Calfrac Well Services Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 6 speakers on the call.

Operator

Day, ladies and gentlemen, and thank you for standing by. Welcome to the Calfrac Well Services Limited Second 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. At this time, I would like to turn the conference over to Mr.

Operator

Michael Ulliniuk, Chief Financial Officer. Sir, please begin.

Speaker 1

Thank you, Howard. Good morning, and welcome to our discussion of Calfrac Well Services' 2nd quarter 2023 results. Joining me on the call today is Pat Powell, Calfrac's Chief Executive 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.

Speaker 1

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 call to questions. In a release issued earlier today, Calfrac reported its Q2 2023 results. Please note that all financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non IFRS Please see our news release for additional disclosure on these financial measures.

Speaker 1

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 have disclosed previously, the company is committed to a plan to sell its Russian division and has designated these assets, liabilities and operations in Russia as held for sale and discontinued operations in the financial statements. Calfrac is seeking to complete this transaction as soon as possible, While complying with all applicable laws and sanctions.

Speaker 1

The focus on the remainder of this call will be on Calfrac's continuing operations unless otherwise specified. Now I will pass the call over to Pat.

Speaker 2

Thanks, Mike. Good morning, and thank you everybody for joining our call today. Before Mike provides the financial highlights of the Q2, I will offer some opening remarks. First, I want to commend my operating teams in North America and Argentina for delivering on our brand promise and maintaining our stellar safety record, which translated into record second quarter EBITDA from continuing operations of $87,800,000 or 18.8 percent of revenue. I would like to also thank our long term customers and new customers who continue to choose Calfrac to assist in bringing their wells into production, Also our suppliers that enable us to provide our services in a safe and efficient manner.

Speaker 2

Calfrac has now shown significant Financial improvement for the 4th consecutive quarter. The performance during the Q2 is especially impressive As the company achieved these results during a period of seasonal breakup in Western Canada and North Dakota, as well as through an extremely challenging wildfire season in Canada. Despite these strong operating and financial results, Calfrac remains focused on driving continued improvement on its return to shareholders through effective cost management and maximizing our fracturing fleet utilization. We've continually analyzed all aspects of our service offerings to create a best in class oilfield service company. I believe that we have made steady progress toward that objective during the 1st 6 months of the year.

Speaker 2

I will now provide an update on Calfrac's capital program. Thus far in 2023, we have deployed the initial 9 Tier 4 DGB Pumping units into our North American division. The performance of this new pumping equipment has met our expectations with diesel displacement rates that have exceeded 80% in their initial usage in the field. Overall, the announced Fleet investment plan remains on schedule as we expect to deploy another 4 pumps in the next couple of weeks and the balance of the 50 Tier 4 Units into North America by the end of the Q1 of 2024. This refurbishment will continue into the future as finances and the markets dictate.

Speaker 2

This program will play a significant role in Calfrac's ability to on our balance sheet as we migrate our operating fleet to next generation pumping equipment to help meet our customers' expectations And our ESG commitments. I am very impressed with the strong execution of our operating teams at Calfrac during the first half of the year. And as the largest Canadian headquartered pressure pumping company, we expect to leverage on our geographical footprint And build on that performance through the remainder of 2023 by capitalizing on the strong markets that we are currently enjoying. Moving forward, we remain focused on our 3 strategic objectives. We do it safely, Right and profitably, not only for Calfrac, but for our shareholders, employees, customers and suppliers.

Speaker 2

With that said, I'll now pass the call over to Mike, who will present an overview of our quarterly financial performance.

Speaker 1

Thank you, Pat. Calfrac's revenue from continuing operations during the 2nd quarter was $466,500,000 or 46% higher than the same period in 2022. Adjusted EBITDA during the Q2 of 2023 more than doubled to $87,800,000 versus $40,700,000 in the comparable quarter in 2022. The results in the Q2 of 2023 included fluid end expense of approximately $10,000,000 As the company implemented a prospective change in accounting estimate for fluid ends at the beginning of the year to record those items as a component of R and M expense rather than as a capital expenditure. This significant improvement in financial performance was primarily due to higher fracturing fleet utilization and the addition of 2 large spreads operating in North America, combined with better overall pricing levels in Argentina.

Speaker 1

Despite the year over year growth in utilization, the 2nd quarter was hampered by wildfires in British Columbia and Alberta during April May, which resulted in several lost operating days. However, most of these delayed work programs were completed in June. Calfrac grew net income from continuing operations by $57,300,000 during the Q2 to $50,500,000 compared to a net loss of $6,800,000 in the comparable quarter of 2022. Calfrac incurred capital expenditures of $30,700,000 during the Q2 versus $15,200,000 in the same period of 2022. The year over year increase in capital spending was primarily related to the company's previously announced Tier 4 Fleet modernization program, which continues to progress in accordance with our planned deployment schedule.

Speaker 1

The announced $5,000,000 increase to Calfrac's 2023 capital budget was entirely related to Argentina, mainly to bolster our fracturing operations in the Vaca Muerta shale play. These additional capital expenditures will be funded by the cash flow from operations generated in that country. As part of Calfrac's efforts to right size its business and maximize returns for shareholders, the company sold certain non core assets located in North America for net proceeds of approximately $22,000,000 which were dedicated to the repayment of long term debt. To summarize the balance sheet at the end of the second quarter, the company had working capital of $282,900,000 from continuing operations. During the Q2, the company had used $3,400,000 of its credit facilities for letters of credit and had $175,000,000 of borrowings under its revolving term loan facility, leaving approximately $72,000,000 in available credit.

Speaker 1

Calfrac exited the quarter with net debt to adjusted EBITDA of approximately 1 times as compared to 1.5 times at year end. This leverage ratio is the lowest in recent history, and the company expects to reduce long term debt by approximately $80,000,000 by the end of this year, as working capital is no longer expected to be a material use of its cash flow from operations. Now I will turn the call back to Pat to provide our outlook.

Speaker 2

Thanks, Mike. So I'll present an outlook on Calfrac's continuing operations across our geographic footprint. In North America, despite losing a we've already mentioned a normal number of operational days due to Factors outside our control, wildfires, weather, customer delays, Calfrac managed to generate its best second quarter We anticipate that the strong operational momentum in the first half will continue throughout the remainder of this year and enable us to maximize returns for our shareholders. In Argentina, Calfrac's operations generated strong financial results for another quarter and has now produced operating profits in Excessive capital expenditures for 10 of the last 11 quarters. In addition to delivering consistent profits, Calfrac has a manufacturer in Argentina as a manufacturer in country With the capabilities to build or refurbish existing equipment locally using cash flow generated within Argentina, This equipment could then be used in country or exported to North America.

Speaker 2

2 of the 9 pumps that we have deployed this year were built in Argentina. Through the end of 2023, we expect solid utilization by a dedicated contract work across all service lines, which is expected to produce strong financial returns in Argentina. We've had a great start to the year and I think that we can accomplish even more as we continue to make progress on our 3 strategic priorities, which are maximizing consolidated net income and free cash flow through a disciplined returns focused approach. Number 2 is dedicating free cash flow to reducing the company's long term debt. And 3, investing in new technologies that will enhance Calfrac's service and deliverability in the field.

Speaker 2

I will now turn the call back to Mike to begin the Q and A portion of the call.

Speaker 1

Thanks, Pat. I would now like to turn the call back to Howard for the Q and A portion.

Operator

Our first question or comment comes from the line of Cole Perera from Stifel. Your line is open.

Speaker 3

Hi, good morning everyone. Obviously, the North American business looked quite strong. Can you just talk about how we should be thinking about your U. S. Fleet utilization and economics into the second half relative to Q2?

Speaker 2

We see it's Pat here. We see continued Steady, I would say, utilization going forward in the second half. We do have a little bit of white space I would call now. But with the oil price Adding the gas price, stiffening up a bit, I think that we'll probably fill some of those holes on the spot market. But So we're looking for, I would just say, steady going forward.

Speaker 3

Okay, great. And Can you talk about what you've seen with pricing in the U. S. For your fleets? And did you have much Spot exposure, was it really kind of running on prior contracts?

Speaker 2

I would say it's a little bit of both. We have our long term customers that we've worked for a long time And we'll continue to work for and we do always have some spot work. We like to have some spot work just because of the way The work can get pushed and then we sometimes we'll have a fleet sitting that's just because of a well problem or something and then We can fill it in with some spot work.

Speaker 3

Got it. And on the balance sheet side, is there sort of a debt level that you're comfortable with? I mean, is it as a function of EBITDA? Is it Working capital, is it 0 debt? How do you think about that?

Speaker 1

Hi, Cole. It's Mike. I think Where we're heading is certainly the direction that Pat and I are driving to have debt Dramatically lower than we entered the year. As I talked to on my call notes, we're anticipating $80,000,000 of debt reduction between now and the end of the year. And we continue to make strides in an absolute debt level that, I would say, is below 200,000,000 But we know that that's going to be a number of quarters away, but we think we're going to make some good progress on that between now year end.

Speaker 3

Okay, got it. That's all for me. Thanks. I'll turn it back.

Operator

Thank you. Our next question or comment comes from the line of Keith Mackie from RBC Capital Markets. Mr. Mackie, your line is open.

Speaker 4

Hi, thanks and good morning. Hi, thanks and good morning. Just wanted to start out with the DGB upgrade. It sounds like you've got a few pumps coming out in the next Few weeks, which, I guess by my count would leave you about 46 pumps to do between now and the end of Q1, which would be about 7 months. So, it comes out to around 6 to 7 pumps a month.

Speaker 4

Can you just speak to your confidence in your ability to deliver on that plan and how much Might depend on 3rd party lead times and things like that.

Speaker 2

Well, we spent quite a bit of time on this, Keith. So the I mean, Caterpillar assures us that the engine and transmissions won't be an issue. And We have a number of pumps in we're doing this rebuild in Louisiana. And we have We're pretty much their own sole customer down there with the they have a production line where we have 8 or 9 pumps in production right now In different stages, plus these 4 that are going to be out in the next couple of weeks. So, I mean, we're as confident as our Suppliers are telling us that we will have these 50 pumps in the field in the By the Q1 of early in the Q1 of 2024.

Speaker 2

So I'm fairly confident it's going to happen.

Speaker 4

Got it. Thanks, Pat. And just Mike on capital allocation again. So $80,000,000 of debt repayment through this year. What do you think about what to do next?

Speaker 4

Is it Further debt repayment, is it incremental CapEx, is it shareholder returns of some kind and what type of shareholder returns do you think You'd look at 1st or how would you frame that?

Speaker 1

I think from our side, our focus It's on debt repayment at this time, Keith. As I mentioned, I think we're making great progress on that. Certainly, we're going to see that here in the second half. And as we look into next year, I think our focus is a mixture of debt repayment, getting us sub-two 100,000,000 As well as investing in our equipment as we've done here in 2023.

Speaker 4

Got it. Thanks very much. That's it for me.

Operator

Thank you. Our next question or comment comes from the line of Saeed Waqar from ATB Capital Markets. Mr. Saeed, your line is open.

Speaker 5

Thank you for taking my question and good morning. My question relates to the working capital build. Certainly, it was much larger than what we were expecting and your days Seavable went up quite a bit. Could you maybe comment on that? Is it just a timing issue and it's going to come down Are those days receivable are likely to stay relatively steady?

Speaker 5

And is that receivable buildup in Geographically, North America or international, could you maybe comment on that?

Speaker 1

Yes, Wachar, I certainly can. Thanks for the question. The buildup in working capital is really a function of 2 factors. 1 is Really the cadence of work activity in the Q2 in North America. So we had a very strong second half of the second quarter.

Speaker 1

So Just with our normal DSO, that's and DPOs levels that we have, that is Pretty much on our run rate. And then the other aspect is Argentina had a very strong quarter as well. Their DSO It is considerably longer than North America. And so as a function on a consolidated or a continuing operations basis, That also plays a significant role in the build. We certainly see that reversing here in the 3rd quarter.

Speaker 1

And certainly, between now year end, I think things will moderate quite well. But yes, it's a function of really timing of work activity in the second quarter And where that work was actually taking place.

Speaker 5

Do you expect working capital to be a source of cash in Q3 or Just maybe neutral.

Speaker 1

Yes. I think the way we're looking at it was steady activity in North America, as Pat outlined. We don't see the dramatic need to increase working capital. And as I mentioned before, I think Argentina hit a high point In the Q2 for revenue. So we're certainly going to see that as going to be an inflow of cash By how much?

Speaker 1

It will depend again on activity. But I think the Q4 generally is a bit slower, so you'll see more of that recapture likely in the Q4.

Speaker 5

Great. And then just on the fracs end markets, both in the U. S. And the Canadian market, We've heard some comments about tightness in supply on the Canadian side and maybe loosening on the U. S.

Speaker 5

Side. Could you maybe comment on the supply sand supply dynamics?

Speaker 2

You're talking sand, Ricard?

Speaker 5

Yes, frac sand.

Speaker 2

Frac sand. Yes, we've In Canada, we have a bit of a unique situation, I believe, with our we have our own Sand Transloads and we have a good working relationship with our sand suppliers Out of Wisconsin, so we're not seeing the Calfrac itself is not seeing Too many issues on getting sand. The United States is it can be a little bit tougher, but so far we've been managing Quite well. I haven't heard any urgency out of our supply chain people That they're expecting to have any issues that we can't handle with sand going forward. The trucking and a few It can be a bit of an issue, but we're also pretty well supplied there.

Speaker 2

So I think we're okay. As Far as I can see with Sand, I'm not overly concerned.

Speaker 5

Okay. One of your key major customers and a major company in Canada, there were some talk before about Declines in activity that they were shutting down in September and they were customer of yours from a pumping perspective. So has there been any new changes there? Or have you been able to find Different jobs for those crews?

Speaker 2

I would say that we still have some white space because of this. But with the oil and gas prices stiffening as they have, I think we're going to be okay. I would imagine we will be a little bit lighter than we want to be, but Not concerningly right now.

Speaker 5

Okay. Well, thank you very much. Appreciate the color.

Speaker 2

Thanks, Warkar.

Operator

Thank you. Our next question or comment comes from the line of James Groullet from Peters and Company. Mr. Groullet, your line is open. Mr.

Operator

Gerlach, your line is open. I'd like to turn the conference back over to management for any closing remarks.

Speaker 1

Thanks, Howard. And yes, we'd like to thank everyone for joining us for today's call, and we certainly look forward to presenting our Q3 results in early November. Thanks very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a

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Key Takeaways

  • Calfrac achieved record second quarter EBITDA of $87.8 million (18.8% of revenue), more than doubling adjusted EBITDA year-over-year on revenue up 46% to $466.5 million.
  • The company maintained its stellar safety record and strong fracturing fleet utilization despite seasonal breakup and an extreme wildfire season in Western Canada.
  • Launched a Tier 4 fleet modernization program, deploying nine new DGB pumping units with diesel displacement exceeding 80% and targeting 50 units in North America by early Q1 2024.
  • Strengthened its balance sheet with net income of $50.5 million from continuing operations, net debt to adjusted EBITDA at approximately 1× (the lowest in recent history), and a plan to reduce long-term debt by ~$80 million by year-end.
  • Remains focused on three strategic priorities—safety, disciplined returns (maximizing free cash flow and debt reduction), and investing in new technologies to enhance service delivery.
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Earnings Conference Call
Calfrac Well Services Q2 2023
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