Calfrac Well Services Ltd. (OTCPK:CFWFF) Q4 2022 Earnings Conference Call March 16, 2023 12:00 PM ET
Company Participants
Mike Olinek – CFO
Pat Powell – CEO
Conference Call Participants
Keith MacKey – RBC Capital Markets
Cole Pereira – Stifel
Waqar Syed – ATB Capital Markets
John Daniel – Daniel Energy Partners
Operator
Good morning, ladies and gentlemen. And welcome to the Calfrac Well Services Limited Fourth Quarter 2022 Earnings Release and Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we’ll conduct the question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, March 16, 2023.
I would now like to turn the conference over to Mike Olinek. Please go ahead.
Mike Olinek
Thank you, Joelle. Good morning, and welcome to our discussion of Calfrac Well Services Fourth Quarter 2022 Results. Joining me on the call today is Pat Powell, Calfrac’s CEO.
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 fourth 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. 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 2022 annual information form, 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. Calfrac is continuing to make progress to complete this transaction as soon as possible, while complying with all applicable laws and sanctions. 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 thank you, everyone, for joining the call today. Before Mike provides the financial highlights of the first quarter that he talked about, I’ll offer some opening remarks. This past year was one of the most successful years in the company’s history. I am proud of our financial and operational accomplishments, and I am impressed by our team’s commitment and resilience as they overcame adversity during the first half of the year to capitalize on an improving market during the second half of 2022.
Shortly after joining the company approximately nine months ago, I set three strategic priorities for the organization. First was to maximize consolidated net income and free cash flow through a disciplined return on invested capital-focused pricing strategy, combined with the stringent focus on the management of all operating and overhead costs. Number two was to dedicate all free cash flow to reducing the company’s long-term debt and evaluate additional strategies to improve its capital structure.
And third was we would invest in technology that enhance our service deliverability in the field and that also drives improved profitability into the future.
Over the last two quarters, Calfrac has made considerable progress on each of these priorities. Firstly, the company delivered its best third quarter financial performance since 2012 and generated strong financial results in the fourth quarter, despite the impact of intense winter storms in December that affected our utilization in the U.S. for approximately 10 days.
We exited the year with a total of 14 active frac fleets in North America and are currently operating 15 spreads in the field today. In Argentina, we have one large frac fleet servicing the Vaca Muerta shale play and 6 smaller fleets that are active in the conventional basins of Southern Argentina.
We also took the opportunity to align the company’s executive team and corporate organizational structure over the past several months, so that we can more effectively support our North American and Argentina operating divisions in this extremely competitive oil field services market.
We are driving continued improvements throughout all levels of the company by seeking out opportunities to streamline our processes and procedures across North America and Argentina. Our goal is to harmonize the company’s best practices and to make small changes that can have significant impacts to our overall safety, service quality and financial performance.
Since the end of the second quarter, Calfrac has made substantial headway with respect to reducing its long-term debt. In December ’22, the company completed its 1.5 Lien Note conversion program, which reduced the principal amount of the notes outstanding to approximately $2.6 million at year-end as compared to approximately $57.4 million at the end of June.
In addition to the 1.5 lien, the company generated significant free cash flow during the second half of ’22, which resulted in a $30 million repayment of its revolving credit facility since June 30, ’22. As the company is now expecting an inflection point with respect to its working capital requirements after the first quarter of this year, we are targeting an accelerated paydown of the company’s revolving credit facilities beginning in the second quarter of 2023.
Lastly, the company recently announced a multiyear fracturing fleet modernization program, which will commence with the conversion of 50 Tier 2 pumping units into Tier 4 dual fuel capable pumping units. This asset enhancement program will serve to increase Calfrac service quality to its customers and supplements the delivery of nine Tier 4 pumping units, which we’re previously committed to.
Four of these units will be going into service next week, three more before the end of the quarter and the last two following closely behind. Company is also upgrading its operating technology, which will allow for better real-time access to job data and serve to drive better fracturing performance in the field for our clients.
I’m looking forward to building on the momentum of the last couple of quarters. And as the largest Canadian headquartered pumping — pressure-pumping company, I feel that Calfrac’s geological footprint leaves us well positioned to advance our strategic priorities during 2023.
I will now pass the call 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 fourth quarter of 2022 was $447.8 million or 95% higher than the same period in 2021. For the full year, revenue totaled $1.5 billion or 70% higher than last year.
Adjusted EBITDA during the fourth quarter of 2022 increased to $76 million versus $8.4 million in the comparable quarter in 2021. As Pat mentioned, the financial results during the fourth quarter were achieved despite the company’s operations in the United States being impacted by severe winter storms in December, which caused work stoppages for our crews in the Rockies region for approximately 10 days.
For the full year, Calfrac generated adjusted EBITDA of $233.7 million, an increase of $182.1 million from the prior year. This significant improvement in financial performance was primarily due to better utilization and pricing for the company’s fracturing fleets, combined with a larger operating footprint in North America.
Calfrac recorded net income from continuing operations during the fourth quarter of $14.8 million and $35.3 million for the year ended December 31, 2022. These results included an impairment of property, plant and equipment of $10.7 million in the United States to permanently retire 54 obsolete fracturing pumps, and an impairment of inventory of $8.5 million in North America to write down spare parts and product inventory to their net realizable value.
Calfrac spent a total of $35.8 million in capital expenditures from continuing operations in the fourth quarter compared to $14.9 million in the same period of 2021. These expenditures were primarily related to maintenance and sustaining capital to support the company’s fracturing operations as well as $8.3 million of reactivation costs related to Calfrac’s United States division and $3.5 million related to the Tier 4 fleet modernization program. In 2022, the company spent $87.9 million as compared to $66.6 million in the prior year, primarily due to higher maintenance capital required to support improved activity levels in North America.
Calfrac’s board of directors recently approved the company’s 2023 capital budget of approximately $155 million, which consists primarily of maintenance capital, exclusive of fluid ends, as well as the fleet modernization program. Effective January 1, 2023, Calfrac will expense all fluid ends, and they will be reported as a component of operating expenses on a go-forward basis.
During the fourth quarter of 2022, the company completed the early conversion of its 1.5 Lien Notes. As a result, $44.8 million of notes were converted into common shares at a price of approximately $1.33 per share. At the end of the year, the outstanding principal amount of 1.5 Lien Notes was $2.6 million. As a result of this program, the company issued 33.6 million new common shares and paid $2.3 million in interest as an early conversion fee.
To summarize the balance sheet at the end of the fourth quarter, the company had working capital of $183.6 million from continuing operations, including $8.5 million in cash. During the fourth quarter, the company repaid $30 million on its revolving credit facilities and exited the year with $170 million of borrowings under those facilities, leaving approximately $80 million in available borrowing capacity at the end of 2022.
Before I turn the call back to Pat, I want to highlight the change in Calfrac’s organizational structure that was disclosed and the other development section of the news release. As part of Calfrac’s strategy to realign and streamline its structure, the company has decided to report the financial and operating performance for the United States and Canada under a single North America division, beginning with the interim financial statements and MD&A for the first quarter of 2023.
Now I’ll turn the call back to Pat to provide our outlook.
Pat Powell
Thanks, Mike. Our operations in North America produced significant year-over-year improvement in financial results during the first quarter. This momentum has carried into the first quarter, and visibility into the second quarter is still very strong.
We expect the pressure-pumping market to remain fairly tight throughout 2023. Everything is up — is a bit up in the air today with the recent bank issues and the drop in quantity prices, but we are confident that we can manage our way through. Our customers continue to demand more intense completion designs, and Calfrac meets these challenges by providing best-in-class operating performance that highlights our operational, technical and supply chain expertise.
In the U.S., we leveraged our asset base with efficient job execution to generate superior adjusted EBITDA per fleet versus the fourth quarter of last year, despite intense winter storms that significantly reduced activity in the Rockies during December. For 2023, we are anticipating steady demand for our 10 fracturing fleets in the United States as we continually monitor market opportunities to optimize our crews scheduling.
In Canada, fourth quarter was impacted by weather and customer budget exhaustion. With the exception of a normal seasonal slowdown in the second quarter, we expect consistent utilization for our 5 large fleets and 6 coil-tubing units into the second half of 2023.
Like our competitors, we view the supply chain networks at near full capacity, especially as it relates to sand transportation and equipment rental. As a result, we continue to experience input cost inflation, but not at the rates witnessed earlier in 2022. However, we continue to communicate with our supply chain partners to understand the timing and drivers of these increases and, where possible, work to develop more cost competitive solutions and/or negotiate price increases on our fracturing projects with up-to-date cost estimates.
I want to commend our supply chain teams for mitigating any potential disruptions to our fracturing operations, thus far in 2023. We have not experienced any sand supply shortfalls in a busy start to the New Year in North America. But make no mistake, sand is a continuing worry to us. But so far, our guys are doing a great job. So we’re also looking forward to deploying our new Tier 4 units into the field as well as updating our fracturing operating system technology in North America during the first six months of the year, which will enhance our data capabilities and drive better decision-making on location.
I’ll now turn to Calfrac’s Argentina operations. Calfrac’s operations in Argentina generated improved year-over-year financial performance, and we expect this to continue into 2023 as higher utilization, combined with improved pricing for our services, is anticipated to produce enhanced financial returns. As the North American fracturing market transitions to Tier 4 for electric fleets, Calfrac’s presence in Argentina provides it with a potential strategic opportunity to deploy good excess Tier 2 pumping equipment from North America into that country to generate incremental return on invested capital.
To do this, we will not only need a formal contractual commitment from an oil company in Argentina, but we will also need a change to the existing foreign currency restrictions in Argentina before this equipment would be transferred from North America. So as we enter 2023, I believe that Calfrac is well positioned to take advantage of the strong business outlook in North America and Argentina, while our operating and support teams will continue to make progress on our three strategic priorities.
Firstly, we will leverage our geographical footprint and remain disciplined in our capital allocation approach to prioritize financial returns over market share gains; next, we will dedicate all free cash flow to strengthen the company’s balance sheet; and lastly, we will seek to improve Calfrac’s asset quality through timely targeted investments in next-generation technology that will enhance our service quality and drive improved profitability into the future.
So back to you, Mike.
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
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Keith MacKey with RBC Capital Markets. Please go ahead.
Keith MacKey
Hi, good morning. And thanks for taking my questions. Maybe I just wanted to start out on the fluid ends. I understand the new accounting treatment, can you discuss what you might expect to spend on fluid end through 2023?
Mike Olinek
Good morning, Keith. Yeah, our annualized spend, just given the footprint we have in North America and Argentina, is around $30 million a year. So that’s, I would say, a good proxy for an estimate for this year, provided everything stays as it is right now in the field.
Keith MacKey
Got it. Thanks, Keith. And just on the natural gas fleet footprint, I know some commentary in the release about that. Can you just kind of run through what your frac fleet footprint is through the U.S. Northeast? Have you seen any customer attrition yet? And just really what underpins the confidence you have in being able to redeploy or reduce your footprint for — if you do see some turnover in that demand?
Mike Olinek
Yeah. I would say of our footprints in the U.S., a minor portion is really dedicated to the Marcellus area. So as we walk through the year, the dry gas side obviously has been impacted on a commodity price. We’ve all seen that in the last number of months, certainly well off the highs that we had last year.
And so we’re very mindful of that and then we’ll allocate our capital accordingly. So our limited fleet footprint there doesn’t have a lot of exposure, I think, on an overall top line or EBITDA expectation for 2023. But right now, we are still active in that area. We have a dedicated customer through the middle of the year, and we’re working towards solidifying that customer throughout the remainder of the year.
So I think on our side, that’s really the pure dry gas. We do have some operations in Colorado that are levered to the Piceance Basin. That is also dry gas weighted. So that would be our main exposures operationally in the U.S. Otherwise, it’s mainly oil focused or liquids gas focused.
Keith MacKey
Thanks for that color. And just finally, curious for some more detail on what you’re seeing in the sand market. How tight is the supply-demand equation? Where — what markets are seeing the most tightness? And what are you experiencing roughly in terms of tonnage pricing for sand?
Pat Powell
So the sand has got multiple issues. One is the appetite for the different grades of sand changes. So where 40-70 was what everybody wanted. A while ago today, they want 100 mesh. So that caused some troubles at the sand mines themselves. I believe there’s still lots of sand. That’s just getting the grades that the customer wants. And sometimes, he has to switch from what you actually want to a different grade. So that’s an issue.
The sand mines only have so much of each grade. We’re anticipating to probably pump, I’d say off the top of my head, another 25% more sand-ish in 2023 than we did in 2022 just because of our first half of the year is quite a bit busier than it was last year. So that’s where we would be at it.
Then, of course, there’s rare availability that can cause issues. So sand is a big part of our business. So there is a bit of work there.
Keith MacKey
Got it. I’ll leave it there. Thanks very much.
Pat Powell
Thanks, Keith.
Operator
Your next question comes from Cole Pereira with Stifel. Please go ahead.
Cole Pereira
Good morning. Just to build on Keith’s question a little bit. Can you talk about what you’re seeing on the ground with regards to supply and demand fundamentals in the U.S.? Are you seeing many excess fleets around looking to perhaps bid price a bit lower?
Pat Powell
We’re not seeing that today, but with the recent developments of the collapse of commodity prices to where they are today and the bank issues, it wouldn’t surprise me going forward if there isn’t. Some pricing issues coming. It just depends on how deep and how long this present situation goes.
Cole Pereira
Got it. And on the Canadian side, can you talk about what that fifth fleet, how utilized was that in Q1? And are you — do you kind of have a flexible approach to that fleet in the back half of the year just given some of the uncertainty?
Pat Powell
The fleet that we moved down to the U.S., brought back to Canada has been 100% basically utilized since we put it in the field. And it was parked against the fence and if you go back against the fence again. Did that answer your question?
Cole Pereira
Got it. And then — Yes, that’s great. Thanks. And in Canada, are you seeing much in the way of customers talking about Blueberry or LNG-related development for the back half of the year?
Pat Powell
I think it’s a little slower than what I anticipated it might be, but I was in conversations with Afel [ph] the other day. And that company said they plan to be very busy in that Fort St. John area. So that — I mean not take it for what it’s worth, but it was a pretty good sign to me.
So I would think we’ll see some improvement there, which maybe will take up some of the slack, if we do get slack in our traditional pumping areas.
Cole Pereira
Got it. And then on the resegmentation, can obviously understand there’s an administrative cost savings element, but can you just give some more details on the rationale? I mean, they’re pretty distinct markets, both of which are material, pretty distinct drivers, et cetera.
Mike Olinek
Yeah, Cole, I think really where it is, is a focus internally on our North American business. I think prior to that, our leadership was focused more on a geographic basis. I think the way that Pat has viewed the business since he got here is that we’re a North American business, and there’s a border in between.
And so from our perspective on performance, we’re looking like we’ve got 15 fracturing fleets in North America that can be allocated in either market, understanding there’s supply-demand dynamics. I would say right now, the financial metrics around those markets are relatively similar. And so it just felt like a good time to make that change at the start of this year.
Cole Pereira
Got it. That’s all for me. Thanks, I’ll turn back.
Operator
Your next question comes from Waqar Syed with ATB Capital Markets. Please go ahead.
Waqar Syed
Thank you for taking my question. Pat, could you quantify the weather impact in terms of days that you’ve seen in Q1 in your U.S. operations? And how does that weather impact, compared to the days you experienced in Q4?
Pat Powell
Q1, I would say we had — Mike, what would you say? Roughly the same or a little less?
Mike Olinek
Waqar, I would say that we have had approximately 10 days, thus far, in the quarter, very similar. It’s not all been in one month. It’s been kind of shared between January and February. And unfortunately, when you look at the weather forecast for March, there’s more storms flowing into our areas in Wyoming and North Dakota that have been principally impacted by some of this weather. So I would say it’s going to be probably a bit more pronounced than it was in Q4, just because it was only limited to one month.
Pat Powell
And to take that one step further, there can be — there can still be some major snow events in April in that North Dakota, Wyoming area. So we’re hoping it’s behind us, and it should be, but there’s no guarantees with the weather. That is a little bit out of our control.
Waqar Syed
Sure. Now in terms of pricing, did you get any pickup in pricing Q1 versus Q4 for your North American fleet?
Pat Powell
Not really. And of course, with what we’ve got going on today in the market, I was hoping to get some pricing in Q1, but it’s going to — it’s probably going to be a difficult push today.
Waqar Syed
Okay. So just to understand the pricing dynamics. So far, you haven’t seen any declines in pricing. Is that fair?
Pat Powell
Yeah, no decline and improved utilization. Utilization —
Waqar Syed
And into modernization.
Pat Powell
Yeah, utilization is really just as important to us as pricing, so —
Waqar Syed
So if you’re looking at profitability — quarter-over-quarter profitability in the U.S. operations, you’ll have maybe a slightly higher fleet count, maybe 10 versus 9.5 or something in Q4 and then relatively similar number of days down. So you expect EBITDA to be relatively flat in the U.S. quarter-over-quarter?
Mike Olinek
Yeah, relatively flat. I mean, again, it will ultimately depend on utilization in March. But the trend that we’re seeing thus far is pretty close to that, yeah.
Waqar Syed
Okay. And then on the Canadian side, you will have an extra fleet and obviously better utilization otherwise as well. So the pickup, any quarter-over-quarter change in EBITDA at the company level would primarily be driven by Canada?
Mike Olinek
Yeah. Certainly, there’s, I would say a systemic change in our utilization between Q4 and Q1 in Canada, which is going to drive better results. I would say, secondarily to that, I think we’ve got more consistent utilization as well in Argentina that will, I think, be a driver of quarter-over-quarter sequential growth.
Waqar Syed
So then, if I look at the consensus estimates right now for Q1, it’s about $93 million. How comfortable are you with that number out there relative to that? Your EBITDA in Q4 was around $76 million?
Mike Olinek
Yea. I mean, we can talk more after the call. But I would say that the weather challenges that we had in the U.S. that impacted us in Q4, we’ve talked about that already impacting Q1. So I would suggest that the estimates are, I would say, above what we think we can deliver. But it’s a function, again, of utilization.
But I would say, though, on a sequential basis, it’s — our estimates are that we’re going to have sequential improvement, but not to the degree that’s in the estimate today.
Waqar Syed
Okay. Fair enough. Now you are introducing new Tier 4 systems into the field. There will be significant savings for the customer on the fuel side. Now how would that translate to your own EBITDA per crew type improvement?
Pat Powell
Well, we’re — of course, we’re replacing very experienced close to end-of-life equipment with new equipment. So I mean, just your breakdowns and your — for the first probably three years, those — that equipment, once we get it in the field and get the few of the new bugs that you usually have with new equipment out of it, it should run very cost effectively for the first three or four years before it comes up to kind of mid-life repairs. So we would see a — we should see a major drop in our R&M on every pump that gets replaced.
Waqar Syed
Fair enough. But like in terms of pricing, do you see any pickup? And let me just throw out some numbers here, that we’re seeing — for the U.S. companies, we see EBITDA per crew in that — that $24 million to maybe $28 million per crew annualized in the U.S. for Tier 4 type equipment versus like closer to maybe $15 million to $18 million for Tier 2 dual fuel and Tier 2 diesel type equipment. So would you — would we start to think about like your EBITDA per crew for those Tier 4 fleets going closer to that maybe $25 million number?
Mike Olinek
They’re certainly going to gravitate a higher EBITDA per fleet once we get to some level of scale. I think when you’re dealing with nine pumps that we’re putting in the field here in the next few months, I would say that’s more of a realistic expectation coming out of 2023 into ’24. But you’re not wrong, there’s going to be incremental improvement stepping through the year as we activate those crews.
Waqar Syed
Okay. And then just one final question. Are there any cost benefits of this single reporting for North America?
Mike Olinek
Yes, there are. I mean I think that there are some synergies around that, and it’s another reason why we’re looking at our business that way, but it’s primarily driven by operations. But yes, there’s an administrative, I would say, synergy associated with that change.
Waqar Syed
Got it. Well, thank you very much. Appreciate the color.
Mike Olinek
Thanks, Waqar.
Operator
[Operator Instructions] There are no further questions at this time. Please proceed.
Mike Olinek
I think there’s one more in the queue, Joelle that we would like to take, please.
Operator
Okay. Your next question comes from John Daniel with Daniel Energy Partners.
John Daniel
Squeezing me in. I just want to go back to the sand question. Is that — the challenges, is that limited to 1 basin? Is that broad-based? And then the follow-up on that is, are you seeing more of your customers trying to self-source the sand? Or are you taking on more of that process?
Pat Powell
Kind of yes to all. I guess it’s kind of in all basins a little bit, depending on where we’re at. A lot of the U.S., they’ve been kind of switching to just domestic sand, which has helped down there, a little more than, say, Canada. So that’s a bit of an issue.
And the E&Ps are taking on, in some places, more and more sand, but it’ll — that will probably switch as supplies get tighter, and they’ll leave it up to us, I would think, but we’ll see what happens there. But who know? To date, we have not run out of sand. And this isn’t something that I think is imminent, but it’s something that has certainly been brought to my attention that we’re getting by, but we don’t have excess so —
John Daniel
Fair enough. And then one of the refrains you hear from the E&P community is oil and gas prices are lower, but my service costs are really high. Therefore, I need as an operator relief. And I’m curious, as they deliver that message to you all, and obviously, they’re your customers so you’ll listen.
Does the negotiation lend itself well to, okay, we can give some early today. But, by the way, if oil goes back to 85-90 WTI, we immediately reestablish the price. So I’m curious if you can just elaborate on their willingness to give it back to you if the excuse is, they get a discount because price commodities have gone lower.
Pat Powell
Well, we — first off, we haven’t — in this cycle, we haven’t really seen too much of it. I mean, they’re kicking the ball around a little bit like they always do. I mean, they’re always trying to get pricing out of us. I would think that will intensify here going forward. But in reality, frackers on a whole we just kind of got back to a sustainable pricing level.
So it’s going to be a pretty big push. A company like Calfrac, we have the ability to put stuff back on the fence, probably more so than we had in the past just because of our debt levels. And at the end of the day, I mean we’re in a capital-intensive business that this stuff wears out. And we just — we have this Tier 4 conversion to meet the climate change requirements of ourselves, of course, and our customers. That all comes at a cost. So I don’t think it’s going to be a push. It will be a battle, but we’re kind of expecting it.
John Daniel
Okay. Well thank you let me [indiscernible]. I appreciate it.
Pat Powell
Yeah, thank you.
Mike Olinek
Thanks, John.
John Daniel
Yes, sir.
Operator
There are no further questions at this time. Please proceed.
Mike Olinek
Thanks, Joelle. Well, thank you to everyone for joining our call today. And we look forward to hosting our first quarter earnings call in early May. Thanks very much.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. And ask that you please disconnect your lines.