Q3 2023 Calfrac Well Services Ltd Earnings Call

Yeah.

Good day and welcome to the <unk> well Services Ltd third quarter 2023 earnings release and conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one one on your telephone.

You will then hear an automated message advising your hand is raised to withdraw your question. Please press star. 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 <unk> Chief Financial Officer. Please go ahead.

Thank you good morning, and welcome to our discussion of <unk>.

<unk> third quarter 'twenty to 'twenty three results.

Joining me on the call today is Scott Powell Cal Frac CEO.

This mornings conference call will be conducted as follows.

I will provide some opening commentary after which I will summarize the financial performance.

And position of the company.

Pat will then provide an outlook for <unk> business and some closing remarks.

After the completion of these remarks, we will open the call to questions.

In our news release issued earlier today <unk> reported its third 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.

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> SEDAR filings, including our 2022 annual information form.

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

As we have disclosed for a number of quarters. The company has 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 looking forward to completing 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 Capex, continuing operations unless otherwise specified.

Now I will pass the call over to Pat.

Thanks, Mike Good morning, and thank you everyone for joining our call today.

For Mike provides the financial highlights of the third quarter I'll offer some opening remarks.

First I wanted to take a minute and discuss a significant.

Significant progress we have made on our long term financial and operational goals during the past year.

Our first strategic goal that I set for the company was to increase profitability.

And we've made great strides in that regard.

In 2023, our year to date net income from continuing operations normalize for the deferred tax asset and impairment reversals was approximately 8% of revenue.

Over five times higher than the same period last year.

The significant improvement demonstrates the high quality of Cal Fracs customers, who appreciate the quality of our services and our execution ability.

The second goal was to lower our outstanding debt.

The company has made significant progress in this initiative.

Paid approximately $30 million of long term debt during the third quarter and we continue to target further debt reduction in the fourth quarter.

Earlier in the year. The company was focused on finding its working capital requirements like Jim totaled approximately $135 million sensor middle of 2022.

Okay.

And finally, the third strategic initiative for Cal Frac was to upgrade our equipment in the field during the third quarter. We have gained significant momentum with our tier four fleet modernization program and have deployed 23 tier four DGB units so far this year.

Our pumps being deployed every week.

Reducing our outstanding debt, while upgrading our equipment is our two pronged approach to strengthen the balance sheet and improve our asset quality.

None of this progress would have been possible without our dedicated teams across North America and Argentina.

And for that I want to commend them for their hard work and commitment to deliver on our brand promise.

Now turning to the third quarter I am happy to report that we have navigated shifting frac schedules to generate the highest quarterly adjusted EBITDA margin, thus far in 2023.

Historically, the third quarter is our strongest period and this year was no exception.

One way that we are able to respond to a changing frac calendars by managing our costs, specifically, our equipment repairs and maintenance.

Although we've refreshed everyone on where are we being let's talk about where Cal frac is going.

Our tier four DGB upgrade program remains on schedule and we expect to deploy 59 tier pumps by the end of the first quarter of 2024.

And to continue with the upgrade program beyond these initial units as finances and markets dictate.

We pay close attention to the equipment transformation being happening in the industry.

We're excited about enhancing our position in the next generation fracturing market and meeting our customers' expectations and our ESG priorities.

Okay.

I believe that Cal Frac service quality is second to none.

And that we have the best team in the industry working together to achieve our long term goals.

As the largest Canadian headquartered pressure pumping company, we expect to leverage our geographical footprint and strong operational momentum to capitalize on the current market while remaining focused on our three strategic objectives.

We did.

Probably not.

The only for Cal Frac, but also for our shareholders employees suppliers and customers.

I will now pass the call over to Mike, who will be the first step and overview of our quarterly financial performance.

Thank you Pat.

<unk> revenue from continuing operations during the third quarter of 2023 was $483 1 million or 10% higher than the same period in 2022.

Adjusted EBITDA during the third quarter.

23 was $91 3 million or 3% lower than the same period last year.

Due mainly to higher operating expenses following the prospective change in estimate related to fluid ends during the first quarter of 2023.

Fluid ends are now reported as a part of repairs and maintenance expense instead of as a component of capital expenditures.

Okay.

<unk> net income from continuing operations more than doubled to $97 $5 million during the third quarter versus $45 $4 million in the comparable quarter of 2022.

The year over year improvement was mainly due to a $41 6 million reversal of impairment of property plant and equipment.

And our deferred tax recovery of $9 million.

Both items related to an improved business outlook for the company's operations in Canada.

Okay.

<unk> incurred capital expenditures of $58 million during the third quarter versus $24 7 million in the same period of 2022.

This increase in capital spending was primarily related to the company's previously announced tier four fleet modernization program.

Which accounted for $33 2 million of the total capital expenditures during the third quarter.

Okay.

As we recently announced the company amended its revolving credit facility agreement during the third quarter, which extended.

And the maturity into late 2025 at the earliest.

We believe that this extended runway will play an important role in enabling <unk> to fully execute on its long term strategy.

To summarize the balance sheet at the end of the third quarter. The company had working capital of $283 7 million from continuing operations.

<unk> had used $3 5 million of its credit facilities for letters of credit.

And had $150 million of borrowings under its revolving term loan facility.

Leaving approximately $96 5 million in available credit.

Yes.

<unk> made further progress on reducing its net debt to adjusted EBITDA as it exited the quarter with a ratio of <unk> 92 times as compared to approximately one five times at year end.

Which is the lowest in recent history.

The company continues to project, a $70 million to $80 million reduction in total long term debt by the end of the year.

This decrease in debt is slightly lower than originally anticipated due to a delay related to our planned asset divestiture.

Now I would like to turn the call back to Pat to provide our outlook.

Thanks, Mike.

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

We have a positive outlook for our north American in origin, Chino operations and feel that each business unit helps us maximize shareholder returns and contributes to us reaching our long term goals.

Regardless of the operating area, we are driven by our strong safety centered culture and employee by him to deliver on our brand promise.

During the quarter the market softness experienced in the United States was offset by strong utilization in Canada.

For the fourth quarter, we expect the opposite to occur where increased activity in the United States is anticipated to offset customer budget exhaustion in Canada.

We believe that our focus on execution combined with our diverse.

Geographic footprint will produce steady financial returns for our stakeholders.

Our operations in Argentina produced another solid quarter of profitability.

We expect that strong utilization will continue for the rest of this year and ended 2024.

As dedicated contract work across all service lines.

<unk> do generate consistent.

Financial returns.

Okay.

Accomplishments so far this year and are looking forward to a solid finish in 2023 as we continued delivering on our brand promise and make progress on our three strategic priorities.

First maximizing on consolidated net income and free cash flow through a disciplined returns focused approach.

Secondly, dedicating free cash flow to reducing the company's long term debt.

Third investing in new technologies that enhanced Cal Frac service to deliver ability in the field.

I will now turn the call back to Mike to begin the Q&A portion of this call.

Thank you Pat.

I'll now ask Abigail to begin the Q&A portion of today's call.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our first question.

Our first question comes from call P area with Stifel. Your line is open.

Hi, good morning, all thinking.

Thinking about Canada in Q1.

Obviously, a lot of tailwind, but you also have one of your competitors, bringing up a spread from the U S. Can you just add some color on how youre thinking about supply and demand and activity pricing et cetera.

Paul It's Pat.

We have also moved crews back and forth between Canada and the U S.

So.

It's kind of hard for me to comment.

On weather.

It should happen.

I guess the.

Yeah.

As long as the pricing.

Change in that.

You have extra word I guess.

That's why we did it so if that's what they've named Dot minutes fine yes.

Dave.

<unk> brought the pricing down to bring our fleet up from the U S and I would say, it's probably not good for <unk>.

More of the industry.

Sorry, I guess, maybe to rephrase that.

Based on those data points and you know what you see in your schedule.

It sounds like you don't really see a degradation of supply and demand at this point acknowledging I mean, there's still a few months ago.

I don't I don't think one fleet will.

We will make.

Not much different.

I don't believe it will make that much difference to calc for act.

I think our customer base is strong.

Got it and then can you just add some color on how customer conversations.

In the U S have been going and what's the outlook like.

For next year compared to right now or 2023 as a whole.

From where I see.

A fairly strong army for FERC Cal Frac in the areas that we operate in.

The work.

I think we're going to see a slight increase over what we ended in chronic treatment for R&D.

Got it Okay. That's all for me, Thanks, I'll turn it back.

One moment for our next question.

Yeah.

Our next question comes from Keith Mackey with RBC capital markets. Your line is open.

Hi, Good morning, I, just wanted to start out with the tier four.

Tier four equipment. So you've got like you said 23 pumps in the field now so.

They may or May not give you a chance yet to see how the how the profitability differs between some of this newer equipment and some of the older equipment, but but Mike what are you seeing on your.

As far as profitability goes on the fleets that are running the new the new pumps is there a noticeable uptick in the margins that youre getting on that equipment or or is it still hard to tell.

Keith I'll take that call that question, it's Pat.

Early for us to call to make the call that are not great now look where we're quite happy that we have deployed a full.

Tier four DGB being crew back into the Marcellus.

Which just went to work here shortly.

So we will.

And the next month or two we will we will be able to answer that question for us, but so far we're abbvie.

Good luck with the with the 23 that are out there we are seeing.

We can put a few last pumps on location.

When we have a number of tier four pumps out there.

It's all good.

Alright, alright, good to hear and secondly for me.

Our best guess right now I think is.

<unk> got around five fleets running in Canada, and $10 10 in the U S.

Based on what you know today would you anticipate that mix changing through 2024 at all.

Okay.

Not from what I see today, I think that that's pretty well well, where we'll be of course as we as we are.

Build out our tier four fleets, we will gain a couple of fleets, which at this time.

We will just.

This would be waylaid in 'twenty four so it's more of a 'twenty five question and at that time, we would we would have I believe will probably gain a couple of fleets as we do this modernization there'll be tier two fleets.

We will gain we will gain a couple of fleets.

Okay. That's helpful. Thanks very much.

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

Well, thanks, very much and yes, I would just like to close today's call. Thank everyone for joining and we look forward to hosting our Q4 call in Q1 of 2024, so thanks very much.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Okay.

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Okay.

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