Calfrac Well Services Ltd.
Q4 2015 Earnings Call Transcript

Published: 24 Feb 2016

[Executives:]

Fernando Aguilar - President and CEO Mick McNulty - CFO Ashley Connolly - Manager, Capita I Markets

[Analysts:]

Byron Pope - Tudor, Pickering, Holt Brian Purdy - PI Financial Jon Morrison - CIBC World Markets Ian Gillies - First Energy Sean Meakim - JPMorgan

[Operator:]

Good morning. My name is Sharon and I will be conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Limited Fourth 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]. Mr. Fernando Aguilar, President and Chief Executive Officer, Calfrac Well Services, you may begin your conference.

[Fernando Aguilar:]

Thank you, Sharon. Good morning and welcome to our discussion of Calfrac Well Services fourth quarter results. Before we get started, I would like to outline how this conference call will be conducted. Mick McNulty, our Chief Financial Officer, will begin with an overview of our quarterly financial performance. I will then discuss our outlook for 2015. After which, Mick, Ashley and I will be available to answer questions that you may have. I will now turn the call over to Mick.

[Mick McNulty:]

Thank you, Fernando and thank you, everyone, for joining us for today's call. Before I begin my discussion this morning, I would like to note that this conference call will contain certain statements and expressions that are considered to be forward-looking statements under applicable securities legislation. Our assessment of future plans and operations is based on expectations that involve a number of business risks and uncertainties. These risks are set out in detail in our annual information form and include, but are not limited to, commodity prices for oil and natural gas, equipment inventory levels, national and international economic conditions, political uncertainties and government regulation, the ability of our customers to access credit in capital markets, the concentration of our customer base, competition in the markets where we operate, product and supply availabilities, risks associated with our foreign operations, weather conditions, outcome of legal proceedings, currency exchange rates and labor shortages. These conditions could cause the company's actual results to differ materially from our current expectations. During the fourth quarter of 2015, Calfrac achieved the following financial results in comparison to the fourth quarter of 2014. Consolidated revenue of $286.2 million, a 62% year-over-year decrease, resulting primarily from lower activity and pricing in North America, offset partially by revenue growth in Argentina. Adjusted EBITDA which is used for the proceeds of covenant calculations was $22.9 million in the fourth quarter of 2015 compared to $121.7 million in the fourth quarter of 2014. The decrease was mainly as a result of weaker pricing for the company's services in Canada and the United States combined with significantly lower equipment utilization in North America. So that everyone is clear, adjusted EBITDA is calculated by adding the following amounts to operating income. Non-cash stock-based compensation of $785,000, restructuring charges of $11.9 million, losses attributable to non-controlled interest of $286,000 and realized foreign exchange gains of $4.2 million. Calfrac recorded a net loss attributable to shareholders of $141.5 million or $1.45 per share diluted, which included write downs of property, plant and equipment and inventory, restructuring charges as well as a litigation provision. That compares to net income of $26.5 million or $0.28 per share diluted in the fourth quarter of 2014. Additional details regarding excluding items included in the fourth quarter results are as follows. There was a $11.9 million restructuring provision primarily related to the Canadian, U.S. corporate divisions of which $4 million was included in SG&A. The company is determined to make the necessary adjustments in order to survive the current down turn. And we will continue to align costs with anticipated activity levels. The restructuring process leverage is ongoing, and so we are unable to provide many more details in this regard at the present time. Also in the quarter as a result of substantial downward shift in the commodity price environment, Calfrac recorded an impairment charge with respect to property, plant and equipment of $114.5 million, primarily related to the company's United States operations which have been the most severely impacted by the current commodity prices. This compares to a charge of $4.6 million in 2014. We also recorded an impairment charge with respect to inventory of $14.3 million which is also recorded primarily related to the company's Canadian and United States operations. And finally we increased our U.S. litigation provision by US$1.5 million to a total of US$5.5 million in the quarter. The results from Calfrac's operating segments are as follows. Revenue from our Canadian operations during the fourth quarter 2015 was $123.3 million versus $297 million in the same period of 2014. The 58% decrease was primarily due to significantly lower activity and reduce pricing for the company's fracturing services. Revenue per frac job decreased by 25% from the same period in the prior year as a result of lower pricing offset partially by greater service intensity. Total proppant per reported frac job increased by 42% over the prior year. Coiled tubing jobs decreased by 39% from the prior year’s fourth quarter due to lower activity in the shallow oil plays of Saskatchewan and the shallow gas areas of Southern Alberta. Operating income in Canada during the fourth quarter of 2015 was $10.2 million, which included restructuring costs totaling $4 million during the quarter. This compares to the $67.6 million of operating income in the same period of 2014, which included restructuring costs of $2.8 million. The company was able to mitigate the impact of lower activity and pricing through the implementation of several cost reduction initiatives designed to maintain the company’s competitiveness in a lower price environment. Operating costs were 51% lower than in the comparable quarter of 2014, which is attributable to the decline in activity combined with the impact of cost savings realized during the quarter. During the year, Calfrac realized reductions of approximately 32% -- sorry 30% for proppant, 22% for third-party subcontractors and 11% for chemical costs. The significant reduction in product costs were partially offset by the impact of the weaker Canadian dollar for the cost of proppants and chemicals that are primarily sourced from the U.S. During the quarter, the company had approximately 202,000 horsepower temporarily idled in Canada. SG&A expenses declined by 51% year-over-year, primarily due to workforce reductions, which have totaled approximately 40% since the end of 2014 as well as lower compensation structure, combined with a reclassification of about $1.1 million of employee costs from SG&A to operating costs. Overall, the Canadian division reduced its fixed cost structure by roughly 48% since the end of 2014. Of the $4 million restructuring costs recorded, $1.5 million were related to SG&A. Of note, on a sequential basis, the Canadian division managed to improve its operating income as a percentage of revenue excluding restructuring costs by roughly 270 basis points despite a further deterioration in pricing and the impacts of the holiday break in December. Revenue from Calfrac’s U.S. operations decreased to $81.3 million during the fourth quarter and $355.7 million in the comparable quarter of 2014 due to significantly lower fracturing activity in Pennsylvania, South Texas, North Dakota and Arkansas, resulting in 58% fewer fracturing jobs period-over-period. Activity in the Rockies remained resilient during the quarter due to an active customer base in this region. Revenue per job was 47% lower year-over-year due to significantly weaker pricing and, to a lesser extent, job mix. Proppant per fracturing job decreased by 26% from the same period in the prior year due to lower activities in more service intensive regions such as the Marcellus Shale gas play. The company’s U.S. operations had an operating loss of $3.9 million during the fourth quarter, which included restructuring costs totaling $5.1 million. This compares to operating income of $52.8 million inclusive of $3.1 million in restructuring costs in the same period in 2014. The decline was primarily due to significantly lower pricing and utilization. Operating income as a percentage of revenue declined materially from 15.7% in the fourth quarter of 2014 to 1.5% in 2015, after adjusting for the restructuring charges in both periods. The deterioration in the operating income percentage was due to intense pricing competition from many of the company’s major competitors and lower equipment utilization in Pennsylvania, South Texas and North Dakota. Mitigating the overall trend were U.S. dollar pricing reductions for proppant averaging 38%, with chemical costs also down by approximately 25% from the beginning of the year. Calfrac had approximately 322,000 horsepower idled in the U.S. during the quarter. SG&A expenses decreased by 50% in the fourth quarter of 2015 from the same period in the prior year due to cost reductions that were initiated towards the end of the first quarter and continued throughout the remainder of 2015. Overall, the U.S. division has reduced its headcount and its U.S. dollar fixed cost structure by approximately 60% since the end of 2014. Of the $5.1 million in restructuring recorded in the U.S. division, $1.1 million was included in SG&A. In the fourth quarter of 2014, the company recorded a restructuring charge of $3.1 million. On a sequential basis, the U.S. division was also able to improve margins despite deteriorating market conditions. Specifically operating income as a percentage of revenue improved roughly 890 basis points from the third quarter of 2015 after adjusting for the restructuring costs. During the fourth quarter of 2015, revenue from Calfrac’s Russian operations decreased by 13% to $32.6 million from $37.7 million in the corresponding three-month period of 2014. Russian revenue is generated in rubles and the decrease was primarily caused by the 16% devaluation of the Russian ruble in the fourth quarter of 2015 compared to the same period in 2014. The decline in the ruble was partially offset by higher fracturing and coiled tubing activity in Nefteugansk. Revenue per fracturing job declined by 3% due to the currency devaluation offset partially by the completion of larger jobs in Usinsk where weather permitted more activity in the area north of that city. Calfrac performs larger active fracturing jobs in this region, which is only accessible by ice roads. Operating income in Russia was a creditable $4.2 million during the fourth quarter compared to $4.8 million in the corresponding period of 2014, despite the 16% decline in the ruble. Operating income as a percentage of revenue was 13% virtually unchanged year-over-year. SG&A expenses declined by 66% in the fourth quarter of 2015 from the prior year's quarter due to the impact of the depreciation of the Russian ruble combined with the cost reduction initiatives, including lower bonuses and personnel reductions. Calfrac's Latin American operations generated total revenue of $48.9 million during the fourth quarter versus $58.5 million in the comparable period in 2014. Revenue in Argentina increased by $2.2 million due to higher cementing activity offset partially by lower fracturing activity combined with a pricing decrease that was implemented in the first quarter of 2015. The increase in revenue in Argentina was more than offset by lower revenue in Mexico and Colombia during the quarter. Lower revenue in Mexico was the result of lower year-over-year activity, the depreciation of the Mexican peso and a positive revenue adjusted in Mexico during the fourth quarter of 2014 totaling US$6.4 million. This did not reoccur in the fourth quarter of 2015. The company completed its existing commitments in Colombia during the second quarter of 2015 and is now in the process of closing operations. Operating income in Latin America for the fourth quarter of 2015 was $4 million compared to $11.8 million in the comparative quarter in 2014. Operating income in the fourth quarter of 2015 was lower due to decreased equipment utilization in Mexico, the effect of the onetime revenue adjustments as I previously described, lower pricing in Argentina, and higher SG&A and district overheads in Argentina related to the company's expanded unconventional fracturing operations. Calfrac's corporate expenses decrease 41% from the fourth quarter of 2014 as a result of the company greatly reducing its overheads throughout 2015 to better align its cost structure with anticipated activity levels. These initiatives contributed approximately $12 million to the total decrease in corporate expenses primarily by reducing corporate personnel costs and annual bonuses. The company recorded restructuring costs totaling $2.3 million during the quarter of which $1.4 million was recorded in SG&A. In the fourth quarter of 2014, $0.9 million of restructuring costs were recorded. Calfrac recorded income tax recovery of $72 million during the fourth quarter of 2015, compared to an expense of $17.5 million in the comparable period of 2014. The fourth quarter of 2015 results included an asset impairment, an inventory write-down and the write-off of deferred tax assets. Excluding these onetime items the income tax recovery would have been $26.7 million leading to an effective tax rate of 30% which is consistent with the normalized effective tax rate of 29% during the comparable period in 2014. In light of the current environment, the company had reduced its 2016 capital budget by approximately $10 million down to $15 million. Partially upsetting the reduction is the impact of the strengthening U.S. dollar which increased expected carryover capital to $35 million up from the $30 million previously reported. In total Calfrac now expects to spend $50 million throughout 2016. The company's working capital was approximately $306 million which included a $124 million in cash. Long-term debt at quarter end was approximately $927 million, the vast majority of which is not due until 2020. As at December 31, 2015 the company had used $40 million of its credit facilities for letters of credit and had a $110 million outstanding under its credit facility, leaving a $150 million in available credit. On December the 11th, Calfrac amended its credit facilities to provide increased financial flexibility. The case impairments of the incumbent package are as follows. Relaxation of the funded debt to EBITDA covenants including two periods of waivers over the first six months of 2016, followed by 5 times in the second half of 2016, down to 4.5 times in the first half of 2017, 4 times in the second half of 2017 and 3 times thereafter. The introduction of an equity cure positively impacted EBITDA on funded debt for the purposes of the covenant calculation. Two equity cures can be utilized over the covenant's relief period that extends to December 2017, so long as they are not in consecutive quarters. Mature cannot exceed the greater than 50% of total trailing 12 month EBITDA or $25 million of the cure. On this point on December 22, 2015, Calfrac completed an equity offering of $25 million which serves the fully fund one equity cure should the company had required. In addition the total debt capitalization ratio was removed and a funded debt to capitalization ratio of 30% was introduced. Another element included voluntary reduction in the total facilities from $400 million to $300 million. We also introduced a contract of a borrowing base, with advances under credit facilities limited by a combination of eligible North American receivables, cash excluding what is held in a segregated account for the purpose of potential equity cure and a portion of property, plant and equipment. And lastly, to allow for increased restructuring flexibility, second lien financing of up to $400 million is permitted subject to certain conditions. At this point, I think it’s important to note that while we are outside our fixed charge coverage ratio in our long-term note indenture, this is not a covenant breach nor is it an event of default, as seems to have been reported in some circles. The fixed charge coverage ratio acts as a restriction on the occurrence of additional indebtedness and certain restricted payments. As we disclosed in our release, there are numerous baskets available that allow incurrence of additional indebtedness and allow us to make any restricted payments that maybe required in the operation of our business. We are well aware of our balance sheet situation and we are continuously discussing ideas to improve our liquidity position and will execute on those strategies that are in the best interest of our stakeholders. Overall through the recent amendments to covenants, the existence of a fully funded equity cure, the strong relationship that the company has with its banks, and the fact that the company’s unsecured senior notes do not mature until 2020, Calfrac believes it will be able to navigate through the current downturn. Probably of no surprise to anybody, in response to the ongoing challenging business environment, the Board of Directors have determined to suspend Calfrac’s dividend effective immediately and until further notice. Finally, as this will be my last conference call for Calfrac, I would first like to thank Fernando for allowing me to be part of this excellent management team. Secondly, I’d also like to thank the shareholders and the analysts for supporting the company over the years, especially in the last 15 months of this very trying period. Your patience and understanding is very much appreciated. I would also reiterate what I said before in that although we continue to face significant headwinds, I fully believe that with this management team and with the very supportive Board, the company is well equipped to survive this downturn and to prosper thereafter. I would now like to turn the call back to Fernando for an outlook on the company’s operations.

[Fernando Aguilar:]

Thank you, Mick. The North American oil field service industry is set to face another challenging year in 2016. The price of crude oil remains volatile, averaging around $30 per barrel since the beginning of the year and hitting a 12-year low in February. As a result, the company’s customers have further scaled back capital spending plans for 2016, which marks the first time since the late-80s that global exploration and production spending has decreased for two consecutive years. As such, Calfrac anticipates equipment utilization in North America will remain low for the majority of 2016, with the potential for a modest improvement towards the end of the year. Pricing continues to be a challenge with some competitors bidding at historically low levels in Canada and the United States. Calfrac’s international operations are expected to continue to generate positive operating margins, which will mitigate the anticipated weakness across North America. Given the current low commodity price environment and lack of visibility, Calfrac continues to focus on aggressively managing its cost structure. Calfrac is encouraged with what has been achieved to date, including fixed cost reductions of roughly 50% and 60% from the fourth quarter of 2014 in Canada and the United States, respectively. As a result of the current market, the company has reduced its headcount by approximately 40% in Canada and 60% in the U.S. since the end of 2014. Retaining key employees has always been a keen focus for the company but unfortunately with the current downturn shaping up to be the worst in decades, the company has had to make some difficult decisions in order to position itself to survive in this environment, and has been forced to let go of some of its longstanding employees. In working with the company’s key suppliers, the logistics group has reduced costs for key products including having realized reductions of approximately 30% for proppant, 20% for third party subcontractors and 11% for chemical costs in Canada compared to the beginning of 2015. The strength of the U.S. dollar has and will continue to negatively impact product costs with the majority of the company’s sand and chemicals sourced from the United States. In the U.S., proppant costs including third party hauling have been reduced on average by approximately 40% while chemical costs are down 25% from January, 2015 on a U.S. dollar basis. We continue to analyze all measures that we can employ to further lower our cost structure including process efficiencies and further cost mitigation strategies. Moving down to our divisions, I will start with Canada. Activity levels in the first quarter of 2016 started off slowly with limited activity throughout January as customers continue to adjust their spending plans and delay planned work. Given the mild winter weather witnessed across the Western Canadian Sedimentary Basin, Calfrac anticipates an early break up which combined with an overall lack of capital spending by customers is expected to result in a very limited activity in March. Pricing has decreased a further 10% to 15% from the fourth quarter of 2015 with some competitors now bidding at below breakeven levels. Overall, the company believes producer spending will be down substantially, with the year’s actual spending remaining dependent on commodity prices. Approximately 45% of Calfrac’s Canadian fracturing equipment fleet remains idle and the company will continue to prudently manage its future operating scale and cost structure in order to navigate through this challenging market. In Canada, gas-focused activity now represents a larger portion of Calfrac's work and the company expects that trend to continue, offsetting some of the weakness in oil-focused activity with drilling and completion activity in the Viking and Cardium plays likely to remain limited until crude oil prices exceed $40 to $45 per barrel. That said, gas-directed drilling is currently facing its own challenges with AECO trading at sub $2 Mcf. In the U.S., the land-based rig count is already averaging a further 20% reduction from the fourth quarter of 2015 with no signs of a near-term reversal in that trend. A number of exploration and production companies have announced capital budgets that are lower by upwards of 50% year-over-year and Calfrac anticipates overall drilling and completion spending across the U.S. to be down meaningfully for 2016. Pricing remains at unsustainable levels but we believe that it has actually found a bottom. Approximately 50% of the company's horsepower in the U.S. is currently idle and we will continue to reduce our operating scale to match near-term activity levels. In Russia, the company expects activity in 2016 to be relatively consistent with 2015. However, the first quarter financial results are expected to be lower sequentially as a result of the continued devaluation of the ruble and activity delays with select customers, also changing weather conditions. Calfrac has been successful in the 2016 tender process thus far, also negotiations are ongoing and anticipated to be concluded by the end of the first quarter. The company has experienced growing interest from new customers which has allowed Calfrac to further diversify its revenues across a larger number of companies. Overall, the company expects activity levels in 2016 to be consistent with the prior year as new contracts in Southern Argentina are expected to offset the slowdown that Calfrac is currently experiencing in the Neuquén area. Although Argentina's internal price of oil will help maintain a certain level of activity, international oil companies have been cautious in dedicating new capital to the Vaca Muerta play pending an improvement in global oil prices. As a result, some shale oil projects have been delayed with activity transitioning to more gas-focused plays. On a positive note, Argentina's recently elected new government has already implemented changes to the country's previous policies that the company believes are generating the basis for future foreign investment and will contribute to the continued development of Argentina's conventional and unconventional oil and gas resources. In Mexico, Calfrac expects activity in the longer term to increase as the national reform of the energy industry continues to proceed. As a result of the current low levels of activity and cautious approach to spending by PEMEX in the short to medium term, the company has scaled back its operations in order to match costs with anticipated revenue. Although Calfrac's long term strategy has no change, in the short to medium term the company remains focus on one thing, surviving to what is shaping out to be the worst industry downturn in decades. Key focal points include managing the company's costs structure, employing frugal cost efficiencies, retaining as many of as less people as possible during the expected activity levels, maintaining strong relationships with the existing customers as well as expanding customer base, all while ensuring the company has sufficient liquidity to navigate these difficult cyclical downturns. The company's international operations continue to generate strong cash contributions and provide an avenue for growth. Calfrac believes that pressure pumping service industry will remain an integral component of the unconventional resource development over the long term and that the company will be well-positioned given its focus on top-tier safety, service quality, logistics, management and technology. And as you know and Mick mentioned this is his last conference call. I would like on behalf of our management team, the Board of Directors of Calfrac and all the employees from the company to thank Mick for his contribution to the company. He has been an outstanding team member. We believe that he is going to be missed. We wish him the best in his retirement and future plans for his life. And I am going to be -- difficult for us to work without Mick here but life continues. But I also would like to say something that is important for us in this difficult environment. Our employees have been working very hard through this difficult downturn and again on behalf of the management team I would like to thank all the employees for all the contribution and hard work and effort that they have been putting for the company. I will now turn the call back to the operator for questions. Thank you all of you very much for listening.

[Operator:]

[Operator Instruction] Your first question comes from Byron Pope from Tudor Pickering Holt. Your line is open.

[Byron Pope:]

Good morning. Fernando, you guys did a great job with managing costs in your U.S. operations in the fourth quarter facing what should be a fairly meaningful fall off in overall completions activity in the U.S. So I was wondering if you could just frame for us how your customers are thinking about activity at least in the first quarter and the extent to which there might be further costs that you can take out of the system to keep your EBITDA in the U.S. operations somewhere around breakeven if not slightly positive?

[Fernando Aguilar:]

Byron, thank you for your question. And this is exactly what we are trying to, visiting customers in the U.S., in the last couple of weeks, it is very clear that this low commodity pricing environment is not helping them and is not helping us. That makes it a little bit difficult for companies in our sector to plan our resources. So we have to take drastic actions in order to manage our cost base and making sure that we build the structure related to what we have in front of us, which is very difficult to us. I will give you examples, one of our main operators in the U.S., one of the bigger companies, a couple of months ago they have 15 rigs, two weeks ago they have six and now they are going to two. I’m not talking about a small company. I’m talking about a company that was in the 150 to 200 rigs 18 months ago. So when you see this type of behavior coming from all sorts of customers and the number of companies that are basically going bankrupt from the operators point of view, you have to make sure that you continue fighting with the existing customers based on the work that you have available. It hasn’t been easy. But the goal that we have as you said, try to breakeven at operating income level and make sure that we have that structure design at that level. So we believe that the longer this downturn continues its going to be a very difficult time for the companies in the sector. But of course, there has to be some recovery because we have gone through levels of activity that are very, very low compared to the past. If you take what is happening today, we’re talking about around 500 rigs in the U.S. coming from 2,100 which is around 60% drop, around 200 rigs in Canada which is basically around 50% from a year ago and even international the number of rigs in the international area is about 1,000 rigs, which is 20%. So all this effect of low activity related to drilling and completion of new wells plus the natural decline that happens in the market will hit the world one day and that’s basically the question is when that there is going to be that a change in activity is going to happen and then a more attractive activity level is going to be in front of us. But the goal again is basically to fight for that breakeven situation in the markets where we operate in North America. Just to make sure that we don’t waste any of our cash in that area.

[Byron Pope:]

Okay. And I realize most of your frac spreads are working on 24-hour operations. At a high level, can you frame for us what those still active crews are -- what level they are roughly in terms of from a utilization perspective of the spreads that are still active today?

[Fernando Aguilar:]

Yes. So I still believe that what we said in the previous meeting, Byron, remains true. Customers who are operating, they don’t have let’s say the 100% utilization continue, because of a number of wells that have been completed. But when you go into these batches where you have one or two crews that are operating 24 hours continuously, customers try to execute that inventory until they finish. So I can say that we should be at about 70% utilization of those larger parts on let’s say big activity levels, but the intensity of those customers who are still operating hasn’t been reduced. That they don’t do the same amount of work, but the volumes that are pumped remain basically the same. They are trying to make economies in some of the areas related to the type of systems that they pump, but the reality is that they continue with the same intensity, but in reduced utilization.

[Byron Pope:]

Thank you. Mick, I wish you the best.

[Fernando Aguilar:]

Thank you, Byron.

[Mick McNulty:]

Thank you, Byron.

[Operator:]

Your next question comes from Sean Meakim from JPMorgan. Your line is open. Sean Meakim your line is open. Your next question comes from Brian Purdy from PI Financial. Your line is open.

[Brian Purdy:]

Good morning, guys.

[Fernando Aguilar:]

Good morning, Brian.

[Brian Purdy:]

I was just wondering if you guys are looking at additional parking of your fleet. You've mentioned here some of the percentages in various markets, but obviously revenue and it looks like activity has declined more than that. So I'm just wondering, given the trends you're seeing for 2016 if we can expect to see further equipment parked?

[Fernando Aguilar:]

Brian yes, the answer is simply is yes. If we don’t really see or have the visibility of the type of activity that we need in order to continue operating with this installed capacity that we have today, yes, we will park more equipment. Is that something that we want? Of course not. Because it is -- parking equipment and reducing the number of employees that we have assigned to this fleet is not something that we like. We prefer that market that is growing. We’re hiring people. We are training personnel, developing new technologies and doing these type of things. But in a market that is going the opposite way, you have to take these drastic decisions. And as we see or we don’t see activity happening in front of us, we will park more equipment for sure.

[Brian Purdy:]

Okay. And your comment here about pricing being unsustainable. Is there further cost reduction initiatives that you can take? Is it even possible to reduce labor costs further than you already have in terms of wages? I'm sure you can reduce headcount a little more, but is it possible to reduce salaries more?

[Fernando Aguilar:]

Yes, there are many, many different avenues that you can have. You can take more people into a more pipeline operation. You can also move more of your -- you know that we reported last time that we moved our transferred people into variable pay. We will continue moving some of the operations people into variable pay according to the activity that we have in front of us and that will reduce the compensation levels that we have. So yes, every single day in these markets, our management team is looking very carefully on all of our lines to make sure that we optimize the way we operate. So we have been considering those and we have been taking actions on them. And also if activity doesn’t happen or is not happening as we know, then more people will have unfortunately to leave the company.

[Brian Purdy:]

Okay. And I've been pretty impressed the way your Russian and Latin American operations have held up here. Given your outlook, it sounds like everything is -- activity not looking at any material declines there. Is it possible that you could see some declines in those markets as well, or are you pretty confident given the outlook you've stated here?

[Fernando Aguilar:]

This is a question that basically take us to realize that the world is in a very uncertain situation today related to our industry. If you think that the most precious commodity in the world that makes the world move from generating electricity to transporting people and producing chemicals for whatever uses we have in the world, at least at this level of operators and service companies in this jump -- financial jump you will think that something is wrong, right. And of course there is an excess production that has to be neutralized or balanced in the months to come, but this is not normal. And we think that this is only a North American problem is not true. As I was mentioning earlier 20% of the international activity have been dropping and of course those important deepwater projects out of offshore Brazil and Angola and the North Sea and different areas and even in the Far East are not really happening and is going to take time for those projects to be let's say reinitialized again. So the world is not immune to that and when you hear that Qatar, Oman, Venezuela, Russia and Saudi are talking, trying through peaceful action and they trying to invite people like Iraq and Iran, you realize that the whole world is part of this. So Russia is as you know it's a very important oil country, exceeding 10 million barrels of oil per day and their activity and their cash and their value depends on their production. So they have to be very careful that they don’t reduce that activity levels. And we believe that we have a very good track record and a very good position in their country. Argentina has a new government, as Mick presented earlier and that new government is interested in basically stopping the bleeding that their country have for many years with let's say with a lack of dollars into their reserves. So if that happens that will make sure that more investors would be attracted to go back to Argentina. Is it happening as fast as we believe, not really. I think we have a similar activity level to what we have before. But we believe that as time goes by and there is more certainty about how a commodity pricing will stabilize we will see the international operators investing in Argentina and increasing their activity levels. So we are positive about those markets and the same thing happens to Mexico. Mexico we managed to stabilize our business. It is not as important as we believe it could be or it can become. As you are aware PEMEX changed their management, their CEO recently and we believe that in the new -- that this new government will try to incentivize more companies going into Mexico and helping them develop those mature fields and in fact we see some Canadian companies move in that direction and trying to understand how a Mexican market -- I am telling about operators -- how the Mexican market operates.

[Brian Purdy:]

Okay great. Thanks for that. That’s all I had.

[Fernando Aguilar:]

Thank you very much Brian.

[Operator:]

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

[Jon Morrison:]

Do you guys currently have any equipment running in Mexico?

[Fernando Aguilar:]

Yes we do.

[Jon Morrison:]

Okay. Is it fair to assume that it isn't a drag to the overall profitability of LatAm at this stage?

[Fernando Aguilar:]

No. What we are trying to do is, first of all you have to realize that there has been a shift into the Mexican activity. There was in the past few years ago, or few quarters ago we used to have a lot of activity related to fracturing in the North and in the last couple of months we have managed to transfer our contracts to the South which is going to help us initiating on activity levels that is in a different market but is very profitable. So we don’t believe that there is a drag that is going to come from Mexico in terms of the financial profits that we can make in the region.

[Jon Morrison:]

Fernando, you referenced new contracts in Southern Argentina offsetting the slowdown in Neuquén. Does that slowdown that you're referencing in Neuquén is it specific to YPF or is it other customers that are driving the reduced activity levels?

[Fernando Aguilar:]

It is important -- I mean this is very detailed Jon and we can't basically have a fair discussion on these. But I’ll answer the question to you. So when you have a new government in a Latin American country, unions and people try to give pressure to the government to see how government normally reacts. And that’s what has happened in the last month or two, is basically the unions have been trying to force the hand of the President, trying to understand how this new government is going to treat them. So but they have been negotiating, I think things are basically moving forward. The contract that you referring to are new customers that we have in the South, that are going to generate an interesting activity in a new unconventional block that as you know was discovered in the Southern part of the country in the Cumorah rural area. And as the new government tries -- sorry new government understands how YPF functions and operates, because you know that a new government requires -- sorry requested YPF's CEO to step down. They will bring their own CEO and then that is basically creating that little let’s say slow Neuquén activity, but is not something that is going to be substantially reduced. But I also have to say that the new customers and new contracts that we have are including international operators that are very excited about some of the technologies that we brought to the country that are basically bringing a lot of efficiencies and productivities to their operations. So we’ve been gaining work that was basically awarded to some of our competitors in the country and we are very pleased with that performance.

[Jon Morrison:]

Okay. In the release, you make a comment about you believe that pricing is largely troughed at this stage. Is that based on a high-level thought that it couldn't get much worse than it is just based on where margins are or are you seeing consistent level off in bidding pricing over the last four to six weeks at this stage?

[Fernando Aguilar:]

I think consistently. yes. But there are some companies that are trying to buy market share that are basically dropping prices in some conference or some areas by 20%. So this is -- those are one offs trying to conquer market share in different areas and I think that's going to be painful for them because customers will -- the level of pricing that we have today nobody is maintaining money. And if you continue dropping prices too, you’re basically giving away your resources to those customers. Good for the customers by the way, but very bad for the industry and for themselves.

[Jon Morrison:]

Is any of the $35 million of 2015 CapEx rollover that you guys are doing this year able to be delayed or cancelled at this stage? And just from a sequencing perspective, should we think about the bulk of your CapEx coming in the front half of the year?

[Fernando Aguilar:]

Yes. The answer is yes. We are basically looking into that number as we speak. We got in our Board discussion yesterday approval for that, but our commitment from the management team is to see how much reduction can happen out of it.

[Ashley Connolly:]

I would add, I mean you are previously saying that the bulk of it would be spent in Q1 and that's no longer to be the case. So we’re able to push it out throughout the year.

[Jon Morrison:]

Okay. Mick, you gave quite a bit of color around the borrowing base and how it's calculated within the release this quarter. If you get to a point where the borrowing base calculation goes below the $300 million total facility size, does it just get permanently reduced to that level or can you give us some sense of how the mechanics of it all would work?

[Mick McNulty:]

So if I understand your question, Jon, you’re asking if the borrowing base goes below $300 million, does our facility drop to that level?

[Jon Morrison:]

Exactly.

[Mick McNulty:]

No that’s not the case. It's just the borrowing base will govern what you can borrow in the coming month, not -- it doesn’t affect the headline facility.

[Jon Morrison:]

Okay. So if it goes point in time down, it can still go back up and doesn’t structurally change the arrangement?

[Mick McNulty:]

That’s correct.

[Jon Morrison:]

Okay, thanks. That’s all I had. I’ll turn it back, guys.

[Fernando Aguilar:]

Thank you very much.

[Operator:]

Your next question comes Ian Gillies from First Energy. Your line is open.

[Ian Gillies:]

Good morning to all.

[Mick McNulty:]

Good morning, Ian.

[Fernando Aguilar:]

Good morning, Ian.

[Ian Gillies:]

I just wanted to touch on, if you need additional liquidity beyond the first equity cure, at this point do you think the preference would be to use the second equity cure or to look at asset sales?

[Fernando Aguilar:]

All options are on the table and we will have a look at them, but we would like not to take any of the two as part of our strategy. So that’s basically what we believe, Ian.

[Mick McNulty:]

So Ian, we have to add that we’ve got one equity cure already funded. We’ve got the current forecast, we don’t see a problem in making our covenants. Obviously we don’t have a completely clear crystal ball, so we currently exactly what’s going to happen in the future. But based upon what we see at the moment we don’t seem to see that’s a question. But if you can imagine, that’s at the top of our minds and it’s something we monitor on a daily basis. We’ve already -- you have seen that we’ve not been slow to cut overheads and infrastructure costs. We continue to look at all options to reduce costs and that’s our preferred approach.

[Ian Gillies:]

Okay, thanks very much. That’s really helpful. And with respect to the fixed charge coverage, does that limit your ability to use the second lien notes or to try and tender back to get some of your debt or is that not impacted by that covenant?

[Mick McNulty:]

Well, I mean I wouldn't say it’s not impacted, but I stress that we have room under the indenture to incur additional debt indebtedness. And I think we did show the calculation that’s 30% of tangible assets, which if you do the math it comes to over $500 million. So that means that under the indenture, rules of the indenture we can still incur an additional $500 million, I am not saying we are going to, I am just saying that is available to us if we obviously get agreement with our banks to be able to do that.

[Ian Gillies:]

Okay, and then the last one. I think a lot of people were hoping to see through Q4 is to see some asset retirements out of the pressure pumpers, and we haven't really seen them. We've seen some broad numbers for what the industry may retire through 2016. From your view, why wouldn't Calfrac retire call it the bottom 10% of its fleet from an age perspective or why don't you think you've seen some of your peers do it as well just in an effort to indicate that the supply and demand balance is getting better in the market?

[Fernando Aguilar:]

I think the reason for that Ian, is that, and you remember very well the way that Calfrac takes care of maintenance and our equipment. Basically when you take a piece of equipment that in a 24 hour operation gets basically renewed in a two to three year basis, you could have pumps that were basically built in -- I don’t in 2000 or 2005 and these pumps today are completely new and different. They only thing that is common to that piece of equipment is the chassis. So but if you take what is happening in some of the U.S. markets where we believe retirement is coming from accidents and fires. Like the last week, accidents in the U.S. where you had a crew from Halliburton, one from CNJ and one from Frac Tech that is basically taking maybe 150,000 horsepower from the market and then the companies are basically parking equipment because the equipment is not working. Oil competitors that were in the 1.8 million to 2 million horsepower that went down to half of their fleet because of lack of maintenance. So the numbers -- and if you remember what Halliburton presented a few weeks ago, were lower in the 4 million to 5 million horsepower that come in accordance to what we have today. But we still have around 4 million horsepower from the 8 million or 9 million that are in use today that are in excess. But that excess can be eaten with an activity increase. So we believe that the 5 million horsepower out of market is the realistic number that we have up to now and that will continue because the pricing is not sustaining at other companies maintaining the equipment.

[Ian Gillies:]

Okay. Thanks very much. I’ll turn it back over.

[Operator:]

Your next question comes from Sean Meakim from JPMorgan. Your line is open.

[Sean Meakim:]

Mick, congrats on your retirement.

[Mick McNulty:]

Thank you, Sean.

[Sean Meakim:]

Just wanted to touch base on Canadian activity. You know that the deep gas part of the market has been relatively resilient compared to the rest of North America, just also noting we have some real challenges in the global LNG market. Just curious if you had any updated thoughts around that sort of activity going through the rest of the year?

[Fernando Aguilar:]

This is -- and again Sean, this is more or less the same disability that we have today. We are entering -- in Canada you have to realize that we are entering the breakup period. So this is basically a period where companies will accommodate their plans for the year. And as we were mentioning before, on this breakup and weather pattern that we have been having in Alberta, British Columbia and Saskatchewan in the last few weeks is accelerating breakup to start. And I believe that the commodity pricing for us -- that accommodation of activity levels and spending from our customers for the second part of the year is going to be let's say presented in the next few weeks. So it is not really something that -- it is happening as we speak today. We have -- those activity levels are helping. But there is uncertainty of course what happens in the second part of the year and that will depend on many different things as all of us know.

[Sean Meakim:]

That's fair. And then just as we think about -- obviously there's, as you just noted, there's a lack of visibility into the second half. But if we were to get some up lift in the commodity, something commensurate with what the strip implies, if E&Ps had a little bit of additional cash flow, would your expectation be that would stay on their balance sheet or that some of it could get deployed into drawing down some of their duck inventory?

[Fernando Aguilar:]

Sorry, Sean you are talking about the data on the uncompleted wells?

[Sean Meakim:]

Yes. So you are saying in the second half, if we get a little bit of an uplift in the commodity, something commensurate with what the forward strip implies, so we have a better second half commodity price than we had in the first half. Such that cash flows are a little better for E&Ps, would you expect that to stay on their balance sheets in terms of would they just keep the cash on hand, or do you think there could be some opportunity for incremental work in the form of drill those uncompleted wells getting drawn out?

[Fernando Aguilar:]

Thank you for clarifying. I believe it depends on the specific situation of each company. We see companies that can basically go and take care of that inventory and we also have other companies -- and some of the customers that we have been visiting lately they are more interested in cash generation to serve their obligations. So it really varies between company and company.

[Sean Meakim:]

Okay, fair enough. Thanks again.

[Fernando Aguilar:]

Thank you very much, Sean.

[Operator:]

[Operator Instruction]. We have no questions at this time. Mr. Aguilar, I turn the call over to you.

[Fernando Aguilar:]

Well, thank you everybody for participating in today’s conference call, and, Sharon, thank you for helping us today.

[Operator:]

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