Calfrac Well Services Ltd.
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Executives:]

Fernando Aguilar - CEO Mike Olinek - CFO Scott Treadwell - VP Capital Markets & Strategy

[Analysts:]

Sean Meakim - JPMorgan Jon Morrison - CIBC Capital Markets Wesley Nixon - National Bank Financial Ian Gillies - JMP

[Operator:]

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Calfrac Well Services Limited First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Fernando Aguilar, President and Chief Executive Officer, you may begin your conference.

[Fernando Aguilar:]

Thank you, Chris. Good morning and welcome to our discussion of Calfrac Well Services First Quarter Results. Before we get started I would like to outline how this conference call will be conducted. I will provide some opening remarks after which Mike Olinek, our Chief Financial Officer will present an overview of our quarterly financial performance. I will then discuss our outlook for 2017. As you are aware that Scott Treadwell joined Calfrac during the quarter as Vice President Capital Markets and Strategy, after which Mike, Scott and I will be available to answer questions that you may have. As shown in our result this morning the first quarter of 2017 was a welcome improvement from previous results and represents the first step away from the unsustainable activity and pricing levels that we have seen over the last two and a half years. I will first and foremost like to thank all the employees at Calfrac new and old, who are responsible for the result. I'm very proud of the contributions put forth in navigating through a historic downturn and look forward to continued improvement ahead. Our results in North America reflects a return to growth in the part of many of our clients driven by improvements in commodity prices and returns. At the same time our North American client base has been pursuing more intense completion strategies in every basin which we believe will place an increased value on safe and efficient execution as well as reliable and cost effective logistics. I believe that Calfrac's investment in our logistics network as well as our focus on flawless execution and operating footprint across North America position the company very well for the years ahead. I am pleased to see that we're having constructive conversations with our North American client base about further reactivations of equipment and more sustainable pricing for our services. At the same time we recognize that further improvements in returns must be achieved in order to justify further reactivations and investment in assets, whether in a sustaining or growth context. As our business and financial results continue to improve we will increase our focus on our balance sheet in order to create a capital structure that efficiently balances the realities of the capital intensive business and inherent volatility of the oil and gas industry. Now I will pass the call over to Mike who will begin with an overview of our quarterly financial performance.

[Mike Olinek:]

Thank you, Fernando, and thank you everyone for joining us for today’s call. In our news release earlier today Calfrac reported its first quarter 2017 results. Please note that these financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-GAAP 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 that could cause our results to differ materially from our expectation. Please see our news release and other regulatory filings for more information on forward looking statements and these risk factors. Consolidated revenue in the first quarter increased 24% year over year due to a 67% increase in fracturing activity in North America. Adjusted EBITDA for the quarter was CAD21.6 million compared to a negative CAD5.9 million in the first quarter 2016. These improved results were driven by significantly higher and more consistent utilization in the United States and Canada, offset partially by weaker results in Latin America and Russia as compared to 2016. In addition, the company reversed the portion of its stock based compensation expense related to performance and restricted share units which resulted in a CAD3.5 million positive impacts on adjusted EBITDA at this quarter. Turning to Canada. First quarter revenue was up 53% from the same quarter in 2016, primarily as a result of improved fracturing activity with some offset due to changes in job mix and completion design. The number of fracturing jobs was higher due to an overall increase in completion activity in Western Canada, combined with the reactivation of two additional crews that were operational during the quarter. The number of coil tubing jobs more than doubled from the first quarter in 2016, as a result of the activation of four coil tubing units, which supported the increased demand for the company's fracturing services. Revenue for fracturing job decreased by 26% from the same period in the prior year, as the company's job mix included a higher proportion of activity and lower intensity fracturing regions. Excluding equipment reactivation cost of 0.4 million, operating income margins increased by approximately 1,090 basis points year-over-year, which is primarily related to improved crew utilization. In the United States, revenue in the first quarter of 2017 was 29% higher than the same quarter in 2016 due to higher fracturing activity in Colorado, and the completion of large in jobs Pennsylvania and North Dakota, as 50% more sand pumps period-over-period. Activity in Colorado increased by a 160%, although customer mix and jobs design resulted in the completion of smaller averaged job sizes. Revenue per job was consistent year-over-year due to the completion of larger jobs in the Marcellus Shale Gas play in Pennsylvania and the Bakken Shale oil play in North Dakota, offset by the completion of smaller jobs in Colorado, as Calfrac performed non-fracturing jobs for a customer during the quarter, while another customer changed to the smaller jobs design. The biggest driver of improvement in this segment was the consistency and volume of work in the quarter. This increase in revenue was partially offset by a 4% depreciation in the U.S. dollar versus the Canadian dollar. The company's in United States operations generated operating income of 10 million during the first quarter of 2017, compared to an operating loss of 12.2 million in the same period in 2016. The turnaround deposit of operating income was primarily the results of improved utilization in Colorado and Pennsylvania which was offset partially by 1.7 million in reactivation cost that were incurred during the quarter. SG&A expenses decreased by 56% in the first quarter of 2017 as the comparable quarter contained 3.1 million in restructuring cost associated with the temporary closer of the company's South Texas operations, and a reduction in crews operating in Pennsylvania. Revenue from Calfrac’s Russian operations increased by 22% during the first quarter of 2017 from the same period in 2016. This increase in revenue was largely attributable to the 23% depreciation of the Russian ruble in the first quarter of 2017, as well as cold weather in any sense [ph] which allowed activities to continues to the end of the quarter in 2017 whereas warmer weather in the prior year did not allow activities to continue in the same manner. Revenue for fracturing job increased by 13% primarily due to the appreciation of the Russian ruble affected partially by the completion of smaller jobs due to customer and job mix. Operating income in the company's Russian segment with the loss of 0.1 million compared to income of 0.8 million in 2016 due to more variable activity during periods of extremely cold weather in Siberia as well as increased cost of operating in the winter months. Calfrac’s Latin American operations generated total revenue of 32 million during the first quarter of 2017, a 28% decrease year-over-year. Revenue in Argentina declined due to lower pricing, the completion of smaller jobs and less coil tubing activity. In Mexico, revenue decreased by 3.1 million primarily due to lower fractioning activity with its major customer. Operating income in Latin America was 2.2 million during the first quarter of 2017, compared to operating income of 6.9 million in the first quarter of 2016. This decrease is primarily due to lower pricing and a shift in activity from Northern Argentina which typically has larger jobs to Southern Argentina where the average job size is smaller. Turning to the balance sheet, the company had approximately 86 million of cash including two fully funded 25 million equity cures, as well as working capital of approximately 279 million at the end of the first quarter of 2017. In addition, Calfrac has used only 1.9 million of its credit facilities for letters of credit and has borrowings of 15 million on its credit facilities, leaving 283.1 million in available liquidity subject to borrowing base limitations at the end of the first quarter. With cash in excess of our credit facility borrowings, we were in full compliance with our financial covenants as at March 31, 2017. Calfrac’s 2017 capital budget has been increased from 25 million to 45 million, which is mainly allocated to a sustaining capital projects that support our existing pressure pumping operations in Canada and the Unites States. I would now like to turn the call back to Fernando to provide our outlook.

[Fernando Aguilar:]

Thank you, Mike. I will now summarize Calfrac's outlook within its key operating areas. The outlook for the company's operations in Canada remains positive also stream breakup in Western Canada will likely affect Calfrac's ability to service work through a portion of the second quarter. Client demand remains high and with substantial work underway or scheduled in the second quarter, we are optimistic that results will exceed typical second quarter levels seen in recent years. The company continues to evaluate opportunities to reactivate additional equipment in Canada, however leverage [ph] availability and pricing remained key challenges for industry at large. The company continues to recruit aggressively and will examine all opportunities to expand its field labor force. With increasing activity and intensity, the company believes that the demand for propane will continue to stress currently [ph] with structure in Canada this year. Calfrac's comprehensive supply chain network that internally manages the vast majority of it's operational requirements should allow the company more flexibility in responding to increasing client demand, with cost and reliability of supply as key differentiators. Although the company's financial results have improved, investment for growth and a sustainable business model will require for a pricing improvement this year. The company is in the final stages of reactivating two incremental fleets in Colorado with contributions expected for at least half of the second quarter. Calfrac continues to engage with clients in existing and legacy operating areas as well as in areas where the company has no operating history. While further reactivations in Calfrac's U.S. operations are lightly we will not sacrifice short term profitability of Calfrac's operating and safety culture to secure incremental work. In the short term the company believes that its U.S. operations will continue to transition to more normalized operating margins and a robust client demand for incremental equipment in all operating districts will provide additional opportunities in the second half of the year. With further increases to the land recount in the United States and persistent tightness in the labor market, Calfrac believes the U.S. fracturing market could become supply constrained in the back half of 2017, which would be expected to drive full improvements in pricing and margins. Over and above these factors Calfrac has observed a move by customers away from low cost areas to a focus on execution, efficiency and safety a trend which plays to the company's strength. Now I would like to discuss Calfrac's international operation. In Russia the first quarter was slightly behind the company's expectations due to weather and ground conditions in Western Siberia, but largely in line with previous first quarter results. Overall activity and pricing are expected to remain relatively flat on a year-over-year basis with financial results projected to remain stable when compared to 2016. The efforts of the Argentinean government to attract investment in the country's oil and gas sectors appears to be moving forward. With multiple EMP companies have announced significant investment plans for the country, the company believes that it will benefit from increasing activity this year. However shifts in client specific work programs and labor issues may continue to impact results in the short term. In Mexico, the business environment remains challenging with very limited pressure pumping activity. Calfrac will continue to evaluate the market while maintaining a small scale operating presence with minimal cost structure. With improving operating results and client demand Calfrac's focus in the short term is on managing the reactivation of its assets in a safe, efficient, and profitable manner while in the medium term the goal of generating free cash flow remains unchanged. With fundamental improvement in the operation on financial performance of Calfrac's business opportunities to address the long term structure of the company's balance sheet will manifest themselves and management will seek to combine security, flexibility and low cost in reductions ahead. As a result of increased activity and demand for equipment the company is announcing an increase in its 2017 capital budget from 25 million to 45 million, the incremental spend as Mike mentioned will be largely focused on capital component related to its structuring operations for North America. Thank you all very much for joining us today, and now I will return the call back to the operator for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Sean Meakim of JPMorgan, your line is open.

[Sean Meakim:]

So just first to touch on Canada a little bit, a couple of questions there. So first near term, when your activity being better during break up and it certainly makes sense given where oil prices are, but I'm curious how much of that you could attribute to more pad drilling this year and helping keeping crews running consistently through the quarter?

[Fernando Aguilar:]

Yes Sean, that is correct. Customers are basically planning ahead and as the Canadian market is turning into a, let's say a more -- following the model of the U.S. in terms of larger pads and more wells per pads, they have been able to plan ahead of time and are working with [indiscernible] for taking care of that awards in Q2.

[Scott Treadwell:]

Sean, it's Scott. If I was going to add to that, I'd say that while the planning has been substantially better, we still operate in a very weather impacted season in Canada and so we've seen even in the last couple of weeks some operational hick-ups really just trying to get sand to and from location, trying to get third-party in and out. So pads improve the situation, but they don’t remove the reality of Canadian break-up.

[Sean Meakim:]

Right. That's totally fair. Are you able to quantify that what the mix looks like, kind of pad versus non, help me here Scott, [Multiple Speakers] versus last couple of years?

[Fernando Aguilar:]

So most of the work is basically turning to pad work and I would say 73

[Scott Treadwell:]

And I would say that as the weather and ground conditions improved. You'll see that normalize a little bit as we get back to work in Saskatchewan and Southern and Central Alberta, but as it stands today most of those areas are under full on road bans and so the only way to do any work is really further north and some sorts of pads.

[Sean Meakim:]

Got it. Thank you that's very helpful. And then just on the U.S., I think one of the key questions from our perspective, just thinking about, given the improvement in efficiency you saw and how that drove your margins this quarter in Colorado and Pennsylvania, how sustainable you believe these volumes are going to be as we go through the year. What are the key levers there?

[Fernando Aguilar:]

I think they won't continue. You know when you are entering these markets in which customers are basically going back to efficiencies and the higher productivities they will continue to move in that that duration and we see that in all of our operational districts. I don’t see any changes in that respect and they are returning as we mention in our outlook, that customers are very interested in company they are going to provide them with a continuous operational and very low non-productive times and that's what basically Calfrac is ready to offer them. Due to a quality of our equipment and the way that we've been executing traditionally in the company following license to operate which is basically related to a very high standard and safety and a very strong operational performance. So we don’t see any changes because as commodity pricing firms up and customers are committed to take those wells into production, that's exactly the game that they want to play.

[Sean Meakim:]

And then one last thing, if I could just tap you on the same discussion by distributor [ph] basin it's getting a little bit more difficulty getting traction in the Permian, it's bit of a different animal than Colorado and Pennsylvania. Could you maybe just give us a little into the puts and takes of how that's been going and how you see that opportunity turning out?

[Fernando Aguilar:]

Sorry, you are asking us about the Permian traction, compared to the rest of the basins?

[Sean Meakim:]

Well also just saying, I guess nothing about the near-term, I'm thinking about longer-term, given the opportunities set in the U.S. right the Permian is and a pretty important resource and so I guess I'm just kind of thinking about longer term, the puts and takes of that opportunity relative to the areas where you've had more established relationships and a lot more successes historically.

[Fernando Aguilar:]

Yes, we traditionally -- our strategy has been changed, and we have presented to you guys in the past, especially in between 2013 and 2014 was our penetration into the market. In Texas fracking the San Antonio, the assets that we acquired from a company I was operating there. And then continuing our penetration into the Permian. We haven’t changed that as I was saying, but the downturn came and we had to postpone on those plans. We believe that Texas is very important market and it's reflected by the number of fleets that are operating in the area, but we'll continue solidifying our presence in that area where we are, just making sure we get to the level of economies of the scale that are going to continue helping our financial performance moving forward, and Texas it's always a place that we will continue thinking. We have been continuously approaching and been approached by customers in the area, both the Eagle Ford and the Permian and all discussions are happening, we are used to waiting for the right opportunity that will not scarifies our financial performance.

[Sean Meakim:]

Fair enough, okay that makes sense. Thanks a lot.

[Operator:]

Your next question comes from Jon Morrison of CIBC Capital Markets. Your line is open.

[Jon Morrison:]

Given everything that you know right now, where do you expect to exit 2017 for marking a force current [ph] in Canada and U.S.?

[Fernando Aguilar:]

Well, I think that’s a number that we will give you a little discloser and we have to be careful how we answer that question, but we will continue reactivating fleets as customers' approach us with good financial possibilities for performance. So while you see in our outlook for Q2, we are reactivating two additional fleets for the U.S. it's an indication of positive discussions with customers. The same is happening in Canada with a couple of, let's say, operating crews to be activated, let's say in the next couple of quarters. But you all will depends John, on how customers are basically willing to pay the -- let's say the normal level of pricing that is required for the industry to recover from this downturn. I don’t think the pricing that we are experiencing today has basically recovered from where we were. We have to admit that the cost base has been dramatically reduced during the down term, but you can see that the suppliers are basically coming back, trying to recover as well. So the whole service sector including the supplies, will likely be in a recovery mode and that is critical for reactivation of additional fleets. So we like to have all fleets activated by the end of year? Yes. Is it going to be possible? Mostly probably not. Because you have label constrains, so you have some issues that are not going to be able to, let's to be possible, in terms of the numbers of people that are going to be required, because you remember that about 300,000 people left the industry in this downturn and what normally happens in an environment like this, at least one-third of these employees are not going to come back. So challenged by pricing expected by customers, suppliers, inclusion their prices for the service side. And also. the availability of employees is going to limit, the number of fleets to be activated from now until the end of the year.

[Scott Treadwell:]

And Jon, if I was going to add to that, I would say that there is obviously some subtle differences between our position in Canada and U.S. from a competitive standpoint, and so that will dictate some subtle differences in how we look at reactivations. But from a high level, every time you have a conversation about bringing equipment off to fence, incurring cost to refurbish, repair, rehire staff, to me that’s an opportunity to sort of start with a blank slate from pricing and to sort of message our return expectations and our shareholder's return expectations to our clients and not necessarily to think about where the market is and how much incrementally you can get, but really how that conversation from sort of principals. And I think that’s something we are going to take the opportunity to make sure we have those conversations and not just reactivate at the fastest pace we can or the targets specific basin or customers. It's going to be a bit more of a high level the conversation and decision, I guess, at the end of it.

[Jon Morrison:]

Is it fair to assume that you would need higher embedded pricing and profitability to ultimately reactivate more than you have mentioned the market so far?

[Fernando Aguilar:]

So you have to remember the pricing is staying at a level where you are carrying legacy pricing from previous contracts or operation that you're having today. So the pricing for you that you average today is not where it has to be. I believe pricing between U.S. and Canada dropped during these down to 50% and 60%, that is something that hasn't been recovered by the industry and you know we will continue pushing pricing. I believe that when you think that, if you see all our commodity oil is the one that is, let's say available today and the customers can make money out of that. You have to see that some of the money that they are making is basically at the expense of the service companies because the service sector you see is still today in negative EPS. So until you recover from that, you are going to be able to say that pricing has recovered, so companies are basically getting a return on the investments that they have, and you can invest in technology and equipment development and more efficiencies and productivities areas in the industry, right?

[Jon Morrison:]

You gave some signals around pricing changes in the U.S. on a sequential basis on a consolidated level, can you give any sense of how different the pricing momentum was in the markets where you operate and how large the delta is of levels of pricing or margins, Bakken, Rockies, Marcellus, just high level feel of how things are changing your customers' markets?

[Fernando Aguilar:]

It is difference because customers operate with different systems and different amount of equipment. The basins where we operate are basically covering both gas and oil, so you understand that our fleet type, number of people, type of chemistry that we use are different. So it varies, but in general terms it's being going on the positive side. I have to tell you that because the U.S. market is larger than the Canadian one, number of competitors, number of customers, number of regions, et cetera. and the discipline that is being happening the last two and a half years is now happening a little bit in Canada. I will say that Canada is trailing one quarter ahead of the U.S. in terms of pricing improvement. So why, because the market saturates a little bit faster than the U.S. and the U.S. can see some companies that are undercutting prices to get active. So I will say that it depends on the area, but in general terms the improvement are according to the numbers that we provided in our disclosure are basically taking us to the places where customers are looking at opting for price improvement, number one, but they're also working on productivity, which is basically helping us. With a combination of the two, to provide the markets with a better financial performance.

[Mike Olinek:]

Just maybe to add to that as a general comment, I wanted to steer the conversation away from any specifics on pricing and obviously everyone sees the service sector results and we’re still struggling from a net income EPS perspective, cash flow and EBITDA are great. But at the same time I don't want to pressure the conversations that we're having with our clients, I certainly don’t want to make the job for our sales staff and our divisional staff any harder than it is. So we're going to sort of restrict ourselves to fairly generic commentary on pricing, you know certainly directional we’ll be happy to give you some color on, but much more than that I think we'd want to stay with the public commentary with anything.

[Jon Morrison:]

In Canada, can you give any order of magnitude of how much higher Q2 bookings are this year versus last year?

[Mike Olinek:]

Well the bookings would be materially higher, I think the issue is going to be what you can actually get to from a weather perspective and that's not just kind of road conditions around [indiscernible], it's going to be when it starts to dry up around Kindersley, when you can start accessing the roads around [indiscernible]. So the potential is there for meaningful growth but again I’d be cautious about putting any numbers to it just simply because the weather can have a pretty massive impact on April and May and even the first part of June.

[Scott Treadwell:]

Same time John, you remember that the number of rigs that operated in Q1 that provided the number of wells to be completed in Q2 was much higher. So you can deduct that number from how we see the drilling site was in order to prepare Q2 for a completion.

[Jon Morrison:]

For sure. On the U.S. or on the labor inflation side, you guys make some comments about it within the release, can you give us any sort of an idea of what you are thinking for U.S. labor inflation costs and how that would compare to sand and chemical inflation that you are seeing in the U.S. right now? How you [Multiple Speakers] increase on the labor I guess, what do you think about [Multiple Speakers]?

[Fernando Aguilar:]

We are going to repeat into that, I would say 5%.

[Jon Morrison:]

Okay, in Argentina, obviously, the last few quarters have been challenged, first by the floods in and union issues and now a bit of a slowdown in the spending like YPF and others. Do you expect much sequential momentum in Argentina as the year progresses?

[Fernando Aguilar:]

So as we speak John right now, [indiscernible] is in Houston talking to oil and gas companies, inviting them to make sure they continue welcoming the reals going to Argentina and investing in the country. So we follow very closely what is happening with the country, at high level we can say that there is an interest and a motivation from the development to continue developing the industry for all those reasons that we have discussed in many of our meetings. So the problem is that as you know that the downturn that hit the industry also hit Argentina and we saw a 30% rig decrease in the country, and that basically held because less work to be shared between all the companies that are present in that place. Is that going to change, their indications because now you see that company like TechPerol [ph] and CruisePetrol [ph] and the company like YPF and also Pan American and they are the four local companies that are investing more than what they are investing in 2016. And there was a number that was disclosed by the government of about $5 billion that we was supposed to -- and now it's about between 6 billion and 7 billion according to the additional investments coming from people like Total and Shell and Exxon. So we believe the overall market is going to get into that momentum of higher activity, we have to make sure that those message is going from the government related to how expense labor is, number one, and also making sure that the labor is not going to strikes to us, to slow or stop activity. That will translate into continuous activity and will make the industry profitable. Because one of the issues at Exxon and I believe Shell have been discussing with the government is that, they have in one of the label had cost in Argentina is higher than other geographies and due to that August time issue and higher let's say labor cost. So is that happening and the industry goes into a more normalized way of operating, I believe this is going to be a recovery from the activity levels that we saw in 2016 and '15 and '16.

[Jon Morrison:]

Okay, lastly and just from me. Do you expect a rising ruble to be a drag to your Russian customer spending plans in the back half of the year? Is there have been any messaging for them and towards you guys that they are looking to slowdown spending as the year progresses?

[Mike Olinek:]

Hi, John it's Mike. No I don’t think there has been any changes. As you know we contract annually here, as far as work volume and there has been no indication from our customers that we will have any impact on that.

[Jon Morrison:]

Okay, appreciate the color, good quarter guys.

[Operator:]

Your next question comes from Wesley Nixon from National Bank Financial. Your line is open.

[Wesley Nixon:]

I expected to see active Canadian capacity rise in Q1 sequentially just based on the large fleet that was going to be deployed in January due to the Grande Prairie, normally looks like active capacity was up about 1,000 horse power, so this suggest maybe some capacity might have been remove from the market. So I am curious, was this related to mainly to the smaller job sizes or in fact was there a fleet that was removed from Canada in Q1?

[Scott Treadwell:]

Yes Wesley, I mean it was really more on the people's side of being able to staff the equipment in a different configuration. There was some addition to horse power as you saw, but it was relatively modest. So as I said it's really about how do you deploy the horse power in different configurations.

[Wesley Nixon:]

And how would those configurations vary between the Montney and Deep basin?

[Scott Treadwell:]

Well to a Montney spread, you might have 30,000 to 40,000 horse power location and then obviously redundant spares back at the shop. As you go into the less intensive plays, that number drops down to a low of under 10,000 in Southeast [indiscernible] and so really what it comes down to as looking at your labor and as I think has been messaged pretty consistently, labor has been the eliminating factor for lot of the operation, not just for us, but across all of the services space. And so you look at labor, if you look at your equipment and your customer mix and how can you best extract cash flow out of that ingredient mix.

[Wesley Nixon:]

Okay. And so if labor wasn’t a constraining factor in Q1, would you have otherwise had another or more capacity active in that field?

[Fernando Aguilar:]

Yes, maybe that’s to be possible as the companies are trying to address the market. You see some of our competitors like, I was saying before the market is getting to saturation. So if you have more people and equipment available, mostly probably yes.

[Scott Treadwell:]

Yes, I think you would had to have that line let's say October, November in order to -- even if labor is not a constrained, just to get the guys through the door and trained and ready to go. There would be some obviously incremental equipment reactivation cost. So as we sit here today, an extra fleet would have been certainly a godsend for the guys in Grande Prairie to pick up some spot work and help those customers. But again, the line let's say, where we would have had that decision back in October, November, we just didn't have that clarity.

[Wesley Nixon:]

Right, okay that makes sense. Appreciate the color. And a question, just curious I was hoping for little more additional color on the incremental capital, I recognize that reactivation cost in 2017 are by and large going to expense, so I am curious which product lines and geographies in North America are going to be receiving most of this sustaining capital?

[Fernando Aguilar:]

All the pressure is basically about fractioning and it is both U.S. and Canada.

[Wesley Nixon:]

Okay and in terms of a split between U.S. and Canada, would you able to provide me additional color on which region is going to be receiving more?

[Fernando Aguilar:]

Well, if you see -- if you have a look at the revenue generated by the two geographies, I’ll say 45

[Wesley Nixon:]

Okay.

[Fernando Aguilar:]

It's basically very -- it is -- what is happening here as you can understand is that the beautiful parts of the pressure pumping business, I mean even though thinking that we haven't recovered yet, is that intensity is increasing. So as that intensity is increase and moving from the U.S. into Canada, we would have a similar way of operation between the two countries and in terms of not only in 24 hours, but the amount of sand and the amount of fluids and higher pressures and higher rates that we are pumping. While we were using in 2014 one frac bit for every three rigs, that number has dropped to two in 2017. So customer -- and the reason for this is higher intensity in our sector and that is automatically a 33% increase without counting the additional wells that can be drilled. So that is very good because drilling rigs are becoming more efficient, but they're generating more business for the pumping sites.

[Wesley Nixon:]

Okay, last one. What percentage of your fleet today is legacy pricing?

[Fernando Aguilar:]

I would say that maybe 10%, 15% of what we have, let’s say from Q3, 2016 will be -- I would say between 10% and 20%. We can go back and check that in more detail and give you a better number, but I wouldn’t be too far away between that 10% to 20%. You know I think what is important here to realize is that, when people talk about price increases, they forget that like you said, you're still carrying the legacy pricing on your back.

[Wesley Nixon:]

Okay, thank you.

[Operator:]

[Operator Instructions] Your next question comes from Ian Gillies of JMP, your line is open.

[Ian Gillies:]

Just curious I mean, absent any pricing discussions in the U.S., I mean with the reactivation of two more crews in Colorado, in the second quarter year, would it be fair to assume that we should get further positive margin progression in Q3 and Q4 just due to economies of scale?

[Fernando Aguilar:]

Well Ian that's exactly what we're hoping for, you know -- I mean if we don't have that margin progression we were not going to reactivate those fleets. You know it is -- like it was written in our disclosure and our report, these business, the way it is and it was still today, is unsustainable, unless we increase the prices and bring them to a level where the company can get a return on investment that we have in the field in an asset intensive environment, we are not going to reactivate any fleets. So the answer is we expect those margins to continue progressing.

[Scott Treadwell:]

All I would to that Ian, would just be to say that, we certainly set it up that way and that's the way it looks on the board, but to use the hockey analogy, we got to get out on the ice to play the game. So you know the temple of the actual field operation any unexpected cost inflation, that's something we have to deal with a little bit more on the fly, but to Fernando's point that's certainly the way we've drawn it up.

[Ian Gillies:]

Maybe just to provide you guys with a bit of a chance to talk about it, I mean, with that in mind and the crews being reactivated, I mean obviously there's some upfront cost there. So is there -- I assume it's going to be substantial force, I guess to hurt margins in the second quarter in an effort just to get this equipment out in the field.

[Fernando Aguilar:]

Well yes, because as you can understand we will like you know, we basically would like to continue reactivating fleets as, we said only if the price are correct. But as we reactivate the fleets we will spending money. So that will remain happening throughout the year, right.

[Ian Gillies:]

Yes, that's helpful. With respect to Argentina, I mean one of the reasons why it's always been an attractive place has been the high barriers to entry and given the change in government and given some other the change in items in that country. Do you still view it as a high barriers entry place for services and maybe especially those what want to compete in the fracturing market?

[Fernando Aguilar:]

We still believe Ian, yes we still believe if that is the case and even you can bring equipment to any country right, but if you don’t speak the language you don’t understand the port politics and the economy and how to operate you will have you have many examples of that when people try to go from Canada or the U.S. zone to I don’t know you can name South America or the Middle-East or Africa right. So if you know how to operate in those geographies and you take advantage of the market, that's what makes a company very successful when they're doing work all over the world and they try to balance their operations with North America. So Argentina is a place where we know how to operate and we've been very successful, we hold the record of the highest number of frac jobs per day in that country. So Calfrac is a company that knows how to operate in those environments and we just need more activity as a industry mix there. So the answer is yes.

[Ian Gillies:]

Okay, that's helpful as well. And then Mike maybe this one is for you. There appear to be some noise around G&A in the quarter, can you maybe provide any color about what happened with G&A and some run rate guidance there, just how we should be thinking about cash G&A specifically?

[Mike Olinek:]

I mean I think for cash G&A it's going to be fairly consistent quarter-to-quarter. It's runs around 6.5 million to 7 million in the quarter. So I would use that for all of this year. We don’t see a whole lot of growth in that even as our business expands. And yes as I discussed in my notes we have that 3.5 million adjustment related to our stock-based comp program. We should expect something similar in Q2, but will see how things go.

[Ian Gillies:]

Okay, and last one from me I meant to ask about this, when we were talking about the U.S., there appears there has been a lot of success for Calfrac in Colorado. Are you may be able to expand a bit on what you've been able to do either from an operating standpoint to expand the market share there to ramp up, I guess a bit quicker than I would have anticipated?

[Scott Treadwell:]

Yes, I think there is a couple of things that play there. One, to Fernando's point, we know how to operate there, I think being a Canadian service company, the Northern U.S. feels a lot like home for us from an operational standpoint. We've got a long history there with people and a long history there with the customers. And so I think there is bit of a natural fit and I think it's probably testament to the quality of equipment and people we've got on the operations, that they were able to see such a change in the scope of work and yet execute so well during the quarter.

[Ian Gillies:]

Okay, perfect. Thanks very much. I'll turn it back over now.

[Operator:]

There are no further questions at this time. I return the call to our presenters.

[Fernando Aguilar:]

So we like to thank everybody for participating in our conference call. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.