Calfrac Well Services Ltd.
Q4 2021 Earnings Call Transcript

Published: 16 Mar 2022

[Operator:]

Good day and welcome to the Calfrac Well Services Ltd. Fourth Quarter 2021 Earnings Release and Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Olinek, Chief Financial Officer. Please, go ahead.

[Mike Olinek:]

Thank you, Jenny. Good morning and welcome to our discussion of Calfrac Well Services fourth quarter 2021 results. Joining me on the call today is Lindsay Link, Calfrac's President and Chief Operating Officer. This morning's conference call will be conducted as follows. Lindsay will provide some opening commentary, after which I will summarize the financial position and performance of the company. Lindsay 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 the news release issued earlier today, Calfrac reported its fourth quarter and full year 2021 results. Please note that all financial figures are in Canadian dollars, unless otherwise indicated. Some of our comments today will refer to non-IFRS financial measures, such as adjusted EBITDA and operating income. 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 2020 Annual Report for more information on forward-looking statements and these risk factors. Lindsay, over to you.

[Lindsay Link:]

Thanks, Mike. Good morning. And thank you everyone for joining our call today. Before Mike provides the financial highlights of the fourth quarter, I will offer a few opening remarks. The fourth quarter was consistent with our expectations, activity weakened due to customer capital discipline that resulted in a slower back half of the quarter. The beginning of the New Year was strong for the Canadian Division. However, a delayed start for our US operations, combined with significant cost pressures in both divisions will likely impact our first quarter results. The rate of change in inflationary costs gives us the opportunity to have frequent conversations with our customers and adjust pricing. Over the past month, these conversations with our customers have been resolved much faster than in prior cycles. As we settle into 2022, our operations are building momentum. And I believe that we are well positioned for a continuation of improving results due in large part to our commitment to quality job execution and our safety first culture. North American activities look to be improving year-over-year and pricing continues to move up. But the pace of cost inflation remains a factor. The recent rise in energy prices has had a significant impact on the operating cost structure of pressure pumping companies. As a result, pricing for services needs to increase significantly to compensate for this rise in cost, as well as provide a sustainable return. Last year our Safety Center culture fostered one of the lowest incident rates in c Calfrac’s history despite increasing headcount throughout the year. We are proud of our license to operate as we meet or exceed our nonproductive time targets, allowing us to pump more hours every day. In North America, we routinely pump more than 20 hours a day and we have approached pumping 24 straight hours numerous times. The ability to consistently pump a long time depends on a few factors. In addition to well-maintained equipment, it also requires coordination with our customers and suppliers to ensure that resources and materials are on location in time. Now, I will pass the call over to Mike who present an overview of our quarterly financial performance.

[Mike Olinek:]

Thank you, Lindsay. Consolidated revenue in the fourth quarter increased by 43% year-over-year to $257.8 million. The improved revenue was mainly due to the fracturing job count increasing by 34% resulting primarily from higher activity in all operating divisions. Adjusted EBITDA reported for the quarter was $9.5 million, compared to $13.7 million a year ago. Operating income decreased by 42% to $9.1 million versus $15 .6 million in 2020 due to lower than expected fracturing equipment utilization in Russia, due to the inability of the customer to supply [Indiscernible] for 11 days in December, and lower operating margins in Canada, resulting mainly from the reactivation of a fourth fracturing fleet in anticipation of an active first quarter of 2022, combined with higher fuel and product costs. This decrease was partially offset by higher equipment utilization in the United States and Argentina. The net loss for the quarter was $28.3 million versus net income of $125.9 million in the same quarter of 2020 that included the gain on settlement of debt from the company's recapitalization transaction that was completed in the fourth quarter of the previous year, net of deferred income tax expense. Interest expense during the fourth quarter of 2021 decreased by $153 million from the same period in the prior year due to the significant reduction in long term debt that resulted from the company's recapitalization transaction. Calfrac spent a total of $15.8 million on capital expenditures in the fourth quarter, compared to $6.5 million in the same period of 2020. These expenditures were predominantly related to maintenance capital, and the increase was due primarily to the change in the amount of active equipment in North America between the two periods. In 2021, the company's capital expenditures were $70.7 million, of which $5.2 million related to carryover capital from the previous year. Given a significant improvement in the company's operations in North America that is forecasted for 2022 Calfrac successfully negotiated additional amendments to its revolving credit facilities, and secured a bridge financing loan in order to provide the necessary liquidity to fund the anticipated increase in working capital requirements for its operations moving forward. To summarize the balance sheet as at the end of the fourth quarter, the company had working capital of $170.7 million. At December 31, 2021, the company had used $0.9 million of its credit facilities for letters of credit, had a $190 million borrowing under its credit facilities, and $1.4 million of bank overdraft. I'll now turn the call back to Lindsay to provide our outlook.

[Lindsay Link:]

Thanks Mike. I will now present an outlook for Calfrac’s operations across our geographical footprint. We're continuing to see the North American service market tighten with the help of a few catalysts. First is an increase in the amount of horsepower required on location which reduces the available idle capacity? The second catalyst is the equipment and commodity supply chain constraints. And while the third is the relentless labor shortage. While these factors are not permanent, they limit the speed at which additional fleets can be deployed, but will help build improved pricing dynamics. In the US division, our fourth quarter results exceeded last year same quarter. And we believe the first quarter will be a success, sequential improvement as well. As expected, the United States operations experienced a delayed start in 2022. But we have built momentum in the quarter and we look to extend this throughout the rest of the year. To highlight how quickly activity has ramped up, we exited 2021 with four operating fleet, and then doubled our active fleet count to eight by the end of January. And we continue to maintain that fleet count today. We intend to operate nine active fleets in the second quarter and hold that level through the end of the year to support our strategic partners. We are confident that we can achieve full utilization and considerably outperform last year's financial results without footprint among our operating districts. Because of the incremental maintenance required to activate our idle equipment, we would need to see a significant step up in our return on investment in order to activate additional fleets. In conjunction with higher utilization, we face high rising imports costs. So we have -- we are having conversations with our suppliers and customers to share the inflationary impact. Pricing adjustments due to cost inflation is achievable with our customers. But the more difficult situation is the increasing cadence in which we need to have these conversations. With a much stronger commodity price combined with increasing activity, we are starting to recognize some net pricing improvement, which is a welcome development from the severe fall in profitability that occurred during the past two years. In Canada, the fourth quarter profitability was below the same period in 2020 due to lower utilization in the back half of the quarter combined with the expiration of the wage subsidies, as well as increased costs primarily due to reactivating a fracturing fleet and coil tubing units, which were deployed in an active first quarter. First quarter started off strong, and we anticipate the existing Western Canadian fracturing market tightness to continue into the second half of the year. We expect to have a relatively strong first quarter with four fracturing fleets, while significantly outperforming the fourth quarter of 2021. The labor shortage is the primary constraint on growth in the Canadian market and retaining people in the industry is difficult. Calfrac maintains an active and robust recruiting and training program and anticipates operating four fracturing fleets for the remainder of the year. Similar to the US division, cost inflation has been a significant headwind for the most part, we have been successful in passing through cost increases, but is a continual process due to the velocity at which they are occurring. Since the Canadian pressure pumping market is not as fragmented as the US market, prices for our services did not fall as low as in the US, but further recovery is still required to sustain the industry. I'll now turn to Calfrac’s international operations. Our operations in Argentina have continued their impressive steady performance and improved from the third quarter as well as year-over-year due to the exceptional work performed by our employees in the Vaca Muerta shale. The first quarter is progressing according to plan despite earlier weather impacts, our operating efficiencies are improving as we progress through the quarter. For example, we recently pump 11 fracturing stages in one day, and we expect consistent utilization with our contracted work to continue through the rest of 2022. The fourth quarter in the company's Russia division was down sequentially and year-over-year due to lower than expected fracturing utilization resulting from our customers and procurement interruptions in December. As we have outlined in our press release, the situation in Ukraine has added a level of risk and uncertainty around our Russian operations. And we are evaluating our options. And we'll have more to discuss when we report our first quarter results. We are optimistic for our continuing strengthening oilfield services market in 2022. I'd like to thank all of our team for their efforts in helping us. I'm proud to be part of this team as we move forward. Back to you, Mike.

[Mike Olinek:]

Alright. Thanks Lindsay. We can, Jenny, we can open up the call to questions, if there are any.

[Operator:]

[Operator Instructions] We'll go to our first question from Cole Pereira of Stifel.

[Cole Pereira:]

Hi, good morning, everyone. I just wanted to start with Canada. Can you share any observations if you've seen any predatory pricing at all in the quarter and if you're seeing any spare capacity in the market right now?

[Lindsay Link:]

Good morning, Cole. You're talking about the first quarter I assume. And I believe in the first quarter we haven't seen as much predatory pricing because the activity is such that I think everyone is quite busy.

[Cole Pereira:]

Okay, perfect. That's helpful. Thanks. Moving on to Russia. So I mean, I think it's fairly well known that you're working for one of the state owned entities there. And as you said, you're continuing to evaluate your presence. But is maybe part of the rationale to have not yet made the decision to suspend operations, due in part to some what could be some balance sheet and financial risk to Calfrac if you were to do so.

[Mike Olinek:]

Cole, good morning. It's Mike here. As we've stated really, the ongoing conflict in Ukraine certainly added a level of risk and uncertainty around the company's operations in Russia, as you can certainly appreciate, it's a very dynamic situation right now. And so we're evaluating our options in the country. So really, we'll have more to discuss as we report our first quarter in May.

[Cole Pereira:]

Okay, great. Just wanted to go to the US business as well. So obviously, there's some headwinds in Q4 and continue to some extent Q1. I mean, if we go back to Q3, 2021, operating income was $14 million. I mean, as we think about maybe into Q2 is some of the weather headwind subsist, is it kind of reasonable to think you could get back or maybe exceed that level from Q2 forward?

[Mike Olinek:]

Yes, Cole. Certainly, I think our fleet of operating equipment in the US is about the same. But I think what we're going to be seeing, I think, in 2022, is a general theme as we get out of Q1 here, is really very limited whitespace, for any of the crews that we have going forward. So it's more akin to some of the better years that we would have seen back in 2017 or 2018, in that respect. And so when you get to that level of utilization, and as we mentioned, we're starting to see net price improvements here as well, that outpace the cost inflation, we certainly see the ability to do better than our Q3 as we move forward here outside of Q1.

[Lindsay Link:]

Cole, if I can just add -- just a bit more color on the activity that the slowest start kind of masks the expectation for, I'll say, for Q2, and if it's very busy down their rate at the moment, then we expect it to get busier.

[Cole Pereira:]

Okay, great. And then maybe just quickly, on the labor shortage front, are you able to differentiate between Canada and the US, and whether it's better or worse in either jurisdiction?

[Lindsay Link:]

I think it's tight in both areas. In some ways, I think our US recruiting has been more successful. It's a larger pool. And I think the pressure pumping market still offers a lot for our employees. In Canada, it's a much more focused market. I'm going to say, a good portion of our employees, we require them to have CDL licenses. And I think given just the overall geography of Canada, this category of person is in greater demand with a limited population. So it just takes us a longer period of time to do the recruitment to staff of a fleet than it does in the US.

[Operator:]

We’ll go to our next question from Keith MacKey of RBC.

[Keith MacKey:]

Hi, good morning. Just wanted to maybe start out in Canada on the pricing dynamics, if you were to break down how pricing progressed in Canada from the first half of 2021, call it to the second half of 2021 on a gross basis, so forgetting about inflation, how much would you say pricing improved in Canada during that time?

[Lindsay Link:]

So, Keith, really, if we're looking kind of H1, if I understand you H1 of ‘21 through H2 of ‘21. How pricing progress is that your question, sir?

[Keith MacKey:]

That's correct. Yes.

[Mike Olinek:]

Yes. So really it certainly did move up, I would say, as we exited Q2 structurally probably on a gross basis is that 10% to 15%? It certainly, as we compare that to the US, it did not fall as much. Now, some of the drivers of those increases were related to cost related elements, though.

[Keith MacKey:]

Got it. Okay. And then, as you go from Q1, and winter of 2022, to the second half of 2022, how do you see that pricing dynamic playing out? Do you think it's likely another 10% to 15% within inflation coming in, as it does, or how are you thinking about the progression of pricing through the second half of the year? Because I did notice you're looking a little, your commentary in the press releases is a little bit more constructive than I would say it was last year this time. So what are you thinking in terms of those numbers?

[Mike Olinek:]

Yes, I think the constructive comments really come around with our discussions with our key clients in Canada and their plans for this year, versus maybe a year ago, where they were little more tentative coming out of the COVID pandemic. So there's, I think, structurally, they're a little more visibility on utilization. And then over and above that, I mean, I think the cost realities are certainly coming to the forefront here in our business. And structurally having those conversations as Lindsay mentioned, on a fairly regular basis here, we get the opportunity to derive how we're going to move pricing up further. So I think we constructively think that 10% to 15%, is probably on the low end, just because I think the cost inflation this year is probably higher than it was a year ago. But on the net side, I think there's an ability here because I think the tightness in the market is certainly much different and better in 2022 than it was a year ago.

[Keith MacKey:]

Got it. That makes sense. And you continue to run four fleets in Canada. If you were to achieve that level of pricing that you just talked about, Mike, what is the prospect of adding a fifth fleet to the market?

[Mike Olinek:]

Yes, no, I think those are opportunities that we're certainly willing to look into. I think we're being patient in the sense that we'd like to see the core clients that would be demanding that because it's obviously looking at what level of utilization you're going to have on that fleet. And we're certainly wanting to see the pricing dynamics in the base and continue to improve. So it's one of those things that we're certainly evaluating, and we'll do it for the right customers at the right price. But we're liking the momentum that we're getting on price and wanting to see the net pricing continue to improve before we make that decision.

[Lindsay Link:]

Just to add on that, Keith, we definitely have the capability to add the fifth fleet, though, if the dynamics work in that favor.

[Keith MacKey:]

Got it. Thanks for the color. And just one final one sticking with Canada, on the labor side. Is there anything that is structurally changed about the labor market to make it so tight? And do you see that sort of changing back through the second half of 2022?

[Lindsay Link:]

Well, it’s a great question, Keith, it’s tough answer to totally figure out but I do believe as we all drive on the roads, there's just more large vehicles on the road than what there used to be. And that's a good portion of our labor. It's a skill set that we require. And so I think that's probably the dynamic that is changed the most. And then of course, the relentless spikes and then the cliffs that have taken place with the last few years of our industry, especially the services industry, makes it hard to talk about long term with some of your new recruits on there. So hopefully we're in a cycle that has a steady upturn. And people can see that it has a steady upturn and that the oil and gas industry is a necessary part of society and that we can recruit people back into our industry. I think it's getting them back in as opposed to just what we have currently working for us.

[Operator:]

We'll go next to Waqar Syed of ATB Capital Markets.

[Waqar Syed:]

Thank you for taking my questions. A couple of questions just first on the US margin side, you mentioned that margins of profitability of business looks to be similar to maybe 2017-18. Now, back in ’17, ‘18, your EBITDA margins in the US were in the mid-teens to as high as 25%. Do you see that happening as we go through 2022?

[Mike Olinek:]

Hi, good morning, Waqar, it’s Mike here. Yes, we certainly are seeing the progression in operating margins, I think be on a trajectory similar to 2017, which we did not certainly accomplish last year, we did see net margin improvement between H1 and H2. But what we're projecting for 2022 is something I would not say that's at 2018 levels, but it's certainly starting to approach those levels. And more akin to how the market was evolving in 2017 in the US side.

[Lindsay Link:]

Yes, Waqar, we didn't have quite the inflationary pressure that we had, that we have now that we had back in that time. So it is a little bit of how fast we can catch the price and see how long it is before it gets eroded from a cost perspective.

[Waqar Syed:]

Okay. And then, the Russian Ruble has depreciated quite significantly. And so as we look into Q1, should we just take down our revenues. And EBITDA, OpEx and asset values by about 35% or so.

[Lindsay Link:]

Waqar, the actual advent of the Ukraine conflict happened at the end of February, so things would have been probably a little bit more normal for most of the quarter, at least, that's what we've seen. I mean, past that, obviously, yes, the ruble decline is going to impact reported revenue and profitability in Russia going forward.

[Waqar Syed:]

And so and what kind of write-downs, is it possible in Q1, any guidance on that?

[Lindsay Link:]

As I mentioned before, earlier on the call, really, there's a lot of uncertainty around the company's operations in Russia at this point. And you can clearly appreciate it's a very dynamic situation. And so at this point, we're just going to have to wait till we have more to report here at the end of early in May, with our first quarter results.

[Waqar Syed:]

Okay. And then, in terms of CapEx for 2022. I'm not sure if you've already announced that or put it there and artifact if you have I may have missed it.

[Lindsay Link:]

No, we have not reported that officially, Waqar, but I would say, given the uptick in North America, and the fact that we did about $70 million of CapEx, it's going to be north of that number next year, just based on a constant fleet of active equipment operating, that 14 fleet or 13 fleet sort of range in North America. So it will definitely be higher than that. I would suggest a range is certainly between $85 million and $95 million, kind of on a full year basis.

[Waqar Syed:]

Okay, and what's your current liquidity level right now? And any guidance about the free cash flow picture looks like for Q1?

[Mike Olinek:]

Yes, Waqar, I mean, that's really a good launching point as to what we accomplished here in March with our lending syndicate and the bridge loan that we secured. We're very happy with what we've done there as far as solidifying the company's liquidity profile for what we think are these going to be expected working capital demands, you're moving forward. When you're talking free cash flow on a full year basis. I mean, it was obviously negative in a rebuilding year like 2021. And where we see that going on a full year basis this year is to being positive, albeit, obviously, probably neutral to slightly positive just as we're building our operations up in North America considerably in 2022 from last year.

[Waqar Syed:]

And working capital last year was like a cash outflow of $50 million. And your revenues are going up this year quite a bit. Wouldn't working capital, again be a source of cash outflow by a significant amount?

[Mike Olinek:]

Yes, no, working capital, obviously on a full year basis will be an outflow. It won't be anywhere near as high as the $50 million that we had to incur this year, but it's probably going to be about half that number, Waqar.

[Operator:]

We'll go next to John Gibson of BMO Capital Markets.

[John Gibson:]

Good morning, all. Just narrowing in specifically for Q1 in the US, is given lower utilization started the year but a stronger finishing is sort of the reverse of what happened in Q4. Do you think it takes margins to normalize back to maybe even Q3 levels given some pricing improvements, or could you see continued margin depression, similar to Q4?

[Lindsay Link:]

Good morning, John. Yes, as we not so much for the quarter, but for the exit into March I expect to be approaching those levels. The slow start always gives you a hard time, especially in the US because of whitespace. And that by itself doesn't give you any margin. So January was hard for those guys. But they have improved night and day from performance in March or for March that we expect.

[Mike Olinek:]

Sorry, just on our expectations here, we think, sequentially, the US revenue is going to be up probably 10% to 15%, from Q4. And so with that, and the better utilization of those crews, albeit it was obviously a delayed start in one of our operating areas. Operating income should also be improved from where it was in Q4 on a percentage basis on dollar basis.

[John Gibson:]

Okay, yes, that's what I was trying to get out there. Any specific reactivation costs we should expect in Q1 in the US?

[Mike Olinek:]

No.

[John Gibson:]

And then last one for me. I'm just wondering how customer conversations are going regarding the second half in Canada. I mean, we've heard from some of your competitors that there could be or there is demand for incremental crew starting in Q3, just wondering what your take on this, just in terms of how discussions with customers have gone so far.

[Lindsay Link:]

John, it's ongoing conversations, obviously, first to capture the cost increases and the likely continuation of those costs increases. And that really sets the conversation as to whether or not you would have additional capacity to choose their work. Because the last thing you want to do is come through the last couple of years of what I would call not sustainable economics and then just continue that process down into Q3 by adding a call it excess capacity and subdued pricing. So we need to see the pricing for the return on that investment to make it worthwhile for all the fleets not just for the next fleet.

[Operator:]

And with no other questions in queue, I would now like to turn the call back over to Lindsey Link, President and Chief Operating Officer for any additional or closing comments.

[Lindsay Link:]

Thanks Jenny. Thank you all for joining our call today. We look forward to talking to you in May.

[Operator:]

And so this concludes today's call. Thank you for your participation. You may now disconnect.