Canyon Services Group's (CYSVF) CEO Brad Fedora on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Canyon Services (CYSVF)

Canyon Services Group Inc. (OTC:CYSVF) Q2 2014 Earnings Conference Call August 1, 2014 11:00 AM ET

Executives

Brad Fedora - President, Chief Executive Officer, Director

Barry O’Brien - Chief Financial Officer, Vice President - Finance

Ken Wagner - President and Chief Executive Officer of Fraction

Todd Thue - Chief Operating Officer

Analysts

Jason Sawatzky - AltaCorp

Greg Coleman - National Bank

Kevin Lo - First Energy

Scott Treadwell - TD Securities

Jon Morrison - CIBC World

Operator

Good day, ladies and gentlemen. Welcome to the 2014 Second Quarter Financial Results Conference Call. I would like to introduce Brad Fedora. Please go ahead.

Brad Fedora

Hi. Thanks, everyone, for joining. Again it's Brad Fedora, the President and CEO of Canyon Services Group. With me is, Barry O’Brien, our CFO; and then a few other people from our senior executive team are here in the room. We are going to be discussing Q2 and the current business conditions, so please log onto our website at www.canyontech.ca, and on that website you will find our investor presentation and second page of our investor presentation is a disclaimer that makes reference to our discussions here today.

Barry is going to start off the call with some operating summary and then I am going to finish the call with market commentary.

Barry O’Brien

Thanks Brad. Following a very busy first quarter, the second quarter of 2014 got off to a strong start as a long cold winter delayed the seasonal spring break-up into early April, while June experienced drier field conditions, especially in the northern portions of the Western Canadian Sedimentary Basin. In addition, Canyon's ongoing sales initiatives resulted in further market share growth with companies operating in the deep basin as well as market share expansion in southeast Saskatchewan and southwest Manitoba.

In the second quarter jobs completed more than doubled to 347 from 151 in Q2 2013, while consolidated revenues also more than doubled to $60 million in Q2 2014 from $27 million in the prior year comparable quarter. Over 90% of Q2 2014 consolidated revenues were provided by hydraulic fracturing services with average fracturing revenue per job decreasing by 14% to $275,000 from $321,000 in Q2 2013. The decrease in average fracturing revenue per job is due to job mix and industry pricing pressure.

Canyon's increased activity in revenues in the second quarter were offset by an increase in fixed costs due to staff additions of about 140 people in the quarter to prepare for a busier second half of the year and due to significant seasonal price discounts which are traditionally offered to customers during spring break up.

As a result, Canyon recorded negative EBITDA before share-based payments of $9.2 million, a 30% improvement over the negative $13.1 million recorded in Q2 2013. Canyon exited Q2 2014 with just under 1,100 people compared to about 800 at the same time last year.

For the three months ended June 30, 2014, loss and comprehensive loss totaled $15.3 million compared to $17.2 million in Q2 2013, and basic and diluted loss per share was $0.24 for the current quarter compared to $0.28 for the comparable 2013 quarter.

I will now summarize the financial results for the six months ended June 30, 2014. Jobs completed in the current six-month period doubled to 1,237 from 621 in the prior comparable period, while consolidated revenues increased by 74% to $199 million from $114 million over the same periods or again over 90% of consolidated revenues in the six months ended June 30 were provided by hydraulic fracturing services with average fracturing review per job decreasing by 18% to 215,000 from 261,000 last year. The decrease in average fracturing revenue pre job is due to industry pricing pressure compared to last year and job mix.

For the six months ended June 30, 2014, EBITDA before share-based payments more than doubled to $18.2 million from $7.2 million recorded in the prior year comparable period. Fixed costs were increased by 30% as Canyon had added about 250 people in the current six-month period compared to the same period last year to prepare for a busy second half of 2014.

In the six months ended June 30, 2014, loss and comprehensive loss was $3.4 million, down from the loss and comprehensive loss of $8.7 million in the six months ended last year.

Basic and diluted loss per share was $0.05 for the six months ended June 30, 2014 compared to $0.14 in the prior year comparable period.

Subsequent to the period end, effective July 1, 2014, Canyon closed the previously announced acquisition of Fraction Energy Services Ltd., a leading water and fracturing fluid logistics, containment, transfer and storage management business. Fraction currently employs approximately 150 people and in the three and six months ended June 30, 2014 generated $6 million and $14 million of EBITDA, respectively.

Effective July 14, 2014, Canyon acquired four deep coiled tubing packages which included twin fluid pumpers, BOPs, injectors and three cranes from a Canadian oilfield services company for approximately $19.7 million. This acquisition will increase Canyon's deep coiled tubing fleet to 11 packages. Canyon expects to deploy these assets in Northwest Alberta and Northeast British Columbia.

With the purchase of the coiled tubing assets, Canyon's 2014 capital budget has increased to $95 million. This amount also includes the previously announced $63 million and $3.2 million, recently allocated to expand Canyon's Grande Prairie operating base and a further $8.7 million that would be spent over the remainder of 2014 in the Fraction business.

On July 2, 2014 Canyon amended its bank credit facilities to extend the term by one year. The facilities now consist of a $20 million operating facility and an $80 million revolving facility, which includes a $30 million accordion feature. As of June 30, 2014, Canyon had available credit facilities combined with positive working capital totaling $112 million.

On June 26, 2014, Canyon declared a quarterly dividend of $0.15 per common share or $10.3 million, which was paid to shareholders on July 25, 2014.

I will now return the presentation to Brad.

Brad Fedora

Okay. Thanks, Barry. Yes. I would characterize Q2 as being surprisingly good. I think the level of activity caught all of the service providers by surprise. The downside of the surprise, of course, was that I think we were more aggressive on pricing than certainly we would have been had we known how busy was going to be, so you can see from the financial results that we had very good top-line, but it didn't translate into the same proportionate bottom-line improvement year-over-year. That's just due to the fact that the pricing was lower than last year's breakup pricing, so very skinny margins on a field level.

Then augmented by the fact that we added 140 people over the quarter, we are up 140 people since Q1 and we are 250 people since Q2 2013, so great quarter from an activity and a revenue perspective, but unfortunately due to the competitive pricing environment it didn't translate into much improved bottom-line improvement, but that activity level has generally continued into the summer. Q2 was much busier than we expected and the summer, I think, is going to be as good or better than we have expected.

To-date in July had a great month and I would say today we are operating at full capacity. We are defined only by the number of people we can put to work. That always gets complicated by the fact that everybody in the company and around the oil patch want to take holidays in the summer as everybody else does, but at this time our revenue is defined only by our ability to put together a fully functioning and fully trained crews.

Pricing has improved since Q1 any pricing that was entered into, any pricing agreements that we are entered into over Q2 for second half of the of the year work were negotiated at higher prices than Q1. I would say, Canyon can be characterized as having sort of 50% of our revenue comes from long-term pricing arrangements with our customers and 50% of our revenue comes from a long-term customers, but on spot-based pricing which means that the pricing is reviewed sort of once a quarter or maybe once or twice a quarter, so it reflects current industry conditions, so long-term pricing arrangements haven't changed, but our spot pricing has change. I would say our spot pricing is up about 10%.

We are frustrated by the reluctance of the remainder of the industry to get on board with improved pricing. You know, however, you get to improve pricing whether it's a price book or a recovery of costs et cetera. That's totally a relevant. All that matters is that pricing improves and I can say I feel that at this time probably for the first time in the last six-seven years that Canyon is sort of leading the charge on getting improved pricing and successfully so, but it has been a bumpy road.

When I say pricing, I do mean whether it's it straight pricing improvement or discount improvement or the ability to pass on costs totally a relevant how you get, but pricing has improved. The good sign is, we are getting calls from some of the customers that we had bid on and lost to our competitors, because the competitors obviously were offering much lower prices than we were prepared to offer, but some of those customers are calling us back, because of course the competitors that won that work no longer want to actually show up for that previously agreed to price, so that is a very good sign that the industry is stabilizing from a price perspective.

The visibility for the remainder of 2014 is very good. I can say at this point, we feel like we are basically booked until breakup of 2015. This is the best visibility that we have ever had. There is a most concrete visibility that we have ever had for the future nine months. You know, at this stage customers need to be planning sort of 30, 60-plus days out or else the work won't get done. One of our biggest frustrations that we are trying to work through now is the amount of work that we are not able to get to.

We are try to figure out how to manage all of our logistics and balance our client base, obviously, but our biggest frustration at this point this is getting newly hired people trained and experienced so that we can put more crews on the road, because we are in a stage here where we are not able to meet as many requests as we as we would like.

The work over Q2 was very Montney-focused I would say and it's going to continue into the summer this way. About 60% of the work we did in Q2 was in the Montney. About 20% of the work was in the Duvernay, and the most of the remainder was is in Saskatchewan.

Our Saskatchewan operations we are very happy with, I think we have made a move to increase our exposure into the southern basin in Canada and that has gone very well. Obviously, we got lucky with the fact that Baker Hughes shutdown found two of its southern bases and laid off some people in Canada in late Q1 and we have been a direct beneficiary of that.

Our 24-hour operations we expect will represent about 56% of our work going forward. It's not, and we have talked about this many times before, 24-hour operations do not make our operations more profitable, but that do mean that given a certain set of people that there is likely some excess equipment, so if you are able to hire quickly and get those people trained, we can sort of put more crews to work. I think that sort of increase in effective capacity is well understood by everybody and we are in the fortunate position that we have been able to hire and retain people through Q2 and into Q3 and we expect to have more crews available by September 1 to try to take advantage of some of the activity that's happening out there.

Of course 24-hour work is a lot more accepted by our staff in the summer than it is in the winter, so I always want to caution people's expectations on what 24-hour operations will mean to revenue and bottom-line, because given the labor market that we working in today our staff are certainly not receptive to working nights if they don't have to, so it's a big stress on labor throughout the whole system and the other thing that stresses of course all the third-party logistics that we rely on to try to move that much sand or nitrogen or CO2 onto location in a very short period of time. Often the number of fracs you could do in a 24-hour period is defined only by how much sand and water you get on to location.

As things get cold and as activity picks up, all of that excess labor, excess third-party trucking et cetera, is going to quickly get very, very utilized, so we don't expect that our 24-hour operations could ever really effectively exceed 50% of our revenue and I wouldn't be surprised if it eventually comes down as the industry ramps up.

Our area of focus is still the Montney, Duvernay, deep basin in general. We are actually seeing a bit of pick-up in activity in the Cardium, and of course the Bakken and Shaunavon in Saskatchewan. Again, I want to reiterate, we have previously made comments about how he want to see our Saskatchewan or our southern basin activity represents almost 20% of our revenue and I think we are well on track for that to occur.

Other trends in the industry is, meters per well, the horizontal section of the well is still growing, which invariably means more fracs per well. We are seen the amount of sand on a per well basis increased significantly. I think in general over the last 18 months, the amount of sand that we pump on a per well basis has growing about 30%.

I think people are generally of the view that the bigger the frac, the better the production and that's translating into either bigger individual fracs or more fracs on a per well basis. We are seeing records amount of profit being pumped. That of course means that you must very actively manage your sand supply and I don't think this is a surprise to anyone that sand has been relatively short supply. Of course it's not the sand itself that's in short supply; it's the rail and the logistics out of the U.S. in the Canada.

Domestic sand that doesn't really have any pinch points at this point. About half of the sand that we pump does come from Northeast U.S. in Wisconsin, of course, which we all call Ottawa White and getting sand moved on rail can be challenging at times, so naturally we have entered into long-term arrangements with some of our suppliers to make sure that doesn't become an issue going forward, but there is going to be times that any given size of sand is in short supply, generally it's temporary, but it's going to just be an ongoing issue that becomes part of your day-to-day operations.

I would say that the wells that we are working on are still fairly liquid-focused. We haven't seen a big ramp up in dry gas drilling. We have seen some of course and we are seeing the threshold liquids or liquids production on a [per] day basis come down then operators don't require 50, 60 barrels a million anymore. Lots of guys are saying 20 to 30 is good enough with these gas prices, so we are slowly transitioning to a more gassy mentality, but at this point it's still very oil and natural gas liquids-focused.

As we talked about on previous calls, the infrastructure that we built out over the last few years whether it's physical or organizational development is paying off. Our ability to add 150 people over breakup was great work by our team. I guess, we were frankly a little bit surprised that we were able to grow our staffing so easily over breakup and we continue to grow as the summer continues and this is important, because the amount of infrastructure and logistics on a per well basis is continuing to grow and you can't do any of that without the people side of it.

Our customer list hasn't really changed. A lot of things have paid off nicely for us in the last six months and I don't expect that our focus on our customer list will really change much in the next year or two.

Other costs in the system, we are starting to feel some inflationary pressure. Things like, of course, we expect rail rates will continue to climb as the years go on. Labor is going to be an ongoing issue that was never going to go away for the callers that are calling in from the U.S. are the least. There was zero unemployment in Western Canada. Thousands unskilled jobs workers here have limitless choices and you know what that means which is there's going to be inflation on labor costs.

In general, Canyon models approximately 3% to 5% inflation on salaries or whether it's direct or indirect via benefits et cetera, but we are modeling sort of 3% to 5% per annum for labor inflation.

Chemical, I would say pricing has been pretty stable, but we are starting to see chemicals and acids and things like that, we are starting to see signs of inflation and that of course, now that the U.S. is getting stronger, Canada is getting stronger, the suppliers of that are feeling the pinch. There is a lot of manufacturing capacity in that part of the business, so I don't think we are going to have a manufacturing capacity issue. It's probably more going to be our chemical and acid suppliers. If their ability to add people and get production et cetera onto the roads.

Again, anytime it comes along with later logistics issues that may cause supply interruptions, but I think we are managing that very well and I don't expect that to be a significant issue going forward. Same thing with CO2 and N2, there's a lot of N2, especially being pumped in Western Canada right now, but thankfully the manufacturing supply has responded by increasing capacity. We have talked about this before fuel cost represent sort of anywhere between 7% to 9% of our revenue, depending on the pricing environment and of course it's easy to manage from a supply perspective, very little we can do on a cost perspective. Everybody knows diesel prices just are reflective of the supply and demand issues with diesel and oil prices in general.

Our capital budget summary, I think as Barry discussed briefly is, we had increased to $95 million. That does includable $9 million for the Fraction expenditures, so we did close the Fraction deal on July 1 and their capital for the second half of 2014 is approximately $9 million. As Barry was referencing, is we did acquire equipment from GasFrac at the end of Q1, which was approximately $9 million in costs.

We are adding about 30,000 horsepower all the ancillary equipment, the general stuff that we have been adding year-over-year and spending a lot of money on equipment to make our fleet run more efficiently and effectively and we are expanding our physical infrastructure i.e. our bases just to accommodate a larger company.

Bill times on frac pumps are sort of six to nine months, but blenders are 12-month. As everybody knows, blenders have a bottleneck or the most critical part of your frac spread, so in general we are now sitting in a stage, where it takes about a year to get a fully functioning frac spread. The pumps come easily, but some of the sands, storage and transportation equipment and blenders can take a while.

Coil, I would say is more like a year-and-a-half and that's a big reason why we acquired those four coiled units in early July from one of our Canadian competitors. They were pretty standardized coiled units, they are deep coil units and we could get them immediately at a small discount to what they would have cost us to build new.

We think, we sort of bought them at about a 3 to 5, by the time all the smoke clears on some retrofitting and painting et cetera, I think we basically paid sort of 3% discount to new which we thought was a good deal given the wait times for that equipment. I would say our coiled [CNA] divisions are really just getting started.

We had so many manufacturing delays in those divisions that I think finally we have caught up and we can run properly sized coil division and a properly sized CNA division and we will deploy those assets with the focus on the deep basin and southern operations. Still at this time, we are not pursuing any Horn River work whatsoever, we are not exposed to the Horn River as we have discussed many times before we always said the Horn River did not have enough consistent work to warrant spending the money to go there and I think that's sort of paying off here with our focus of our equipment people in the Montney and the Duvernay.

Just to get back to the Fraction acquisition, which is water hydraulic fracturing fluid and water management, that is becoming a bigger part of the industry. As sand per well grows, that generally means that the amount of fluid per well is growing. You know, we are seeing operate desire from operators to have other people manage the amount of fluid and dealing with the governments to access that fluid etcetera and a huge desire to want to recycle and reuse frac flow back, so I think the industry has done a great job of recycling, reusing and trying to get fracture treatments as green as possible. We issued 5.4 million shares to the Fraction shareholders and about $4.5 million of cash to the Fraction option holders and the deal closed July 1.

Year-to-date EBITDA for the first six months, the first half of 2014, EBITDA was $14 million and their Q2 EBITDA was about $6 million, so you can do your own math on a full-year basis there, but we think we paid appropriately for that for that acquisition and it will have a very good returns on our investments.

I am going to hand phone over to Ken Wagner, who runs that division and he is just going to give you some general outlook commentary for the remainder of the year.

Ken Wagner

Thanks Brad. Thanks for the callers calling in. First of all just a quick overview, Fraction Energy Services has been around for a couple of years. 2012, we started the business. We are based out of Fort St. John, British Columbia Grand Prairie Alberta, which is Northeastern D.C. and Northwestern Alberta.

Our prime focus was with a well diverse customer base is the Montney play and the Duvernay. We are expecting for the remainder of the year on our tanks, which [for] storage 85% to complete the year. ON our pumping division, we are fully booked through Q3, with Q4 filling up as well, so we are 150 employees, strong, very strong brand that we are happy to be part of the Canyon group.

All the employees are here long-term. The key guys are, we have signed a three-year escrow and we are looking forward to form relation with the Canyon group, and we are excited to be part of the group.

Thanks, Brad.

Brad Fedora

Thanks. Just in closing, the business environment for Canyon anyway is very good. We are really excited about what we have accomplished, profitability is increasing, we are operating at full capacity, got good visibility, our customer base is well-financed, we feel really good about certainly the next nine months anyway.

I don't expect just the last comment I am going to make is I don't expect any changes to the dividend this year. We look at that quarterly, the board reviews it quarterly of course. Hopefully, I am a shareholder and I understand that shareholders want dividends as high as possible and so do I, so as soon as we can increase that dividend, we will, but sustainability, financial flexibility and return on invested capital are primary motivators of how we make investment decisions, so we will balance that against investment opportunities of course going forward.

I think I am going to stopped there. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) First question is from Jason Sawatzky of AltaCorp. Please go ahead, Jason.

Jason Sawatzky - AltaCorp

Good morning, guys.

Brad Fedora

Hi, Jason.

Jason Sawatzky - AltaCorp

Brad, just to clarify on the pricing, you said on the spot market prices up 10%, is that up 10% since Q1 of this year or is that up 10% year-over-year?

Brad Fedora

It's up 10% from Q1.

Jason Sawatzky - AltaCorp

Okay. 10% from Q1, okay.

Brad Fedora

I will just qualify that with, for Canyon it's up 10%. A lot of our competitors I think have fallen behind and trying to get price increases push forward and whether the disconnect between senior management and their sales group, but something is missing.

We have been calling for this 10% price increase now for three, four months and that's generally worked out like we had hoped it would.

Jason Sawatzky - AltaCorp

Okay. Then just kind of given how strong the demand picture looks about back half. Do you expect or do you see any more pricing increases in the back half or do you think this is it for a while?

Brad Fedora

Yes. I wouldn't be surprised if once the industry sort of realizes how finely balanced this market is. If they want to increase budgets this winter, I wouldn't be surprised that we see another similar price increase in late fall as people position for the winter programs.

Jason Sawatzky - AltaCorp

Great. Okay. Then just turning to the labor side there, obviously guys have added almost 38% to headcount since last year 1,100 people. Are you sort of right-sized now in terms of the number of people that you need given what you are in terms of activity in the back half or do you still need to hire more people here?

Brad Fedora

I don't know if we will feel like we are right-sized. The logistics demands combined with the 24-hour operations makes us feel like we are always short of people. I don't know, I think, I guess, what I'm answering is no. I don't expect we will ever been a perfect situation, but we got to weigh that against outlook for the future etcetera, so labor is something that we sort of manage daily.

Jason Sawatzky - AltaCorp

We wouldn't expect to see another and 140 people hired in Q3 or anything like that?

Brad Fedora

Yeah. I mean, you never know, because part of the issue is, you got to put hiring plans in the motion sort of three to six months before you think you are going to need the labor, so if we go into this fall and we see a really busy winter and a busy 2015 as we expect, we will probably just continue to hire at the same rate and there's still lots of turnover, lots turnover in the first six months for new employees. That's hasn't improved.

I would say our retention past the six month has improved and our hiring practices have improved with time, but I don't know what's going to happen on the labor front. I mean, I expect it will be a constant grind.

Jason Sawatzky - AltaCorp

Yes. Okay. Then just final question on just on the frac and logistics issue, a number of those are large service Cos in the U.S. Halliburton, that was a major focus on some of their calls was just how bad the logistics are rounding up getting frac and is there a way to quantify that impact on your business right now?

Brad Fedora

Well, I will make some comments and then our COO, Todd Thue will make some comments. It's a few percent for sure.

Jason Sawatzky - AltaCorp

Okay.

Brad Fedora

It has got to take somewhere between 2% and 5% off the bottom-line. Todd? Just on the cost side

Todd Thue

Yes. The bottlenecks that Brad had mentioned earlier on would be [CN], because they are one of the main supplier of rail service into Canada, but other than that there is stand available in Wisconsin. The key to us is the planning and aligning with the right logistics people as far as [transloaders] and trucking companies to make sure we can supply the product to the site when required.

Jason Sawatzky - AltaCorp

Okay. Now, that's great. Thanks guys.

Operator

Our next questions from Greg Coleman of National Bank. Please go ahead, Greg.

Greg Coleman - National Bank

Hey, guys. Just a couple of quick ones, thanks to the color on Fraction, and good to hear the chatter there. Just wondering how Q3 is tracking relative to Q2, because it's a new company and you are still getting familiar with. Should we expect the same kind of seasonal trends we see for fracking in the rest of energy services in general from Q2 and Q3? You mentioned, I think it was $6 million of EBITDA in Q2?

Brad Fedora

Q2 is clearly the lowest quarter from a cash flow and EBITDA perspective, so I would think that their Q3 like on the Canyon Q3 is going to be an improvement over Q1.

Greg Coleman - National Bank

Great. You mentioned that your personnel constrain today, I think, just wondering if you can give us an idea if that's the case, how much of your horsepower, how much of your fleet is I guess however you want to term it sitting idle or waiting for crews or whatnot. Just trying to figure out what the gap is between the number of crews you have got and the number of I guess spreads you have got.

Brad Fedora

That changes every day as you know.

Greg Coleman - National Bank

A ballpark, like, is it half your stuff that is working.

Brad Fedora

Between maintenance and excess equipment, it's kind of a theoretical exercise, but it's got to be 20% equipment sitting around.

Greg Coleman - National Bank

Okay.

Brad Fedora

If we had more had more people, we could put it to work. I want to stress that a lot of people issues are due to summer holidays. The amount of people we have staffed up that has gone a long way to making our fleet really efficient, but now these people have families just like you and I do and in Canada people take holidays in the summer and that's all there is to it. You know that's our people issues correct sort of overnight, come August 15th, when the holidays are over.

Greg Coleman - National Bank

That remaining 20% back out in the field - if you wanted to or there is still a bit of a delta.

Brad Fedora

Well, there is always a bit of a inefficiency in the system, but yes, whether it's August 15, or September 1, our people to equipment ratio is really good.

Greg Coleman - National Bank

Okay. Just on the new [gear] you are putting out an additional 20,000 horse was added. Is that correct?

Brad Fedora

Right. Then and then 10…

Greg Coleman - National Bank

What's the timing on that additional 10? Like this fall September, October?

Brad Fedora

Mid-Q4.

Greg Coleman - National Bank

Mid-Q4?

Brad Fedora

Yes.

Greg Coleman - National Bank

Great. Then just finally on the pricing side, you mentioned half your fleet is kind of under longer-term pricing agreement, half of it is in spot. What's higher spot or long-term?

Brad Fedora

They are now about the same.

Greg Coleman - National Bank

Yes? After the 10% over Q1 there…

Brad Fedora

Yes. Like when you look back over the last 18 months, the longer-term pricing arrangements were better than where spot got to in the second half of 2013. By the end of Q1, they were almost the same. Then with this increase on the spot side, they are about the same now.

Greg Coleman - National Bank

Okay. Great. That's it for me. Thanks, everybody.

Brad Fedora

Thanks.

Operator

Our next question is from (Inaudible) of Tudor, Pickering, Holt. Please go ahead.

Unidentified Analyst

Good morning, guys.

Brad Fedora

Hi.

Unidentified Analyst

First question just thinking about the decision to build versus buy, you mentioned coils lead times are one and a half years, blenders are 12 months, unemployment 0%. Should we expect you to continue to be acquisitive in the back of the year given this environment? Then also what service lines would you be looking to expand?

Brad Fedora

Well, we would love to be acquisitive, but I think we could probably expect that going forward to bid-ask spread on buying versus selling is going to widen and it's going to make deals like we have done on the coil and the Fraction's divisions to get more and more difficult. Those are sort of unique situations that we had pursued for a while and then we were fortunate enough to be able to negotiate a reasonable price for both.

As you know, when times get busy, the bid-ask spread generally becomes insurmountable, so we are always looking to expand CNA coil because those divisions frankly - our revenue to fixed cost ratio has never been appropriate in those divisions and it has improved greatly with the amount of CAN equipment that we are getting and those for coil units, but those two divisions are not positive contributors of EBITDA to the company and it's a scale issue, so we always our eye out for those assets, but we are not optimistic that we are going to find anything now that things have turned here.

Outside of those two divisions, the Fraction division is always looking for complementary acquisitions, whether big or small and it's a pretty limited dataset there, but there's sort of more opportunity to pick up assets around North America, because there are more benign assets, and so Ken Wagner and his group always have an eye out for sort of really one-time opportunities throughout Canada and U.S. to pick up assets inexpensively, so I know I can kind of dance around the questions, because I really don't know what the answer is, which is other than we are always on the lookout, but the bid-ask spread is not improving.

Unidentified Analyst

Okay. Thanks. Second question, you guys or you cited inflationary pressures and then obviously you pushed through a 10% price increase, so how much of this do you believe is true net pricing?

Brad Fedora

We kind of roughly guesstimate over time that 8% of every 10% goes to the bottom-line and that your 7% or 8%, and say, 2% to 3% is cost recovery is kind of how we model price changes.

Unidentified Analyst

Okay. That's great. Then just final question for me regarding the addition of 140 people this past quarter, how much of that affected Q2 results, just trying to think about this Q2 versus last year Q2.

Brad Fedora

Well, we are up 250 people from last Q2. If you wanted model it, I would say $4,000 a month per person plus benefits in general.

Unidentified Analyst

Okay. Thanks a lot. I will turn it back over.

Operator

Our next question is from Kevin Lo of First Energy. Please go ahead, Kevin.

Kevin Lo - First Energy

Hey, guys. You are relating almost, like call it 50-50 spot and long-term. How much of the long-term is long-term I guess through a breakup of 2Q - '15.

Brad Fedora

There is no such thing as lockup. You know that.

Kevin Lo - First Energy

Yes.

Brad Fedora

Long-term pricing arrangements are just that, a handshake. Now, it might big stack of paper, but they mean absolutely nothing, so we would never say this much is locked up like it's zero is locked up. These pricing arrangements continue his theory until at least the end of the year, but to sort of have confidence beyond Christmases is not realistic.

Kevin Lo - First Energy

Right, but for what it's always explained to me is that it's the lock arrangements are basically the ceiling price, so it's very hard me to tell you the customers that here is what the handshake agreement is that you are going to push that further, so I guess my question really is that if the spot pricing for you guys move up beyond the long-term, which as you were suggesting before is basically flat, then what is your capability of moving prices on that 50% that is long-term beyond Q1 - within, let's say the Q1 '15 timeframe?

Brad Fedora

I don't know. Let's say our ability to move long-term pricing arrangements between now and the end of the year is nil, but beyond Christmas I am not sure.

Kevin Lo - First Energy

Okay.

Brad Fedora

Because if we have a significantly different industry in January than we have today, I mean, those long-term pricing arrangements are going to go up.

Kevin Lo - First Energy

Okay. You referenced logistics as a concern and I think Todd was talking about CN being one of the limitations. Is there any money spend today that should be bottleneck your logistics?

Brad Fedora

Yes, but it's not an efficient use of our money.

Kevin Lo - First Energy

Okay.

Brad Fedora

We are much better off incentivizing the suppliers to spend the money, because every $10 million that we spend, they spend $10 million they can stretch that dollar a lot farther than we can, because they already have infrastructure to build upon right, whereas we are kind of starting from scratch and so our money is not efficiently spent on transportation logistics for other than the trucks, things like that.

Kevin Lo - First Energy

Fair enough. Last question kind of follow-on to somebody else's question in terms of capital for let's say year. If delivery dates are this long, what's the probability or could you kind of comment on your desire to maybe increase the capital program on existing builds, maybe other back half of the year or in your 2015 capital program?

Brad Fedora

Well, by this fall we will have to start nailing down 2015 program, but I don't really have anything to report other than I would expect that late 2014, I would expect some commentary on 2015 capital by the end of this year.

Kevin Lo - First Energy

Okay. Great. Thanks, guys.

Brad Fedora

Thanks.

Operator

Our next question is from Scott Treadwell - of TD Securities. Please go ahead, Scott.

Scott Treadwell - TD Securities

Thanks. Morning, guys. Most of my questions have been answered, but I wanted to circle back onto the overhead here. You referenced in the press release that you could support a much higher level of revenue with the overheads you have got. Obviously that's going to take more equipment, but could you at least quantify in terms of how much more equipment could you support excluding field staff hires, with the overhead in back office you have got today.

Brad Fedora

Quite a bit more. The back office or the G&A infrastructure, I would say it's pretty efficient when you consider like the incremental cost required versus the incremental revenue that can be added, but I don't sort of have a ratio to give you.

From our field level, as the people we hired over break up, get trained in the holidays are coming to an end. When you look at Q1, our monthly revenue capability is significantly higher than what you would calculate as our monthly revenue in Q1 of this year.

From a percentage basis, I don't think I want to give you that, because we don't give guidance. It's a fixed cost business. As we have always said and as you always say to investors like it works against when things slowdown and it works for you when things heat up and I would say the difference with the Canyon versus the rest of the industry is that, I think we have been really fortunate in the people that we have been able to add and our infrastructure versus our revenue were still kind of in the sweet spot where we can add incremental crews without big changes in costs.

Scott Treadwell - TD Securities

Okay. That's a great start actually, because the next question is on the field side. Can you give us a sense. You quantified the cost per month per person, but if let's just say the next build was for 25,000 horsepower, it in terms of number of fields staff you have to hire to kind of run that at normal Canyon utilization whether it's 12 or 24, what would that sort of look like as an average? Would it be 50 people, 100 people, how would that shakeout.

Brad Fedora

Probably in the neighborhood of 50 to 60 people with logistical support and days off.

Scott Treadwell - TD Securities

Okay, so that would be kind of an all in number to add to the fleet?

Brad Fedora

It would be closer.

Scott Treadwell - TD Securities

Okay. That's great. The horsepower that came on in July, you referenced that you are short of people. Could I assume that that horsepower is not quite as busy or can't be as busy as the rest of the business or if we sort of spread that out and it's as busy as everything else in your point about you've always got some spare equipment on any given day.

Brad Fedora

The gas frac horsepower?

Scott Treadwell - TD Securities

Yes.

Brad Fedora

It's just blended into our fleet. We don't differentiate that equipment from anything else like we have 100 pumps and we don't sort of segment at all, but the first half of July had the usual summer ramp up. In the second half of July, we have been basically operating at close to capacity from a people perspective, but just as the company gets bigger, the equipment gets less efficient. It gets kind of spread out around the basin and the fracs change day-to-day you are always kind of built and staffed for the peaks sizing, I guess you would say from a frac sizing and peak activity from a people perspective, so there's always going to be 15% [lost] in the system that is either being maintained or sitting at 8 somewhere, because today's frac only needed 8 pumps, we have got nine pumps, so I don't know sort of.

I think you always got to assume that 15% or even somewhere between 10% and 20% of the equipment fleet is idle at all times.

Scott Treadwell - TD Securities

Okay. That's good. Last one for me on the sort of overhead side. I mean short of opening a new base, there probably isn't huge investment in that sort of fixed cost thing on the capital side I would assume?

Brad Fedora

Other than the land, in Grand Prairie that we have added as you can imagine land in Grand Prairie is ridiculously expensive. - Pretty quick.

Scott Treadwell - TD Securities

From here, what you have talked about the potential that more horsepower other than maybe adding a shop or something like that. You are not thinking about adding a whole new base of horsepower?

Brad Fedora

No, no, no. We can add horsepower to our existing base. There is no problem.

Scott Treadwell - TD Securities

Okay. That's great. That's all I needed, guys. Thanks very much.

Brad Fedora

Thanks.

Operator

All right, our next question is from Jon Morrison of CIBC World. Please go ahead, Jon.

Jon Morrison - CIBC World

Good morning all.

Brad Fedora

Good morning, Jon.

Jon Morrison - CIBC World

Just a point of clarification, you said pricing was up 10% over Q1, am I right assuming that that means that pricing is up, call it spot pricing is up 20% over - was the low in Q2?

Brad Fedora

Yes.

Jon Morrison - CIBC World

Have you guys actually pushed through a price book increase at this point?

Brad Fedora

Price book increase, I wouldn't focus on that. I mean, the price book revisions get made. Our new price book come out from our perspective anyway. Generally, just correct mistakes that are in the price book or changes in the market, but we would never say in the new price book is out, so therefore pricing is up by x. It doesn't work like that. A new price book comes out to adds new menu of things to select from given that the industry changes every year.

Yes. Sure you can increase all the numbers in the price book, but it doesn't mean it's not an automatic acceptance by the customers. You are always sort of negotiating the bottom right-hand corner of the invoice.

I don't think it's relevant whether or not we are putting out a new price book, but that's not relevant to price increases I guess - currency.

Jon Morrison - CIBC World

You have achieved the which the 10% through some combination of price book and discounts - doesn't matter how?

Barry O’Brien

Right, the cost recovery and things like that.

Jon Morrison - CIBC World

To jump back to the staffing side, as I know it's been asked a couple of different ways, but with the 1,100 staff you have today, is it fair to assume that you could operate the current capacity that you have, call it, 50% 24-hour operations through a very busy Q3 and Q4 or would you potentially have to have more cash from this really looking forward?

Barry O’Brien

No. Not assuming that extra 10,000 horsepower. That's part of the 4Q program.

Brad Fedora

I would say we can operate our fleet pretty efficiently with assuming 50% 24-hour operations.

Jon Morrison - CIBC World

What's the early signs on staffing the coiled stuff that you picked up. I would assume that you have hired a component of the staff that was already on those spreads?

Brad Fedora

Yes. I would say, we didn't get as much as staff as we had hoped we would get, because there is just so we opportunities for these people and we are not changing our compensation system to accommodate somebody else's, which meant we didn't get as we staff as would have hoped, but we are actually still doing some retrofitting and stuff to that coil, so those four coil units are not operational yet. That probably really doesn't hit the field until September both. Units are ready for the field until September, so we will start trying to staff that up year sort of starting after the weekend.

Jon Morrison - CIBC World

Realistically, you will probably get half a quarter of contribution out of those units in a call it full utilization basis.

Brad Fedora

No. We will get third of a quarter and I don't know what utilization would be, but I think if we got 50% utilization out of those units, we would be happy.

Jon Morrison - CIBC World

Sorry. I mean, Q4, just as you ramp up the actual staffing and marketing of those units then you wouldn't be fracturing in a full very busy Q4 for those units.

Brad Fedora

No. I mean, it's too early to kind of give you any kind of parameters on that. The coil staffing for the record is the hardest staffing through out of all the operating divisions of a pressure pumper or it is for us any way.

Jon Morrison - CIBC World

Brad, on the comment you made about…

Brad Fedora

Jon, let me just back up. I wouldn't start doing a lot of incremental contribution modeling from those four coil units.

Jon Morrison - CIBC World

Yes. That's basically what I was getting at, is that it would be very hard to get large contribution in 2014 because the staffing of those units are harder than anything else.

Brad Fedora

We completely agree and we are still kind of building up that division. Like I was saying before, our coil and CNA divisions are not positive contributors to our bottom-line.

Jon Morrison - CIBC World

Okay.

Brad Fedora

That's you are probably absolutely correct in that that's in 2015 add.

Jon Morrison - CIBC World

On the comment you made about 24-hour operations not making your business more profitable. Assuming that that's a function of time as you scale up your scale up your business to become more 24-hour based in your customers get themselves ready for the coming on a 24-hour basis and the ancillary side of the business kind of ramps up for that rent a flat, because I have to assume that once the, say, that industry gets more used 24-hour operation similar to what we see in the U.S. in the U.S. You would have to think that year incremental ROIC improves running 24 hours versus 12 hours.

Brad Fedora

Yes. I think I know exactly what you are saying and the theory behind what you are seeing is always sound. I am not sure this industry can ever really ramp up to accommodate what we are doing, because unlike in the U.S. we don't drive down the freeway to get to our fracs. There's just not enough truckers to go round. I don't think that's an experience of the companies operating in the basin. That's not the issue. It's just availability or labor is the problem. I don't see that really improving anytime soon, so the industry's ability to handle 24 hours is never going to be as good as it is in the US. I don't think.

Jon Morrison - CIBC World

Last one just from me, Brad, on the infrastructure side around trucking, logistics and [broadband]. You said that the industry really needs resolve the issue and it's probably not your best issue best use of capital, but what your sense right now that those third-party providers are actually making the necessary capital investments for you to actually reduce your call it delivery problems or chemical cost at this point I could actually making it. Do you think you realize that the next 12 months or it takes a lot of - rollout.

Brad Fedora

No. I think they were making it for a while now and is a few well-funded companies I guess that we are not going to name, but I think it's already paying off.

Jon Morrison - CIBC World

Okay. Appreciate the color guys.

Brad Fedora

Thanks.

Operator

All right. Our next question is from the unexpected already paying off precipitately makes questions from the more of Steve [Cameron] of Claire Securities. Please go ahead Steve.

Unidentified Analyst

Hi, guys. Just a couple of quick ones here. Just back to the long-term pricing arrangement, so certainly no pricing gains on those through the end of the year, but is there escalators in those for cost of fuel or labor going up on every situation is different Steve - you got a member customers, they are all generally pretty reasonable. If any input charges changed significantly, we have never had an issue with getting small adjustments made. They got to see that there are sort of permanent and diesel spikes one month, do we go and change the pricing? No.

If CNs as rail pricing is doubling, it's going to stay that way for the next five years. Of course, the customers are going to be open to looking at things, so every situation is different, but I would say the customers that we have these long-term relationships with, I would say are very reasonable and are very open to adjustment they are warranted.

Unidentified Analyst

Okay. That's great. Maybe just switching gears, just to the year over increase in depreciation, I believe that's just on the accelerated fluid and depreciation. Is there anything else going into that or is it just those fluid?

Barry O’Brien

Steve, we introduced 50,000 horsepower in the last half of last year, as well that would impact that increased depreciation expense in the first half of this year, but you would not have seen any depreciation on that 50,000 horsepower in the first half of 2013. If you remember, we had about that $40,000 to 50,000 parked for quite a while until we introduced them in the second half 2013.

Unidentified Analyst

Okay. That's it for me. Thanks, guys.

Barry O’Brien

Okay.

Operator

There are no other questions at this time.

Barry O’Brien

Okay. Thanks, everyone. Thanks for joining the call. We certainly appreciate your time. The management team of Canyon is available today for further questions, so something that you would like to inquire about, please call us. Thanks and we will talk to you again in three months.

Operator

Ladies and gentlemen, this concludes the 2014 second quarter financial results conference call. Thank you for your participation. Have a great day.

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