Calfrac Well Services Ltd. (OTCPK:CFWFF) Q2 2022 Earnings Conference Call July 28, 2022 12:00 PM ET
Company Participants
Mike Olinek – Chief Financial Officer
Pat Powell – Chief Executive Officer
Conference Call Participants
Keith MacKey – RBC Capital Markets
Cole Pereira – Stifel
John Daniel – Daniel Energy Partners
Waqar Syed – ATB Capital
Operator
Good day and welcome to the Calfrac Well Services Limited Second Quarter 2022 Earnings Release and Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Mike Olinek CFO. Please go ahead.
Mike Olinek
Thank you, Elaine. Good morning and welcome to our discussion of Calfrac Well Services’ second quarter 2022 results. Joining me on the call today are Pat Powell, Calfrac’s Chief Executive Officer; and Lindsay Link, President and Chief Operating Officer.
This morning’s conference call will be conducted as follows; Pat will provide some opening commentary after which, I will summarize the financial position and performance of the company. Pat will then provide an outlook for Calfrac’s business and some closing remarks. After the completion of our prepared remarks, we will open the conference call to questions.
In a news release issued earlier today, Calfrac reported its unaudited second quarter 2022 results. Please note that all financial figures are in Canadian dollars unless otherwise indicated.
Some of our comments today will refer to non-IFRS measures such as adjusted EBITDA and operating income. Please see our news release for additional disclosure on these financial measures.
Our comments today will also include forward-looking statements regarding Calfrac’s future results and prospects. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our results to differ materially from our expectations. Please see this morning’s news release and Calfrac’s SEDAR filings including our 2021 annual report for more information on forward-looking statements and these risk factors.
Lastly, as we disclosed during the first quarter earnings release, the company is committed to a plan to sell its Russian division and has designated the assets liabilities and operations in Russia as held for sale and discontinued operations in the financial statements.
The company has made progress in relation to the sale of its Russian subsidiary. However, in conjunction with the ongoing sales process and in light of the additional Canadian sanctions and restrictions that were issued in relation to the Russian oil and gas industry during the second quarter, the company has recorded an impairment of CAD42.8 million to write down the Russian division’s current and long-term assets to their expected recoverable amount. The focus of the remainder of this call will be on Calfrac’s continuing operations unless otherwise specified.
Pat over to you.
Pat Powell
Thanks Mike. Good morning and thanks everybody for joining the call. Today, before Mike provides the financial highlights of the second quarter, I’ll offer a few opening remarks.
First, let me introduce myself — a little bit about myself. I started my career over 40 years ago in our family oilfield trucking business and worked my way up to CEO, while growing that company into a large and diversified oilfield services business.
After facilitating the sale of that company, I rounded out my business experience by serving as CEO or a Board member for numerous other oilfield service companies. I plan on utilizing my business insight learned from past experience to help Calfrac solve its most pressing problems going forward.
As we anticipate commodity prices continuing to support strong pressure pumping fundamentals, my top priority is to leverage the current market cycle, to expand margins by increasing the prices for our services, while collaborating with customers to improve operational efficiencies to generate substantial net income and sustainable free cash flow.
We are excited about the outlook for Calfrac both in the near-term and as we enter the third quarter, which has historically been our most active and profitable quarter. As well as in the long-term, we believe that the market environment is similar to 2017 and that we are in the early stages of a multiyear energy up cycle.
Calfrac considers our position as a leader in the North American and — as a leader in North America and Argentina to bode well for us to meet customers’ increasing demands for a high-quality service provider.
With that said, I will now pass it back over to Mike, who will present an overview of our quarterly financial performance.
Mike Olinek
Thank you, Pat. Calfrac’s revenue from continuing operations during the second quarter increased by 83% year-over-year to CAD318.5 million. The revenue increase was due to improved fracturing revenue per job as well as higher fracturing job count.
The 41% increase in fracturing revenue per job was due to passing through increased input costs to the customers across all operating divisions combined with improved net pricing in North America. The 30% increase in fracturing job count was due to increased utilization per fleet combined with a higher average fleet count in the United States.
Adjusted EBITDA from continuing operations reported for the quarter was CAD39.3 million compared to a loss of CAD1.1 million in the second quarter of 2021. Operating income from continuing operations increased significantly to CAD36.6 million from operating income from continuing operations of CAD0.8 million in the comparable quarter of 2021. These increases were primarily due to better utilization and improved pricing in the United States division.
Sequentially, the company’s revenue from continuing operations increased 8% from last quarter or CAD24 million. The revenue increase was due to the increased pricing in North America as well as improved job mix in Canada and Argentina as evidenced by 35% higher revenue per job combined with significantly higher fracturing activity in the United States, offset by lower activity in Canada due to the onset of spring breakup.
Sequentially adjusted EBITDA increased 88% or CAD18.4 million from last quarter, primarily due to improved crew utilization combined with pricing increases in the United States. The sequential adjusted EBITDA fall-through was 77%, revealing the company’s operational torque. The net loss from continuing operations for the quarter was CAD6.8 million versus a net loss from continuing operations of CAD35.5 million in the same quarter of 2021.
For the three months ended June 30, 2022 depreciation expense from continuing operations was relatively consistent with the corresponding quarter in 2021. The slight decrease in second quarter depreciation expense was primarily due to the mix and timing of capital expenditures related to major components.
Interest expense during the second quarter of 2022 increased by CAD1.6 million from the same period in the prior year due to higher borrowings and interest rates under the company’s revolving credit facilities combined with interest expense related to draws made under the company’s bridge loan.
Calfrac spent a total of CAD 15.2 million on capital expenditures from continuing operations in the second quarter compared to CAD17.1 million in the same period of 2021. These expenditures were primarily related to maintenance and sustaining capital to support the company’s United States fracturing operations.
The consolidated company had an outflow of CAD 27.4 million from changes in working capital during the second quarter versus an inflow of CAD15.8 million in the comparative quarter in 2021. This change was largely driven by an increase in revenue combined with the impact of the nearly 70% appreciation of the Russian ruble during the second quarter.
During the second quarter of 2022 cash proceeds of CAD0.6 million were received from the exercise of warrants and stock options. To summarize the balance sheet as at the end of the second quarter, the company had working capital of CAD144.5 million from continuing operations, including CAD17.4 million in cash.
At June 30, 2022 the company had used CAD0.9 million of its credit facilities for letters of credit and had CAD200 million of borrowings under its credit facilities leaving CAD49.1 million in available borrowing capacity at the end of the second quarter. The company’s credit facilities are subject to a monthly borrowing base which at June 30, 2022 was above the maximum of CAD 250 million.
During the quarter the company repaid and canceled its CAD25 million secured bridge loan of which the company had drawn CAD15 million prior to its repayment. Also Calfrac reduced its funded debt and total debt leverage to levels that will terminate the covenant relief period under its credit — revolving credit facility agreement upon the filing of its second quarter compliance certificate, which is anticipated to occur before the end of July.
I’ll now turn the call back to Pat to provide our outlook.
Pat Powell
Thanks Mike. I will now present an outlook of Calfrac’s operations across our geographic footprint. Our North American market has experienced solid growth through the first half of the year. We expect the momentum to increase through 2023 as the industry remains undersupplied, customers are already booking our pumping equipment for 2023.
In the United States, our second quarter results show meaningful sequential and year-over-year improvement primarily due to regular price increases combined with the tremendous activity growth. Despite losing 24 operating days in April, due to weather challenges in our largest district, we did anticipate or we did achieve full utilization of all nine fleets in June which contributed to completing 56% more stages as it compared to April.
Mining the activity increase with updated pricing allowed the company to deliver significantly better financial performance as it exited the quarter. We anticipate robust demand for our services to persist through 2023, while we continue to expand margins and optimize the fracturing schedule to produce strong financial results. We intend to maintain our current operational footprint of nine active fleets for the rest of the year. However, we are evaluating potential customer and pricing scenarios that would justify making further equipment investments.
In Canada, second quarter results were impacted by seasonal breakup. However, our outlook is very strong for the second half of the year as we anticipate full utilization combined with improved pricing and steady cost inflation for our four large fracturing fleets to generate substantially improved financial returns.
We expect increased demand through 2023 much as — much the same as in the US, as customers are already speaking on our equipment to execute next year’s — their next year’s capital programs. While an additional fleet can be reactivated in Canada with minimal start-up costs, finding labor to south the crew remains a bigger hurdle. At this time Calfrac will maintain its current operational footprint. However, we will continue to evaluate options regarding equipment expansion and we’ll put additional fleets into the field when the economics make sense.
Now we’ll go to the international operations. Even with the substantial currency devaluation and inflationary forces combined with limitations on transferring capital out of the country, our outlook for operations in Argentina is very constructive. We anticipate improved financial results as a multiyear contract goes into effect in the third quarter increasing pricing for our dedicated fleet in the Vaca Muerta, shale play combined with increasing visibility for growth prospects in the Neuquen region of Southern Argentina.
We expect to maintain high utilization for our fleet throughout the rest of the year in Argentina. We will continue to leverage our geographical diversification with a focus on executing our work safely right and profitably to generate sustainable returns for our shareholders.
I’d like to thank the Calfrac team for welcoming me into the company. And I’m looking forward to the rest of the year. Back to you.
Mike Olinek
Thank you, Pat. I’ll now turn the call back to our operator for the Q&A portion of today’s call.
Question-and-Answer Session
Operator
[Operator Instructions] We will take our first question from Keith MacKey from RBC Capital Markets. Please go ahead.
Keith MacKey
Hi. Good morning and thanks for taking my questions. Just curious if we can start out with the U.S. EBITDA per fleet, you mentioned you had pumped I think it was 56% more stages in June than April. Can you maybe just help us delineate the EBITDA per fleet between those months? And where you think that could then lead to in the back half of the year, please?
Mike Olinek
Good morning Keith. It’s Mike here. Yeah, certainly we had very good progression on EBITDA per fleet throughout the second quarter. I think really where we exited it was somewhere around CAD15 million per fleet. And we probably were around that CAD10 million per fleet earlier in the quarter.
So it varied quite dramatically. And I think we see continued progression into the third quarter here on that EBITDA per fleet. So hoping to average somewhere between CAD15 million and CAD20 million in the third quarter here.
So things are stepping in the right direction. Some of that is going to be utilization driven and some of that is, again increased net pricing gains that we foresee happening and taking hold here in the third quarter.
Keith MacKey
Got it. I appreciate the comments Mike. So Pat looking forward to certainly working more with you over the years here. Maybe if you could just give us a little bit more context into your goal of expanding margins and growing free cash flow.
Do you think you have the right business footprint now to achieve that through the cycle as opposed to just in the next up cycle? And just your thoughts on, where you’d like to take the company to achieve that goal.
Pat Powell
Well, yeah, I haven’t been here very long so I — but I have been around the company a bit. And I like the company. I like the people that are in the company. So our focus will certainly be on our balance sheet and secondly, our equipment.
So we — we’ll focus on pricing. I’m a firm believer that profitability shouldn’t be a dirty word in a company. And I think we’re in the right market now to achieve that so. It will be the market that fixes balance sheets in this industry more than what we can do inside the company so. Does that answer to your question?
Keith MacKey
Yeah, it does. It does. Thanks very much. That’s it for me. I will go back to the operator.
Pat Powell
Thanks, Keith.
Operator
[Operator Instructions] We will take our next question from Cole Pereira from Stifel. Please go ahead.
Cole Pereira
Yeah. Thanks and good morning everyone. Just wondering, if we could get a bit more details on the Russia sale, do you have a sort of a formal or maybe informal agreement in place? And you’re just trying to figure out how you work with the sanctions and so on and so forth at this juncture?
Mike Olinek
Good morning, Cole, Mike here. Yeah, as I stated in my call notes, around Russia, we’ve made some progress in the sale. But really at this point in time I think we have some things to work out.
We think this is something we’re going to accomplish sooner than later, but it’s still a process when you’re dealing with a major disposition of a Russian sub in the context of the sanctioned environment that we have there.
So no real extra color that I can provide at this point other than, I think we made some inroads on that. And you saw by the write-down of the asset that the valuation of the asset is reflective I think of the market that we’re a part of there, so really not much more to get into there.
Cole Pereira
Okay. Great. That’s good color. Thanks. And Pat, you made some comments on looking at additional equipment reactivations in the US. I mean is there does pricing have to move up maybe x percent to get you there, or is it more a customer needs to lock in or something like that? Like what do you need to see to reactivate another spread in the US?
Pat Powell
I think in the US, I think the pricing is getting pretty close to where we need to be as long as inflation stays fairly steady. I’ve talked to our guys and said, look any contract that we enter into we have to have room if our sand prices, chemical prices, labor prices, increase, the customer has to be readily acceptable of these price increases
So I mean if we get that we would put a fleet back into the field but it would have to be under a contract that we’ve got some longevity. But we do have which I believe in the limited knowledge I’ve got and the length of time I’ve been here that we have a bit of an advantage with the idle horsepower that we have setting that can be put back into the field a lot more economically than buying new and probably quicker in this market. So does that answer your question?
Cole Pereira
Yes. No, that’s great color. And then just out of curiosity, what do you think the time line would be if you were to reactivate another spread in the US?
Pat Powell
I would think by the time we crude it five to six months, we would have one and we could be working in combination with the second fleet at that time. So it’s a little messy but I would say it’s probably five to six months, yes.
Cole Pereira
Okay. Great. And then thinking about 2023, obviously there’s a couple – there’s a wide range of outcomes for where activity could go but it obviously seems biased higher. And you kind of just touched on it a little bit but how do you think about what the right frac footprint is for Calfrac in the US next year?
Mike Olinek
I think geographically if that’s what you’re talking about I think we’re probably where we want to be right now. We’ve been getting calls from customers in the areas that we are which looks like finances dictating of course and contracts and stuff that we could put all our fleets to work in the areas that we’re working in. So that’s where we will focus.
Cole Pereira
Got it. And I guess so you may be thinking as well from a spread count standpoint?
Mike Olinek
Yes. I mean Cole as you know we’re in the broader Rockies in Colorado. We’re in North Dakota Wyoming and the PA Marcellus area. So I think all of those I think Pat’s referring to we have the ability with our existing and maybe new customer base to expand in any of those areas. It will really be opportunity-based as to where those fleets go to work. So it will be based on the customer, the visibility of work, the confidence that we have in that work and then the ability to have it at the right price.
So I think that’s kind of some of the optionality that Calfrac has. We have the ability to put some fleets back to work relatively quickly and we’ve got some opportunities in all of those areas to put them to work. It’s just where those decisions will be made and we’ll see what happens as the year progresses in that way.
Cole Pereira
Okay. Got it. That’s all for me. Thanks. I’ll turn it back.
Pat Powell
Thanks, Cole.
Operator
We will take our next question is from John Daniel from Daniel Energy Partners. Please go ahead.
John Daniel
Hey, guys. Thanks for including me. Just two quick questions. Hearing everything correctly five to six months if you wanted to deploy the next fleet in the US subject to utilization, pricing scenarios that are acceptable to you? I mean kind of I think stating the obvious, everything is going in the right direction. It would seem logical that you probably have that opportunity sometime in Q3 but then so if we’re deploying end of year early Q1 am I off-base with that?
Mike Olinek
No I think you’re right on John respectively.
John Daniel
Fair enough. And then I got just one on the supply chain. Talking to some of the refurb shops and so forth they keep talking about the inability to find or the challenges to find spare parts particularly in things like engines. I’m just curious, if you could weigh in on what your maintenance teams are telling you. And do you see a scenario where utilization on this equipment for the industry is just so hard spare parts become even more challenged because of supply chain soft that it could impact industry utilization next year? Kind of a big picture question, but just your thoughts?
Mike Olinek
The – to stay with the Tier 2, Tier 2 fleet. We have our challenges but they’re not insurmountable. As we progress to tier four engines and the dual fuel systems it will be more challenging for sure. There will be a longer lead time. But right now we’re we will start putting Tier 4 pumpers into the field as we can get those engines, but we will be fine for what we can see with Tier 2 and then just adding as we get them.
Pat Powell
And John, a large number of our rebuilds are done in-house. As far as pressure pumps themselves. We do the vast majority of that in-house. I think you saw a small little news release. We’re trialing a new frac transmission that holds a lot of promise for opening up the supply chain, and maybe giving an option to especially one of the major suppliers because that supply chain is long lead times 40 weeks plus on some of the things. But we’re looking for alternatives. I mean, you have to believe that we’ve been kind of out of COVID for a good six to eight months at some point in time that supply chain will start to loosen up. It may get a little bit tighter, but eventually it has to get back to a little more normal.
John Daniel
One would think. Last I’m interested you bought up the transmission. How long does the trial last before you say hey this is good and we want to order some? Is it one job 10 jobs? Just any color would be helpful.
Mike Olinek
No, you need at least 1,000 hours on it to make a determination on there. Even then you’re not going to go full steam ahead. But 1,000 hours of pumping you should be able to see, if there’s bucks or no bucks. And then, if you’re trying to compete with some of the other industry operators out there that’s going to take several years to get you to that position. But it’s working well and we’ve got a large number of those transmissions. So we’re hoping that that works out in our favor.
John Daniel
Perfect. Thank you, gentlemen. Sounds good.
Mike Olinek
Thanks, John.
Pat Powell
Thanks, John.
Operator
[Operator Instructions] We will take our next question from Waqar Syed from ATB Capital. Please go ahead.
Waqar Syed
Thank you for taking my question. One of your competitors mentioned that they worry about shortages of sand and chemicals and disruption to activity in Canada because of that. How are you positioned with respect to that aspect? And do you think that’s a real risk in Canada?
Mike Olinek
We’re certainly concerned about the supply of sand, Calfrac we do things a little bit differently. So I think we have a bit of an advantage we buy a rate from the mine gate and we still use the third-party sand suppliers. So we think we might have a bit of an advantage on the availability of the product. So we run our own unit trains and like I said earlier in the call, I haven’t been here long enough, but I believe it’s an advantage and we will – and hopefully it is so.
Waqar Syed
And then in terms of your customers in the US going to kind of close to leading-edge pricing. Are all your big customers now close to leading-edge prices, or are you still kind of working towards that goal?
Mike Olinek
On the pricing?
Waqar Syed
Yes.
Mike Olinek
Well, we continue to work with our major customers on pricing. But so far, they’ve all been able to accept pricing increases and understand that with the inflationary cost that there will be more increases. I think they’re getting increases. Well I know they are right across, the whole spectrum of services provided to them. So yes, it’s — that’s always a battle, but I think we’re doing a pretty good job. But utilization is probably as important to us, as pricing increases. And they can really help with utilization and scheduling, which they are doing because they’re just — they know that there is going — probably going to be a shortage of fleets. So they’re pretty accommodating on their schedules today.
Pat Powell
And I don’t think we’re quite finished on our — our financial results, aren’t where we want them to be. They’re much improved, but there’s still a ways to go, Waqar.
Waqar Syed
Sure. And then just, one last question, Mike. You mentioned that EBITDA accrued was CAD10 million in Q2. Could you remind again what — did you say CAD10 million or US$10 million?
Mike Olinek
Yes. What I said Waqar, just to clarify the range I think that we saw at the early part of Q2 in the US was CAD10 million. I think we exited somewhere around CAD15 million. And I think where we’re guiding, I think going forward with utilization as Pat alluded to, as well as improved net pricing with some of our client base. It’s going to start in that 15%. And I think there’s the ability to get as much as CAD20 per fleet as we’re exiting the year. So things are moving in the right direction. But again, pricing and utilization have to work to get to the top end number and those are the things that we’re focused on.
Waqar Syed
Okay. That’s, helpful. And then relative to that EBITDA, what’s the maintenance CapEx in the US per fleet?
Mike Olinek
The maintenance capital per fleet is about CAD4 million on an annualized basis.
Waqar Syed
And that will be Canadian as well Canadian dollars or US dollars?
Mike Olinek
Yes, Waqar.
Waqar Syed
Canadian dollars?
Mike Olinek
Canadian dollars.
Waqar Syed
Yes, Okay. Thank you very much. Appreciate it.
Mike Olinek
No, problem. Thanks, Waqar
Operator
[Operator Instructions] There appears to be no further questions. I would like to hand the call back over to Mike Olinek, for any additional or closing remarks.
Mike Olinek
Thanks, Elaine. Yes, I want to thank everyone for joining us for today’s call and we look forward to our third quarter call later in the year. Thanks very much.
Operator
That concludes today’s call. Thank you for your participation. You may now disconnect.
Be the first to comment