Calfrac Well Services Ltd.
Q4 2016 Earnings Call Transcript

Published: 23 Feb 2017

[Executives:]

Fernando Aguilar - President and Chief Executive Officer Michael Olinek - Vice President, Finance and Interim Chief Financial Officer Ashley Connolly - Manager, Capital Markets

[Analysts:]

Sean Meakim - JP Morgan Greg Colman - National Bank Jon Morrison - CIBC Capital Markets Ian Gillies - GMP Ben Owens - RBC Capital Markets Jeff Fetterly - Peters & Company

[Operator:]

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Calfrac Well Services Limited Fourth Quarter 2016 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, Melissa. Good morning and welcome to our discussion of Calfrac Well Services’ fourth quarter results. Before we get started, on behalf of the Board of Directors, I am pleased to announce that Mike Olinek has been appointed Chief Financial Officer of the Corporation. Mike joined Calfrac in August 2006 as Corporate Controller and was promoted to Vice President, Finance in April 2011. He has been serving as Interim Chief Financial Officer since March of 2016 and has done an outstanding job in that role amidst a particularly challenging operating environment, resulting from low oil and gas prices. Prior to joining Calfrac, Mike first served five years with a major accounting firm where he obtained his Chartered Professional Accountant designation. He then served in progressively responsible financial roles over 12 years with two large multinational exploration and production companies. Mike's firsthand knowledge of our industry and the valuable experience he has gained over the past decade with Calfrac will be invaluable as the Company seeks to capitalize on the improving market fundamentals that are emerging. Calfrac is also pleased to announce the appointment of Scott Treadwell as Vice President, Capital Markets and Strategy, and the transition of Mark Paslawski, previously the Corporation's Vice President, General Counsel and Corporate Secretary, to the role of Vice President, Corporate Development and Corporate Secretary. Scott has over seven years of capital market experience in the oil and gas services sector, and most recently served as Director, Energy Services Research at a major Canadian investment bank. Scott also has also over nine years of domestic and international oil and gas industry experience, the bulk of which was in the oilfield services arena. We are excited to bring Scott on board to lead our capital markets efforts and to play an important role in a strategic planning and execution with the rest of the executive management team. Mark joined Calfrac as General Counsel and Corporate Secretary in September of 2007 having practiced securities and corporate law for eight years at the Calgary office of a major Canadian law firm. Mark has been assuming a progressively more business focused role throughout his tenure with Calfrac, and his transition to his new position will allow him to dedicate more time and energy to these endeavors. I look forward to the contribution of each of these individuals to make our executive management team in the years ahead. At this time, I would also like to thank, Ashley Connolly, for his contribution to Calfrac. We appreciate all her hard work and wish her the best of luck in his new role. Now I will pass the call over to Mike, who will begin with an overview of our quarterly financial performance. I will then discuss our outlook for 2017. After, Mike, Mark, Ashley, and I will be available to answer your questions that you may have. Mike, please go ahead.

[Michael Olinek:]

Thank you, Fernando, and thank you everyone for joining us for today’s call. Before I begin my discussion this morning, I will refer you to the forward-looking statements disclaimer and our AIF, which is available on our website and SEDAR. I will take Calfrac’s fourth quarter press release, which is also available on our website and SEDAR as read, and will only be discussing the key financial highlights this morning. Consolidated revenue in the fourth quarter decreased 33% year-over-year due to a 15% reduction in fracturing job count, primarily related to lower activity in North America. Lower pricing in both Canada and the U.S. also had a meaningful impact on the revenue decline. Adjusted EBITDA for the fourth quarter of 2016 was negative $13.7 million compared to a positive $22.9 million in the fourth quarter of 2015. These lower results were driven by significantly lower utilization and pricing in the United States and Canada, and to a lesser extent in Argentina, as well as lower utilization across Calfrac’s Russian operations. In addition, a $4.5 million year-over-year increase in stock-based compensation expense, primarily related to restricted share units also had a negative impact on adjusted EBITDA this quarter. Turning to Canada. Fourth quarter revenue was down 41% from the same quarter in 2015, primarily as a result of lower fracturing activity in pricing, the completion of smaller jobs as a greater portion of work was focused in the Viking, combined with the impact of a major customer providing its own sand. Coiled tubing activity for the company was higher due to increased activity in Saskatchewan light oil plays and growth in Calfrac’s annular fracturing operations. Excluding one-time costs, operating income margins decreased approximately 740 basis points year-over-year, again primarily related to a decrease in activity in pricing. In the United States, revenue in the fourth quarter of 2016 was 29% lower than the same quarter in 2015 due to significantly lower pricing and fracturing activity across most of the company’s operating regions, with the exception of Colorado, as 28% fewer fracturing jobs were completed period-over-period. As we have previously discussed, Calfrac temporarily closed its South Texas operations and suspended all remaining cementing operations during the first quarter of 2016, which also contributed to the decrease in revenue. Lower than expected utilization in Colorado and North Dakota caused by operational inefficiencies with new customers, as well as delays resulting from a combination of bad weather and a slower-than-expected increase in customer activity were the primary contributors to the $7.2 million operating loss reported in the fourth quarter of 2016. I would like to spend some time discussing the inefficiencies that we experienced over the last two quarters in the U.S. When we price a bid, the margin expectation is predicated on the completion of a certain number of stages per day. As a result of working with new customers, evolving completion design and the challenges related to completing older wells, it was difficult to reach our minimum stage count thresholds in some instances, which led to margin erosion. We believe that the initial start-up inefficiencies have largely been eliminated and we have also addressed these issues with our customers through a combination of overall pricing increases, including a more comprehensive approach to recovering standby fees which should mitigate these issues on a go-forward basis. Overall we are currently experiencing better utilization in the first quarter of 2017. In Russia, the company's revenue in the fourth quarter of 2016 decreased by 25% from the corresponding quarter in 2015, largely due to the impact of no longer providing proppant to one of our customers, as well as lower activity that resulted from extremely cold weather in Western Siberia during December, where temperatures dropped below minus 50 degrees Celsius at some points. Operating income as a percentage of revenue was 4% compared to 13% in 2015, primarily due to lower utilization resulting from weather impact and some operational inefficiencies with one of the company’s contacted customers. Calfrac’s Latin American operations generated total revenue of $38.2 million during the fourth quarter of 2016, a 22% decrease year-over-year. Revenue in Argentina declined due to lower pricing, the completion of smaller jobs and less cementing activity. In addition, flooding in Neuquén during late October combined with continued union strikes, negatively impacted utilization during the quarter. In Mexico, the decline in revenue was primarily driven by lower coiled tubing activity with its major customer. After adjusting for restructuring cost of $3.4 million, operating income in Latin America was slightly above breakeven during the fourth quarter of 2016. Turning to the balance sheet, we had approximately $110 million of cash including two fully funded $25 million equity cures, as well as working capital of approximately $270 million as at December 31, 2016. In addition, Calfrac had used only $1.9 million of its credit facilities for letters of credit and had no borrowings under its credit facilities, leaving $298.1 million in available liquidity subject to borrowing base limitations at the end of the fourth quarter. With no net borrowings under our credit facilities and our significant cash balance, we were in full compliance with our financial covenants as at December 31, 2016. Calfrac’s 2017 capital budget is approximately $25 million, which is mainly comprised of sustaining capital projects. I would now like to turn the call back to Fernando for an outlook on our operations.

[Fernando Aguilar:]

Thank you, Mike. Last year was one of the most challenging years experienced by the North American pressure pumping industry. The U.S. land rig count fell to 380 rigs while the Canadian rig count dropped to as low as 34 rigs in 2016. As a result of this lack of activity, pricing in the pressure pumping sub-sector fell to unsustainable levels, and consequently drove several North American competitors into bankruptcy and/or to undertake financial restructuring measures. In 2016, Calfrac was focused on managing its cost structure and preserving liquidity which resulted in significant headcount reductions across the Company, the introduction of structural changes in Canadian field labor compensation, further idling of assets and the closure of certain districts both on a permanent and temporary basis. While difficult decisions had to be made over the course of the last two years, Calfrac was able to navigate through the downturn and is optimistic for an industry recovery. As evident in the rebound in the North American rig count and the recent strength in crude oil prices and relative strength in natural gas prices, the Company believes that the market has begun to improve. Activity has experienced positive momentum over the last few months and utilization of Calfrac's active fleet has meaningfully increased in North America, while the Company's international operations have stabilized. Although Calfrac believes that 2017 will be an improvement from 2016, the Company expects the first half of the year to be a transition period as the pressure pumping industry begins to recover in Canada and the United States. I will now run through our operating divisions starting with Canada. Calfrac's activity has become strong since the beginning of the year and the Company anticipates full utilization of its active fleet through to spring break-up. Given that the rig count has held above 300 rigs for the last several weeks, Calfrac believes that completion activity in the second half of 2017 will exceed levels experienced over the last few years. The Company reactivated a fleet at the end of November that is dedicated to the Saskatchewan light oil plays as well as a larger fleet focused in the Grande Prairie region that was deployed in late January. The majority of Calfrac's activity is focused in the Montney gas and Saskatchewan light oil plays where the Company maintains a strong market share while activity in the Cardium has also begun to reemerge. Based on the previously mentioned capacity additions and given current activity levels of visibility, Calfrac believes that it has an appropriate amount of active capacity but the Company will continue to monitor the market for opportunities to redeploy additional horsepower on a profitable basis. The labor market is and will continue to be tight and the Company believes that this factor will be a significant constraint in bringing additional capacity back into service. Given the high utilization of active horsepower in the market, Calfrac has been able to increase pricing for its services and first quarter levels are expected to improve and average 10% from the lows experienced in the third quarter of 2016. Pricing remains dynamic but the Company expects this positive momentum will continue over the course of 2017. In terms of supplier costs, third-party trucking was the first to increase and sand and chemical costs are starting to trend higher as the market recovers. Calfrac does not anticipate the higher input costs to have a significant impact on its financial results given that the Company has and will continue to pass these increased costs along to its customers. The United States division has been the most challenged market throughout the downturn. While the Company believes it will benefit from increased pressure pumping demand in the first half of 2017, Calfrac remains cautious as it builds back scale across its operating areas and pricing levels improve. The Company has reactivated a second fleet for the Bakken and increased the size of one of its Rockies fleets in order to satisfy the demand of its customers. Reactivaition costs in the first question related to these two fleets were approximately $2 million in operating expense. Pricing fundamentals are improving and the addition of the aforementioned capacity is expected to yield returns that will drive the U.S. division towards positive operating margins. Calfrac is also experiencing increased demand for its services in the Marcellus, and if pricing continues to strengthen, the Company believes there may be an opportunity to reactivate an additional fleet in 2017. Consistent with Calfrac's Canadian operations, supplier costs have started to increase but those costs have and will continue to be passed along to its customers. In Russia, activity in the first quarter is meeting the Company's expectations and financial results are anticipated to be relatively consistent with the first quarter of 2016. The majority of 2017 tendering process has come to a close and Calfrac was successful in securing work with both existing as well as new customers. 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. Moving to Calfrac’s Latin American division, the Argentinean government recently announced a plan that aims to boost the exploration and development of unconventional resources in the Neuquén area. Included in the deal was the extension of Plan Gas, a commitment to investments in infrastructure, positive tax reforms and an adjustment to certain union conditions aimed at improving labor productivity. Oil and gas companies are expected to invest $5 billion in unconventional exploration and development in 2017, and Calfrac believes additional joint-ventures in the Vaca Muerta shale formation are likely to be announced over the coming year. Overall this announcement reinforces the Company's positive long-term outlook for the country and Calfrac believes it is in a strong position to benefit from the expected increase in activity in the coming years. In the near-term, the Company expects financial results to improve due to a combination of cost-cutting initiatives and stabilized activity levels. However labor disruptions in the form of work slowdowns have recently emerged and could negatively impact operating results. Overall the Company anticipates that increased fracturing activity in 2017 will offset a decrease in cementing activity while pricing is expected to remain largely stable with current levels. 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 a minimal cost structure. In the fourth quarter of 2016, Calfrac completed an equity raise for net proceeds of $50.6 million, which served to further improve liquidity as well as pre-fund the Company's second equity cure. With the ability to utilize two equity cures, coupled with its cash position, undrawn credit facilities, modest capital budget and overall improved visibility, the Company believes it is in a strong position as the pressure pumping market recovers. I would now turn the call back to the operator for questions. Thank you all very much for listening.

[Operator:]

Thank you. [Operator Instructions]. We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Sean Meakim from JP Morgan. Your line is open.

[Sean Meakim:]

Hi guys.

[Fernando Aguilar:]

Good morning, Sean.

[Michael Olinek:]

Good morning, Sean.

[Sean Meakim:]

So just trying to get a little bit better sense of the state of the customer mindset in Canada. At this stage, are customers still in a scramble to lack of equipment for post-breakup or are they still, I guess, maybe a bit of mixed signals on customer mindset, and as we think about that, what that implies from the second half, how we think about flexibility on Calfrac side in terms of how many fleets could you reactivate from the second half if demand was there for them?

[Fernando Aguilar:]

Yes. So Sean, it is important to note that any momentum that we can build in Canada for our operations related to pricing or bringing equipment back are normally interrupted by the normal breakup that we experienced in Q2. So thinking that, and like Michael was presenting that, in our industry, in our business, there are some inefficiencies that reduce the speed of work and the ability of companies to execute the programs as they are normally planned. We believe that there will be some spill of this activity coming from Q1 where we have a very high level of activity in our competitors as well into Q2, and that is basically building a very interesting Q2 in front of the pumping service companies. However the ability of these companies to bring more equipment back in a slowdown - in a period of slowdown basically reduces the possibility of bringing more equipment and we know exactly how they - let's say, Q2 and Q3 are going to shape up. But we believe that if the activity remains as we have today in Q1 and spill over Q2 and the reduced activity that will happen because of breakup, Q3 can go back to a very strong level and that is going to show some of our fleets to be brought back to work.

[Sean Meakim:]

Okay. Thank you for that. And then how do we think about zero reactivations? Could you give us a sense of what the cash cost have been with those that you’ve worked on thus far, or what you expect going forward, and maybe if we could distinguish between the U.S. and Canada? That will be helpful.

[Fernando Aguilar:]

Yes. I think you've been reading a lot of information from different companies from the superiors to Halliburtons and a lot of different notes that give a very big range of expenditures in that respect. You have to - I have to note here that the amount of money spent in the U.S. related to Canada is different and most probably in the U.S. is higher because the intensity in the U.S. is being, let's say, that’s the place that where intensity has been very high compared to Canada. Canada is catching up in that respect and we believe that in 2017 and into 2018, we will see that intensity increasing and getting closer to the levels that we experienced in the U.S. So when we say that this is the case, then that means that the amount of money that we spent in the U.S. to reactivate the fleet is a little bit higher than with the one we have in Canada and that's number one. But we'll have to realize as well that Calgary has been very careful in the way that we have been taking care of our equipment even in the downturn and the numbers that we've seen, some company is talking about $5 million, some company is talking about $10 million to reactivate the fleet. Calfrac is basically between $2 million and $3 million for the larger fleets and maybe around $1 million for smaller fleet.

[Sean Meakim:]

Sorry, I just missed there at the end there. So you were saying from your perspective for a smaller fleet maybe $1 million to reactive and was there another number in there?

[Fernando Aguilar:]

And $2 million for a larger fleet.

[Sean Meakim:]

Got it. Okay. Is there mix of capitalized versus what would go in the P&L?

[Fernando Aguilar:]

No, it’s basically expenses, no capitalize. Operating expenses, Sean. Yes.

[Sean Meakim:]

Perfect. Okay. Thanks a lot, Fernando. I appreciate it.

[Fernando Aguilar:]

You’re welcome.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Greg Colman from National Bank. Your line is open.

[Greg Colman:]

Thanks all for taking my questions. Just wanted to build on the reactivation cost there. Fernando, really appreciate that color $2 million to $3 million for larger fleet, $1 million for smaller fleet. If we were just to gross all up, what would it cost to get everything back up and running? I understand that some of the equipment that's maybe newer and parked would be quite a bit less but some of the older equipment that’s parked might be quite a bit more. There is probably a sliding scale on those actual numbers, and if you were to reactivate the whole fleet, what would be the total cost?

[Fernando Aguilar:]

Yes, that's correct, Greg. And of course the equipment - and this applies to all companies in our sector. The equipment is not going to be reactivated at the same time because as the operators bring back more rigs and the activity, the completion activity increases, you're going to have, like you say, a sliding increase of activity. So if we wanted to fix the whole fleet, it's going to take around $30 million. And that's the number that we have for Calfrac. Well, we are talking about 50% of the equipment that we have deployed in North America which is about 0.5 million horsepower.

[Greg Colman:]

Right. So $30 million to reactivate that 0.5 million?

[Fernando Aguilar:]

That's correct.

[Greg Colman:]

And on the 0.5 million that’s there, we've seen some of your peers retire some of the older spread yield to horsepower pre-2003 stuff. Is there any of that in your fleet that we could start to see just come out of the horsepower mix?

[Fernando Aguilar:]

We did last year. We retired some equipment last year and we reported that. Just some equipment in Canada, some equipment in the U.S., but we don't expect from the equipment that we are talking about here, based on your question, to retire any equipment. And again, Greg, it goes to a level of care that our field operations people take with the equipment, and like we were saying before, as you keep - and we normally, when we have the full fleet in operations, we normally keep 20% of our fleet rotating for maintenance and that maintenance was not only the maintenance on location but deep maintenance in the bases to make sure that our equipment is always in good condition. And this is related to the level of high execution that our company has to make sure that we are one company with a lowest non-productive time in the industry and very high level of standards in terms of quality and safety. So I believe that the number that we are giving you are pretty accurate because we monitor them in a continuous basis with our base managers, district managers and also the corporate team.

[Greg Colman:]

Got it. So yes, to be clear, the stuff you did last year and that’s in the history but we shouldn't expect to see any more retired. All of the horsepower you have in the books now our stuff that could go back to work at the right pricing levels?

[Fernando Aguilar:]

That is correct. And you should remember as well that apart from all our equipment and that, let's say, I cannot say a little amount of money because when an industry basically has an activity and you have to spend $30 million in repairs, that is a substantial amount of money but this money is going to come from better pricing and higher activity levels today. But you have to remember, Greg, as well that we have 100,000 horsepower parked brand-new. We are using that in North America and 40,000 that have been built for Argentina as well.

[Greg Colman:]

Right. That's really good point actually. Okay. Thank you for that. Shifting gears a little bit to U.S. Really appreciate the color, Mike you had given earlier on the costs associated with the quarter and what end up happening there. When we look forward into Q1 - and I might have missed this, you might have already said this. But when we look forward into Q1, given the adjustments you made to your operations in the U.S. and the way you've been discussing awards with your customers, would you expect that part of the world to be breakeven or better from an EBITDA perspective from a field margin perspective or whatnot in the first quarter, or Fernando as your comments were about the first half of this year being a transition year. Is that something we should expect until more midyear?

[Fernando Aguilar:]

Yes, so Greg, when you go - and we mentioned that in the script. When you have an operation like the one we had in the U.S. that has been basically dramatically hit by a low level of activity and fierce competition because of the number of competitors that we had in industry, we mentioned as well the number of companies that have one bankrupt and others that had to go through a very important restructuring financial situation that were affected by these downturn is just amazing, how a lot of these companies are still around. And Calfrac tried to preserve the company. So our management team work very hard to make sure that we were not going to wipe the shareholder base and we were working very hard to keep the unity of the company in the different geographies and the different business lines that we have. Yes, we closed bases. Yes, we parked equipment. Yes, we had to release some of the valuable employees that we had in the company and we had to reduce the amount of business that we have with our suppliers, but this has been a very complicated and difficult downturn. However we are optimist that this lack of investment and lack of activity in the industry is going to be translated into a need to go back and produce oil and gas because when you stop investing at the levels that you need for three, four years - for two or three years, it is going to be required to go back to work. And as you know very well, Greg, the first place for that to happen is North America. It's the most efficient market in the world. And we said that we wanted to preserve our business is because even though we've been challenged by that situation especially in the U.S., we see that the U.S. market is one of the most important ones in the world and is the most active and most efficient one, as it can go down very quickly, it can recover as well, and we've seen that as well. So our expectation is basically to go from negative transition into breakeven and positive, and that's what we said in our outlook that what we think in the first half of 2017 is that transition.

[Greg Colman:]

So if I could rephrase, just to make sure I understand correctly, the first half of 2017 being that transition from negative to positive with likely entry into positive EBITDA from the U.S. operations in middle of 2017, call it, end of Q2 beginning of Q3?

[Fernando Aguilar:]

That is correct.

[Greg Colman:]

Okay, great. And I suspect I know the answer to this based on the way you talked about the U.S. market but I think it's worth asking anyway. Given the elevated leverage relative to some of your other peers, just talking about the U.S. in general with quite a few IPOs in the pipeline, billions of dollars’ worth of frac equipment coming to the market and some of that have already been very well received, and I know it's a bit of a strange metric but an EV [ph] for horsepower basis trading well in excess of $2,000 to $4,000. Do you entertain at all changing the size of your U.S. fleet and potentially monetizing some of those assets, or is that something that is not even being contemplated with management given the trajectory of the U.S. recovery?

[Fernando Aguilar:]

Greg, it is - management is responsible to bring any opportunity to the management table discussion and also bring it up to the board. And of course any opportunity that is a business opportunity for Calfrac from monetizing that you were saying, to expanding our business, is always considered at Calfrac. So it doesn’t really matter what type of opportunity is in front of us. And a person like Mark is responsible for this type of, let's say, capture opportunities and then discuss it at our level and bring it to the board. So we are always watching and looking at what is happening. We believe that the industry is in at a good place to recover. As you know very well when you went down 40%, 50% in pricing, you don't go to a positive pricing right away. So that's why we talk about that transition. And as we get into a positive margin territory, we will see exactly what happens in terms of the business, but we'll always listen to opportunities. We always consider expansion and business deals that can be basically in favor of our shareholder base. By the way we see today, we see the market recovering and that market recovering is going to be helping us. And of course when you see that our notes that are basically due 2020 are basically trading close to par. That is a recognition from the market of the potential and the possibility that the company has on the recovery road. So I'm not - I think we need to continue concentrating diligently in our pricing and our operations as we normally did, and we will have different discussion in the second part of this year as I have mentioned earlier.

[Greg Colman:]

Got it. That makes sense. And this is the last one from me and then I’ll just hand it back over. Perhaps approach from a different way. With the consolidation of bases and shutting down of bases in the U.S., is your current fixed infrastructure and not the rolling stock, but the staging grounds you have and the customer base you have, is it appropriate to be able to reactivate in time the entire 600,000 plus horsepower, or would there be a portion of that that your fixed infrastructure wouldn't be able to support and you would need to grow the fixed infrastructure in order to fully reactivate the entire U.S. fleet?

[Fernando Aguilar:]

I think the management team is quite capable of understanding the different steps that they have to take in order to reactivate fleets in U.S. and of course in Canada. The two places are similar because it is the same business but are different because of the labor base that we experienced in the different locations. In the Canadian Western Sedimentary Basin is concentrated in one area, while in the U.S you have maybe five or six different areas that are very far away and the labor base is very different. But in any of those cases, I have to remind you that, let's say, in 2014 we managed to grow or business by 60% - sorry, by 100% in the U.S. and 60% overall for Calfrac. So the ability to recover is there. The same management team that were in ‘14 are here in 2017. So it's just a matter of understanding how good pricing is going to help us reactivating our fleets. It depends on the activity levels and also the ability to have the pricing that we need in order to pay for those expenses and make money.

[Greg Colman:]

Got it. Well, thank you for that clarity. That's it for me.

[Fernando Aguilar:]

Thank you very much, Greg.

[Michael Olinek:]

Thanks Greg.

[Operator:]

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

[Jon Morrison:]

Good morning all.

[Fernando Aguilar:]

Good morning, Jon.

[Michael Olinek:]

Good morning.

[Jon Morrison:]

Congrats on the promotion, Mike.

[Michael Olinek:]

Thanks Jon.

[Jon Morrison:]

Just a point of clarification on U.S. margin progression. Do your comments assume that you are, call it, activating incremental crews to get back towards that positive margins by the midyear, or do you believe that you could get there based on what you have in the field working today?

[Fernando Aguilar:]

It's a combination of the two, Jon. So you have to - as we mentioned in our introductory note, we are increasing the size of one of our fleets in Colorado and we are also deploying a second fleet in the Bakken as it was presented to you. At the same time, Mike explained the level of detail that goes into when you're bidding and how pricing is taken into consideration. And then when customers start going back to - started to go back to work, the level of efficiencies were not at same level as we were bidding for those piece of work. So as we go back to those customers to make sure that pricing is respected from the negotiation we have with them and the additional equipment that we are bringing back to work, the combination of the two are basically bringing us from the negative margins in 2016 into that transition of the first half of 2017.

[Jon Morrison:]

Has ultra-cold temperatures been a challenge in North Dakota in January or February to a degree that we should think about being a drag to profitability in Q1 at this point?

[Fernando Aguilar:]

Yes and no. We are trying to compensate for those weather issues that we've been experiencing some in Canada southern parts of the country and also the north part of the U.S. And also I have to tell you Russia is another one, because in Russia we went from - in some cases, 40 or 45 Celsius negative to two, three degrees positive. So these swings in temperature are basically making roads impossible to circulate. So you have those two extremes in Russia and you have - we've been experiencing here in Canada. But we were trying to compensate with that with a better pricing that we are putting in front of the table.

[Jon Morrison:]

Fernando, what would it take for a line of sight on activity rises or pricing increases for you to contemplate to reopening your southern U.S. footprint? And I guess as a follow-on, is the Permian entrance more likely than an Eagle Ford reactivation at this point if you go down that road?

[Fernando Aguilar:]

These are the discussions that we normally have in a daily and weekly basis, Jon. We've seen more rigs coming into the Eagle Ford recently and I think you put a note on that as well, and the Permian opportunities continue coming in front of us because customers that we have in different areas are asking us to continue bidding in those areas. So we are not very far away from doing that, but you have to remember that what we are trying to always make sure that we optimize our pricing power and I think that because some of the tenders that we present in different areas, you still have people bidding lower in some cases. We need between 100 - the industry needs between 100 and 200 rigs to have saturated at that level of activity of equipment that is active today and is not active today in the market, just close to a 13 million or 14 million horsepower. So as we continue moving into that adding 10 to 15 rigs per week, you will see that the pricing power from the pressure pumping companies will continue moving up, and that transition period that we call H1 of 2017 and getting to a more positive territory in the second part of the year, where we see most of the, let's say, better times in terms of margins coming up to our sector.

[Jon Morrison:]

You commented in your preamble about the possibility of reactivating another crew [ph] in the Marcellus in some pointing in ‘17. Does that require an increase in pricing or is it just visibility on a work program that you need to do to get an incremental crew there working?

[Fernando Aguilar:]

I think the two of them. It's basically a combination of pricing and also activity. We have two or three customers in the area have been requesting our services and they see an increased number of rigs coming in the second part of the year and that's why we believe that is going to be the case, but if the pricing is not correct, we are not going to do it.

[Jon Morrison:]

Mike, how do you think about using the equity cures given everything that's in front of you and you know today?

[Michael Olinek:]

Well, Jon, as you know, we have the ability to use both equity cures before the end of our covenant relief period, which is the end of ‘17 and we feel it's to our greatest advantage from a credit access point of view to utilize both of those cures in that timeframe. But we do continually evaluate what is the best timing to use those cures. And as we discussed in our release, we can elect to use that cure or to elect to use a cure in respect of any quarter at any time prior to filing our quarterly disclosures documents on SEDAR. So we continually evaluate it and we just - we will intend to use those between now and end of ‘17.

[Jon Morrison:]

Okay. Last one just from me. Fernando, you referenced the $5 billion of aggregate spending that's expected to take hold on the upstream market in Argentina in 2017. Do you believe that pace of spend is enough to drive incremental expansion in your asset utilization and revenue and margins in the next few quarters in that market, or it's more of a highlight of a long-term story that could unfold in Argentina?

[Fernando Aguilar:]

No. I think what is important is that in Q4 you had that discussion between market [ph] and the unions. And then so the head of the union in Argentina talked to the President of the country and they agreed on, let's say, a new game plan. And what happens when, let's say, the labor members or the union members are hit by that 20%, 30% decrease in their wages and the benefits they were having before, they tried to basically block what their leader did. So it's going to be some transition period between that agreement at high level to what happens and translates and percolates in the field. So we see that happening as we speak. We’ve been doing a very good job penetrating some of the, let's say, major accounts in the country in the last few years as you know, because Calfrac is relatively new in the fracturing business in Argentina compared to 70 or 80 years of Halliburton and Schlumberger present in the country. So we continue getting important accounts and even with international companies. Those international companies, as you know, are now committing to the government to increase their presence and increase their investment orders like, let's say, Petrobras for example is watching what happens between the government and the union. But in general terms the atmosphere is more positive in ‘17 while it was in ‘16. And we believe that that increase is basically moving forward and the President and the country are moving in the right direction. So as a summary of what I'm trying to say, Jon, is that we believe that ‘17 is going to give us a better performance than the one that we had in ‘16.

[Jon Morrison:]

Appreciate the color. I’ll turn it back.

[Fernando Aguilar:]

Thank you, Jon.

[Michael Olinek:]

Thanks Jon.

[Operator:]

Your next question comes from the line of Ian Gillies from GMP. Your line is open.

[Ian Gillies:]

Good morning, everyone.

[Fernando Aguilar:]

Good morning, Ian.

[Michael Olinek:]

Good morning.

[Ian Gillies:]

I wanted to start on the U.S. side, if we could. With your view that you think your - if margin should revert back to positive territory or breakeven by midyear, are you able to provide a roadmap at all about how many crews you’d like operating in each region by that point in time to get there?

[Fernando Aguilar:]

So today we have six. If we think that we have that second one ready for the Bakken, it’s two in Bakken, two in Marcellus and two in Colorado, Ian.

[Ian Gillies:]

Yes. And so I guess this is somewhat following on Jon's comment is, do you have any desire to add additional crews to get to that breakeven margin or do you have to do with what it is today and just get better efficiency out of your current customers that you’re working for today?

[Fernando Aguilar:]

So I want to highlight the 1.2 million horsepower that we have in North America including the new equipment active. That's our job. We were not held by the industry fundamentals in the last two years but our objective basically is to have all the equipment active. But as I mentioned earlier in the answer to Jon, we are adding or we have added equipment in the U.S. but at the same time we've been negotiating and discussing pricing with our customers. So the combination of those four fleets to six rigs and the six fleets and now pricing is what is going to take us through the transition of better pricing in the U.S., Ian.

[Ian Gillies:]

Okay, thank you. That's extremely helpful. Switching gears to Canada. Everyone has noted there has been a material increase in frac intensity. Are you able to highlight a bit about some of the impacts maybe it's having on the equipment in margins etcetera, just given the incremental wear and tear that you can get from increased sand usage?

[Fernando Aguilar:]

Yes. Like we mentioned earlier, we will see the Canadian operation getting into a more U.S. type of completion activity in terms of amount of sand that is pumped, the volumes and pressures that are normally run in the U.S. because customers in the U.S. have realized that by following a tight cost completion methodology, they have been able to produce more from their wells in both oil and gas, and of course the completion technologies are different but at the same time we see that, as we get into a more active environment, the demand for our services per customer or per basin is increasing. So that's very positive for us because as we continue firming pricing, we will see that intensity generating more business for us. So in Canada, you will see that the amount of, let's say, equipment getting more back to be repaired and all the normal repairs that take place for equipment will happen in Canada as they normally happen in the U.S., so the answer is yes.

[Ian Gillies:]

Okay. And the last one for me along the same line in Canada was, you noted one of your large customers supply [indiscernible] sand in the quarter, and if that becomes an increasing trend moving forward from a variety of customers, how should will you think about that impacting the P&L?

[Fernando Aguilar:]

You mean the sand increase?

[Ian Gillies:]

No, what I'm referring to is if producers are procuring their own sand, how do we think about the impact on Calfrac’s income statement or Canadian segment results?

[Fernando Aguilar:]

Yes, so it is normally something that happens and I think I have mentioned that earlier, Ian. Normally in the industry you always have around 10%, let's say, maximum in some time during the downturns of 20% of customers trying to procure everything themselves and that happens when they have nothing else to do rather than getting to the service companies business. And sometimes procurement people try to do it that way because they think that that they can be more efficient than the service companies. That is not the case and then that 10%, 20% is always going to be there. But as companies go back and they become busier, their business is to produce oil and gas and find locations where that production is going to happen, so they will forget about that because in any case when you have a network that is basically trying to fulfill all of your obligations in terms of providing materials to your customers, you are more efficient than a specific customer going to one specific location. So I don't really see that as a big issue. And you will always have one or two companies that are trying to do that. But when they make the calculation, they normally realize that it’s not the case but because you have - their own people are making that calculation, they are not going hung themselves. So at the end of the day, I'm not too concerned about it. It's not the general trend in the industry. It's more an isolated situation.

[Ian Gillies:]

Okay, that's helpful. Thank you very much. I'll turn the call back over.

[Fernando Aguilar:]

Thank you very much, Ian.

[Michael Olinek:]

Thank you, Ian.

[Operator:]

Your next question comes from the line of Ben Owens from RBC Capital Markets. Your line is open.

[Ben Owens:]

Good morning.

[Fernando Aguilar:]

Good morning, Ben.

[Michael Olinek:]

Hi Ben.

[Ben Owens:]

Follow-up on the sand question. I wanted to ask, given the growing tightness we've seen in the frac sand market, have you guys run into any situations where you’ve seen any delays in getting sand to a job or getting delivered to the basin?

[Fernando Aguilar:]

I think I have to answer that thinking depending on the basins and all that, Ben. But the answer is yes. You have sometimes tough winters and we have experienced that in the different years where we've been operating at the level of intensity. Sometimes you have trains that are not basically making it on time but it is up to the - let's say, to the operations and supply chain network to make sure that the materials arrive on time. So most probably you have these cases happening especially in winter time, but today I can say that we should be okay in terms of that situation.

[Ben Owens:]

Okay, thanks. Has that resulted in any lower utilization than you would have normally been able to drive?

[Fernando Aguilar:]

No.

[Ben Owens:]

Okay. And then a follow-up on that on the labor front. Given the tightness there in the labor market as well, have you had to make any changes to the pay structure for field staff in order to bring people on board and grow up?

[Fernando Aguilar:]

One of our competitors started some time ago a variable pay and we will be reluctant about it but the industry moved in that direction and we adopted not 100% like all people did but some of the positions that will affected by that variable pay situation. We knew that when the market was going to get busier and tighter, it was going to be difficult to keep that type of situation. And in fact those competitors who started doing that, started early January to go back to the employees and give them retention bonus for Q2, especially Q2 while making sure that they were going to have the people available. We have done the same thing, in fact we’re trying to go back and make sure that if Q2 slows down, we are going to be able to retain our employees and go through that slow, let's say, slow if that happens quarter to make sure that people are going to remain because today when you have between 200,000 and 300,000 people leaving the industry, you have lost one-third, especially the new generation that don't - they are not interested in working in industry that has been basically releasing them and treating them like it happened in the last two or three years, right. So it is going to be a catch-up period from the companies to make sure that we recover that level of relationship with the employee base and a potential workers base to make sure that people are attracted to the industry and that they are going to start being happy to be part of the industry again. But this downturn hasn’t been too good to the industry in general, and that's why we have to make sure that that employee base that is out there is protected and we have to make sure that they remain with the companies because if that is not the case, then the industry is going to have a big problem trying to attract people in the future.

[Ben Owens:]

Okay. Thanks for the color. I'll hand it back.

[Fernando Aguilar:]

You’re welcome.

[Operator:]

Your next question comes from the line of Jeff Fetterly from Peters & Company. Your line is open.

[Jeff Fetterly:]

Good morning, everyone.

[Fernando Aguilar:]

Good morning, Jeff.

[Michael Olinek:]

Good morning, Jeff.

[Jeff Fetterly:]

The reference in the release around cost inflation obviously specific on the Canadian side but also increasing on the U.S. side. How significant has that been for both markets so far?

[Fernando Aguilar:]

It is - when you, Jeff, you go through a very negative environment where we've been in the last two years. ‘15 and ‘16, and you try to keep very close to your supplier to make sure that they were part to the solution to the problem which is basically keep a very close discussion about keeping their prices low, so our cost was going to be kept at a level that it was competitive. These people have made a very good job. And Calfrac - from our inception, Calfrac has been very good with the relations that we have with our suppliers. Us, let's say, the two years of the downturns that are turning into a more positive, suppliers want to make sure that they want to recover some of the lost ground that they have been losing. So the first sector that came into that area was transport. Trucking started increasing. And then you see some increases in sand, and the chemical companies are now coming to talk about it. And what we are trying to do at same time in order to avoid that situation getting out of control is having the same discussion with our customers as well. So that increases that we see are basically almost passed through immediately to customers. So this is where we are today. How is pricing power going to continue in the future that you don't have to go back to the customer every time that sand company is increasing the prices. That's going to be a different story, but this is going to happen once the commodity price gets to a level where you can have the price of the services in a normal environment like we used to have before. And I think all the - the industry is going through that transition now that is going to take you to that place where your price is going to have the real cost that you are incurring when you're operating.

[Ashley Connolly:]

So, Jeff, just to follow-on for sand specifically, we've seen increases in the realm of an $8 to $10 a ton. For the overall tickets with sand delivered to location, a fairly small portion in that, the rail piece and the transport [ph] piece of that ticket, which are bigger has stayed constant, so not a huge impact on the overall deliver to location, yes.

[Fernando Aguilar:]

But passed to the customer.

[Ashley Connolly:]

Yes.

[Jeff Fetterly:]

So would you blend third-party trucking with chemicals with sand? You talked about the 10% pricing increase on average that you’ve see on the Canadian side. Would that be net of the cost inflation, or is there an erosion element in that?

[Ashley Connolly:]

That should be net. There will be some delays obviously with getting back the prices from the customers but overall that number is a net number.

[Fernando Aguilar:]

You can think of 20% because there is a time delay as Ashley is mentioning when you have that price - let's say a new cost coming from customers and then when you discuss it with your different suppliers and then you with certain customers. They basically lay there [ph].

[Jeff Fetterly:]

And has the cost inflation on the U.S. side been any different or material?

[Fernando Aguilar:]

It's very similar.

[Jeff Fetterly:]

On the Canadian side.

[Fernando Aguilar:]

No, Jeff, it’s very similar to Canada.

[Jeff Fetterly:]

Okay. The comments you made earlier about pricing traction and the 10% or so increase relative to the Q3 trough. Was that specific to Canada, and if so, how would the U.S. pricing traction compares with that?

[Fernando Aguilar:]

I would say that yes, the answer - that the comment that I made was for Canada but we are today in the U.S. is maybe half of that.

[Jeff Fetterly:]

Okay. Just to clarify the question earlier in your comments on the Argentinian side. So your outlook is obviously improving but the comment in the release around labor disruptions in the form of work slowdowns having recently emerged. Is that a Q1 specific item that you're seeing, or is that something that is a continuation of issues you've seen in previous months?

[Fernando Aguilar:]

I think it was worst in - like I said before, what you had in Q4 and Q3 in 2016 was strikes that basically stopped operation completely. The government announced the deal with the union and this is a high level agreement that I mentioned earlier. And when the union workers basically had tried to demonstrate against something like that, they are not going on strike because they get released from the union. So what they do is they sabotage the situation by slowing down the operations and that's the Q1 effect. But we believe that this is - the government is going to go back to a discussion and something is going to happen in that respect.

[Jeff Fetterly:]

So is it realistic to be modeling the Latin America business to return to profitability in the near-term, or is that something that will take a couple of more quarters to happen?

[Michael Olinek:]

No, Jeff. I think what we were expecting to see here is a return to profitability in the first quarter and transitioning to, I think, better profitability as the year progresses.

[Jeff Fetterly:]

And that's largely a function of the cost reduction measures that were made over the course of ‘16 in Q4?

[Fernando Aguilar:]

Not only, Jeff. It’s also related to contracts that are basically being executed in the Vaca Muerta field in Neuquén for different customers including the National Oil Company.

[Jeff Fetterly:]

Okay, great. Thank you for the color.

[Fernando Aguilar:]

Yes, you’re welcome.

[Operator:]

There are no further questions at this time. Mr. Aguilar, I turn the call back over to you.

[Fernando Aguilar:]

Thank you very much, Melissa. Thank you everybody for participating in our call. And again, we want to wish, Ashley, good luck in her new venture and also welcome the new members of the team and Mike and Mark in their new jobs. Thank you. Goodbye everybody.

[Operator:]

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