Calfrac Well Services Q4 2023 Earnings Call Transcript

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March 14, 2024

There are 6 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Calfrac Wealth Services Limited 4th 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.

Operator

I would now like to hand the conference over to your speaker today, Mike Olinik, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you. Good morning and to work our discussion of Calfrac's Calfrac's Q4 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 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 conference call to questions. In the news release issued earlier today, Calfrac reported its Q4 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 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 2023 Annual Information Form for more information on forward looking statements and these risk factors. As we have disclosed for several quarters, the company is committed to sell its Russian division and has designated the assets' liabilities in Russia as held for sale and discontinued in the financial statements.

Speaker 1

Calfrac is looking 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. Now I will pass the call over to Pat.

Speaker 2

Thanks, Mike. Good morning, and thanks for joining our call today. Before Mike provides the financial highlights of the Q4 and the full year, I will offer some opening remarks. Last year was a great year for Calfrac as we made important progress towards our long term financial and operational goals. We could not have achieved these results without our strong company culture and commitment to safety.

Speaker 2

Our safety focused culture is demonstrated on all our job sites, where we remind everyone that our brand promise begins with do it safely. Our commitment to safety is evident in the decrease in our TRIF from 1.19 in 20 22 to 1.05 in 2023. By remaining focused on the 3rd part of our brand promise, which is do it profitably, we were able to deliver the best annual net income from continuing operations in Calfrac's history of $197,000,000 dollars High quality execution and strong customer relationships continue to contribute to Calfrac's success. 2023 was also a significant year of reduction in Calfrac's long term debt. We made great progress and exited the year with a long term debt balance of 250,800,000 dollars which was the lowest which was the company's lowest debt level since 2,009 and a net debt to adjusted EBITDA from continuing operations of 0.74, which is also the lowest in many years.

Speaker 2

We remain focused on strengthening the balance sheet through debt reduction and asset improvement in 2024. We also continue to invest in our technologies and enhance our services in the field. We crossed an important Q4 as we developed the equivalent as we deployed the equivalent of 2 Tier 4 EGB fleets in North America to meet the growing customer demand for next generation lower emissions equipment. In addition, we upgraded the field telecom systems in North America to improve data transmission speed and quality, enabling us to interpret data quicker to make better decisions for our customers. In conclusion, 2023 was a successful year that leaves Calfrac in a much better financial and operational position to safely and profitably navigate the challenging pressure pumping market.

Speaker 2

For that, I want to commend our dedicated teams throughout our company for their hard work and commitment to continually meet and exceed our company and customers' expectations. I will 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 Q4 of 2020 3 was $421,400,000 or 6% lower than the same period in 2022, primarily due to a proportional increase in the number of jobs with customer provided sand in North America. This resulted in a 29% reduction in revenue per job compared to the same period in 2022. For the full year, revenue totaled approximately $1,900,000,000 24% higher than the prior year due to increased activity across all operating areas. Adjusted EBITDA during the Q4 of 2023 was $62,600,000 18% lower than the same period last year, mainly due to a reduction in operating margins following the perspective change in accounting estimates related to fluid ends that was adopted at the beginning of 2023.

Speaker 1

Fluid ends are now reported as a part of repairs and maintenance expense instead of as a component of capital expenditures. In the Q4 of 2023, Fluid Ends reduced adjusted EBITDA by $12,600,000 versus in 2022 where capital expenditures included approximately $9,000,000 related to Fluidsent. In 2023, Calfrac generated adjusted EBITDA of $325,500,000 39 percent higher than 2022 due to significantly improved utilization across all operating divisions and a larger operating footprint in North America. For the full year of 2023, Fluid ends reduced adjusted EBITDA by approximately 44,000,000 dollars versus in 2022 where approximately $29,000,000 of fluid end purchases were included in capital expenditures. Calfrac's net income from continuing operations decreased by 11% to $13,200,000 during the 4th quarter versus $14,800,000 in the comparable quarter of 2022.

Speaker 1

The company generated net income of $197,600,000 in 2023, a record versus $35,300,000 in 2022 and the results this year included an impairment reversal related to property, plant and equipment of $41,600,000 dollars offset partially by a foreign exchange loss of $22,400,000 mainly related to Argentina. Calfrac incurred capital expenditures of $49,400,000 during the Q4 versus $35,800,000 in the same period of 2022. For the full year 2023, Calfrac spent $165,400,000 as compared to $87,900,000 in the prior year. A large portion of the increase in capital spending was related to the company's Tier 4 fleet modernization program. Moving to the balance sheet, the company had working capital of $236,400,000 from continuing operations at the end of the year.

Speaker 1

Calfrac used $3,400,000 of its credit facilities for letters of credit and had $95,000,000 of borrowings under its revolving term loan facility, leaving approximately $152,000,000 in available credit. Calfrac exited the year with a net debt to adjusted EBITDA ratio of 0.74, which was its lowest in recent history and a significant improvement from the previous year. The reduction in net debt was $105,000,000 versus the previously announced guidance of $70,000,000 to 80,000,000 dollars Now I would like to turn the call back

Speaker 3

to Pat.

Speaker 2

Thanks, Mike. I will now present an outlook of for Calfrac's continuing operations across our geographic footprint. We have a positive long term outlook for our North American and Argentina operations. And we believe that providing high quality services in both areas benefits Calfrac and its stakeholders. We look forward to continuing to safely and efficiently deploy our assets to maximize value for our shareholders.

Speaker 2

This year, activity in the United States began slower than expected for Calfrac. As our customers changed their completion programs in anticipation of an extended period of low natural gas prices. As a result, Calfrac idled 2 frac fleets in early February and expects to have an average of 5 fleets working in the Q1. We anticipate that customer demand for our services will increase starting in the second quarter through to the end of 2024. Our operations in Canada are expected to deliver consistent financial results with 2023 with the deployment of our 5 large frac fleets and 6 coiled tubing units throughout the year.

Speaker 2

The slow start to the year will generate lower year over year financial results for our North American operations. In response to the changing market conditions in North America, Calfrac may defer up to 50,000,000 dollars of the planned 2024 capital spend related to the fleet modernization program. We will closely monitor the market to determine the right path forward. Our operations in Argentina carried strong momentum from last year into 2024, and we anticipate robust utilization through the rest of this year across all our service lines. We continue to watch the country's political environment and believe that it is becoming more accepting towards business investment.

Speaker 2

We are excited about our future in Argentina and expect to generate consistent financial returns going forward. Despite the volatility in the pressure pumping market, Calfrac still remains focused on its 3 key strategic priorities. First one will be maximizing consolidated net income and free cash flow through a disciplined return focused approach. The second is dedicating free cash flow to reducing the company's long term debt. And third, investing in new technologies that enhance Calfrac's service deliverability in the field.

Speaker 2

I'll now turn the call back to Mike to begin the Q and A portion of this call. Thank you, Pat.

Speaker 1

I will now ask our operator to begin the Q and A portion of today's call.

Operator

Thank you. Our first question comes from the line of Keith McKay from RBC Capital Markets.

Speaker 4

Hi, good morning. Can you just talk a little bit about the status of the Tier 4 upgrade program? I think you mentioned you've got 2 fleets in the field. Just can you run through how much equipment or pumps this represents? And then ultimately, how much you think you could get to through 2024?

Speaker 4

And I know that the potential capital deferral might affect some of that, but can you just sort of walk through a little bit more about that, please?

Speaker 2

Sure. We were expecting to have 100 Tier 4 pumps in the field in North America at the end of 'twenty four. And with the which is still the plan, but just to be prudent with what we're seeing in the U. S. Today and our Q1 not being where I would like it.

Speaker 2

As we put our refurb program in motion, I made sure that we had some off ramps if needed. And that would mean that if the market doesn't do what we'd like to see it do over the last three quarters, I have the ability now to stop the build on about $50,000,000 worth of equipment, which we would defer into later in the year when we get better visibility in Q3 or Q4. But the plan is still, depending on the market to exit 2024 with 100 pumps. But I just thought it was prudent that we set up our build program that if things didn't go the way they were, I was not stuck with supply contracts that I had to beat.

Speaker 4

Okay, got it. So you still like I guess for modeling purposes, we should we still be including the full CapEx in our models and plans given where you think the market will go and the potential deferral is just an if scenario. Is that a fair way to think about it?

Speaker 2

Yes. It's a fair way to think about it. I don't know what to tell you to put in your models because obviously I'm not 100% confident that the drilling allow us to meet our forecasts. So if that answers your question.

Speaker 4

Yes. No, that's appreciated.

Speaker 2

But guess the worst case scenario is we would add to it 80 pumps instead of 100.

Speaker 4

Okay. And how many do you have upgraded now, Pat?

Speaker 2

We would have like 37 in the U. S. And our first pumps will start to arrive in Canada either this week or they're actually just stuck at the border right now. So it'll be this week or early next week. And we plan to exit 2024 with 40 frac pumps in Canada, new DGV pumps.

Speaker 4

Got it. Okay. Okay. Fair enough. And can you just remind us of your, I guess, base case debt repayment plan for 2024?

Speaker 4

I think it was somewhere around that $70,000,000 to $80,000,000 number. But if you could just give us a bit of an update on that would be appreciated as well.

Speaker 2

Yes, I'll just let Mike answer that question.

Speaker 1

Yes, Keith, it's Mike here. I'm not sure that we've come out with formal guidance around debt repayment for 2024. I think ultimately what we're looking to do corporately is to continue to make progress on the debt front. We, as announced, made considerable progress last year. And we are balancing the investment in new equipment with debt retirement.

Speaker 1

And I think are confident that we're going to continue to grind that lower. We're just not sure what that number looks like at this point.

Speaker 4

Got it. Okay. Thanks very much. I'll turn it back.

Operator

Thank you. One moment for our next question. Our next question comes from the line of wakar Syed from ATB Capital Markets.

Speaker 3

Thank you for taking my call. Mike, you mentioned that there's going to be like 5 average crews working in the U. S. In Q1. And then the 2 were kind of dropped off in February.

Speaker 3

Now does it mean that in Q4, there were 7 working or there were actually 10 working and just 2 is just like a drop in February and you expect more crews to be dropped?

Speaker 1

I think as we reported our Q4 results, Wachar, I think in North America, you probably ran an average of 12 to 13 fleets in the Q4. And I think where we're at right now is that total is likely down about 2 on average, so kind of 210 for Q1. And then going back to somewhere in that 12% to 13% range for the probably around 12% for the second quarter as well. So that's kind of just where things are going. And that's just differences with the breakup in Canada as well as we expect to start up significant start up of operations in the U.

Speaker 1

S. To begin early in the second quarter.

Speaker 3

And why are you confident that activity is going to pick up in Q2? And could you my understanding would be that like most of your crews are not really levered to natural gas. Maybe one is in the U. S. Market in Appalachia and the remaining probably more leveraged to oil unless I'm mistaken.

Speaker 3

And so may have been should have less limited impact from the gas prices?

Speaker 2

So, of course, as we get closer to the second quarter, we have we always have more visibility of the work that's going to take place. That doesn't always mean that it happens. But right now, we don't have much white space for our North American fleets for the 13 that we have left. So we're fairly confident today that these fleets the 13 fleets will be all up and running.

Speaker 3

Okay. And there was one of your competitors in the U. S. Came out had the earnings call yesterday and spoke about that they were pretty aggressive about market share gains and obviously then they're probably lowering prices. Are you seeing that impact in your markets?

Speaker 2

Well, we're always done before as service companies, we're always under pressure for pricing, but I'm not going to say that it won't affect us, but I don't think it's a very effective way to run a business. So if we have a competitor that wants to work for nothing, well, I guess his stuff will go to work first. And hopefully our good long term customers and customer relationships will see through this and stick with us is what I would think. It's been tried quite a few times in it. I don't think anybody has been very successful at that model.

Speaker 2

We burn up a lot of equipment and we need to be paid a fair rate or there's not much sense being in the business. Market share doesn't work for me.

Speaker 3

Sure. Yes. And then Pat, for in Canada, in general, Q1, how does Q1 look on a year over year basis?

Speaker 2

Q1 is looking fine for us. In Canada, we were Canada had a bit of a disappointing Q4 of last year, but Q1, we went back to work and we're pretty much, I would say by the end of the half, we're kind of going to be right kind of where we want to be in Canada.

Speaker 3

Sure. But like the rig count is running about 7% to 8% lower year over year. Are you seeing similar trends on the pumping side or no pumping is flat to up year over year?

Speaker 2

Yes. I would think that's fair. Flat, pretty much flat, I think, yes.

Speaker 3

And then how do you see

Speaker 2

We're going to see more of our customers supplying their own sand and stuff, which isn't always a good thing for us.

Speaker 3

And why is that happening? Why are customers supplying their own sand? Like sand jobs are getting more sand is being pumped per well, logistics getting more complicated. So why are your customers taking that on themselves?

Speaker 2

I think they can get a they just buy sand cheaper than we're willing to sell it to.

Speaker 3

Okay. So you see that to be like a trend that will continue going forward?

Speaker 2

I would think we're going to see more of it, yes.

Speaker 3

Thank you very much. That's all for me. Appreciate the color.

Speaker 1

Thank you, Wachar.

Operator

Thank you. One moment for our next question. Our next question comes from the line of John Daniel from Daniel Energy Partners.

Speaker 5

Hey, guys. Just two questions. Thanks for including me. The first is a follow-up to Akar's question. Mean, it sounds like reading the press release and from your prepared remarks, the fleet reduction was more a function of customer specific slowdowns as opposed to you lost the work to someone.

Speaker 5

I just want to make sure that's right.

Speaker 2

Yes, I would say that's right, John. And there's also as you're as we're doing our refurb program and then you hit a hiccup, we're trying to balance these pumps to get as close to end of life as we possibly can out of them as we drop them off into the rebuild. So it's so as our the main component is our engines. As we lose an engine, it's kind of like if you rebuild that engine back to a Tier 2, you've got a Tier 2 pump for another 5 years. So some of this is customers, but it's also some of it is because of the refurb program.

Speaker 2

I don't want to have a whole bunch of pumps with good engines that I'm going to have to park before end of life because I can't find work for Tier 2 down the road a couple of years.

Speaker 5

Right.

Speaker 2

So there's a little bit of both going on. I always say we're kind of balancing on a beach ball here and we're going to try to get it as right as we can, but I know that we'll never be right, If possible.

Speaker 5

I feel like a lot of analysts listen to calls. So the next one is just can you provide any color on pumping hours per day, the trends that you've seen over the last few quarters?

Speaker 2

I would say our pumping hours have stayed fairly consistent. As we're getting in more of course, as we're getting more of this newer pumps, we're seeing some efficiencies there. So we're getting more hours pumping with our newer pumps than we are with the older ones, which is, of course, why we're rebuilding to start.

Speaker 5

Okay. That's all I've got. Thank you very much for including me.

Speaker 2

Thanks, Scott.

Operator

Thank you. At this time, I would now like to turn the conference back over to Mike Olinik for closing remarks.

Speaker 1

Thank you, Gigi. And thanks, everyone, for joining the call today, and we look forward to hosting our Q1 call in a couple of months. Thanks very much.

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Key Takeaways

  • Record Profitability: Calfrac delivered its highest ever annual net income from continuing operations of $197.6 million in 2023, driven by improved operational utilization and strong customer relationships, while further lowering its total recordable incident frequency (TRIF) to 1.05.
  • Debt Reduction Milestone: The company reduced long‐term debt to $250.8 million—the lowest since 2009—and achieved a net debt to adjusted EBITDA ratio of 0.74, surpassing its $70–$80 million debt reduction guidance with $105 million of net debt paydown in 2023.
  • Fleet Modernization Drive: In Q4, Calfrac deployed the equivalent of two Tier 4 low-emission frac fleets in North America and upgraded field telecom systems, aiming to field 100 Tier 4 pumps by year‐end 2024 while reserving the right to defer up to $50 million of CapEx if market conditions weaken.
  • Mixed Q4 Financials: Q4 revenue from continuing operations fell 6% year-over-year to $421.4 million due to increased customer-provided sand jobs, and adjusted EBITDA declined 18% largely because of a change in accounting treatment for fluid ends.
  • 2024 Outlook and Priorities: Calfrac expects a slow North American start with average fleet utilization dropping to five in Q1 before rebounding in Q2, while Argentina remains robust; the company’s three strategic priorities are maximizing free cash flow, further debt reduction, and continued investment in field technologies.
A.I. generated. May contain errors.
Earnings Conference Call
Calfrac Well Services Q4 2023
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