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Executives

Doug Ramsay - Chief Executive Officer

Laura Cillis - Senior Vice President, Finance and Chief Financial Officer

Tom Medvedic - Senior Vice President, Corporate Development

Fernando Aguilar - President and Chief Operating Officer

Analysts

John Daniel - Simmons and Company

Dana Benner - AltaCorp Capital

Scott Treadwell - TD Securities

John Tasdemir - Canaccord

Kevin Lo - FirstEnergy

Calfrac Well Services Ltd. (OTCPK:CFWFF) Q1 2013 Earnings Conference Call May 8, 2013 12:00 PM ET

Operator

Good morning. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Limited First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I will now turn the call over to Chief Executive Officer, Doug Ramsay, you may begin your conference.

Doug Ramsay - Chief Executive Officer

Thank you, Mike. Good morning. And welcome to our discussion of Calfrac Well Services first quarter results. Before we get started I like to outline how this conference call will be conducted. Laura Cillis our Senior Vice President, Finance and Chief Financial Officer will begin with an overview of our quarterly finance performance. I will then provide a review of operations and discuss our outlook for the remainder of the year after which Laura, Fernando Aguilar, Tom Medvedic, Mark Paslawski, I’d be able to answer your questions.

I will now turn the call over to Laura.

Laura Cillis - Senior Vice President, Finance and Chief Financial Officer

Thank you Doug. And thank you everyone for joining us for today’s call. Before I begin my discussion this morning I’d like to note that this conference call contains certain statements and expressions that could be considered to be forward-looking statements under applicable securities legislation. Our assessment in the future plans and operations is based on expectations that involve a number of business risks and uncertainties. These risks are said out in detail in our most recently filed Annual Information Form and include but are not limited to commodity prices for oil and natural gas, equipment inventory level, national and international economic conditions, political uncertainties and government regulation, the ability of our customers to access credit and capital markets, the concentration of our customer base, competition in the markets where we operate, product and supply availabilities, risks associated with our foreign operations weather conditions, foreign exchange rates and labor shortages. These conditions could cause the company’s actual results to differ materially from our current expectations.

During the first quarter of 2013 Calfrac achieved the following financial results in comparison to the first quarter of 2012. Consolidated revenue was $423.4 million a decrease of 11% from the first quarter of 2012, the decrease was driven primarily by lower pricing and job sizes in the United States. The revenue decline in the United States partially offset by strong growth in Calfrac’s Russian operations.

Operating income which is income generated after operating expenses and selling general and administrative expenses was $62.7 million for the first quarter which decreased from a $113.4 million in 2012. This decline in operating income was primarily due to competitive pricing pressures in Canada and the United States combined with lower activity levels in the U.S. and higher logistical cost associated with the completion of larger fracturing jobs in Canada.

Net income attributable to shareholders of Calfrac was $24.6 million or $0.54 per share diluted versus $70.8 million or $1.59 per share in the first quarter of 2012. Adjusted for the impact of foreign exchange gains in both periods, net income attributable to shareholders of Calfrac was $22.7 million or $0.50 per share diluted versus $59.3 million or $1.33 per share in the first quarter of 2012.

In Canada, total revenue increased to $231.6 million in the first quarter of 2013 from $225.8 million for the same period of 2012. The 3% increase in revenue was primarily due to larger job sizes in the Duvernay and Montney as well as several carbonate place in Western Canada combined with favorable weather conditions in the month of March which allowed continued high utilization through the end of the quarter.

The increase was partially offset by increased pricing pressure in Western Canada. Canada’s operating income for the first quarter of 2013 was $55.9 million or 24% of revenue. In the same period of 2012 operating income was $77.3 million or 34% of revenue. The decrease was primarily due to more competitive pricing environment in combination with higher operating cost resulting from an increase in logistical cost associated with the completion of larger fracturing jobs and longer average travel distances to well sites in the unconventional oil and natural gas resource plays of Western Canada.

For the United States total revenue was $127 million, a decrease of 35% over the same quarter last year. The decrease was primarily due to increased pricing pressure and the completion of smaller jobs. Natural gas drilling and completion activity continue to remain relatively low in the U.S. and resulted in increased competition in all of the company’s operating regions.

Completion activity in natural gas producing areas such as the Marcellus and Fayetteville shale plays as well as the Piceance Basin was impacted negatively as the number of active drilling rigs in these areas decreased by 28% in the first quarter of 2013 compared to the same period in 2012.

Operating income in the United States was $18 million for the first quarter of 2013, a decrease of $28.1 million from the comparative period of 2012. The significant decrease in operating income was primarily due to competitive pricing pressure and lower fracturing equipment utilization in the unconventional natural gas plays of the U.S. The decrease in operating income was mitigated by reductions in labor and maintenance expenses resulting from cost savings initiatives implemented by the company in late 2012 combined with supply chain and logistical improvement and declines in the cost of certain key materials such as guar.

Calfrac’s revenue from its Russian operations during the first quarter of 2013 increased by 32% to $37.2 million from $28.1 million in the corresponding period of 2012. The increase in revenue was mainly due to higher fracturing activity resulting from increased demand following a successful 2013 tender process and the commencement of horizontal multistage fracturing operation in the latter part of 2012 that has continued into 2013. In addition the company resumed providing proppant as part of its fracturing operations to a significant customer in Western Siberia in 2013 which also contributed to this increase. The increase in revenue from fracturing operations was partially offset by lower coiled tubing activity.

Russia’s operating income was $2 million in the first quarter of 2013 compared to $1.6 million in the corresponding period of 2012. The increase in operating income was primarily due to the higher revenue base combined with greater operating efficiencies associated with multistage fracturing, offset partially by higher maintenance and product costs due to the provision of proppant to a significant customer during the quarter.

Latin America which consists of Mexico, Argentina and Colombia generated revenue of $27.7 million in the first quarter of 2013 compared to $25.3 million in the same quarter of 2012. The increase in revenue was primarily due to higher coiled tubing activity combined with the completion of larger cementing and coiled tubing jobs in Argentina. This increase in revenue was offset slightly by lower fracturing activity in the Burgos field of Northern Mexico as a large project could not be completed in March, 2013, due to operational issues by the customer.

Latin America generated an operating income of $1.2 million in the first quarter of 2013 compared to $2.5 million in the same period of 2012. The decrease was mainly related to lower fracturing activity in Mexico combined with cost related to the start-up of fracturing operations in Argentina. The effective tax rate for the first quarter of 2013 and 2012 was 22% and 27% respectively. The decrease in total income tax expense was primarily due to lower profitability in the United States and Canada. The lower effective tax rate for the first quarter of 2013 was primarily due to a lower percentage of taxable income in the United States, which has a higher average statutory tax rate.

Turning to the balance sheet. The company exited the quarter in strong financial condition with working capital up $332.2 million which included $47.2 million in cash and long-term debt of $450.6 million the majority of which is not due until 2020. As of March 31, 2013 the company had utilized $14.4 million of its credit facility for letters of credit leaving $285.6 million in available credit. (Technical Difficulty) and maximize shareholder value.

I would now like to turn the call back to Doug for an overview of the company’s operations.

Doug Ramsay - Chief Executive Officer

Well thank you, Laura. I will now provide a brief overview of our operations during the past quarter and then discuss our prospects for the future for each of our business segments. I will begin with our operation in Canada. The company experienced relatively slow start to the first quarter as the pace of drilling activity in Western Canada did not increase until late 2012. The lag between the commencement of drilling operations and completion activity result in a lower activity for the first half of January.

As the drilling of these wells was completed activity increased significantly late January and early February and this momentum continued through its remainder of the quarter. Calfrac’s strong activity in the first quarter was due in part to colder weather persisting drove most of Western Canada until late March which will allow the company to operate at very high utilization throughout most of the months.

Calfrac is a strong and active customer base as well as long-term relationships with a number of large customers. Calfrac expects the well completion activity will continue to grow as many of the larger plays such as the Montney and Duvernay transitioned from delineation to development. This activity is expected to increase with an influx of capital from foreign entities and large multinational companies. This interest in Western Canada natural gas is largely related to long-term LNG export strategy. The company’s leadership position at the development of the Montney, Duvernay and Horn River expected to participate significantly the development of the resources need to support LNG exports.

Overall industry activity is expected to grow materially over the next several years. Over the longer term further operational efficiencies are expected to be achieved to expand the use of 24-hour operations and multi-well pad development. While the company remains optimistic about the future natural gas development in Western Canada completion activity in the oil plays remains very strong. The use of higher-rate treatments in plays such as the Cardium are leading to greater demand for larger fracturing crews and larger stage sizes. Technology and play economics continue to improve which should provide the basis for further increases in future activities.

Calfrac’s first quarter results in United States was positively impacted by the right-sizing efforts implemented in the fourth quarter of last year and early part of 2013. This process combined with higher equipment utilization and enhancements in the company’s supply chain, and logistic capabilities contributed significantly to its improved financial performance. Calfrac’s U.S. operating cost structure has been realigned with its current activity base and will be closely monitored for any future changes in the market. While the company is pleased with improvements from the financial performance of its U.S. division the short term outlook remains uncertain.

Pricing pressure combined with volatility and equipment utilization has provided a lack, a short term visibility regarding future operating margins. Fundamentally remains an oversupply capacity servicing this market. It is anticipated to limit any significantly pricing recovery over this short term. While pricing condition in the United States remains very competitive Calfrac believe that the prices are beginning to stabilize. Although the company does not expect market condition to change significantly during the second quarter is cautiously optimistic that the well drilling and completions activity will improve in the latter part of 1013.

Calfrac continues to believe it is well positioned of the U.S. pressure pumping business. In addition to its contract position Calfrac services two of the most active unconventional resource plays in United States, including the Bakken oil shale play in North Dakota and Marcellus shale gas play in Pennsylvania. The company believes that the Marcellus shale play will be one of the primary beneficiaries of the recent increase in the price of natural gas. In response to this market opportunity, Calfrac recently redeployed an additional fracturing spread into this region brings our total number of spreads to four and based on a recent tender award, expects to have fifth crew operating in the third quarter.

Revenue and operating margins improved during the first quarter for Calfrac’s Russian division of fracturing activity and equipment utilization grew significantly from the fourth quarter of 2012. This improvement in equipment utilization was driven by a shift by Calfrac’s customers to multistage completions within horizontal wellbores. However the increase in operating margins from the previous quarter was negatively impacted by cost related to colder weather operations.

The company anticipates that the operating margin of Russia will improve in the second and third quarters of 2013 as weather becomes less of a factor. The company has been very pleased with the involvement in the deployment of multistage completion technologies in horizontal wellbores over the last several quarters. Calfrac expects that this trend will continue to drive demand for its services over the short and longer term as Russia’s producing sector gains confidence with this completion strategy.

Turning to Latin America. Calfrac’s financial results in Mexico remain relatively consistent with fourth quarter with slight reduction in fracturing activity as the company was unable to complete a significant horizontal project before the end of the quarter due to delays by the operator. Multistage fracturing operations in the horizontal wellbores in Mexico continued to gain momentum in the first quarter of 2013 as the company leveraged its proven technologies. With the success of our initial horizontal fracturing projects in Mexico the company believes that there will be more work of this nature in 2013 and beyond. However, recent budgetary constraints may curtail some activity in Chicontepec over the short term, which may result in lower equipment utilization throughout its remainder of the year. In response to these new market conditions, the company has recently rationalized an Mexican operating cost structure to manage through this process.

Cementing and coiled tubing activity in Argentina during the first quarter was consistent with Calfrac’s expectations although start-up costs associated with the commencement of fracturing operations result in a lower operating margin for Latin America during the first quarter. With the successful completion of Calfrac’s first fracturing treatment in Argentina on May 4, the company believes that is well positioned to take advantage of opportunities related to development of unconventional resource plays, which is expected to drive higher oilfield activity over the longer term. This represents a major milestone for the company as it builds its presence in this emerging pressure pumping market.

Despite an overall reduction in oilfield activity in Colombia due to the regulatory and infrastructure issues, Calfrac remains committed to this country. A portion of the company’s cementing fleet is currently contracted under a long-term service agreement with the largest oil and gas producers in Colombia. This provides a minimum level of activity to sustain the company’s operations through this period of historically low activity. Calfrac expects these issues in Colombia will be resolved and that it is well positioned to take advantage of future recoveries.

Thank you for joining us today. Now we’re ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of John Daniel of Simmons and Company. Your line is open.

John Daniel - Simmons and Company

Hey guys. Tom, quick question for you on the fifth fleet that will be going out in the Marcellus, is that a fleet that will be – is pricing a competitor or is this going to be growth of additional fleets by the customer?

Tom Medvedic

Good morning, John. Yes, Tom Medvedic here. Yeah in effect it is a newer customer for us in the region and they have a presence there and had a presence there for a number of years. So this is certainly an expansion of our customer base in that region.

John Daniel - Simmons and Company

Okay.

Doug Ramsay

And we are replacing the competitor.

John Daniel - Simmons and Company

You are, okay. And then with the fifth fleet, can you say where the assets will be coming from, are they already…

Fernando Aguilar

Yeah it’s – good morning John, it’s Fernando here.

John Daniel - Simmons and Company

Okay.

Fernando Aguilar

So the assets are basically coming from personalizing assets that we had in our different basins, in different districts. So it is a equipment that is basically new but it is moving from the (supers) equipment for maintenance and rotation that we had in different places. So it is not an expansion, there is going to be requiring and capital to be invested.

John Daniel - Simmons and Company

Okay. And then you guys go and bore with the forcibly go into work (indiscernible) go into work, let’s call it overall U.S. fleet utilization arising, the anticipated margins will grow from here for the whole study and (indiscernible).

Tom Medvedic

John, yeah John Tom Medvedic again. Yeah I think as we stated in the release John obviously and you obviously are well aware of this I mean visibility in the U.S. pumping space right now is somewhat limited, we stated that a couple of times in the release.

John Daniel - Simmons and Company

Right.

Tom Medvedic

Clearly there is some operating leverage that we expect to ultimately get in our business as we see volume of business increase and quite frankly that’s probably more of a Q3, Q4 story than a Q2 story.

John Daniel - Simmons and Company

Sure.

Tom Medvedic

That the challenge you’d have in the midst of that environment is quite frankly pricing continues to be competitive and so.

John Daniel - Simmons and Company

Okay.

Tom Medvedic

And so to what extent that the pricing erosion that we experienced in Q4 and Q1 offset some of the benefits of higher utilization. So I think our prospect at this point is we certainly wouldn’t expect any significant margin improvement in the short term but we’re hopeful that as we head towards the latter part of the year will begin to realize some of those benefits but there are a lot of moving pieces right now.

John Daniel - Simmons and Company

Okay. And speaking about moving pieces contract coverage this quarter for some of your peers has been – create challenges as the contracts get rolled. Can you remind us where we are in terms of your fleets with what this contracted today, what remain and what spot when the contracts roll et cetera and then I will turn it over to others?

Mark Paslawski

Thanks, John, its Mark Paslawski. I believe last quarter Tom spoke to this question and just let everybody know that the majority of our long-term equipments aren’t rolling over until 2014 or beyond and that obviously remains the case still today.

John Daniel - Simmons and Company

Great, thanks for the reminder. Thank you.

Operator

Your next question is from the line of Dana Benner of AltaCorp Capital. Your line is open.

Dana Benner - AltaCorp Capital

Good morning all. I wanted to start with Canada and the variable, the margin variable that you reported and wonder to what extent weighing the various factors you’ve got maybe a little more pressure on pricing, you got a late start in January you mentioned greater distances et cetera and trying to understand permanency of the impact of various things. So for example let’s just say we hit the road in July 1 and it’s otherwise favorable weather wise et cetera. Do we see a pricing that’s stabilized and maybe opportunity for some of the things that impacted you in Q1 did dissipate or help me understand if you were surprised that the level of margins or it was just a factor of the way the quarter went utilization wise just trying to understand that?

Tom Medvedic

Dana, its Tom here. So couple of comments regard to Q1 I mean overall activity obviously sequentially as we stated it was 15% so I think broadly speaking we are quite happy with the volume of activity we experienced in Q1 over a strong Q4 from our perspective from an industry standpoint. So the overall volume of activity I think met our expectations and like Doug mentioned certainly weather was a factor that helped us get there. As far as the cost structure is concerned clearly I think from our perspective as we move more into some of the larger pad development work that becomes a more and more of a focus on logistics and strictly the volumes of product that are being pumped was - quite significantly in Q1. I think from our perspective we continue to rationalize our supply chain and logistics business and we’re hoping to reap for the benefits of that in the future and certainly I think we’ve seen some very good improvements in our U.S. side of things. But I think the focus at this point is further streamlining that and we think there are some opportunities to do that.

Now the background being what do we see kind of post Q2 I think from a pricing perspective our view is pricing was relatively firm through Q1, Q2 was always difficult quarter to kind of get the parameters to where pricing is going. Our sense from Calfrac’s perspective is we expect strong utilization through our fleet through Q3 and Q4. So our view is pricing certainly should begin to stabilize, whether there are opportunities to get further benefits on rationalizing that logistics network, that’s what we are working on Dana. And I think our view on margin expectations on the Canadian side for Q3 and Q4 probably are somewhere consistent with what we saw in Q1 broadly speaking.

Dana Benner - AltaCorp Capital

Right. I guess turning to Q3 and Q4 yours is been a client mix which has been very favorable to potentially picking up additional work from major players that are either in the basin or that have recently moved into the basin. And I wonder if that gives you the sense of optimism for you to say that you expect strong utilization Q3, Q4, so does it relate to say supply toward the West Coast, the LNG project or is it just a broader base of work that gives you that optimism?

Fernando Aguilar

Dana, good morning, it’s Fernando here again. So yeah absolutely yes our positioning in the BC or BC River Basins in the country we’re basically go into all party (extension) for the coming quarters if you were mentioning Q3 and Q4 we expect high utilization coming from being active with our customer base and that has been basically investing heavily in those areas and we expect that to come.

Dana Benner - AltaCorp Capital

Right. But is that I guess what I’m wondering is, is this optimism a natural follow through from say contract wins around certain projects or is it just a broader based optimism coming from again a broader mix of clients?

Fernando Aguilar

No it’s the first part of your question is related to contracts that are being basically extended and awarded in our customer base not only in the LNG areas but also in the other places we operate in town.

Tom Medvedic

Dana, its Tom here and I just quickly add. From our view certainly we worked very diligently in trying to nurture these long-term relationships with certainly companies that we expect will continue to be very active. And as we look forward becoming more active and I think we’ve done a pretty good job on executing on that side of things. So when you look at the place specifics question and this discussion is largely is predicated on the Canadian gas side of things. I think we’ve been very prudent in looking at Montney development and Duvernay development and Deep Basin is a place where you see more companies involved but in the context of the first two particular place I think we’ve been able to nurture some very good relationship with companies that had been active in that area, I think we’ve done some very strong work and have had excellent service quality reputation in that regard. And so we expect to be significantly involved in that development in the future.

Dana Benner - AltaCorp Capital

Right. Just one final question as it relates to Argentina now that you are up and running on the fracing side. Should we expect that the costs that were incurred to get those operations moving start to fade away or will you need meaningfully greater scale before you start to see margins that fracing can normally generate out of the country?

Fernando Aguilar

Yeah I think it is a combination of the two. We continue let’s say enhancing our presence in the country but at the same time is good to see that while the fractioning revenues are happening and one of the reasons why we were basically delayed was due to the fact of delays in the regulatory sources that are important for our vendors and that’s some of the normal logistics when you start an operation. But I believe there is like you mentioned is a combination of the two. We continue investing in the country but we will see those costs offset by our new revenue generated in the country.

Dana Benner - AltaCorp Capital

Okay, well that’s great. Thank you.

Fernando Aguilar

Thank you, Dana.

Tom Medvedic

Thanks, Dana.

Operator

Your next question is from the line of Scott Treadwell of TD Securities. Your line is open.

Scott Treadwell - TD Securities

Thanks. Good morning guys. If I could maybe move to the U.S. for a second, obviously a job very well done in moving the margins up as much as you did sequentially. I’m wondering could you just very broadly breakdown how much of that margin growth was based on cost savings either input costs or you are sort of structural overhead and then how much of that came from sort of utilization?

Tom Medvedic

Hey Scott, it’s Tom here. I can’t necessarily breakdown on a percentage basis I mean the sense that we have and you are well aware of our business having more leverage towards higher fixed cost structure and gaining obviously margin benefits from higher utilization. Certainly we saw some of that in Q1 as reflected in the revenue base but I would say equally important was some of the rationalization that took place in late Q4 and into Q1. So I don’t have a firm breakdown from a margin standpoint, Scott I mean they were both significant probably an equal measure I would say broadly if you can look at things as far as the margin improvement. So again with the fixed cost structure it’s high as this on our business, you certainly do gain the leverage from higher utilization, but also there is no question of the cost structure rationalization to business in that $125 million to $130 million range certainly helped out as well. So not trying to be, not trying to avoid the question but to break that down level of detail would be difficult, I’d say they are probably equally important.

Scott Treadwell - TD Securities

Okay. That’s a great start. To take it maybe to the next level is as you look obviously pricing has come down so Q1, Q2 results in 2012 are probably a bit of a stretch. But you mentioned as well the customers that maybe moved away from Calfrac in Q4 looking for better pricing and had it since come back based on operational results or relationships. Is that a trend that you see continuing in Q2 or is that call it a game of musical chairs or whatever you want has basically played itself out and you kind of got your customers, the guys that are coming back are back?

Tom Medvedic

Well I would say Scott I mean I think you hit the nail run ahead in one respect in the sense through Q4 specifically we saw some customers, some operators go to what we would say be the low bid on some of their tenders and they’ve kind of lived in that environment for few months were not terribly satisfied with the service quality that they were experiencing and took a step back and really revaluated the companies that they wanted to wind themselves up with long-term. So I think through Q1 you saw the benefits of that and I think from our perspective that’s really an ongoing focus of ours right.

We really want or sort of position ourselves as that the value proposition and the context we likely will not be the low bid in the context of a tender process but we think we bring more value than some of our competitors in the context of the level of service we price or charge. So we think that’s an ongoing thing and so we are happy with the improvement that we saw through Q1 as far as operating performance but suffice to say and it’s as I think we reiterated a couple of times, the U.S. continues to be a challenging environment. So to suggest that at this point it’s onward and upward and I think it is probably a little aggressive and we feel like Q4 was probably the trough in the market I think Q1 obviously notion – positive signs but I think at this stage we still are cautious in our outlook and are continuing to try and run that business as efficiently as possible but there are still challenges that exists.

Doug Ramsay

I would add Scott that there is another element that is important you can see it here. And it is that some of the customers changed their job volumes in order for them to reduce their operating cost some of the fracturing activities in some of the areas where we operate have reduced the job sizes and of course that basically brings down – affects the performance of our operations as Tom was mentioning.

Scott Treadwell - TD Securities

Okay, that’s a great statement. And maybe just to build on that it was obviously mentioned earlier a number of smaller U.S. guys had some pretty weak price in Q1 and their recurring them was contract roll-off and it may not have been spoken to but obviously a loss of some share as those that work went to the spot market. Is there any concern or I guess more directly have you seen any evidence that some of these smaller guys are a little bit desperate and that there maybe some instability in pricing ahead or is there something that gives you some sense that they are going to make due with what they’ve got and taking pricing down 10% or 15% isn’t necessarily something they are thinking about?

Doug Ramsay

That is correct. What you are saying is exactly what is happening. There are some companies are basically going to desperate bidding and some customer are basically taking then to operate but in the course of the quarter their performance goes very well because they don’t have the funds and ask through to keep it, it’s safe and the quality operation running. So that basically prevents them to remain with those contracts and those customers. And what happens after that is that customers basically end-up paying more because of the time that they are wasting and losing and working for these companies to perform and then they go back again and call the companies that they provide the service and quality that they expect. So it’s just a matter of time to stabilize that level of understanding that is not only a matter of the big pricing that we should make that is the total cost of operating that basically gives you the companies that are efficient and productive to work for them.

Tom Medvedic

And then I just add one final point here Scott. Certainly a focal point for our company since reflection but certainly on the last 12 to 18 months as we’ve seen product volumes continuing to increase just a whole supply chain and logistic aspect of our business certainly has matured quite significantly here over the last couple of years and I think from a cost perspective we would argue that our cost structure would probably much more efficient in some of those areas which is a critical part of execution. And so they can extend that they can become more price aggressive I think somewhat diminished or limited by their own cost structure which we believe we have an advantage on that so from a margin standpoint we do think we’re more competitive in that context.

Scott Treadwell - TD Newcrest

Okay, no that’s good. And my last question is on Canada obviously a good long relationship for you guys in Groundbirch and the Montney. And I'm just wondering have you gone the sense that, that capital at Groundbirch is moving in large part to the Duvernay or is any acceleration that happened in the Duvernay likely to be additive to what’s happened in the past at Groundbirch?

Doug Ramsay

Well Scott I think our perspective is that clearly those are two areas that has been a focus area of development for a number of companies, I think our sense of things Duvernay activity we think broadly speaking is poised increased to years to come. We think that from Montney perspective I think that the view from our standpoint is it is also over longer term poised increase. I think in the short-term what we’ve probably seen is some reallocation of focus towards Duvernay development just to kind of get a greater sense as to what that resource base actually represents. So I would refer to that areas being much more delineation focus at this point in the Duvernay whereas in the Montney we’re probably lot further ahead so guys are looking at the gas equation from commodity standpoint and I’d say look at their future plans probably somewhat predicated on the price of natural gas and their view on the sustainability of it moving forward. So our sense is certainly Groundbirch and Montney is further ahead of the development scale I don’t think anyone would argue with that. At which point do we see full development I think is going to be an operator by operator question but our view broadly speaking is Duvernay will continue to attract more capital as the companies that are active and they would try and get a greater sense as to what that resource base truly represents moving forward.

Scott Treadwell - TD Newcrest

Okay. So more of a positive focus on the Duvernay rather than a preference to allocate capital there in the long-term?

Doug Ramsay

Well I think again I think – I think that the operators in the Montney will have a pretty good idea of what they got and so I think any future bump in activity there will be predicated on a couple of things LNG to the extent they're involved in a formal LNG strategy, I think we’ll precipitate activity there and then the other part will really good predicated on where gas goes and to the extent that they perceived some stability and strength in that gas in that 450 range I think we’ll precipitate more activity in that as well so I think the two place really are as different stage maturity although each company really has a different – there are different level in the maturity based on last three to five years and how active they’ve been.

Scott Treadwell - TD Newcrest

Okay, great guys. As always appreciate the color. I’ll turn it back to the queue.

Doug Ramsay

Thank you.

Operator

Your next question is from the line of John Tasdemir from Canaccord. Your line is open.

John Tasdemir - Canaccord

Hey guys, nice quarter. Tom (indiscernible) just talk about it maybe you can (indiscernible) our session down from here little bit. When you talk about the natural gas markets in Canada and what you guys are seeing some optimism, if you separate it between let’s say an LNG market and more domestic gas market like you said driven off 4 to 450 natural gas prices. Are you seeing actual work or opportunities develop in the say gas market is targeted toward just the more domestic market.

Tom Medvedic

Yes.

John Tasdemir - Canaccord

Or is that something that just has the potential to come.

Tom Medvedic

I would say not yet I think our commentary John out of the release I think broadly U.S. versus Canada I don’t think we’ve seen a real response from the operators in relation to domestic gas production and the impact of that, I think our view is to the extent we see some stability and sustainability to the commodity I think that we’ll probably see that. Potentially a lot for this year but probably more focus on 2014 development from a domestic gas production perspective, I think the other side of the equation clearly is what do we seeing from an LNG standpoint I mean clearly we’re still a number of years away from gas export capability but certainly there are some operators out there that are beginning to develop their and execute their LNG strategy and we hope to be and expect to be part of that relatively quickly.

John Tasdemir - Canaccord

Okay, that makes sense. I guess kind of just a bigger picture, let’s just say it certainly sounds like Canadian market is – the pressure pumping market is much tighter than the U.S. market and had become into balance. Let’s just say that for whatever reason, the Canadian market starts to get tight and utilization picks up. Will you see pricing improvements in Canada or will you see some equipment from the U.S. migrate in to Canada, will you move equipment in to Canada to facilitate that tightness in the market or bit above to, how does that play out?

Fernando Aguilar

Yeah, John I think we normally think and plan our activities based on the best opportunities for our investment to provide return to our stockholders. So the answer is yes, we believe that these are situation that continues in let’s say or the situation becomes tight, of course, we are going to evaluate for the best opportunities for the company will be and we will deploy assets accordingly. The same reason applies not only to Canada but the other countries where we operate basically we are today fracturing in five countries out of the six where we are present, and that's the main driver for business. So if the business as you mentioned grows our way the pricing would improve of course and the pricing of the equipment will happen there but you have to remember that one of the elements that the company has been very successful with and strategy works very well. We use our personal planning so we need – we have a plan in the company and we have a rolling forecast that helps us building our presence in different basins and bringing the person on board that is required for those operations.

John Tasdemir - Canaccord

Okay. Alright, it sounds like little bit of both some improvement in some – you’ll put your assets in a best returning areas.

Doug Ramsay

Our capital program we've had over a number of years John allows us to if required involves us to ramp-up very quickly and equipment builds if we need to, right. So we’re not afraid to add capital if required but we have a very large presently today over a million horsepower in the fraction side of things will allows us this flexibility. And efficiency we’ve been able to build in to our business through some very unique strategies with our equipment as well as get lot more hours out of our pumps lot more hours of engines and transmissions. So we have very, very little of our equipment that would be down at any given time. So that's really been our strategy. And with our global operations group we can ramp-up very quickly if we see that but based on inventory we have today we’re not going to change our capital and based on our I guess our cautious optimism for the future is all part of our plan and we’re not afraid we design equipment and we’ve talked about this before. You can cross the borders cross the ocean very easily and it’s very compatible to any of the other equipment we have in our operating groups.

So the little extra we spend and how we focus on that both from operation and safety engineered style equipment, we can go anywhere and move very quickly. And the NAFTA allows us to move certainly between Canada, U.S. and Mexico very easily right so.

John Tasdemir - Canaccord

So, Doug would you say not to beat this up more but would you say that let’s just say Canada those get tighter and starts to get really tight, would you see redeployment at some of U.S. equipment or wherever before you would necessarily start building your equipment or not necessarily.

Doug Ramsay

Sure, you bet. Now that’s – we would do that in a heartbeat, in fact if it does get tighter what happens normally is that our customers will be more focused on 24 operations and as that ramps up we can short of value in our style of business as compared to some of our competitors how we can ramp that up very quickly. Going back to Fernando’s strategy of our personnel base, we have the capability of bringing people on relatively quickly with how we run our business and how we treat our employees through these cycles too.

John Tasdemir - Canaccord

Okay. It sounds good. And then just sorry, one just quick question for you Tom the margin you put up in the first quarter in the U.S. a 14% is that a good kind of base margin to think about if I want to model margin progression or margin deterioration based on pricing I mean is that a good baseline starting?

Tom Medvedic

We knew you would ask that. John, the only thing I‘ll say is clearly visibility is poor and so our perspective is that - that is a moving target. We are hopeful that there are challenges in the context of pricing so it’s tougher for us to really ascertain that and provide. I mean, clearly, we don’t provide guidance but there is just so many moving parts at this point, we would tend to take a cautious approach to margin expectations moving forward.

John Tasdemir - Canaccord

Understood. Okay, thanks guys.

Operator

Your next question is from the line of Kevin Lo of FirstEnergy. Your line is open.

Kevin Lo - FirstEnergy

Hi, guys. Can you kind of talk about Canada and whether do you saw any market share changes like you had outstanding results in Canada. You outgrew revenue when everybody else is I suspect its going to be lower. So, like I’m trying to gauge how much of that is your clients getting bigger or and just being more active in the quarter and how much of it is you guys taking market share from other guys?

Tom Medvedic

Well I guess in the context Kevin, its Tom Medvedic here is I think if you take a look at our Canadian performance over the last three quarters quite frankly and Q4 and Q1 probably being most important. And I’m going back to my earlier comments, I mean, clearly we spend a lot of time and effort in nurturing the customer base that we have broadly speaking but certainly included and that will be Western Canada. And I think honestly, I think our view is some of the companies that we’ve aligned ourselves up with have shown good growth profiles and long-term growth strategy. And so, as we sort of assess the changing dynamics of Western Canada from an E&P standpoint, we think, we’ve got a pretty solid slate of customers. So, I do think it’s somewhat customer related Kevin but I think it will be too flipping just to say, you are working for the right guys. I think in the context is we’ve been very diligent deciding the companies that we want to align ourselves with.

And so the question becomes one of the same. I think clearly from the E&P capital spend with the guys that we have aligned ourselves up with have all become a proportionately larger percentage of the Canadian E&P spend and so we’ve been the beneficiaries of that. I think, you saw that in Q4 and I think in some respects you maybe see that in Q1 as well. So, I don’t know if that answers your question directly enough. But from our perspective, certainly we feel like we spend lot of time and effort and its part of our strategy as well. I mean, we’re very much focused on nurturing long-term relationships in each of the geographic segments that we operate with. Some of the customers in question that have become more and more active are customers that we’ve had for 5 and 10 years if not longer. And so, I think you are starting to see the fruits of that and we think quite frankly builds there or provides the foundation for what we think is significant future growth here over the next one to thee to five years.

Kevin Lo - FirstEnergy

No that’s actually a great answer. And can you talk about North Dakota and the environment there in terms of demand and pricing?

Tom Medvedic

Yeah North Dakota I think broadly speaking quite honestly Kevin is has become as challenging as some of our other basins in the U.S. I think. Broadly speaking the oversupply issue that started to manifest itself a year, year and a half ago quite honestly has spread through all most if not all basins and North Dakota will be included in that.

So, I think from our perspective, we are happy with our presence there in the context of our operating base or our crews, the amount of equipment we have there. I think clearly, we would like to have a larger operation there in the context of overall utilization but we are continuing to look at that.

And we do think the Bakken broadly speaking is going to be one of the basins over the next several years that will continue to be one of the largest producing areas in the U.S. as far as oil production is concerned. So, I think the opportunity is there and I think we’re well positioned there. I think from our standpoint it’s been almost three years since we have been there. I think we’ve established a pretty good reputation for service quality and as a Canadian company by background I think we’ve got the skill-set to work in what can be a harsh environment and I think the customer base there appreciate that. But we certainly see growth opportunities there but at this stage it is competitive like most other basins there and so we’re trying to work through that as best we can.

Kevin Lo - FirstEnergy

Okay. Last question with respect to the CFO role, Tom are you getting a big raise because now you are taking on that - those responsibilities as well and how is that search going for a new position, a new person?

Doug Ramsay

Kevin, this is Doug, I’ll answer that.

Tom Medvedic

No, okay.

Doug Ramsay

Tom is going to fit in that role just fine and we appreciate for his efforts here and extend on his date till the date of June that’s been very helpful in getting through these challenging times we’ve had in our business and we’re very comfortable with Tom stepping of that new position and we all go offline and maybe we’ll discuss his raise in over lunch, how is that Kevin..

Kevin Lo - FirstEnergy

That’s great, he maybe (indiscernible).

Doug Ramsay

You are buoyant. Thank you for that.

Kevin Lo - FirstEnergy

Alright, thanks guys.

Doug Ramsay

Thanks, Kevin.

Operator

Your next question is from the line of (indiscernible) Bank. Your line is open.

Unidentified Analyst

Yeah, just a quick one from me. You spend a big chunk of your capital program in Q1 but there is I think still some carry-over left. Are we going to see excess horsepower grow in Canada or the U.S. by the end of the year?

Doug Ramsay

Our expectation (Sean) is that we will complete our 2012 capital program which will bring a little bit more horsepower to the table here in the next quarter or two, but it’s nothing material in nature. So the vast majority of the horsepower ads have taken place by the end of Q1. So the capital that is really yet to be spent for the remainder of this year will be largely focused on logistics equipment, some facility work and expanding our Latin America decision or footprint there. So in gross horsepower terms it’s not going to be a whole lot of more horsepower.

Unidentified Analyst

Great. That’s perfect. Thanks.

Operator

There are no further questions. I will turn the call back over to the presenters.

Doug Ramsay - Chief Executive Officer

Well thanks a lot Mike, I appreciate everybody tuned in today and great questions and again thank you for taking the time, I know there is lots going on this next few days and certainly the follow-up Laura, Tom and I will be around for any follow-up. So we will turn it over back to you and thanks again.

Operator

This concludes today’s conference call. You may now disconnect.

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