Calfrac Well Services Ltd.
Q4 2017 Earnings Call Transcript

Published: 4 Mar 2018

[Executives:]

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

[Analysts:]

Sean Meakim - JP Morgan Ben Owens - RBC Capital Markets Taylor Zurcher - Tudor, Pickering & Holt Wesley Nixon - National Bank Financial Ian Gillies - GMP Jeff Fetterly - Peters & Company

[Operator:]

Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Ltd. Fourth Quarter 2017 Results Call. [Operator Instructions] I would now like to turn the call over to Fernando Aguilar, President and Chief Executive Officer, please go ahead.

[Fernando Aguilar:]

Good morning. Thank you, Dan. Good morning and welcome to our discussion of Calfrac Well Services fourth quarter 2017 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 an executive 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 a news release earlier today, Calfrac reported its fourth quarter and full-year 2017 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, 2017 closed with continued growth and good performance in our U.S. operations as more equipment went to work and productivity gains were cemented across much of the operations. In Canada, a very noisy fourth quarter marked the underlying strength of our franchise which is off to a strong start today in the first quarter of 2018. I would, on behalf of the Board and senior management like to thank everyone at Calfrac for their efforts and results in 2017. What began as a year of caution, quickly turned into rapid reactivations and growth. Managing that shift with our losing sight of what really matters, the safety of our people and the quality of our service was amazing. Global oil fundamentals improved through the fourth quarter, faster than many industry observers have forecast. In our view, the tightening of the global oil market continues. And with the spending growth limited to North American onshore activities, and global demand growth continuing to surprise to the offside, our view in oil remains very attractive in the medium term. While gas fundamentals are not as strong as the global oil market, they remain solid enough to support gas-related activity in the U.S. Gas prices in Canada have specifically continued to suffer during the fourth quarter with a number of producers shutting in volumes and curtailing spending wrapped up. The situation in the Canadian market in our view calls for caution. The budgets of a number of Canadian producers have been reduced in 2018 and research shows that these cuts really happened all once. While Canada is home and the foundation of upon which Calfrac is built, market ebbs and flows appear to point to our U.S. operation as a driver of all overall growth in 2018. Now, I will pass the call over to Mike who will begin with an overview of our quarterly financial performance. Mike?

[Mike Olinek:]

Thank you, Fernando. And thank you, everyone, for joining us for today’s call. Consolidated revenue in the fourth quarter increased by 152% year-over-year due to a 106% increase in fracturing job counts in North America. In the fourth quarter, the Company recorded total annual bonus and stock-based compensation expense of $22.6 million which represented the full cost of 2017 incentive plan. Excluding these compensation-related expenses, the Company would have generated adjusted EBITDA of $71.8 million in the fourth quarter of 2017. In the normal course, annual compensation expenses are forecast and accrued for during the year. But due to the rapid improvement in the operating and financial performance during 2017, no accrual was recorded until the full-year results were finalized, and these amounts were approved by Calfrac’s Board of Directors. For 2018, all annual compensation costs will be recorded on a quarterly basis. Adjusted EBITDA reported for the quarter was $49.2 million compared to negative $13.7 million a year ago. These improved results were driven primarily by significantly higher and more consistent utilization in the United States and Canada, although the results in Russia also improved as compared to 2016. In Canada, fourth quarter revenue was up 89% from the same quarter in 2016, mainly as a result of improved fracturing activity and higher pricing. The number of fracturing jobs was higher due to an overall increase in completion activity in Western Canada as well as more active equipment and some change in job mix. The number of coiled tubing jobs increased by 31% from the fourth quarter in 2016, primarily due to the nature of Calfrac’s coiled tubing business, which supports its fracturing operations. Revenue per fracturing job increased by 28% from the same period in the prior year, due mainly to improved pricing for the Company services. Operating income of $14.7 million improved 901% from 2016, which was aided by higher pricing and productivity but offset by $1.4 million in reactivation costs and $3.6 million in additional annual bonus expenses. In the United States, the Company has responded aggressively to the rebound in industry activity by activating nine fracturing crews during 2017 including the commencement of operations in the Permian Basin in the third quarter and the restart of operations in the Company’s San Antonio district late in the fourth quarter. The result was a 236% increase in the number of fracturing jobs completed period over period and a 362% increase in revenue from the comparative quarter in 2016. A 5% depreciation in the U.S. dollar versus the Canadian dollar partially offset the improvement in revenue. Revenue per job increased 37% 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 United States, using customer supplied proppant, while another two 12-hour fleets in Colorado did not use any sand at all. The Company’s United States operations generated operating income of $49.5 million during the fourth quarter of 2017 compared to an operating loss of $7.2 million in the same period in 2016. The turnaround to positive operating income was primarily the result of improved utilization and pricing in all areas, but was offset by $4.1 million in annual bonus expenses and $6 million in equipment reactivation costs. Revenue from Calfrac’s Russian operations increased by 43% during the fourth quarter of 2017 to $35 million from $24.4 million in the corresponding three-month period of 2016. The increase in revenue was largely attributable to a 31% increase in fracturing activity combined with the 3% appreciation of the Russian ruble during the quarter. Revenue per fracturing job increased by 19%, primarily due to the appreciation of the Russian ruble and the completion of larger jobs. The Company’s Russian operations generated operating income of $4 million during the fourth quarter compared to $0.9 million in the corresponding period of 2016. This increase was mainly due to improved fracturing crew utilization combined with the appreciation of the Russian ruble. SG&A expenses were $0.6 million higher than the comparable quarter in 2016, mainly due to higher annual bonus costs combined with the appreciation of the Russian ruble. Calfrac’s Latin American operations generated total revenue of $46 million during the fourth quarter of 2017 versus $38.2 million in the comparable three months period in 2016. Revenue in Latin America was 21% higher than the comparable quarter, primarily due to higher work volumes in the Vaca Muerta shale play. The improvement was partially offset by lower cementing activity in Argentina, resulting from lower overall levels of drilling activity. Coiled tubing activity in Argentina increased year-over-year, but the impact was offset by the completion of smaller jobs. The Company’s operations in Latin America reported an operating loss of $3.1 million compared to $2.9 million in the fourth quarter of 2016. Although the Company improved its revenue during the quarter, its operating fleet continued to be underutilized and market pricing remained near trough level. The Company’s corporate division recorded total costs of $20.3 million during the fourth quarter, driven largely by $13.7 million of full-year bonus and stock-based compensation charges that were recorded in the quarter. Going forward, the Company expects the corporate division to incur costs in the range of $15 million to $16 million per quarter including the estimated accruals for annual bonus and long-term incentive compensation. Calfrac recorded a before tax reversal of a previous impairment on property, plant and equipment in the amount of $76.3 million related to the Company’s assets and operations in the United States. This reversal reflects the material improvement in financial performance for that operating division over the course of 2017. Due to reductions in income tax rates in the United States and Argentina that were enacted in the fourth quarter, the Company recorded a net deferred tax recovery of $8.8 million. For the 2018 fiscal year, Calfrac does not expect to incur significant cash taxes, given available tax pools and our expected profitability mix. From a cash flow perspective, the Company increased cash by $9.2 million during the quarter, resulting primarily from $45 million of operating cash flow offset by $31.6 million of net capital expenditures. In addition, Calfrac received $28.7 million in warrant proceeds that were used to repay some of its credit facility borrowings during the fourth quarter. Turning to the balance sheet. The Company had approximately $52.7 million of cash including one fully funded $25 million equity cure, as well as working capital of approximately $327 million at the end of the fourth quarter of 2017. In addition, Calfrac had used only $2.7 million of its credit facilities for letters of credit and had borrowings of $25 million on its credit facility, leaving $247.3 million in available liquidity at the end of the fourth quarter. As at December 31, 2017, the Company was in full compliance of 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 land rig count in the U.S. has improved steadily through the early part of 2018, which typically sets the stage for increased demand for completion services within six months. Against that backdrop, Calfrac plans to continue reactivation fleets in the United States and it is adding 30,000 idle horsepower from our Canadian operations to help meet that increased demand. Fracturing intensity continues to increase in our U.S. operations and that is the flight to quality. Our consistently high performance has not only positive feedback from clients but a number of multi-fleet customers and of course demand for more. In Canada, our outlook is more cautious. Calfrac has no plans to add any additional equipment to our Canadian fleet in 2018. Calfrac believes that our current fleet in Canada is sufficient to meet the demands of our customer base for the remainder of 2018. We have no plans to alter our active Canadian fleet, but we’ll continue to evaluate our alternatives associated with the deployment of our remaining idle North American capacity. In recent months, we have moved two coiled tubing units and some onsite sand equipment from the United States back to Canada to take advantage of opportunities in the country. As intensity grows, so does the impact of equipment. We have introduced a refurbishment program to our capital spending plans for 2018 in order to allow our fleets to continue to perform at a high level in the years to come. Operations in the first quarter had begun at a good pace in North America in line with our expectations during the conversation we had at 2017 close. Recent news about san supply issues have affected us in the U.S. and have manifested a showpiece of lower activity rather than outright shutdowns of any running fleet. In Canada, our fully integrated supply chain has delivered with meaningful lost time due to sand delays and we have multiple requests for incremental work as clients recognize the value of our low-risk logistics model in Canada. On both sides of the border, the sand issue should improve with warmer weather ahead. So, we do not expect material deterioration in the situation over the short term, although as always, we will be ready to react to support our operations and those of our clients. The outlook for the Company’s operations in Canada remains positive with virtually all of our active equipments scheduled through spring break. With more pile work scheduled in February and March, our visibility remains higher through the end of the quarter. Looking ahead into the second quarter, while we have commitments for solid workload in that period, much can happen between March and the end of June that could alter the ultimate outcome. Beyond the second quarter, our visibility remains limited. Although we have had discussions with clients that indicate a good activity level post breakup, we remain aware of gas market issues, which could alter our clients’ plans in the future and as such we remain cautious on the latter part of the year. Calfrac’s U.S. operations continued to show growth in the fourth quarter including completing the restart of operations in our San Antonio district. Today, Calfrac has 14 active fleets in the U.S. and we expect that we will exit the second quarter with 16. The supply-demand balance in the U.S. market appears tight and we believe it will remain that way through 2018. And we expect producers will increase activity driven by improving returns. If market tightness remains, we would expect opportunities to move pricing higher, should appear through the year. Calfrac expects to deploy its 15 fracturing spreads in the near term into our South Texas operation with 15 spread likely entering sometime in the second quarter. Now, I would like to discuss Calfrac’s international operations. In Russia, the fourth quarter was slightly ahead of our expectations, largely due to more manageable weather and operating conditions during the quarter. Normal winter weather in the first quarter is impacting both activity and cost in line with prior years. 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 continued to improve in the fourth quarter driven by increased activity in the Vaca Muerta shale play in the country. Profitability levels were hampered by the transition away from conventional work as well as lower pricing and productivity in the field. We expect that with continued high levels of activity in Vaca Muerta, while our operating model as well as pricing would improve through 2018, though we remain aware that the pace of that change would not likely resemble what was seen in North America in the last 18 months. The Company has announced the capital budget for 2018 of $132 million, largely focused on maintaining our asset base in excellent operating conditions. Additional investments in refurbishing older assets and resuming all corporate assets and processes are also underway to further improvement of operating and financial performance Thank you all very much for joining us today. And I would now turn the call back to the operator for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Sean Meakim with JP Morgan. Please go ahead.

[Sean Meakim:]

So, Fernando, maybe just starting off talking out about the horsepower that you mentioned of moving to the U.S., you highlighted 30,000 kind of coming from Canada. I don’t think that you quantify the amount coming from Mexico. I’m not sure how material it is. But, if the horsepower is coming to support operation, that seems like you’re likely to blend a lot of it into the existing fleets. And you certainly emphasized service intensity is on the rise. So, maybe give us a little bit of a sense of -- is it correct that we’re not going to effectively be adding an incremental fleet maybe from a revenue basis does not -- not necessarily generate an incremental opportunity, but how much is basically driven by higher pumping rates, more 24/7 mix versus just from a maintenance perspective, finding that you need to keep more horsepower on-site as you are swapping pumps out more regularly. Maybe great just to give a little bit more granularity on what you are seeing particularly in the U.S. with your fleets today?

[Fernando Aguilar:]

Yes, Sean. So, I think the answer to your question is a combination of both. If you go back to 2014, we were talking about 35,000 to 40,000 horsepower per frac fleet and that number is basically going around 50,000 today. So, you need to add additional pumping equipment to -- let’s say, to the fleet today. And then, that is the piece that is basically complementing the intensity piece. But at the same time, we are configurating new fleets in the market. And that’s why you see that we are moving from 14 to 16 as was reported today. And of course, we’re looking for more opportunities as the market continues tightening. So, I would say that it’s a combination of the two that is helping us, not only to keep enough equipment rotating for maintenance, also increases related to intensity and also configurating new fleet. So, in few words, the answer is related to additional equipment will help us cover those three areas.

[Sean Meakim:]

And then, thinking about a lot of the challenges that we’ve seen in terms of logistics in the first quarter, obviously a lot of weather related, but we’re also seen more unbundling, of course, among a lot of your customers, looking at self-source sand in some cases. Just, it would be great to get update of how you see pricing in the U.S. evolve specifically, how successful you expect to be first quarter, second quarter and drive incremental pricing. And then as a caveat to that you’re seeing the impact of self-sourcing a sand, how successful you are in being able to transfer some of the dollar gross profit margin from the pass-through over to the service margin component of your equipment?

[Fernando Aguilar:]

Yes. So, Sean, before Scott gives you a little bit of color, I have to tell you a couple of things. First of all, sand has always been a priority in the Company since the day we started fracturing our first well 19 years ago. So, sand today, and as always is the critical component of our fracturing business and it’s a daily exercise that happens throughout the different operational districts that we have in the Company. Not only for let’s say lower volumes like Argentina, Russia, but North America of course is critical to be watching and monitoring the rails and the transload facilities and demand for storage and the volumes normally manage and handle with our suppliers, which are basically partners in the exercise of what Calfrac normally does. So, the sand exercise is basically something that is very, very close to our operation, because the last thing that you want to have is non-productive time related for customers waiting for sand to shop on locations. So, this is critical. Of course, when you have issues related to rail, weather, accidents and this type of things, they delay and they expose, let’s say, the well sites to be waiting for sand. We try to mitigate that with larger volumes, the large storage, and trying to anticipate those weather issues with a very close monitoring of the situation. But, what is important about this and is the next point that you were asking about sourcing, you will always have customers interested in sourcing materials and doing their sand and doing their chemicals, and some customers even go further and they do their own fracturing. But that’s not the tendency or the trend in the industry. It basically varies between times from 10% to 20%. Normally, it doesn’t go higher than that because the service industry is more efficient at managing that. Scott now will give you a little bit of color in the sand respect as well.

[Scott Treadwell:]

Sure. Hi, Sean. I think, really, just to add, I mean, you referenced sort of pricing opportunities, obviously we don’t really discuss that on the call. But, I think we’ve talked about it pretty consistently that productivity is as or more important through our bottom-line than pricing. And Fernando alluded to it, the efficiencies. So, from that perspective in terms of stages per day, we’re a little bit agnostic as to who provides the sand. It’s all about getting it there. But obviously there is a bottom-line impact to providing sand for customers. As I said, we’re a little bit agnostic on the operation as long as it’s there, we get our stage count done per day. As we started operations in Texas and restarted in South Texas. There has been a bit of a mix. And I think we’ve come up the curve nicely, although as we disclosed this morning, we’ve had some of the same issues as a lot of our peers and customers. As that sort of points into pricing in the sort of short-term, we would really shy away from using logistics as a wedge issue to drive pricing higher. The way we would bring that conversation really would be our efficiency in the field deserves some sort of reward. A lot of time, reward is the efficiency itself, it helps your profitability. But we really try not to take that adversarial approach of using a wedge issue to drive pricing higher through the business. Sometimes, it’s not avoidable. So, really that’s on our ammo. [Ph]

[Operator:]

Your next question comes from the line of Ben Owens with RBC Capital Markets. Please go ahead.

[Ben Owens:]

You guys touched on impact of seasonality from rail congestion for sand in the U.S. I was curious if there is any region or regions that are more or less impacted by those issues during the first quarter here?

[Scott Treadwell:]

There is a bit of a mix, Ben. I think, what you are seeing in Texas is there is a bit of issue getting sand out of the North, the white sand coming down to Texas, but then there is further complication trying to maintain a tracking fleet and get the sand actually to the well place. We’ve got a bit of a double whammy there. The other place that’s probably a little more challenging would be Pennsylvania. There is currently flood watches and alerts on the Ohio River, which restricts the ability for the railroads to get across further east, which obviously means the sand volumes get back up. When that happens, it really affects everybody at the same time. It really does highlight why we try to maintain safety stocks and have some mitigating strategies in place to try and get around that. But if you run out of sand for a week on the railroad side, everybody starts to get hit at the same time. As we said -- as the weather improves we expect a lot of that to go away, especially the congestion in the northern part of the state. But I don’t think the weather is going to cure the trucking issues we have in Texas. That’s just going to come with time and that may be a bit more of a measured approach across the industry.

[Fernando Aguilar:]

And if you add to Scott’s oilfield related activities, then you have an economy that is doing very well. So, it is more of volume that has been moved throughout the country. So, that is affecting the whole country’s railroads and infrastructure.

[Ben Owens:]

Okay, got it. So, based on your answer, it’s fair to assume that North Dakota and Colorado are probably less affected by those sand issues than the other region?

[Scott Treadwell:]

Well, Colorado, absolutely, because the fleets that are in Grand Junction are using sand, and it’s a little less sand-intensive generally. North Dakota obviously has been affected by weather and rail, but you are close enough to the white sand basin that you can in an extreme situation actually truck from the mine to the wells right. So, it obviously entails increased costs which we discuss with our customers before we go ahead, but it does give you a pretty quick fix in the short term. I don’t think you want to do it in the long term. But if you’re talking about a couple of weeks’ shutdown or delay on sand, you can manage in the short-term in North Dakota.

[Ben Owens:]

Okay. And then, the last question for me. I was curious how you guys arrive at the decision to allocate 30,000 horsepower for moving to the U.S. and leaving 70,000 in Canada, is there a chance for you guys revisit that decision to leave the 70,000 in Canada?

[Fernando Aguilar:]

Absolutely. The market is dynamic and our equipment can operate in any geography. And of course one statement that Scott normally gives you guys is, like our customers, we are also allocating our assets related to the best return that we can get. So, we will continue monitoring the activity pickup in the U.S., which we basically go in the right direction for Calfrac’s positioning in the U.S. market. So this is not related only to one or two states, it’s related to all the areas where Calfrac is operating. But as we continue looking into how the market gets tight, we will continue allocating those resources with customers of the quality and the level of the ones that we are currently working for, understanding that as the market gets tighter, we will have opportunities not only to work for those efficient customers but also to have some sort of price movement. And of course, Canada, which is a very important place for Calfrac and we are very important player here in the Canadian market. We would like to monitor very closely to see what type of equipment level is adequate for the visibility that we have for the second part of the year.

[Scott Treadwell:]

Yes. Ben, to add to that I guess, it probably goes back to the way we try to message things from the corporate group is sort of risk first. I think, if you look at it that we didn’t announce a fleet move and an opportunity in the state. It tells you that I think our focus was on making sure that the great work we’ve done in 2017 in adding fleet wasn’t going to be spoiled by trying to add too many too fast in the early part of 2018. And so, we wanted to make sure that the assets we had on the ground in the U.S., the fleet and the operations we had, they work uninterrupted as we continue to do further reactivations. So it’s certainly not a final decision but I think the first step was really to make sure that what we had continues to work at the level we and our customers expect.

[Operator:]

Your next question comes from the line of Taylor Zurcher with Tudor, Pickering & Holt. Please go ahead.

[Taylor Zurcher:]

As we think about the Q1 in Canada, it sounds like more operators have been starting to defer completion towards Q3, at least relative to years passed. And so as we think about you guys reactivating one more crew early -- in early portion of Q1, could you frame what a realistic sort of revenue run rate for Q1 might be, at least relative to Q3 of ‘17, assuming you’re seeing that same dynamic playing out?

[Fernando Aguilar:]

Yes. Taylor, we normally don’t go through a level of detail that you are asking here. But you can compare what we had in Q3, which was a very good quarter for both divisions. Then, we had the seasonality effect and also weather and holiday issues in Q4. But I have to tell you that when we were referring, we were talking about customers’ plans and customers’ activities for Q1, Q2 in 2018. Calfrac has been aligning itself with customers that are basically very much into liquids-rich and condensate areas and thus providing us with activity and visibility that we have today in the market. So, you can basically try to compare what happened in Q3 of 2017 moving into the fourth quarter and now what we have in Q1 and Q2, and of course Q2, that will depend a lot in how the breakup happens earlier or later. But we are confident that the high level activity we have today will continue throughout the first two quarters of the year because of those customer plans that we have. Now, what happens in the second part of the year will depend on how commodity prices evolve and as well evaluating what the gas companies are planning to. But, we are basically concentrating our efforts and our activities with those liquids-rich customers today.

[Scott Treadwell:]

Yes. I think the way to frame it is just from the activity side, Taylor, we referenced a number of times on the Q3 call that it was a 10 out of 10 quarter. We couldn’t have done anything more than we actually did. So, if you sort of imply that that’s sort of full utilization on the equipment we had, we certainly hit that level for periods here in Q1, but we’re obviously sensitive to sort of last two or three weeks and March being slowdown due to weather and road bans. And so, we don’t feel like there is certainly a step down there from an activity perspective, but there’s definitely some threat as we get into the lateral part of March. And we referenced it in our disclosure, there are really hasn’t been the input change in price from Q3 here through to Q1.

[Taylor Zurcher:]

And then, maybe shifting gears a little bit to Latin America. I realize there is some shifting underlying dynamics as it relates to the nature of the work you’re doing down there. But, moving forward, Q4 and other EBITDA negative quarter. Is there line of sight, at least the way you see it today to right size the business or get pricing to a point where at least at some point in 2018 where you think you could make money at the EBITDA line, maybe not Q1, but sometime thereafter?

[Fernando Aguilar:]

Absolutely. What is the situation in Argentina? Argentina is not as dynamic as North America is. When you take all the actions that have been related to volume of business, how logistics are handled and how the rigs are basically deployed and operated, the downturn basically came later, like a year and a half later to Argentina. And the remaining part of the downturn was still around to last, I would say six to eight months of 2017. So, now, we’re moving because the customers are bringing more rigs and activity is improving. We are moving into a tight market in Argentina. We’re moving to a situation that customers will not have that excess equipment coming from the pressure pumping companies. And they will struggle trying to get enough let’s say available companies working for them. And then, you have a little bit of entry barriers are more complicated because of the way they have to import equipment and bringing to the country and deal with all those things. So, we believe as you all said, 2000 -- the last quarter was basically getting to very low loss, but getting into more constructive quarter in Q1 and moving forward into a better year. Calfrac believes, Taylor that we will be -- we will have a better year in 2018 than 2017 related to activity level, better pricing and also more efficient. Because I believe the Argentinean customers are now finally getting to learn a little bit more how to operate in a more efficient way. So, a combination of those factors make us more comfortable about how Argentina is going to look like in ‘18.

[Operator:]

Your next question comes from the line of Wesley Nixon with National Bank Financial. Please go ahead.

[Wesley Nixon:]

I was wondering, if you could talk a little bit about the mix of your exposure across your 14 U.S. fleets between the spot market and the contract market.

[Scott Treadwell:]

Yes. So, there is really nothing on the spot market to speak of. Contract covers a whole gamut of relationships. At this point, there is no take or pays really in the industry. So, there is really nothing there. We do have some sort of right of first refusal agreements and we’ve got some term pricing agreements, which tend to be more prevalent in the U.S. market. So, those relationships continue and they have a sort of evergreen nature to them. But there is really nothing in the industry today that would extend, maybe out as far as two years with sort of pricing agreement and things like that, but that’s about it today. And as I said, none of our fleets are moving from customer to customer with any kind of frequency.

[Wesley Nixon:]

Okay. Switching gears a little bit. We’ve seen estimates for oncoming supply in the U.S. between new builds and reactivations is anywhere from 2 million to 3 million horsepower. I think there is a room in the market of the U.S. to meet that oncoming supply to this rig count, or do you think that the rig count kind of needs to grow over the course of the year to keep that market tight?

[Fernando Aguilar:]

It’s going to be a combination of the two because you need -- so if the commodity price remains at the level where it is, the discussions that we have with customers will bring not a lot of issues on our rigs, but you can think between 5% and 10% more rigs. So, the different discussions that you can basically have, Wesley, trying to understand what the market is going to be, we believe that that range is I think from 50 to 100 additional rigs in the year to come. And today, the market is under-supplied. And you have a lot of let’s say -- you remember that we mentioned about flight for quality coming from customers, because you have a lot of equipment that is basically still part but needs to be fully refurbished or recuperated from the downturn. But, the component that is very critical to your question is intensity, higher pressure, higher volumes, and a lot of more volumes of sand are basically taking equipment faster from the market. So that number that you are saying is basically the average consumption of equipment that is going to happen in the U.S. related to attrition. So, it will be balanced with that amount of equipment. But of course if you continue at the level where we are today and you double that equipment, the market is to be balancing in a faster way. And of course, it takes time for the manufacturers to bring equipment online. So, we believe that the next 12 to 18 months, the market is going to be under-supplied.

[Scott Treadwell:]

Yes. I guess, to add to that, Taylor, we obviously track horsepower additions as well. But, we certainly track competitors talking about a percentage horsepower addition, but something smaller than that in terms of fleet addition. And really it’s the fleets that talk about the supply and demand side. So, what we’re seeing, I think, to Fernando’s points is the intensity, attrition and maybe condition of stuff that is parked against the fence for the industry in general, it probably doesn’t add up to whatever the nameplate addition you’re kind of forecasting when you think about it in terms of percentage of fleets added.

[Wesley Nixon:]

Right, okay. Switching gears again. That was some great color. One more question for me. The two more incremental spreads you’re looking at putting down in the U.S. before the end of the second quarter, how are you balancing the decision between allocating those between your various basins?

[Fernando Aguilar:]

It’s basically related to like Scott was mentioning earlier, it’s about the risk and the opportunity and is the discussion that goes with let’s say longer time commitment, more efficiencies and productivity comes from customers. So, the whole balance is about keeping very good cost control from our side with good pricing. But at the same time you are looking for customers that are going to give you efficiency that you require in order to keep the continuous operation running, which is translated into more sales per day in a way. So that productivity and efficiencies that we look for is represented by the customers in the areas where we are allocating our equipment.

[Scott Treadwell:]

Yes, it’s not done on a macro call. We don’t simply look at the rig count in a basin and decide where we are going to go from there. It really does come down to a specific business case with a specific customer that will evaluate and make a decision. And then, as Fernando said, the cost absorption at the base level, the labor market, all go into that. But really, it’s a specific business case. And if it ends being adding a fourth or a fifth spread into a busy base or adding a second or third spread into a less active base, that’s sort of a secondary consideration. It’s really the merits of the business case on the margin that drive it.

[Wesley Nixon:]

And last one, any consideration around new builds at this point in time?

[Fernando Aguilar:]

No, we still have to reactivate all equipment that we have, Wesley. This is -- 2018 will go through the reactivation that we have in front of us and then later we will evaluate options and we will evaluate exactly where we are. But, you still have the homework to do in-house. And once that’s done, we will sit down as a team and consider that.

[Operator:]

And your next question comes from the line of Ian Gillies with GMP. Please go ahead.

[Ian Gillies:]

With respect to the Permian and Eagle Ford, I apologize if I maybe missed it in the prepared remarks, but are you able to provide an update of how many crews or how much horsepower you think you may have in each region by mid-year, acknowledging that they may not be yet -- the crews may not be applied to customers yet?

[Scott Treadwell:]

Yes. The plan as it sort of stands right now is that in Artesia, we can run up to three crews; that would sort be the plan in the broad strokes and two in the Eagle Ford. And that’s largely -- as I talked about the specific business case, putting a second crew in the Eagle Ford, gives us that incremental cost absorption at that base. The third crew in West Texas, I think, going beyond that you might start to stretch, not only your infrastructure as a Company but given how busy that area is and your lack of access to trucking and labor and all those things that happen when an area is booming, probably makes it a little harder to think about more than three spreads unless you are going to build a substantially bigger base and take on incremental capital.

[Fernando Aguilar:]

Ian, you know very well that most of the market activity related to drilling is concentrated about 40% in Texas. And Texas is an important geography. But, I have to tell you as well that the other basins where Calfrac operates, they have very high demand of our services. So, it is always a risk allocation of our capital and our opportunities in front of us. So, it is very exciting to see how customers are basically pushing us to go through different areas where they operate. So, it is a balance, but of course, we never underestimate the size of the business and the volumes that can be generated in the Texas basins.

[Ian Gillies:]

Thanks, guys. That’s useful. And a bit of a housekeeping one. Over the next couple of quarters, would you expect Q1 and Q2 reactivation costs in the U.S. to be similar to that of Q4, just given what I would consider some more reactivations?

[Mike Olinek:]

Yes, Ian. It’s Mike here. I would say that that’s a good run rate to use going forward for reactivations.

[Ian Gillies:]

Okay. And last one for me. With respect to moving equipment from Canada to the U.S., as I think about Argentina, as I look at the profitability there, I mean at what point do you have to take a hard look at starting to move some equipment out of Argentina and back to the U.S., just given the potential for near term profitability given what’s happening there? I mean, I know profitability may ramp up in Argentina but U.S. looks considerably better at the moment.

[Fernando Aguilar:]

Absolutely. That’s a very good question and it’s something that the management team is continuously looking into. Of course, you have commitments that you have to deal with and you have to be careful that you don’t leave those commitments on the table without taking care of them. So that’s something as you well put, we are consistently looking into those things. And the management team here in the Company is always considering the best allocation of our capital.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jeff Fetterly with Peters & Company. Please go ahead.

[Jeff Fetterly:]

Just to simplify the Latin America piece. To get that business or that segment generating profitability, is it more likely to come from increase in the revenue base or changing the mix of revenue or reducing cost structure?

[Fernando Aguilar:]

It is -- I mean, I think it for the three things that we’re working on. It requires an activity increase. That activity increase is reflected by the number of stages that you can generate per day in a very specific customer. The second one is to make sure that you control the costs. And I believe Jeff, you’ve seen that some of the discussions that our customers are having with the government are related to lower the personnel costs, which is directly influenced by the unions, which is a big issue. There were discussions at very high level between government and union leaders. But, those haven’t been translated down to the field and that’s still an area where the industry is suffering. And then third one is basically coming from the activity that has been lately generated by more drilling activity in the country. So, you touched the three points that are basically related to the way that Argentina has to operate. But, one of the challenges that the industry is facing in Argentina is that what companies like Calfrac and others are used to in North America in terms of volumes, managed and logistics turns and the number of fleets, and I stated that we normally operate in a daily basis are far from getting closer to what we need in Argentina to be delivering the higher margin. So, if you go back and see how much the well costs and the stages, and the cost per stage is costing the customers, it’s higher than what happens in Latin America, because lack of efficiency that is available in the country.

[Jeff Fetterly:]

What’s your comfort or line of sight for seeing those things improve? I know, you’re continuing to work on and looking for opportunities. But, how comfortable are you to each of those factors or all of those factors can move favorably in ‘18?

[Scott Treadwell:]

Sure, Jeff. I think, at the macro level, we are only about six months past the trough rig count in Argentina. And if you look at the U.S. and the North American market in generally, it was about six months after the rig count trough that you started to see real tightness develop -- the initial tightens in the completion market. So, we don’t think that -- we’re not seeing that to the same degree, we’re certainly seeing that trend, but it’s going to be a shallower slope there. So, as long as the rig count continues or maybe even increases, we think that overall demand part starts to move up. That should influence the second part, which would be pricing. Again, it’s probably another six months until you can really have any conversations about that. But again, it’s customer-specific and application specific. The real unknown I think for us is the productivity. Without getting into specifics, there is meaningful productivity gaps in terms of stages per day, frac days per month between a fleet in Latin America and then that’s not just Calfrac as everybody, and a fleet in North America. I think, as that gap closes, it definitely has that hugest tailwind for profitability. We’re pretty confident that that will continue to improve through the year but the pace is really the great unknown. I don’t think it’ll catch up the way North America is, but if can improve productivity by 20% or 30%, I think that’s going to be a pretty meaningful tailwind. I don’t think that’s out of the realm of possibility, but again, we have to take that a little bit day by day to be a bit cliché about it.

[Jeff Fetterly:]

On the U.S. side, the logistics and other issues or challenges you’ve seen in Q1, have those been impacting productivity of the fleet or the overall business or is that more just adding your cost structure?

[Fernando Aguilar:]

In some areas. In some areas, they have and some areas they have empty. It’s a large market, it’s big all over the place. You have -- because we operate in -- from Pennsylvania to back into Colorado to Texas. So, it is in some places it has affected and in some places it has not.

[Scott Treadwell:]

I would say there is a little bit there on the cost side, when you do run into some productivity issues, having to curtail your stage count by agreement with your customer. Sometimes, the customer might say, I don’t care, go find me the sand. And so, you may have to like trucking from Wisconsin to North Dakota. You may be able to pass that through but it’s going to have an impact. You’re probably not going to able to add on the same level of margin. So, there is always some short-term cost issues there. But, the productivity has more been, as we said in the prepared remarks, more of a curtailment through the short-term rather than kind of giving up on a pad because you can’t get sand for three or four weeks.

[Jeff Fetterly:]

Those issues you think could push working into the second quarter or beyond or do you think those resolve themselves within the context of Q1?

[Scott Treadwell:]

I think in the U.S. the productivity is low which obviously pushes everything to the right a little bit, but I don’t think we’re contemplating yet that you’ve got material work programs in Q1 that they just won’t get done. Things might have split to the right by a week or two but you’re not talking about what pads that you’re expecting to get on mid-March that’s now going to be mid May.

[Jeff Fetterly:]

Okay. And in terms of equipment reactivations in the U.S. 14th crew in Q1; where was that deployed to?

[Scott Treadwell:]

The 14 fleet was the startup fleet in San Antonio.

[Jeff Fetterly:]

Okay. And then, did I hear earlier that the 15th crew will be into South Texas and 16th is still being determined?

[Scott Treadwell:]

No. The 15th crew is going to West Texas.

[Jeff Fetterly:]

Okay.

[Scott Treadwell:]

And then, yes, the 16th crew is still to be determined.

[Jeff Fetterly:]

Okay, great. And just last question, Mike. Your guidance around corporate cost sits $15 million or $16 million per quarter. Would the delta on a year-over-year basis be predominantly associated with variable comp or incentive comp or is there an inflation on the other corporate cost element in the business?

[Mike Olinek:]

Yes. Jeff, there has been a reinstatement of our full comp as far as our salaries, a before STIP and long-term incentive comp. So that’s a minor part of it. I would say, the most material part of the increase is really due to stock-based compensation that’s tied to our stock price, and then secondarily would be our short-term incentive plan increases.

[Operator:]

And I am showing no further questions in our telephone queue at this time. I would like to turn the call back over to the presenters.

[Fernando Aguilar:]

Thank you, Dan. So, thank you, everybody, for attending our conference call. And I look forward for the close of our Q1 2018 conference call in a couple of months. Thank you. Have a good day.

[Operator:]

Thank you to everyone for attending today. This will conclude today’s call. You may now disconnect.