Calfrac Well Services' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Calfrac Well (CFWFF)

Calfrac Well Services Ltd. (OTCPK:CFWFF) Q4 2013 Earnings Conference Call February 26, 2014 12:00 PM ET

Executives

Fernando Aguilar - President and CEO

Mick McNulty - CFO

Tom Medvedic - SVP, Corporate Development

Ian Gillies - Manager, IR

Doug Ramsay - Vice Chairman and Founder

Analysts

Byron Holt - Tudor, Pickering, Holt

Sean Meakim - Barclays Capital

Dan MacDonald - RBC Capital Markets

Scott Treadwell - TD Securities

Kevin Lo - FirstEnergy

Andrew Bedford - Raymond James

Jeff Fetterly - Peters & Co

Jon Morrison - CIBC World Markets

Operator

Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Fourth 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. Fernando Aguilar, you may begin your conference.

Fernando Aguilar

Thank you, Stephanie. Good morning and welcome to our discussion of Calfrac Well Services fourth quarter results. Before we get started, I would like to outline how this conference call will be conducted. Mick McNulty, our Chief Finance Officer will begin with an overview of our quarterly finance performance. I will then provide a review of our operations and discuss our outlook for the remainder of 2014, after which Tom Medvedic and Ian Gillies, I’ll be available to answer your question that you may have.

I will now turn the call over to Mick.

Mick McNulty

Thank you, Fernando. 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 set 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, availability of raw materials and component parts, risks associated with our foreign operations, weather conditions, the 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 fourth quarter of 2013 Calfrac achieved the following financial results in comparison to the fourth quarter of 2012. Consolidated revenue was $463.1 million, an increase of 26% on $95.6 million from the fourth quarter of 2012. The increase came mainly from the U.S. following commencement of fracturing operations in the Eagle Ford combined with increased activity in the Niobrara and Marcellus. We also enjoyed higher fracturing activity in Russia with the increased amount of horizontal multi-stage fracturing operations and also saw a ramp up in fracturing operations in Argentina as we commence fracking with YPF.

Operating income was $57.4 million for the fourth quarter, which increased from $43.2 million in 2012. The increase in operating income emitted almost entirely from improved profitability in the U.S. offset partially by the effects of a tougher pricing environment in Canada. Net income attributable to shareholders of Calfrac was $11.8 million or $0.25 per share versus $11.2 million or $0.25 per share in the fourth quarter of ’12.

In Canada, total revenue decreased slightly to $197.1 million in the fourth quarter of 2013 from $201.6 million for the same period of 2012. The 2% decline in revenue was primarily due to increased pricing pressure, partially offset by the completion of larger jobs during the quarter.

Canada’s operating income for the fourth quarter 2013 was $35 million or 18% of revenue. In the same period of 2012 operating income was $49 million or 24% of revenue. The decrease in profitability was due to a more competitive pricing environment compared to the same period last year and increased fuel and subcontractor costs somewhat related to the extremely cold weather we experienced last quarter.

For the United States, total revenue was $189.2 million, a 72% increase in the same quarter last year. The increase was primarily due to the commencement of fracturing operations in the Eagle Ford following the successful acquisitions of the Mission assets early in the fourth quarter of 2013. In addition, higher activity in the Niobrara and Marcellus contributed to the revenue increase. This increase was tempered somewhat by lower pricing in the U.S. resulting from the competitive nature of some of the areas in which we are working.

Operating income in the U.S. was $29.6 million for the fourth quarter, an increase of $24.1 million from the comparative period in ‘12. The increase in operating income was primarily due to the commencement of operations in Eagle Ford as mentioned earlier plus high utilization in the Marcellus and as well in the Fayetteville in addition to Niobrara shale play.

Turning to Russia, our revenue there during the fourth quarter of 2013 increased by 17.2 million or 71% 41.4 million compared to 24.2 million in the corresponding quarter last year. The increase in revenue was mainly due to higher fracturing activity as a result of increased demand for horizontal multi-stage fracturing operations in Western Siberia and larger fracturing job sizes. The company also began supplying proppant to two significant customers in 2013 which contributed to the revenue growth.

Russia’s operating income was $2.7 million in the fourth quarter compared to an operating loss of $0.3 million in the corresponding period of 2012. The turnaround in operating income was primarily a result of operational efficiencies, resulting from higher fracturing equipment utilization and greater operational leverage. The increase in operating income was somewhat tempered by higher fuel maintenance costs with the onset of winter operating conditions.

In Latin America, which consists of Mexico, Argentina and Columbia, they generated revenue of $35.3 million compared to $31.7 million in the fourth quarter of 2012. The increase in revenue was primarily due to a significant increase in unconventional activity in Argentina, as a result of the pressure pumping services contract that was signed at YPF at the beginning of the fourth quarter.

This increase in revenue was offset by lower fracturing activity in Mexico which largely resulted from budget constraints suffered by our major customer there. The Columbia market continues to present challenging conditions due to the permitting and infrastructure issues for our customers, which results in intermittent operations and reduced equipment utilization for ourselves.

Latin America generated operating income of $3.8 million in the fourth quarter compared to $3.1 million for the same period of 2012. The increase in operating income was due to the commencement of the fracturing operations in Argentina, combined with higher cementing and coal tubing equipment utilization in that country.

On a corporate basis the effective tax rate or ETR for the fourth quarter of 2013 and 2012 was 8% and 23% respectively. The decrease in total income of tax expense was primarily due to the lower profitability in Canada and Mexico offset partially by higher taxable income in the U.S. The low ETR was due to the mix of earnings between various tax jurisdictions combined with a lower than expected ETR in the United States.

The lower ETR in the U.S. was primarily due to the reclassification of $1.8 million of deferred tax expense related to the mission acquisition, to offset a gain of combination as is required under IFRS. As mentioned earlier in October the company completed the acquisition of the operating assets submission. The acquisition provided the company with modern fracturing and coal tubing equipments and an entry into the sectors market.

Under the terms and purchase agreement the total purchase price was approximately $150.5 million excluding transaction costs. And included certain working capital associated with the ongoing operations of the business.

The purchase price accounting for this transaction resulted in the business combination expense of $2.5 million which is also recorded in the fourth quarter of 2013. Following on immediately from the acquisition, the company closed a private offering of US$150 million, aggregated principle of 7.5% senior notes, net proceeds of C$150.2 million, after applicable discount and debt issuance costs.

The net proceeds from this offering were used to finance the mission asset acquisition. We continue to monitor our balance sheet and cash position very closely and play particular attention to the credit profile of our customers. We’re focused on maintaining a strong balance sheet, would revise the financial flexibility to pursue further growth opportunities and maximize shareholder value.

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

Fernando Aguilar

I will now provide a brief overview of our operation during the past quarter and then discuss our prospects for the future for each of our business segments. I will begin with our operations in Canada. Calfrac financial and operating results in Canada for the fourth quarter met expectations as activity significantly increased as the quarter progressed with the onset of winter. Activity was particularly strong in the Montney play as several customers were focused on completing their 2013 programs during the quarter, however bitterly cold temperatures throughout the much of December did result in higher than expected fuel and sub-contractor costs that impacted the company’s ability to efficiently complete its scheduled programs.

Financial performance in the fourth quarter was also weakened by further pricing competition on collateral work during the early part of the quarter. Pricing stabilized as the quarter progressed and Calfrac expects this stable pricing environment to continue throughout the first quarter of 2014 as demand for these services remains at very higher levels.

Looking to the future, fracturing and coal tubing activity in Western Canada is anticipated to remain strong in the Montney Deep Basin, Cardium and Duvernay for the foreseeable future. Development of liquid rich gas space such as Montney, Deep Basin and Duvernay slightly represented most meaningful short-term catalyst for increased activity. Taking a longer term view the movement over LNG export capability will be a significant driver of high demand for the company’s services. The company’s leadership position in the development of the Montney, Duvernay and Horn River resource plays is expected to position it to participate significantly in the development of the natural gas reserves required to support these LNG initiatives. Calfrac believes that two or three LNG projects will move forward, but the timing for these projects remains unclear. Several of the company's long-standing customers are at the forefront of this development, which is expected to be a catalyst for a significant increase in the demand for the company's services over the longer term. Calfrac has seen the benefit of initial LNG activity in 2013 and expects this source of activity will grow materially in 2014. This should gain greater momentum in 2015 and beyond as further visibility unfolds regarding the scope and timing of the LNG projects.

Calfrac expects that oil-focused activity will remain stable for the rest of the year, with the introduction of higher-rate treatments in certain plays, such as the Cardium, driving higher equipment utilization. Viking activity is expected to increase in 2014 over 2013.

In the United States Calfrac’s financial performance in the fourth quarter was consistent with expectations as equipment utilization remains high in the Marcellus and Fayetteville natural gas shale plays combined with improved utilization in the Bakken and Niobrara oil plays. The revenue base was further bolstered by the acquisition of Mission Well Services at the beginning of the fourth quarter as Calfrac made its entry into the Eagle Ford play.

Financial results for the fourth quarter were negative affected by holiday disruptions and inclement weather preventing several regions in the later part of the quarter. The integration of Mission proceeded as planned although operating margins were impacted by the exposure to the weak callout market and recurrence of certain cost related to integrating Mission into the Calfrac platform.

In the near term uncertainty remains due to the United States' over-supplied pressure pumping market. Calfrac's equipment utilization is expected to be quite strong given the company's active customer base, contract coverage and positioning in some of the most economic plays such as the Marcellus, Niobrara and Eagle Ford. While the company does not expect market conditions to change significantly in the first half of 2014, it remains cautiously optimistic that activity on potentially pricing will improve in the last six months of 2014 as further unconventional development occurs in Calfrac areas of operations.

Calfrac believes that the Marcellus will remain very active due to its low cost structure and close proximity to consuming markets. In addition, Calfrac believes that activity in the Utica shale will see meaningful growth in 2014 as well results continue to improve. Calfrac's long-standing presence in the Rocky Mountain region provides additional growth prospects in the Niobrara shale oil play, as many producers have begun using longer-reach horizontal wells and greater stimulation intensity with encouraging results. The company has recently experienced a significant increase in activity in the Niobrara and expects further growth in 2014.

Equipment utilization for Calfrac’s Russian operations continues to be positively impacted by the increase in horizontal multi-stage fracturing activity in Western Siberia. While equipment utilization remains high in the fourth quarter, Calfrac’s financial results were lower on a quarter over quarter basis due to higher cost structure resulting from the onset of winter operating conditions.

Calfrac’s Russian financial results in 2013 met its expectations and based on the results of the 2014 contract tender process, it expects improvement in both utilization and pricing in 2014. This outlook is primarily based on the expanded use of new technologies in Western Siberia such as horizontal drilling and multi-stage completions. Approximately a third of Calfrac's fracturing work was focused on horizontal wells entering 2013. Calfrac expects that this trend will continue to drive demand for its services over the short and long term as Russia's producing sector gains confidence in this approach.

Calfrac's Latin American operating results during the quarter improved substantially from the third quarter mainly due to an increase in fracturing activity in Argentina offset partially by a significant reduction in drilling and completion activity in the northern region of Mexico due to budget reductions implemented by the company's main customer. In Argentina, the aforementioned increase in fracturing activity was related to the recently announced YPF tight gas contract.

With Calfrac's successful entry into the Argentinean fracturing market in 2013, the company believes that it is well-positioned to take advantage of additional opportunities related to the development of the country's unconventional resource plays. Calfrac expects that horizontal drilling combined with multi-stage fracturing will be key inputs to unlocking Argentina's tight sands and shale resources. With limited industry capacity in-country to service these emerging unconventional plays, the company's strategy is to lever its long-standing reputation for service quality and technical expertise, which is expected to provide the foundation for long-term growth in Argentina.

In Mexico, the company expects the use of multi-stage fracturing of horizontal wellbores to become more prominent over the longer term as capital budgets recover. Based on customer feedback, the majority of future onshore activity will be focused on horizontal wells, which should spur demand for Calfrac's services. However, short term visibility remains poor. The company continues to monitor this environment closely and we’ll actively manage this segment as more information becomes available. While the short-time outlook remains quite challenging Calfrac is encouraged by the recent legislative and constitutional changes enacted in Mexico to open this market to foreign investment. The Company believes that implementation is likely to take some time as further clarity is required surrounding the rules that are going to govern foreign energy investment. This is likely to have a more material impact on oilfield service activity after 2014.

I would like to conclude my comments today on a couple of personal matters. As I assumed the CEO role here at Calfrac, I would like to publically acknowledge and thank Doug Ramsay for the incredible leadership he has provided over the 15 years founding this company and growing it to what it today, one of the preeminent pumping companies in the world. I look forward to continuing to work closely with Doug in his role as Vice Chair. I would also like to take this opportunity to thank Tim Swinton for his wisdom and guidance from the time Calfrac went public in 2004. Tim has recently retired from his position as a Director of Calfrac. The Board and management of Calfrac would like to sincerely thank Tim for his many outstanding contributions to the growth of Calfrac over the past decade, and wish him the very best in his retirement.

I would now like to turn the call back to operator to open the lines for any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Byron Holt with Tudor, Pickering, Holt. Your line is open.

Byron Holt - Tudor, Pickering, Holt

Fernando, I wanted to get your take. I’m trying to think about the operational baseline for your US operations and very solid margins there with the integration of Mission, but just trying to think through margins going forward for the US segment because the top line growth was stout in Q4 but not much in the way of incremental profitability, so I’m just trying to think through the various moving pieces and how we should be thinking about the margin progression for US operations over the next several quarters?

Fernando Aguilar

Yes, Byron, good morning. Thank you. As we’ve been discussing in the last few months and I was presented in this conference call, still challenging due to the fact that our supplies to the fact in the market. I believe what is happening in U.S. today is different from the company to company and from basin to basin. Our relationship with the customer base that we have today is basically helping us to look in higher equipment utilization and a more steady business.

I believe that in the places executing this strategy of Calfrac put in place couple of years ago is playing very well related to long-term contract with our main customer base and trying to understand how we can split our strategy between oil and gas. And I believe that’s why results from company to company are different. I believe as well that if we want look into the future, we don’t really see us as mentioned in our notes that the pricing in the U.S. is going to change in the first half of the year. If utilization continues to increase, we believe that we’ll some price improvement over the end of the year, not before.

Byron Holt - Tudor, Pickering, Holt

Okay. And so aside from any let’s say weather issues in the northern regions in Q1, there wouldn’t be any reason why as your utilization levels improve why Q4 wouldn’t or shouldn’t mark the margin trough for your U.S. operations is that a fair characterization?

Tom Medvedic

Byron, Tom Medvedic here. I think our view towards Q1 and Q2 is relatively stable platform in the context of utilization. As Fernando stated, pricing from our perspective we don’t think it materially changes in the next couple of quarters. So I think at this stage, we obviously over the last several quarters have taken a lot of initiatives that have proved efficiencies, supply changes logistics which I think are borne out by the number, but at this stage until we see a material improvement in the supply demand fundamentals in the U.S. and by that extending to price, the margin expectations may fluctuate a little bit but they’re probably going to be in that range for the next quarter or two so.

Byron Holt - Tudor, Pickering, Holt

Okay. And then with regard to Latin America, it sounds as though certainly the first half of 2014 is uncertain but your commentary almost sounds like the entirety of 2014 is still up in the air with regard to Mexico activity, so is it reasonable to think about activity levels for your operations there at basically the Q4 level not expecting much in the way of improvement as we step through 2014 for Mexico?

Fernando Aguilar

If you take Latin America as a whole, it is always interesting to see difference between countries to countries. And Mexico is very interesting because what all service companies have experienced into 2013 related to budget constrain and the way that they try to allocate capital to the gas operation in Reynosa and also to Chicontepec was challenging for everybody and is still the case. We believe that the country with this energy reform is going to change dramatically in the future we’ve seen today a lot of discussion happening at high level in the country between the president of the country and the president of Pemex and trying to incorporate the different Pemex directors into trying to understand how this energy reform is going to take place. Of course we have to delineate the rules for this reform and they are not going to happen in Italy there it is going to take some time. In the meantime Pemex will try to recover some of the activity that it lost in 2013 but we believe this is going to be more towards Q2-Q3 than Q1 of this year.

At the end of the day what is going to happen in Mexico has to be followed very closely as we’ve been told that Pemex the director of extraction production has been changed and now they’re going to appoint a new director in the following weeks that is basically going to align his strategy with the countries one.

So can Mexico remains challenging as we expressed earlier but the good news for us in the Latin American business is that Argentina the more we’re getting to the year and the busier we get with our customers in the country we will see Calfrac going more active and more busier in that area. So in a way good news are coming from the south and we have to watch what Mexico’s developments are going to take place.

Operator

Your next question comes from the line of Sean Meakim with Barclays. Your line is open.

Sean Meakim - Barclays Capital

Switching over to Canada, it seems that the market may be a bit looser than what we would have thought, just given the high level of utilization today. What do you think is driving that ongoing competition and how are ENPs approaching you in terms of securing equipment for the second half?

Tom Medvedic

Sean, its Tom here. I mean I think as we take a look at the market today clearly utilization is extremely high I think I will take from our perspective as we take a look at the market unfolding we expect that utilization will continue to breakup whenever what point ever that will happens. But at point looks like very strong term outlook as far as utilization is concerned.

In the breakup obviously we don’t have ton of clarity right now obviously traditionally we see a significant pullback in activity and we expect to get more clarity here in the next four to six weeks. So I think no real structural change on Q2 at this point in time either positive or negative. I think as we head into Q3 and Q4 again the data points probably will begin to surface in the next six to eight weeks I think operators at this point are clearly focused on trying to complete their Q1 programs, we’ll assess those programs, we’ll assess the commodity price environment their balance sheet and the like and then fully come with Q1 reporting they will true up their 2014 capital plans for Q3 and Q4.

Suffice to say however we do expect continued high activity in unconventional plays and from our perspective the key plays to keep watch on is obviously going to that the more capital types of plays being Deep Basin, liquids rich, Montney and Duvernay. So our overall visibility on that side I think remains quite strong. And really as we go further on the year it really becomes more difficult to firmly project.

We overall think the dynamics as far as supply demand in Western Canada remain certainly significantly better than on U.S. at this stage. Part of the challenges I think we’ve seen here in short term is somewhat associated with the significant ramp up in activity in Western Canada in the last couple of months, and while that has traditionally been the case where we see as November-December things ramping up.

There are always are some logistical challenges that come with that but from our view really activity in Canada really could not be stronger from our perspective. Now the question becomes is at what point do we get opportunity to push pricing a little bit from where we’ve seen over the last probably couple of quarters where we’ve seen some weakness persist. And at this point I think we’re little cautious to say definitively it’s going to be at this point in time I think we’re cautiously optimistic that there may be opportunities towards the back half of this year. But I think at this point I think we’re going to have to wait for another month or two to definitively say that there is an opportunity that will present itself there.

Sean Meakim - Barclays Capital

And so given some of the unexpected associated costs with that higher utilization, having not been able thus far to really pass that along, does that give us a little bit more of a dim view on margins for the second half if you're not successful in being able to push that pricing higher?

Tom Medvedic

Well I think Sean our perspective is obviously when you see some of those costs creep up associate with weather related issues or spike in activity related to some commodity that we provide and given the pricing environment that we’ve seen in the short term in Canada some of those costs are more difficult for pass through and obviously we’ve seen some of those challenges present themselves before. However, I think in the context of a longer term view in management and business moving forward and working together with the customers we’re obviously hopeful that as we work together moving forward that there will be an equitable split of assuming that those incremental costs right?

Doug Ramsay

That being said Sean, this is Doug. We are approaching our customers in our Canadian business with the dollar difference and in lot of our contracts we have opportunity to raise pricing as we get cost, come to us. So, we are positioned very well to pass those on through contractual base and as the call worth ramps up, of course our pricing will change for that. So, we are optimistic for, consciously optimistic for the second half, selling through Q1 as prices because the dollar difference and commodity challenges right?

Sean Meakim - Barclays Capital

Right and that makes lot of sense and one more if I could on the U.S. side. Just it’s our view that investor perception of available horsepower in the market is large than what probably is actually out there on the ground today in lot of the U.S. players. Could you give us some kind of indication of what you're seeing on the ground in terms of number of bidders out there kind of wait times to get for E&Ps, the staff to get cruise up and running, some of those data points kind of point to how the market looks in some of your key oil plays?

Fernando Aguilar

We work in five complete different regions in the U.S. and the market dynamics are different in every play but remains competitive everywhere where we are from Bakken to Marcellus down to Eagle Ford. The only place where we basically enjoy complete different situation is the deal because that’s, the only company fracturing that in that area is Calfrac today, used to based on our performance related to quality and safety which has been extremely good for them and has open other doors in the market. But wherever we are bidding in the different place, still a lot of companies bidding for the same work. We believe that as I was mentioning earlier, there is a complete different approach in the marketplace related to the companies you upgrade and based on the study that you are trying to execute.

But the reality is that the oversupply still is there and you are bidding, the prices are not basically improving as people would like to. They continue to be low and the market is very tough, so I think and that’s the way we see that happening in the next two to three quarters we don’t see that changing dramatically in the next couple of quarters or let’s say three quarters but trying to execute the strategy related to the customer base and the long-term relationships and something that is very important that has paid off for Calfrac is performance, is making sure that safety, service, quality and technical support and technology are basically backing the customers’ expectations and that’s what has given Calfrac more visibility, more work and more business.

Tom Medvedic

And Sean, Tom here for those comments I think and certainly knowing your views from Barclays standpoint was, we have probably coincide with some of those views that it is basin specific, so certainly the supply demand fundamentals are different in each specific basin and so you have to manage your business according to those supply demand fundamentals. So, there is certain areas that the market is tighter than others and we certainly see that in our operations as well. Although, over a long term perspective I think that tends to sort of even itself out, so there's a rapid activity in the Permian as an example ultimately attracts some incremental capital coming to that which I think restore some of the balance in maybe some of the other areas broadly, understanding that tends to take a little bit of time. But that would be our prospect at this point.

Operator

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

Dan MacDonald - RBC Capital Markets

Just wondering looking at the Mission acquisition sort of how far along the internal improvements you are there I guess and we are seeing how much more margins you think you might be able to gain back and what the timing might that look like? And then when you look at your U.S. operations as a whole, which areas do you really see right now as the most appealing in terms of potentially adding some incremental horsepower to and that would obviously include the new area like the Permian and how you kind of look at that?

Tom Medvedic

Dan it's Tom here so a couple comments. I think as we sort of certainly view the US right now and maybe specifically answer your question on Mission, I think our view going into the transaction quite frankly was it was going to take two to three quarters before we had Mission fully integrated and I think that plan has basically been in place, operationally the transition has gone exceptionally well and no real issues in that transitional aspect that would be categorized as surprised. You fundamentally a challenge that we had and we knew this going in is the Eagle Ford is a challenging area from a pricing standpoint so trying to build your business in the midst of a very challenging pricing environment obviously takes some time, so no surprises in that regard. My gut feel at this point is it's probably going to be a late Q1 into Q2 time frame before we see the full benefits of having Mission integrated into our platform but fundamentally, I think still as we look back very, very happy with how the transaction has unfolded, the positioning in South Texas and quite honestly just the overall opportunity in the Eagle Ford from a longer term perspective, we do think the data points that continue to come from customers in that area are supportive of long term growth and this allows us to participate moving forward. On your second question as to the areas that we see incrementally, the demand and perhaps pricing, without going into too much detail because obviously you deal with strategy issues, suffice it to say our platform in the Marcellus and Utica has performed quite well and we do see continued opportunities into the future. I think we continue to see changes as we discussed in our Press Release presented themselves in the Niobrara which I think continue to provide some further opportunities as we look into the future so those are the two areas we would specifically note but I think final comment that I would say if we were to take a look at our broad presence in the US, in addition to bases that I mentioned looking at North Dakota Bakken and the Eagle Ford, I think we're well positioned in the US to take advantage of opportunities in the future and from our view, certainly we think that the market moves to a much more constructive market here in the next year or two and there's certainly a lot more upside than downside at this stage.

Dan McDonald - RBC Capital Markets

And then just maybe trying to look at the Canadian cost and pricing dynamic a different way. In the I guess fairly leadership obviously underpriced work going into the winter given how busy people have been but if you do get a late breakup do you think that does open the door to increasing spot market pricing from obviously driven by cost recovery and there by helps set the stage for broader pricing increases maybe a bit sooner than you might get if we do get an earlier breakup? Is that a fair way to look at that dynamic?

Mick McNulty

Well, Dan I think it is interesting, your question is very interesting and it's something that we debate on a routine basis. The time that we have from today until late breakup is too short for pricing to change direction in Canada. We don't think in the next let's say four weeks to six weeks when we believe the breakup is going to start hitting the Canadian operations that you will be able to exercise on price pressure and change that so breakup is not going to help the industry here in Canada just to change direction. I believe we will have to see that beginning of Q3 and then looking to Q4 and Q1 and what we normally believe happens with pricing is that you need two quarters of very high utilization in order for your pricing to change direction and that's not going to happen in the first half of this year.

Operator

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

Scott Treadwell - TD Securities

Hi guys, just maybe to touch on the U.S. operation here a little bit. The assets you picked up for missions specifically coal tubing. Any timeline maybe there already are, but any timeline for when you expect those to be adding some revenue to the U.S. operations?

Mick McNulty

That is very interesting question. You know that in our business when you try to combine three different business lines between cementing, coal tubing and fracturing. Coal tubing you see is very different service line and that line is basically what I can interpret as work of our artist. So four people to execute coal tubing work and there is another business line in the industry that is very similar in terms of the artist fine hands to operate, which is basically sleek line. So it is not the same to go and have for different business lines and that’s what we have been doing the last few weeks when we acquired the assets and we started moving.

So what I can tell you today is that we have established operations in the northern part of the country in the Bakken for coal tubing that is our first base where we’re operating coal tubing today as we speak. We’re going to be moving into another district in the very near future as well. So we have been building that business, I think you will see revenues coming up as we speak in coal tubing business and I believe that we’ll look very positively about it in the future, throughout the utilization of these assets that we acquired.

So we’re positive about the way that we’re penetrating those markets. The results up to now in the first operation that we have been executing have been very good on the customer, he’s very satisfied. So we will try to expand that in the Bakken and moving into another northern district as we speak.

Scott Treadwell - TD Securities

Perfect. And the other one on the mission side was I know when you talked about having a plan ready to go into effect as soon as the acquisition closed. And part of that was some personnel changes and getting rid of some office space. Can you quantify kind of what the one-time on the ground cost were in the quarter sort of forget the acquisition costs but just what it took to sort of restructure the business and making much more like Calfrac wasn’t in the Q4.

Tom Medvedic

Scott it's Tom here. From a material perspective I don't think there was a huge number per se, and clearly there is not only efficiencies that up to rationalize that, but I wouldn’t necessarily want to quote a number specifically that was x-dollars, you know it suffice to say I think the margins that we see coming out of South Texas are affected more by smart pricing than the overhead cost structure. There was a cost that was probably born in Q4 related to integration, that would have been little bit more significant, but net-net in the grand scheme of $200 million a quarter operation I wouldn't say it was terribly material, but I think moving forward certainly you’re there will be for rationalization that take place that ultimately will have the bottom-line, but I will take that as a tremendously material number at this stage.

Scott Treadwell - TD Securities

Okay, and as long as it’s, and I think that’s going to be a big surprise, once it goes away in subsequent quarters that was really the aim. Yes the only other question I had was sort of a follow on Dan’s, maybe as we look into March, I’m assuming that your view is, it’s going to be a weather limited quarter that your customers in order book could take you into April if weather permitted and that you know programs are going to start running down in the next 10 days as long as weather is cooperating.

Tom Medvedic

I think so, Scott, do you know it will depend. I mean we can’t run the weather in our favor for the future but we believe that the activity we have today is quite high for both U.S. and Canada. If weather permitting we will be able to continue executing our strategy and moving forward into Q2. So we really know how things look but you know that some of the, let’s say southern districts in Canada and northern districts in the U.S. will be having some, let’s say, road balance and activity limited, but activity in the North will continue until we get into late April and beginning of May.

Fernando Aguilar

I think Scott, just to add to that, I mean I think as we sit here with almost 600 rings operating in Western Canada, you know I think really it is weather that’s going to be the limitation, and that’s it can squeeze into Q1 and obviously that's traditionally the case and I think it’s no different Q1 of this year. So it’s going to be weather dependent. I think as we sit here on the cusp of another minus 23 or minus 25 weekends in Alberta, I think we're just kind of continue moderate latency verticals.

Operator

Your next question comes from the line of Kevin Lo with FirstEnergy; your line is open.

Kevin Lo - FirstEnergy

The competitive pricing tension in Canada, lot of it was - and all we were hearing about it was all of multinational and stuff, is that still the case or is everybody locally, in the firms locally, they’re competing against each other as well. You know, can you kind of tell how the dynamic is working in Canada?

Tom Medvedic

Kevin, without getting to too much detail, I mean I think your statement to say that pricing competition was sole domain of the multinationals. I don't think we would agree with that. I think it was quite frankly, are very broad statement as far as market as we saw Q3 and early part of Q4 and full, that’s a more smaller competitors in Canada where you are equally to blame or equally aggressive as some of our international counterparts. So I wouldn't necessarily, I don’t think collectively here we would agree with that statement. I think it was a little more broadly based within that perspective. I think there was a number of companies that would be more in tune with the supply/demand fundamentals. We are more disciplined in that regard, but some of the aggressiveness that you saw wasn’t truly the domain of international companies.

Kevin Lo - FirstEnergy

And then just a last thing, if you can, if you guys can touch upon tax rate guidance. I know it’s a bit early still in terms of the year, but any kind of guidance, and help us out on how that’s going to shape out for this year?

Tom Medvedic

Sorry what was that again Kevin, on tax?

Kevin Lo - FirstEnergy

Mick, yes, the tax rate, and how we can mould that for 2014.

Tom Medvedic

It is interesting now with deferred tax rules, one thing that’s we talked about with our advisors is that, our tax rates are going to be probably fairly volatile over the period depending on a number of different issues. Now I think for 2014 it shouldn’t be totally different from what we saw in ’13. We maybe see a little bit more up and down quarter to quarter. But for the full year I did see a huge difference in the tax rate.

Operator

Your next question comes from the line of Andrew Bedford with Raymond James; your line is open.

Andrew Bedford - Raymond James

Maybe you cleared this up already but it wasn't clear for me. Did you say anything about what is happening to spot pricing in Canada, sort of right now.

Tom Medvedic

I think, what we said Andrew, it is basically stabilized through, I think say the early for of November on we have seen the spot pricing effectively stabilizing, and there may be some small pockets for some callout work but be able to move pricing a little but effectively from our perspective it’s remained pretty stable here through the early part of November to today and obviously given the demand expectations, for the rest of the quarter, we don’t expect there to be a material change here moving forward.

Andrew Bedford - Raymond James

Okay, maybe you can help me reconcile this because on the one hand yourselves and couple of your competitors have all articulated how busy and how your utilization has been since November. And the language around the first quarter here that’s very busy but would be a lead from you say that or maybe it’s not busy for everybody, if you’re still getting competitive pricing in the callout work, is that a fair comment?

Fernando Aguilar

Andrew, I would say, again different service companies are going to be busier than others. I would say how I would characterize it is given the longstanding relationship that we have with core customers in western Canada that’s the pricing is somewhat set as we head into Q1, right. So you have a certain amount of your fleet dedicated to towards more of the spot work and certain amount of fleet dedicated to your longstanding contractual customers. So I’d say on the spot pricing side, there is certainly obviously more volatility associated with that and that’s we see some of competitiveness in Q3 and early Q4.

And that’s the area where we’re able push some of that in Q1. Now for us, philosophically, we firmly believe and aligning ourselves up with some core customer taking a longer term perspective on those relationship. And so we’re not as exposed on both the downside and the upside to some of that volatility so suffice to say, it does have something change overnight certainly in our context relating to taking advantages of some of those market dynamics.

Andrew Bedford - Raymond James

Can you just remind how much of your work is on the spot market right now versus inverse or how much you Canadian work is covered by contract right now?

Fernando Aguilar

We’d say broadly as far as our customer relationship probably about 70% of our work to be tied up with long-term customers. And that’s the core philosophy that we believe since Doug founded the company in 1999 you know about two-thirds plus that we dedicate to a lot these longer term type relationships.

Andrew Bedford - Raymond James

Okay and so is there any scenario that evolves here over the next few weeks where you don’t end up coming out of the first quarter or going into breakup period with a backlog?

Fernando Aguilar

We expect at this point that there will be a backlog. We just think again and you look the fundamentals as to how busy we’re today the fact that we’re still running upwards the 600 rigs, there is going to be some spillover it’s inevitable. I think the only question at hand is how much that work can we get to in the month of March and early April. And again as we reiterate early that’s just going to be a weather related factor. But I think unquestionably there is going to be some spillover.

Andrew Bedford - Raymond James

Okay and this is a long-term question now is that, as you look back to time has there even been a scenario or situation where you entered the second quarter with the material backlog but you didn’t get pricing traction?

Fernando Aguilar

Oh, boy, I guess probably the most today here in the room is me.

Andrew Bedford - Raymond James

I was really targeting at you.

Fernando Aguilar

So I guess market dynamics continue to change but certainly if you look at over the last few years, we have a backlog into Q2 and Q3 unless our customers decide not to complete well bores or there is some other challenges and commodities and so on so forth, there is financing challenge and overall dynamics. We certainly believe here that again, what Tom said with 600 rigs working with these large-large pads that we work on now days, longer reach horizontal well bores, multistage fracs and continue to be the style of business with more fracs per well bore, or more profit being pumped.

As we have these backlogs, it certainly does spill well into Q3 and Q4 and a lot of our customers are looking ways to take advantage of infrastructure and place that’s much better was 10, 20, and 30 years ago to something work in Q2. So as much as we would like to stand our Canadian business that we can level lot of things to almost that’s never going to happen because unique phenomenon on how the ground freezes every year in Canada and thaws out makes it impossible. So I think to answer your question, has there been a time now there is a backlog like this and when certainly with this volume of flow we have today, we expect things will roll in Q2 to be along Q1 or probably Q1 being into April which is not really by calendar but I will get a good kick into the second half of the year.

Operator

Your next question comes from the line of Jeff Fetterly with Peters & Co. Your line is open.

Jeff Fetterly - Peters & Co

Good morning, guys, just a mix of questions. On the Canadian side year-over-year margins were down 650 basis points revenue was fairly flat, can you give us feel of quantitative or quantitative how much of that margin compression was pricing based versus cost increase, versus job mix?

Tom Medvedic

Tom here Jeff, I would say the majority of that would be pricing.

Jeff Fetterly - Peters & Co

And so when you think about Q1 to Anders question previously activity is about as strong as it could be right now. From a margin standpoint with pricing being fairly weak still into the first quarter, how much margin lift do you think you can actually get on a sequential basis Q1 versus Q4?

Tom Medvedic

I think it’s going to be somewhat muted, I think it is highly dependent on what March looks like, if you get economies of scale for the quarter to be honest with you Jeff. So certainly year-over-year basis Q1 margins ‘13 versus Q1 margin ‘14 using the parameters on some of the pricing that would have been, but I think you draw your own. As you recall 2013, weather worked in our favor, in just in the context of having a full margin activity. So our overall view is there is perhaps opportunity to see some improvement but certainly I wouldn’t necessarily expect that it would be an exponential type increase on a quarter-over-quarter basis.

Jeff Fetterly - Peters & Co

In terms of Q1 activities to date, did you guys ramp up fairly quickly in January or did it take some time to reach the capacity you are at today?

Tom Medvedic

January this year it took place more quickly than it did last year, so I’d say in the context of looking back for last three or four years I would say to place by enlarge a little bit more quickly than it did in years time.

Jeff Fetterly - Peters & Co

Earlier you talked about some of the cost inflation and Doug you referenced being able to recruit some of that inside and both inside and outside and outside of contracts. How do you guys expect you’ll to be able to do that? Did you put price booking fees through or do you think discounts will narrow to the point where you could recoup some of what’s been incurred for cost inflation.

Doug Ramsay

No Jeff, we don’t -- that’s not the way we operate, the way we operate is basically based on the contracts that we have with our customers we have individual discussions with them based on the commodities that we will like to recover some of the costs that are basically affected by the cost escalation. And that could be because of the U.S., Canadian exchange rate or that could be because of pricing from our suppliers going up. But this is on a one-on-one basis.

Jeff Fetterly - Peters & Co

What about the spot markets stuff?

Doug Ramsay

Spot market stuff is basically priced in -- is differently priced, because we’re talking about going back to customers and discuss about pricing those contracts that we have that have basically established pricing for the longer term relationship but spot market. Spot market we price what we believe the correct price is supposed to be.

Tom Medvedic

Here anecdotally our customer being engulfed by one of our competitors, that happens if you get these high demands, but that’s not our way of doing business, are we afraid to make money? No. Are we’re afraid to raise the prices? No. Do we gouge and our customers? No. And you can hear anecdotally and I hear it all the time, because I know lot of these guys and I do wander the streets of Calgary, the customers that poke me a lot of time, but that’s not our way of our business.

Jeff Fetterly - Peters & Co

Last question on the Mexican side, Fernando your comments earlier, I am little surprised that how cautious your look is for 2014 given the anecdotal comments we’re seeing from the drilling contractors in terms of new build awards and eminent new build awards in Mexico. Do you expect, is it region specific where you see the cautiousness in terms of outlook or is there something different on the completion side that you think might compare to the drilling side?

Fernando Aguilar

There are three front operation in Mexico and one operation is one in the South, which is more carbonate deep wells, high pressure environment and in the north you have what we call the gas plays in Reynosa and Chicontepec which is shallower heading into horizontal wells so the two markets are very different. And they have been investing heavily in two areas, with basically offshore, where more seismic has been shot in the Gulf of Mexico and then trying to develop those say high profile wells in Tabasco and -- so that is a market where we see an increase in activity. We don’t really see the same activity increase but it will open again, but like I was saying we have to be cautious about that activity in the next quarter or two is related to the northern part of the country.

So some people are basically -- Mexico is a big country, Pemex is a big Company and they're trying to let’s say to sort out some of the issues that they have been having and financially most of the issues that they had were north -- were related to the north where we were operating and in this, let’s say not only horizontal wells but also some of the shale activity that we’re trying to develop in the Eagle Ford equivalent they have in northern part of the country.

Jeff Fetterly - Peters & Co

Over the medium term how important is this for Calfrac to have a presence or exposure to the Villa Hermosa Southern activity?

Fernando Aguilar

It is important I believe I had opportunity in my career to participate in that business in the past and I believe that’s a good area for Calfrac to penetrate and we are considering seriously some move into that area because at the end of the day we are not in Mexico to be participating on in the northern parts of the country but also a whole let’s say land onshore operations in Mexico. Like the Mission acquisition in the Eagle Ford in the U.S. Texas what’s’ our part of strategy, for Mexico Villa Hermosa is part of our strategy.

Operator

Your next question comes from the line of Jim Morrison with CIBC World Markets. Your line is open.

Jon Morrison - CIBC World Markets

In the U.S. you talked about improved utilization in the Bakken and Rockies’ region, can you give us sense of how meaningful the change was on a sequential basis in terms of utilization quarter-over-quarter?

Fernando Aguilar

Well, I don’t have the dollar figures in front of us nor would I probably share that with you anyways Jon but in that context I think it was a material towards the Q4 versus Q3, it was significant and I think we see the momentum in both of those areas building. So, I would say it wasn’t small in nature. We do see momentum building in both these areas probably more so in the Niobrara than on the Bakken.

Jon Morrison - CIBC World Markets

Was it just a function of just accelerating customer programs or whether new contact towards in the quarter which took place and benefited Q4 results?

Fernando Aguilar

I think it probably function of both but certainly having some greater exposure to certain customers that are active in those areas would probably be the more significant of the two.

Jon Morrison - CIBC World Markets

In the press release you referenced supply chain and logistical improvements in the U.S. taking place in the quarter. Can you give any additional color on what that entails?

Fernando Aguilar

I think Jon from our perspective I mean one thing that a lot of people I think realize is the importance of supply chain logistics given the volumes of commodities and products that we deal with on a day-in day-out basis and I think there is some companies that, in our competitive landscape that do it very, very well and other companies have struggled with it. And I think one of things that I think we would be very focused on is to suggest that as we move more and more of this larger pad development that it is becoming, not only from an execution standpoint but from a financial standpoint it’s becoming critically important that you have those two aspect nail down. And we think it becomes a differentiator in our ability to execute and compete with some of our competitors.

So, our comments are just a highlight that it is an extremely important aspect to a job and really is part of the reason why I think certainly in last several quarters we have been able to put up some numbers that put us relatively good state in the competitive landscape.

Jon Morrison - CIBC World Markets

Thinking in general terms can you give us sense of how big the difference is in the pricing on your contracted fleets in the U.S. versus the current spot market?

Fernando Aguilar

I can’t quote a percentage at this point; it’s sufficed to say our contract coverage is going to be higher than where the spot market is today. I would say, our overall view is depending on the basin that we are speaking of Jon is obviously more significant in certain basins than other basins just based on the competitiveness of that particular basin in question. So, clearly part of the long-term strategy here is to have long-term contract coverage on both side of the program quite frankly international as well to provide that stability and platform and will continue to be so in the future. So, I think that core philosophy will continue into the future and has provided us with obviously some downside protection through the jobs in the market not only back in 08, 09 and again it’s foundational piece to help you run the business.

Jon Morrison - CIBC World Markets

Is it fair to say that as you get towards the end of ‘14 with the improving market conditions and geographically where you are positioned, you don’t believe that you are going to see a large drop in operating margins if some of those contracts come to term at the end of ‘14?

Fernando Aguilar

I think that’s a fair statement Jon, I think in our perspective is I think people understand that the relationships with the customers that we have the contracts with, in our view go well beyond just the paper at hand, right. These are relationships that we have nurtured since the inception of this company and really the contract really formalize that relationship. And I think those customers keenly understand the value of the relationship and it’s not just a matter of at the termination of that contract but including that contract you go out to bid in way you go. Certainly I think from our perspective that the customer base that we nurtured is a longer term perceptive and the contract a part of it formalize that.

Now that’s not to suggest that the market isn’t going to have some bearing on what the financial parameters of those contracts are, I mean I don’t think anyone is naïve enough to think that, that isn’t the case. But it’s not strictly tied to small market prices either, so give us a bit of hybrid there but at this point we certainly wouldn’t expect there to be decline in potential margins as those contracts potentially go off in the next year year-and-half.

Jon Morrison - CIBC World Markets

On the Mission assets, is there any formal view at this point that looking at redeploying slugged assets into Canada or geographically shifting some assets over to Texas into other basins in the U.S. at this point?

Fernando Aguilar

No John when we did to the acquisition and looking to the assets and all the day I think the deal was basically to at the beginning when we were thinking about doing it was basically to keep 50% of the assets in Texas and using the other 50% in our capital plan for 2014 there were things are evolving we basically are keeping most of the assets as we’ve discussed earlier with some exceptions like coil tubing moving north and helping establishing our coil tubing operations in different areas.

But what we can see today is we are keeping most of the assets in Texas but we will be supporting areas that will have picks of activity in the near future. So a very realistic picture where we’re trying to lease keep or maintain most of the assets in Texas and support if necessary operations that require a crew for I don’t know two weeks, three weeks, whatever, in a surrounding areas so that’s the way that we are looking into it and we are executing it.

Jon Morrison - CIBC World Markets

Last one from me, just on Argentina. Is it fair to say that the profitability of operations in that country is in line with North America at this point once you back what I would assume to be some sort of a fiscal drag at Mexico and less robust activity in Columbia?

Fernando Aguilar

Yes, I think it is very interesting, that question is very-very interesting because a lot of people are very skeptical about Argentina. And the political and economical situation of the country is complicated as we know. But there is a reality and the reality is that the country can’t continue paying $15 billion in imports in energy into the country, right. So we believe that having that potential and that resource underground is going to help Argentina turn around and become let’s say a more important country in the energy landscape.

So, what has happened to Calfrac in the last few months, we’ve been building our presence in the country? We’ve been improving it takes time to enter new market and enter new country and our execution on this proving the strategy of Calfrac has where we operate which is related to our excellence in service quality and in safety and we’ve been recognized by our most important customer down there as a potential not a potential as a partner for the future development of these fields that we’re basically working on today.

So, we have our expectations and our results in terms of profitability in Argentina are better than what we expected and I believe that we will continue moving that direction. And like you said we’ll help to little bit compensating for some of the shortfalls that we have in Mexico.

Operator

I am showing no further questions in the queue at this time. I turn the call back over to presenters.

Fernando Aguilar

Okay. So, Stephanie, thank you. So I like to thank everyone for your participation in our Q4 2013 conference call. And I invite all of you if you have additional questions to contact us here in Calgary. Thank you very much and have a good day.

Operator

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

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