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Executives

Ian Gillies - Manager, IR

Fernando Aguilar - CEO

Mick McNulty - CFO

Analysts

Sean Meakim - Barclays

Dana Benner - AltaCorp Capital

Scott Treadwell - TD Securities

Kevin Lo - FirstEnergy

Jon Morrison - CIBC World Markets

Jeff Fetterly - Peters & Co

Calfrac Well Services Ltd. (OTCPK:CFWFF) Q1 2014 Earnings Conference Call May 8, 2014 12:00 PM ET

Operator

Good morning, ladies and gentlemen, my name is Aaron and I'll be your operator today. At this time, I'd like to welcome everyone to the Calfrac Well Services Limited First Quarter Results Conference Call. At this time, all lines have been placed on mute to prevent any background noise. And after our speakers' remarks, we are going to have a question-and-answer session. (Operator Instructions).

Now I would like to turn the call over to Mr. Fernando Aguilar, Chief Executive Officer. Mr. Aguilar, you may begin.

Fernando Aguilar

Thank you very much, Aaron. Good morning and welcome to our discussion of Calfrac Well Services first 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 Mick, Ian Gillies and 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, 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 first quarter of 2013, Calfrac achieved the following financial results in comparison to the first quarter of 2013. Consolidated revenue was $547.6 million, an increase of 29% from the first quarter of 2013. The increase was driven primarily by high activity in Canada combined with increased activity in the Niobrara and Marcellus shale plays in the U.S., higher fracking activity in Russia due to an expanded customer base and increased demand for horizontal multi-stage fracturing operations and commencement of fracturing operations in Argentina which commenced in during the second quarter of 2013.

Operating income, which is income generated after operating expenses and selling, general and administrative expenses, was $64.1 million for the first quarter, a modest increase in 2013. Margins were negatively impacted by lower year-over-year pricing in both Canada and the U.S. The strong U.S. Dollar which resulted in high input cost in Canada, high Canadian logistical cost due to transport constrains and our customers' requirement a larger product values as well as weather disruptions in the U.S. and Russia.

Net income attributable to shareholders of Calfrac was $8.9 million or $0.19 per share fully diluted, and included a before tax foreign exchange loss of $2.8 million. This compares to $24.6 million or $0.54 per share in the first quarter of 2013, which included a foreign exchange gain of $2.4 million before taxes.

In Q1 2014, depreciation expense was $33.5 million, and this is up by 35% in the first quarter of 2013 due primarily to the purchase of Mission Well Services assets in the fourth quarter of last year. And the full effect of the company's 2013 capital program.

Calfrac's interest expense increased by $5.7 million to $14.9 million due mainly to the issuance of an additional $150 million of seniors unsecured notes to finance the acquisition of Mission.

In Canada, total revenue increased to $267.7 million in the first quarter of 2014 from $231.6 million for the same period of 2013. The 16% increase in revenue was driven by higher activity, primarily in the Montney and Duvernay plays, as the number of fracturing jobs increased by 18 percent from the first quarter of last year combined with the trend towards much larger jobs. This was somewhat upset of course by lower pricing.

Operating income in Canada decreased by 6% to $52.5 million from $55.9 million in the same period of 2013. The decrease in operating income was primarily due to the lower pricing, higher fuel and subcontractor transportation costs combined with the impact of a weaker Canadian dollar on the cost of materials that are sourced from the U.S..

For the U.S., total revenue was $211 million, a 56% increase in the same quarter last year. The growth was primarily due to significantly higher activity in the Niobrara play and in the Marcellus. The commencement of the company's presence in the Eagle Ford in the fourth quarter of 2013 also contributed to strong year-over-year growth in revenues.

Operating income in the U.S. was $21.7 million for the first quarter, a 20% increase from the comparative period last year. The increase was mainly due to the higher activity in the quarter. Operating margin as a percentage of revenue declined to 10%from 14 percent year-over-year due to harsh weather conditions affecting equipment utilization and logistics as well as costs of integrating the Mission into Calfrac's operations.

Revenue from Calfrac's Russian operations during the first quarter increased by 5% to $38.9 million from $37.2 million in the corresponding quarter of 2013. This increase in revenue was mainly due to higher fracturing activity as a result of the company expanding its operations into Usinsk for a new customer combined with increased demand for horizontal multi-stage fracturing operations in Western Siberia.

Russia's operating income was $0.8 million during the first quarter compared to $2 million in the corresponding period of 2013. This decrease was due to the unusual weather conditions during the first quarter, which included both colder and warmer-than-normal conditions and different parts of Russia affecting equipment utilization and access to well sites, respectively. In addition, we did incur some start-up costs related to the company's new operations in Usinsk.

Turning to Latin America which consists of Mexico, Argentina and Columbia, this region generated revenue of $30 million in the first quarter compared to $27.7 million in the same quarter last year. The increase in revenue was due mainly the commencement of fracturing operations in Argentina during the second quarter of 2013 and the subsequent expansion of operations into the Las Heras district in southern Argentina. This was offset by significantly lower activity in Mexico resulting from budget constraints experienced by the company's major customer in the regions where we operate.

Latin America generated operating income of $5.9 million versus $1.2 million in the comparative quarter last year. This significant increase in operating income was due to strong fracturing activity in Argentina, and was partially offset by the low utilization in Mexico and Colombia.

The company recorded income tax expense of $2.6 million during the first quarter of 2014 compared to $7 million in the comparable period of 2013. The effective income tax rate for the three months ended March 31, 2014 was consistent with the comparable quarter of 2013 at 22%. The decrease in total income tax expense was primarily due to lower profitability in Canada, the U.S. and Mexico offset partially by higher taxable income in Argentina.

Calfrac's 2014 capital program was increased by $10 million to $130 million to add some U.S. support equipment. Total spending in '14 including carry over capital was expected to be just over $150 million. In Canada, Calfrac retired five shallow coiled tubing units during the first quarter but added one deep capacity unit.

Turning to the balance sheet, the company's working capital was approximately $338.9 million, which included $25 million in cash and long term debt of $667 million, the vast majority of which is not due until (inaudible). As of March 31, the company had utilized $28.7 million of its credit facilities for letters of credit and had borrowed $14.4 million against this facility. This leaves us with $256.9 million in available credit.

We continue to monitor our balance sheet and cash position very closely. And we also look very closely at the credit profile of all of our customers. We are focused on maintaining a strong balance sheet which provides us with 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

Thank you, Mick. I will now provide a brief overview of our operation during the past quarter and then discuss our prospects for the future in each of our business segments. I will begin with our operations in Canada. Calfrac it is in its typical period of reduce activity due to a spring break up.

Our results in the second point there would largely depend on how quickly weather related road bans are removed. Fracturing and coiled tubing activity I expect it to be strong when spring break up concludes.

Calfrac expectation is that our activity will increase at a moderate pace as break up ends and road bans are progressively lifted. The company is also optimistic that activity will increase in the second half of 2014 when compared to second half of 2013 due to several factors including a stronger natural gas pricing that occurred throughout, stable end pricing, a weaker Canadian dollar, the effects of oil and natural gas asset consolidation over the past six months, LNG related activity and improved equity markets for Calfrac's customers.

The company believes these factors to lead to pricing improving in the second half of the year.

Calfrac continues to believe it has the leadership position in the key natural gas plays of Canada which include the Montney, Deep Basin and Duvernay and expects to participate in the long-term development of this trends. Calfrac's customers remain at the forefront of these developments, which should be a catalyst for higher activity in the second half of 2013 and beyond. Calfrac believes its people, service quality, technology and HSE practices will make it a key partner in these developments.

Calfrac expressed that oil-focused activity will remain stable for the rest of the year with introduction of higher rate treatments in certain plays such as Cardium, driving higher equipment utilization. Activity in the working place expected to increase in 2014 over 2013. Calfrac also expects to achieve further operational efficiencies in the Canadian market through the expanded use of 24-hour operations and multi-well pad development.

In the United States, Calfrac expects that it would experience moderate activity increases throughout the remainder of the year which will result in a strong equipment utilization. These expectation is driven by the company's active customer base, contract coverage and positioning in some of the most active place in North America, which include The Marcellus, Eagle Ford and North Dakota Bakken. Calfrac's strong customer relationships in the Fayetteville and Rockies are resulting in high utilization levels.

The company remains focused on effectively managing its cost structure to improve margin performance in the face of competitive pricing. In addition, weather disruptions in the company's supply chain and logistic operations should be reduced for the remainder of 2014. The company believes the Marcellus shale play activity will remain robust for the remainder of the year due to a slow cost structure for natural gas, it's proximity to consuming markets and upcoming natural gas pipeline activity. As a result, the company will deploy a fifth crew in the second half of 2014 using existing equipment. As well, the Utica play continues to deliver some well results, which may provide the basis for higher activity in that basin.

In the Fayetteville, Calfrac is expecting activity to be higher on year-over-year basis based on customer indications and a strong natural gas prices. Robust activity is also expected to be stronger year-over-year as the company has materially increased its exposure with one of the most active operators in Niobrara. In Eagle Ford, Calfrac continues to move forward with integration of the Mission assets. Pricing remains competitive but Calfrac believes it is stable and that activity should increase.

Lastly, drilling activity in North Dakota Bakken remains high but the market is oversupplied pressure pumping equipment. The company continues to assess ways to improve its performance in this region.

The United States well service and market it fractured and pricing can be based on specific. Calfrac didn't see any meaningful change in its pricing in Q1. However, the company has taken older equipment being deployed in (inaudible). We are optimistic that increase demand in this place will reduce horse power supply scenario that we operate. As well, the trend of more stages per well and increases in tonnage per stage are positives for Calfrac. The company is of the view that these events could lead to a more constructive pricing environment towards the end of 2014.

Calfrac anticipates that equipment utilization in Russia will improve as 2014 progresses, following activity being negatively impacted by inclement weather in the early portion of 2014. The company believes that expanded use of new technologies in Western Siberia such as horizontal drilling and multi-stage completions will continue. Approximately 50% of Calfrac's fracturing work was focused on horizontal wells in the first quarter of 2014. The company 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 fourth quarter mainly due to an increase in fracturing activity in Argentina, offset 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, Calfrac is optimistic about the future development plans of oil and gas assets. The company began fracturing operations in 2013 and horizontal activity has accelerated in 2014. The investments expected to be made in Argentina by national and integrated oil companies provide support of Calfrac's view on these market. The company will deploy an additional 32,000 horse power to the country in the second half of 2014 which includes an additional high-rate pumping crew that is expected to focus on unconventional development in the Vaca Muerta shale play. Customers continue to gravitate towards Calfrac's growing reputation for service quality and technical expertise, which is providing the foundation for long-term growth in Argentina.

In Mexico, Calfrac expects unconventional development to become more prominent over the longer term once reform of the energy industry is complete. Calfrac believes this will set the stage for increased capital spending by Pemex, as well as new entrants to Mexico. With this in mind, Calfrac will prudently manage its cost structure and closely monitor ongoing developments to remain prepared to take advantage of new opportunities.

In summary, Calfrac's commitment to long term customer relationships, service quality, safety and return on capital employed have already to effectively manage the peaks and troughs of the oil conservative cycle. This approach has allowed the company to achieve a strong utilization level, capitalize on M&A opportunity during trough periods and adequate and organically during more buoyant times. The company will remain committed to this philosophy and believes it will result in posting long term shareholder return. Calfrac remains committed to disciplined growth in core operating areas. The company is continuing to assess new opportunities but only at rates of returns that made sense to our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Dan MacDonald from RBC Capital Markets. Please go ahead. Again, Dan MacDonald from RBC Capital, your line is open.

Your next question comes from line of Sean Meakim from Barclays. Please go ahead.

Sean Meakim - Barclays

Hey. Good morning everyone.

Fernando Aguilar

Good morning.

Sean Meakim - Barclays

So just to touch on the pricing environment, you noted that -- what you saw on 1Q sequentially stable pricing in the U.S. and Canada. Are you seeing -- kind of -- may be a broader statement. Are you seeing pockets of improvement in the U.S. and in Canada? Are we seeing opportunities for passing through costs, some of the higher cost that you are experiencing on two customers and or is there potential for net pricing in the second half?

Fernando Aguilar

I think we basically have the same situation happening as we speak. We have opportunities with existing customers who are basically one to have -- to go for more work. We will be having opportunity of pushing prices in a 3% to 4% range. We also see opportunities in areas where we have been asked for new customers to operate for them. But the pricing situation, as we say, is stable and is basically giving smaller opportunities. I think there is positive atmosphere in the market related to what companies are saying about pricing, but the reality is that this is happening in isolated pockets, it's not happening everywhere. And we see as well the opportunity as you were mentioning of cost recovery coming from -- like we were mentioning in our report, coming from the exchange rate and how these cost can be recovered for our contacts.

Sean Meakim - Barclays

Okay. Then just to clarify one point. The fifth crew you're adding to the Marcellus, is that equipment coming from the Eagle Ford or can you give us some indication where you're pulling that equipment?

Fernando Aguilar

The equipment that we are deploying Marcellus is a combination of different things. And the first one is basically the continuous ever green build program that we have. I think you are aware that Calfrac a continuous build program that is part of our capital plan. So some of this equipment is being built as we speak and it would continue being part of our capital plan for this year and also next year. And we are also moving piece of equipment from different areas according to the requirements to be in that crew. So it is a combination of new equipment that is going from our capital plan and also optimizing the equipment resources that we have in different places, not only coming from the Eagle Ford.

Sean Meakim - Barclays

Can you give us some indication of how the size will be of that crew?

Fernando Aguilar

It's around 20 pounds.

Sean Meakim - Barclays

Okay. Then, just one last one from me. It seems like you noted that Eagle Ford seems to be stabilizing. We're hearing similar comments from some of your competitors. How is the -- can you give us a little more color on how Mission is going from integration standpoint, just kind of you how we're doing as far as integrating the fixed assets, how we're doing in terms of improving the customer base, those types of things?

Fernando Aguilar

Yes, Sean, well, first of all, Mission does not exist any more. Mission is -- assets were acquired and the company has fully integrated the personnel and the equipment to our operation. We -- as you remember, when the company acquired those assets, we mentioned it was going to take around a year for full integration of the assets and the systems, because we didn't really have access to a lot of information that we have today. So what we see today in our operation Eagle Ford, our reputation of branding is happening. We are growing that presence in a day-to-day basis. The equipment and the people have been going through the Calfrac standards and operational procedures. So we have been -- I had the opportunity of visiting crews operating the field in the last couple of trips that I had there. And I can tell you that that group of people are very motivated and are very interested and Calfrac continues growing. We see that integration continuing throughout the year, but what we can think of is a bigger business for Calfrac in the second part of the year due to prospect that we are discussing currently with new customers for us in the Eagle Ford.

Sean Meakim - Barclays

Fair enough. Thanks, Fernando. Appreciate it.

Fernando Aguilar

Thanks, Sean.

Operator

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

Dana Benner - AltaCorp Capital

Good morning, guys.

Mick McNulty

Morning, Dana.

Fernando Aguilar

Good morning, Dana.

Dana Benner - AltaCorp Capital

I want to start with your tone of all things. If we look at the way the market is assessing the fracing business right now we see it in the stock prices. Obviously the market is expecting some fairly major changes, maybe not right away but the beginning of a meaningful improvement in the business and your tone showed is very cautious. Now I think that's commendable in the sense that you want to over-deliver but I'm just wondering if your tone intentionally this way without reason or you just don't feel like you have enough information yet to really make bolder assessments on hiring activity in North America in the back half and then pricing.

Fernando Aguilar

That's a very interesting question and I think that gives you a little bit of perspective how Calfrac operates. The information that we manage is of course completed by the information that we get from customers and it is the information that you get from oil service companies and other oil and gas companies as well in both countries, but specifically speaking about the North American market.

So you know very well that the other supply of pressure pumping equipment in the U.S. is a fact of life, it is there. And the other reason we're pricing, the housing starts are picking up very quickly because that activity remains as central. If you follow the number of drilling rigs in gas drilling is not increasing and then activity remains, let's say, stable with the exception of the Permian where we see some movement in to horizontal drilling and newer activities.

We've been executing very well our strategy and you can see that our performance in the U.S. even though we had a soft quarter for U.S., well that's a combination of factors. One factor was related to weather as everybody experienced. The other one is we are investing in the additional crews that are going to be deployed between Texas and Marcellus and also revamping our business and activity in Colorado. We are cautious because we know that pricing hasn't been taking off as people are talking and expecting it to go.

So if you go now to the Canadian side, I think our tone is more cautious as well than our competitors because there is something that is called break up, that is here its happening as we speak and that's just down and stop the operation completely. Do we know how quickly break up is going to finish and how we can get into the second part of the year? we don't know yet because last year we experienced a very bad start due to floods in Alberta, but if the activity indication that we have in the first quarter and the backlog that has been created remains that give us the opportunity for the second part of the year to be more active and for our business and our customers to let's say to more operations. And then when you compare 2013 and 2014 we feel today that we are going to be busier.

We are cautious in our tone is basically moderate because there are a lot of unknowns that are not related to weather, but when we take the two years we believe that activity in both countries is going to be better, yes.

When we talk about pricing and this the question that you can think of how you can improve your financial performance and of course pricing is the number one, and if that happens and we can basically execute those price increases that we have in mind we will be doing better, but the market reality is that you see how people ready to work in the two countries with lower pricing because the equipment is available. So we'll continue executing our strategy which is related cost control, good logistics, good execution in the field, manage our license to operate in safety and service quality, to make sure that we continue to optimize where we operate and then we will see how the second part is going to benefit our performance.

Dana Benner - AltaCorp Capital

Well that's great. Secondly and finally, with respect to Canada if activity does end up getting better and potentially immediately that on the second half, how much of that do you think could be 24-hour ops and how good for Calfrac is 24-hour ops incrementally?

Fernando Aguilar

So this is an exercise that we normally conduct, and then the question is very interesting because in fact yesterday during our board meeting we were discussing about that shift. We believe that the limitation that we have in Canada related to the one we have in the US is more how ready our customers are to move into 24-hour operations. I think if we sit down with our customers and plan for that activity then we can get access to the people and the equipment that we will require, but it is more customer oriented and -- not only customers it is also third party services that are related to our business. We believe that at least in the range of 10%, 15% 24-hour operation increase will happen in the second part of the year. If we think that today 24-hour operations are basically running, I can say between 30% and 40% if we can go in the second part of the year to 10% 15% 24-hour operations that will give us an improvement that is going to benefit the way we operate and the amount of water that we can perform for our customers.

Operator

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

Scott Treadwell - TD Securities

Thanks, good morning, guys. Wanted to circle onto the comments you made about Bakken and I mean you have been there for a long time and I know you went through a debt laden '12 early '13 and recovered nicely. I am just wondering if your commentary about trying to improve performance there is in response to something market driven that happened where conditions have gotten progressively worse maybe since Q3, Q4 last year or if it's just more of a general comment that it certainly gotten better but there is still some room to go?

Fernando Aguilar

Scott, this is a very good question because in our previous script we had the opportunity of discussing with our customers in the area. As you are aware, three pressure pumping company have left that play and that is basically the situation of our pricing that is not giving those companies the opportunity of having a better financial performance. The pricing still very, very, very competitive and in one of our discussions with one of our most important customers in the area, we told them I don’t think it is convenient for you to see more companies leaving the play because this is what happens, everybody leaves and then prices go up and they will continue this situational prices going up and down.

So we said we need prices to improve in the area and we need your help if you really want Calfrac to continue operating for you knowing that you are satisfied and happy with our quality performance and safety record. And they said we understand that and we would like to see what you have in mind in terms of time pricing to performance and continue recovering from where you are today. I said the numbers are out there, they are public, people know exactly what is happening in different place where we operate. So if the oil and gas companies don’t help pricing you are going to have a lot of problems in the future. So I think if we remain at the level where we are today and we manage to improve our pricing, our financial performance should improve slightly in the area.

The activity levels, as you are putting in your question, will remain similar to what we had before. The customer base that we have most probably we are having, let' say, more activity now but I believe that and we try to be positive about what happens there because I think the potential is there. That is a very important for the U.S. and if we manage to get our performance improving, the Bakken will not be what it was in 2011 but at least it is not going to dilute the performance so for our U.S. operations.

Scott Treadwell - TD Securities

Okay. That's good. My next question kind of looks at that growth and pretty impressive that you managed to just load some extra horsepower from the ever green and standing assets that you have but I am assuming as you go forward that well is pretty much dry and if you are going to add equipment it has to pretty much be new builds or buys. And I am just wondering as you look today at what's on offer if there is anything on the contract side. How far would the terms be away from something that you guys would pull the trigger on signing that contract to build? Is it relatively closed or still not even worth talking about because it’s kind of night and day what the expectations are?

Fernando Aguilar

Yes, this is a continuous discussion that we normally have with our board of directors and discussions that happen with our corporate management team is exactly what type of resources we have to run our business without forgetting about the future but remembering that we are in the present. The present is basically giving us a picture today and some companies have disclosed results that they are building I don’t know 10,000 horse power or 40,000 horse power as we can read in the U.S. That's not a big deal. The big deal is what is going to happen in the future and how efficiently you can run your operation.

We always look for opportunities and also opportunities have given Calfrac the opportunity of growing in the 50 years of existence that we have today. That is a very serious approach we are very, very disciplined in terms of capital spending and we are very careful that we don’t build equipment and then we end up parking our equipment against the fence.

So we try to project what we think it going to happen in 2015 and 2016 we understand that we have to use something and we have plans around that and we can not disclose them today because we have to go through a diligence understanding what resources are going to be required but that is one of the priority that Calfrac's management and board of directors always have is to make sure that the resources are going to be available for our growth and also are going to be fully utilized and the return on those assets are going to satisfy our investors requirements.

So opportunities are there, yes. Are we looking to them? Of course. And we want to make sure and as you could see as well that we are in the process of moving 32,000 horse power to Argentina. So we move the equipment with activities and we try to optimize the way we operate. So you will see that in our, let's say, '15 and '16 plans activity will help us bring more equipment but we would bring it when it is going to be required.

Scott Treadwell - TD Securities

Okay. That's great guys. As always appreciate the color and I will turn it back.

Fernando Aguilar

Thank you very much.

Operator

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

Kevin Lo - FirstEnergy

Hey guys. I have got a couple of quick ones. First, if you guys can kind of talk about Argentina and when you expect the equipment to contribute and what kind of contribution that could be in terms of a ballpark?

Fernando Aguilar

Yes, Kevin, good morning. So Argentina is a little bit different than our place because it is not only a matter of transferring equipment it is also a matter of building equipment in-house in the country, because the local government wants to promote and develop the local industry. So what we see for Argentina is that as (inaudible) combination of the two and our indication is that the equipment that which have been transferred is already being transported down to Argentina and the one that we are building is going to be the completion of the build is going to be at the end of this quarter.

So I think we should be able to run some operations with a new fleet or larger fleet in the second part of 2014. We are very positive about the interest that these equipment is bringing to the customers because we see not only the local companies basically requesting our services but the international players I am talking of all the big ones that have been (inaudible) and the management team in Argentina asking for when are you going to be ready and what that (inaudible) activity can you dedicate to us. So there are three (inaudible) customers in Argentina that are going to start grilling more seriously they didn’t (inaudible) what they have done and that activity could be stronger in 2015 than what we had in the previous years.

Kevin Lo - FirstEnergy

Okay. That's great. I guess from a return stand point, do you see that area as good or like how does that area compared to the other areas in terms of return and capital on the 32,000 horse power.

Mick McNulty

So Kevin, this is Mick here. Obviously we are not going to tell you exactly what we are turning there but we are very happy with initially the forecast that they gave us and the actual results that we are seeing in Argentina. So I would characterize Argentina as being as good if not better than other regions.

Kevin Lo - FirstEnergy

Okay. Great. That's helpful for me thank you.

Fernando Aguilar

Thank you, Kevin.

Operator

(Operator Instructions) Your next question comes from the line of Jon Morrison from CIBC World Markets. Please go ahead.

Jon Morrison - CIBC World Markets

Based on your comments is it fair to say that you don’t plan to push book in Canada in Q2?

Fernando Aguilar

You want literally about price increase in Canadian Q2?

Jon Morrison - CIBC World Markets

Yes.

Fernando Aguilar

Oh, Jon it's not, I mean we already that I think it is not facing reality, Q2 you have a lot of equipment sitting within that maybe because of break up. Try to push pricing and in fact companies normally operate under lower prices in that in Q2 break up trying to stimulate customers' intentions to work and provide some volume of activity. If there is opportunity for prices to increase in Canada they have to be as of Q3 and Q4. How quickly Q3 pricing increase will happen will depend on how this market is going to be but it depends on the ramp up of the activity in that quarter. Honestly speaking and these discussion that we have related to pricing in the previous conference call Calfrac believes that pricing will happen only if the market is busy enough and the momentum that activity creates is going to take into a situation of supply demand increasing to a place where we can basically more those prices.

So if pricing is going to grow substantially higher it will happen in Q4, not in Q2 for sure, and you could see a little bit of a beginning but not very aggressive because of the pickup is not from 0 to 100 in one day it takes some time for customers to go back to their place and their wells and the oil service companies to actively prepare the wire line and the drilling and everything that is associated with our business.

Jon Morrison - CIBC World Markets

Appreciate the color. On the incremental customer successor when that you reference in the MDNA on the Niobrara, does that have the potential to require additional equipment build out over the next two, three, four quarters?

Fernando Aguilar

Yes, there is a potential, because what is very interesting is that this business is about how efficient you are and how well you perform and we have been breaking records for this customers in terms of number of stages per week performing the area and that's the customer that we were now working for in that specific basin and they are very satisfied and happy with our performance so if we continue performing and things are basically executed the way that we are doing today I see a lot of potential in the future and that would give us the opportunity of investing in equipment and people on resources for (inaudible) operation.

Mick McNulty

Jon, understanding of course that it is going to take six to nine month to build that equipment.

Jon Morrison - CIBC World Markets

Is there a likelihood that you potentially do anything on the M&A side to satisfy some of those customer demands or has the improving outlook in the US market elevated the ask for what people are willing to sell equipment for that it's probably more competitive to build stuff new?

Mick McNulty

It -- well, I mean look the -- certainly, the markets changed now. The set of their low hanging fruit is will be taken. It's not to say that there is not any opportunities, Jon. And we are active. We are looking all the time. We have -- we are looking the couple of things right now. But we also recognize that people see the uptick in the market and they are not going to self send some dollar any more. So we will make a decision. I mean, we will make an acquisition if we think it's a good return for us. But you are right, I mean we are also going to -- they remind getting brand new equipments, might be the better option.

Jon Morrison - CIBC World Markets

On the incremental crew you guys are adding in the Marcellus, how much of the effective capacity of that crew is effectively spoken for at this point and how much visibility do you have on duration of kind of utilization of that crew at this point?

Fernando Aguilar

I believe, Jon, that right I -- the investment that Calfrac made in Pennsylvania in terms of the facilities and the potential, understanding how the full reservoir understanding of our customer patience and all that place are opportunities, we believe that this is going to be a long term operation. And we are very positive about how much our business can continue, not only being very stable but also providing an important presence for the company. Due to a factors we mentioned in our report, pipelines are basically being built. This is very, very close to the market. We also have an area that has embraced the activity very well. The environmental and the relations with the government are very positive. So we believe that -- and as well, the earth is very important. Of course, it is how prolific these wells are.

So if you combine all of them we see Pennsylvania, Utica and Marcellus activities to remain very strong. And we have been growing our presence and -- part of what we are talking about softer margins in Q1 were related to investing, because every time that you bring a crew, you are talking about 200 people, 150 people depending on how big it is. So you have to start hiring the people, developing the personnel to be ready for the operation. So at the end of the day, we are building for our future in the Marcellus area and we are positive about it for the long term, not only for the next quarter or two.

Jon Morrison - CIBC World Markets

Just trying to eliminate some of the noise around weather in the U.S. operations and margins in the quarter. Can you give any sense of magnitude in terms of March margins versus January and February and were you exiting the quarter at a much higher rate than your average was?

Mick McNulty

Yes. The exit was much better than 70, January, February.

Fernando Aguilar

And what is interesting, Jon, is that we anticipated that question because that is a question that has gone other conference calls. And of course, weather played an important role in this quarter performance. I don't know, but we had opportunity of discussing this. But one of our trips throughout the U.S., we went through most of our districts and the weather was basically a 50 year lowest temperature in the places where we are visiting, including Arkansas and Texas. And Texas has seen as well a very, very cold weather not compared to what happens in Pennsylvania or the Bakken. But the unit has experienced a very, very boiled weather in the first quarter. What is interesting from our point of view is, as Mick was mentioning the exit was more positive. And I think we are moving into a faster pace and things could be better in Q2.

Jon Morrison - CIBC World Markets

On that basis, is it fair to say that have weather not been there it would not have been dissimilar from Q4 on a sequential basis?

Mick McNulty

There is lot of moving cost, Jon. Certainly, it would not be this bad, let us put it that way. But there was some amount of noise in there in terms of some operating cost, some repairs and maintenance that we were investing repairing equipments to move equipment to our console. So there is -- they are not that comparable. Certainly, it would have been a lot better, significantly better if we have not had the weather. Let me figure out that.

Jon Morrison - CIBC World Markets

Appreciate the color. Just to follow on Kevin's question, the last one from me. In Argentina what is the likelihood that you look at adding further capacity in 2015, beyond what you are currently planning to deploy? Given that there is a high degree of ask on the local content side, is the delivery time for new equipment dissimilar from what you would see in North America, thinking about a six to nine month build time?

Fernando Aguilar

Yes. It's different. It's different because the local companies cannot deliver equipment at the same phase and they don't have the same facilities like the one that we have it in Canada and U.S. But the answer to the first part of your question is, yes. We see more equipments and more activity going down to Argentina. And when you try to operate in a new country and you try to understand not only logistics but also everything that it's associated with business, it is not as simple as people think. It's not like moving equipments from the Marcellus to the Bakken or whatever. So yes, we see the happening because I don't think we have seen the higher activity level of the Argentina shale revolution, if we can call it. And today, as you are aware, YPF is basically trying to develop their tight and conventional reservoirs to generate cash in order to put more money into working. So once it put all the money into working, then you have more international operators working in that direction. Activity is going to be very different from what we have today. Are the logistics going to help us, may be no, because we don't have the rail networks and the roads that basically can take up all that type of activity. But it would be a ramp up and it is going to be very important compared to what we are experiencing today.

Operator

Your next question comes from line of Jeff Fetterly from Peters & Co. Please go ahead.

Jeff Fetterly - Peters & Co

Good morning, guys. Just two follow-on questions. In the MD&A your comments on the United States you talk about supply chain and logistic issues in Q1. Can you expand on that, please?

Fernando Aguilar

Good question, Jeff. Good morning. Some areas that -- in a couple of places due to changes in the way and regulations that the rail companies are operating today, we are using speed for trains and rail wagons and all that have created bottlenecks in two of the places where it will be operated. So it was a matter of having issues with receiving sand in terminals and then having the truck loads and storage and having enough sand to operate. And that was -- that was created because some of the jobs we were executing increased in volumes, but that was something that happened to some other companies that are operating the area where we were. So bottlenecks basically related to rail, that is what I referred to.

Jeff Fetterly - Peters & Co

And how meaningful do you expect those issues to be going forward?

Fernando Aguilar

Well, we have been having a lot of meetings between our suppliers and also with the rail companies. I don't know if you are aware of, but we have great experts in our organization, try to understand and anticipate a move of chemicals, sand and other pieces that are important to our business. So we try to anticipate as much as we can. And I think let us say for the next couple of quarters we are trying to look into 2016, our people are watching very closely how the delivery times and how these wells are basically moving. In -- if you think that winter is behind us, we expect that now from -- from now till the end of the year we should be in better shape. What happens in winter that will -- that can change things. But we are more positive about the second part of this year related to how the rail companies and also the suppliers are reacting to these pressures that the market is giving them.

Jeff Fetterly - Peters & Co

Okay. On the Bakken side, the weakness and challenges you saw in Q1, is that customer-based? Is that just competition in terms of supply? What is your read of that specific market and how do you adjust going forward?

Fernando Aguilar

So it's a combination of customer activity, it's a combination of a competition. We still believe that there are too many pressure pumping companies in the area. We will continue executing our cost control and trying to improve our pricing and currently execute way that we get more work. If I pick one area in the U.S. where business is very, very tough and very competitive, I think it's not as clear as the rest that could be (inaudible).

Jeff Fetterly - Peters & Co

Okay. Appreciate the color.

Fernando Aguilar

Thank you, Jeff.

Operator

And we have no more further questions in the queue. I turn it back -- turn the call back over to presenters.

Fernando Aguilar

Okay. So we would -- we like to thank all of you for your questions and your participation in our Q1 conference call. I will see you in our next one. Thank you very much. Have a good day.

Mick McNulty

Goodbye.

Operator

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

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Source: Calfrac Well Services' (CFWFF) CEO Tom Baltimore on Q1 2014 Results - Earnings Call Transcript
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