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Executives

Doug Ramsay - Chief Executive Officer

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

Fernando Aguilar - President and COO

Analysts

Sean McKeon - Barclays

Dan MacDonald - RBC Capital Markets

Scott Treadwell - TD Securities

Dana Benner - AltaCorp Capital

John Daniel - Simmons & Company

Kevin Lo - FirstEnergy

Calfrac Well Services Ltd. (OTCPK:CFWFF) Q3 2013 Earnings Conference Call November 6, 2013 12:00 PM ET

Operator

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

I will now turn the call over to Doug Ramsay, Chief Executive Officer. Please go ahead.

Doug Ramsay

Well thank you, Laurel. And good morning and welcome to our discussion of Calfrac Well Services third 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 Interim Chief Finance Officer will begin with an overview of our quarterly finance performance. I will then provide a review of operations, discuss our outlook for the remainder of the year after which Fernando Aguilar, Mark Paslawski, Tom and I’ll be available to answer your question that you may have.

I’ll now turn the call over to Tom.

Tom Medvedic

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 our expectations that involve a number of business risks and uncertainties. These risks are set out in detail in our most recently filed Annual Information Form and included 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 third quarter of 2013 Calfrac achieved the following financial results in comparison to the third quarter of 2012. Consolidated revenue was $388.7 million a decrease of 7% from the third quarter of 2012, the decrease was driven primarily by lower pricing in Canada and the United States combined with lower fraction in coiled tubing activity in Canada and lower fraction activity in the Chicontepec region of Northern Mexico. The decrease was partially offset 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 $51.7 million for the third quarter which decreased from $70.6 million in 2012. This decline in operating income was mainly as a result of competitive pricing pressures in Canada and the United States, lower activity in Western Canada and Mexico partially offset by better financial performance in the United States driven by lower operating costs.

Net loss attributable to shareholders of Calfrac was $6.1 million or $0.13 per share diluted versus $26.9 million or $0.60 per share in the third quarter of 2012. This includes the $5 million FX loss for the third quarter in 2013 versus $400,000 gain in the previous year. In Canada, total revenue decreased to $167.7 million in the third quarter of 2013 from $200.8 million in the same period of 2012. The 16% decline in revenue was primarily due to continued wet weather in Central and Southern Alberta reducing the fracturing activity in the quarter offset partially by higher activity in the Montney play.

In addition in more competitive pricing environment and lower coal tubing activity in the Horn River region also contributed to the reduction in revenue. Canada’s operating income for the third quarter of 2013 was $28.8 million or 17% of revenue. In the same period of 2012, operating income was $56.4 million or 28% of revenue. The decrease was due to a more competitive pricing environment combined with lower overall equipment utilization due to incumbent weather and lower customer activity.

For the United States, total revenue was $153.7 million, a decrease of 3% from the same quarter of last year. The decrease is primarily due to competitive pricing pressures in the United States market offset partially by higher fracturing and submitting activity. Fracturing activity in the Marcellus and Fayetteville Shales was significantly higher in the third 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.

Operating income in the United States was $31.3 million for the third quarter of 2013, an increase of $8.6 million in the comparative period of 2012. The increase in operating income was primarily due to lower product costs resulting from supply chain and logistical improvements as well as rationalizing its fixed cost structure to its current revenue base.

CapEx revenues from international operations during the third quarter of 2013 increase by 37% to $42.9 million from $31.2 million in the corresponding quarter of 2012. The increase in revenue was mainly due to an increased demand for horizontal multistage fracturing operations in Western Siberia combined with larger conventional frac job sizes.

During the third quarter approximately 30% of Calfrac's total Russian fracturing activity was related to multi well stage completions compared to less than 4% in comparable period of 2012. Russia’s operating income was $5.3 million in the third quarter of 2013 compared to $3.5 million in the corresponding period of 2012. The increase in operating income was primarily due to operational efficiencies resulting from higher fracturing equipment utilization and a higher overall revenue base.

Latin America which consists of Mexico, Argentina and Colombia, generated revenue of $24.4 million in the third quarter of 2013, compared to $27.4 million in the same quarter of 2012. The decrease in revenue was primarily due to lower fracturing activity in Chicontepec basin in Mexico resulting from significant budget restraints in the Northern region or Calfrac operates. This was partially offset by the commencement of fracturing operations in Argentina combined with higher cementing and coil tubing activity in that country.

Latin American incurred an operating loss of $0.5 million in the third quarter of 2013, compared to an operating income of $2 million in the same period of 2012. The decrease was mainly related to lower equipment utilization in Mexico.

Corporately, the effective tax rate for the third quarter of 2013 and 2012 was 36% and 32% respectively. The decrease in total income tax expense was primarily due to lower profitability in the Canada. The higher effective income tax recovery rate for the third quarter of 2013 was primarily due to higher percentage of taxable income in United States which has a higher average statutory tax rate.

Turning to the balance sheet, the company’s working capital was approximately $292.9 million which included $63.7 million of cash and long-term debt of $457.2 million. The majority of which is not due until 2020. As of September 30, 2013 the company had utilized approximately $25 million of its credit facilities from letters of credit, leaving $275 million of available credit.

Let’s go to the quarter end. The company completed an add-on to its senior unsecured note maturing in 2020. This effectively turned off the draw taken from our syndicated facility to fund the Mission acquisition. As a result Calfrac’s capital structure continues to provide ample liquidity as it continues to execute on its business strategy. We continue to monitor our balance sheet and cash position very closely, as well as the credit portfolio of all our customers. We're focused on maintaining strong balance sheet, which provides a 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

Well thank you Tom. I will now provide a brief overview of our operations during the past quarter and discuss our prospects for the future for each of our business segments.

I'll begin with operations in Canada. Calfrac’s financial operating results from Canada during the third quarter were negatively affected by wet weather during the first half of third quarter. This resulted in our lower than expected equipment mineralization which the company was unable to make up during the remainder of the quarter. Furthermore lower than planned activity with a few significant customers also negatively affect on equipment utilization.

Financial performance in the third quarter was also weakened by increased pricing competition on on callout work. Pricing began to stabilize late in the quarter and Calfrac expects it to remain flat for the rest of the year. Calfrac expects equipment utilization to increase in the remainder of the fourth quarter for the improvement projected for the first quarter of 2014, which could drive improved pricing in Canada.

Looking to the future, fracturing and coiled tubing activity in Western Canada is expected to be strong over the long term for the development of liquids rich gas plays such as Duvernay and Deep Basin and the movement towards LNG export capability being the primary drivers of higher anticipated future demand for the company’s services.

The company has a strong and active customer base as well as a number of long term relationships with larger customers in both of these plays. Recent results from both of these plays provide significant optimism for the future development. Duvernay play in particular represents one of the most capital intensive developments in Western Canada and has a potential to materially increase the demand for completion services over the longer term.

Calfrac is one of the most expert service providers in this play anticipated position going forward on the basis for future growth. In addition to first liquids rich gas plays another driver anticipated long term growth for Calfrac is emergence of LNG export opportunities. Several long-standing customers are in the forefront of development in this area, which is expected to be a conduit for a significant increase and demand for service over the longer term.

United States Calfrac’s financial performance of third quarter exceeded company’s expectations to the strong equipment utilization of Marcellus and Fayetteville natural gas plays combined with improved utilization of Bakken oil play in North Dakota.

Increases in activity and financial results were offset partially lower than anticipate fraction activity in Rocky Mount region due to heavy rain falls in Colorado during September combined with lower coal prices. Pricing expects to remain competitive until the U.S. market pressure pumping over capacity is rectified.

Operational improvements that we’re initiating in the United States in late 2012 and 2013 result in an improved financial performance during the first three quarters of 2013 in midst of the challenging market conditions. Near-term uncertainty remains.

The company does not expect market conditions to change dramatically in the rest of the fourth quarter and we continue to monitor capital programs our customers as the quarter unfolds. Consistent with this philosophy of pursuing acquisitions in a opportunity driven but financial disciplined manner combined with a view of expands present in the U.S. pressure pumping market, Calfrac recently acquired all the operating assets of Mission Well Services [which has] approximately 160,000 horse power, 3D coiled tubing and related equipment as well as operating basin in San Antonio and Fairfield, Texas.

The acquisition was achieved at a significant discount to equipment replacement cost provides Calfrac a strategic presence in the Eagle Ford shale play. Calfrac remains well positioned in U.S. pressure pumping business the company services three of the most active unconventional resource plays in the United States, the Bakken oil shale play in North Dakota, Marcellus shale natural gas plant Pennsylvania and West Virginia and now the Eagle Ford shale play in Texas.

While short term challenges remained, the company remains optimistic regarding long term operating in the United States. The third quarter results for Calfrac’s Russian operations were positive affected by the increase in horizontal multi-stage fraction activity in Western Siberia. While this technology is still in early stages of development Calfrac remains optimistic while gains further acceptance and be a driver of future growth and operating our financial performance in Russia. During the quarter in excess of 30% of work Russia was formed a horizontal level boards which represents a major shift in this market and is expect to continued.

This September, the company increases three to six fracturing spreads operating in Western Siberia open a new district in Usinsk region with a new customer. Contract commence our fracturing operations region in October and expect that this new district will become a growth platform for 2014 and beyond. Also during the third quarter Calfrac successfully introduced two inch coiled tubing services into the Russian service offering. The expansion into the larger diameter coiled tubing will provide another platform for growth in this market segment.

Calfrac's Latin American operating results during the third quarter were lower than expected mainly due to drilling and completion activity in the northern region of Mexico continuing to be curtailed by budget reductions implemented by Calfrac's main customer. The reduction in activity is not expected to change significantly throughout the remainder of 2013, but Calfrac is optimistic that activity will improve in 2014, as several large projects are currently being tendered. Many of these tenders contemplate a move towards horizontal drilling with multi-stage fracturing, which should stimulate further demand for our services. In the meantime, the company continues to manage its cost structure more closely aligned with its short-term revenue base and will monitor this closely as events unfold.

The Calfrac successful entry in the Argentinean fracturing market during the second quarter and third quarters 2013, the company believes that it is well positioned to take advantage opportunities related to the development of unconventional resource play in this country. Calfrac believes that horizontal billing combined multistage fracturing will be the key inputs unlocking these resources. Calfrac's recently announced contract with YPF is an example of this strategy in the action. In Calfrac, the contract as providing a strong foundation to grow the company's fracturing, coiled tubing and cementing service in Argentina. Activity related to this contract began in the fourth quarter and we expect the financial performance of this segment will improve significantly in the future.

Challenging market conditions in Colombia persisted in the third quarter of 2013, resulting in lower than expected equipment utilization and financial performance. Permitting and infrastructure issues remain barriers to greater oilfield activity. The company expects these issues to be resolved, but continues to closely manage its operating costs while focusing on expanding its customer base. Calfrac currently operates four cementing units in Colombia and does not intend to deploy additional equipment until market conditions improve.

As announced earlier today, the addition of McNulty to our team as Chief Financial Officer. We expect that his experience spanning over the 30 years in oilfield services sector and extensive international exposure will serve Calfrac well as it continues to execute on our growth strategy, both domestically and abroad.

At this time, I would also like to thank Tom Medvedic for serving as Interim Chief Financial Officer over the past four months, which allowed us the opportunity to add a candidate of Mick’s caliber to our management team.

And thank you for joining us today. Now we are ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Sean McKeon of Barclays. Please go ahead

Sean McKeon - Barclays

Good morning guys.

Doug Ramsay

Good morning Sean.

Sean McKeon - Barclays

So thinking about the Canadian market more or less balanced in terms of supply and demand as looking into ‘14 are you starting to get more increase in customers looking to lock up equipment later in the ‘14 particularly those that are tied towards increased LNG activity, something more on line what we saw with that a contract you signed with Progress?

Tom Medvedic

Sean, Tom here. I think with the season we're in right now is obviously our customers as we are as well going to our 2014 capital budgeting exercises and overall view to what should expect in 2014. So we would expect over the next two to three months to get some additional feedback from our customers as what they forth stand of their 2014 capital plans in tail.

From an LNG specifics standpoint I would say there is one or two particular projects that seem to be more, we look forward more aggressively than others and obviously we're tied into one of those quite significantly. So I would say it’s probably little prematured to get into that level of granularity as far as visibility at this point in time, but certainly as we mentioned in the release we do expect that the LNG will be a driver for overall Canadian services space and specifically for us just given our customer base in that area, but it’s really difficult to ask change specifically as to beyond the contracts we have in place when that ramp will take place on a larger basis.

Sean McKeon - Barclays

Okay. That’s helpful. And then switching to the U.S. with the acquisition of Mission recently and we saw another small player recently filed for bankruptcy, are we starting to see the small pumpers capitally and kind of do you see additional opportunities for consolidation and what’s kind of the pricing dynamic you’re seeing from the small pumpers today?

Tom Medvedic

Sean it’s Tom here again. So a couple of comments I would say clearly, our view is that there will be more consolidation opportunities for the pumping business overall, I mean obviously one of the big differences between the Canadian and U.S. side is the concentration of competition in Canada is much more so the case than in the U.S. So I think there is going to be opportunities, clearly it remains to be a challenging market.

Some companies are up to the task others are not, so we continue to monitor that fairly closely, as we look back at the Mission transactions specifically, I mean I think true to our, to our colors of last ‘14, ‘15 years of operations, we've been very disciplined in our view on M&A and we continue to take that as a core philosophy of what we do.

So we’ll continue to look at opportunities down there if that makes sense overall, we’re obviously as a company hopeful there will be more consolidation in the U.S. business, whether it’s us or somebody else, we think from a pricing standpoint, from a capital discipline capital standpoint that would be positive for the overall pumping business.

So to answer your question directly, I do expect that with some additional consolidation taking place and obviously we are continuing to look at those opportunities made until.

Sean McKeon - Barclays

And I guess one more follow-up to that on the Mission acquisition, you mentioned at the time, of the deal that the assets weren’t fully utilized that you are looking to get utilization up in the next several quarters. We've been hearing a lot of incremental data points this quarter on the Permian activities for ’14 looking to be up significantly in terms of horizontal activity. Is there opportunity do you see or scope for some of those crews to move in from the Eagle Ford into the Permian depending on the level of activity growth we see in one market versus the other next year?

Fernando Aguilar

Good morning Sean. This is Fernando Aguilar here. So we been operating in the Eagle Ford Mission since for approximately a months now, but we’re trying to is consistent with our strategy is to build a very consistent customer base. So we’re not basically planning to start blend equipment all over Texas today. What we want to is to make sure that our current customers plus potential customers in the Eagle Ford are going to be properly taking care of. We see a lot of opportunities with a new customer base so we are penetrating today. We see that Eagle Ford to become one of our important plays in the U.S. and we believe that as soon as we move and continues stabilizing and balancing our presence in the area, we look for further opportunities in other plays like the Permian.

Doug Ramsay

I might just add a couple comments Sean to that. I mean, obviously one of the core (inaudible) use of Calfrac broadly and specifically to our U.S. presence is being very much focused on establishing a certain scale and scope in each of the geographic segments of each of the districts that are in question. So while we are very much aware as the changes that appear to be taking place in the Permian particularly from a horizontal perspective and I think that’s a great data point to watch closely over the next several quarters. We will enter these markets as we being prudent and allowing us the opportunity to get to a certain scale in a reasonable period of time. So very balanced view on what additional opportunities I would say as far as the Mission acquisition is concerned. We obviously have undertaken a process reallocating some of those assets not just within in the Eagle Ford specifically, but obviously equip utilization is paramount to our business and we will continue to look at opportunities.

Sean McKeon - Barclays

That makes a lot of sense. Thanks guys.

Operator

Your next question comes from Dan MacDonald with RBC Capital Markets. Your line is open.

Dan MacDonald - RBC Capital Markets

Just staying on Mission for a minute, can you give us a sense of how much of those assets you have already moved out of the Eagle Ford? And given that those assets were obviously operating well under the overall U.S. profitability is and now we’ve had a month your feet went on them. Do you have a sense for how long it will take to kind of bring their operating profitability up to the rest of your U.S. business?

Fernando Aguilar

I think Dan it is very important for us to understand that there are two elements that compose or basically give us a two different business lines in operations for those assets. So the coaching assets are being most north of Texas because that is the area where we see our coiled tubing activity starting in the U.S. As you know this is a new business line that we are deploying, but talking about fracturing what we have kept in the Eagle Ford in San Antonio -- in the San Antonio area is basically [free flips].

I will have one flip that is going to be available based on customer opportunities and possibilities, so we can say out of the (inaudible) that we acquired, three of them are currently operating and they are -- I can’t say previously and consistent with some of the customers that Mission had in the past. What is important for us is to demonstrate the customers continuing to from what Mission was doing. They had a good reputation in performance servicing the area and I think the transition that has taken place between two operating groups is basically working well. Our management team and the previous Mission management and operations group are working together very well and I think you'll start looking at some of these resources in the near future.

Going back to coiled tubing in the north of the country especially in the Bakken, we see opportunities for coiled tubing and also in Pennsylvania are going to be deploy as early as of 2014 and I think this is going to bring the technologies that we are currently using in Canada for coiled tubing pressure and for coiled tubing and bringing those technologies in an area where we didn't have access to that operations.

So, the fourth, or fifth possibilities for bringing crews into Texas will depend on how we can expand our customer base and we can add new customers and new names to our operations.

Doug Ramsay

Dan, I'll just want to address the financial part of your question. So obviously we’re going through the integration place and I think the benefit that we had in announcing the deal the end of September and putting an integration plan through the month of September. And when we closed the deal in early October, we were able to hit the ground. And that being said, obviously the pricing environment in the state of Texas is obviously challenging. So to expect that, we're going to generate Calfrac second or third quarter margin is probably a stretch. So, I think there is going to be probably a quarters for us to get those operations aligned with the Calfrac's loss. I think from a cost structure perspective however. I think that plan is firmly in place and I think the cost structure of our Eagle Ford operations is very aligned with the rest of the company. The challenge that we have is clearly going to be on the contract side on the revenue side.

So we're working on that, we're expanding the customer base based on our reputation that we've got as well on technology, logistics and the like that are obviously foundational pieces for our platform broadly. So there is going to be, there is probably some margin pullback in Q4, just strictly because of the margin that the Mission assets will be generating versus what Calfrac will be used to, but at this point I would say our overall (inaudible) is the integration has gone very, very well. From an operational, from a financial standpoint the integration has gone better than I think we would have expected a month and half ago. So we're very positive on the transaction and hope to see some further financial benefits as we get through 2014.

Dan MacDonald - RBC Capital Markets

And then just looking to Russia now that you’re starting to see some early indications of what activity might be in like ‘14, is there any indication that some of the structural changes that the Russia has brought in might intend some higher development activity there next year or is it still bit too early to tell?

Fernando Aguilar

Yeah. Russia is, it is very interesting, we have a new area of operation as that was mentioned in introduction. We are currently operating since and we boost equipment to that area and the performance that we've been experiencing is quite positive due to efficiency that we've brought to again. There are more volumes coming under discussion with our customers in both the (inaudible) areas we operate today. So we can see an increase of our activity plans for next year and the performance that we bring on the volumes that are basically going to be generated, but these multi-staged well completions will yield in a better Russia operation for 2014 and there are couple of all possibilities so far, new customers that we are discussing currently that will basically bring us to higher equipment utilization on a more complete way of doing things including bigger coiled tubing operations in unit in the area.

Doug Ramsay

I think Dan as you are well aware, we’re in the (inaudible) process as we speak not a [combined] year, late this year, early January and so we’ll have a greater visibility through the next couple months as to how 2014 will unfold, but directionally it appears to be moving in the right area.

Dan MacDonald - RBC Capital Markets

Thanks a lot.

Operator

Your next question comes from Scott Treadwell of TD Securities. Please go ahead.

Scott Treadwell - TD Securities

Maybe just navigate through the short term here in the U.S. If I think about Q4, there is obviously a holiday slowdown to some degree, there is going to be an exploration of capital for budgets, but you are adding in a revenue a full quarter of revenue from Mission. If you sort of throw all that up in the air, does it land with revenue being up sequentially in the U.S. in Q4 or is it sort of flat to down, what's your sort of gut telling you today?

Tom Medvedic

Scott, revenue certainly should be up on a sequential basis, I mean, I see as you alluded just the addition of Mission alone, it’s going to add significantly to the revenue base for the U.S. operations. So that's always going to be positive the fourth quarter overall. Our visibility with regards to, with regards to the U.S. really is pretty strong visibility from October through November. As you say we’ll need the next few weeks to see how December is unfolding, but overall I would say our sense is to certainly become more positive over the last several weeks based on some customer visibility.

But there is going to be some slowdown there is no question relating to U.S. Thanks Giving and Christmas season and the dates associated with when those holidays fall. But overall, I would say certainly our view would be the revenue base will be up significantly quarter-over-quarter by layering Mission. From a margin standpoint again you probably have the implications of the integration of Mission and where they were from a contracts or from a revenue standpoint probably grinding the operating margin percentages a little bit from what we would have seen in Q3.

Fernando Aguilar

Many analysts got a lot of these, we’re maybe more talking with some of our competitors because of our extensive contract coverage we have in the U.S. as compared to some of our competitors. So I think we feel relatively positive for our Q4 in the U.S. And again as Tom has discussed certainly over ‘12 it will be up substantially on the revenue basis because of this very, very significant integration of Mission assets. These guys -- we took that company over last day of September at midnight and we had [three factories] within next couple of days, in early October and we maintained that momentum to today and we expect to continue. So it is very well done, our operation teams were excellent how they execute that.

Tom Medvedic

And I think just strategically Dan not to be able to point, but obviously with the Eagle Ford position that we have now certainly gives us a further commodity precipitation and certainly our expectation is Eagle Ford will be a beneficiary of increasing lot of activity here over the next several quarters. So like Doug mentioned in his notes, we feel like our U.S. presence district by district is pretty well positioned. So we expect things to generally look favorable over the next several quarters that being fully cost and affect that U.S. is a difficult market from a pricing standpoint. So there is still that challenge that we need to work through.

Scott Treadwell - TD Securities

Okay. And to look at the spare equipment from that you referenced to be the coiled tubing is on the move, so I don’t expect any revenue to show up in the short term. With the sort of last spread of that remaining horsepower that you reference is being transferred. Is that likely to be transferred as an incremental spread in the U.S.? Is it potentially going to displace something that can come back to Canada or is it going to be maybe more of the filler where a few pumpers go here and a few pumpers go there as required?

Fernando Aguilar

All of the above, all of that. Scott, you will, I mean just complement what Doug is answering here, it will depend on the opportunities that are in front of us. So we have a very active marketing sales and technical teams that are basically looking for opportunities. I mentioned earlier that we are going to be and we have been expanding our customer base, you have to remember that the Texas area was part of our strategy in the medium to long term, but this opportunity that came in front of us accelerated that process and we are talking to customers that we are not in the customer lease and they are interested to see how Calfrac is going to be operational for them based on our reputation.

So I agree with that, it will depend on how can we bring more equipment into the area, we didn't acquire those assets to stay at that level. Our vision or view of the Texas market is one of the most important markets in the U.S. We can see a lot of opportunities not only in the Eagle Ford, but also in the Permian, but we will take our time to analyze with that equipment and (inaudible) of the equipment. The necessary equipment that has to be in the area is going to be part of our strategic discussions towards the end of this year and bring us to the board to see, where we see our activities in 2014.

Scott Treadwell - TD Securities

Okay. Great. My last question, turning back to Canada, I think the last year, maybe even two years, you guys have benefited in Q4 with a customer lift that has worked if not right through December, certainly for a good portion of it. With the big projects you've got underway in the Montney and maybe some in the Duvernay as well, what sort of visibility like, without getting too granular, for sort of the latter part of December? Do you think you'll at least have some crews working mostly through December or will it be a broader slowdown for the last bit of the month?

Tom Medvedic

Scott it's Tom here. So there are a couple of very large pads that we, they are going to be moving on to here in November. I'd say, so we're expecting pretty active November. I think as we shift into December, I think the momentum will continue through the first 20 days of December. We do have a handful of customers that we expect to work over the Christmas period. But that being said, as a traditionally the case, you obviously particularly in Canada, you do get that seasonal slowdown in and around Christmas time. So we get some greater visibility here over the next four to six weeks as to what that’s going to look like, but overall we expect that momentum is generally moving forward.

Looking directionally, Q4 as we mentioned in the release should be better than Q3, utilization will be better pricing has stabilized. The real pick-up in activity quite frankly from visibility standpoint is Q1. We expect that very, very active first quarter. As Doug mentioned in his notes, we're hopeful that we can push pricing up a little bit in Q1 I think at this point the jury is still out. It’s a little bit early to make any specific representations there. But I think our view is that Q1 looks to be a very, very active quarter. So I think there is momentum building in Q4, we’ll probably see the full benefit of that more in Q1 than in Q4.

Scott Treadwell - TD Securities

Okay, great guys. Thanks for the clarification. I'll turn it back.

Doug Ramsay

Thanks Scott.

Operator

Your next question comes from Dana Benner of AltaCorp Capital. Please go ahead.

Dana Benner - AltaCorp Capital

Good morning guys.

Doug Ramsay

Hi Dana.

Tom Medvedic

Hi Dana.

Dana Benner - AltaCorp Capital

I wanted to start with Q3 in Canada, margins at 17%. Given your track record, you guys were probably a little disappointed with that. I understand weather was a little tough to start. And then as you ramp up in LNG work, maybe it doesn't proceed as smoothly, given the magnitude of the task. And it raises the question with me, how much of the margin shortfall, however we would've defined that to be, would have been weather related versus say the maybe inefficient major ramp of activity around LNG? And not year-end efficiency, but just the way these things work out.

Tom Medvedic

Dana, probably it was equal proportions at this point that would be our assessment. Clearly weather-related issues were more significant towards the early part of the quarter and some of the other inefficiencies that we were faced with persisted through August and the earlier part of September. So I would say probably equal portion. And then again as I mentioned in the release, Dana, there was a portion obviously related to some weaker pricing than we would anticipated. So those would have been the primary factors. But certainly weather and some of those inefficiencies would have been the primary reasons.

Doug Ramsay

I think what is important here to clarify is that we are exposing ourselves to around [tubing] activity where I can say that we were ready. We’re ready with the number of people and the equipment for these operations. But when you take the [pipe] construction, the well preparation and then jumping from 7 to 25, 26 rigs, this has been challenging for some of our customers. And I believe that as time goes by and we set out and the logistics are putting in place from the operators and also from the service companies operating the area, you will see that these efficiencies are going to be improved. And we can see a more steady operation ramping as we speak into 2014 as well, Dana.

Dana Benner - AltaCorp Capital

So realistically then, would it probably take into Q1 before you're really humming kind of everything working well together or could it require maybe even as far out as say, next summer for all this to come together as you would like?

Doug Ramsay

No, I think you will see that the transition is happening as we speak as part of the ramping up between a strong management between comparing Q3 and Q4, Q4 is going to be more active with more steady operation in the area, the crews are going to be more consistent. So I would say mid Q4 into Q1 you will see those efficiencies taking place.

Tom Medvedic

And I would add, Dana just our visibility on the scope of these projects or this project specifically I think we do expect to increase in 2014 versus 2013. So the overall magnitude is some number of wells being drilled and completed next year and will be or expected to be at least from our standpoint to be substantially higher next year versus this year which hopefully against the conduit for rig utilization and obviously from that standpoint greater efficiency and comparability.

Dana Benner - AltaCorp Capital

Great. Thank you for that. Moving to the US, to put up a 20 point margin in the US in the context of what's happening there, I think pretty much any observer would go, wow. Were you surprised with that?

Doug Ramsay

No, I don’t think we are surprised because you remember in our previous couple of quarters when we were discussing about the way that we wanted the US to operate based on the areas where they are strategy defined that Calfrac was going to be active. We work in two different things as you remember. One was our equipment utilization and the second one was our cost control in these areas. And as you can see the results are basically paying off. Our field people and our divisional people in the US are executing the plan as it was set up. And I think you can see those results paying off today.

But it is very interesting to see is that we said, we have good performance as you could see, but we still say the pricing is competitive when it’s a tough market as Tom mentioned earlier. So it hasn’t improved yet. We see that a lot of reports going from you guys and other people who are our competitors and other people basically look very positive for or better let’s say more positive for 2014. However the pricing still remains competitive in all the areas where we operate. So I think the combination of executing a plan and making sure that we perform well, is basically early in that [resource] for Calfrac.

Dana Benner - AltaCorp Capital

Great. Just one final question, looking outside North America over the next say, three to five years, what area are you most excited about? Russia seemed maybe hopefully turning the quarter, Argentina, other initiatives, what is most exciting, Mexico?

Doug Ramsay

This is a very good question, because we are excited in all the areas we operate. I think the only one that is going to be slower than the rest is Columbia based on two different things, one is the discussions that Columbian government are having with the [rebels] and elections in 2015, sorry 2014, but at the same time what is interesting for us is that Mexico is turning the quarter. We will see in 2014 that is going to be more active and it is going to concentrating in more North American type operations. We have horizontal wells and multi-stage fracturing so which is basically they see what happens crossing the border. And I think we can bring that experience down South.

Argentina is just a beginning for us. As you could see, we are basically turning the corner and we are very positive about what is going to happen in the fourth quarter and onwards, because right now we count in country with the equipment that is required to execute the YPF operations as we announced earlier. And of course Russia is another area. So I am or we are very positive about the three different countries. And we are as well looking to different opportunities in different places as they show up in front of us. But those three countries are going to be for sure better in 2014 than what they were in 2013.

Tom Medvedic

And I think Dana, obviously our view towards the North American market specifically is well. I think if you just see the capital intensity of the business in Canada continue to move forward. Whether that conduit is LNG development of about 3 to 5 year basis we’ve seen obviously could be -- given the magnitude of some of these projects. Whether we see some additional capital being dedicated towards liquids-rich areas like the Duvernay and Deep Basin, we ultimately see the unconventional part of the business in Canada gaining further momentum. And as we look at Canada overall from a competitive perspective, obviously it's a very concentrated market. We think there is good supply demand balance right now and there could be a significant increase in the demand side of the equation here over that 3 to 5 year basis.

On the 3 to 5 year outlook, we obviously feel like we're well positioned in the US market in the three major basins that we've had identified right now. And so our overall view is pretty constructive over that 3 to five year basis. And now execution is going to be important and I think our track record in that regard kind of speaks for itself, so we're optimistic.

Dana Benner - AltaCorp Capital

Probably not a bad time for a guy like McNulty to join, I'll turn it back.

Doug Ramsay

Thank you.

Operator

Your next question comes from John Daniel with Simmons & Company. Please go ahead.

John Daniel - Simmons & Company

Thanks. Tom, I'll just start with a couple housekeeping ones. First, safe to assume there is no goodwill with the Mission deal? And any color on the Q4 depreciation?

Tom Medvedic

Well, I think obviously we're just going through the first accounting right now, John, but presumably on the metrics that I think you’re well aware of as far as the discount to replacement we certainly wouldn’t expect goodwill associated with that particular transaction. We’ll go through that process here over the next two to four weeks, but our expectation is that’s a safe assumption. And sorry what was the second question, John?

John Daniel - Simmons & Company

Just then based on that, thoughts on depreciation for Q4?

Tom Medvedic

Depreciation, right so I think effectively you’re going to be adding the better part of $140 million of capital to our asset base and it will be subject to our normal depreciation policy. So if you just I think just take a look at our depreciation policy for our operating equipment and use the $140 million as the basis of that you’d probably do some math, it’s obviously going to go up in the fourth quarter, but again on October 01 closing.

John Daniel - Simmons & Company

I guess the reason I'm asking, Tom, is if you think about these assets, they're ballpark roughly, what, three years old? If the useful life is five to seven years, you then subtract three from that, call it three years into the useful life?

Tom Medvedic

You know what John, we would [miss also] like that whatsoever. I mean just based on the caliber of the equipment that we acquired based on our assessment of the quality assets and how they had been maintained, we certainly wouldn’t make the statement that this has a three to five year life left not by any stretched imagination. So I would say that our assessment a month into the transaction is we've been pleasantly surprised by not only the quality of the equipment and how well it had been maintained, but obviously the people that came with the instruction that came with that is all top [notch].

So we wouldn’t have anything but a very, very positive assessment as to how the integration has gone and what we've been able to uncover here since we've got those assets on our [pool]. And in fact, clearly a big part of our due diligence exercise before the announcement of the acquisition was made, we spent quite a bit of time looking at the assets as well. And so we’re very much comfortable with that asset base and wouldn’t consider sort of any impairment associated with that, in fact we've been very positive to the quality of the operation.

John Daniel - Simmons & Company

Got it. Okay. I won't beat you up any more on that. Doug, you mentioned the benefit of the contracts in the US operations. Can you remind me or remind us how many of the fleets are still backed by contact and when those contracts begin to roll?

Doug Ramsay

I think I’ll let Tom answer that. Sorry John, I couldn’t get a --.

Tom Medvedic

John I would say, give or take by about 60% of our fleet in the US is contracted. Most of those contracts won’t roll until late next year. So we’re probably on average around a year out before we see a significant rolling of contracts.

John Daniel - Simmons & Company

Okay. Fair enough. Just a couple quick ones. The Canada horsepower declined by 15,000 in Q3, but it looks like the other, Latin America and Russia were up by 15,000. Is that what the explanation is, 15,000 went from Canada to the other markets?

Tom Medvedic

That was just a rationalization of few pumpers here between Russia and Latin America, John. So it’s just, there is some of those pumpers were sent abroad predicated on customer requirements. And will be aren’t back filled here through our evergreen program. So we do expect Canada to open the lead being around $400,000 or 400,000 horsepower here in the foreseeable future.

John Daniel - Simmons & Company

Okay. All right. And then just one more if I may and this kind of follows on an earlier question. But the comments with respect to Canada for Q4 are encouraging, but I've got to ask a modeling question. Last year, the margins in Canada were down in Q4 by roughly 400 basis points, which I presume was tied to some of the pricing pressures then. Given that utilization looks to be pulled up pretty well here in Q4, should we assume that margins move higher in Q4 in Canada or do we see some sort of seasonal decline?

Tom Medvedic

Well, I think honestly, John, I would necessarily do a year-over-year comparison, I would probably do a sequential comparison Q3 versus Q4. So yeah, John, I mean I think from our perspective at this point is we do think utilization will be a little bit higher in Q4 than it was in Q3. And I know overall pricing has stabilized, I would say overall financial results will be a little bit better I don’t necessarily know that we are going to certainly see a significant increase in the overall revenue base significant increase in operating margin I think directionally I think it will be a little bit better quarter-over-quarter. I think the real pick-up in activity and the real pickup in margin based on higher revenue base comes in Q1. So I think it’s heading in the right direction, but I certainly wouldn’t expect Q4 to hit it out of the park perse just because of some of the seasonality issues that we have in Canada relating to Christmas and the well pick activity has picked up what we saw in Q3 it hasn’t picked up from that significant perspective, so it’s going in the right direction.

Doug Ramsay

And you know through Q4, John we get way better road access in our Canadian business than we had there in Q3. We had a pretty nice autumn in Canada came to freezing temperatures. So things are freezing up now and we’re getting a benefit of that on our moves too, because we’re not stepping on location because of wet weather. So we’ll get better traction in Q4 in Canada than we did in Q3.

John Daniel - Simmons & Company

Fair enough. I'm getting old, my memory is failing me. And I was looking at the model for last year, when you went from 28% down to 24%, Q3 versus Q4, and just wanting to understand that trend and how that could play out this year. That's all.

Doug Ramsay

Yeah, Okay. Thank you.

John Daniel - Simmons & Company

Thanks guys.

Tom Medvedic

Thanks John.

Operator

Your next question comes from the line of Kevin Lo of FirstEnergy. Please go ahead.

Kevin Lo - FirstEnergy

Guys, all of my questions have been answered. Thank you.

Doug Ramsay

Thanks Kevin.

Operator

There are no further questions in the queue. I will turn the call back to presenter.

Doug Ramsay

We appreciate that very much. I’d like to thank everyone that was on the call here today. Our respect for our Canadian competitors, I think they are on, up next. So we’ll turn it back over to operator. And thank you very much for the discussion today.

Operator

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

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