Calfrac Well Services Ltd.
Q2 2015 Earnings Call Transcript

Published: 2 Aug 2015

[Executives:]

Fernando Aguilar - President and CEO Mick McNulty - CFO

[Analysts:]

Shawn Maychem - JPMorgan Dan MacDonald - RBC Capital Markets Conner Lina - Morgan Stanley Byron Pope - Tudor, Pickering, Holt Scott Treadwell - TD Securities Dana Benner - AltaCorp Capital, Inc. Greg Coleman - National Bank Financial Jon Morrison - CIBC World Markets

[Operator:]

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

[Fernando Aguilar:]

Thank you, Tracy. Good morning and welcome to our discussion of Calfrac Wells Services second quarter results. Before we get started, I’d 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’ll then discuss our outlook for the remainder of 2015. After which, Mick, Ashley Connolly, and I’ll be available to answer the questions that you may have. Ashley recently joined Calfrac taking on the roll of Manager of Capital Markets and she will become a primary point of contact for both investors and analysts going forward. We welcome you to Calfrac Ashley and I’m very pleased to have you join our team. I’ll 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’d 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 and 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 second quarter of 2015, Calfrac achieved the following financial results in comparison to the second quarter of 2014. Consolidated revenue of $319.6 million, a 36% decrease from the second quarter of 2014, resulting primarily from lower activity and pricing in North America, offset partially by revenue growth in Argentina combined with a continued trend of greater service intensity and more stages completed per well in North America. An operating loss of $7 million for the second quarter of 2015 representing a 116% decrease from the $44.8 million of income to the second quarter of 2014. The decrease was primarily a result of weaker pricing for the company services in North America combined with significantly lower equipment utilization in the United States. Cost reduction initiatives implemented across the company mitigated a decline in operating income. A net loss attributable to shareholders of Calfrac of $43.3 million or $0.45 per share diluted compared to $12.9 million or $0.14 per share diluted in 2014. The results from Calfrac’s operating segments are as follows

[Fernando Aguilar:]

Thank you, Mick. Crude oil prices are weakened in recent months to a price range that is significantly lower than in 2014. As a result, it is anticipated that equipment utilization and pricing in the oil field service industry will continue to be adversely affected for the remainder of the year and likely in 2016. Industry reports have indicated that North American oil and gas capital spending is down by 35% to 40% in 2015 from 2014. The first half of 2015 demonstrated that customers are taking a very cautious approach in allocating capital and is expected to continue to keep activity low in the second half of 2015. Natural gas prices have declined modestly in recent months due to a stronger-than-expected supply growth and the storage levels moving back in line with the five-year average. Natural gas liquids pricing, which has been a key factor in natural gas development in Canada and the United States, has declined significantly. The anticipated impact of these developments is a reduction in activity in key natural gas plays in North America in 2015. Calfrac is enduring to restructure its business in order to be profitable in a lower commodity price environment and continues to closely monitor its core structure for additional savings. The Company is making every effort to protect its best people in order to quickly respond when market conditions improve and also to remain operationally strong over the long-term. In addition, the Company believes that it is continuing to create a competitive advantage and deliver cost efficiencies through the ongoing implementation of various logistics initiatives despite the further weakening of the Canadian dollar which has increased U.S dollar denominated sand and proppant expenses. The logistics group has reduced cost for key inputs such as proppant and chemicals. Diesel fuel, a key input into operations has fallen considerably in cost due to the declining crude oil prices. Third-party trucking costs have also been lowered by a turn in pricing concessions and more efficient use of company’s internal fleet. The impact of cost savings initiatives implemented across the company was only partially realized in the second quarter with a full implemented -- fully expected to be seen in third quarter results. Going forward, Calfrac continues to analyze additional measures that it can employ to further lower its cost structure. In Canada, for the first half of 2015, horizontal well completion activity was significantly lower than in the first half of 2014. In 2015, the spring breakup arrived earlier than expected due to warm weather conditions for the winter. While activity in the second half of 2015 will depend on the extent and pace at which oil and natural gas prices recover, at this stage company anticipates activity through the remainder of the year to be at lowest levels experienced since 2009. In response Calfrac has temporarily idled approximately 44% of its Canadian fracturing equipment. Calfrac intends to retain its leadership position in Western Canada’s most important natural gas and natural gas liquids plays, but as a result of the weakening of natural gas and natural gas liquids prices, activity is expected to be lower in the second half of 2015 from the second half of 2014. Calfrac also anticipates a meaningful reduction in oil focused activity for the remainder of 2015 compared to 2014. A recovery in oil prices would, however, result in a relatively quick response in activity in the Viking and Cardium plays. The Company believes these plays will be an important component of its growth in the medium to long-term. In the United States, the Company anticipates that activity in the third and fourth quarters of 2015 will be lower than the second quarter of the year. Visibility for activity remains limited given the ongoing changes in capital spending plans by the Company’s customers and competitive pricing dynamics. In response to these difficult market conditions and lower levels of activity, Calfrac has suspended its fracturing operations in the Fayetteville and will continue to assess the viability of each district in which it currently operates. The sporadic activity and weak pricing has lead to the Company temporarily idling of 40% of the fracturing equipment in the United States in the second quarter of 2015 due to margins that are not anticipated to meet Company’s required financial returns. Calfrac has a plan in place to ensure that the equipment is kept up to its high standards and can be reactivated quickly when industry activity recovers. While Calfrac recognizes that this is going to be a challenging year, we continue to believe that there will be some positives to take from these downturn. Calfrac anticipates that there will be a significant amount of pressure pumping equipment retired and consolidation will occur amongst the pressure pumpers. It is too early to speculate on how much equipment will be retired or how consolidation will play out, but it should create a better supply and demand dynamic in upcoming years. Calfrac continues to believe in the long-term potential of Argentina’s conventional and unconventional oil and gas development. The increasing customer demand for the Company's services is providing the opportunity to deploy additional equipment into the country, such as the 40,000 horsepower, which is on schedule to be deployed in the latter part of 2015. An additional fracturing and cementing equipment related to $12 million increase in capital spend announced in June. As such, we anticipate increased levels of activity in the second half of the year with demand spanning across a large number of customers. Calfrac believes that its service quality and technical expertise are contributing to its reputation as a service provider of choice in Argentina, thereby providing the foundation for long-term growth. In Mexico, Calfrac remains optimistic regarding activity in the longer term as the national reform of the energy industry is proceeding. Calfrac believes this will eventually set the stage for increased capital spending by Pemex and create an avenue for new oil and gas companies to enter Mexico. Calfrac expects its activity in Russia in 2015 to be similar to 2014, outside of normal weather-related variability. Calfrac’s participation in unconventional development will be delayed until sanctions applied by Canada, the United States and certain other jurisdictions are removed. The significant devaluation of the Russian rouble will decrease reported 2015 financial results versus 2014. The long-term prospects in Russia, however, remain encouraging as unconventional development has become a pillar of that country’s oil and gas natural growth plans. The depressed prices for crude oil and natural gas, as well as uncertainty as to the timing of a price recovery are likely to make the remainder of 2015 and early 2016 challenging for the entire industry. That said, Calfrac believes it has a well-defined strategy to manage the near-term challenges and remains optimistic about its future opportunities. The Company has an experienced Board of Directors and management team that have been through a number of industry downturns leaving Calfrac well positioned to navigate the current cycle. The Company has taken advantage of market opportunities in previous industry downturns to strengthen its operations and competitive position, which has had a positive effect on operational performance when industry activity has recovered. Over the long-term, Calfrac believes that the pressure pumping services industry will remain an integral component of unconventional resource development and that the Company’s top-tier safety, service quality, logistics management and technology will serve to generate cost efficiencies for its customers and profitability for Calfrac. In May, Calfrac was the first company in Canada to receive its API Q2 certification, an effort that was over three years in the making, for Calfrac becoming certified under American Petroleum Institute’s standard Q2 is an important statement to our customer and vendors of our high commitment to service quality and quality in general. I’d also like to congratulate and thank Calfrac’s employees for the hard work that resulted in Calfrac being selected as the winner of award for excellence in well completion, the recent Canada and oil gas awards as well as Alberta’s oil magazine’s top service company for 2014. I’ll now turn the call back to the operator for questions. Thank you all very much for listening.

[Operator:]

[Operator Instructions] And your first question comes from the line of Shawn Maychem with JPMorgan. Your line is now open.

[Shawn Maychem:]

Hey, good morning.

[Fernando Aguilar:]

Good morning, Shawn.

[Shawn Maychem:]

Good afternoon to where I’m. So just wanted to start off talking about the U.S a little bit, you noted that you suspended operations in the Fayetteville. Just given the depressed level of pricing in the market today, do you think -- at some point we transition towards a recovery, that more crews per play will be required to generate acceptable returns in the recovery?

[Fernando Aguilar:]

Okay. So first let me talk a little bit the Fayetteville. Activity declined a lot as you’re aware. Basically our current customer there is operating its own fracturing fleets. But when you’re talking about trying to bring more fleets in a play to generate the margins, I think this is a balance that it is going to be kept until activity recovers. We will have the fleets that are required for activity level thinking of the profitability that we want to generate or let’s say the minimum profitability that we want to generate rather than adding equipment that is going to take us into negative territory.

[Shawn Maychem:]

Okay. And then, just when you think about some of the cost reductions to date, you noticed some of the impacts on the margins, certainly in Canada we could see some of that in the second quarter. Can you give us a little more granularity on how much you think is still to come in the second half in terms of things that you’ve done year-to-date that will impact the second half of the year or additional measures you can take to try to minimize losses if there is profitability?

[Fernando Aguilar:]

Yes. So this is a very good question and I’ll answer the first part of the question, Shawn and then Mick is going to compliment it with more granularity as you were asking. So I have to tell you that all the actions that the company’s take related to cost take time to be fully deployed and the example is when you’re basically talking about inventories and you’re talking actions we implement in the field and how quickly the message gets down to the operations, to the suppliers and people that are related to our cost efficiency measures or cost reduction plan. So I think and we believe as a company that in the second part of 2015 we will see a full impact of all these actions. We’ve being working very hard in all different areas, working with our partners, in this case the suppliers, helping us going to the levels where we’ve to get and in some cases I have to tell you that some suppliers are basically same. We cannot lower our prices to you anymore because this is the limit where we can basically or the limit we can operate. So I believe the full impact is going to be seen and in Canada as you start to make a differentiation with the U.S., Q2 is a very complicated quarter, because of breakout. But in the U.S in terms of repairs and maintenance, personal reductions, supplies, and also products. We will see a full deployment of these efficiency gains in the second part of the year.

[Mick McNulty:]

Yes, Shawn, just to give you a little bit more granularity as Fernando says, we probably haven’t seen the full impact of the lowest cost reductions, particularly when it comes to the cost of sand and chemicals, and third-party contractor type cost. So we will see those costs come down a little bit more I think in Q3. The problem of course that you have to remember is that in the U.S., in particular, we really don’t have great visibility on seeing pricing stabilizing. It’s still very much a very murky picture. And so I don’t know that you can necessarily make the assumption that cost savings are going to result in increases in the bottom line, at least not in Q3. Maybe we start to see that later in the year, but we’re not seeing that in Q3. And then for Canada, Q2 is obviously lower activity and so we don’t see the full impact of cost savings in the operating side of things. I think we’ve seen significant savings on the people side, both in Canada and U.S and in the corporate department. But the other problem that we get hit within the Canada is that all our sand is imported and majority of our chemicals as well. And we’re being negatively impacted there by the exchange rate. So a lot of the benefits that we’re getting in the reduction of -- in pricing is being offset by the impact of the exchange rate. So I don’t know if that really answers your question, but that’s probably about as much color that I can give you right now.

[Shawn Maychem:]

No. That’s helpful. Gives us a lot to chew on. Thanks a lot, guys.

[Mick McNulty:]

Okay.

[Fernando Aguilar:]

Thank you, Shawn.

[Operator:]

Your next question comes from the line of Dan MacDonald from RBC Capital Markets. Your line is now open.

[Dan MacDonald:]

Hi, good morning.

[Fernando Aguilar:]

Good morning.

[Dan MacDonald:]

Just staying on the cost side here for a minute, one of your Canadian competitors is making the move to take field costs to a fully variable structure here in the back part of the year, versus the much higher fixed cost burden that they have now. Can you kind of give us your thoughts on the industry’s ability to make that important change and on a high level whether Calfrac would kind of consider following suit?

[Mick McNulty:]

Dan I think we’re always looking to reduce the cost model wherever we possibly can. And any initiatives on that -- to that end I think have to be applauded. And certainly you can achieve a lot of those sort of savings in a depressed environment like we have right now. So I think we’d certainly look at that option, but I think most importantly of all, we got to remember that people are what makes this company tick. And what we don’t want to do is get to a position where we actually end up loosing our good people. So we applaud the initiative. We think it has merit. I think you need the whole industry to be onboard which is to take effect, and we will work with our people to see what we can do to make it more variable.

[Fernando Aguilar:]

Dan, if I can add something to this question, and the answer that Mick is providing you, you have to remember that, let’s say in the North American market the two markets are really different. What we experience in the U.S and what we’re going to experience in Canada. Canada today due to the depressed commodity prices and a lack of activity is basically showing this type of initiatives on or ideas that people can have in this case related to people. You have to remember that if activity or when activity recovers and goes back again, the limited resources that are in our province and also in our country will limit the ability of taking these over the long-term. Once you have the LNG programs and then oil sands back in -- on track, and drilling and completion activity happening as we normally have in a -- not in a year like this one. There will be a lot of competition for these resources and it is going to make it very difficult to think that the initiatives that people implement in a year like this will remain for the long-term. It is -- it used to be same. So like Mick said, we have -- we’re always exploring ideas and trying to become creative on the way that we can preserve and protect our base. But it is important to realize the market that where you’re operating.

[Dan MacDonald:]

Great. Thanks for the color, guys. I'll turn it back over.

[Mick McNulty:]

Thank you, Dan.

[Operator:]

Your next question comes from the line of Conner Lina with Morgan Stanley. Your line is now open.

[Conner Lina:]

Yes. Is this coming through?

[Mick McNulty:]

Yes, we can hear you Conner.

[Conner Lina:]

All right, yes. Thank you. I was just wondering if you could talk about, what your visibility is on the work calendar here, maybe compare and contrast what you are seeing in the U.S and Canada?

[Fernando Aguilar:]

I think visibility -- and this is very interesting and very important question that you're asking, because when you talk to other people, other people will basically tell you, you have different answers to that question and the visibility some people out there saying that they have very good visibility and we don't believe that. Visibility is happening in a shorter form as we used to have in the past. I think customers are cautious. They are trying to understand what is going to happen with commodity pricing. There will be other elements that may be are going to not help too much on visibility and it could be fair elections in Canada, could be commodity pricing happening in front of us. So I think the visibility we -- what we normally do is we sit down with our operations people and we see how far we can see and I can tell you that we go quarter after quarter. You’ve to remember, Conner that the way that Calfrac operates is forecast is in the rolling mode, that we normally analyze the next quarter in front of us and then the three consecutive quarters. And we are in a cycle that is basically taking us in a 12 to 18 months. So we are very cautious and careful and that's why if you try to think that our planning is basically going to give you ideas on what is going to happen in 2016, it is too far away from us from today's point of view. We also have to say that we will try to manage our resources and equipment deployment and most probably if activity remains where we think is going to be and commodity pricing will recover, we see that more of a 2016 exercise that where we can see for 2015.

[Conner Lina:]

Fair enough. Makes sense. And I just wanted to follow-up on one of the comments you guys had made earlier about pricing maybe not firming up yet. Can you talk about where you are still seeing maybe downward pricing pressure and if you, have any regions or crews in mind that you might be considering shutting down later this year?

[Fernando Aguilar:]

So we don't like shutting down fleets or releasing employees. We are basically a company that wants to continue growing, but of course we want to make money. We want to make sure that our customers produce more oil and gas, they make money, we make money, so this is a business that we would like to be in. But in environment like these we have to be very careful and of course we have to protect not only our balance sheet, but our company for the future. So if we go to pricing, we believe that the level of activity that we have in Canada today is not a place where we see price increases, but there is some price stability in Canada today. Some competitors came with very low pricing in the previous quarter trying to secure work for the second half of the year and that of course affected real stability of pricing at that time. The U.S is different, because in the U.S when you have so many different competitors and different companies operating, there are two companies today that were three before and now these two companies represent one-third of the market. So this is better with Halliburton and Slumber J with around 7.8 or 7.7 million horsepower, they are basically -- they control one-third of the market in the U.S. When you participate in the different basins and you're competing for those activities, you can see that smaller competitors trying to put their customers or their business, they’ve been lowering prices below, let's say, positive margin. So they are competing with prices that are basically negative. What is interesting about this is that customers realize that the viability of these competitors for the longer-term is basically a risk, because when you're talking about fracturing operations in unconventional reservoirs, you’re talking about a lot of materials, a lot of people and a lot of equipment that require maintenance which is basically going to impact the quality of your operation if you don't provide the services and -- that the customers are expecting. So customers are basically going down and looking at how low prices have gone and trying to secure that activity level with companies like Halliburton and Slumber J, because they know that even at low prices these companies are going to be able to deliver. So this is what we're seeing today. We see that some of the smaller competitors are not getting the amount of work that they would like to have, because the customers are afraid that in this low price environment they would collapse and they are going to be end up with no, let's say, a secure supply in their operations. So this is basically the reality. We see -- we still don't see the stability in the U.S as we would like to. I don’t think prices are going lower for us, because we’re not basically lowering our prices. That’s why we prefer to idle equipment and stop operations rather than going to that territory, but the visibility that we get today in terms of the competitive landscape is showing us that some of our smaller competitors are basically not getting work and the number of companies are getting without work, the list is increasing. And that’s why we made that statement in our initial comments that we will see some equipment being retired, some companies in trouble and this will help the dynamics of the supply demand equation in the near-term, lets say medium to long-term for our business in the U.S.

[Conner Lina:]

Great. Thanks for the color.

[Fernando Aguilar:]

Thank you, Conner.

[Operator:]

Your next question comes from the line of Byron Pope with Tudor, Pickering, Holt. Your line is now open.

[Byron Pope:]

Good morning.

[Fernando Aguilar:]

Hi, Byron.

[Byron Pope:]

I had two quick questions. With regards to your U.S operations, just thinking about your commentary about activity in Q3 and Q4 being lower than Q2, I’m assuming that’s primarily a function of the equipment that you’re idling, as well as exiting the Fayetteville. Is that a fair characterization?

[Fernando Aguilar:]

You mean for the Rockies?

[Byron Pope:]

For all of your U.S operations. I guess maybe put differently, if I think about your spreads that are still active, would you expect second -- activity in Q3, and Q4 for those active spreads to be lower than what it might have been in Q2? So I’m just trying to frame your commentary and how much of that is driven by just the fact that you’ve had to idle a lot of your equipment and the fact that you’re exiting the Fayetteville.

[Fernando Aguilar:]

Yes. So as we mentioned, Fayetteville is a result of lower drilling activity, because we were sharing the market with our customer. It’s not happening anymore, because they reduce their activity to 50% of what they have, so they can basically cover that activity with their own fleets. But if you take in general, I think our market for the U.S is used to constant battle and I think all of our competitors are basically doing the same thing. We are -- if you take the market today from the 18 million horsepower that you have in the U.S and you think that you have in the range of 800 rigs today, you don't need to have -- I mean, even if we think of 5 million horsepower being idle in the market today, we still have like 3 to 4 million horsepower additional, let's say, overcapacity in the market today. And that's why pricing is not really improving until you have, lets say, a -- our calculation is basically -- Byron, our calculation today is that if we can, lets say have -- lets say around 200 to 300 rig increase, there will be more stability in the activity in the U.S and then pricing is going to be more stable. So I think the challenge remains there when you have all these competitors in every single basin. There is no difference between what happens in Colorado, Marcellus, and the Eagle Ford, of course we follow the Permian very closely because that's an area where Calfrac will like to take the opportunity of this downturn to penetrate that market. But if you take any single market in the U.S., we see exactly the same behavior. And of course customers instead of bidding for a six months or one year program, they’re basically going part after part, well after well, so to make sure that they get the benefit of the lower pricing. So this is what is happening and that’s why the visibility remains challenging, because the customers are trying to play that game. But I have to tell you something that is very interesting. When you are in market like this, and you have a -- this low level of profitability, some of the competitors are not investing their equipment and they're basically providing some failure in terms of the -- of their execution, their quality is not at the level with customers expect. And this is generating some opportunities that we believe, we can capture in the second part of 2015.

[Byron Pope:]

Okay. And second quick question. Just trying to think about job mix in an environment where activities changing in a rapid fashion. If you were to take a snapshot of your U.S and Canadian operations today, roughly what percentage of your work is 24 -- on 24 hour operations, both in Canada and the U.S?

[Fernando Aguilar:]

Okay. This is interesting, because we as part of our strategy in 2014, we were telling you that our plan if the market remains the same, we were going to be at -- we wanted to be at 50% 24-hour operations in Canada. I think Canada today with the activity level that we have, we should be within 30% and 40%, and in the U.S the fleets that are operating all of them are 24-hour operations.

[Byron Pope:]

Okay. Thank you. Appreciate it.

[Fernando Aguilar:]

Thank you.

[Operator:]

Your next question comes from the line of Scott Treadwell from TD Securities. Your line is now open.

[Scott Treadwell:]

Thanks. Good morning guys. So my first question was on the Fayetteville, that’s been answered. My second one is on Latin America. I’m just wondering with the new equipment that’s coming down there, is that all sort of additive or is there a dimension of kind of raising the quality, raising the -- or lowering the age of the equipment there? Just trying to get a sense if all that equipment that you expect it to be kind of additive to the revenue base or if some of it’s -- some of the existing equipment might go into kind of a sort of support role rather than a primary revenue mode?

[Fernando Aguilar:]

You know Scott, the policy in our company is whenever we started operations in a new geography or a new market, we don't transfer old equipment. And you have to remember that in Argentina the regional equipment that was sent to the country a few years ago when we started cementing and coiled tubing, we have a temporary import license and that equipment has to leave the country after that period expires. So cementing and that’s -- that was a small operation. You recall that during those years when we were scouting the market and trying to understand how that Argentinean market was developing, that was fine. It was a very small operation, we didn’t care about that. When we started moving to fracturing and you have to remember that this has been between 1.5 to 2 years now, everything there is new. And everything that we’re adding to Argentina is new and is built in country. Let's say 80% of -- the majority of the equipment that we've in Argentina is of that quality. Our CEO visited Argentina recently and he went to the manufacturer that we use to check not only on the quality of the equipment, but also on -- when the equipment was going to be ready and that’s why we mentioned to you in our release that the equipment delivery is going to be on time, the second part to the year. And this equipment is good quality as the same one that we have in U.S or Canada or Russia and the equipment is basically ready. We are not replacing equipment, we’re adding equipment that is going to help us, satisfying the customer needs and demand that we’ve been increasingly obtaining through the deployment of technology and the good name that Calfrac has been getting in Argentina, because of the quality that we provide for the most important customers in the area. We visited Argentina, I believe three weeks ago and 80% of the, lets say, top -- 80% of the production in Argentina are related to gas and oil fields were visited by us in that visit. And those are customers that would like to see Calfrac more active and engaged in more of the business and be -- that new company on the block that is differentiating with technology and policy, and that's helping us grow. And that's why we are positive of Argentina, because we see that market as an interesting opportunity for us not only for the near-term, but also for the future.

[Scott Treadwell:]

Okay, great. My second question really is on working capital. Mick, I’m not sure how much clarity you want to give, but obviously you’ve monetized a bunch out of working capital here in Q2 and just looking at the constituent parts, I’m just wondering you’ve seen receivables and payables come down, inventory is down a bit. I’m just wondering as you look into Q3, what your sort of forecast is. How much cash can you get out of working capital, assuming that your sort of activity forecast are, hold true that there is no major uptick in activity, which could obviously throw a wrinkle in.

[Mick McNulty:]

Yes, I think it's fair to say that we have got majority of the benefits of working capital has come in Q2, Scott. So I wouldn’t be predicting a ton more in Q3.

[Scott Treadwell:]

Okay.

[Mick McNulty:]

Don’t forget, activity returns in Canada and so you will be building receivables because of the build up in activity and that’s the main reason.

[Scott Treadwell:]

Okay. And so on inventory that the level that you exited at, there is no sort of efficiencies and kind of getting leaner on the inventory side that you predicted that’s going to be material in Q3?

[Mick McNulty:]

No, I would say we would -- we will continue to be more efficient with our inventory, but its probably not going to move the needle a ton.

[Scott Treadwell:]

Okay. Okay. Perfect. That’s all I’ve got guys. Appreciate the color. Thanks.

[Mick McNulty:]

Okay.

[Operator:]

Your next question comes from the line of Dana Benner with AltaCorp Capital. Your line is now open.

[Dana Benner:]

Good morning, guys.

[Fernando Aguilar:]

Good morning, Dana.

[Mick McNulty:]

Good morning, Dana.

[Dana Benner:]

I wanted to start on the question of margins. I thought the margins in Q2 were very impressive given everything that’s gone on and it seems to be a bit of a theme in the sector right now, margin protection. And I wonder with all of the cost cuts with the rationalization, optimization, et cetera, whether, there may even be, upward margin surprise as you look to the back half of this year. You’ve got 40% to 45% of your fleet, sitting idle. And so if you’re running the rest pretty hard, perhaps there is the opportunity for not great margins, but maybe meaningfully better, which could be a positive surprise to lots of people. How would you characterize that?

[Fernando Aguilar:]

Dana, we would love to see that. And I think that’s -- that was a good statement from your side saying, if these actions that we’ve started taking in 2014 and continue working in the first half of the year, now how -- more stable, lets say, cost base and a better understanding, because as I had mentioned earlier Q2 is a very difficult period because you have people going on break up and then parking equipment, maintaining equipment and all that, so we hope that we can see those margins improving in Canada for the second part of the year and the effect of our cost rationalization programs becoming effective. As I answered in the previous question, the U.S is more challenging for the same reason that I mentioned that we still see some competitors doing crazy things and even the larger, the bigger ones are trying to protect market share by doing, but trying to keep some of the -- of those customers for themselves and improve their market share for the future. So I’d say that what you mentioned, it makes more sense in Canada than in the U.S. And in the U.S we have to be extremely careful that we don’t get into a game of bidding with negative margins that will take -- it will make us weaker, because people forget and sometimes if you separate the discussion between your operations people and your sales people, the sales people will always try to sell and the operations people will always try to operate. But if they’re in a -- some sort of the [indiscernible] point of view, you can do a lot of damage to the company, because the cost of operating at those levels is very, very high. You’re talking about millions of pounds of sand and hundreds of people are basically related to the operations and that doesn’t make any sense. So I see your point more feasible in the Canadian operation rather than the U.S. In the U.S we’re more cautious. We have to be very careful how we face that and our people are working together from operations to sales and management to make sure that we don’t fall into that trap, that can make the company very weak, because we’re going to be basically paying our customers to do their work.

[Dana Benner:]

Great. I guess second question would be back to the geo region of Argentina. And you mentioned the 40,000 horsepower deploying second half of this year. Do you have any more precise timing and the type of work? Will that additional horsepower go right into unconventional or will it be a mix? So just more granularity.

[Fernando Aguilar:]

It’s a mix. So you have in Argentina, two big markets happening. One market is the south where we’ve [indiscernible] and Las Heras, and then you have Vaca Muerta in the north. The good news is the commodities and early stage of development and that has been identified as the key potential reservoir in the country. But the good news is that the second area where we operate which is the south as I was mentioning, there is a new shale play that is going to be developed and two of the largest customers in the area really, really want to start developing that. But the market on the activity in Argentina is related to three different groups of activities, conventional, tight, and shale, and we operate in all of them. So if you ask me where the 40,000 horsepower will be? They will be in all of them. We will be in tight, we will be in conventional, and we will be in the shale development, starting especially in the Neuquén area.

[Dana Benner:]

Okay. And then, I guess just more precise timing by end of Q3, early Q4 is that …?

[Fernando Aguilar:]

Yes, I think so 40,000 horsepower will come not at the same time. So we have equipment that is being delivered. So part of the activity will start happening at the end of August. And we will ramp up throughout the second half of the year and towards the end of the year we will have that equipment in operation. So the beginning of -- and this is going to be conventional, the beginning of activity in Canada for an additional one or two fleets will happen towards the end of August.

[Dana Benner:]

Okay. Just third and finally with respect to fleet retirement, I know that in prior conference calls you’ve put out there that potentially 20% of the U.S fleet could be retired due to lack of investment, maintenance, et cetera through this down cycle. And I wonder if you still think that that’s a reasonable number and could we see it by the end of this year, might be take a little bit longer for that to happen. What’s your sense?

[Fernando Aguilar:]

I think you're right. I mean, we haven't changed our picture in that respect. We still believe that 20% is a good estimate and we normally check that number falling up on the competitors, and you remember our discussion, it is about Baker running their equipment down the ground. So it is -- you have already 1.8 million horsepower in that area that is happening. So you need to a maybe another 1.8 to 2 million horsepower and its coming from different sources like company that are already out of business like GoFrac and the list is basically expanding and going down -- going up and out to around 10 different companies. So we believe that 20% is a good estimate from the different discussion that we’ve following competitors and talking to analysts and people who are basically in the circuit.

[Dana Benner:]

Right. Okay. Well, that’s great. I will turn it back. Thank you.

[Fernando Aguilar:]

Thank you, Dana.

[Operator:]

The next question comes from the line of Greg Coleman with National Bank Financial. Your line is now open.

[Greg Coleman:]

Thanks all. I’d like to start with a couple quick questions on your idle active split. Just wondering if you could give us an update as to where it is now? Has it changed materially from the end of Q2?

[Fernando Aguilar:]

Sorry, you’re referring to activity or, sorry Greg, I didn’t …

[Greg Coleman:]

No problem. Your specific fleet, the idle versus active component. I was wondering if that -- if it’s changed materially since the information we got earlier today, since the end of Q2?

[Fernando Aguilar:]

It's very similar, because the end of Q2 is just now; I mean it’s like two, three weeks ago. And we started picking up some activity in Canada. So let's say the fleet -- the idle fleet in the U.S is as you know. The one in Canada has picked up a little bit of activity, but not really …

[Greg Coleman:]

Not really materially, okay. And can you just give us a quick reminder as to the equipment that’s sitting idle? What are the costs, if any, associated with ramping it back up, putting it back out into the field?

[Fernando Aguilar:]

We normally -- we’ve been keeping our equipment up to speed basically. We don't really -- first of all, our people in the field cannot go back to those piece of equipment and cannibalize them, because that’s what we will need when activity picks up again. And we’ve lost some tenders, because in our tenders we include repairs and maintenance numbers that some competitors are not. So we keep our equipment in a pretty good condition. So it’s going to be a nominal amount, but not really something that will be a big impact in our going forward operations.

[Greg Coleman:]

Got it. And on those -- on the equipment, on the fleets that you’ve decided to park, could you give us a feel of the over under for field margins where you say this is just too low and we are going to put it aside. Is it zero field margin or is it higher than that and would you define the zero field margin as you mentioned as including the repair and maintenance for the equipment?

[Fernando Aguilar:]

No, zero field margin is basically negative for us. So field margin in the, let’s say, mid single-digit area could be limit for that equipment to go back to operations, but we’re -- where we’re today is where we want to be, we don’t really want to go lower than that.

[Mick McNulty:]

And our margins always include repairs and maintenance, Greg.

[Greg Coleman:]

Your field margins include R&M?

[Mick McNulty:]

Yes, they will.

[Greg Coleman:]

Great. And then just one more from me and then that's it. Maintenance capital for the year, $52 million, assuming you’re sort of tepid outlook does -- is what we see for the coming -- upcoming, I don’t know, couple quarters or years. So is that a good level of what we should be thinking just to maintain the fleet at the current level of operations for the foreseeable future?

[Fernando Aguilar:]

Yes, so you have to remember that it depends on how large the revenue is for the company. But if we, lets say, from where we were at the end of 2014, where we will be in 2015 and what we believe, we’re going to be ranging, that $52 million will give us a range between $40 million and $80 million for the future. It depends how busy 2016 will be, but we believe its not too far away, not too far off. You have to remember that while in the last year and half while people had basically haven't been investing in building equipment and Calfrac went out and built or is building 140,000 horsepower, we will be very well positioned for the future activity upturn. So that's more or less with, we can say that we are controlling those numbers very well and we are really happy with that level of maintenance capital.

[Greg Coleman:]

That’s great. Are there any of the competitors that are losing market share that have very young attractive fleets that you are looking at as potential acquisition targets, or given the uncertainty especially in the U.S, is that something which you would -- would you not even consider at the current time?

[Fernando Aguilar:]

No, no Greg, we’re always considering. For us, it’s always important to analyze opportunities. When you have the amount of equipment that is available today we don't really need 0.5 million or 1 million horsepower acquisition or let's say, business opportunity. Smaller companies with the right culture, the right geography, the right personnel, the right people and the right customer base is what we’d be looking into. And like as I mentioned earlier, the Permian could be a good opportunity for us to get into other area and you don't need to have a 200,000 or 300,000 horsepower company to do that, because we have equipment that can be made available in addition to what that company can offer, right.

[Greg Coleman:]

No. That makes sense. Thanks a lot, Fernando. That’s it for me.

[Fernando Aguilar:]

Thank you, Greg.

[Operator:]

Your next question comes from the line of Jon Morrison with CIBC World Markets. Your line is now open.

[Jon Morrison:]

Good morning, all.

[Fernando Aguilar:]

Good morning, Jon.

[Mick McNulty:]

Hi, Jon.

[Jon Morrison:]

Just a point of -- good morning. Just a point of clarification, are you planning to maintain an operating footprint in basic can be reactivated within the Fayetteville, once the market conditions improve or is that for all intents and purposes permanent closure?

[Fernando Aguilar:]

This is a very difficult question to answer. We have continued cementing operations in the area, so we have a footprint. The Fayetteville is today challenged by the performance with Marcellus for those customers. And they have very good production coming from Marcellus that are basically taking some of their investment possibilities more in the Northeast rather than the Fayetteville. So we believe that if the price of gas increases and the Fayetteville gets reactivated, most probably customers will have more drilling rigs active in the area and completion will increase and of course we will be available to work for those customers in that region. But the way we see that today and for the next six months to a year, that is going to be challenging, and we will have that equipment available to operate in areas like Colorado or Texas or the Northeast, Jon.

[Jon Morrison:]

Outside of the Fayetteville, were there any other operating bases closed or idled in the quarter in Canada or the U.S?

[Fernando Aguilar:]

No.

[Jon Morrison:]

Okay.

[Mick McNulty:]

I think we had a satellite base in Pennsylvania that we reduced activity from, to step down to a skeleton crew. But that was -- it was a satellite base.

[Jon Morrison:]

Okay. On Argentina are you guys seeing any slowdown in YPS activity levels given the uncertainty that surrounds the elections this fall at this point or basically nothing changed in the last three months?

[Fernando Aguilar:]

I think activity in Argentina is accommodating a little bit. You see some, let’s say, interesting things are happening and that's the result of our visit. They improve their sand transportation in the country by rail. They're organizing and trying to, let’s say, evaluate different approaches that they have to complete the wells. So they are trying to use now and replace those new generation rigs that they have been bringing from [indiscernible] in the last few months. So I think we will -- we see a slowdown that is basically accommodating the way that they’re operating more than anything else. Of course, we have to be cautious and careful on how the elections are going to unfold. But everybody that we’ve been talking to they understand how important their operations in the energy business is for the country and even opposition to the current government is not talking about going in a complete different direction to the one that Cristina Kirchner has today.

[Jon Morrison:]

Mick, I realize that you’ve got lots of liquidity in the balance sheet and access to cash isn’t going to be an issue. But should the macro environment not improve from here over the next 12 to 18 months, what’s your comfort that you can live within those new covenants, assuming pricing doesn’t go any higher?

[Mick McNulty:]

You know, I think we have -- we’re pretty comfortable, Jon. We have obviously looked at a number of different scenarios going further -- going forward. And I think those are going to stand up in good stead.

[Jon Morrison:]

Okay. Within the release you guys give a pretty good update on pricing in both Canada and the U.S., which I assume is in reference to fracturing services. Were any of the other service lines coil or cementing astronomically different than what you referenced in the release, or they’ve largely moved in lock step with fracturing?

[Mick McNulty:]

Pretty much the same.

[Jon Morrison:]

Okay. Last one just for me, on the province side, have suppliers been good to work within that they’ve reduced pricing in line with market conditions, or have any of the long-term supply arrangements that you signed in 2014 been a drag to performance for this year?

[Mick McNulty:]

No, I think suppliers have been very, very good to work with and they understand the situation that everybody is in and they’re working with us.

[Fernando Aguilar:]

This is -- as you know, Jon, Calfrac is very, very serious in those relationships, because we are here for the long-term. But I have to tell you that we had a couple of discussions. You get a bid and everybody is bidding lower to get the work and then you go into that spiral down that never stops, right. And I had a couple of situations that I got a phone call from a supplier saying, listen, we would love to work with you guys, we’re very interested in the future of the relationship, but for this specific tender that you want that product or material to be lower, we’re sorry, we cannot do it because our losses would be, you know. So this is what is happening today. I think this is good, because some sort of discipline has to come to the market and people need to stop losing money that way, right. So and the customers have to pay for the work with the cost that is of the price that they have to pay. So I’m happy to see some of the situation happening because there is a line that is been drawn by the strong people. And like we’re doing with some of our customers and it has to go to that level. So this is just an example of what’s going on in that area.

[Jon Morrison:]

Appreciate the color. Thanks. Good quarter, guys.

[Fernando Aguilar:]

Thank you, Jon.

[Mick McNulty:]

Thanks, Jon.

[Operator:]

Your next question comes from the line of [Hanif Madni with PHN] [ph]. Your line is now open.

[Unidentified Analyst:]

Yes, hi, guys. Thanks. As shareholders and bond holders, I guess a philosophical question. Do you think it’s appropriate given the head winds that you are currently facing and the fact that your debt is currently trading at pretty distressed levels, is it appropriate to be paying out any cash dividend?

[Fernando Aguilar:]

So before Mick answer the question, I’m going to the detail, I have to tell you that our debt basically is a 2020 exercise, because a lot of people think that we’ve like oil -- some of our competitors debt covenants are related to limits in our debt and timelines that are different. I’ve to remind you [Hanif] [ph] that we’re going to 2020. Mick?

[Mick McNulty:]

Yes, [Hanif] [ph] and I agree with Fernando. I don’t -- I think it’s a bit extreme to use that word distressed. We are not in any kind of liquidity issue right now. There is no need to repay any of that debt till 2020.

[Unidentified Analyst:]

Not meant to be offensive. That was a strict financial definition, over 1,000 basis point spread. I mean your debt yields 12% as you know and trades in the low 80s. So that is distressed in the formal definition of how the high yield bond market works. Just to leak out $20 million, $25 million, nobody owns your stock for your dividend or perhaps is this related to the heavy insider ownership and the founder owners that a dividend is being paid here, where normally would not be in most other situations?

[Mick McNulty:]

Yes, [Hanif] [ph] the Board takes the responsibility very, very seriously and they assess whether it’s appropriate to pay a dividend on a quarterly basis. As we’ve said, we cut the dividend in Q2 and the Board will continue to assess whether anymore changes are required. And I think that’s what I’m going to say on the matter.

[Unidentified Analyst:]

Okay. That’s fair. Thank you.

[A - Fernando Aguilar:]

Thank you, [indiscernible]. We will like to thank everybody for participating on our Q2 conference call.

[Operator:]

Thank you for joining ladies and gentlemen. This concludes today’s conference call. You may now disconnect.