Calfrac Well Services Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 4 speakers on the call.

Operator

Good day, and welcome to the Calfrac Well Services Limited Third Quarter 2023 Earnings Release and Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Ullinick, Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning and welcome to our discussion of Calfrac's Q3 2023 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 performance and position of the company.

Speaker 1

Pat will then provide an outlook for Calfrac's business and some closing remarks. After the completion of these remarks, we will open the call to questions. In a news release issued earlier today, Calfrac reported its Q3 2023 results. Please note that all financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today or refer to non IFRS measures such as adjusted EBITDA.

Speaker 1

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. As we have disclosed for a number of quarters, 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.

Speaker 1

Calfrac is looking forward to completing 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. Now I will pass the call over to Pat. Thanks, Mike. Good morning and thank you everyone for joining our call today.

Speaker 1

Before Mike provides the financial highlights of the Q3, I'll offer some opening remarks. First, I want to take a minute and discuss the Significant progress that we have made on our long term financial and operational goals during the past year. The first strategic goal that I set for the company was to increase profitability, and we've made great strides in that regard. In 2023, our year to date net income from continuing operations normalized for the deferred tax asset and impairment reversals was approximately 8% of revenue, over 5 times higher than the same period last year. The significant improvement demonstrates the high quality of Calfrac's customers who appreciate the quality of our services and our execution The second goal was to lower our outstanding debt.

Speaker 1

The company has made significant progress in this initiative as it repaid approximately $30,000,000 of long term debt during the Q3, and we continue to target further debt reduction in the Q4. Earlier in the year, the company was focused on funding its working capital requirements, which have totaled approximately $135,000,000 since the middle of 2022. And finally, the 3rd strategic initiative for Calfrac was to upgrade our equipment in the field. During the Q3, we have gained significant momentum with our Tier 4 fleet modernization program and have deployed 23 Tier 4 DGB units so far this year with more pumps being deployed every week. Reducing our outstanding debt while upgrading our equipment is our 2 pronged approach to strengthen the balance sheet and improve our asset quality.

Speaker 1

None of this progress would have been possible without our dedicated teams across North America and Argentina. And for that, I want to commend them for their hard work and commitment to deliver on our brand promise. Now turning to the Q3, I'm happy to report that we have navigated shifting frac schedules to generate the highest quarterly Adjusted EBITDA margin thus far in 2023. Historically, the Q3 is our strongest period and this year was no exception. One way that we were able to respond to a changing frac calendar is by managing our costs, specifically our equipment repairs and maintenance.

Speaker 1

Now that we've refreshed everyone on where we've been, let's talk about where Calfrac is going. Our Tier 4 EGB upgrade program remains on schedule and we expect to deploy 59 Tier 3 pumps by the end of the Q1 of 2024 and to continue with the upgrade program beyond these initial units as finances and markets dictate. We pay close attention to the equipment information being happening in the industry and are excited about enhancing our position in the next generation fracturing market and meeting our customers' expectations and our ESG priorities. I believe that Calfrac service quality is second to none and that we have the best team in the industry working together to achieve our long term goals. As the largest Canadian headquartered pressure pumping company, We expect to leverage our geographical footprint and strong operational momentum to capitalize on the current market, While remaining focused on our 3 strategic objectives, We do not believe that we are profitable, not only for Calfrac, but also for our shareholders, employees, suppliers and customers.

Speaker 1

I will now pass the call over to Mike, who will be first an overview of our quarterly financial performance. Thank you, Pat. Calfrac's revenue from continuing operations during the Q3 of 2023 was $483,100,000 are 10% higher than the same period in 2022. Adjusted EBITDA during the Q3 of 2023 was $91,300,000 or 3% lower than the same period last year, due mainly to higher operating expenses following the perspective change related to fluid ends during the Q1 of 2023. Fluid ends are now reported as a part of repairs and maintenance expense instead of as a component of capital expenditures.

Speaker 1

In 2023, fluid ends reduced adjusted EBITDA by CapReqs net income from continuing operations more than doubled to $97,500,000 during the Q3 versus $45,400,000 in the The year over year improvement was mainly due to a $41,600,000 reversal of impairment of property, plant and equipment and a deferred tax recovery of $9,000,000 both items related to an improved business outlook for the company's operations in Canada. Calfrac incurred capital expenditures of $50,800,000 during the Q3 versus 24.7 $1,000,000 in the same period of 2022. This increase in capital spending was primarily related to the company's As we recently announced, the company amended its revolving credit facility agreement during the Q3, which extended the maturity into late 2025 at the earliest. We believe that this extended runway will play an important role in enabling Calfrac to fully execute on its long term strategy. To summarize the balance sheet at the end of the 3rd quarter, The company had working capital of $283,700,000 from continuing operations.

Speaker 1

Calfrac had used $3,500,000 of its credit for letters of credit and had $150,000,000 of borrowings under its revolving term loan facility, leaving approximately $96,500,000 in available credit. Calfrac made further progress on reducing its net debt to adjusted EBITDA as it exited the quarter with a ratio of 0.92 times as compared to approximately 1.5 times at year end, which is the lowest in recent history. The company continues to project a $70,000,000 to $80,000,000 reduction in total long term debt by the end of the year. The decrease in debt is slightly lower than originally anticipated due to a delay related to a planned asset divestiture. Now I would like to turn the call back to Pat to provide our outlook.

Speaker 1

Thanks, Mike. I will now present an outlook on Calfrac's continuing operations across our geographic footprint. We have a positive outlook for our North American and Argentina operations and feel that each business unit helps us maximize shareholder returns and contributes to us reaching our long term goals. Regardless of the operating area, we are driven by our strong safety centered culture and employee buy in to deliver on our brand promise. During the quarter, the market softness experienced in the United States was offset by strong utilization in Canada.

Speaker 1

For the Q4, we expect the opposite to occur, where increased activity in the United States As anticipated to offset customer budget exhaustion in Canada, we believe that our focus on execution combined with our diverse Geographic footprint will produce steady financial returns for our stakeholders. Our operations in Argentina produced another solid quarter of profitability. We expect that strong utilization will continue for the rest of this year and into 2024, As dedicated contract work across all service lines is expected to generate consistent Financial returns. Accomplishments so far this year and are looking forward to a solid finish in 2023 as we continue delivering on our brand promise and make progress on our 3 strategic priorities. First, maximizing on consolidated net income and free cash flow through a disciplined returns focused approach.

Speaker 1

Secondly, dedicating free cash flow to reducing the company's long term debt and third, investing in new technologies that enhance I will now turn the call back to Mike to begin the Q and A portion of this call. Thank you, Pat. I'll now ask Abigail to begin the Q and A portion of today's call.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from Cole Peoria With Stifel, your line is open.

Speaker 2

Hi, good morning all. Thinking about Canada in Q1, There's obviously a lot of tailwinds, but you also have one of your competitors bringing up a spread from the U. S. Can you just add some color on how you're thinking about Supply and demand activity, pricing, etcetera?

Speaker 1

Cole, it's Pat. We have also moved crews back and forth between Canada and the U. S. So it's kind of hard for me to comment on whether it should happen Or not, I guess. As long as the pricing It doesn't change and you have extra word.

Speaker 1

I guess, I mean, that's why we did it. So if that's what they've done, then it's fine. If they've Brought the pricing down to bring a fleet up from the U. S. And I would say it's probably not good for them or the industry.

Speaker 2

Sorry, I guess maybe to rephrase that, based on those data points and what you see in your schedule, I mean, it sounds like you don't really see a degradation of supply and demand at this point, acknowledging, I mean, there's just still a few months to go.

Speaker 1

I don't think one fleet will make that much difference. I don't believe it will make that much difference to Calfrac. I think our customer base is strong.

Speaker 2

Got it. And then can you just add some color on how customer conversations in the U. S. Have been going and what's the outlook like there for next year compared to right now or 2023 as a whole?

Speaker 1

From where I see, I see a fairly strong 24 for Calfrac in the areas that we Braden, I think we're going to see a slight increase Over what we did in 'twenty three and 'twenty four in the U. S.

Speaker 2

Got it. Okay, that's all for me. Thanks. I'll turn it back.

Operator

One moment for our next question. Our next question comes from Keith Mackey with RBC Capital Markets. Your line is open.

Speaker 3

Hi, good morning. I just wanted to start out with the Tier 4 equipment. So you've got, You said 23 pumps in the field now. So may or may not give you a chance yet to see how the profitability differs between Some of this newer equipment and some of the older equipment, but Mike, what are you seeing on your as far as profitability goes On the fleets that are running the new pumps, is there a noticeable uptick in the margins that you're getting on that equipment? Or is it still hard to tell?

Speaker 1

Keith, I'll take that call or that question. It's Pat. It's a little early for us to call to make a Call on that right now, but we're quite happy that we have deployed a full Tier 4 DGB The crew back into the Marcellus, so which just went to work here shortly. So we will In the next month or 2, we will be able to answer that question for you. But so far, we're having Good luck with the 23 that are out there.

Speaker 1

We're seeing we can put a few less pumps on location When we have a number of Tier 4 pumps out there, so it's all good.

Speaker 3

All right. All right. Good to hear. And secondly for me, our best guess right now I think is you've Got around 5 fleets running in Canada and 10 in the U. S.

Speaker 3

Based on what you know today, would you anticipate that mix Changing through 2024 at

Speaker 1

all? Not from what I see today. I think that that's pretty well where we'll be. Of course, as we Build out our Tier 4 fleets, we will gain a couple of fleets, which at this time, we will just This would be way late in 2024, so it's more of a 2025 question. And at that time, we would have I believe we'll probably gain a couple of fleets as we do this modernization.

Speaker 1

There'll be Tier 2 fleets, but we will gain a couple of fleets.

Speaker 3

Okay. That's helpful. Thanks very much.

Operator

Thank you. I'm showing no further questions at this time. I would like to turn the call back to Michael Ulleneck for closing remarks.

Speaker 1

Well, thanks very much. And yes, just like to close today's call. Thank everyone for joining. And we look forward to hosting our Q4 call in Q1 of 2024. So thanks very much.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Key Takeaways

  • Calfrac reported Q3 2023 revenue of C$483.1 million, up 10% year-over-year, with Adjusted EBITDA of C$91.3 million (down 3% due to fluid ends reclassification) and net income from continuing operations more than doubling to C$97.5 million aided by impairment reversals and deferred tax recovery.
  • The company has exceeded its first strategic goal by boosting its net income margin to approximately 8% of revenue year-to-date (over 5× last year) and repaid about C$30 million of long-term debt in Q3, with further debt reduction targeted in Q4.
  • Calfrac’s balance sheet strengthened with working capital of C$283.7 million, C$96.5 million available on its revolving facility, and a net debt/EBITDA ratio of 0.92× (down from 1.5× at year-end), and it expects to cut total long-term debt by C$70–80 million by year-end.
  • The Tier 4 fleet modernization program has deployed 23 DGB units so far and remains on track to deliver 59 pumps by Q1 2024, with early deployments showing promising efficiency gains.
  • Looking ahead, Calfrac expects U.S. activity to rise in Q4 (offsetting softer Canadian budgets) and a stronger 2024 in its U.S. operating areas, while Argentina continues to deliver solid utilization and profitability under dedicated contracts.
A.I. generated. May contain errors.
Earnings Conference Call
Calfrac Well Services Q3 2023
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