Calfrac Well Services Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 7 speakers on the call.

Operator

Good day, everyone, and thank you for standing by. Welcome to the Calfrac Wealth Services First Quarter 2024 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. And please be advised that today's conference is being recorded.

Operator

Now it's my pleasure to hand the conference over to the Chief Financial Officer, Michael Olinek. Please proceed.

Speaker 1

Thank you, Carmen. Good morning, and welcome to our discussion of Calfrac Well Services' Q1 2024 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 2

Pat will

Speaker 1

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 a news release issued earlier today, Calfrac reported its Q1 2024 results. Please note that all financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today refer to non IFRS measures such as adjusted EBITDA.

Speaker 1

Please see our news release for additional disclosure on these financial measures. With us today, we'll 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 previously disclosed, 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

As a result, 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 a financial update, I'll turn the call over to Mike, I'll turn the call over to Mike for some opening remarks. Unfortunately, the Q1 was that we reported this morning was not what we were expecting and was disappointing. The North American miss cannot be attributed to any one event.

Speaker 2

The lower than expected financial results during the Q1 were primarily impacted by low utilization of as several North American customers chose to defer work out of the winter months into the second and third quarters. And we also felt the impact of a merger on the E and P side that didn't go our way. Finally, low natural gas prices had a negative impact on overall utilization. This was partially offset by a record quarter in Argentina. Despite the drop in utilization, we maintained our focus on providing safe high quality services to all our customers and continue forward with our equipment modernization program.

Speaker 2

During the quarter, we deployed a new fleet of high capacity sand transport units in North America that increase the amount of sand per load that can be delivered to location by 38%, which will reduce our overall costs. And we are on track to operate 5 Tier 4 DGB cat on cat fleets in North America by the end of the year, providing our customers with next generation low emissions fracturing equipment. I'd also like to commend our team for continuing to provide safe and efficient service as we reduced our trailing 12 month TRIF from 1.05 to 0.87. It takes hard work and commitment across the organization to safely and properly navigate the pressure pumping market to achieve our objectives. I will now pass the call back 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 Q1 of 2024 was $330,100,000 a decrease of 33% from the same period in 2023, primarily due to a slower than expected start in North America as several customers chose to delay work out of the winter months into the remainder of the year. Additionally, the company saw a reduction in natural gas activity in response to the low commodity prices. Adjusted EBITDA during the Q1 of 2024 was 26,100,000 dollars lower by 69% from the same period last year, mainly due to the significant decline in North American utilization, combined with slightly lower pricing relative to the Q1 of 2023. Activity in Argentina remained strong and the company achieved a record first quarter EBITDA for this division in 2024.

Speaker 1

Calfrac's net loss from continuing operations was $2,900,000 during the Q1 versus net income of 36 $300,000 in the comparable quarter of 2023, a decrease of $39,200,000 Calfrac incurred capital expenditures of $48,100,000 during the Q1 versus $34,500,000 in the same period of 2023. A majority of this increase was related to the company's Tier 4 fleet modernization program, which totaled $28,400,000 in 20.24 compared to $19,000,000 in 2023 combined with new investments made for sand transport equipment in Canada. Moving to the balance sheet. The company had working capital of $273,700,000 from continuing operations at the end of the first quarter, including $58,200,000 in cash, of which $33,900,000 was held in Argentina. Calfrac faces certain restrictions on the amount of cash that can be repatriated out of Argentina.

Speaker 1

However, these restrictions are currently evolving to allow for quicker repatriation back to Canada. As at March 31, 12, the cash balance in Argentina included a U. S. Dollar denominated investment totaling US18 $1,000,000 in Argentinian government bonds that are recorded as a short term investment. The company plans to commence with the repatriation of this investment to Canada beginning in July, evenly over a 12 month period.

Speaker 1

The remaining excess cash in Argentina was held in various short term investments that are designed to mitigate against the impacts of inflation and the devaluation of the peso to the greatest extent possible. At the end of the Q1 of 2024, Calfrac used 3 point $6,000,000 of its credit facilities for letters of credit and had $155,000,000 of borrowings under its revolving term loan facility, which left the company with available credit of $91,400,000 Calfrac exited the 1st quarter with a net debt to adjusted EBITDA ratio of 1.05. Now I would like to turn the call back to Pat to provide our outlook.

Speaker 2

Thanks, Mike. I will now present an outlook for Calfrac's continuing operations across our geographic footprint. Utilization has improved significantly into the Q2, and we expect high utilization of our equipment and crews for the foreseeable future. This increase in utilization will lead to significantly improved financial results from North America for the remainder of the year. All three service lines in Argentina performed well as the team accomplished several operational milestones in the Q1, while improving their trip to a new divisional vest.

Speaker 2

A record of 21 pumping hours was achieved. Secondly, we achieved total coil tubing depth of over 7,300 meters while using 2 3eight tubing. And lastly, our cementing operation established a new divisional standards record by producing a customer satisfaction rating of 98 percent while working for 5 different operators. The new business environment in Argentina coupled with the expected development of their world class shale play is expecting to provide the foundation for to continue generating strong financial results from this segment. Calfrac has a reputation for safety and efficiency, which continues to increase the demand for our services.

Speaker 2

We are currently in a negotiation phase for upcoming contracts and expect to have improved visibility on future activity within the next few months. We have a positive long term outlook for our company across our operating areas and remain focused on our 3 strategic priorities. Number 1, maximizing consolidated net income and free cash flow through a disciplined returns focused approach. Number 2, dedicating free cash flow to reducing the company's long term debt and 3, investing in new technologies that enhance Calfrac's service deliverability in the field. I will now turn the call back to Mike to begin the Q and A portion of this call.

Speaker 1

Thank you, Pat. I will now ask Carmen to begin the Q and A portion of today's call.

Operator

Thank you so much. And our first question comes from Cole Pereira with Stifel. Please proceed.

Speaker 3

Hi, good morning all. Just wondering in the U. S, can you just break down how many fleets you're running and how many of them would be targeting gas right now?

Speaker 2

We would have 1 fleet targeting gas right now. And we have the equivalent of 9 fleets that are operational with crew. And I would say one fleet that's kind of furloughed right now. The size of the fleets have changed quite a bit in the areas, some of the areas that we work because we're now doing some Saimu fracs. We have a Saimu frac going right now that has 40 pumps on location.

Speaker 2

So it's your fleet count is starting to be kind of irrelevant due to the number of pumps sometimes being used.

Speaker 3

Got you. That makes sense. And then on the Argentina side, can you just talk a little bit how things have been going over the past few months? Any details you can share on conversations with customers or maybe with anyone at the government level?

Speaker 2

So I'll take this call again, Mike. So I was just down in Argentina and spent some time down there. And our we're very excited about Argentina right now. We are able now to repatriate cash, as Mike mentioned, through this Argentine bonds. Everything is still fairly complicated in Argentina, but it is getting better.

Speaker 2

And it looks like they're moving towards us being able to move good used equipment back down to Argentina, which will be a huge plus for Calfrac with the Tier 4 conversion, we'll be able to put some of our good Tier 2 pumps down into Argentina to get the rest of the useful life out of them. So that's a big plus for us. From the government standpoint, everybody seems very pro business and we expect to continue to see some very good movement out of Argentina.

Speaker 3

Okay. Got you. Thanks. And then Mike, on the Argentinian bond, can you just kind of explain the mechanics of how the cash flows from that actually work?

Speaker 1

Yes. It's quite simple, Cole. Like we'll take onetwelve of the US18 million dollars per month and be able to apply that against existing intercompany debt. So it's a tax free transfer of cash back to Canada to allow us to repay debt in Canada. So it's one of those things that's been heavily restricted under the previous government, and it's now starting to open up.

Speaker 1

So the hope is that this type of activity starts to increasingly become more normalized to be very similar to what we would do in any other country. In addition to that, like just the any bills that are paid on behalf of the Argentinian sub by the Canadian parent post the new government, those are also being repaid on a very accelerated basis over the course of 4 months, where previously that was delayed up to 6 months before you could make a petition to the Central Bank to allow those funds to come back. So things are certainly becoming more of a normal course business in Argentina.

Speaker 3

Got it. And then just one more for me. On the Canadian side, how are conversations with customers going for the second half of the year? And how do you feel about water availability?

Speaker 2

The second half of the year is from what we're hearing from our customers is shaping up to be fairly busy. And as far as water, our major customers have water pits available to them. So they're not too stressed about water. I would think some of the smaller spot market kind of guys that we work for, it might pose a bit of a threat depending on how the drought situation continues. But it's not quite as dry in the areas that we predominantly work in, but it is certainly a concern.

Speaker 3

Got it. That's all for me. Thanks. I'll turn it back.

Operator

Thank you. One moment for our next question please. And it comes from the line of Blake MacLean with Daniel Energy Partners. Please proceed.

Speaker 4

Good morning. Thanks for taking my call.

Speaker 2

Welcome.

Speaker 4

I just wanted to ask about the customer deferral of work. I was hoping maybe you could give us a sense for how those conversations are progressing, how they're thinking about their programs in the back half of the year, maybe anything they've shared with respect to what they're focused on or looking at?

Speaker 2

Well, we've just been seeing a trend in the last year and a half or so is towards the end of the Q4 and January, February, predominantly in the U. S, they've been shifting the work out of the Q1 due to the weather and the storms and the associated costs with that, which seems a little different when you're sitting in a $80 oil market, but that's what we've been seeing so that it's filling up the rest of the year for us. So it's not ideal, but that's

Speaker 1

what we're seeing. I think to add on to that, Blake, it's Mike here. I think what you're seeing for the remainder of the year to the second part of your question is very strong activity for our fleets in the United States in the 2nd and third quarters. In cases that we're seeing, we could be fully booked to overbook. So it's one of those things that I think the operators have done intentionally, but I don't know that they understand the unintended impacts, which I think are going to benefit us as we walk through the year with very high utilization.

Speaker 4

Got it. Okay, that's very helpful. Thank you all again for the time this morning.

Speaker 5

Thank you.

Operator

Thank you. One moment for our next question please. And it comes from the line of Keith MacKay with RBC Capital Markets.

Speaker 6

Hi, good morning. I'm hoping to dig into Q2 a little bit more in North America. It sounds like some of the U. S. Deferrals will reverse, but I don't know if the gas prices have really changed much and the customer consolidation hasn't really changed much.

Speaker 6

So it sounds like it's really all down to the work that was deferred plus any other work that was kind of booked. And then of course you're fighting the down seasonality in Canada. So can you just give us a sense of how much better roughly you think Q2 can be in North America versus Q1, whether that's from a revenue recovery or growth standpoint or incremental margin standpoint. Just any other sort of goalposts you can put around that as well as the levers impacting it would be helpful.

Speaker 1

Yes. I mean, Keith, you're spot on that in Canada, there's definitely a breakup period in the early part of the second quarter that impacts activity quite significantly. Post the start of May here. And that's going to carry, I think, us all the way through into the early part of Q4. So I think we've got a good line of sight on our we've got a very definitive customer base in Canada.

Speaker 1

And I think they've got very well laid out plans for the remainder of the year. And outside of breakup, I don't know that we're seeing a lot of impacts on that side. In the U. S, I think, as Pat mentioned and we talked about, the activity levels were very low in certain months in Q1. And we're not certainly seeing that right out of the gate in the second quarter.

Speaker 1

We're gradually going to build up to being all of our crews being fully utilized here in the second quarter. And that's again going to carry us through to the early part of Q4. So speaking to where things are, I think we're going to align a lot better to where we would have been last year in Q2, not quite to the same level, because obviously we're not operating the same number of crews. But certainly things look dramatically better than Q1 in North America.

Speaker 6

Yes. Okay. Got it. And just a follow-up to that. So if Q2 looks roughly similar this year versus last year with a slightly lower equipment count, What does that imply for pricing on a year over year basis?

Speaker 1

I think we saw some pricing degradation in the North American market. I mean, there's certainly been crews that have been added that obviously affects some of the pricing. And then you'll see that here in Canada some as well, whether it's spot market or leading edge pricing not being what it was a year ago, just based on the tightness of the market not being the same as a year ago. Having said that, I think a lot of our crews are levered to longer term relationships and I think those pricing has remained relatively intact. Got it.

Speaker 1

Okay. Well, that's it

Speaker 6

for me. Thanks very much.

Speaker 1

Thanks, Keith.

Operator

Thank you. Syed with ATB Capital Markets. Please proceed.

Speaker 5

Thank you. So when I look at your dual fuel fleet, it looks like 35% of the fleets or horsepower is dual fuel. I find that many U. S. Companies are closer to the 65%, 70% level.

Speaker 5

Is that an impact? Is that an issue right now in terms of getting the utilization higher than it needs to be?

Speaker 2

Well, we with the dramatic drop in the frac, the working frac fleet count in the Williston Basin,

Speaker 5

we did

Speaker 2

lose a pad due to the fact that we didn't have a Tier 4 fleet and there was Tier 4 fleets available. So yes, it will impact us, which is part of the main reason that we're continuing with our Tier 4 modernization Tier 4 equipment. So for sure it's an issue, but we expect to have to exit the year with 5 fleets. So we're definitely closing the gap.

Speaker 5

Sure. But when I look at your Tier 4 DGBs right now, you're at 2 fleets. And I think that if I may be mistaken, but I think that Q3 last year, you were at 2 as well. So have the upgrades been pushed to the right sum?

Speaker 1

No, Wachar. I'm not sure you're correct on what last year's fleet count would have been. It would have been closer to 1

Speaker 3

in Q3. Okay.

Speaker 1

Yes. So we're actually building that program up. So we exited the year with 2. We kind of still are in the same spot here through the Q1. But I think we're going to through the end of the second quarter, end of the third, we're going to see that pump count increase quite significantly.

Speaker 1

What they're

Speaker 2

we were scheduled to have Canadian pumps for January, the 1st part of January. And due to I'm getting very tired of hearing about it, but supply chain issues. We were delayed a couple of months, but we do have our first 6 pumps now in Canada. And they will continue to we'll continue to escalate that count.

Speaker 5

Okay, great. And then there was a $60,000,000 of additional debt that was taken in the quarter. Do you expect it to be paid down this year or this is how are you thinking about that debt pay down?

Speaker 1

Lucar, as Pat mentioned, I mean, that's one of our priorities from a strategy perspective is to make sure that we continue to drive debt lower. So I mean, I think working capital demands in the business and the Tier 4 program to a certain extent caused the increase in the revolver through Q1. That's going to continue, I think, through the 2nd and third quarters. But as we experienced last year, we should see another significant pay down back on the revolver and debt should overall on an overall basis be flat to lower by the end of the year.

Speaker 5

Okay, great. Thank you very much. That's all for me.

Operator

Thank you. As I see no further questions, I will conclude the Q and A session and hand it back to Michael Olenek for final comments.

Speaker 1

Thank you, Carmen, and thank you everyone for joining us on our call today. We look forward to hosting our Q2 call. Thank you very much.

Operator

Thank you all for participating and you may now disconnect.

Powered by Quartr

Key Takeaways

  • Calfrac reported Q1 revenue of C$330.1 million, a 33% decline year-over-year, with adjusted EBITDA of C$26.1 million down 69% and a net loss of C$2.9 million versus net income of C$36.3 million in Q1 2023.
  • The shortfall was driven by lower North American utilization due to customer deferrals, weak natural gas prices and an E&P merger that fell through, partially offset by a record quarter in Argentina.
  • During the quarter, the company invested C$48.1 million in its equipment modernization program, deploying new high-capacity sand transport units to boost sand per load by 38% and advancing toward five Tier 4 EGB fracturing fleets by year-end.
  • Calfrac exited Q1 with working capital of C$273.7 million (including C$58.2 million in cash), a net debt/adjusted EBITDA ratio of 1.05, and a plan to repatriate its US$181 million Argentine bond investment over the next 12 months.
  • Looking ahead, utilization has improved markedly in Q2 and the company expects high demand across North America and Argentina, underpinned by strategic priorities to maximize free cash flow, reduce debt and invest in new field technologies.
A.I. generated. May contain errors.
Earnings Conference Call
Calfrac Well Services Q1 2024
00:00 / 00:00