Calfrac Well Services Ltd.
Q3 2022 Earnings Call Transcript

Published: 3 Nov 2022

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to Calfrac Well Services Limited Third Quarter 2022 Earnings Release Conference Call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Wednesday, November 2, 2022. I'd now like to turn the conference over to Michael Olinek, Chief Financial Officer. Please go ahead, sir.

[Michael D. Olinek:]

Thank you, David. Good morning and welcome to our discussion of Calfrac Well Services third quarter 2022 results. Joining me on the call today are Pat Powell, Calfrac's Chief Executive Officer; and Lindsay Link, Calfrac's President and COO. This morning's 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 numbers. Pat will then provide an outlook for Calfrac's business and some closing remarks. After the completion of our prepared remarks, we will open the conference call to questions. In a news release issued earlier today, Calfrac reported its unaudited third quarter 2022 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 EBITDA. 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 this morning's news release and Calfrac's SEDAR filings, including our 2021 Annual Report for more information on forward-looking statements and these risk factors. Lastly, as we disclosed during the first quarter earnings release, 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 statement. The company has made progress with relation to the sale of its Russian subsidiary and seeks 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 Calfrac's continuing operations, unless otherwise specified. Pat, over to you.

[Patrick G. Powell:]

Thanks, Mike. Good morning and thanks to everybody for joining our call today. Before Mike provides the financial highlights of the third quarter, I'll offer a few opening remarks. Calfrac achieved the best quarter from an EBITDA percentage basis since 2012. This was possible first because of the present market and secondly because of the right execution and commitment to our brand promise. I'm proud of what the entire team has accomplished so far this year, and I'm looking forward to continuing down this path through 2023. As North America continues to play an important role in worldwide energy production, Calfrac is positioning itself to be a key long-term contributor. One of the ways that Calfrac will remain a top service provider of choice and better serve our customers' ESG objectives is through practical investments in our business. We're excited to begin the transition of the company to next gen equipment by converting existing Tier 2 pumps to like new Tier 4 dual gas units. We will roll out the first rebuilt pumps into our United States divisions to an existing customer before year end, and plan to convert additional pumps for deployment next year. We feel by making the right operational decisions each day, while never losing sight of our balance sheet, and by investing in projects with the highest expected yield, we will safely exceed our customer's expectations and continue to generate increased financial performance to produce sustainable returns for our shareholders. With that said, I'll pass the call over to Mike who will present an overview of our, which we think are very good quarterly financial performance.

[Michael D. Olinek:]

Thank you, Pat. Calfrac's revenue from continuing operations during the third quarter of 2022 was 438.3 million, or 67% higher than the same period in 2021. Adjusted EBITDA increased to 91.3 million during the third quarter of 2022 from 29.8 million in the comparable quarter in 2021, which resulted in a corresponding 52.4 million year-over-year increase in net income from continuing operations. This significant improvement in financial performance was primarily due to more consistent utilization for the company's 13 fracturing fleets that were operating during the quarter in North America, as well as an expansion in pricing to address the significant input cost inflation that was experienced over the past few quarters. On a consolidated basis, the company had an outflow of $57.9 million from changes in working capital during the third quarter versus 40.3 million in the comparative quarter in 2021. This change was largely driven by the significant quarter-over-quarter increase in revenue. Calfrac spent a total of 24.7 million on capital expenditures from continuing operations in the third quarter compared to 24.1 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 $4.5 million of reactivation costs related to Calfrac's United States division. During the third quarter of 2022, cash proceeds of 0.6 million were received from the exercise of warrants and stock options. Subsequent to the end of the third quarter, 8.6 million of Calfrac's 1.5 lien notes were converted into common shares. Following this conversion, the remaining principle amount outstanding was 47.4 million, a decrease of 12.6 million from the original issuance amount of 60 million. To summarize the balance sheet, at the end of the third quarter, the company had working capital of 208 million from continuing operations, including 11.9 million in cash. As the company previously announced in an earlier press release, Calfrac amended and restated its credit agreement, which included an extension of the maturity date to July 1, 2024. At September 30, 2022, the company had used $1 million of its credit facilities for letters of credit and had 200 million of borrowings under its credit facilities, leaving 49 million in available borrowing capacity at the end of the third quarter. The company was in full compliance with its financial covenants associated with its credit facilities at the end of the quarter. I'll turn the call back to Pat to provide our outlook.

[Patrick G. Powell:]

Thanks, Mike. I'll present an outlook for Calfrac's continuing operations across our geographic footprint. Our operations in North America produced significant year-over-year financial results in the third quarter, and we anticipate this momentum to carry through next year as we expect demand to continue to exceed supply. In the United States, Calfrac grew fleet profitability throughout the third quarter with an average adjusted EBITDA per fleet that more than tripled the same period last year. The company drove these strong results through job execution and effective scheduling coordination across its nine fleets. We anticipate steady demand through next year and are currently working with our customers to optimize the fracturing schedule for our operating crews. Capitalized on the demand for company services in the U.S., Calfrac has made the strategic decision to reactivate a 10th fleet which has recently commenced operations. In Canada, steady utilization of our four large fleets and five coiled tubing units, as well as consistent price increases drove the strong year-over-year third quarter financial results. As a market leader, we expect to build upon the momentum through next year as customers pursue Calfrac to execute their completion schedules. We will continue to evaluate equipment expansion options and we'll activate additional fleets if and when it makes sense for Calfrac. Calfrac's operations in Argentina generated improved financial performance as a new contract for the dedicated fracturing fleet and coiled tubing unit in the Vaca Muerta shale play took effect. The outlook remains strong in Argentina and Calfrac's safe, excellent delivery of services, we expect steady utilization to the rest of this year to produce solid financial returns. I would like to end the call with a few takeaways. First, we are excited about the financial results this quarter and have made a positive outlook on the remainder of this year and through 2023 as we expect that the fracking market will remain tight. Secondly, we are looking forward to beginning the transition to next-generation equipment by leveraging Tier 4 technology to meet growing customer demand and expand margins. And most importantly, we are confident that our strategy of practical capital investment combined with the right decisions will maximize operating cash flow regardless of the business cycle to put Calfrac in the best position possible going forward. Back to you, Mike.

[Michael D. Olinek:]

Thank you, Pat. I'll now turn the call back to the operator for the Q&A portion of today's call.

[Operator:]

Thank you. [Operator Instructions]. And we'll take our first question from Cole Pereira with Stifel. Your line is now open.

[Cole Pereira:]

Hi, good morning everyone. Just on the additional activation front, I assume price is no longer the limiting factor, particularly in the U.S. So I mean, is it just a question of customers firming up their plans and needing more visibility on Q1 or how should we think about that?

[Patrick G. Powell:]

Well, pricing is still fairly paramount for Calfrac. We won't put a fleet to work at any pricing less than what we're receiving today. Does that answer your question?

[Cole Pereira:]

Sure. And I guess on the U.S. business front, so EBITDA per fleet was very strong. I mean, obviously your business in the U.S. obviously has some seasonality typically. Can you just give any guidepost how we should be thinking about that metric over the next few quarters and at a high level, what can that metric get to without any additional increases in frac pricing, i.e., just from improved utilization?

[Michael D. Olinek:]

Well, good morning Cole, it's Mike here. As far as the EBITDA per fleet in the third quarter, I think what you're seeing there is, I think, high, high utilization for our nine fleets. I would say we're as close to nine fleets of activation as you can get, practically speaking, because there's always going to be some downtime. So the third quarter is likely the high watermark as far as utilization. So using that benchmark as you move forward, I think you're at that 20 million to 25 million EBITDA per fleet moving forward if you're not going to adjust for any sort of net pricing gain. And so I think from that aspect, that's really, I think, where we're at. And to maybe add to the earlier comment from Pat on where we see the visibility in the U.S. We have a strong franchise in the broader Rockies region, up and down stretching from the Bakken into Colorado. So we have an ability there through our customer base to certainly look to leverage more growth and market share. But that's really going to be a factor to Pat's point around the economics and the visibility on utilization of that crew, whether we would actually spend the money to reactivate or not. We also have optionality in the Marcellus as well as it comes to expansion. So we do have opportunities down there and you're right on the profitability. But the market is very, very tight and we would look to deploy that equipment only if it makes sense on a longer-term basis.

[Cole Pereira:]

Got it. So I guess maybe at a high level in a, call it more bullish environment, you would maybe look to reactivate one or two fleets into 2023?

[Michael D. Olinek:]

Yes. I mean I think at the top end, it would probably be two, at least at this point, but it certainly would obviously be dependent, as I mentioned before, on the quality of the customer and the visibility of work and the economics associated with that project.

[Cole Pereira:]

Got it. That makes sense, thanks. And just quickly, can you just provide some commentary on where cost inflation has been in Q3 relative to Q2 and how you see that evolving over the rest of the year and into next?

[Michael D. Olinek:]

Yes. The cost inflation, I think, hit us very hard in the front half of the year. I think to some degree, it abated. There's certainly always going to be cost pressures throughout all the operating cost drivers, Cole. But the main drivers, I think we saw the significant step-up in cost in the front half and saw that trimmed down a little bit, but there's always going to be inflation as we move forward.

[Cole Pereira:]

Got it, that’s all from me, thanks. I will turn it back.

[Michael D. Olinek:]

Alright, thanks Cole.

[Operator:]

Next we'll go to Keith MacKey with RBC Capital Markets. Your line is open.

[Keith MacKey:]

Hi, thanks for taking my questions. Can you maybe just [Technical Difficulty] potentially in Q4 and in 2023, can you maybe just talk about how many pumps you expect to do over that time, how much horsepower, and then any capital or the capital associated with it?

[Michael D. Olinek:]

I'm sorry, Keith, I'm going to have to ask you to repeat your question. You cut out on our end here just a little bit.

[Keith MacKey:]

Yes. [Technical Difficulty] replacement, how many pumps or how many horsepower and capital associated would you say is with that?

[Michael D. Olinek:]

I think as far as what we've got in the queue today is we've got four pumps that we're expecting to get delivered here before the end of the year in North America, and another couple coming out of Latin America. We're really in the process, I think, of evaluating how far we get to in our next year's planning. We're right in the planning cycle for 2023 CAPEX at this point. But maybe, Pat, if you wanted to add to that.

[Patrick G. Powell:]

Well, just from sheer math, just the hours that we're putting on our engines, we would expect to rebuild 65 engines next year just on a normal cycle. And a lot of these engines, as we can get engines and the timing is right, we will be doing switching those to Tier 4 engines at that time. But as Mike alluded to, we're not quite there yet. We're just going to start putting a pencil to all this here in the next week or two, so.

[Keith MacKey:]

Got it. Okay. Appreciate the commentary. Maybe just on Canada, can you talk about the state of the market there, how things are looking heading into and through tendering season for 2023 activity because certainly, we've seen a pretty big ramp-up in the rig count. Some of that is, of course, heavy oil and whatnot. But can you maybe just run through how tight you expect the Canadian market to be through the rest of the fall and into the winter for Canada?

[Michael D. Olinek:]

Maybe, I think our utilization might be a little lighter in December, this fourth quarter than we're going to see in the U.S. But we're expecting a very robust 2023 from anything we hear from our customers. We're pretty excited about 2023 right now.

[Keith MacKey:]

Got it, thank you. That’s it for me.

[Michael D. Olinek:]

Thanks Keith.

[Operator:]

And next we'll go to Waqar Syed with ATB Capital Markets. Your line is open.

[Waqar Syed:]

Hi. Thank you. Patrick just touched upon it, but -- so you don't expect any seasonality in the U.S. in Q4 this year or you do expect some seasonality and that's being offset by kind of two months of work from the tenth crew.

[Michael D. Olinek:]

Good morning, Waqar, it's Mike. Yes, we're -- as we operate in the Northern areas of the U.S. predominantly, we're going to have some seasonality and some issues as far as weather, that always occurs. I think where this is maybe a little different than a year ago is the visible gaps in work with our client base. I think we see a pretty steady workload for the 10 fleets that we're going to have operating as we exit the year. So there's likely to be gaps, there always is, but I think we're going to see more consistent utilization than a year ago. So it is a bit different in that respect. But I think there's always going to be scheduling and movement and those kind of things, but it won't be anywhere near as pronounced as it was a year ago.

[Waqar Syed:]

Okay. And then in terms of the Tier 4 upgrades, Pat, you mentioned there may be like 65 engines that are due to be rebuilt. Do you think if you were to rebuild all 65 next year given the supply chain constraints, do you think you'll be able to place an order and have them delivered in 2023?

[Patrick G. Powell:]

Yes. We're already in talks and we have the right amount of engines tied up. We just haven't pulled the trigger on them yet, so.

[Waqar Syed:]

Okay. And what's kind of the cost of these upgrades per pump or per fleet if you could maybe provide some color there?

[Patrick G. Powell:]

We'll be about 1.3 million to rebuild and refurbish Tier 2 pump to a Tier 4 pump, which gives us basically a new unit. We'll reuse the pump and the carrier.

[Waqar Syed:]

So that 1.3 million is in U.S. dollars?

[Patrick G. Powell:]

Yes.

[Waqar Syed:]

Okay. That makes sense. And could you just talk about the pricing trends that you're seeing in the U.S. and the Canadian markets, are you seeing the leading edge continue to move higher, or are you seeing some stabilization now in those two markets?

[Patrick G. Powell:]

Pricing, our pricing or pricing cost to us.

[Waqar Syed:]

No, the pricing that you're charging to your customer and then -- yeah, first of all that?

[Patrick G. Powell:]

We're always pushing for increased pricing.

[Waqar Syed:]

Okay. And you're still getting that traction -- yes.

[Patrick G. Powell:]

Well, we probably won't get the big gains we've seen, which we really needed. I mean that was just a catch-up. But as our costs go up, we sit in front of our customers and try to negotiate that we cover our costs.

[Waqar Syed:]

Yes. Now if you look at the margins in North America, they are now for you materially higher than in Argentina. Do you see Argentina margins kind of going up as well through the course of 2023 or is there any structural reason why they couldn't get to like the 20% kind of range?

[Patrick G. Powell:]

We see the margin going up there. We had a contract that has expired and we have entered into a new contract. And our margins will be much closer to North America going forward.

[Waqar Syed:]

Great, wonderful news. Thank you sir.

[Michael D. Olinek:]

Thanks Waqar.

[Operator:]

And next we'll go to John Gibson with BMO Capital Markets. Your line is open.

[John Gibson:]

Good morning all. Most of my questions have been answered, but I did want to poke you on the Tier 4 upgrades. I'm wondering if you had any desired upgrade to the DGB engines in Canada or is it mostly BES you're focusing on?

[Patrick G. Powell:]

Yes. No, we'll be doing Canada also. We have some engines in the queue for Canada also, yes.

[Michael D. Olinek:]

Yes, so the deployment of new Tier 4 is levered to the U.S., but we're certainly, as we look into next year's capital planning, John, we'll be doing the same in Canada to a certain extent.

[John Gibson:]

Okay, great. Just last one for me, just with regards to pricing some of your peers have spoken to modest net pricing gains in Q3 in Canada. Was this the case and so can you maybe talk about more specifics in terms of percentage gains?

[Michael D. Olinek:]

Yes. I mean, I think we have to be mindful that for us, we came off a fairly low activity or low utilization quarter in Q2 in Canada. And I think our crews were very active in the third quarter and did a great job for our client base. In conjunction with that, the sales group had worked on negotiating net price gains as well. But I think it really is a focus of very strong execution and I think better pricing. So I think it's one of the things where both factors really equated to why we had such strong performance in the quarter.

[John Gibson:]

Got it, congrats on the great quarter. I turn back.

[Michael D. Olinek:]

Thanks John.

[Operator:]

Okay. That concludes today's question-and-answer session. I would now like to turn it back over to the presenters for any closing or additional remarks.

[Michael D. Olinek:]

Thanks, David. I'd like to close up the call here. As we announced as part of the press release today, Lindsay Link will be retiring from Calfrac early in the New Year. Just want to thank Lindsay for his significant contributions to Calfrac over his 10-plus years or nine-plus years with the company. And thank you very much. And looking forward to releasing our Q4 earnings in March. So thanks very much to everybody and good day.

[Operator:]

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation. You may now disconnect.