Calfrac Well Services Ltd.
Q1 2020 Earnings Call Transcript

Published: 25 Jun 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Calfrac Well Services Limited First Quarter 2020 Earnings Release and Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Scott Treadwell, Vice President of Capital Markets and Strategy. Thank you. Please go ahead, sir.

[Scott Treadwell:]

Thanks Julian. Good morning everyone, and welcome to our discussion of Calfrac Well Services first quarter 2020 results. Also on the call today are Lindsay Link, Calfrac's President and Chief Operating Officer; and Michael Olinek, our Chief Financial Officer. This morning's conference call will be conducted as follows; Lindsay will provide some introductory remarks, after which Mike will provide an overview of the financial performance of the company. Lindsay will then close the presentation with an outlook for Calfrac's business. After the presentation, we will open the call to questions. In our news release issued earlier today, Calfrac reported its first quarter 2020 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 our news release and other regulatory filings, including our 2019 annual report for more information on forward-looking statements and these risk factors. Lindsay, over to you.

[Lindsay Link:]

Thanks Scott. Good morning and thank you for joining our call today. Before Mike on financial matters, I'd like to offer a few opening remarks. At the risk of stating the obvious, the first quarter was very eventful [technical difficulty] our society and our industry. The follow-up from these events are very negative for the oilfield service segment in North America, with activity levels falling as much as 70% from early March through May. Oil prices have recovered in the last few weeks, which has sparked a level of optimism surrounding a return to activity. However, I'd like to caution everyone that while an improvement scene has been a welcome relief, I do not believe return to normal activity levels will occur in the near term. As such at Calfrac we have adjusted our cost base and capital spending to align with the current business environment. Through all the turmoil we have seen recently, it is easy to overlook the man and women in our industry that have been impacted over the last few months. But it is their dedication and determination that makes Calfrac and our industry what it is. I won't draw on the first quarter events further, but I will take a minute to congratulate our people for their outstanding performance in continuing to improve our productivity and safety in the field. Our license to operate depends on our execution in the field and I am exceptionally proud of our team. Finally, I want to get ahead of some questions. While we are all here to discuss our results and outlook for the business, I know many of you will want further insight into our recently announced process to examine alternatives for our balance sheet. Unfortunately, we won't be able to provide any color on the process beyond what has been publicly released. And we won't speculate on potential outcomes. The message I'd like to leave everyone with is that it is business as usual for us when it comes to our operations. And I could not be happier with the feedback I am receiving from our customers about our performance in the field. Our employees, clients, and vendors can rest assure that we intend on operating the same way today as we always have, and I have no plans for that to change. Now I will pass the call over to Mike who will present an overview of quarterly financial performance.

[Michael Olinek:]

Thank you, Lindsay. And thank you everyone for joining us for today's call. Given the time that has passed since the close of the first quarter, I will focus on the company's consolidated financial performance and provide additional detail on the trends in our cash flows. Consolidated revenue in the first quarter decreased by 36% year-over-year, primarily due to lower activity levels and pricing across all our operating divisions, including smaller operating footprints in North America and Russia and some impact from reduced work volumes due to the significant drop in commodity prices observed late in the quarter. Adjusted EBITDA reported for the quarter was $6.8 million, compared to $44.1 million a year ago. Operating income was down 87% to $5.7 million from $43.6 million in 2019. These weaker results were mainly driven by lower activity in pricing in North America, as well as $2.6 million of restructuring costs that were recorded during the quarter. Net loss for the quarter was $122.9 million, which includes a gain on debt retirement of $130.4 million and expense of $115.6 million related to the write-off of the company's deferred tax asset and an impairment of PP&E and other assets in the company's North American operations of $54 million. For the three months ended March 31, 2020, depreciation expense decreased by $8.8 million to $63.3 million from $72.1 million in the corresponding quarter of 2019. This decrease was driven primarily by a $9.5 million charge to depreciation was recorded in the first quarter of 2019 which resulted from changes in the company's estimates of useful life and salvage value of certain components related fracturing equipment. In January 2020, Calfrac's Board of Directors approved the company's 2020 capital budget of $100 million. In light of the significant changes to industry activity, this capital budget was reduced to $55 million late in the quarter, and will be adjusted as required in response to market conditions and economics. As activity and revenue has slowed since late March, the company's working capital has been a significant source of cash. Collection and payment patterns have not changed materially and Calfrac continues to manage its accounts receivables and payables in the normal course without any significant issues. During the first quarter, Calfrac also completed a debt exchange transaction that removed $98 million U.S. of long-term debt from the company's balance sheet and reduced annual debt service costs by 5.5 million U.S. To summarize the balance sheet, the company had working capital of $233.1 million on March 31. In March 31, 2020, the company had used $0.9 million of its credit facilities for letters of credit and had $180.5 million of borrowing under its credit facilities and $3 million of bank overdraft, leaving $190.6 million in potential borrowing capacity at the end of the first quarter. As at March 31, 2020, the company was in full compliance with its financial covenants. I would now like to 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. The recent move in oil prices to $40 per barrel has been the catalyst for some activation of equipment in our United States operation. Banks are taking a measured approach to capital allocation and we do not expect that to change in the near term. For Calfrac our approach has been to stay in close communication with our clients and offer technical support as they work to improve their understanding of the reservoirs. What we have not done is bid work out of desperation at little to no field margin and negative EBITDA. As we look to the end of the second quarter and into the second half of the year, I expect continued improvement in activity levels as clients balance the need to bring new production online for land retention, midstream commitments, orders to support credit facility availability against the backdrop of oil prices and expected cash flows and return. Today, Calfrac is operating three fleets in the United States and we expect our ports to go back to work in the days ahead. We have adjusted work schedules to allow us to carry more field staff at little incremental costs, which will allow us to move up to six fleets in a very short order if our clients require it. For reactivation, the speed of the slowdown will also reduce costs as equipment goes back to work. For the first number of fleets to go back to work, we know that no major maintenance was deferred and so the cost to restart will largely be focused on inspections, preventive maintenance, and licensing costs. I would expect that the cost per fleet to restart will be under $1 million for the first three to five fleets. With the number of incremental retirements of pumping equipment in the United States, I would expect that in a more normal environment of $45 or better oil prices or 700 or more rigs that the pressure pumping market in the United States will be closer to balance than it was in 2019. In Canada, we have seen a modest return to activity - on the part of our clients with most of our scheduled work going ahead as planned. For the remainder of the year, I expect the Canadian Division to deploy between one and two large fleets in the Montney and Duvernay areas, and one or two fleets, smaller fleets in the Viking. As in the United States are scheduled for field personnel and equipment condition, I mean we can respond quickly to increase demand at a very low cost. Pricing in the Canadian market remains choppy and reflects a lack of discipline in a market that should be more stable than it is. We saw a number of unsolicited bids and RFP responses that were irrationally priced. Calfrac continues to approach our clients as partners, while pricing our services, not only recognizing current market conditions, but also with an eye to the financial realities of an asset and capital intensive industry. Now a few words on Calfrac's international operations. In Russia, the end of spring breakup has meant that operations have transitioned back to a more consistent tempo, and I'm pleased to report that activity levels have risen consistently from the spring lows. As in the typical case, I expect the results in the second and third quarters to be the best of the year, both in terms of revenue generation and profitability. Our operations in Argentina suffered significantly due to the country's shutdown, but a gradual restart has allowed our people to get partially back to work concentrated mainly in the Southern areas of the country that are more remote and generally less manpower intensive. Operations in Neuquen are in the process of restarting within our cementing and coils tubing service lines, but given the large crew size inherent to Vaca Muerta simulation operations, the restart will take more time to execute correctly. We are working with governments and unions in the region as well as our client’s contractors and employees to achieve a full restart without putting people's health at risk. I'd like to thank all our employees again for their efforts to maintain our safety and productivity performance through this historic period. And I'd like to thank everyone for joining us today, and I will now turn the call back to the operator for questions.

[Operator:]

[Operator Instructions] Your first question comes from Keith Mackey from RBC. Your line is open.

[Keith Mackey:]

Just a question first on the PP&E, so the $941 million on the balance sheet, do you have an approximate split of that between pumping assets and non-pumping assets?

[Michael Olinek:]

I don't have that at hand right now, but I would say majority relates to pumping assets.

[Keith Mackey:]

Okay, thanks for that for that color. Second question, just wondering if you have any color you can provide on government support that you've taken advantage of either the wage subsidies or any loan guarantees, either in Canada, U.S. or I suppose anything internationally as well?

[Lindsay Link:]

Yes, we have taken advantage of the wage subsidy program in Canada. We've currently gone through a couple of months of that and are continuing to see benefit in that program going forward. But other than that, we've not accessed any other government programs of any note.

[Keith Mackey:]

Okay, thank you. And then one more just a clarification I sort of have heard it. The comment about seeing irrational pricing in the market was that in Canada or the U.S. that you were referring to there?

[Scott Treadwell:]

Hi Keith, it’s Scott. I mean I'd say we've seen pockets of that in all of the markets or all the North American markets. I think our comment was more around that the Canadian market just structurally should see less of that, but certainly in the recent past hasn't.

[Operator:]

[Operator Instructions] Your next question comes from Jason Mendel from RBC Capital Markets. Your line is open.

[Jason Mendel:]

Actually two quick ones, first off on the working capital use in the quarter and the comment in the press release about timing of receipts, any additional color you can give us on what the second quarter is looking like and what the timing difference was in terms of magnitude relative to the $44 million use of cash in the quarter?

[Michael Olinek:]

Yes I know it was a very significant swing. I think it was just a really a timing event at the end of Q1 with our customers and their actual payments on the receivables. And obviously, kind of a profiling of when those receipts were due anyway and so, the significant inflows that I mentioned kind of in my notes really hit in April and to a larger extent even in May. So I think, we're going to see a much larger cash injection from working capital in the second quarter and it was just really a timing oddity thing as far as how Q1 ended from a working capital perspective.

[Jason Mendel:]

And obviously it wasn't disclosed, but it's at least worth asking. Are you able to provide a cash balance right now?

[Michael Olinek:]

No, we don't provide guidance of that nature on this call.

[Jason Mendel:]

Okay. And then last question on the cost per fleet to bring them back you kind of talked about I think about 1 million or less than 1 million for the - first three to five. Hopefully, we are headed this way, but from more of an optimistic perspective, what is that number sort of get to when we get deeper into the fleets?

[Lindsay Link:]

I think it’s good question, thanks, Jason. I think after you get to the fifth fleet, it really depends on the cadence of recovery. If we have the opportunity to pick and choose from our idle fleets, we may be able to maintain that less than $1 million per fleet startup. But if the cadence is quicker, then we probably are, probably doubling that amount as we have to replace with some of the major components. It’s not necessarily a P&L expense, but more on our capital expenses, does that make sense?

[Jason Mendel:]

It does, but maybe just not thinking about this right? So if it happens faster, you'll need to replace more?

[Lindsay Link:]

Yes, because I won't be able to redeploy, the units from let's say the activity occurs in the Balkan, and I have idle equipment in South Texas. So, and yet I have some equipment that maybe needs more major repairs, it is closer to that - to the Balkan restart. So I may have to do the major repairs to get that equipment ready in the timing that it takes - that the new work starts off. Because you know service companies - if the client gives you two weeks to startup, we're ready to startup in two weeks in there. So if I had two months, I would move some equipment that requires less cost to startup now then if I had less time to do it. Because our assets as you know I mean, we have with 1 million horsepower in the Southern - in the U.S., but it's not all in one place right.

[Jason Mendel:]

Got you, so it's not only the speed but also the diversification of the recovery or the improvement?

[Lindsay Link:]

Okay yes, you know because we're looking to spend as little money on the startup as possible with still giving a fully functional and high level of service, fracturing services.

[Operator:]

Your next question comes from Waqar Syed from AltaCorp Capital. Your line is open.

[Waqar Syed:]

I joined a little bit late so you may have answered already so apologize if that's the case. Now, the wage subsidies for the government, I believe you said that you received some if so, what was the amount in Q2 and what do you expect for Q3?

[Michael Olinek:]

Waqar, it's Mike here. Yes we're in the midst of trying to finalize our submissions here for the second quarter. So we have received two tranches. It's around about $3 million level. Going forward, I'm really not sure it's really predicated on work schedules and who is working and who is not. So it's not really - I'm not able to give guidance as far as that goes regardless, so sorry about that.

[Waqar Syed:]

No worries, now in terms of Q2 activity, we're already getting close to the end of the quarter. So you probably have a very good idea on what the activity levels were in Canada and the U.S. Could you maybe provide some guidance there?

[Michael Olinek:]

Well, I won't go as far as to give guidance, but I guess maybe reiterate your point that you dialed in a bit late. I think activity really dropped for us as we progressed through April and then into May and it recovered a little bit in June. In Canada, we've got two spreads and probably a third one potentially, as we get into July. In the U.S., we've got three spreads working and a fourth one kind of on the way. Those are relatively recent developments. But as I would say, April was probably a pretty sharp deceleration. May was kind of bouncing along the bottom and then June was recovery, but a small recovery but still positive from where it was and so Lindsay's comments, we expect that to kind of continue and potentially accelerate, but certainly not massively, getting back to kind of Q1 levels or anything like that. But, we expect at least sort of steady work from that June level and potentially some improvement.

[Waqar Syed:]

And so, just in terms of the calendar, that's pretty full for July now or does it have white spaces both in the U.S. and Canada?

[Michael Olinek:]

I would say, broadly we wouldn't be running a fleet if it wasn't pretty highly utilized. I think just with the fixed costs, you have and the fleet at district and divisional level, bringing on another fleet towards 11 or 12 days a month just doesn't make any sense. And so, I think you can sort of make the assumption that broadly across the industry, you shouldn't see too many fleets working on very spotty schedules, unless there's a baseline company. And so for us building that baseline has to be pretty high utilization.

[Waqar Syed:]

And then as you mentioned you expect, there's a possibility that additional crews maybe needed in the in the U.S. What's your view if that happens? Where would these incremental crews go, is it Northeast or the Rockies are in the Texas area? Where do you expect them to go?

[Lindsay Link:]

Waqar, I think that it's probably setting into the - more into the oil plays now. I think the gas plays in the Northeast have probably been fully satisfied for what they're, what demand state they were a little more resilience then maybe the Texas or the North Dakota market. So, I think they would probably be in those areas. And of course for us, we're more interested in areas where we operated. We're not really prepared to go into areas that we don't operate in.

[Operator:]

We have no further questions in queue. I'd like to turn the call over to Lindsay Link for closing remarks.

[Lindsay Link:]

All right. Thank you very much for attending our call and we will see you on our Q2 call shortly.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.