far we've been managing quite well I haven't I haven't heard any urgency out of our.
Supply chain.
People that they are.
That they are expecting to have any issues that we can handle what sand going forward.
The trucking and a few can.
Can be a bit of an issue but.
We're also pretty well supplied there. So I think we're okay as far as I can see was sound I'm not overly concerned.
Okay.
Now one of your key immediate discuss emerged as a major company in Canada.
There was some talk before about.
Declines in activity.
That they were shutting down in September and they were cut.
Some of yours from.
Pumping perspective, so as there been any changes there.
Have you been able to find.
Different jobs for those crews.
I would say that we still have some white space because of this.
But do you know what.
With the oil.
That gas prices stiffening as they have.
Think we're gonna be O K I.
I would imagine will we will.
Yeah, a little bit lighter than we want to be but.
Not concerning lease right now.
Okay.
Well. Thank you very much appreciate the color.
Thanks Waqar.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone.
Our next question or comment comes from the line of James <unk> from Peters <unk> Company. Mr. <unk>. Your line is open.
Mr. <unk> your line is open.
Okay.
I would like to turn the conference back over to management for any closing remarks.
Thanks Howard.
And we yes, we'd like to thank everyone for joining us for today's call and we certainly look forward to presenting our third quarter results in early November thanks very much.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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