Q4 2023 Calfrac Well Services Ltd Earnings Call

Yeah.

Operator: Good day, and thank you for standing by. Welcome to Calfrac Well Services Limited's 4th Quarter 2023 Earnings Release and Conference Call. At this time, all participants are in a listen-only mode.

Good day, and thank you for standing by welcome to Cal Frac, well Services Ltd fourth 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.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised.

Ask a question during this session 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 one again, please be advised that today's conference is being recorded.

Operator: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Olinek, Chief Financial Officer. Please go ahead.

I'd now like to hand, the conference over to your Speaker today, Mike <unk> Chief Financial Officer. Please go ahead.

Michael D. Olinek: Thank you. Good morning, and welcome to our discussion of Calfrac Well Services' fourth quarter 2023 results. Joining me on the call today is Pat Powell, Calfrac's Chief Executive Officer. This morning's conference call will be conducted as follows.

Okay.

Thank you.

Good morning, Kurt.

Discussion.

Well services fourth quarter 2023 results.

Joining me on the call today is Pat how cop Fracs Chief Executive Officer.

This mornings conference call will be conducted as follows.

Michael D. Olinek: I will provide some opening commentary, after which I will summarize the financial performance and position of the company. I will then provide an outlook for Calfrac's business and some closing remarks. After the completion of these remarks, we will open the conference call to questions, in a news release issued earlier today.

Matt 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 Cal practice business and some closing remarks.

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

And the news release issued earlier today.

Michael D. Olinek: Calfrac reported its fourth 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-IFRS measures, such as adjusted EBDA.

<unk> reported its fourth quarter 2023 results.

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.

Michael D. Olinek: Please see our news release for additional disclosure on these financial measures. Our comments today will also include forward-looking statements regarding Calfrac's 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 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.

It could cause our results to differ materially from our expectations.

Michael D. Olinek: Please see this morning's news release and Calfrac's CEDAR filings, including our 2023 Annual Information Form, for more information on forward-looking statements and these risk factors. As we have disclosed for several quarters, the company is committed to selling its Russian division and has designated the assets, liabilities, and operations in Russia as held for sale and discontinued in the financial statement. Calfrac is looking to complete this transaction as soon as possible while complying with all applicable laws and regulations. The focus of the remainder of this call will be on Calfrac's continuing operations, unless otherwise specified. Now, I will pass the call over to Pat. For more information, visit www. FEMA.gov Thanks, Mike. Good morning.

Please see this morning's news release, and Cao practice SEDAR filings, including our 2023 annual information form for more information on forward looking statements.

And these risk factors.

As we have disclosed for several quarters. The company is committed to sell its Russian division and has designated the asset by Bill <unk>.

Russia as held for sale and discontinued in the financial statements.

Cal Frac is looking to complete this transaction as soon as possible, while complying with all applicable laws and sanctions.

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

Now I will pass the call over to <unk>.

Yes.

Yeah.

Thanks, Mike.

Patrick G. Powell: Thanks for joining our call today. Before Mike provides the financial highlights of the fourth quarter and the full year, I will offer some opening remarks. Last year was a great year for Calfrac as we made important progress towards our long-term financial and operational goals. However, we could not have achieved these results without our strong company culture and commitment to safety. Our safety focus culture is demonstrated on all our job sites, where we remind everyone that our brand promise begins with doing it safely.

Good morning, and thanks for joining our call today before Mike provides the financial highlights of the fourth quarter and the full year I will offer some opening remarks.

Last year was a great year for Cal Frac as we made important progress towards our long term financial and operational goals.

We could we could not have achieved these results without our strong company culture and commitment to safety.

Our safety focused culture is demonstrated on all our job sites, where we remind everyone that our brand promise begins with do it safely.

Patrick G. Powell: Our commitment to safety is evident in the decrease in our TRIF from 1.19 in 2022 to 1.05 in 2023. By remaining focused on the third part of our brand promise, which is to do it profitably, we were able to deliver the best annual net income from continuing operations in Calfrac's history of $197 million. High quality execution and strong customer relationships continue to contribute to Calfrac's success. 2023 was also a significant year of reduction in Calfrac's long-term debt. We made great progress and exited the year with a long-term debt balance of $250.8 million, which was the lowest, which was the company's lowest debt level since 2009, and a net debt to Adjusted EBITDA from continuing operations of $0.74, which is also the lowest in many years.

Our commitment to safety.

Evident in the decrease in our trail from 1.19 and 2022.

215, and 2000 1.15 and 2023.

By remaining focused on the third part of our brand promise, which is do it profitably we were able to deliver the best annual net income from continuing operations.

<unk> history of $197 million.

High quality execution and strong customer relationships continued to contribute to <unk> success.

2023 was also a significant year of reduction in <unk> long term debt.

We made great progress and exited the year with a long term debt balance of $258 million.

Which was the lowest.

The company's lowest debt.

Level since 2009.

And our net debt to adjusted EBITDA from continuing operations.

Seven four which is also the lowest in many years.

Patrick G. Powell: We remain focused on strengthening the balance sheet through debt reduction and asset improvement in 2024. We will also continue to invest in our technologies and enhance our services in the field. We crossed an important milestone in the fourth quarter as we deployed the equivalent of two Tier 4 EGB fleets in North America to meet the growing customer demand for next-generation lower emissions equipment. In addition, we upgraded the field data and telecom systems in North America to improve data transmission speed and quality, enabling us to interpret data quicker to make better decisions for our customers. In conclusion, 2023 was a successful year that leaves Calfrac in a much better financial and operational position to safely and profitably navigate the challenging pressure pumping market. For that, I want to thank our dedicated teams throughout our company for their hard work and commitment to continually meet and exceed our company and customers' expectations. I will now pass the call over to Mike, who will present an overview of our quarterly financial performance. Thank you, Pat.

We remain focused on strengthening the balance sheet through debt reduction and asset improvement in 2024.

We also continue to invest in our technologies and enhance our services in the field.

We crossed an important milestone in the fourth quarter as we develop.

However, as we deploy the equivalent of two tier four.

B fleets in North America to meet growing customer demand for next generation lower emissions equivalent.

In addition, we upgraded the field data and telecom systems in North America to improve data transmission speed and quality, enabling us to interpret data quicker to make better decisions for our customers.

In conclusion 2023 was a successful year that leaves Cal frac in a much better financial and operational position.

To safely and profitably navigate the challenging pressure pumping market.

For that I wanted to commend our dedicated teams throughout our company for their hard work and commitment to continually meet and exceed our company and customers expectations.

I will now pass call over to Mike, who will present, an overview of our quarterly financial performance.

Michael D. Olinek: Calfrac's revenue from continuing operations during the fourth quarter of 2023 was $421.4 million, or 6% lower than the same period in 2022. Primarily due to a proportional increase in the number of jobs with customer-provided stands in North America. This resulted in a 29% reduction in revenue per job compared to the same period in 2022.

Thank you Pat.

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

$421 4 million or 6% lower than the same period in 2022.

Primarily primarily due to a proportional increase in the number of jobs with customer provided sand in North America.

This resulted in a 29% reduction in revenue per job compared to the same period in 2022.

Michael D. Olinek: For the full year, revenue totaled approximately $1.9 billion, 24% higher than the prior year, due to increased activity across all operating areas. Adjusted EBITDA during the fourth quarter of 2023 was $62.6 million, 18% lower than the same period last year, mainly due to a reduction in operating margins following the prospective change in accounting estimates related to fluid ends that was adopted at the beginning of 2023. Pollute ends are now reported as a part of repairs and maintenance expense instead of as a component of capital expenditures, beginning in the fourth quarter of 2023.

For the full year revenue totaled approximately $1 9 billion, 24% higher than the prior year due to increased activity across all operating areas.

Adjusted EBITDA during the fourth quarter of 2023 was $62 6 million, 18% lower than the same period last year, mainly due to a reduction in operating margins. Following the perspective change in accounting estimates related to fluid ends that was adopted at the beginning of 2023.

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

In the fourth quarter of 2023.

Michael D. Olinek: Fluid ends reduced adjusted EBITDA by $12.6 million versus in 2022, where capital expenditures included approximately $9 million related to fluid ends. In 2023, Calfrac generated adjusted EBITDA of $325.5 million. 39% higher than 2022 due to significantly improved utilization across all operating divisions and a larger operating footprint in North America. For the full year of 2023, Fluid Ends reduced adjusted EBDA by approximately $44 million, versus in 2022, where approximately 29 million fluid end purchases were included in capital expenditures. Calfrac's net income from continuing operations decreased by 11% to $13.2 million during the fourth quarter versus $14.8 million in the comparable quarter of 2022. The company generated net income of $197.6 million in 2023, a record, versus $35.3 million in 2022. And the results this year included an impairment reversal related to property plant equipment of $41.6 million, upset partially by a foreign exchange loss of $22.4 million, mainly related to Argentina.

Fluid ends reduced adjusted EBITDA by $12 6 million versus in 2022, where capital expenditures included approximately $9 million related to fluid ends.

In 2023, Cal Frac generated adjusted EBITDA of $325 5 million.

39% higher than 2022.

Due to significantly improved utilization across all operating divisions, and a larger operating footprint in North America.

For the full year of 2023 fluid ends reduced adjusted EBITDA by approximately $44 million.

Versus in 2022 were approximately $29 million of fluid end purchases were included in capital expenditures.

<unk> net income from continuing operations decreased by 11% to $13 2 million during the fourth quarter versus $14 8 million in the comparable quarter of 2022.

The company generated net income of $197 6 million in 2023 a record.

Is $35 3 million in 2022 and the results. This year included an impairment reversal related to property plant and equipment of $41 6 million.

Offset partially by a foreign exchange loss of $22 4 million mainly related to Argentina.

Michael D. Olinek: Calfrac incurred capital expenditures of $49.4 million during the fourth quarter versus $35.8 million in the same period of 2022. For the full year 2023, Calfrac spent $165.4 million as compared to $87.9 million in the prior year. A large portion of the increase in capital spending was related to the company's Tier 4 fleet modernization program. Moving to the balance sheet, the company had working capital of $236.4 million from continuing operations at the end of the year.

Cal Frac incurred capital expenditures of $49 4 million during the fourth quarter versus $35 8 million in the same period of 2022.

For the full year 2023, Calpac spent $165 4 million as compared to $87 9 million in the prior year.

A large portion of the increase in capital spending was related to the Companys tier four fleet modernization program.

Okay.

Moving to the balance sheet. The company had working capital of $236 4 million from continuing operations at the end of the year.

Patrick G. Powell: Calfrac used $3.4 million of its credit facilities for letters of credit and had $95 million of borrowings under its revolving term loan facility, leaving approximately $152 million in available credit. Calfrac exited the year with a net debt to adjusted EBITDA ratio of.74, which was its lowest in recent history and a significant improvement from the previous year. The reduction in net debt was $105 million versus the previously announced guidance of $70 to $80 million. Now, I would like to turn the call back to Pat. Thanks, Mike.

<unk> $3 4 million of its credit facilities for letters of credit and had $95 million of borrowings under its revolving term loan facility, leaving.

Leaving approximately $152 million in available credit.

<unk> exited the year with a net debt to adjusted EBITDA ratio of <unk> 74, which was the lowest in recent history and a significant improvement from the previous year.

The reduction in net debt was $105 million versus the previously announced guidance of 70 to $70 million to $80 million.

Now I would like to turn the call back.

Yes.

Patrick G. Powell: I will now present an outlook for Calfrac's continuing operations across our geographic footprint. We have a positive long-term outlook for our North American and Argentina operations. And we believe that providing high-quality services in both areas benefits Calfrac and its stakeholders. We look forward to continuing to safely and efficiently deploy our assets to maximize value for our shareholders. This year, activity in the United States began slower than expected for Calfrac. However, as our customers changed their completion programs,

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

We have a positive long term outlook for our North American in Argentina operations.

And we believe that providing high quality services in both areas benefits calc Frac added <unk> and its stakeholders.

We look forward to continuing to safely and efficiently deploy our assets to maximize value for our shareholders.

Yes.

This year activity in the United States began to slower than expected for Cal Frac.

As our customers change their completion program in anticipation of an extended period of low natural gas prices.

As a result of the Cal Frac idled two frac fleets in early February and expects to have an average of five fleets working in the first quarter.

We anticipate the customer demand for our services will increase starting in the second quarter.

Through to the end of 2024.

Our operations in Canada are expected to deliver consistent financial results with 2023.

With the deployment of our five large frac fleets.

And the sixth coiled tubing units throughout the year.

The slow start to the year will generate lower year over year financial results for our North American operations.

In response to the changing market conditions in North America, Cal Frac may defer up to $50 million of the plan in 2020 for capital spend related to the fleet modernization program.

We will closely monitor the market determine the right path forward.

Our operations in Argentina carried strong momentum from last year into 2024, and we anticipate robust utilization through the rest of this year across all our service lines.

We continue to watch the country's political environment and believe that it is becoming more accepting towards business investments.

We are excited about our future in Argentina, and expect to generate consistent financial returns going forward.

Despite the volatility in the pressure pumping market Cal Frac still remains focused on <unk> key strategic priorities.

First one will be maximizing consolidated net income and free cash flow through our disciplined return focused approach.

The second is dedicating free cash flow to reducing the company's long term debt.

And third investing in new technologies, and enhanced gel Frac service deliverability in the field.

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

Thank you Patty.

I will now ask our operator to begin the Q&A portion of today's call.

Thank you.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.

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

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

Hi, good morning.

Just talk a little bit about the status of the tier four upgrade program. Thank you mentioned you've got two fleets in the field just can you run through how much equipment.

Our pumps. This represents and then ultimately how much do you think you could get to through 2024, and I know that the potential capital deferral might affect some of that but can you just sort of walk through a little bit more about that please.

Okay.

Sure.

We were expecting to have 100 tier four pumps in the field in North America at the end of 'twenty four.

And with the with the.

But what you still the plan.

Just to be prudent with what we're seeing in the U S. Today in our first quarter, not being where I would like it.

As we as we put our.

<unk> program in motion I made sure that we had some off ramps if needed.

And that that would mean that debt.

The market.

Doesn't do what we'd like to see it do over the last three quarters.

I have the ability now to stop the build on about $50 million worth of equipment.

We would differ.

The later in the year, when we get better visibility in Q3 or Q4.

But the plan is still.

Depending on the market two to exit 2024, with a 100 pumps.

But I just thought it was prudent that we set up our build program.

If things didn't go the way they were I was not stock.

With supply contracts, so they had to had to meet.

Okay got it so you're still like I guess for modeling purposes.

Should we still be including the full capex in in in our models and plans given where you think the market will go and the potential deferral is just yes.

Yes scenario is that is that a fair way to think about it.

Yes, it's a fair way to think about it I don't know.

What to tell you to put in your models, because obviously I am not 100% confident that the.

The drilling will allow us to meet our forecast.

If that answers your question.

Yes, yes.

I appreciate it.

I guess, the worst worst worst case scenarios, we would add to its 80 pumps.

Instead of 100.

And how many do you have upgraded now Pat.

We would have.

Slide 37 in the U S and our first.

Our first Fox will start to arrive in Canada.

Either this week or actually just stop at the border right now so it will be next week or early next week.

And we plan to exit.

'twenty 'twenty four with 40.

Comps in Canada.

New DGB.

Got it.

Got it okay. Okay fair enough and can you just remind us of your.

Guess base case get repayment plan for for 2024, I think it was somewhere around that $70 million to $80 million number, but if you could just give us a bit of an update on that would be appreciated as well.

Yeah, I'll, just let Mike answer that question, yes.

Keith It's Mike here I'm not sure that we've come out with formal guidance around debt repayment for 24, I think ultimately what we're looking to do Corporately is to continue to make progress on the debt front, we as announced.

Considerable progress last year, and we're balancing the investment in new equipment with debt retirement, and I think we.

We're confident that we're going to continue to grind that lower we're just not sure what that number looks like at this point.

Got it okay. Thanks, very much I'll turn it back.

Thank you.

One moment for our next question.

Our next question comes from the line of Waqar Syed from ATB capital markets.

Thank you for taking my call.

Sure.

Mike.

You mentioned that theres going to be like five average crews working in the U S. In Q1.

And then two where kind of dropped off in.

In February.

Now does it mean that in Q4, there were seven working.

Actually tend to king and just to as to was this stake.

The drop in February and do you expect more clues to be dropped.

I think as we reported our Q4 results Waqar I think in North America, We probably ran an average of 12 to 13 fleets in the fourth quarter.

And I think where we're at right now is that total is likely down about two on average so kind of two <unk> for Q1.

And then going back to somewhere in that 12% to 13 range for the.

Bob probably around 12 for the second quarter as well, so that's kind of where things are going and that's just differences with the breakup in Canada as well as we expect to start up.

Significant startup of operations in the U S to begin early in the second quarter.

And.

Why are you confident that it's <unk>.

<unk> has been a pickup in.

In Q2 and could you.

My understanding would be that like most of your.

Crews are not really levered to national gas.

Maybe maybe one is in the U S market in Appalachia, and the remaining probably more leverage to oil unless I'm mistaken.

And some may or may have been.

It should have less limited impact from gas prices.

So.

So.

Of course, as we get closer to the second quarter, we have we always have more visibility.

The work that's going to take place.

That doesn't always mean that it happens, but right now we.

We don't have.

<unk>.

Much white space for our North American fleets for the 13 that we have left.

So we're fairly confident today that.

These fleet 13 fleets will be will be all up and running.

Okay.

And.

There was one of your competitors in the U S came out.

Had their earnings call yesterday and spoke about.

Aggressive about market share gains and obviously then they probably lowering prices are you seeing that impact.

And in your markets.

While we're always adding a fourth our service companies, we're always under pressure for pricing, but.

No.

I'm not going to say that it won't affect us, but I don't think its a very effective way to run a business. So.

Yeah.

If we have a competitor that.

They want to work for nothing well I guess he has his stuff will go to work first in and.

Hopefully our good long term customers and customer relationships will will see through this.

And stick with us.

What I would think.

It's been tried quite a few times that I don't think anybody has been very successful with that model.

Please please burn up a lot of it.

We burned up a lot of equipment and we need to be paid a fair.

Fair.

Rates are they're just not make sense being in the business. So our market share doesn't work.

Sure Yes.

And then that.

In Canada.

In General Q1.

How does Q1 look on a year over year basis.

Q1, Q1 is looking fine for us.

In Canada, we were.

Sure.

In Canada.

Canada.

A bit of a disappointing fourth quarter of last year, but Q.

Q1, we went back to work.

Pretty much I would say by the end of the end of the half we're kind of going to be rate kind of where we want to be in China.

Sure, but like the rig count is running about 78% lower year over year.

Is are you seeing similar trends on the pumping side and a bumping is flat to up year over year.

I would think Thats fair flat flat pretty much flat I think.

And how do you see.

We're going to see more of our customers supplying their own sand and stuff, which is which.

Is it always a good thing for us.

All right.

And why is that happening why is why are customers supplying their own sand like sand jobs are getting.

More sand is being pumped per well.

Logistics getting more complicated to wire.

Your customers taking that on themselves.

I think they can get it.

They just buy sand cheaper.

Then we're willing to sell it to.

Okay. So you see that to be like.

A trend that will continue going forward.

I would think we're going to see more of it yes.

Okay.

Alright. Thank you very much that's all from me I appreciate the color.

Thank you Waqar.

Thank you.

One moment for our next question.

Our next question comes from the line of John Daniel from Daniel Energy Partners.

Hey, guys just.

Two questions. Thanks for including me. The first is a follow up to <unk> question.

It sounds like reading the press release and some of your prepared remarks.

The fleet reduction was more a function of customer specific slowdowns.

As opposed to lots of work to someone that just want to make sure that's right.

Yes, I would say that's right John and there is also as you as we're doing our.

As we're doing a refurb.

Program.

And then you had a hiccup.

We're trying to balance the pumps to get.

Close to end of life as we possibly can out of them as we as we drop them off into the rebuild.

So yes.

So sure.

The main component is our engine.

As we lose an engine.

China light.

If you rebuild that Amgen back to a tier two you've got a tier II Palmer for another five years. So some of that <unk> edge customers, but it's also some of it is because of the refurb program I don't want to have.

A whole bunch of pumps.

Great.

With good engines that have to.

Two part before end of life.

Can't find work for tier two.

Down the road a couple of years right.

Got it.

Bit of both there is a little bit of bulk billing model I always say, we're kind of balancing out our beach ball here, we're going to try to get it as right as we can but I know I know, we will never be right right.

If possible.

A lot of analysts that listen to the call. So.

The next one is just can you provide any color on.

Pumping hours per day, the trends that you've seen over the last few quarters.

I would say our pumping hours have stayed fairly consistent.

We're getting it in more of course is we're getting more.

This.

Newer pumps.

Sure.

We're seeing some efficiencies there.

But we're getting more hours pumping with our newer products than we are with the older ones, which is of course why we are why we're.

We're rebuilding startup.

Okay.

That's all I've got thank you very much for including me.

Thanks, Tom.

Thank you at this time I would now like to turn the conference back over to Mike <unk> for closing remarks.

Thank you Gigi.

And thanks, everyone for joining the call today, and we look forward to hosting our Q1 call in a couple of months thanks very much.

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

Okay.

[music].

Okay.

Okay.

Yes.