Calfrac Well Services Ltd.
Q1 2018 Earnings Call Transcript

Published: 1 May 2018

[Executives:]

Fernando Aguilar - President and CEO Mike Olinek - CFO Scott Treadwell - VP, Capital Markets and Strategy

[Analysts:]

Ian Gillies - GMP Greg Colman - National Bank Financial Jon Morrison - CIBC Capital Markets John Daniel - Simmons & Company

[Operator:]

Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Ltd. First Quarter 2018 Results Conference Call. [Operator Instructions] Fernando Aguilar, President and Chief Executive Officer, you may begin your conference.

[Fernando Aguilar:]

Thank you, Kim. Good morning and welcome to our discussion of Calfrac Well Services first quarter results. Joining me on the call today are Mike Olinek, Calfrac’s Chief Financial Officer; and Scott Treadwell, our Vice President of Capital Markets and Strategy. This morning’s conference call will be conducted as follows. I will provide a summary of the quarter, after which, Mike will provide an overview of the financial performance of the company. I will then close the presentation with an outlook for Calfrac’s business. After the presentation, we will open the call to questions. In the news release earlier today, Calfrac reported its first quarter 2018 results. Please note that these 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 for more information on forward-looking statements and these risk factors. As shown in our results this morning, 2018 has started off well for Calfrac with strong performances in North America in spite of a number of industry wide issues surrounding logistics. While Calfrac is not immune to such issues, our investments in the supply chain that we have delivered validates our approach in this key area of the business. On behalf of the board and the senior management team, I would like to thank everyone at Calfrac for their continued efforts in the field in the districts and in our support offices. Our business is a people business and I know we are second to none when it comes to quality of our people. Global oil fundamentals continued to improve through the first quarter and we believe many of our clients have begun the planning needed to expand their spending plans, while remaining disciplined in terms of cash flow. This measured approach to growth by our clients is ultimately a good thing for the entire energy complex and one that mirrors our own approach to future expansion. A colder than normal winter has helped natural gas fundamentals and we remain optimistic on the long term health of North American natural gas, including further prospects for LNG exports. As a result, activity in the US and Canada was up meaningfully compared to both Q4 levels and those seen in the first quarter in 2017. Combined with improved pricing and higher levels of efficiency, these higher activity levels have allowed Calfrac to reactivate almost all our North American fraction equipment with further growth expected in the quarters ahead. While our view on North American pressure pumping remains optimistic through the next 12 to 18 months, we will not change our strategy of managing risk with a focus on generating cash flow through a strong client base, safe and outstanding fleet service and constant cost management. Now, I will pass the call over to Mike who will present an overview of our quarterly financial performance.

[Mike Olinek:]

Thank you, Fernando and thank you everyone for joining us for today's call. Consolidated revenue in the first quarter increased by 117% year-over-year, primarily due to a 62% increase in fracturing job count in North America. Adjusted EBITDA reported for the quarter was 73 million compared to 21.6 million a year ago. These improved results were driven primarily by significantly higher and more consistent utilization in the United States and Canada. In Canada, first quarter revenue was up 71% from the same quarter in 2017, mainly as a result of improved fracturing activity and higher pricing. A number of fracturing jobs was hired due to the company having 56% more equipment in the field as compared to the first quarter of 2017. The number of coil tubing jobs however fell by 10% from the first quarter in 2017, primarily due to a slower start to activity as compared to the prior year. Revenue per fracturing job increased by 18% from the same period in 2017, due mainly to job mix and improved pricing for the company’s services. Operating income of 31.7 million improved 155% from 2017, which was aided by higher pricing and productivity, but offset somewhat by increased sand transportation costs incurred to overcome sand logistics challenges encountered during the quarter. In the United States, the company's plant reactivations continue, but at a faster pace than expected. The deployment of a 16th fracturing spread into the US occurred in March, which was over two months ahead of schedule. These reactivations combined with strong utilization and improved pricing drove a 222% increase in revenue from the comparative quarter in 2017. The 4% depreciation in the US dollar versus the Canadian dollar partially offset the improvement in revenue. Revenue per job increased 64% year-over-year due to improved pricing, aided partially by larger average job sizes. This increase was offset slightly by two of Calfrac’s fracturing fleets in the United States using customer supply process, while another used -- another three used 12 of our fleets in Colorado did not use any sand at all . The company’s United States operations generated operating income of 53.2 million during the first quarter 2018 compared to 10 million in the same period in 2017. The improved profitability was driven by higher pricing as well as better fixed cost absorption, but was offset by 5 million in reactivation cost during the quarter as well as an increase in personnel costs. Revenue from Calfrac’s Russian operations increased by 13% during the first quarter of 2018, to 31.2 million from 27.7 million in the corresponding period of 2017. The increase in revenue was largely attributable to a 10% increase in fracturing job revenue as well as 45% increase in the number of coil tubing jobs completed. Consistent with the first quarter of 2017, the company's Russian operations operated at a level of profitability typical for this time of year. Although revenue increased from prior year levels, the high level of variability in activity from week to week drove several inefficiencies and costs that impacted profitability. In addition, increased personnel costs were largely responsible for the year-over-year increase in SG&A costs in Russia. Calfrac’s Argentinian operations generated total revenue of 45.9 million during the first quarter of 2018, an increase of 43% from the prior year. The revenue increase was primarily due to higher work volumes in the Vaca Muerta shale play. The improvement was partially offset by lower cementing activity in the northern area of the country and several labor disruptions in the southern area. The company's operations in Argentina reported an operating loss of 3 million compared to income of 2.2 million in the first quarter of 2017. The transition to unconventional operations is chiefly responsible for the operating loss, but this result included 1.6 million in one-time overhead costs that were incurred during the quarter. The company's corporate division recorded total cost of 13 million during the first quarter, up 214% from the prior year, a 7.4 million increase in stock based compensation accruals were the primary driver of this increase, although higher personnel costs were also a factor. From a cash flow perspective, the company's cash balance fell by 22.6 million during the quarter with capital spending and working capital investments representing the largest uses of cash during the quarter. Turning to the balance sheet, at March 31, the company had approximately 30.2 million of cash, including one fully funded 25 million equity care as well as working capital of approximately 361 million. In addition, Calfrac has used only 0.8 million of its credit facilities for letters of credit and had borrowings of 55 million on its credit facilities, leaving 219.2 million in available liquidity at the end of the first quarter. Subsequent to the end of the quarter, the company released the segregated funds and reduced its credit facility borrowings, partially due to the material improvement in the operating and financial performance of our business. As at March 31, 2018, the company was in full compliance with its financial covenants. I would now like to turn the call back to Fernando to provide our outlook.

[Fernando Aguilar:]

Thank you, Mike. Before I give a detailed outlook, I would like to update our view on industry fundamentals in North America. The rig count in the United States is up by 9% since the beginning of 2018, although the horizontal rig count is up almost 12% in the same time frame. The addition of almost 100 horizontal rigs over the last four months has not yet fully been felt in terms of completion, as many basins have moved to larger parts of mines to fully drill. Based on our current industry dynamics, the added rigs require approximately 45 to 50 spreads to service or at least 2 million horsepower. We believe that as producers recalibrate their budgets on a higher assumed price deck, incremental rig additions should occur in the near term, setting up higher fracturing demand through the summer and into the end of the year. Much has been written about the material growth in supply or fracturing assets. Also, our view remains unchanged. With higher activity and intensity, we believe demand levels remain above current supply and a minimum full portion of the new additions are not additive to the industry’s activity potential. It is our belief that up to half of the announced new builds on reactivation are slated to add capacity to existing spreads right now representing incremental rig additions. It remains our view that with WTI pricing in the range of $65 per barrel, the US frac market is unlikely to achieve supply demand balance before the later part of 2019. Should commodity prices move substantially beyond that level, then we would expect the balance to be pushed further in to the future. Given the edge and condition of much of the North American fleet, we do not expect the need to refurbish fleets to subside for several years, potentially resulting in a tight market for an extended period. In Canada, our outlook remains slightly cautious, but greenshoots are certainly appearing. First and foremost is the rapid acceleration of interest and activity in the East shale area of the Duvernay. While Calfrac has been advising clients and performing work in this area for an extended period, the pace of change has been surprising and is certainly cause for some of them. Secondly, activity in the Montney and our Duvernay areas appears robust through the remainder of the year, driven by a strong commensurate economic, but also increased activity by several large producers who previously focused capital spending in the oil sands for across North American or lower asset base. We broadened the revenue base from our coil tubing operation in Canada. We are in the process of reactivating two previously add-on coil tubing rigs deployed from the United States. The first rig was activated at the end of the first quarter and we expect the second to be online later this year. As we expected, activity in April was materially slower than was seen in March, due to the onset of spring break up conditions. However, we expect the material increase in activity levels in the coming weeks and we have bookings for this in May and June. However, as is always the case, weather and road conditions will ultimately dictate how much more can be serviced in the second quarter. Further ahead, indications and commitments remain strong through the summer into the forward, but visibility on activity in the fourth quarter remains low. On both sides of the border, the same issues should improve with warmer weather ahead. So we do not expect some logistics to impact our operations in the near term. I'm very happy to see the performance of our Canadian operation during a challenging winter season, largely due to our investments in logistics and supply chain expertise. The outlook for the company's operations in the United States remains positive with all 16 of our spreads working today and 17th spread coming to the fleet late in the second quarter. We continue to feel requests for equipment from clients in different areas and our management team will endeavor to balance geographic and client exposure, while delivering ongoing improvement in profitability. While our operations and profitability in the United States were impacted by some of these issues in the first quarter, I am confident that as our organic growth rate slows in the upcoming quarters, our ability to deliver sand and chemicals as required will improve over and above any industry improvements. I have already spoken to our view and our supply and demand balance in the US truck market, though additionally, I believe that Calfrac’s ability to execute a safe and efficient operation will continue to deliver a strong value to both our clients and our shareholders. Now, I would like to discuss Calfrac international operations. In Russia, the first quarter was slightly behind our expectations. As weather issues were not typical, where more – than in years past. Many more stops and starts for our operation, which impacted both activity and costs. Our outlook for 2018 is for operational and financial results to be relatively similar to 2017 in Russia, aside from currency exchange impacts. Revenue in Argentina was flat sequentially in the first quarter, as activity levels overall were largely unchanged. Profitability levels were likewise flat, reflecting some improvement in the field profitability offset by some one-time costs in the overhead. We expect that with continued higher levels of activity in Vaca Muerta, our operation should see improvement in profitability in the quarters ahead. The company has announced an increase to its capital base for 2018 of 23 million, bringing to total of 155 million, with an incremental spend largely focused on the reactivation and deployment of previously idle fracturing assets into our North American operations. Thank you all very much for joining us today. And now, I will turn the call back to Kim for questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Ian Gillies with GMP.

[Ian Gillies:]

With respect to the CapEx increase, I guess, announced in the quarter. As you guys went through that process, would it have been done with, would there have been a commensurate increase, I guess, in your budgeted EBITDA or is R&M or some other piece of the business, I guess, is it running a bit harder than expected from a CapEx perspective.

[Mike Olinek:]

Hi, Ian. It’s Mike here. To answer your question, it really relates to the larger scale of equipment we have operating and the fact that we've got that equipment operating in the US a lot earlier than we had originally planned for. On top of that, I think if you look at it, we certainly believe that our components ultimately are hanging in to the useful life that we’re accustomed to. So really nothing to speak to on that end.

[Ian Gillies:]

Okay. That's helpful. Thanks very much. And with respect to, I guess, assessing opportunities in the US versus Canada and the movement of equipment, I mean, is there any timelines around when you hope to make those sorts of decisions or do you need to see what some of your Canadian customers want to do in the back half of the year first?

[Fernando Aguilar:]

That’s continuous -- is a continuous approach of our US team, Ian. We normally assess continuously our opportunities in our portfolio and as we normally, puts it in front of the investors community. Our business is like our customers. We have to – we had a portfolio of opportunities and we have to calculate the risks associated with all those opportunities and how the company faces them. So I can’t tell you today, because if we do this in a specific move in one direction or the other, because it is a continuous job.

[Mike Olinek:]

And Ian, I guess to add to that and to reiterate, I guess, we've probably said it a few times, we won’t make any of these decisions simply based on a macro input, whether it's rig count or imply fracturing demand. It will be a specific business case brought to us by geography with a customer and a district beside it and with pretty decent visibility on what the economics look like and so when you think about the time required to reactivate a spread, you're talking about a significant amount of lead time and so those opportunities, those business cases have to be developed before we jump in to the next level of reactivations.

[Ian Gillies:]

Perfect. And with respect to the Permian, I mean you have three crews going out, what I think to be three crews. How is Calfrac kind of managing I guess the infrastructure piece of that or the logistics piece, given I guess the infancy of your operations in that area and some of the areas you've been able to have some access?

[Fernando Aguilar:]

This is the same approach that we use everywhere, consistent with our modus operandi. We started operations in the later part of 2017 in the Permian and we ramped up to three fracked rigs. We moved into a facility that accommodated our equipment and our people and we start establishing the networks related to supply chain for materials for materials like sand and chemicals and also spare parts for our equipment, implemented a very strong maintenance set up in that area and started operating. And in fact three weeks ago, Scott and I were visiting the Permian and we had the opportunity of looking at our new facility and how we were serving an area that you can see more rigs coming into where we operate today, which is, it was a good thing for Calfrac. It was a good decision that the company made moving into that area and working for a top tier customer lease that is very efficient and is as well providing us with the possibility of not only being able to penetrate the market where we wanted to be in the past, but also to be able to grow our business and have a strong presence and continue growing our presence in Texas.

[Ian Gillies:]

Okay. And last one for me, it was pretty bullish outlook on the US as a whole and there isn't a ton of spare capacity left in the North American fleet. Have you started to tinker with the idea of new built fleets, given where margins are and where returns are or is it -- do you still feel like you're a long way from that today?

[Fernando Aguilar:]

No. Calfrac is a company that tried to optimize the asset that we have and today our priorities continue executing on our reactivations and making sure that all of our equipment used not only in top shape, but also to a level of operation that requires these higher intensity and productivity market where we operate today. We still have equipment to be reactivated. We'll continue with our plan and later in the year, once we see how the market is developing and how things are happening, we can have the discussion, but for the time being, we will continue optimizing the usage of our assets.

[Mike Olinek:]

And again I guess just to reiterate, that would be similar to reactivations or redeployments. It's going to be a specific business case that will get brought forward to management and then to the board for approval and again you might be able to get your head around a new build economics at the margin on a macro sort of viewpoint, but we're going to take a view of it has to be a specific customer, what are the terms and conditions, cost recoveries, all of those things will go into it before we make that decision and to Fernando’s point, we've still got some dry powder with existing assets before we really get to that level.

[Operator:]

Your next question comes from the line of Greg Colman with National Bank Financial.

[Greg Colman:]

Just want to stay in the US for a little bit here. Can you -- do you mind giving us a sense of the cadence for US -- of the US margin performance in the quarter? Was it relatively flat over the duration or did you sort of see that ramping and going up in the end based on the reactivation of the spreads and how pricing was playing out and how demand was playing out?

[Fernando Aguilar:]

Well, before Mike would jump into the question, Greg, the quarter as you'd be reading some of our competitors in the US were affected by two things, depending on where you operate, but basically in Pennsylvania and also in North Dakota and weather related issues and also sand disruptions. They affected everybody's performance. Some companies got more affected than ours, but the reality that those two things got into the operations and generated some of the inefficiencies in the system. As going back to the numbers, Mike, go ahead and make the comment about the comparison.

[Mike Olinek:]

Yeah. I mean I would say that if you exclude the reactivation cost that we had in the US, we had a very strong quarter as far as overall margins. I wouldn't say that there is much of an increase from what we saw in Q4. I think as we get forward and we get more utilization out of the fleets we added kind of late in the quarter, we should see some better run rates as we have better fixed cost absorption in some of our districts. So I can see it incrementing slightly but really not getting a lot in that pricing movement at this point in time. So, yeah.

[Greg Colman:]

Sorry thanks for that and sort of I'm missing in your disclosure, but did you provide us with sort of a normalized margin number in the US, excluding reactivation?

[Mike Olinek:]

No, we didn't, but we did reference the reactivation costs.

[Greg Colman:]

Would you be willing to opine as to what it would look like if you were to back that out?

[Mike Olinek:]

It's going to be roughly about 18.5%.

[Greg Colman:]

And then just talking about the reactivations and the 23 million that Ian was talking about too, is that entirely related to the 30,000 horsepower that's being redeployed now or is it some additional move or some additional reason? It just seems a little bit high on a per truck basis, if it is just related to that 30,000?

[Mike Olinek:]

No. It's not just related to the 30,000. It's kind of related to the overall fleet and the fact that we've reactivated a lot of our US horsepower earlier than we had originally planned to do. So as a result, sort of the component cadence of replacement changes slightly and then you obviously have some other components related to our fleet that are getting changed out on their normal age cycle and that's hitting us a little bit on the capital side as well. The only other thing to remember Greg is that when we announced in the fourth quarter call that we were moving the 30,000 horsepower, we really referenced it as backfilling existing capacity, we hadn’t contemplated a 17th spread. And so it's due in large part to that 30,000 horsepower, but obviously, it spreads more than just the pumps. And so, part of the CapEx is turning 30,000 plus spares into a real spread, which obviously includes more than just the pumps.

[Greg Colman:]

And then just lastly on that, you are transferring the 30,000 down, but we also have 83,000 horsepower sitting idle in the US. How do we think about that? What was that decision to bring Canadian equipment down to the US as opposed to reactivating idle at present, equipment sitting in the US?

[Fernando Aguilar:]

It is geographical location, Greg. US is a big country and we have operations all over. So it’s a matter of blending our equipment with different basins where we operate. So it is nothing related to a specific condition or equipment or equipment is, as we've been saying previous conference calls, has been kept at a very high level from our people and it’s used how close you are from a basin or another in the way that you deploy your equipment.

[Mike Olinek:]

And Greg, that 80,000, obviously, the 17th spread isn't included in the active horsepower. So that number is going to drop in the second quarter, leaving us with something less than that by the time we report our next results.

[Greg Colman:]

And then this is just the last one for me and then I'll leave it there. Fernando, in your concluding remarks, you mentioned that the North American fleet has substantial refurbishment needs and the potential for an undersupply for several years, while still depending obviously on the demand side. How much of your fleet would you say needs that substantial refurbishment to stay active? And related to that, would you consider your fleet to be indicative of sort of the average of the overall basin, especially as we look at the US?

[Fernando Aguilar:]

It depends how you maintain your equipment, Greg and the actions that people take related to the way you operate and this business continues increasing its intensity. And some companies do a better job than others related to that and you can see that in the non-attractive time reported by customers who have multiple competitors working for them, multiple service companies. So, we normally keep between 10% and 20% of our equipment rotating for maintenance, or let’s say, for heavy maintenance more than a conventional preventive part of the maintenance plan. So I would say that this same amount of equipment will be basically vary related to refurbishment, which is basically 10% to 20%.

[Mike Olinek:]

Greg, I mean, at a high level, every piece of frac here needs refurbishment at some point in its life, whether it's three years, five years, seven years, ten years, it's just because that refurbishment was essentially stopped for three years. There's a bit of a catch up. So I think at a high level, we believe the next couple of years across the industry will be probably increased above sort of the run rate for refurbishment spending, but I think as you bring new equipment into the fleet, as you tackle that refurbishment spending, you should see a drop although with intensity to Fernando's point, what used to be 10% spare is now closer to 20% and that may structurally just increase the refurbishment spending requirements across the industry.

[Operator:]

And your next question comes from the line of Jon Morrison with CIBC Capital Markets.

[Jon Morrison:]

Can you talk about the regional dispersions that you're seeing in pricing in the US right now and are the majority of markets starting to converge on fairly similar pricing independent of the basin. I realize that you might not want to get into specifics of where one basin is versus another, but is it quickly becoming fairly universal across the US?

[Scott Treadwell:]

Yeah. Jon, it’s Scott. I don't think there's massive dislocation in pricing across basins. All of the equipment on wheels, I think you certainly did see during Q4, some spreads come out of the MidCon region into Texas and I think part of that was maybe due to some local oversupply and resulting pricing, but I think those things tend to normalize themselves quite quickly and we certainly don't, if you looked at our geographic footprint of equipment, I don't think you would see meaningful difference in pricing on an apples to apples basis. Customer specific or program specific is always going to be a little different, but I don't think you can assign any big difference to geography at this point.

[Jon Morrison:]

You talked about the plan to hold firm at eight marketed fleets in Canada for the balance of the year, which seems very pragmatic, but is there anything that could change that and would it essentially need to be take or pay based at this point to reactivate another crew, if you're getting pressure to add more capacity from a customer?

[Fernando Aguilar:]

Again, Jon, the way that we analyze our business and we see the opportunities, we would like to see that fleet fully operational, fully booked and active and also good pricing in the marketplace. So again, it's a portfolio allocation of assets and we will decide in front of the activity or the customer reactions to take. So we don't see -- the way we see the market today, the uncertainties have been basically on top of the Canadian market are basically giving us the confidence of the activity level and fleet level that we have today. So we don't really see that change, unless, there is a big pickup in the activity.

[Mike Olinek:]

Yeah. And I'd add to that, Jon, I think the only thing I would say is that with the emergence of the shale basin on the Duvernay side a little faster than we thought and probably a bit more attention on the Kaybob area of the Duvernay and a strong Montney outlook, it's possible that what you could see is more demand for larger spreads and that may cause to bring pumps into the business rather than add actual spreads, just maybe take a mid-sized spread say 25,000 horsepower and make it 35,000 horsepower. And just to give you a little more flexibility to meet your customer's needs, but Fernando is, it’s exactly the way we think about it it's going to be a specific business case and in terms of what the terms are, I don't think we'll negotiate in public on that, but certainly we're going to make sure we get for our shareholders the value they deserve for the equipment.

[Jon Morrison:]

With incremental pumps coming into the fleet, obviously, you would have to add a decent amount of people to go with those. Is the labor situation in Canada concerning from an incremental staffing perspective at this point or it’s all just a function of timing and planning?

[Fernando Aguilar:]

No. Jon, I think we would have basically gone through that human resource issue many times. In the notes this morning, we were talking about we’re a people's business and without people, we can't operate. So it's our responsibility as a management team to make sure that we find the right people, with the right culture to join our company and be operational. So even though it could be challenging in some areas depending on the economy and how the industry is basically behaving, throughout the years, we still believe that Calfrac is a company that is very good at attracting people who are participating in our activities and enjoy our culture and are in a way of living and life. So we are confident that whatever we need in terms of people and equipment to activate and bring equipment and people back to operations is something that, as a management team, we're responsible for and we make it happen.

[Jon Morrison:]

When you look at the busy bookings that you referenced in May and June in Canada, are those highly dependent upon positive weather conditions unfolding or the clients that you have soft booked in there have been fairly forward thinking in terms of matting locations or planning work near accessible roads, like if the optimistic Q2 outlook all dependent on weather at this point.

[Fernando Aguilar:]

No. Weather always has an effect. And I think we mentioned that earlier, even the weather effect can basically give you sometimes nice surprises and Mother Nature is very difficult to predict as you know, but the Canadian industry and the Western sedimentary basin have evolved into a more controlled environment for the operations in break up. As we demonstrated last year in Q2 and we hope that we can demonstrate again in Q2 2018.

[Mike Olinek:]

Yeah. I would say that between the large pads that we've got, either, we're working on today and sort of have a line of sight to deploy to in the next little while, most of that extends well into June, but again the cherry on top to Fernando’s point is going to be weather and road conditions and what that lets you get to really more in central and southern Alberta than further north, but obviously it’s that the steady level of utilization that you're going to get through, is it two weeks in June or is it four weeks in June? Certainly, last year, it was four weeks in June and then some, which was a big tailwind for us in that Q2 and again that's just the delta right now between being really optimistic and sort of I think as we are optimistic, but we're not going to jump up and down about how good Q2 could be at this point.

[Jon Morrison:]

Fernando, when you think about the path towards better financial performance in Argentina as the year progresses, is it underpinned by higher activity levels and more regular work and as a result our fixed cost absorption or do you believe that the vast majority of improvements will come on the cost side as the year progresses?

[Fernando Aguilar:]

No. This is a good point and a good question, Jon. Our COO Lindsay and I just came back from Argentina during the weekend and we basically had the opportunity of visiting with customers and looking at how the market is getting tighter and tighter, as we move on, the efficiency levels and logistics are not at the level of North America and it’s going to take some time for them to get there, but we see more rigs in the market, we see more activity happening as we speak and customers are basically changing some of the completion designs in order to get to that level of efficiency where you can have stages per day and improve their operation. So, by using the sleeves and using different techniques, but I have to tell you that at this time, compared to my trips in 2017, was more positive and we are confident that this market is going to continue increasing and improving forecast in the quarters to come.

[Jon Morrison:]

Okay. Last one just from me, thoughts on labor costs in the Permian right now and would you expect your own labor rates to exit the year much different than you're realizing right now?

[Fernando Aguilar:]

No. We see them as they are and we haven't had any issues in that respect and they're very flat, entering the quarter, and what we did is going to happen at the end of the quarter. You remember that the pay has different components and the way we see that today isn't going to change.

[Operator:]

[Operator Instructions] Your next question comes from the line of John Daniel with Simmons & Company.

[John Daniel:]

Fernando, I guess the first would be, could you just provide a little bit more color on just inquiry levels in Latin America and just general color on the current market down there.

[Fernando Aguilar:]

Okay. So for Argentina, so what is happening is that as we continue progressing and comparing to what’s happening, to what was happening in 2017 to today, you see some of the operators that were basically trying or testing the market, becoming more active. So people, for example, people like customers in general, like Shell, Tecpetrol, Pluspetrol, even the bigger players like YPF and also Pan-American and including a very important customer, Total, are basically becoming busier and are bringing additional rigs into their operation today. So that's what is basically generating that activity increase and we can see that in some companies are not capable of providing services because they are in the say fully operational related, in the North American market, when you have that level of activity because of efficiencies, that horsepower should be enough to operate today is going to require some additions for increased number of rigs, but because of those inefficiencies that you have in the system today, you need, let’s say, more equipment from the service companies to operate, so you are not, let’s say, able to provide them with the amount of equivalent that is required to have a smooth operation. So you have a little bit of a stable level of operations today that are giving us opportunities to penetrate some of the markets, may become very busy in the south, in the [indiscernible] area and also making sure that all of our equipment is going to be fully active.

[John Daniel:]

Okay. I know you generally don't like giving specific guidance, but just conceptually if oil prices in the market are staying where they are, let’s just call sustainable here for the next several quarters, would you see a faster acceleration down there in Argentina in ’19 versus what you’re seeing in ’18 over ’17?

[Fernando Aguilar:]

I believe so. I think there is something that is happening in Argentina and in fact while we were in the country, President Macri was talking about, this is the time in Argentina where they have to start eliminating or reducing the subsidies that they have for energy in the country and they were promoting that the industry has to continue improving efficiency and making sure that this – the energy between gas and oil are going to be available for Argentinean people. So, we believe that that trend supported by the government, it is going to continue. There is a challenger, John and I think, the two of us have the opportunity of discussing in the past is a country where the unions that were basically created by previous governments are still very strong and that doesn't really help the deployment of efficiency or efficient operations in the market. So we will have to navigate through those situations to make sure that our customers are not going to get an interrupted operation and we continue executing as we normally do. So, it is challenging, but I believe the government is supporting the direction of the industry.

[Scott Treadwell:]

And John, it’s Scott. I guess to add to that, the biggest torque lever we have from a profitability perspective is still going to be productivity and efficiency in the operation. The rig count could I guess in theory double, but I can tell you very honestly that the industry could be twice as productive as it is today in almost any metric you think about. So I'd really rather, the rig count stay flat and everybody get much better at their jobs than it’s kind of much more rigs to an inefficient situation.

[John Daniel:]

Makes sense. Okay. And then the final one for me and this is -- it's hard to get specific, but as we hear the term increasingly about dedicated agreements, arrangements of customers for frac work, can you say if the terms in these dedicated agreements are getting stickier today than maybe what they were a few quarters ago and just what type of duration are the customers seeking when they want to entertain a dedicated fleet?

[Fernando Aguilar:]

That is a fair question, John and the markets feel like we were saying today is not fully saturated. You still have equipment that is showing how we believe that the new rigs are going to make the market tighter and it’s going to create some tension and that tension is going to bring our customers trying to secure fleets, like they have done in the past. But today, the way it’s happening is about a year arrangement where you provide a frac fleet to a customer for a number of parts and wells on stages and that's the most common thing that we're seeing today is one year.

[Operator:]

[Operator Instructions] And there are no further questions at this time.

[Fernando Aguilar:]

Okay. Kim, thank you very much. So, I like to thank everybody who participated in this conference call and look forward for the next quarter report in the near future. So thank you everybody. Good bye.

[Operator:]

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