Calfrac Well Services Ltd.
Q3 2014 Earnings Call Transcript

Published: 5 Nov 2014

[Executives:]

Jose Fernando Aguilar - Chief Executive Officer, President and Director Michael Joseph McNulty - Chief Financial Officer Ian Gillies -

[Analysts:]

Daniel J. MacDonald - RBC Capital Markets, LLC, Research Division Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division Scott Treadwell - TD Securities Equity Research Dana Benner - AltaCorp Capital Inc., Research Division John M. Daniel - Simmons & Company International, Research Division Jon Morrison - CIBC World Markets Inc., Research Division Jeff Fetterly - Peters & Co. Limited, Research Division Kevin C. H. Lo - FirstEnergy Capital Corp., Research Division

[Operator:]

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Ltd. third quarter results. [Operator Instructions] I would now like to turn the call over to Mr. Fernando Aguilar, President and CEO of Calfrac Well Services Ltd. Please go ahead.

[Jose Fernando Aguilar:]

Thank you, Michelle. 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 2014 and 2015. After which, Mick, Ian Gillies and I will be available to answer questions that you may have. I will now turn the call over to Mick.

[Michael Joseph McNulty:]

Thank you, Fernando, and thank you, everyone, for joining us for today's call. Before I begin my discussion this morning, I would like to note that this conference call will contain certain statements and expressions that are considered to be forward-looking statements under applicable securities legislation. Our assessment of future plans and operations is based on expectations that involve a number of business risks and uncertainties. These risks are set out in detail in our annual information form and include, but aren't limited to, commodity prices for oil and natural gas, equipment inventory levels, national and international economic conditions, political uncertainties and government regulations, 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 third quarter 2014, Calfrac achieved the following financial results in comparison to the third quarter of 2013. Consolidated revenue was a record $697.4 million, an increase of 79% from the third quarter of 2013. The increase was driven primarily by higher activity in the United States, Canada and Latin America. The higher activity in the United States was a function of improved customer demand, the company's entry into the Eagle Ford, a higher percentage of 24-hour operations and increased service intensity per well. In Canada, the higher activity was due to increased service intensity per well, an increase in 24-hour operations and a reduction in weather-related disruptions. In addition, the company's larger scale of fracturing operations in Argentina also contributed to the growth in consolidated revenue. Operating income, which is income generated after operating expenses and selling, general and administrative expenses, was $126.1 million for the third quarter of 2014, a 144% increase from the same period in the prior year. The increase in operating income was a result of a significantly higher activity in the United States, Canada and Argentina. Calfrac reported net income of $44.5 million or $0.46 per share diluted, which included a foreign exchange loss of $5.8 million, compared to net income of $6.1 million or $0.07 per share diluted in the same period of 2013. Depreciation expense was $35.5 million, higher by 28% from the third quarter of 2013, due primarily to the purchase of Mission Well Services assets in the fourth quarter of 2013 and capital asset additions. Calfrac's interest expense increased by $4.6 million to $14.7 million due mainly to the issuance of an additional USD 150 million of senior unsecured notes to finance the acquisition of the company's Eagle Ford assets and the depreciation of the Canadian dollar, combined with higher debt levels in Canada and Argentina. In Canada, revenue increased to $282.1 million for the third quarter of 2014 from $167.7 million for the same period of 2013. Note that this third quarter result was a record level of quarterly revenue for the company. The increase in revenue was a result of a number of fracturing jobs growing by 36% due to an increase in 24-hour operations, increased activity and larger space sizes in the natural gas liquids plays of Western Canada. There was higher activity in the Viking and the ongoing trend of more fracturing stages per well and a reduction in weather-related issues. Further augmenting revenue growth was revenue per job increasing by 24% as a result of higher service intensity and moderate pricing increases. Operating income of $65 million was generated in Canada during the third quarter compared to $28.8 million in the same period of 2013. The increase in operating income was the result of a greater proportion of 24-hour operations, moderately improved pricing and the introduction of cost surcharges for certain inputs into the company's operations. Subcontractor transportation costs as a percentage of revenue were higher on a year-over-year basis as the trend of increased sand usage required high usage of third-party subcontractors to transport sand from the terminal to the well site. SG&A expenses increased by 61% year-over-year but remain similar to the prior year as a percentage of revenue. The increase in SG&A primarily relates to higher personnel and recruiting costs associated with organizational growth. The improvement in operating margins in the third quarter compared to the first quarter of 2014 can be attributed to net Canadian price increases, a more efficient supply chain and improved utilization, which helps spread fixed costs over a larger revenue base. Turning to the U.S. Revenue from our U.S. operations increased to $331.9 million during the third quarter from $153.7 million in the comparable quarter of 2013. The growth in the number of fracturing jobs was primarily due to significantly higher activity in the Rockies, Marcellus, Bakken and Eagle Ford as well as a greater proportion of 24-hour operations. Revenue per job was stable year-over-year as the continued adoption of greater service intensity per job offset slightly weaker pricing in the comparable period. In addition, the stronger U.S. dollar increased reported revenue. Sand usage during the third quarter of 2014 increased on a total and per job basis by 154% and 17%, respectively, over the third quarter of 2013. Operating income in the United States was $67.3 million for the third quarter, an increase of 115% from the comparative period of 2013. The increase was primarily due to higher activity in the quarter. Operating income as a percentage of revenue was unchanged year-over-year at 20%. The gain in operating income was muted somewhat by higher equipment repair costs, subcontractor costs and, to a lesser extent, product costs as larger quantities of sand were required by our customers. SG&A increased by 113% in the third quarter over the same period last year due to higher personnel costs to support their expanded operations and a higher bonus expense, both of which are direct results of the increased activity. Pricing increased moderately in the Bakken and Eagle Ford during the third quarter when compared to the second quarter of 2014. However, wide-ranging price increases remained challenging and without commodity price headwinds, may limit the company's ability to implement further pricing increases from here. During the third quarter of 2014, the company's revenue from its Russian operations increased by 2% to $43.9 million from $42.9 million in the corresponding period last year. The increase was mainly due to the company expanding its operations into Usinsk during this year, which offset a decline in activity in the Nefteugansk region and a weakening of the Russian ruble relative to the Canadian dollar. During the third quarter of 2014, approximately 17% of the company's total fracturing jobs were multi-stage completions within the horizontal wellbores versus 32% in the comparable quarter of 2013. The decline was due to reduction in activity from one of our large customers in the Ugansk [ph] region and is primarily involved -- that was primarily involved in the use of multi-stage completions. At this stage, it is unclear as to when this issue will be resolved. So as we speak, Calfrac is identifying ways to improve the equipment utilization in the region. Operating income in Russia was $5.9 million during the third quarter compared to $5.4 million in the corresponding period of last year. The modest increase was due to a reduction in proppant and chemical costs resulting from smaller job sizes and technical efficiencies leading to lower consumption. SG&A expenses increased by 19% in the third quarter due to the addition of the company's fourth Russian operating base, which is located in Usinsk. Latin America, which consists of Mexico, Argentina and Colombia, generated total revenue of $39.6 million during the third quarter of 2014 versus $24.4 million in the comparable 3-month period last year. The increase was due mainly to a significant growth in activity across all of the company's service lines in Argentina. This was offset by significantly lower activity in Mexico, however, resulting from budget constraints experienced by the company's major customer in that region. The Colombian cementing market also remained challenged during that quarter as some permitting and infrastructure issues continued to negatively impact activity. Operating income in Latin America for the 3 months ended September 30 was $5.4 million compared to a loss of $0.5 million in the comparative quarter of 2013. This increase was primarily due to activity growth since the commencement of fracturing operations in Argentina in mid-2013. Offsetting the improvement in operating income were onetime costs in Mexico of $400,000 as Calfrac rationalized its workforce in response to its short-term expectation of lower activity in that country. The company recorded income tax expense of $24.7 million during the third quarter of 2014 compared to $3.3 million in the comparable period of 2013. The increase in total income tax expense was primarily due to significantly increased profitability in the U.S. and Canada, combined with improved profitability in Argentina. In addition, the company recorded a $1.1 million tax adjustment in Canada during the quarter that related to prior periods. The effective tax rate, excluding onetime adjustments, was 34% during the third quarter of 2014 compared to 36% in the comparable period in 2013. With the recent decline in oil prices, Calfrac is evaluating its current and future capital requirements. As part of this process, we are investigating opportunities to defer or cancel capital that is not already committed. Calfrac expects to have more clarity on these initiatives when it announces its 2015 capital program in early December. Needless to say, our approach will be prudent, given the uncertainty with crude oil prices at this point and the potential it may have on activity levels in 2015. Turning to the balance sheet. The company's working capital was approximately $393.7 million, which included $82.4 million in cash. Long-term debt at quarter end was $701.4 million, the vast majority of which is not due until 2020. As of September 30, 2014, the company had utilized $33.1 million of its credit facility for various letters of credit and has borrowed $39.8 million against the facility. This leaves us with about $227.1 million in available credit. I would now like to turn the call back to Fernando for an overview of the company's operations.

[Jose Fernando Aguilar:]

Thank you, Mick. Crude oil prices have decreased dramatically in the -- in recent months as global demand forecasts have weakened while supply growth has been stronger than expected. In the near term, Calfrac expects activity to be relatively stable across its operating divisions, but uncertainty over the longer term has increased. Many of the company's customers are currently planning their budgets for 2015, and given the sharp decline in crude prices, Calfrac expects its initial E&P capital budgets for 2015 will reflect a cautious approach. The company believes producers' spending could increase when there is more certainty regarding oil prices. As such, Calfrac will take a prudent approach when planning for next year's activities. With the recent decline in oil prices, the dynamic for pricing increases have changed in Canada and the United States. Our customers' netbacks and cash flow will immediately be pressured by a reduction in oil prices. As a result, it is difficult to foresee further material net pricing increases outside of what we have received today. However, there are other ways to increase operating margins such as improved operational efficiency, improving supply chain and logistics management and controlling costs. As usual, Calfrac is taking steps to address all of these items. At the same time, there are a number of positive trends impacting Calfrac's business. Spot natural gas prices in the United States have been relatively stable in recent months, while storage levels in the United States and Canada remain below their 5-year weekly lows. These factors should be constructive for natural gas-related development. Internationally, the company believes the movement towards greater unconventional development will continue with the company benefiting from greater use of multi-stage completion technology. This trend has been highlighted in recent months by the capital commitments in Argentina from large NOCs and IOCs looking to develop that country's unconventional resources. There are also a number of encouraging developments Calfrac is experiencing that are specifically related to well completions such as the greater intensity through larger multi-well pad designs, more fracturing stages per horizontal well and increased tonnage per stage. To further highlight the previous point and provide some perspective, other stages per well in our U.S. division increased by 73% in the third quarter compared to prior year due to greater service intensity in the Rockies, Bakken and Marcellus as well as the addition of the Eagle Ford operations. On a quarter-over-quarter basis, stages per well increased 6%, which was largely driven by the Bakken and Marcellus. Some usage also continues to increase with tons per well increasing 101% compared to the prior year and was up 27% quarter-over-quarter. In Canada, the trend of greater service intensity is also continuing. During the third quarter of 2014, total sand usage increased by 64%, and the amount of sand pumped on a per job basis improved by 23%. The company also believes it has created competitive advantages through its logistics initiatives despite the strain being placed on logistical networks from higher product volumes being used for fracturing across North America. The company expects to have 4 new or expanded facilities operationally in Canada in the fourth quarter of this year. In the U.S., the company is adding new facilities in all of the plays where it provides sand to its customers. Importantly, the capital commitment is not material. As well, the company anticipates its access to leased railcars will increase significantly in the first quarter of 2015 over the first quarter of 2014. Calfrac expects these initiatives will leave it well-situated from a logistics perspective heading into 2015. Our regional outlook is as follows

[Operator:]

[Operator Instructions] Your first question comes from Dan MacDonald from RBC Capital Markets.

[Daniel J. MacDonald - RBC Capital Markets, LLC, Research Division:]

Just wondering if we are following up on the comments for why you expect kind of pricing to be sort of capped, where it's at given the commodity price environment. How much more do you think room there is to gain from a margin perspective just from some further logistical efficiencies?

[Jose Fernando Aguilar:]

Well, I think -- we -- the way we've seen pricing behavior in the last quarter has basically come from 3 different actions. The first one has been straight price increases. The second one has been related to the cost efficiencies and logistics, as we mentioned. And the third one is related to intensity improvement or, I'd say, more productivity. It all depends on the different areas where we operate, and it depends how things are basically evolving. But we believe that those 3 elements are contributing to be fair, and I've taken an average and an equal base, in an average for each country.

[Ian Gillies:]

Sorry, Dan. I just -- to add something on to that. I mean, a lot of these logistics initiatives that we're putting into place in Canada and the U.S. really aren't going to take hold until the fourth quarter. So the benefit will really start to be seen, I think, for some of those logistics initiatives in upcoming quarters.

[Daniel J. MacDonald - RBC Capital Markets, LLC, Research Division:]

I guess all else being equal, you do see some potential margin gain to be had barring any price action?

[Jose Fernando Aguilar:]

Yes. What is interesting is that we are -- as you could see, the efforts that the company has been making in the last quarter related to better efficiencies, cost recoveries and price increases, of course, will continue. It's not -- we have to be very cautious about what we see in front of us because there is no clarity on how our customers or, let's say, the oil and gas operators are going to be planning their budget for next year. But the effort of continue improving our operation and also our pricing is something that we will continue pushing. And our management and our marketing and sales group are basically very aware of the importance of making sure that when there are cost recoveries that need to be passed to the customers, it's something that we have to do and, at the same time, trying to bring those efficiencies to the marketplace that will make our customers produce more oil and gas and bring their production faster to stream.

[Daniel J. MacDonald - RBC Capital Markets, LLC, Research Division:]

And then just if we look to Canada and the 24-hour opportunity there, recognizing the goal is kind of over the next 4 to 5 quarters to get to 50% 24-hour operations, where do you see that maybe if we look to, say, Q1? How much higher 24-hour operations are you may be prepared for on a year-over-year basis?

[Jose Fernando Aguilar:]

Yes. This is a very important point for the industry's success because the more we compare operations between the 2 countries and when we see that in the U.S., we have around 95% 24-hour operations. And moving to Canada, we mentioned earlier in previous quarters that it's limited by different factors like third parties and consultants on location. I understand customers getting ready and organized for all the logistics that are required to run 24-hour operations. We have today a couple -- let's say, 2 or 3 new customers that are basically asking for -- let's say, getting into 24-hour operations. So we see for the first quarter of next year getting to the 40% 24-hour operations.

[Daniel J. MacDonald - RBC Capital Markets, LLC, Research Division:]

And then, I guess, just lastly. To get to the 50%, given you do need to have some increased equipment on site for redundancy purposes, do you have the surplus capacity in Canada to go from 35% to 50% 24-hours? Or would you need to maybe add a handful of equipment pieces to get there?

[Jose Fernando Aguilar:]

Dan, you remember that part of our capital plan for 2014 included expansion equipment for both countries and also for Argentina. I can say -- I can think of 4 crews basically showing up in 2015. So the equipment is going to be available, yes, for the 24-hour operations in 2014 -- '15.

[Michael Joseph McNulty:]

Yes. And in fact, Dan, a major part of that -- not a major part, but a portion of that expansion capital was ancillary equipment, which is aimed directly at -- directly at being able to expand the 24-hour operations.

[Operator:]

Your next question comes from Klayton Kovac from Tudor, Pickering, Holt.

[Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division:]

So I realized you won't give us exact detail of your 2013 budget until December, but can you elaborate a little bit more on expenditures you're marking for deferral or cancellation? And I just want to clarify, will there be any change to your planned 2015 horsepower additions?

[Michael Joseph McNulty:]

So thanks, Klayton, for that question. At the -- at this moment in time, I mean, we have to be flexible in our capital planning. We've already commenced the construction of a big portion of that expansion capital. And sitting here today, we believe that, that's still the best thing to do going forward. Obviously, we want to stay flexible. And as we -- as time goes on here and, certainly, as we see -- as we look for crude oil to find a floor, things may change. I mean, if we're looking at oil prices down at sort of $70, then clearly, we got to sort of take a closer look at the capital that we're building. At this moment in time, though, we think the most prudent thing for us to do is to continue to do that. But allowing us the flexibility to maybe cancel elements of that capital if that opportunity arises. We're also looking at capital that we have not committed to just yet and trying to examine whether we can defer that expenditure at this moment or whether we should just go ahead and build it. So it is a process that we are in the middle of right now. We have not reached firm conclusions yet, and we'll continue to stay flexible, depending what happens with the markets.

[Klayton Kovac - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division:]

Okay. And just as a follow-up, staying on the topic of capital. Regarding your initiative towards increasing in-basin storage and improving your transload facilities, you mentioned that these were only going to require a modest capital commitment. Could you describe what this entails exactly and perhaps provide a few numbers?

[Jose Fernando Aguilar:]

Well, I think what is important to understand here is company strategy, Klayton, related to the way that we deal with our suppliers is some sort of partnership and alliances that we develop with them. We go out and buy the property. So our investment has been basically related to participating in having access to those facilities, and that's why it's not material. And I don't think it's relevant to disclose the number because it's not material, as we were saying before. It's more related to facilities that are going to be run and operated by our suppliers.

[Michael Joseph McNulty:]

And again, so -- and so what we are providing them, Klayton, is some guarantee delivery at least for the first year.

[Operator:]

Question comes from Scott Treadwell from TD Securities.

[Scott Treadwell - TD Securities Equity Research:]

Not to pry more on the sand side of things, but can you maybe just give us a sense -- obviously, third-party costs really go up on a kind of hockey stick curve as you run through your own capacity to handle sand and go onto third parties. Can you give us a sense of either on a tonnage basis, maybe that's the best way to think about it, how much more sand you could handle and maybe what that incremental lift is? When you go from sort of Calfrac-managed logistics to third-party-managed logistics, what sort of percentage increase is that on your sand transportation costs that you're looking to mitigate?

[Jose Fernando Aguilar:]

So if I -- what is important here about the situation of sand, especially in the U.S., Scott, it is -- it's been challenging for all the companies and we've been trying to anticipate. And when you grow your sand utilization by 101% year-over-year, I mean, obviously, you're doing the right thing because you're anticipating the big volumes and higher volumes that you are basically utilizing. And this is a combined planning that goes within customers and also our people at field location and the headquarter operations. So we have -- the cost that can be -- let's say, increased in the whole process, it's a combination of different things, as you know. It goes from production to transport by rail and then taking advantage of transload and storage facilities. So everything is combined. As part of what we normally do, we -- you can have some efficiency gains related to the way you are transporting by securing, let's say, rail that can bring down your cost by 5%. But then your transportation from the storage facility to the well site can increase by 10%. So it depends where you are. It depends on the distances. And it is not a single number that we can give you. It is a combination of all those factors that basically play all together.

[Ian Gillies:]

Yes. So Scott, I mean, thinking about perhaps a little bit differently. I think when we think about sand transportation, what we've decided to do as a company from a strategy perspective is that we really want to take control of sand transportation from the mine to the terminal. We think we can create competitive advantages by doing that. But the reality is we think there's a number of very good subcontractors that can move sand from the terminal to the well site. And that's probably a piece of the business that we don't want to be a part of in a material way.

[Jose Fernando Aguilar:]

So we go back to the strategy, Scott, and having Calfrac as a pure pressure pumping company that concentrates in the core business, which is basically executing completion work for our customers. If you think of all the trucks that I required to move, I don't know, we're going to be in excess of 2.5 million metric tons of sand pumped this year, then we become a sand transport company and not a pressure pumping company. And we want to concentrate in our core business. And that's the reason why we prefer to associate ourselves with good transport companies in the different areas where we operate.

[Scott Treadwell - TD Securities Equity Research:]

Okay. So would it be fair to say then that there's obviously some cost savings that you're looking to get here, but overwriting is normalizing logistics then, getting a more reliable transport network?

[Jose Fernando Aguilar:]

It is -- correct. Because at the end of the day, what we are looking for is always to become more efficient and more productive for our customers. So it is always -- we are always looking into cost efficiencies and productivity gains that are basically passed to customers and also to our profit level. And this is the name of the game, it's about continuous improvement. And that's why you can see that in the last couple of years, where the U.S. activity has been challenging for all the companies, Calfrac continues performing better than a lot of our competitors, and it's because of these efficiencies. Remember that pricing in the year hasn't improved based on passing price increases to the customers. It has improved because of efficiency gains, productivity gains and also, the new customers that we get when we have, say, better execution than those in their fields.

[Scott Treadwell - TD Securities Equity Research:]

Okay, that's great. Last one for me on the HR and staffing side. Can you give us a snapshot of sort of where you sit for staffing, if you feel comfortable with where you are for field staff? And has your sort of hiring pace or outlook for staff changed in the last sort of 6 weeks to 2 months? Or is it may be a bit early? Would that be a bit reactionary to start changing those plans based on what could be a short-term trend in commodities?

[Jose Fernando Aguilar:]

Are you referring to the U.S. or Canada?

[Scott Treadwell - TD Securities Equity Research:]

Both.

[Jose Fernando Aguilar:]

Okay. So we -- so as we mentioned in our release, our plans for Q4 and Q1 are basically remaining stable. Our activity and the intensity of our business, we -- of course, with a seasonal slowdown in the last part of December, what we're foreseeing today, based on our customer list and the activity that we have in front of us, we see some activity that is requiring -- increasing our headcount. Of course, we're going through a seasonal effect for Canada in Q2. So our plans related to where we were before, and today, we've seen an increase in our human resources needs and hire and training process in Canada. We are now going through a process of doing the same thing in the U.S. So if we -- as we normally do have enough visibility from the customer base and the needs that we have, we can properly plan for that. So it's just a matter of planning. It is one of the most important areas we have to concentrate on to make sure that we provide proper specialized personnel on location to take care of the business. So I don't see any, let's say, bottlenecks or big issues in the front of us today because of our planning process that is normally happening. So we feel comfortable with the numbers that we have and the numbers that we require and the numbers that we will bring on board.

[Operator:]

Next question comes from Dana Benner from AltaCorp Capital.

[Dana Benner - AltaCorp Capital Inc., Research Division:]

I wanted to start with Canada, if I could. I noticed that your fracking revenue per job was up 24%. And I wonder if you could provide us any clarity context or whatever in terms of the -- maybe the breakdown between what would have been pricing-related increases and then job mix. There are a number of different metrics floating around out there about how much people either achieved or trying to pass through in terms of realized pricing increases. So any additional color would be helpful.

[Michael Joseph McNulty:]

Sure, Dana. I mean, obviously, for us, we have a significant portion of our business which is contracted. And so other than being able to pass through some cost recoveries, those contracts would not permit pricing increases at this point. But on the non-contracted business, I would say that we were looking and were successful largely to -- in getting 5% to 7% pricing increases.

[Dana Benner - AltaCorp Capital Inc., Research Division:]

I guess second question is your client mix has helped you in Canada for quite some time. You've clearly had a favorable mix and well-identified, well-pursued. And I wonder if in a quarter like Q3, that may have worked against you a little bit, whereby you simply weren't able to push through what others may have been able to get with a different client base.

[Jose Fernando Aguilar:]

Yes, I think you are correct. And you remember, you've been following the company, Dana, for many years, and you can see that when activity gets busier and due to the nature of the way we execute our strategy and keep contracted Calfrac business in front of these customers, our ability to increase prices when the activity is very hot and high is limited. So this is correct. But at the same time, when times are tougher -- or tough, that same customer base give us the possibility of behaving in a more stable way than our competitors. So you are absolutely right. It is more the spot market that affects our performance in a quarter like that. But we are in this business for the long term. We're in this business for building those relationships that are going to make this company bigger and greater every single year. And we appreciate that those peaks in activity that some companies benefit. But at the end of the day, we are more into a longer term, and I think you will see how this would play in the future.

[Dana Benner - AltaCorp Capital Inc., Research Division:]

Great. Okay, very helpful. I guess moving to Russia, you mentioned a meaningful customer having pulled back its program and you're trying to assess the impact you're working with the sanctions issue, I guess, as it relates to perhaps growth in that market. And I wonder if you can give us some more color as to which of those 2 you think might be a bigger impact as to whether Russia is a growth market next year.

[Jose Fernando Aguilar:]

I would add another element, which is, you mentioned 2, which are very important. And the third one will be the currency evaluation that also affects the performance of the operation. So when you have these political and socioeconomical issues taking place and border problems between places like Ukraine and Russia, sanctions and all that, it becomes very complicated to try to understand from an oil service company point of view how these sanctions are going to affect you, especially understanding that part of our, let's say, positive news that we had, we were one of the pioneering companies getting access to unconventional work from international companies in the country. So now that we have sanctions and we have to deal with them, there is still an oil and gas market that is very important for Western Europe that Russia plays a very important role today because I don't believe that North America or other plays are going to be able to satisfy the Western European needs as we speak in the short term. So we believe conventional business will continue being important. The issues that are basically happening are more related to the ability from some of these companies to provide drilling services that are going to provide the wells for ourselves to be able to execute completions. So that's one of the areas that is creating a problem. At the same time, from the positive note, I have to say, as we mentioned earlier, Dana, that we are negotiating next year's activity. And of course, the balance between the other 3 or 4 different customers that we work for, is trying to understand what these volumes are going to be relevant for us to move equipment from 1 customer to the other and make sure that we have the ability to highlight a bigger presence, a larger presence where it is beneficial for Calfrac. So that's the exercise that is taking place today. And now we believe that this is -- in the next couple of months, these values are going to be defined, and we are going to be able to provide better information for you in the next conference call.

[Dana Benner - AltaCorp Capital Inc., Research Division:]

Okay. Just 1 last question. I see you're growing quickly in Argentina, but Mexico is evolving. I wonder 3 years out from now, do you think Mexico could still be bigger than Argentina based on reforms? Or is it too early to tell? We already get a sense for your Argentina growth rate? But what about Mexico?

[Jose Fernando Aguilar:]

I just came back from Mexico, I believe, 2 or 3 weeks ago. We had the opportunity of talking to government officials related to the Secretary of Energy. We met as well with the PEMEX executives. And we also had the opportunity of visiting with our Mexican oil and gas independent companies that are trying to understand, as everybody, how the energy reform is going to kick in and how these Round 0 and Round 0.5 are going to be put in effect. So how does the market evolve in the next 2 to 3 years? It will depend on how attractive this frame is going to be -- is going to work in 2015. What is happening now is -- I think the information that was relevant from my visit was there will be 3 plays. The first play, of course, is PEMEX on its own and more or less similar to what we used to have before. They would keep some of the blocks and the activity that they had in the areas where they believe they can continue exploring them with employee and technology base that they currently have. The second one is what they call farm-outs. And in those farm-outs, they are going to be working with companies who are aligned with them. So they are going to be participating in those activities with some sort of minority interest but basically watching how the companies operate but still having the possibility of deciding and participating in the -- let's say, in the decision process. And the third one is completely dependent oil and gas companies. It could be local, it could be international that are going to enter the market. The rules are not very clear yet, and they are working on that. The different consultants that we had a possibility of talking to are very positive on how, let's say, fast the process is going on because this is coming directly from the president of the country, President Nieto. He's very, very interested that this situation moves fast. And Lozoya, Emilio Lozoya, who is the President of PEMEX, also mentioned to us that this is a priority for the country. So there are 2 areas that are a priority for the country in terms of these energy opening. One is the CFE, which is the Comisión Federal de Electricidad, which is all activities related to, let's say, produce, generate gas for fueling the industry and also the country. And the second one is PEMEX, as we are discussing. So 2, 3 years from now, most probably, there will be an from a lot of companies to enter the country. But I can think of a more mature business in Argentina 3 years from now. So it will be interesting to see the development, but I cannot really tell you exactly if those 2 activities are going to be similar size. But the 2 of them are going to be important international markets for a company like Calfrac.

[Operator:]

Question comes from John Daniel from Simmons & Company.

[John M. Daniel - Simmons & Company International, Research Division:]

Fernando, you mentioned an expectation that customers will take a cautious approach, which seems reasonable, but you've also seemed to suggest that near-term visibility remains okay. So my question is, when would you expect the customer caution to begin impacting utilization or price or anything along those lines?

[Jose Fernando Aguilar:]

So thank you.

[John M. Daniel - Simmons & Company International, Research Division:]

Is that a Q1 event?

[Jose Fernando Aguilar:]

Yes, yes, John, thank you very much. We believe that our customers continue working on their budgets and understanding how the stability of the price of oil, like Mick was mentioning, find bottom of the floor. They will basically understand where their activity levels will be. We are confident that the next 2 quarters, the activity will remain stable, and that's the visibility we have today. Then Q2 2015 comes and then you have breakup in Canada. By Q1 2015, we believe we will have that visibility. And we went through this specific point during our Audit Committee meeting yesterday with the board. And this is what we told them we feel today, it is the Q1 timing for that certainty or uncertainty to produce the activity levels that we will basically help us planning in a better way. So when price of oil drops the way it has dropped and then you have these different pressures in the different markets where the company -- or the companies operate, we have to be cautious and prudent. We cannot plan of -- if we were extrapolating -- if the price of oil was not changing and we were going to extrapolate what was happening in -- let's say, Q2, Q3 2014 into 2015, we were going to be dancing a different song. And today, because that's not the case and the price of oil has dropped a lot, I believe companies -- everybody have to cautious and prudent about how the business is going to unveil in the following year. It's just a matter of being responsible about the resources that we are assigned to and make sure that we are, as well, responsible to our shareholders and our employees in the way we plan our company. So hopefully, this is going to be better than what we have today in terms of the commodity pricing. But if it's not the case, the company will be very well-prepared to take the actions that are going to protect our profitability into the future.

[Michael Joseph McNulty:]

And I just like to add something to that, John. It is uncertain. And well, you can't make firm plans when you see that level of uncertainty. But it's critical for us to be flexible because just as the market could fall in Q1 of 2015, it's equally possible that it could recover and we could see continued growth. So we are looking at 2 separate plans. We're looking at sort of how do we react if things go badly and how do we react if things stay the same. So I think it's important we stay flexible and agile and adjust as the market sends us the signals.

[Jose Fernando Aguilar:]

And at the same time, John, we are prepared to grow with the market as the market takes off as well. So it's just a matter of having the agility. And I think in today's business, companies are successfully -- they have the ability and the scale to move fast when a market is moving fast and take precautionary measures if the market doesn't go that way.

[John M. Daniel - Simmons & Company International, Research Division:]

Okay. If you allow me one dumb question. As you increase your railcar capacity, I'm assuming that you'll be procuring more sand with FOB mine prices. Is that right?

[Jose Fernando Aguilar:]

Yes, that is right.

[Ian Gillies:]

So John, we already do procure price. We primarily procure our sand FOB mine. It's just we have been using -- what we will be using is less third-party railcars.

[John M. Daniel - Simmons & Company International, Research Division:]

Got it. Okay. And then the last one is -- I don't know if you even have this data. But if you do, it'd be great. How many of your frac fleets in the U.S. are Tier 4-compliant?

[Jose Fernando Aguilar:]

I don't think we have it.

[Ian Gillies:]

John, we'd prefer to answer that off-line, if possible.

[Operator:]

Your next question comes from Jon Morrison from CIBC World Markets.

[Jon Morrison - CIBC World Markets Inc., Research Division:]

Were the cautionary notes in the release about a potential slowdown in the U.S. Bakken specific to your customer conversations or more of a high-level pragmatic view of the market given that oil prices declined?

[Ian Gillies:]

Jon, it was more -- it wasn't anything customer-specific relative to us. That was more just a pragmatic view of where that basin's relative economics are relative to some of the other basins within the U.S.

[Jon Morrison - CIBC World Markets Inc., Research Division:]

And the same question on the Marcellus side. You guys' view for fairly stable outlook, is that a broad view of the markets or that's more specific to Calfrac's customer relationships and contracts that gives you firm visibility, that you don't think 2015 is astronomically different than 2014?

[Ian Gillies:]

And so, Jon, on that piece, we would actually be the opposite view. Our view there and the Marcellus specifically, we think given the gas growth in that basin and the transportation issues, it's really important, as you go forward, identifying customers in that play, that they have good access to pipeline and they're able to move -- and be able to move the natural gas. And so we think given our customer base, they can continue along with very, very active development plans in 2015.

[Jon Morrison - CIBC World Markets Inc., Research Division:]

In the U.S., would it be fair to say that the sequential margin improvements from Q2 were broad-based across the platform or more basin-specific?

[Jose Fernando Aguilar:]

I think basin-specific is a good way of putting it, Jon. We have different performance in different basins based on the competitive landscape that we face in each area. So yes, I think you're right, basin-specific.

[Jon Morrison - CIBC World Markets Inc., Research Division:]

Just following on Dana's question, do you view the risk profile in Russia as being substantially different than it was 12 months ago? And would you need to see higher returns than you would have previously had for thresholds of deploying new capital into that market given the sanctions and some of the headwinds that we've seen over the last 6 months?

[Michael Joseph McNulty:]

Yes, Jon. I think in terms of new capital, it's clear, we would not be deploying new capital into that marketplace unless we could be assured of higher rates of return. In terms of the actual risk for the conventional business, quite honestly, we don't see a huge change from that standpoint. What probably has gone away is the sort of the immediate upside of the unconventional. It will be there at some point. I mean, these sanctions will be lifted at some point, that we will have some normality return there. But we don't see increased risk. But we won't be investing more capital there until, number one, it's more stable; number two, it's sort of a better return on investment, and that probably speaks to having an access to the unconventional market.

[Jon Morrison - CIBC World Markets Inc., Research Division:]

Mexico, if you were to see development plans accelerate and, ultimately, some of those 3 things that you talked about, Fernando, start to come through and energy reform changed the market, how quickly could you actually scale up operations in that market, seeing how you just pulled back and trimmed?

[Jose Fernando Aguilar:]

It's very easy, and it's not very complicated because remember, NAFTA countries are basically having some special regulations, the way you move in and out equipment. So that's not a problem. Then the people, which is basically a challenge for companies who are not in the country. We run Mexico, Jon, as you know. We have 100% Latin, Mexican people who speak the language and understand how to operate in the country. And we've been there for a few years now. So we can scale up very quickly. And we have a Latin American operation that can also provide available resources to move up and down according how the opportunities change from 1 place to the other. So we have reduced our footprint based on the slowdown of PEMEX in the last few months, as you know. But the idea is to understand exactly how quickly we need to ramp up. And we will be in the position of doing it. The management team remains being the same. They've been challenged by the last couple of years, PEMEX issues and situations, especially in the north. The company has moved part of the operation to the south to start working in the year more, so understanding a new area that is related to, let's say, companies that operate integrated projects for PEMEX. So we are deployed in the land-based operations in Mexico, and we believe that we can bring that up as quickly as required based on how these activities or opportunities come in front of us.

[Jon Morrison - CIBC World Markets Inc., Research Division:]

Just on the logistics side, I realize it's been asked a number of different ways, but I just wanted to double check. If we think about the investments that you're making right now, should we be thinking about logistical investments being an ongoing capital outlay for the next few years or ultimately something that you believe these self-help initiatives will largely come to an end in the next few quarters and it's a onetime spend, not an ongoing reoccurring spend?

[Jose Fernando Aguilar:]

No. We -- and I go back to the way that the company strategy has worked out for the last 15 years since we started working. We prefer to have partners who provide those services rather than investing in those facilities. So our investments, as Mick was mentioning, are more related to -- let's say, to committing to the volumes that these companies are going to provide to us. And it's not only related to sand, it's related to everything we do from equipment manufacturing, related to sand transportation, related to sand storage, to chemicals, et cetera. So we prefer to keep it that way. And we don't see that as a change. You can't imagine the number of companies that come to offer or, let's say, private equity firms that come to offer businesses in these different areas that you are referring to from logistical to materials to products, et cetera. But we are not interested in changing our strategic view on supplying these pieces to our business.

[Ian Gillies:]

So Jon, I think the piece I would add to that is -- I mean, as we look into next year, at the investments we've made to date and the partners we've had on the logistics piece, we think we're well-situated for next year and where the activity levels are going to be. If activity levels were to move materially higher, completion designs were to change again, we would obviously have to reevaluate these plans. But I think right now, we're pretty comfortable with where we are. We're going to continue to do a little bit of investment here and there, but more or less, we're largely comfortable.

[Jon Morrison - CIBC World Markets Inc., Research Division:]

Are your expansion plans in Argentina tempered at all in the back in the fall of oil prices? Or ultimately, do you believe that YPF and other producers are probably going to go forward with regional plans at this stage?

[Jose Fernando Aguilar:]

No. We continue receiving more positive news about the way that the activity will continue increasing in the country. As you know, Argentina is a place that hires proper management over the different elements of the strategy related to everything, from manufacturing equipment to hiring local people, to speaking the language, to managing the unions, to -- et cetera, et cetera, et cetera. So we -- as you know, in the fourth quarter of 2014, we're deploying a crew of 32,000 horsepower. There -- as part of our plan in July with the board's approval, we started already manufacturing a fleet that is going to hit the market in 2015. So we haven't slowed down or reduced our view on how Argentina will continue contributing to our expansion plans in the region.

[Operator:]

Next question comes from the line of Jeff Fetterly from Peters & Co.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

Mick, your comment on Canadian pricing, 5% to 7% for spot-based work, is that relative to Q1 or year-over-year?

[Michael Joseph McNulty:]

That's relative to Q1.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

And if you incorporate surcharges into that number, what would your gross pricing look like in terms of increasing relative to Q1?

[Michael Joseph McNulty:]

I think it's probably going to be 9% or 10%.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

Okay. And then on a net basis relative to Q1, how much do you think pricing has actually moved?

[Michael Joseph McNulty:]

On a net basis -- so just looking at pure pricing, on a net basis, it's probably 350 basis points.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

Okay. On the U.S. side, Fernando, did I hear you correctly earlier when you said 95% of U.S. crews are running on a 24-hour basis currently?

[Jose Fernando Aguilar:]

Yes, that is correct.

[Michael Joseph McNulty:]

Yes.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

Where would that number have been for Q3 of last year?

[Michael Joseph McNulty:]

About 70% to 75%.

[Jose Fernando Aguilar:]

Yes. Remember that we -- at the time, when we started a year ago, also in Texas, we started with 12-hour crews, and slowly, we moved into 24-hour crews. So you've seen an evolution from 70% to 95% in Q4 2013, Q1, Q2 2014.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

Okay. How much horsepower did you transfer into the U.S. from Mexico?

[Ian Gillies:]

So, Jeff, we transferred roughly 22,500 horsepower from Mexico into the U.S.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

And is the intension for it to remain in the U.S. for the foreseeable future? Or do you have flexibility to move it back at short notice?

[Jose Fernando Aguilar:]

We have flexibility to move the equipment. As I mentioned, Jeff, all of our equipment that has been operating in Mexico under the agreement between the 2 countries can move up and down without a problem. So we have the flexibility. And again, it came based on our protection of our margins in Mexico to make sure that we could have, let's say, a reduced footprint in the country until the activity picks up again.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

But you haven't committed it specifically to customers or projects in the U.S.?

[Jose Fernando Aguilar:]

Not yet, no.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

Okay. One more question on the logistics side. Conceptually, do you guys think about the investments or commitments you make in terms of logistics as being incremental to the revenue line or to costs -- to reducing costs?

[Jose Fernando Aguilar:]

It's a combination of the 2 because if we hadn't done it, we were not going to be able to execute larger jobs. And at the same time, by doing those -- having those activities, we have been able to have an operation that is ready to execute any job anywhere. And it's very interesting because sometimes, we get calls from customers in different areas where we are trying to make sure that we can help them with other crews -- sorry, other service companies' crews that have no access to -- let's say, to sand in this case. And we cannot do it because the cycle, as we have mentioned earlier, in different meetings, it takes around 6 weeks for sand to go from the mine to a location. So it is -- we are making sure that we get what we need for our businesses, but at the same time, we cannot help oil companies that are not really engaged with us in that respect.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

Okay. Your comment earlier in terms of providing strategic advantages to you, do you think you could -- do you think with these investments or commitments, you'll have the ability to deliver sand to location at a lower cost than your competitors? Or do you think it's just the ability to get it there?

[Jose Fernando Aguilar:]

It is always the fight. And hopefully, these efforts that we're making by, let's say, building those facilities and having the ability to get closer and ready to the customer will become cost efficiencies for the company as well. So it is always a discussion that happens between company and suppliers and also a company and the customers. So it's always the -- let's say, the topic that is in the middle of the picture, right, where you -- how can you benefit, making sure that you bring these advantages to your customers that are going to secure their business. And I think customers understand that very well today. And they have been -- as you can see with the numbers, they have been more understanding of the situation by giving us the opportunity of improving or, let's say, having these cost recoveries that we have been mentioning, especially for both U.S. and Canada.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

The CapEx side, Mick, what do you expect cash CapEx in '14 to be?

[Michael Joseph McNulty:]

Again, we're playing with those numbers, Jeff, but I would be sort of looking in at sort of $200 million range.

[Jeff Fetterly - Peters & Co. Limited, Research Division:]

Okay. And just to clarify earlier commentary, of the $150 million that you've designated as carryover CapEx into next year, at this point, how much of that could you either defer or cancel?

[Michael Joseph McNulty:]

I can't give you an answer on that, Jeff, because that's the exercise we're going through right now. And one of the things you have to realize is that we've already commenced building a lot of that equipment. So the decision to cancel isn't an obvious one because you could end up with partially completed equipment and mismatched fleets. So you have too much of one type of equipment, and that's not efficient. So for us, we'd rather take a sort of a longer-term view on it and rather than maybe save some short-term cash, create an equipment profile that is a lot more efficient for us and is suitable to what we want to do.

[Operator:]

And your final question will come from Kevin Lo from FirstEnergy.

[Kevin C. H. Lo - FirstEnergy Capital Corp., Research Division:]

The -- just -- I wanted to get your sense on what your optimism is. Are you more optimistic over Canada because there hasn't been incremental equipment being put in the area or more, I guess, optimistic in the U.S. just because there's more gas and obviously your strong presence in the Marcellus? Where are you more optimistic?

[Jose Fernando Aguilar:]

Well, Kevin, we are optimistic everywhere we operate. This is -- we were not -- maybe we were doing something different and scaling down or shooting down, whatever. But both countries provide very good opportunities for 2015. And we think, as it is happening in the industry lately, all the cycles are basically shorter. So that's where we have to be cautious and prepared for, for those cycles to finish and ramp up in the following one. But I cannot -- I have to say that the Canadian market is limited to the size it has today. And when you compare that market with the U.S., the U.S. is a huge market. It is different regions. It is, I don't know, 18 million horsepower. And we have the ability of executing with our technology, our people and our equipment a very safe and high-quality job. So -- and that's the reason why there's no secret that we have managed to double our size in the U.S. in the last year. It's also held by the customers' intensity of the business increasing. But the reality is that we enjoy the Canadian market. This is home for us, as you know. We like it. We participate with the most important customers in the country. But the reality is that the U.S. is also providing us with a platform that is going to help us continue expanding and increasing our size.

[Kevin C. H. Lo - FirstEnergy Capital Corp., Research Division:]

That's a great answer. Second thing is, as you guys have talked about many times on this conference call about potentially reducing CapEx, I kind of remember when you guys are talking about actually putting a CapEx program early last year because it's a long build cycle, et cetera. I mean, I understand that potentially is a slowdown or whatever. But I mean, why go through and then actually reduce CapEx at this point? And if it's not a material amount, why don't you just let it go and potentially have extra spares and capacity?

[Jose Fernando Aguilar:]

We haven't said that we are reducing our CapEx. We said that we will be very cautious and prudent, analyzing exactly how the situation is going to be presented to us for 2015. At the same time, it's just a matter of being careful. When -- and there is a reason for this. And I go back to this responsibility that we have to have with our shareholders, which is I don't think it's a good idea for any company to keep equipment parked against the fence, right? I think some companies do it because they have to, because activity is basically dropping in a way that you cannot handle -- put your equipment that you have in front of you. So we don't like it. Going to one of our operating districts and then looking at how many piece of equipment are parked in the base, that's not fun. And I think we are in this business to execute. So we try to keep it very, very good balance between the equipment that we have, the equipment that we need. And we don't go crazy ordering equipment. And if you remember a few quarters ago, some people are saying, "Calfrac's ability to execute, where is the additional equipment?" And it was only when we saw there was an opportunity for us to start participating in those additional markets when Calfrac really decided to go and build the equipment. We try to keep a very, very close balance between the 2 of them. We don't want to see any waste in our company. And the idea of making sure that our people in the field are disciplined with their capital plans and we make sure that we have what we need to execute our business and move forward according to how the growth opportunities come in front of us. We can always have the opportunity of going back to the board and ask for capital support for expansion. So it's just a matter of discipline. It's a matter of a very balanced way of looking at the business. And this is the way we are. And we will continue executing in that way we're doing it. So I would like to thank everybody who participated in today's conference call, and we look forward to talk to you again in our Q4 conference call in February next year. So thank you, Michelle, and good day, everybody.

[Operator:]

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