Calfrac Well Services Ltd.
Q3 2015 Earnings Call Transcript

Published: 31 Oct 2015

[Executives:]

Fernando Aguilar - President and Chief Executive Officer Mick McNulty - Chief Financial Officer

[Analysts:]

Sean Meakim - JP Morgan Byron Pope - Tudor Pickering Holt Dana Benner - AltaCorp Capital Brian Purdy - PI Financial Ian Gillies - FirstEnergy Howard Goldberg - Janney Montgomery

[Operator:]

Good afternoon. My name is Stephanie and I will be conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services third quarter 2015 results conference call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Fernando Aguilar, you may begin your conference.

[Fernando Aguilar:]

Good morning and welcome to our discussion of Calfrac Well Services third 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 the remainder of 2015 and 2016, 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 upon 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 third quarter of 2015, Calfrac achieved the following financial results in comparison to the third quarter of 2014. Consolidated revenue of $289.1 million, a 59% decrease from the third quarter of 2014, resulting primarily from lower activity and pricing in North America, offset partially by revenue growth in Argentina. Operating income of $2.8 million versus operating income of $126.1 million in the third quarter of 2014, a decrease of 98%, 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. Cost reductions implemented across the company mitigated the decline in operating income. A net loss attributable to shareholders of Calfrac of $24.2 million or $0.25 per share diluted, compared to net income of $44.5 million or $0.46 per share diluted in the same period last year. Lower year-over-year results was primarily due to significantly lower activity and pricing in North America, combined with a pretax write-off of $13.8 million and $9.5 million of deferred tax assets and goodwill, respectively, partially offset by a $31 million net gain on an acquisition. Additional details regarding the extraordinary items included in third quarter results are as follows. In July, the company acquired all the outstanding shares of GASFRAC Energy Services, Inc., under its court-approved CCAA proceedings. A third party acquired the significant majority of the operating assets and technology, but the residual assets, which included some operating assets and the $31 million deferred tax asset recognized in our financial statements, were acquired as part of the business acquisition. As a result of the company's expectation for muted levels in Mexico in the short to median term, Calfrac wrote off $13.8 million of deferred tax assets related to its Latin America division. And lastly, the company recorded a $9.5 million charge for the write-off of its remaining goodwill associated with the combination of its Canadian and U.S. divisions. The results from Calfrac's operating segments are as follows. Revenue from Calfrac's Canadian operations during the third quarter of 2015 was $121.5 million versus $282.1 million in the same period of 2014. The 57% decrease was primarily due to significantly lower activity and lower pricing for the company's fracturing services. Revenue per fracturing job decreased by 30% year-over-year as a result of significant pricing reductions and job mix, offset partially by the impact of greater service intensity. Total profits per reported fracturing job increased by 12% over the prior year. Coiled tubing jobs decreased by 30% from the prior year due to lower activity in all operating regions. Operating income in Canada during the third quarter of 2015 was $10.6 million, compared to $65.1 million in the same period of 2014. The company was able to mitigate the impact of lower activity and pricing through the implementation of several cost reduction initiatives. Pricing in Canada declined on average by 25% in the third quarter of 2015 from the third quarter of 2014, but held relatively stable on a sequential basis. Operating costs were 48% 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. Calfrac has realized reductions of approximately 25% for proppant costs, 22% for third-party subcontractors and 12% for chemical costs year-to-date. The impact of a weaker Canadian dollar on the cost of proppant and chemicals that are primarily sourced from the United States partially offset the product cost reductions achieved through supply chain initiatives. During the quarter, the company had approximately 195,000 horsepower temporarily idled in Canada rather than operate at margins that did not meet its required financial returns. SG&A expenses declined by 65% year-over-year, primarily due to workforce reductions, which have totaled approximately 40% since the end of 2014 and the impact of a lower compensation structure. Overall, the Canadian division has reduced its fixed cost structure by roughly 48% since the end of 2014. Revenue from Calfrac's United States operations decreased to $93.1 million during the third quarter of 2015, from $331.9 million in the comparable quarter of 2014, due to significantly lower fracturing activity in Pennsylvania, South Texas, North Dakota and Arkansas, resulting in 59% 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 35% lower year-over-year due to significantly weaker pricing and, to a lesser extent, job mix. Pricing was lower by an average of 35% on a year-over-year basis, representing a further 5% decrease from the second quarter of 2015. Proppant per fracturing job decreased by 19% from the same period in the prior year due to job mix and especially lower activity in more service intensive regions such as the Marcellus shale gas play. The company's United States operations experienced an operating loss of $6.9 million for the third quarter of 2015 compared to an operating income of $67.3 million 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 20% in the third quarter of 2014, to a loss of 7% in 2015. The reversal in the operating income percentage from income to loss 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. The closure of Calfrac's fracturing operations in Arkansas during the second quarter of 2015 also contributed to the operating loss. Mitigating the overall trend were pricing reductions for proppant on an average of 28%, while chemical costs were down 25% from the beginning of the year. In addition, Calfrac had approximately 338,000 horsepower idled in the United States during the quarter. SG&A expenses decreased by 39% in the third quarter 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 second and third quarters. Overall, the United States division has reduced its headcount by approximately 50% and its fixed cost structure by 59% since the end of 2014. During the third quarter of 2015, revenue from Calfrac's Russian operations decreased by 18% to $35.9 million from $43.9 million in the corresponding three month period of 2014. The decrease in revenue, which is generated in roubles, was primarily related to the 31% devaluation of the Russian rouble in the third quarter of 2015 from the third quarter of 2014. The decline in the rouble was partially offset by higher fracturing and coiled tubing activity in Nefteyugansk. Revenue per fracturing job declined by 12% due to the currency devaluation offset partially by the completion of larger jobs in Nefteyugansk, where Calfrac provides proppant to its largest customer in the region. Operating income in Russia was $4.3 million during the third quarter, compared to $5.9 million in the corresponding period of 2014, the decline being primarily due to the 31% devaluation of the rouble. Operating income as a percentage of revenue decreased from 13% to 12% due to Calfrac providing a large volume of proppant to a customer which is priced at lower margins. SG&A expenses declined by 65% in the third quarter from the prior year's quarter, due to the impact of the depreciation of Russian rouble and cost reduction initiatives. Calfrac's Latin American operations generated total revenue of $38.6 million, versus $39.6 million in the comparable three month period in 2014. Revenue in Argentina increased by $4.2 million due to higher fracturing and cementing activity offset partially by a pricing decrease that was implemented during 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 a result of lower year-over-year activity combined with a one time revenue reduction of $1.1 million related to a final contractual settlement with its major customer. The company completed its existing commitments in Colombia during the second quarter of 2015 and is in the process of closing operations. Operating income in Latin America for the three months ended September 30, 2015 was $0.8 million compared to $5.4 million in the comparative quarter in 2014. Operating income in the third quarter of 2015 was lower due to a one time revenue reduction totaling $1.1 million in Mexico, combined with higher SG&A and district overhead costs in Argentina related to the company's expanded unconventional fracturing operations. The company recorded an income tax recovery of $9.4 million during the third quarter, compared to an expense of $24.7 million in the comparable period of 2014. The third quarter of 2015 results included a write-off of $13.8 million of deferred tax assets, an impairment of goodwill of $9.5 million as well as a gain on acquisition of $31 million. Excluding these one time items, the income tax recovery would have been $23.2 million, leading to an effective tax rate of 42%. Turning to the balance sheet. The company's working capital was approximately $297 million, which included $55 million in cash. Long term debt at quarter-end was $850 million, the vast majority of which is not due until 2020. As of September 30, 2015, the company utilized $39 million of its credit facility for letters of credit and have borrowed $61 million against its facility, leaving $301 million in available credit. However, it's important to note that the net draw on the credit facility is only approximately $7 million, after giving effect to the cash on hand. As at September 30, 2015, the company was in compliance with its financial covenants. Due to the expectation that activity and pricing in the North American pressure pumping market will remain low, Calfrac is currently negotiating with its banking syndicate for further changes to the company's existing bank covenants. These covenants apply only to the company's credit facilities and not to its unsecured subordinated notes. Calfrac's strong relationship with its banking syndicate, relatively insignificant draw on its revolving credit facility net of cash on hand and the fact that the company's unsecured subordinated notes do not mature until 2020, leave it well positioned to favorably conclude these negotiations. Management is focused on negotiating a structure that will provide the flexibility to withstand a prolonged downturn and is confident that Calfrac will reach a mutually agreeable arrangement prior to yearend. Turning to the question of total debt, I want to emphasize again that $800 million relates to Calfrac's subordinated notes, which are not due until the end of 2020 and carry no maintenance covenants, which provides us with a degree of flexibility that may not be fully appreciated. As a result, we are not compelled to reduce leverage in the face of the current challenging market conditions. However, we continually assess options in this regard and will only conclude a transaction if we believe it is in the best interest of the company and its stakeholders. During the third quarter, Calfrac further reduced its quarterly dividend by 75%, to $0.015 per share and suspended its dividend reinvestment plan. The Board of Directors will continue to monitor market conditions in order to determine whether further changes to Calfrac's dividend policy is advisable. I would now like to turn the call back to Fernando for an outlook on the company's operations.

[Fernando Aguilar:]

Thank you, Mick. Crude oil prices have remained at levels below what is required to generate increased activity in North America. In addition, depressed natural gas and liquids pricing continues to negatively impact the development of key natural gas plays in Canada and the United States. As a result, the company anticipates that equipment utilization and pricing in the oilfield service industry will remain challenged for the balance of the year and throughout 2016. In order to be profitable in the current low commodity price environment, Calfrac remains focused on aggressively managing its cost structure. Calfrac is encouraged with what has been achieved to-date, including roughly 48% and 59% reductions in fixed costs from the fourth quarter of 2014 in Canada and the United States, respectively. As a result of the current market, Calfrac has reduced its headcount by approximately 40% and 50% in Canada and the U.S. since the end of 2014. The company is making every effort to retain its best people in order remain operationally strong over the long term and be better positioned to quickly respond when market conditions improve. In addition, Calfrac believes that it's continuing to create a competitive advantage and deliver cost efficiencies through the ongoing implementation of various logistics initiatives, which has offset the effects of a weakening Canadian dollar that has negatively impacted the U.S. dollar denominated chemical and proppant expenses. In working with company's key suppliers, the logistics group has reduced costs for key products, having realized reductions of approximately 25% for proppant, 22% for third-party subcontractors and 12% for chemical costs year-to-date in Canada. In the U.S., proppant costs, including third-party hauling, have been reduced on average by 28%, while chemical costs are down by 25% from the beginning of the year. Calfrac continues to analyze all measures that it can employ to further lower its cost structure, including process efficiencies and further cost mitigation strategies. In Canada, Calfrac expects strong equipment utilization in the context of the current market until the latter part of the fourth quarter, with the company anticipating an extended holiday break beginning in early to mid-December. Overall activity in 2016 is anticipated to be consistent with 2015, although visibility is limited and will be largely based on the outlook for crude oil and natural gas prices as the year progresses. 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 remain profitable in this challenging market. Weak natural gas and natural gas liquid prices led to significantly lower gas focused activity in the third quarter of 2015 compared to 2014, but it remained stronger than oil focused activity. While the company believes that gas focused activity could represent a larger portion of Calfrac's work over the coming year, weak natural gas prices could keep overall activity levels subdued. Calfrac expects oil focused activity to be significantly lower for the fourth quarter of 2015 than in the comparative period of 2014 and does not anticipate a meaningful improvement in activity throughout 2016. However, should oil prices recover, the company believes that the Viking play would experience a relatively quick increase in activity with the Cardium also contributing to a ramp in activity levels, albeit at a slightly slower pace. In the United States, with the land based rig count continuing to decline from third quarter levels, combined with Calfrac's view that the activity is likely to fall sharply in late November, fourth quarter activity levels are expected to decline sequentially. In response to these difficult market conditions, including lower levels of activity and weak pricing extending through 2016, as well as an overall lack of visibility, the company has now idled approximately 50% of its fracturing equipment in the United States and we continue to reduce its operating scale if margins are not anticipated to meet company's required financial returns. Calfrac has the plans in place to ensure that the equipment is kept up to its high standards and can be reactivated quickly when industry activity recovers. Activity in Russia has been relatively consistent with 2014 and the company expects that trend to continue through the fourth quarter, with the exception of the impact of normal winter weather operating conditions. The significant devaluation of the Russian rouble will decrease reported 2015 financial results versus 2014. Calfrac is currently in the early stages of 2016 contract tender process with its customers and anticipates that activity will be comparable to 2015. While Calfrac's participation in the development of unconventional resource plays in Russia will be delayed due to the current economic sanctions, the long term prospects remain encouraging as unconventional development has become a pillar of Russia's oil and gas natural growth plans. In the third quarter, Argentina's presidential election interrupted what Calfrac would view to be otherwise normal levels of activity which negatively impacted the reported financial results for the quarter. Despite these short term issues, Calfrac continues to believe in the long term potential of Argentina's conventional and unconventional oil and gas development. The majority of the additional 40,000 new build horsepower in Argentina has been deployed and it is expected that this equipment will contribute to Calfrac's 2016 operating results. 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 term to medium term, the company is currently reevaluating its business strategy for that country. Calfrac continues to believe that depressed prices for crude oil and natural gas and uncertainty as to the timing of a price recovery are likely to make the remainder of 2015 and 2016 challenging for the entire industry. As such, the company is focused on what it can control, namely, managing its cost structure, employing further process efficiencies, retaining its best people, maintaining strong relationships with existing customers as well as expanding its customer base, while ensuring the company has sufficient liquidity to navigate the cyclical downturn. Calfrac has an experienced Board of Directors and management team that have been through a number of industry downturns. And while this is tracking to being one of the worst in decades, the company believes that it is well positioned to navigate the current cycle. Calfrac is determined to strengthen its operations and competitive position through the downturn, which we believe will have a positive effect on operational performance when industry activity has recovered. Calfrac believes that the pressure pumping service industry will remain an integral component of 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. I will now turn the call back to the operator for questions. Thank you all very much for listening.

[Operator:]

[Operator Instructions]. Our first question comes from Sean Meakim with JPMorgan. Please go ahead.

[Sean Meakim:]

Hi guys.

[Fernando Aguilar:]

Hi Sean.

[Sean Meakim:]

Just wanted to start out talking about your customers, we think towards 2016. Just curious to get your sense and the answer might be just kind of a mixed bag. But just curious your sense of how you would expect them to react to more economic oil or gas prices next year, just from an activity perspective?

[Fernando Aguilar:]

Well, Sean, I think what is happening today related to customers view as the same as we discussed in the previous call. The visibility continues to be limited due to the consumers' uncertainty in how quickly commodity prices will recover. So the recent activity that is basically dropping in Q3, as you saw and most probably will continue in Q4, because in the last quarter, the number of rigs in the U.S. were around 800 and now I believe we should be around 750. So this uncertainty in the commodity pricing is not giving customers the possibility of plan for 2016 properly. I have to say that activity has remained stable between the two quarters, around 192 to 200 rigs. That's what we have today. But what is very interesting about this is that as activity continues going down and the decline of the reservoirs, not only unconventional in North America, but also conventional in the rest of the world, that will give pressure to production to continue declining. And sometime next year we will see the effect of that lack of activity bringing a more balanced supply and demand of the commodities in the market. That will basically bring production activity back to the market. So visibility is low. Customers are basically watching what they want to, related on how profitable their projects are in front of them.

[Sean Meakim:]

Okay. That's fair. And I guess I am curious to hear your thoughts around market capacity. How much has been rationalized thus far in the downturn and how that could change if we stay at or below current activity levels through the next year?

[Fernando Aguilar:]

So you are talking about horsepower available in the market, right?

[Sean Meakim:]

Yes.

[Fernando Aguilar:]

So we believe that from the 10 million to 11 million horsepower excess capacity in the market today, most probably 40% of that is parked in good condition. But let's say, 50% to 60% of that equipment has been parked and cannibalized by the lack of investment in those equipment pieces. So we believe that it's going to be very difficult for the service companies to bring between four, I can say between four and six million horsepower back to the market quickly when the market returns. So for the market to saturate and prices to improve, as we mentioned, it's going to be a challenge in 2016 but for that to happen, you are not going to require 10 million horsepower to go back to business, but you are basically thinking about four million to five million horsepower. So that's more or less the number that we have found in the different discussions that we have with our operations and also market and competitors and analysis and the way that we see the business today.

[Sean Meakim:]

Well, that would certainly be a big help as we get into a recovery eventually. Thank you for the color.

[Fernando Aguilar:]

Yes. Thank you.

[Operator:]

Your next question comes from Byron Pope with Tudor Pickering Holt. Please go ahead.

[Byron Pope:]

Good morning. Fernando, I have a question about your U.S. operations. Just given the extent to which you have already taken cost out of the system, I think you mentioned 50% headcount reduction, 59% taken out of your fixed cost structure, help us think about what the further levers you have to potentially pull to make your way back toward operating income breakeven, particularly against the backdrop of maybe even slower activity in Q4 versus what you saw in Q3 in the U.S.?

[Fernando Aguilar:]

Byron, good morning and thank you for the question. The situation in the market today and when you talk to customers and they try to understand the low level of pricing in the service industry today, some of the questions that come in front of us is, are these prices sustainable? Are service companies going to be able to continue operating at these levels? And the answer is, no. We have been saying that for a year. And, yes, the industry has to become more efficient, has to become more productive and technology and operational efficiencies and better productivity initially has to help in conjunction with the supply chain management activities that people have. So for any company to go through Q4 and basically try to navigate a quarter with lower activity, it is about reducing personnel and it is about parking more equipment. But the level of pricing that the industry has today in hydraulic and pumping services, the way we see the industry today are not sustainable. The companies are not going to be able to survive for an extended period of time when our competitors are dropping more their prices related to materials that they have to pay cash for them, chemicals, sand and employees. There's a limit for that where you can basically reduce the number of activities or actions related to headcount and payroll and also, suppliers are not taking any more reductions in what they are offering because they are losing money as well. So in an industry like ours, where we have the service industry losing money and the customers losing money, there's no viability for the industry like that, unless we get that balance that I was referring to, the supply and demand to fall in the world. And then activity is going to help industry. And pricing of the commodity is going to help industry to recover from where we are today.

[Byron Pope:]

Okay. And then just one quick question with regard to your Canada operations. You mentioned that extended slowdown here as we enter year-end. But is it too early to tell at this point how the winter drilling season is sizing up in Canada for Q1?

[Fernando Aguilar:]

We don't know yet. Traditionally what we have seen in Canada, companies try to have a Christmas break and people start slowing down. We think or we believe that by mid-December, our customer base is going to start slowing down for the Christmas break. So we can say and anticipate a week or five days before the season starts and then coming back from Christmas, as they normally did in the past. But the visibility that we have for December is something that we will discuss with our customers now as we are preparing our numbers for the quarter and also for the visibility that we have for 2016.

[Byron Pope:]

Okay. That's it for me. Thank you.

[Fernando Aguilar:]

Thank you very much.

[Operator:]

Your next question comes from Dana Benner with AltaCorp Capital. Please go ahead.

[Dana Benner:]

Good morning, all.

[Fernando Aguilar:]

Good morning, Dana.

[Dana Benner:]

I wanted to start with one of the trends that you saw in the quarter and I think it was both Canada and the U.S., but you can clarify and you talked about smaller job sizes. And I know that job mix changes and geographic focus changes. But maybe just give some more color, because pricing otherwise was probably moved a lot less than a lot of people speculating idly on the sector seemed to think it would. So that really is the delta probably.

[Fernando Aguilar:]

Yes. I think as you see reduced activity, Dana, in different place and some of the place become more active or are more active than we have in our case. Let's say in the northern parts of Canada and also in the central parts of the U.S., the shift in the job sizes have had an impact. I believe if you go back and have a normal activity level, that decrease in the job sizes wouldn't be so important. But because we have shifted some of our activities in those regions, we noticed that, I wouldn't say a trend, but it's more related to activity that happened during the quarter. Customers are still and I think, to answer your question the way you want it to be answered, I believe customers are still pumping the same size jobs, in general terms, as they have been throughout the year.

[Dana Benner:]

Okay. That's great. Secondly, if you think about your cost structure right now, would you be basing your cost structure on more or less a flattish environment or one that continues to deteriorate?

[Fernando Aguilar:]

It would all depend. What we see today is flattish and we would keep more or less the same base as we have it. Of course, we are trying to optimize every day, because that's an exercise that our management team takes very seriously and is working continuously on that but if we see there is more deterioration, more actions will happen, yes.

[Dana Benner:]

Great. I guess the flip side of this is, at some point there will be a recovery and companies then will be forced to then hire people back on the other side and so forth. And yet, part of the strange opportunity that comes with a market like this is finding sustainable efficiencies. And so pick some level of activity on the other side, how much of the cost cutting that you had to do will show up in terms of permanent efficiency gains that would otherwise give you greater earnings power on the other side?

[Fernando Aguilar:]

Normally, this is what always happens. And I think the industry has always been learning from these type of situations. If you recall, you go back in time and you see the nine downturns that have happened since the early 1980s till today, the industry basically moved from a big frac per week per fleet, to 60 or 70 that we run today. So that will give you a level of how much efficiency this industry has brought to the table, of course, related to people, related to transport. But we have to realize as well that the job sizes, as you mentioned, have been increasing. So we will always have the opportunity of keeping these cost efficiency that have been realized in the industry and that's a challenge. And I believe the people that come back to the industry and the way that the business is going to be conducted is always more efficient than the previous downturn. We have to understand and I don't think people are realizing that. But first of all, nobody saw this downturn coming and the size of the downturn. But if you go back to 1960 and you try to understand how big this downturn has been, this has been the largest. And there was 1986 and 1996 or 1997, in which the commodity lack of investment in the industry for two consecutive years basically determine how big this downturn was. And in this environment today, what is interesting to see is not only North American activity going down at 50% to 60%, as we have been mentioning, but also 25% to 30% that we see internationally. So the impact, like you mentioned, Dana, recovery is going to happen. I think the most important piece of the question is when the recovery is going to happen and how quickly the service industry is going to realize some of this price recovery that is required for companies to continue operating at a high level of performance, as it is important to have today. But I think that downturn and as we continue with lack of activity, the national decline of the reservoirs, both in North America and internationally, will bring activity recovery and prices will, most importantly, I think they will go to a level that people are not expecting.

[Dana Benner:]

Great. And just one final quick one. Would you expect the same effect in Argentina in Q4 as part of the election cycle?

[Fernando Aguilar:]

So, the first round of elections happened last Sunday. The difference between the first candidate and the second candidate was very minimal. The second round, because for you to win the first round, you have to have 10% advantage over the second one. So the second round is going to happen the November 22. We believe that business will remain cautious in this quarter. But as soon as the new candidate is going to be announced or let's say a new president is going to be announced and the new candidate wins, activity is and they realize and understand the importance of this piece in the financial situation of the country, mostly in Q1 next year, the activity will go back to a level where we were planning for 2016.

[Mick McNulty:]

So, Dana, just to add to that, I think to answer your question, I think we are expecting it to be fairly choppy in Q4, but as Fernando says, once the new guy is in charge, then I think we can see a return to growth in Argentina.

[Dana Benner:]

Okay. That's it. I will turn it back. Thank you.

[Fernando Aguilar:]

Thank you.

[Operator:]

Our next question comes from Brian Purdy with PI Financial. Please go ahead.

[Brian Purdy:]

Good morning, guys.

[Fernando Aguilar:]

Good morning, Brian.

[Mick McNulty:]

Hello, Brian.

[Brian Purdy:]

I just wanted to ask about Canada in particular. Obviously the margins held up a little bit better there. I am just wondering if you could contrast what is going better in Canada than what you are seeing in the U.S.?

[Fernando Aguilar:]

Thank you, Brian. This is a traditional way that business is conducted between the two countries, less number of competitors and more disciplined pricing in the country.

[Brian Purdy:]

So it's mostly a pricing difference?

[Fernando Aguilar:]

Well, you have to understand that the U.S. has 20 million horsepower while Canada has two million and then the number of competitors from 60 in the U.S. to seven or six or eight in Canada, including the smaller ones. The number of competitors is less. And as business increases, we have always said that it is easier for pricing to stabilize faster in Canada because it's easier to saturate the market and the balance between supply and demand can be reached very quickly. So as activity increases, you have seen the industry reducing headcount and fleets by 50%, 60% in both countries. And as you do that, the number of fleets available in Canada go to half, activity picks up by customers drilling and completing wells and then it's easier for that balance to be met. So that's why there is more, let's say better behavior in the Canadian market than in the U.S. market today.

[Brian Purdy:]

Okay. And I am just wondering if, I know the cost reduction cycle has been ongoing here. Do you feel that there are some cost reductions you have already made here in Q3 that haven't fully been reflected in your financials that we will start to see in Q4?

[Fernando Aguilar:]

It is always happening. And the implementation of the cost reduction actions that we have taken, they are always moving one quarter, two quarters ahead of us. We took some painful headcount reductions in Q3. But, of course, the effect is going to be felt in the fourth quarter, yes.

[Brian Purdy:]

Okay. Great. And I just wanted to also ask about the acquisition of the GASFRAC or some of the GASFRAC assets. It sounded like maybe you were most interested in the deferred tax assets. But I was just wondering if that was accurate? Or there were some other equipment and infrastructure that you were interested in there.

[Fernando Aguilar:]

There was limited amount of equipment associated with that acquisition, but we felt it was overall a good transaction for us to complete.

[Brian Purdy:]

For what reason?

[Fernando Aguilar:]

I think just for the various attributes that existed in the company and ability to access some of the people that worked there and the overall attributes of the company is really all I can say, Brian.

[Brian Purdy:]

Okay. All right. Thanks very much.

[Fernando Aguilar:]

Thank you.

[Operator:]

Your next question comes from Ian Gillies with FirstEnergy. Please go ahead.

[Ian Gillies:]

Good morning.

[Fernando Aguilar:]

Good morning, Ian.

[Ian Gillies:]

I was just hoping you guys could give a bit of a run through on some of your various U.S. geographic segments and if some are performing better or worse?

[Fernando Aguilar:]

So the number of rigs in the U.S., as you know, continued declining through the quarter. Texas is a stronger player in that area between the Eagle Ford and the Permian, it is where you see more activity happening today. There has been an important decline of activity in Pennsylvania by most of the customers. And then you see as well some declining happening in the Bakken. We do not operate in the Haynesville area, so we don't really know. And the fire deal, as you know, has been reduced, because the only company operating that area, Southwestern, has reduced the number of rigs as well.. And Colorado remains stable. So that's more or less the color I can give you in terms of activity in the U.S., Ian.

[Ian Gillies:]

Okay. And with respect to the state of the competitive environment in the U.S., are you guys starting to see a greater cadence of issues with respect to service quality from your peers, due to equipment not being kept up and therefore a change in customers or the ability to add new customers understanding that it's a pretty low level of activity right now?

[Fernando Aguilar:]

It is happening. And that is a situation that will benefit Calfrac related to the way we execute our jobs and the way that our people take the execution in the field as one of the most important aspects of our license to operate. I have to say that when we have this situation, this activity discussion a year or two years ago, the number of competitors that were bidding for the same piece of work was between seven and nine competitors invited by the customers. Today, customers are reducing that list because of performance and the list is becoming smaller. It is becoming, in some cases, to five companies, in other cases to only three, because they have realized that not all companies are performing as they expect, number one. They are enjoying the low price environment that is available today. But the reality is that they are realizing that quality is not happening because prices are very low and people are not maintaining their equipment. And some of the smaller companies have gone through their equipment pieces in a way that they park the equipment, it is not operationally sound and they cannot bring it back because it cannot work. So they are failing to perform. So this is happening today and it will continue happening as there is no good price in the market.

[Ian Gillies:]

Okay. Thanks very much. That's helpful. And then I guess the last thing, you guys have done a very good job harvesting working capital throughout the course of the year with activity expected to decline in the fourth quarter. Do you expect there's going to be additional room to harvest working capital? Or do you have it to a level now where it's not going to be able to change?

[Mick McNulty:]

Ian, I think there may be a little bit of a contribution, but I wouldn't say it's going to be significant.

[Ian Gillies:]

Okay. Thanks very much. I will turn it back now, guys.

[Fernando Aguilar:]

Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from Howard Goldberg with Janney Montgomery.

[Howard Goldberg:]

Thank you. Thanks very much. I know you said in your prepared comments that Q4 would be, on a year-over-year basis would be down significantly. I didn't know if that applied to on a sequential basis as well, if you could clarify that.

[Mick McNulty:]

Well, we don't provide forward guidance, Howard. That's something that we have always avoided. I think other parties have said that Q4 and Q1 could represent a trough period of time. So I think, certainly, from the standpoint of the U.S., I wouldn't disagree with that comment. But other than that, we don't provide guidance.

[Howard Goldberg:]

Okay. And I was hoping you might be able to respond to where your secured borrowings might be headed. I know you are expecting some favorable outcome with your discussions with your banks. Are you restricted in any way by the existing senior notes in the amount of first lien or second lien debt that you can incur?

[Fernando Aguilar:]

There are some restrictions within the current banking agreement, yes.

[Howard Goldberg:]

Okay. But do the existing bonds restrict you in any way?

[Fernando Aguilar:]

No.

[Howard Goldberg:]

Okay. Thanks very much.

[Fernando Aguilar:]

Thank you.

[Operator:]

There are no further questions at this time.

[Fernando Aguilar:]

So thank you everybody for participating on our conference call and have a good week.

[Operator:]

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