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Executives

Doug Ramsay - Chief Executive Officer

Tom Medvedic - Senior Vice President, Corporate Development, Interim Chief Finance Officer

Fernando Aguilar - President and Chief Operating Officer

Analysts

Dan Macdonald - RBC Capital Markets

Scott Treadwell - TD Securities

Byron Pope - Tudor, Pickering, Holt

John Daniel - Simmons & Company

Dana Benner - AltaCorp Capital

Kevin Lo - FirstEnergy

Jon Morrison - CIBC

Lara King - Stifel Nicolaus

Todd Garman - Cormark Securities

Jeff Fetterly - Peters & Company

Calfrac Well Services Ltd. (OTCPK:CFWFF) Q2 2013 Earnings Conference Call July 31, 2013 12:00 PM ET

Operator

Good morning. My name is Tracey and I will be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Limited Second 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) Thank you.

Mr. Doug Ramsay, Chief Executive Officer, you may begin your conference.

Doug Ramsay - Chief Executive Officer

Well thank you, Tracey. Good morning. And welcome to our discussion of Calfrac Well Services second quarter results. Before we get started I would like to outline how this conference call will be conducted. Tom Medvedic our Senior Vice President, Corporate Development and our Interim Chief Finance 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 Fernando Aguilar, Tom Medvedic, Mark Paslawski and I’ll be available to answer question that you may have.

I will now turn the call over to Tom.

Tom Medvedic - Senior Vice President, Corporate Development, Interim Chief Finance Officer

Thank you, Doug. And thank you everyone for joining us for today’s call. Before I begin my discussion this morning I would like to note that this conference call will contain certain statements and expressions that are considered to be forward-looking statements under applicable securities legislation.

Our assessment of 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 levels, 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, outcome of legal proceedings, currency exchange rates and labor shortages. These conditions could cause the company’s actual results to differ materially from our current expectations.

During the second quarter of 2013 Calfrac achieved the following financial results in comparison to the second quarter of 2012. Consolidated revenue was $288.7 million a decrease of 14% from the second quarter of 2012, the decrease was driven primarily by lower pricing in Canada and the United States combined with lower activity in Canada due to unseasonably wet weather in western Canada. The decrease was offset partially by higher fracturing activity in the Marcellus and Fayetteville natural gas shale plays, increased multi-stage fracturing activity in Russia and the commencement of fracturing operations in Argentina.

Operating income which is income generated after operating expenses and selling, general and administrative expenses was $16.3 million for the second quarter which decreased from $29.8 million in 2012. This decline in operating income was mainly as a result of competitive pricing pressures in Canada and the United States and lower activity in western Canada due to adverse weather conditions.

Net loss attributable to shareholders of Calfrac was $14.6 million or $0.32 per share diluted versus $11.9 million or $0.27 per share in the second quarter of 2012. In Canada, total revenue decreased to $80.7 million in the second quarter of 2013 from $104.7 million in the same period of 2012. The 23% decrease in revenue was primarily due to the lack of fracturing and coiled tubing projects in the Horn River play combined with more competitive pricing environment. Offset partially by the completion of larger fracturing jobs.

During the second quarter of 2012 a significant Horn River project was completed, the Company had no activity in that region during the second quarter of 2013. In addition extremely wet weather in June in western Canada specifically in Southern and Central

Alberta delayed planned completion projects until the third quarter contributing to the decrease in fracturing activity.

Canada’s operating income for the second quarter of 2013 was $2 million or 3% of revenue in the same period of 2012 operating income was $5.8 million or 6% of revenue. The decrease was due to a more competitive pricing environment combined with lower overall equipment utilization.

For the United States total revenue was $146.3 million, a decrease of 16% over the same quarter last year. The decrease was primarily due to competitive pricing pressures in the United States’ market offset partially by higher fracturing and cementing activity. Fracture activity in the Marcellus and Fayetteville shale plays was significantly higher in the second quarter of 2013 than in the same period of 2012. This increase was offset partially by lower activity in the Bakken oil shale play of North Dakota due to a longer than expected spring break-up period and unseasonably wet weather similar to that in western Canada.

Operating income in the United States was $25.2 million for the second quarter of 2013, a decrease of $7.7 million from the comparative period in 2012. The decrease in operating income was primarily due to the lower revenue base and more competitive pricing environment in 2012 -- than in 2012. The decrease in operating income was limited by reductions in labor and maintenance expenses resulted from costs saving initiatives implemented by the company in late 2012 and early 2013, combined with supply chain and logistical improvements and declines in the cost of certain materials such as guar.

Calfrac’s revenue from its Russian operations during the second quarter of 2013 increased by 28% to $37.3 million from $29.2 million in the corresponding quarter of 2012. The increase in revenue was mainly due to an increased demand for horizontal multi-stage fracturing operations in Western Siberia. During the second quarter, approximately 30% of Calfrac’s total Russian fracturing activity was related to multi-stage well completions compared to no activity in the comparable period of 2012.

The increase in revenue was partially offset by lower coiled tubing activity resulting from the increased use of multi-stage fracturing completions. Russia’s operating income was $3.4 million in the second quarter of 2013 compared to $1.8 million in the corresponding period of 2012. The increase in operating income was primarily due to operational efficiencies resulting from fire -- from higher fracturing equipment utilization and higher overall revenue base.

Latin America which consists of Mexico, Argentina and Colombia generated revenue of $24.4 million in the second quarter of 2013, compared to $26.7 million in the same quarter of 2012. The decrease in revenue was primarily due to lower fracturing activity in Mexico resulting from customer budget reductions in the northern region which was partially offset by the commencement of fracturing operations in Argentina combined with higher cementing and coiled tubing activity in the completion of larger cementing jobs in that country.

Latin American incurred an operating loss of $1 million in the second quarter of 2013, compared to operating income of $1.2 million in the same period of 2012. The decrease was mainly related to lower equipment utilization in Mexico and start-up expenses relating to the company’s commencement of fracturing operations in Argentina. Corporately, the effective tax rate for the second quarter of 2013 and 2012 was 21% and 4% respectively. The decrease in total income tax expense was primarily due to lower profitability in the United States. The higher effective income tax recovery rate for the second quarter of 2013 was primarily due to a larger tax losses in Canada combined with the lower percentage of taxable income in the United States which has higher average statutory tax rates.

Turning to the balance sheet, the company exited the quarter at strong financial condition with working capital of $320 million which included $30.9 million in cash and long-term debt of $493.1 million. The majority of which is not due until 2020. As of June 30, 2013 the company had drawn $26.3 million in operating facility and utilized $17.9 million of that facility for letters of credit leaving $255.8 million in available credit. We continue to monitor our balance sheet and cash position very closely as well as the credit profile of all of our customers. We are focused on maintaining a strong balance sheet which provides the financial flexibility to pursue further growth opportunities and maximize shareholder value.

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

Doug Ramsay - Chief Executive Officer

Well thank you Tom. 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. During the second quarter of 2013, fracturing and coiled tubing activity in western Canada was significantly affected by unseasonably wet weather. These conditions severely hampered Calfrac’s ability execute all its planned projects for the second quarter and as a result this work was deferred until the third quarter.

Despite this, the Company was very active in the Montney unconventional resource play and completed several large multi-well projects in this region. Outlook for fracturing and coiled tubing activity in western Canada remains very strong. Calfrac expects oil-focused activity will remains stable for the remainder of the year with the introduction of higher-rate treatments in certain plays such as Cardium driving higher equipment utilization.

The Company has a strong and active customer base as well as a number of long-term relationships with large customers in the Montney, Deep Basin and Duvernay plays. Positive initial production results particularly with regard to natural gas liquids provide significant optimism about the future development of the Duvernay play. The Duvernay resource play represents one of the most capital intensive plays in western Canada and has the potential to materially increase the demand for completion services in western Canada over the longer term.

Looking beyond the Duvernay play a broader driver of long-term growth for Calfrac is the emergence of LNG export projects, a number of which have been proposed and some of which have to date received key regulatory approvals. In relation to this Calfrac is pleased to announce that it has entered into a multi-year minimum commitment contract for the provision of three fracturing spreads to Progress Energy for its Montney project in northeast British Columbia and also executed a right of first call agreement for an additional spread in respect of the non-Montney work.

These agreements represent another major milestone of the long-term relationship between Progress and Calfrac and the Company looks forward to working closely with the Progress team to assist it in the development of its world class assets in the Montney play. In anticipation of securing these contract and to service the growth anticipated in the Canadian marketplace Calfrac has increased its Canadian horsepower by approximately 34% for the past 12-month period and has been actively securing the additional employee base required to meet anticipate work commitments under the agreements while continue to meet the increasing demand for its services with other customers.

As a result Calfrac expects to be able to meet the increased demand for its service with existing equipment fleet but will continue to closely monitor market conditions and is well positions with its critical suppliers to efficiently increase it’s previously announced capital budget as may be required in the context of the revolving Canadian market.

Calfrac’s United State operations sustained a positive momentum generated in the first quarter of 2013 as revenue and operating income both increased on a quarter-over-quarter basis.

These improvements were primarily driven by increased equipment utilization in the Marcellus natural gas play and the impact the cost-saving initiatives implemented in late 2012 and early 2013. The benefits of the increased activity in this region was offset only partially by lower than expected fracturing activity in the Bakken oil shale play in North Dakota resulting from a longer than anticipated spring break-up period.

Looking to the future Calfrac remains well-positioned in the U.S. pressure pumping business. The Company services two of the most active unconventional resource play in the United States. The Bakken oil shale play in North Dakota and the Marcellus shale natural gas play in Pennsylvania and Western Virginia.

Calfrac believes that the Marcellus shale play will continue to be a primary region for natural gas development due to its low cost structure and proximity to markets. Calfrac continues to be focused on prudently managing its cost structure and expanding its customer relationships in order to maximize profitability. Despite our constructed long-term view on the U.S market there continues to be a near-term uncertainty as a market remains oversupplied. While the Company does not expect market condition to change significantly in the third quarter activity may decline in the fourth quarter as producers evaluate their capital budgets.

That said Calfrac believe that the recent strength in commodity prices may lead to increased activity in the regions where it operates into 2014. Activity in Calfrac’s Russian operations during the second quarter of 2013 met expectations as the onset of spring weather provided the environment for increased equipment utilization and lower operating costs. The improvement in equipment utilization was driven by an increase in the number of horizontal multi-stage completions in Western Siberia. Future growth and improved profitability in this division will be based on the expanded use of new technologies such as horizontal drilling and multi-stage completions.

Over the last few quarters, the number of multi-stage fracturing jobs completed in Russia has increased significantly consequently Calfrac expects that this trend will continue to drive demands for its service over the short and long-term as Russia is producing sector gains confidence in this completion strategy. Budget reductions implemented by Calfrac’s main customer in Mexico during the second quarter of 2013 significantly decreased activity in that country from the first quarter. Company responded by rationalizing its operating cost structure while maintaining a strong market share in northern Mexico. The budget constraints introduced by Calfrac’s customer in Mexico during the second quarter are expected to curtail the company’s equipment utilizations in the third quarter. Despite these long-term challenges the company does expect the use of multi-stage fracturing technology with horizontal wellbores in Mexico to become more prominent over the longer-term as capital budgets are replenished.

The company continues to monitor the business environment closely and we’ll take further actions as wanted. Calfrac’s commencement of fracturing operations in Argentina during May 2013 was a major milestone. The start-up phase has gone exceptionally well and mitigated the impact of the slowdown in Mexico. While most of the initial projects were focused on completions within conventional reservoirs, the company expects commencement – commencement fracturing operations in the unconventional plays in the near future. Calfrac believes that the move to unconventional plays could provide base, the basis for significant growth over the longer-term.

In Colombia, challenging market conditions persisted in the second quarter of 2013 resulting than expected equipment utilization and financial performance. Permitting and infrastructure issues remain barriers to greater oilfield activity. The company expects that these issues will be resolved in the future but continues to closely manage its operating costs while focusing on expanding its customer base.

In closing, I would like to thank Calfrac's employees for their efforts to assist communities that were hit by the flooding in southern Alberta at the end of June. Through your hard work and commitment the Company was able to navigate the evacuation of its corporate head office without detrimental effect on its operations. I’d also like to thank-you for the outstanding job you did illustrating firsthand the volunteerism that sets this region and this company apart through your assistance with preventative sand bagging in Red Deer and Medicine Hat prior to the flooding, and through the operation of pump trucks and the formation of volunteer work crews to assist affected homeowners in Calgary, Medicine Hat and High River in the days following the flooding. The Company recognizes that the rebuild from this disaster will take a great deal of time, and Calfrac hopes that your efforts and the efforts of the thousands of other volunteers will have in a small way assisted in that process.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Dan Macdonald with RBC Capital Markets. Your line is now open.

Dan Macdonald - RBC Capital Markets

Hi good morning guys.

Tom Medvedic

Good morning Dan.

Dan Macdonald - RBC Capital Markets

I was just wondering if you look at the contracts that you signed with Progress here for northeast BC, can you give us a sense what portion of those may be operating on 24-hour operations initially or what might be targeted there?

Fernando Aguilar

So, good morning Dan it’s Fernando Aguilar. So, really the ramp-up is taking place as we speak and currently its one 24-hours and two 12-hour course.

Dan Macdonald - RBC Capital Markets

Okay. Thanks. And then just switching over to Russia and I know it’s just recently passed but do you, have your clients over there given you any sort of sense for what the reduction in tax on tight oil production might mean for some of their plans as you look to next year?

Tom Medvedic

Hey Dan, Tom Medvedic here. We haven’t received the whole lot of feedback at this point in time I think, I think as far a structural changes in that market is concerned I think from our perspective the base of the communication really has been focused on the operational side and in that context talking to seen some major changes in well design with more towards the horizontal so. As far as the financial impact of the change in tax regime there we haven’t really heard I think as we sort of proceed through this year and get into the 2014 Tender Process and as those budgets kind of get formalized to what presumably the implications of the tax regime implement we’ll have a better sense for things as the year unfolds.

Dan Macdonald - RBC Capital Markets

I guess on a high level does it give you some optimism that may be Russia can surpass what your current expectations are?

Tom Medvedic

Well Dan I think directionally I think certainly we’re seeing some progress here from Q1 to Q2 in the context of equipment utilization and financial returns there so. Yeah I mean structurally I think we do expect things to move forward at this point I’d say it’s probably more operation/utilization focused at this point in time but certainly to the extent we can get sort of the dual leverage of a more constructive financial – regime plus higher proportional work being focused on horizontal work clearly the supply-demand equation in Russia is set to improve these last our view as today.

Dan Macdonald - RBC Capital Markets

Okay. That’s all I have. Thanks.

Tom Medvedic

Thanks Dan.

Operator

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

Scott Treadwell - TD Securities

Thanks, good morning guys, wanted to touch base on Canada, looked at the result and the number of coiled tubing jobs year-over-year is now nearly 70%, is all that seasonal or was there some crews that got and moved around to pick up some frac work, was there a customer specific dynamic happening there, because that seems a lot more than just a sort of wet spring impacting the number?

Fernando Aguilar

Yeah Scott is Fernando here. So that’s a very interesting question, because what – is the combination of all the points that you mentioned. And at the same time the company is taking the opportunity of standardizing our equipment due to this several acquisition that we had, so we were in the process in the quarter to bring the equipment back to the same standards, same quality level but we were affected by dealer aspects of that were mentioned in your question. So it is a combination of all of them.

Scott Treadwell - TD Securities

Okay, so going forward you would expect either by market share or year-over-year to just sort of be following the market, so if the market is down 10% you guys would be down 10% there is no step change going forward here?

Tom Medvedic

Yeah. That’s correct.

Fernando Aguilar

That’s correct.

Scott Treadwell - TD Securities

Perfect. So turning to newbuild in Canada, obviously there is a – you spreads in for progress at some point does the conversations going to have to come up about when you build new, is your view at this point that it’s likely to be a speculative announcement that you’re going to have to do it before contract is signed, or has the discussions shifted a little bit to where you may be having some inquiries and you think that a new build in Canada whenever it happens is likely to be back by a contract?

Doug Ramsay

Well that’s a – a it’s a definitely the asset I guess but anyway Scott this is Doug here. So, we had a ongoing capital program with our major suppliers and how we’ve done this in the past that we, we’ve been able to move the needle I guess when it comes to fracturing activity we’re really moving into 24-hour operations. And to move to 24-hour operations we need 20% more capacity than we were on a 12-hour style operations. And of course there is the logistics of sand another suppliers where we have well in hand. So we’ll see more activity in our Canadian business moving to 24-hours rather than adding more horsepower capacity crew-for-crew in the next while.

But we have the relationships and we have the equipment availability to, service we have to wrap up with Progress Energy Canada Ltd, and maintain and build our customer base in Canada through this whole period of time, but we can build all crews to our spec in six to eight months and certainly we have the capability of this cross-border opportunity with Canada and the U.S. and we’ve proven that during spring we’ve proven that over the last three or four years that we can move the equipment and people quite effectively over that period of time right.

So, we have a couple of budget this year, we all continued to monitor that very closely, you can tell by Tom’s discussion on our balance sheet we have the financial leverage to after that as required, but we feel pretty confident that what the program we have in place and the continued field with our main suppliers and the movement to 24-hour operations from 12, we lost the fracturings on our Canadian market, we’re in the U.S. where probably around 60% to 70% already having a little bit higher type of hours that we’re in good shape to service the new contract and to continue to expand our business in Canada.

Tom Medvedic

Hey Scott, Tom Medvedic here. The only thing I would add to Doug’s comment is clearly I think history for us has demonstrated that’s contract is one thing, but certainly trying to get the greatest amount of information intelligence from our customer basis to what their future plans are is a huge driver for how we manage our capital. So, being very discipline in that regard but looking for some insight as to what their plans are as we move forward and clearly as we move into our business planning cycle in early fall and as our customers do the same thing we’ll get some additional information or insight from them as to what is their 2014 plans and beyond sort of encapsulate. So, really has taken a stage approach to this and really making these – decisions based – the best information we can get.

Scott Treadwell - TD Securities

Okay, great. I guess staying with Canada, if I remove the change in activity that the Progress work is obviously going to deliver. When you look at Q3 and Q4 I know you had some other customers that had some good contracts and pad works that they keep it busy basically right through the second half, are you expecting the same sort of workload plus or minus or may be some growth from sort of everybody else x Progress for the second half?

Tom Medvedic

You know Scott, I mean I think our view is this from utilization perspective I think we’ve got pretty good visibility here through the remainder of this year and into Q1 so we do expect utilization to be quite high. I would say just broadly speaking, we probably had the first two weeks of July as we still dealt with the ramifications of wet spring weather is little bit slower, but certainly things have picked up quite significantly here in the last couple of weeks. So as we look forward, we would expect in addition to the Progress work pretty good slate of opportunities here as Q3 and Q4 unfold.

Scott Treadwell - TD Securities

Okay and my last one is on the Bakken, there is obviously a number of guidance including yourself talked about weather issues there. has there been any sort of catch-up here through Q3 or are you still, that you just sort of pushed the schedules to the right and no one is really accelerating activity, because that seems to have been the theme certainly in the States through the first half of the year I'm just wondering if that changed at all?

Fernando Aguilar

No it hasn’t, Scott I think well we see basically a steady activity continued – continuing at a level that we are looking at. So, I don’t – we don’t see or we didn’t have a big change in the direction.

Scott Treadwell - TD Securities

Okay, perfect. That’s all I’ve got guys. Thanks again for the color.

Fernando Aguilar

Thank you.

Operator

Your next question is from Byron Pope with Tudor, Pickering, Holt. Your line is now open.

Byron Pope - Tudor, Pickering, Holt

Good morning guys.

Tom Medvedic

Hi, Byron.

Byron Pope - Tudor, Pickering, Holt

Just with regard to the contract with Progress. Is it fair to think about as that project gets fully ramped up just giving you, you’re going to be kind of sitting there presumably on multi-well pads that once that project gets fully ramped up it should be at least a mutual if not imperative to their role of Canadian margins?

Fernando Aguilar

Well I think what is happening Byron is that they Q2 as you know was slowest – slower start they were basically getting ready for that Q2 ramp-up and the same thing happened to us. We will continue evaluating the way that these contracts is going to continue growing between the two parties but the challenges that both parties will face is basically getting around the logistics in the area and development of other plans according to the way that they are setting them up. So, we, the growth is going to continue happening as they continuing drilling wells and getting ready for the bigger activity.

Tom Medvedic

I think what I might add Byron is certainly as we take a look at the long-term prospect of this particular project obviously this is not just a matter of years but obviously the time horizon that goes well beyond that. But I think yeah I think our view is this as I think as probably two distinct phases associated with the future I think obviously getting to sort of final go ahead and full scale operations and certainly there is very lesser plant for the next year and a half to get to that decision point and then beyond that I think certainly we expected to go into full development well which again probably encapsulates a difference environment as far as the incorporation of multi-well pads and 24-hour operations.

So as I think certainly the scale and scope of the project will increase through the pass-through time and could be a significant driver certainly over the next three to five years or so. I think that’s a good base level of activity certainly from our equipment utilization perspective with further upside here as the years pass.

Byron Pope - Tudor, Pickering, Holt

Okay. That’s helpful. And then with regard to the U.S. operations, given the improvements you’ve made to your cost structure and it seems that your equipment utilization for your frac spreads in the U.S. seem to be holding a bit at it’s fairly healthy levels and moving and I guess an additional spread into the Marcellus toward year end. Is there any reason to think that the operating margins for the U.S. segment can’t maintain and sort of call it somewhere in the mid-teens range as we step through the back half of the year?

Tom Medvedic

I think that’s reasonable Byron. I think our perspective is this at this point obviously we’ve been satisfied with utilization levels over the last couple of quarters clearly as I think Doug alluded to pricing remains the primary challenge in the U.S. market right now and clearly that goes in outs and flows so I mean that’s one challenge that we would caution as we look forward. But clearly I think we’ve through a contract position in the U.S. and through how we managed our business we’ve been able to mitigate some of the implications of that.

Now I think clearly our Q3 visibility as we stated in our press release looks reasonably constructive I think as we get into Q4 Byron and I think this point on a surprise for you I think there is still obviously some lack of visibility that resonates in the U.S. market right now. We saw some issues in Q4 of last year but at this point it’s a little too early to tell specifically whether we will see that same weakness and pullback in CapEx spending in Q4. But we are managing that situation as proactively as we possibly can understanding that that risk exists and there are certain contingency plans that are already being formulated to manage that situation here if that plays out but at this point I think our short-term view is that U.S. operations has done a great job in executing on our business gone down there and we expect Q3 to be fairly representative of what we’ve seen here recently and then we just have to evaluate as we get more clarity on what Q4 is going to look like.

Byron Pope - Tudor, Pcikering, Holt

Okay. Fair enough. Thanks guys I appreciate it.

Tom Medvedic

Thank Byron.

Operator

Your next question is from John Daniel with Simmons & Company. Your line is now open.

John Daniel - Simmons & Company

Hey guys. Tom, I want to come back to Byron’s question on the margins of the Progress contract. I understand you don’t want to give specifics for competitive reasons, but the way you answered the question it sounds like this is more of a revenue-driven initiative initially as oppose to margin enhancement initiative, I just want to see if I'm interpreting your comments correctly?

Tom Medvedic

I'm not sure John I would concur with that assessment I mean I think from our perspective as we’ve looked at that relationships and, relationship and how it is evolving with this scope and scale of that particular relationship. I mean I think obviously it’s been one that has been forged over the last 10 years and we continue I think obviously to maintain that close relationship I mean I think from our perspective obviously we expect to do well through the relationship moving forward I think it’s going to be a relationship that is beneficial to both parties. So we’re not going to get into any specific margin expectations per say I mean clearly we expect to, it has met our internal financial metrics as far as what we expected as far as returns on capital employed and in that context we think it will be the backbone of our Canadian story as we move forward. So I'm not sure, I clearly understand the question John but….

John Daniel - Simmons & Company

Well I think the question was, is and I guess my queue is will this work be added up to the overall Canada segment margins right and that…

Tom Medvedic

Well I think the short answer is clearly yes…

John Daniel - Simmons & Company

Okay...

Tom Medvedic

My perspective that because clearly it’s going to be a driver on higher equipment utilization as we move forward and our perspective just in the context of our Canadian platform is that clearly the two drivers of financial returns in our business are pricing utilization and probably in our context we expect that the EBITDA generating capability of the Canadian segment we think continues to look quite strong.

Doug Ramsay

And I think, also John you have to take in account that when you have a contract at this size this nature that we can be – it creates efficiencies in our, from all the transportation challenges or commodities in general how we manage that as a big cost part of our business. So we can be much more effective in how we manage that part of our business too when we’re, we have a longer-term respective on the Montney and the relationship with Progress and with some other major operators in that basin. We can be very cost effective also when it comes to that which is a huge part of our business as compared to a number of years ago. And I think that’s one of the challenges that a lot of our competitors have not met and don’t understand is how important the front-end of these projects are even before you get a chance to even turn a wheel right. So, I think we’ve taken in account, we’ve done a very good job in managing that part of our business and of course that, those savings are shared always between the customers and the supplier right, so.

John Daniel - Simmons & Company

Right, Now I wasn’t trying to criticize the contract I think it’s great and just the way the initial answer to Byron’s question I misinterpreted the answer I suppose I think kind of my…

Doug Ramsay

I hope we’ve got it right now.

John Daniel - Simmons & Company

We do, we are crystal clear. Okay two more from me and I don’t take that much time. Before you signed this contract well how many of those spreads the three were already working for Progress can you share that I'm just trying to see what’s additive from a utilization stand point?

Tom Medvedic

So John, we are committed on two spreads contractually heading into this, into some of the objectives.

John Daniel - Simmons & Company

Got it. And then one spread that will be working 24-hours was that already working 24-hours before this contract or was it a…

Tom Medvedic

No, no.

John Daniel - Simmons & Company

Okay. Perfect thanks guys.

Tom Medvedic

Thanks John.

Operator

Your next question is from Dana Benner with AltaCorp Capital. Your line is now open.

Dana Benner - AltaCorp Capital

Good morning guys.

Tom Medvedic

Hi Dana.

Doug Ramsay

Good morning Dana.

Dana Benner - AltaCorp Capital

I wanted to and sorry we all keep coming back to the same topic, but it’s such an interesting one back to the Progress announcement. With respect to the right off first call spread we’ve been focusing on today in this call on the three more formalized ones, but the rate of first call may be you can give us a sense for what’s contemplated there and how busy would you expect Progress would be for that non-Montney spread such that is this effectively allocating a four spread or is it going to be more callout work for now how would you characterize then?

Tom Medvedic

Well I think Dana from our view obviously the focal point for Progress right now is obviously Montney’s development although within their suite of assets in western Canada and they do have some non-Montney assets, some oil-focused assets and so at this point the structure of the agreement really is to provide some flexibility on both sides in the context of the scale and scope of what that work entails. So I think it’s just formalize the arrangement between us and them in the context of their development plans over the next while and allows us the opportunity to work together with them in those non-Montney assets. So, in a full space scale and scope I think is yet to be determined we’ll obviously work together with them closely to get understanding for the passthrough time this larger focal point the development of those non-Montney assets are but it’s really difficult for us to ascertain firmly at this point as to how much it rate will be.

Doug Ramsay

But I think in our long range planning what we’re looking at this is that we think it will take about half a crew their half-time right Dana so.

Dana Benner - AltaCorp Capital

Right and probably not starting in Q3 would this more of a Q4?

Doug Ramsay

We’re working on wells with this, crew at this point in time.

Dana Benner - AltaCorp Capital

Okay. May be you can remind all of us on the call how much given that you’ve dedicated three to Progress and then at this other half spread the percent of your Canadian capacity that would now be allocated to LNG related activity might be an interesting stuff for all of us.

Tom Medvedic

Well I think Dana our – at this point we would summarize somewhere between 20%, 25% of our Canadian fleet probably as focused on LNG development.

Dana Benner - AltaCorp Capital

Okay. I guess next question, I guess enough is never good enough even if you’re Calfrac so beyond what you’ve announced any serious irons in the fire for yet more LNG related work with other client’s things that we could see before year end?

Tom Medvedic

Dana, I think at this point I don’t think there is anything firm per say I mean clearly the comment that I would make is that amongst our Canadian customer base in western Canada clearly there are a number of those customers that we would consider core customers that do have long-term LNG strategies that will be developing in the next year or two. So I think we’re well positioned to continue to be involved in that the full extent of which I think will coincide with some clarity on their plans and the specific ramps associated with LNG opportunities so. I think we’re well positioned as far as our Canadian customer basis to who we think the participants will be moving forward and have relationships there.

Dana Benner - AltaCorp Capital

Okay. I’ll turn it back. Thank you.

Tom Medvedic

Thank you, Dana.

Operator

(Operator Instructions). Your next question is from Kevin Lo with FirstEnergy. Your line is now open.

Kevin Lo - FirstEnergy

Hey guys. Just a bit of housekeeping question, can you kind of talk about what utilization of your equipment and people are right now in Canada and U.S?

Tom Medvedic

Kevin, Tom Medvedic here. Yeah so I as far as looking at the Canadian side of things certainly as I mentioned a little earlier we seen a very strong ramp in overall activity here over the last couple of weeks. So as we head into August our assessments were pretty closed to full utilization here moving forward and expect that to be the case like I said earlier for the foreseeable future.

So things are looking strong there. In the U.S really I think it goes region by region overall I think we’ve been satisfied with the utilization rate that we seen obviously I can quote a specific number per se because as you all know our business is different than the drilling business in the context of the, our fleet has made up. So I’d say we’ve been satisfied with the level of utilization overall as far as the U.S operations are concerned. Clearly certain areas such as the Marcellus and Fayetteville opportunity very high and utilized and our expectation is that we’ll see high utilization in areas like North Dakota as the weather issues subside a little bit.

In the Rockies it will be somewhat contingent upon the ramp up in the Niobrara/Wattenberg area but overall hopefully directionally we’ll see some further improvement there as well but that would probably the one area where it’s probably a little bit more volatile just in the context the day to day utilization based on the sort of the shorter term or the lack of sustained work in the context of where that play is and its maturity. So we are hopeful that we’ll see some further improvements but at this stage we certainly been happy with the utilization that we see in the U.S division.

Kevin Lo - FirstEnergy

Okay. And so can I say from your comments that your people you’re well staff right now and you have enough staff to meet demand basically through the rest of the year?

Doug Ramsay

Yes, yes that is correct we are well staffed and when activity picks up and it continues to increasing their very solid plans in operating divisions to call out those requirements. Kevin so we don’t see any issue with the, our people and equipment resources required for our operations.

Kevin Lo - FirstEnergy

Great. Now just a last question can I sum it all up and I mean if you had more equipment today could you use it and which of these kind of to the next part which is I mean at what point I know you are talking about waiting until customer CapEx programs to get more visibility than new builds but I mean could you use more equipment today?

Doug Ramsay

Well I think that’s again area by area, region by region, day by day rate. We try to operate on high equipment efficiencies. We don’t keep much partly as events just in case because you can afford the people to do that. So I think like I mentioned earlier Kevin we are when we get these I guess challenge where we don’t have enough equipment and so and so forth it’s usually region by region and we and further to Tom’s review of our utilizations throughout our North America business. We think we are in pretty good shape when we see the opportunities we couldn’t wrap things up and but we don’t have a lot of unused capacity partly as events that’s not how we manage our business as we start this thing. So and again with the relationship we have with the, our customers, our suppliers, our builders and stuff we can wrap up really quickly Kevin but we’ve always been cautiously optimistic looking into our business and very conservative.

So we are not going to start a crazy build program just because we’ve had a little bit optimism here and sign a great contract and have a great customer base but we are going to be step where we step by step continue to build our business. We are not going to go and buy people both these crazy numbers we saw a few years back just because there is a equipment shortage in the region here and there but again that leads to this M&A thing again in an asset question but its there if opportunities there in some areas where we can do an acquisition that meets our criteria and that is that we will look that very closely and but again it has to meet our criteria and our relation we develop over the past number of years in our equipment deal strategies its really well with this market and this doesn’t do the job at noon and do another job at five in the night timing. This is a very, very active large business we have. So but hope that answered Kevin we are ready to expand as we see it but it’s the capital projects right.

Kevin Lo - FirstEnergy

Yeah thanks, Doug I know your acquisition criteria is cheap so I got it. Thanks.

Doug Ramsay

Thanks.

Tom Medvedic

Thank you.

Operator

Your next question is from Jon Morrison with CIBC. Your line is now open.

Jon Morrison - CIBC

Hi, guys.

Tom Medvedic

Hi, Jon.

Jon Morrison - CIBC

Specific to U.S operations how many crews are actually working on call it actual spot market base its like am I right assuming that it just some of the stuff in the Rockies and the one crew in the Bakken or am I missing something?

Tom Medvedic

I think broadly we start getting this specific at this point Jon you were looking at between 60% and 70% of our equipment in the U.S tied up in longer term type of arrangements whether that would be take a payroll for arrangement. So that’s kind of where we sit today.

Jon Morrison - CIBC

Inclusive of the three or 3.5 however you want to coin it Progress crews signed up in Canada. What’s the total percentage of your fleet that operates under a formal or informal long-term arrangement through the end of the year at this point?

Fernando Aguilar

This is a same, Jon it’s a same number that Tom basically gave you it’s around between 60% and 70% and it varies according to demands and our customers operations. So 60% to70%.

Jon Morrison - CIBC

Okay. Is there an absolute exposure you are willing to take on with one customer in Canada and U.S I realize that Progress is an excellent customer obviously you want that work but from a risk perspective is there a max in terms of fleet that you are willing to dedicate to one customer at this point?

Doug Ramsay

That’s very customer specific right we are very cautious how we do that. We are not going to use the models on the big tree where we select three customers in a large region that’s all we are going to work for that’s not our MO we would be cautious to commit at anytime more than 60% to 70% of our business anywhere in our large in our divisions because we need that 30%, 40% of our and this is all our strategy to Jon this just isn’t fall of a term truck business we have. We have since day one always trying to maintain this 30%, 40% on a spot market. So we can take advantage of pricing to take advantage of ability to build a larger customer base backfill opportunities with existing customers and also and our customer has our primary customers need to wrap up for a short period of time. We can help with our spot equipment. So this is all part of our long-term strategies that I started this company. So that was changed.

Jon Morrison - CIBC

Okay. On a completely different vein Argentina I realized that utilization are very hard to actually quote but how consistent is working do you have an idea of duration in that market where you’d have to start thinking about deploying additional capacity and when this did that come in line?

Fernando Aguilar

Yes this is these are very good question because that’s one of the places that we’ll continue increasing and improving our operations and you heard that we reported that we started to track operation in Argentina the performance has been excellent their relation due to a operations quality and safety and technology deployments with our customers in Argentina is going very well. We’ve been mobilizing equipment and we continue doing it so in fact in the current months we will have a couple of coaching units arriving into the country and more fracturing equipment but it is a matter of working with the local authorities to go through importation process which is a bit different to where we are used to here in North America and we can see an improvement going in that direction. So we will continue improving our numbers and our volume of operations. So we are waiting for some tenders to provide the results. So we are positive about how Argentina is going to continue increasing. And you will see that reflected in our performance in next quarters to come.

Jon Morrison - CIBC

Thanks. That’s all I had guys.

Tom Medvedic

Thanks, Jon.

Operator: Your next question is from John Daniel with Simmons & Company. Your line is now open.

John Daniel - Simmons & Company

Hi, guys thank you for bringing me back in. Tom I may have missed this its been a heavy earning say but how much equipment if any was relocated between the Basins in the U.S in Q2 and are there any relocations expected in Q3?

Doug Ramsay

There wasn’t a whole lot John at this point our fleet of equipment right now basically we have three fleets in North Dakota, four fleets in the Marcellus, two fleets in Fayetteville and a third fleet our three fleets in the Rockies. Now there is some movement back and forth based on customer requirements here and there, but at this stage we haven’t seen a whole lot of changes there in the second quarter fore say.

John Daniel - Simmons & Company

Okay. And then…

Fernando Aguilar

This is – is always is consistent with our discussion in – on a same question that you asked in the last meeting. Talking about how we’re moving resources around the country and we’ve been consistent with our workload on our customer base and this is the way we’re operating.

John Daniel - Simmons & Company

Okay. I think because I saw it on the last conference call you guys mentioned potentially moving the fourth fleet and the fifth fleet to the Marcellus from the Rockies and I just want to see?

Tom Medvedic

Well I think what we did talk about and we alluded to in this press release as well John is we would currently have our fifth fleet available sometime late this year and I think we got pushed back a little bit here just from the timing perspective because that we’ve had some other work come up that has provided us some opportunity to finish some of that work and complete some of that work. So, our full expectation at this point is to have a fifth fleet operating the Marcellus here sometime in Q4.

John Daniel - Simmons & Company

Alright, cool. And not to be the dead horse but since I’ve got you. I know you mentioned the press release that you got did you think the capacity for the progress contract and I'm were given the positive outlook in recognizing the focus by you guys on capital discipline as well as like earlier comment. It sounds like you not – you don’t have a need to order equipments today but you’re at the stage where you are starting to make encouraged to your vendors and suppliers for new frac horsepower?

Doug Ramsay

We’re always out there we have there is an opportunity to top of our business, but really we don’t go shopping for equipment like that John we have two major suppliers that build our frac pumps for us, there is a couple of suppliers that build coiled tubing and our some other parts and pieces and our blenders, but we have our consistent design that gets treat as the technology changes and our suppliers have we have our own inventory of major parts and our suppliers maintain a certain level of major parts that don’t sell it to anybody else and so they talk to us. We’re real far in that, so we’re very sophisticated external build program we don’t build that wrong equipment I don’t believe in that it’s proven over the years as not a good thing for a pressure pumping company, but well we’ve been able to secure this almost same type of relation or a relationship having and building yourself internally.

So, can we go out and wrap up quickly you bet. And we have a dedicated team that’s strong in the market we had a challenge there is some opportunity for more nitrogen equipment regarding Canada we get huge value out of them, we send our team out, we able to secure some equipment very quickly and that equipment be in service here during Q3 and we’re always a star in the market, but we’re not junk dealers and go and looking for the stuff that’s rush and get to fence we have really stringent criteria for equipment. So we do have it really quick John. So I think this has been a really big benefit of how we built this consistent, safe, well-engineered operating agency we have that can go anywhere in the world allows us to have this true international expansion and then we go cross-border we did in Canada and U.S. Canada and Mexico as required very quickly and we understand how to do that and we’re very sophisticated how we do that business.

John Daniel - Simmons & Company

Okay. Well thank you for the off the detail there. Thank you.

Tom Medvedic

Thanks John.

Operator

Your next question is from Lara King with Stifel Nicolaus. Your line is now open.

Lara King - Stifel Nicolaus

Hi gentlemen,

Tom Medvedic

Hi, Lara.

Lara King - Stifel Nicolaus

Could you spend a moment just getting some more color around the Marcellus. The rig kind of appears that moderated somewhat how do you proceed overall demand’s pressure pumping and is your confidence based on your contract status or is there something more than that how do see your position?

Tom Medvedic

Well I think Lara, this is Tom Medvedic here. I think certainly there is the industry staffs that tell you – that tells you the story I mean I think certainly it’s I would caution to retune too much into the rig related staff I think broadly speaking to U.S. market I think we’re seeing the bit of a change in the context of having this smallest position between right count and completion activity. So I think there is some of that happening I think how we would assess overall activity in the Marcellus is it that somewhat certainly customer-specific which certainly we’ve work hard to nurture strong customer relationships there, and I think some of that relates to pad development and well profile which is certainly I think was helpful.

And went back to the matter as I think one of the fundamental changes that were taking place around the last six months as we’ve been able to secure some additional work related to some long-term relationships we have with customers that are new to that region per say which I think overall puts this is in good status as far as the base of operations and the activity levels whereas getting peak other Marcellus with long-term. So, there is various thoughts of that but I think from our perspective which we’ve been there since 2009 and we’ve been presumed ourselves so strong, reputation for service quality, and I think that’s gone a long way with our customer base that we’re in.

Lara King - Stifel Nicolaus

Excellent, thanks. That’s all I’ve got.

Tom Medvedic

Thanks Lara.

Operator

Your next question is from Todd Garman with Cormark Securities. Your line is now open.

Todd Garman - Cormark Securities

Thank you. My questions have been answered.

Doug Ramsay

Thank you, Todd.

Operator

Your next question is from Jeff Fetterly with Peters & Company. Your line is now open.

Jeff Fetterly - Peters & Company

Good morning guys. On the CapEx side, do you still have any form of an evergreen program ongoing?

Doug Ramsay

Yeah Jeff we have a program and sometimes we’ll shift between different pieces of equipment and we do call evergreen. And we make funding commitments to a lot of the – of our main suppliers. And we shift that funding between different types of equipment for example, we got this very unique sand storage and transportation systems and…

Tom Medvedic

Sandstorm.

Doug Ramsay

The Sandstorm system that we will shift carefully in that and the frac pumps so on and so forth with that what the supplier in Canada our major U.S. supplier of frac pumps and other equipment for now building new stuff we have our ongoing refer program where we take equipment in these we refer for which through those that the facilities they have. So we maintain ongoing relationships and in a just a matter of shifting capital between different styles of equipment or different types of equipment that’s required to meet the demands right.

So, and again like I mentioned earlier, we do maintain a certain inventory both internally of major components so as we can either replace on refer or build a new as required and we actually have a first call on inventory of our major suppliers if we don’t – if we’re not going to use it and there is a period of time that we can we let that go over. So that works really well for us. So it does give us that again that flexibility in our catalog and we do have a evergreen program going always because we just surpassed a 100 million horsepower. So no, 1 million, thanks Tom for correcting me. 100 million may be a little bit too much. I do get enthusiastic and my background is sales so you know that was. Anyways the 1 million horsepower I remember and so with that we need to continue to enhance that fleet and look at different technologies that lasts be more efficient. So that’s what we do Jeff.

Jeff Fetterly - Peters & Company

But from a horsepower standpoint, you’re not still adding anything incremental to the fleet you just hit that capital all around?

Doug Ramsay

We have some commitments that equipment we’re built they are building so but we saw the equipment that’s available in the fleet being put out, yes there is still some more horsepower coming.

Jeff Fetterly - Peters & Company

Okay. from a growth standpoint M&A versus organic, in the current market what is the incentive to look at M&A if it appears like the organic opportunities are starting to improve or accelerate?

Tom Medvedic

Jeff, Tom here. Well I mean I think as we assess the market opportunity and clearly there is the two ways we can talk about I think from our perspective obviously as you’re well aware we’ve taken a very disciplined approach to M&A not only from evaluation perspective but as we go through due diligence process in the context of assessing the quality of the equipment and questions. So whether it can fit into our fleet of equipment with relatively low costs and how we integrate it is our obviously part of that equation as well.

So, there are some intangibles associated with M&A clearly I think that we all understand whether it would be people, whether it would be customers, whether it would be infrastructure that are part of the assessment but that being said we do take a pretty disciplined approach to that. Now part of that really is a function of where the market is and clearly I think from our perspective there are limited opportunities for M&A in Canada that’s based on the constituting nature of the market clearly that’s not the case in the U.S. and so if you were to look to a market where you’d think it makes a more logical sense to look at M&A that’s a probably but one that you would look at. But we’re still going to stick to our guns as we always have as Doug since Doug restarted this company very much focused on making sure that we get good value whether that’s through in organic growth build or whether it’s through M&A.

So Jeff I don’t think this strategy changes much but we continue to assess both of those opportunities and the other thing that comes part of the equation just capital allocation as Doug mentioned just recently going over a million horsepower part of our responsibility as a management team is allocation of those resources. And so if we see some weakness in certain markets we may we allocate some of those assets to stronger markets like we done over the last several years. So there are a lot of moving parts as far as expansion discussion and analysis concerned and we try to enter as much of that as we possible can to our strategy.

Jeff Fetterly - Peters & Company

For you guys right now from an M&A stand point is that the primary driver in terms of acquiring assets that give you re-allocated within the existing infrastructure or are you looking to add geographic breadths to the business specifically in the U.S I think?

Tom Medvedic

I think it’s both Jeff quite frankly you know why I think we take a look at opportunities expand our positioning with end markets and into new markets. So really I think it really is a fairly wide scope that we look at and so when you look at M&A again perhaps and some of those intangibles that you put some value on as well establishing a beachhead in some other areas.

Jeff Fetterly - Peters & Company

Okay. A follow on to Lara’s question on the Marcellus I know that the deployment of equipment is very customer specific and opportunity specific but do you guys have any concern about too much capacity going into that market in the near-term or the foreseeable future?

Doug Ramsay

Let me answer that Jeff I guess Tom gave a very elephant answer to Lara on that Marcellus and let me be maybe a little more blip. The customers in area we’re doing three visit to buy and they thought that didn’t works well. So we will be able to really ramp up our activity based on safety and service quality and the ability to deliver what you say and deliver on a timely basis again safely with high service quality.

So our business has really been based on a very strong relationship with one of the major operators in that area. It was both the coal company and a natural gas company and we’ve been offset based on that very strong operating MO that we have with them built with our other customers in area and of course as Tom mentioned and Fernando has point out to me that we have the strong relationships with these majors and some of these operating areas and like how we operate.

So really our expansion has been based on been in the market not deviating from our safety or service quality and our ability to execute and now that our customers in those areas are recognized in that value and we are getting paid for that. So we think we can continue that on and you can have a whole equipment in area if you can execute and you can do it safely and can provide service quality and materials that required to this business. You are not going to be successful. So we just stick to our operating MO you know what it worked out really well for us in the Marcellus.

Tom Medvedic

I think Jeff the only thing I would perhaps add is as we you are very familiar with our long-term strategy I think as we’ve been focused on four quarters in the U.S I mean part of that whole logistics supply chain infrastructure aspect of things. We don’t get the same amount of volatile in moving fractures here and there and its constant sort of capable personal and equipment and so what it does is allows us to be efficient and how we service our customers needs and there is a certain amount of stability to that platform and I think it offers a good amount of benefit from not only our prospective but from our customer perspective as well.

Jeff Fetterly - Peters & Company

Thanks for the color. Congrats on the quarter guys.

Doug Ramsay

Thank you.

Tom Medvedic

Thanks, Jeff.

Operator

There are no further questions at this time. I turn the call back over to Mr. Doug Ramsay.

Doug Ramsay - Chief Executive Officer

Yes, well thank you Tracey and I would like to thank everybody that listen to this broadcast we had and all the great questions we had today. And we look forward to giving you the result of our third quarter in early November. So thank you and we are going to sign off now.

Operator

Ladies and gentlemen thank you for joining. Today’s conference is now concluded. You may disconnect.

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