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Executives

Dale M. Dusterhoft - CEO

Michael A. Baldwin - SVP, Finance and CFO

Gary Summach - Director of Reporting and Investor Relations

Analysts

Dan MacDonald - RBC Capital Markets

Clayton Kovach - Tudor, Pickering, Holt & Co.

Scott Treadwell - TD Securities

Dana Benner - Altacorp Capital

Marc Bianchi - Cowen Securities

Kevin Lo - FirstEnergy Capital

Jon Morrison - CIBC World Markets

Trican Well Service Ltd. (OTCPK:TOLWF) Q2 2014 Earnings Conference Call July 30, 2014 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to Trican's Second Quarter 2014 Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Dale Dusterhoft, Chief Executive Officer of Trican Well Service Limited. Please go ahead Mr. Dusterhoft.

Dale M. Dusterhoft

Thank you very much. Good morning, ladies and gentlemen. I'd like to thank you for attending the Trican Well Service conference call for the second quarter of 2014. Here is a brief outline of how we intend to conduct the call. First of all, Mike Baldwin, our Senior Vice President of Finance and CFO will give an overview of the quarterly results. I will then address issues around current operating conditions and the near term outlook for each of our regions. We'll then open the call up for questions.

Joining us today and available to address questions are Don Luft, our President and Chief Operating Officer; and Gary Summach, our Senior Director of Investor Relations. I'd now like to turn the call over to Mr. Baldwin to discuss the overview of the financial results.

Michael A. Baldwin

Thank you, Dale. Before we begin our discussion, I'd like to point out that this conference call may contain forward-looking statements and other information based on current expectations or results for the Company. Certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection, as reflected in the forward-looking information.

A number of business risks and uncertainties could cause the actual results to differ materially from these forward-looking statements and financial outlook. These risks and uncertainties include, but are not limited to fluctuating prices for crude oil and natural gas, changes in drilling activity, general global economic, political and business conditions, weather conditions, regulatory changes, the successful exploitation and integration of technology, customer acceptance of technology, success in obtaining issued patents, the potential development of competing technologies by market competitors and availability of products, qualified personnel, manufacturing capacity and raw materials.

Among the risks are the ability of the oil and gas companies to finance their operations and other unforeseen factors. Please refer to our 2013 Annual Information Form dated March 21, 2014 for a more complete description of business risks and uncertainties facing Trican.

Our second quarter results were released yesterday and are available on our Web-site at www.trican.ca. As noted in our press release, consolidated revenue for the second quarter of 2014 was $535 million, an increase of 35% compared to the second quarter of 2013.

The adjusted consolidated net loss was $41 million and adjusted loss per share was $0.28 compared to an adjusted loss of $50 million and adjusted loss per share of $0.34 for the same period in 2013. Funds used in operations were $12 million compared to $29 million in the second quarter of 2013.

I will provide commentary on our Canadian operations financial results on a year-over-year basis as the sequential quarterly comparison between the first and second quarters are not as meaningful due to the seasonality of the Canadian business. Commentary on the financial results of all other geographic segments will be on a sequential quarterly basis as we believe this comparison provides the most meaningful insight and analysis into the second quarter financial results for these regions.

Canadian revenue was up substantially year-over-year increasing by 48%. Our Canadian job count increased by 17% compared to the second quarter of 2013 due to a combination of increased customer spending levels and favorable weather conditions in the first half of April.

We also continue to see an increase in fracturing job sizes in Canada which contributed to a 28% year-over-year increase in revenue per job. Canadian operating margins increased by 640 basis points compared to the second quarter of 2013 as increased operating leverage and the rise in activity was partially offset by lower pricing and increased cost.

On a sequential basis, U.S. revenue increased by 27% due to improved weather conditions and higher demand in the Marcellus, Permian and Bakken regions. The increases in these regions were offset partially by lower sequential revenue for operations in the Barnett region and Woodward, Oklahoma.

U.S. operating margins increased by 500 basis points due to increased operational leverage on our fixed cost structure from higher activity. This was partially offset by costs relating to the closure of the Woodward based higher product transportation expenses and increased share based employee cost.

Our international operations include the financial results for operations in Russia, Kazakhstan, Algeria, Australia, Norway Saudi Arabia and Colombia, with Russia comprising the majority of our international results. International revenues increased by 21% sequentially due largely to activity increases in Russia and to a lesser extent increased activity in Saudi Arabia and Colombia.

Operating margins rose sequentially by over 1,600 basis points due mostly to increased revenue and operational leverage on our fixed cost structure in Russia and solid margins in Norway. These factors were offset partially by operating losses in Algeria and startup costs in Saudi Arabia and Colombia.

During the second quarter of 2014, Trican repaid $75 million of senior unsecured notes. Subsequent to this quarter, we increased our revolving credit facility from $500 million to $575 million. Commitments for the increase came both from existing and new banks. All other terms and conditions of the facility remained unchanged including its current maturity date of October 17, 2017.

In addition, we obtained a commitment from an institutional investor to issue $20 million of senior unsecured notes. The notes will have a 10 year maturity, a coupon of 5.75% and will rank equally with all other senior indebtedness. We expect this note issuance to close and fund during the third quarter of 2014.

Capital expenditures for the second quarter of 2014 totaled $24 million. Capital expenditures continued to decrease on a year-over-year basis due to the declines in our 2013 and 2014 capital programs relative to 2012. No significant changes were made to our 2014 capital budget during the second quarter of 2014. The remaining expenditures on our approved but capital budgets are expected to be approximately at $60 million to $70 million.

I will now turn the call over to Dale who will be providing comments on our operating conditions and strategic outlook.

Dale M. Dusterhoft

Thanks Mike. Canadian activity levels in the second quarter of 2014 were up significantly compared to the second quarter of last year, as demand for Canadian pressure pumping services benefited from increased customer spending and increase in fracturing intensity per well and improved weather conditions.

The increase in capital spending was linked to increased customer cash flows throughout the first half of 2014 caused by higher Canadian commodity prices and a stronger U.S. dollar. Demand for fracturing services also benefited from an increase in fracturing intensity per well during the second quarter. We continue to see an increase in sand volumes and fracturing stages per well that is leading to an increase in fracturing demand. Average sand volumes pumped per well have increased by 50% in the first half of this year compared to the first half of last year.

Cold weather throughout March and April and early improvement to an extended winter drilling season and activity levels in early April were stronger compared to the previous year. The favorable weather conditions in April combined with increased customer spending and fracturing intensity contributed to a 34% year-over-year increase in the second quarter average Canadian rig count.

Demand for pressure pumping services is expected to remain strong in Canada during the second half of this year. We expect the strongest demand to be generated from the Montney, Cardium and Deep Basin plays. Drilling and completion activity is also expected to increase in the Duvernay during the second half of '14 compared to the second half of last year.

In response to the strong demand anticipated in Canada, we plan to deploy a new fracturing crew into the Canadian market during the fourth quarter of 2014. The crew size is expected to be 20,000 to 25,000 horsepower and equipment will be drawn from our existing inactive fleet. We will continue to look at opportunities to deploy additional equipment from our idle fleet into the Canadian market as we move into 2015.

Although Canadian operating margins benefited from higher activity during the second quarter, increased costs combined with weak pricing continued to negatively impact operating income. Our Canadian cost structure increased compared to the second quarter of 2013 due to product and product transportation cost increases, wage inflation, higher diesel prices and a weaker Canadian dollar. In addition, no significant fixed cost reductions were contemplated in the second quarter in anticipation of the strong second half activity forecast in Canada.

Given the increased cost structure, one of the primary areas of focus in Canada continues to be on raising prices. A new price book was released in mid-May that reflected a 7% price increase. The new price book will be gradually phased into our Canadian customer base with full implementation expected by the end of 2014. Given the strong demand expected in Canada during the second half of 2014, we anticipate the pricing improvement initiatives will be successful and expect about 60% of our customers to be on the new price book increase in the third quarter, and remainder to be implemented by year-end.

We are currently completing a large Horn River project with a 60,000 horsepower crew and operational and pumping efficiency results that have been strong so far. Approximately 33% of the horsepower used on this project is running on the engines fuelled by a combination of natural gas, sourced on site and diesel. Using natural gas in a conventional diesel engine has quickly evolved and we are optimistic that the most recent technology has led to a product design that is well suited for our service conditions.

This is an exciting development for our industry and we will continue to actively participate in this development with our engine manufacturers. We are also using our proprietary recycled water fracturing fluid in the Horn River this year, which will significantly reduce the fresh water used in this project. Third quarter operating margins are expected to benefit from the Horn River work given the strong utilization anticipated over the duration of this project.

We also expect to complete two small projects in the Liard basin during the third quarter. These will be the first fracturing projects completed by Trican in this basin and reflects potential long-term customer interest in this region in light of Canadian LNG export opportunities.

We continue to be pleased with the progress made by our MVP fracturing fluid system in Canada. We completed over 2,400 stages with this technology in the first half of 2014, which is a 250% increase compared to the first half of last year. Majority of the fracturing work using the MVP system has been performed in the Cardium and given the strong customer acceptance so far, we expect continued success with this system in the Cardium and other potential regions moving forward.

Second quarter results for our U.S. operations benefited from sequential revenue and operating margin increases for our Marcellus and Permian operations. The first quarter of '14 was negatively impacted by cold weather in both of these regions which contributed to sequential utilization improvement.

Revenue generated by our Marcellus operations which is the most profitable U.S. region also benefited from the addition of a fourth fracturing crew in late May. The utilization of this crew was strong upon deployment as demand remained robust in this region. Activity in the third quarter of 2014 is expected to remain strong in the Marcellus. Pricing improvements obtained at the end of the second quarter combined with the fourth quarter of activity from the fourth Marcellus crew is expected to result in sequential increases in revenue and operating income for this region.

Revenues generated by our Permian operations benefited from improved operational performance which led to utilization increases for all crews in this region. Strong and growing demand in the Permian, improvements in service quality, and strategic sales initiatives have led to recent price increases, which are expected to positively impact third quarter results. In addition, we will continue to focus on increasing utilization and reducing costs, both of which are required to achieve acceptable return on capital in this region.

Revenue and operating margins for our Bakken operations increased sequentially and year-over-year during the quarter. Due to strong operational performance, demand for our services in the Bakken is increasing. As a result, we will be adding a second crew to this region during the third quarter of '14 which is expected to result in stronger regional operating margins for our Bakken area. The equipment for this crew will be drawn from our existing parked U.S. operating fleet.

Improvements in the Marcellus, Permian and Bakken regions were partially offset by cost incurred in closing our operations base in Woodward, Oklahoma. One fracturing crew had been operating out of Woodward and was transferred to the Permian during the second quarter. We are currently working to place this crew into an acceptable contract later in 2014.

Second quarter financial results were also negatively impacted by weak utilization for our fracturing crews operating in the Barnett and Oklahoma regions, and weak pricing and operating margins for our Haynesville fracturing crew.

To [advance] (ph) our U.S. financial performance in a meaningful way, underperforming regions such as the Barnett, Haynesville and Oklahoma must improve. New contracts have recently been obtained for fracturing crews in Oklahoma and the Barnett, and if utilization meets our target, sequential financial improvements are expected in these regions. In addition, we will continue to focus on increasing the utilization of the Haynesville crew through discussions with customers operating in East Texas.

Activity remained stable for our two fracturing crews operating in the Eagle Ford. We look to reduce costs and improve pricing in the Eagle Ford over the second half of '14 in an effort to increase operating margins in this region.

U.S. pricing levels are trending up on high activity level areas such as the Permian and the Marcellus. Pricing improvements were obtained in both regions late in the second quarter and are expected to benefit third quarter financial results. Product and product transportation cost increases were noted during the second quarter but these were largely passed on to customers across all regions. Cost flow-through aside, pricing remains competitive in all other operating regions and remained relatively flat sequentially during the second quarter of this year.

With recent improvements in operational execution, pricing increases, new contracts and equipment deployed to high profitability areas, we are pleased with the progress made by our U.S. pressure pumping business during the second quarter. We still have significant improvements to make in the U.S. and must continue to execute on our strategic initiatives to achieve acceptable financial and operating results in this region in the upcoming months.

We are evaluating opportunities to place some of our parked equipment into the U.S. market as customer activity has increased to most of our areas. At the end of the second quarter, we have 165,000 horsepower parked. Out of the remaining parked horsepower, we expect 20,000 to be deployed in the Bakken during the third quarter, and an additional 25,000 to be deployed in Canada near the end of the third quarter, and $30,000 to be operational in the Permian during the first quarter. As a result, we have an additional 90,000 horsepower to deploy by the end of 2014. We would continue to look at deploying this equipment into the region that will yield the highest returns for the Company.

Majority of our international revenue is generated from our Russian operations and record quarterly revenue was achieved in the second quarter of '14. Increasing horizontal drilling and completions activity in Russia contributed to strong utilization for our pressure pumping fleet during the quarter. In addition, our Russian customer base was able to catch up programs that were behind schedule due to cold weather throughout most of the first quarter.

In response to the strong demand, an additional fracturing fleet was deployed in Russia during the second quarter using existing spare capacity in the region. We anticipate that utilization in Russian results will remain strong in the third quarter with the normal weather-related slowdown in the fourth quarter.

Long-term we are encouraged by the move to more horizontal wells and the utilization and operating efficiencies associated with servicing these wells. We are very well-positioned with our significant fracturing fleet and infrastructure in Russia to capitalize on growth in this region over the upcoming years.

We are continuing to monitor the conflict in the Ukraine and the impact that existing and potential economic sanctions may have on our Russian operations. Currently the impact on our Russian operations had been minimal and we do not anticipate any disruption to our Russian business throughout the remainder of 2014 based on the sanctions that have been imposed to date. However, we will continue to monitor the situation closely as it does raise additional business risk in this region. The potential financial impact, if any, to Trican from existing and additional economic sanctions in the future is unknown at this time.

We began active operations in both Colombia and Saudi Arabia during the second quarter with positive operational results. We are currently offering cementing services in Colombia and coiled tubing and industrial services in Saudi Arabia. Both regions incurred operating losses in the second quarter. However, both Colombia and Saudi Arabia are expected to generate positive operating cash flows in the second half of this year as utilization increases.

Our Algerian operations incurred an operating loss during the second quarter due to continued weak utilization in this region. If utilization does not improve over the second half of '14, we will continue exiting this region upon completion of our current customer commitments which we are expecting to be fulfilled by the end of 2014.

Revenue for our Australian business increased sequentially by 15% during the second quarter. We will continue to focus on expanding our cementing customer base in Australia and expect to achieve modest growth in this market over the second half of this year.

Our annual 2014 outlook for Russia has not changed with a strong second quarter making up for weak first quarter results. We continue to expect revenue to increase by approximately 5% relative to 2013 with modest improvement in operating margins. When combined with year-over-year revenue growth in Norway, Australia, Colombia and Saudi Arabia, overall international revenue for '14 is expected to increase by approximately 10%.

Our Completion Tools business in Canada was also negatively impacted by spring break-up during the second quarter, which led to sequential declines in revenue and operating income for this segment of our Canadian operations. However, this business continues to grow and revenue increased by 40% on a year-over-year basis in the second quarter of '14. We expect continued growth of the Canadian Completion Tools business in the second half of '14 with a focus on improving and increasing our tool manufacturing capabilities and leveraging off of our Canadian pressure pumping customer base.

Revenue and operating income decreased sequentially for our U.S. Completion Tools division as one of our major customers reduced activity levels during the second quarter. Despite the lower financial results, we were able to expand our customer base for this division during the second quarter which is expected to have a favorable impact on our operating margins going forward.

We also focused on improving manufacturing and supply-chain capabilities during the quarter that will allow us to respond to increased U.S. demand for our Completion Tools technology. Overall, we are pleased with the customer acceptance of this technology in the United States and expect financial results to improve for this division over the second half of this year.

Second quarter financial results were strong for the Norwegian Completion Tools division for the second consecutive quarter. Customer acceptance of this technology combined with strong operational execution led to a year-over-year revenue increase of almost 200% for this international division. We expect our North Sea Completion Tools business to continue to achieve good financial results over the second half of this year. We will also focus on growing our manufacturing and supply-chain capabilities and expanding our customer base over the second half of '14 in order to position this business for future growth.

I thank you for your attention today and your interest in Trican and I'd like to turn the call over to the operator for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Dan MacDonald of RBC Capital Markets. Please go ahead.

Dan MacDonald - RBC Capital Markets

Just wondering, Dale, if we look at some of the new technology you referenced you're rolling out in the Horn River, can you give us kind of a high-level sense on an apples-to-apples basis what you think that would provide for cost savings for the client, is it sort of 10%, 20%, 30% compared to previous?

Dale M. Dusterhoft

Actually I will be confidential, Dan. The clients got some initiatives in there that gives them a competitive advantage in the area and they probably want to keep that one to themselves.

Dan MacDonald - RBC Capital Markets

Okay. And then just looking at the Duvernay, you did make some comments about expecting increases. Can you kind of give us a high-level sense for the back half of the year as how much busier you think your clients will have you in that play particularly in Canada compared to last year?

Gary Summach

Dan, it's Gary. We'll be slightly busy in the Duvernay than we were last year. We're probably looking at about 15% of our Canadian revenue to be generated from the Duvernay in the second half of this year. That would be probably 5% we generated in the Duvernay in the first half of this year. So, on an annualized basis we're kind of in that 10% range. Last year we would have been 7% or 8%. So it is increasing but it's certainly not driving the activity in Canada. It's still being driven off of Montney and Cardium and Deep Basin.

Dan MacDonald - RBC Capital Markets

Great. And then just lastly, on the Completion Tools business, is there any portion of that in North Sea sales that go into the Russian market at this point?

Dale M. Dusterhoft

We are selling some of our completion tools into the Russian market. That's a relatively new development with kind of our higher-end tools. We've been selling I'll call it a little bit lower-end tool system in there throughout last year and the first part of this year but we're now starting to sell the high-tech tools in there at the present time. So we see that as emerging opportunity for us. It's still a little bit early as customer acceptance is still kind of in the introductory space, but certainly as they grow that market there's an opportunity for us.

Dan MacDonald - RBC Capital Markets

So then I guess if we were worried about any sort of technology export sanctions, would that have a material impact on the completion tool sales currently or is it more of a 'could limit future growth'?

Dale M. Dusterhoft

It would be future growth, it's nothing material now and we really have no idea what's coming on the sanction front.

Gary Summach

And when we speak to the Norwegian results, that's just for the Norwegian market, that's not including any of the Russian results.

Dan MacDonald - RBC Capital Markets

Okay. That's all I have. Thanks a lot, guys.

Operator

The following question is from Clayton Kovach of Tudor, Pickering, Holt. Please go ahead.

Clayton Kovach - Tudor, Pickering, Holt & Co.

So my first question is just trying to think through the U.S. margin progression, how much did the closure of your Woodward base impact margins in Q2, and then also, are there any fixed costs that you'll be incurring when you put your idle equipment back to work in the U.S. or is it all variable cost?

Gary Summach

The Woodward base, the loss was about $2 million in Q2. So that's obviously a one-time cost. There will be some small cost associated with keeping that base kind of secure but it's going to be minimal. So that will come out of Q3. In terms of putting the new crews to work, there are some fixed costs associated with that. You're looking at right now without any pricing increases or cost improvements, you're looking at about 30% incremental margins. So obviously you've got some fixed cost associated with that.

I guess the other point to make was, in Q2 we had some stock based comp related expenses. The share price moved up quite a bit Q1 to Q2. So there's about another $2 million of one-time costs in the Q2 numbers as well in the U.S. So if you add that with Woodward, you're looking at about $4 million in one-time costs in Q2 in the U.S.

Clayton Kovach - Tudor, Pickering, Holt & Co.

Okay, perfect, thanks. And then just as a follow-up, in the press release you cited new contracts being obtained for fracturing crews in the Oklahoma and Barnett regions. What makes these contracts different versus the previous ones?

Dale M. Dusterhoft

So basically we didn't have contracts in place previously, we were working on spot market. There's quite a bit of differences in what we're doing there. So if you looked at the Barnett crew, our Barnett equipment was actually working in a number of different areas for the first half of the year. So it was doing work in the Permian, it would do work in the Mid-con and it did some work in the Barnett and it was all kind of spot market work.

This is a contract now that keeps that crew closer to home which we get two things, one is better utilization, anticipated utilization, we're early into this so we have to see how it plays out, and the other part is that our cost structure is lower because we are not moving it around as much, so it gets margin improvement from cost structure.

And in the Oklahoma region, a little bit of that was gets us closer to home again. That crew traveled a little bit at times, but mainly it's just an improvement in the utilization as we're not dealing with spot market situations with gaps between wells we're completing, and so we anticipate we'll get a more steady utilization which should improve the margins for that particular crew.

Clayton Kovach - Tudor, Pickering, Holt & Co.

Okay, great. I'll turn it back over. Thanks.

Operator

The following question is from Scott Treadwell of TD Securities. Please go ahead.

Scott Treadwell - TD Securities

I guess just to pick up on the last question about the U.S., if I back out the $4 million of one-time costs, then I get an improvement of about $17 million of operating income on $56 million of incremental revenue, so about 30% of incremental margins. Is that sort of the guidance or is that the thought at least that you think margins would improve or EBITDA improves on incremental revenue going forward here, or does that number start to creep up as some of these pricing and utilization initiatives start to kick-in in Q3?

Dale M. Dusterhoft

We're clearly targeting higher margins than that. I think if you start taking away some of the deployed equipment, the new deployed equipment, we're putting them in the areas where we're realizing higher margins than average I think. To justify putting that equipment into place, you need to be seeing higher margins than 30%. So that's a key thing.

And the other area that's been a continued focus, and it's taken a while to take hold of the financial numbers, but we expect to see gradual improvement over the next six months, two years on the supply chain and logistics side of things. So as you start improving or deploying more equipment in the higher profitability areas, get some improvement on sand, supply-chain and logistics as well as get some more pricing increases because we're still pushing that to the extent that we can, then you'd expect to see that incremental margin creep up.

Scott Treadwell - TD Securities

Okay, perfect. That was kind of the color I was after. Turning to the Permian, I know one of the big issues you guys have struggled with over the last sort of year or 18 months has been the visibility of work there. It sounds like that's improving. Would you say now that your visibility in the Permian is as good, better or worse than your other basins, maybe excluding the Marcellus?

Dale M. Dusterhoft

I'd say the visibility on work is quite good in there. So I think the three crews that we have in here, we've got very good visibility going forward, we have opportunities to place additional equipment in there, we're just evaluating them. We do have one crew that we transferred from Woodward that's not active in there yet. We want to make sure we staff it properly there and ensure that we keep and maintain good operational quality.

And we still have supply-chain issues in that region. That's one of the areas where we've had to kind of move around our supply-chain a little bit on the sand side to reduce our costs and that's still going to work itself out through Q3. And so, we want to make sure that if we add additional crews in that region, then we've got a good supply-chain structure and infrastructure in place that allows us to keep our costs low. So there's work to be done in there, but in terms of visibility that's certainly not an issue in that area.

Scott Treadwell - TD Securities

Okay, good. So turning to Canada, the commentary certainly over the last month has been that it's a pretty tight market. As I look through say Q3 and then want to get some idea of where the bar might be, if I look at job count, maybe not necessarily revenue but certainly activity levels, is it kind of feasible that you can be as busy through Q3 as you were in Q1 given that you kind of lost two or three weeks at the beginning of Q1 due to sort of a slow pickup?

Dale M. Dusterhoft

Yes, we are fully booked out through the quarter. So basically all of our crews are booked out and it's just about our weather and everything else as to whether we get to all the work, but I would anticipate that job kind of stay high.

Scott Treadwell - TD Securities

Okay, perfect. When you talked about the Liard and Horn River equipment, I'm assuming that it's not the same amount of horsepower going to Liard but I'm just wondering how long that equipment will be out of, I don't want to say it's on market, but obviously Horn River and Liard are kind of markets onto themselves, and how long that might be out of Trican sort of bulk Canadian operation?

Gary Summach

So the Horn River crew will finish kind of in mid-August timeframe and then we'll be going up to Liard shortly thereafter, and that's only two to three weeks for those two wells, somewhere in that kind of timeframe. And in terms of the amount of equipment tied up there, it wouldn't be exactly the same amount but not materially different in terms of equipment coming back into the rest of our operations. So that puts us into early September.

Scott Treadwell - TD Securities

Okay, perfect. And in Canada, obviously you talked about being sold out and getting some traction on the pricing side. From where you stand kind of today, without kind of quantifying it, how much better do you need to see things before you'd put more equipment into Canada? Would it be a customer contract, would it be another 10% incremental pricing, is there some sort of metric you're looking for or is it maybe just a bunch of things that you're looking at, at the moment?

Dale M. Dusterhoft

I always look at a bunch of things. I mean it's not just what we're seeing at the present time, it's what we believe we are going to see going into '15. And also, customer commitment is a big part of that, if you've got opportunities to either place equipment with existing customers or potentially pick up a new customer that's looking for equipment. So all of those things come into play, but I will say that kind of our look forward is that our return on capital criteria will be that which will give us comfort into adding equipment into the market.

Scott Treadwell - TD Securities

Okay, that's an awesome segue because my last question was, what's the interest like in locking up either existing or potentially new equipment probably starting let's say January 1st next year? Is it materially different than it was a couple of months ago?

Dale M. Dusterhoft

It's a bit early, I don't think we're seeing too much into January yet. We're still mainly locked up for the rest of this year and our customers haven't defined their budgets officially yet for '14. So our view would be the same for '15, our view would be the same as what it's been for the last few months in that we just don't have great visibility into '15 yet, but commodity prices staying where they're at, we don't anticipate that it's going to go backwards.

Scott Treadwell - TD Securities

Okay, that's perfect. Appreciate the color, guys. Thanks very much.

Operator

The following question is from Dana Benner of Altacorp. Please go ahead.

Dana Benner - Altacorp Capital

I wanted to move back to the U.S. if I could, and if we ignore the parked equipment, how fully utilized do you think you were in aggregate in the U.S. in Q2?

Gary Summach

We were around 70% utilized in Q2. That would compare to low to mid 60s in Q1 and a lot of incremental improvement was weather-related in the Permian and the Marcellus.

Dana Benner - Altacorp Capital

Right, and then now that we're at least through part of Q3 and thinking about horsepower and additions, et cetera, or moving of equipment, would you be running like 75% to 80% in Q3, is that a reasonable estimate?

Gary Summach

Yes, I think 75% is reasonable. There's still – if you look at that 70% number in Q2, there's a lot of upside in the Barnett for that crew there, a little bit of upside still in the Permian, a little bit of upside in Oklahoma and Haynesville, so really the dry gas areas. I mean that's really before that second Bakken crew goes in which we expect to happen right around now, kind of early August.

Dana Benner - Altacorp Capital

Right. If we think back to the conference calls of the large U.S. frackers, I understand it's not your job to listen to their conference calls, but one of the things that came out of them was transportation logistics, material shortages, et cetera, real bottlenecks. And yet, just listening to your call, it would appear that really wasn't a big factor for you in the quarter, or to the extent it was, you were able to pass it through to clients. Maybe you could give us some more color on that because it was quite a topic, at least with your U.S. competitors?

Dale M. Dusterhoft

There's no supply shortages during the quarter and I would say we're comfortable with that going forward as well. But I will say that logistics of sand in particular is a significant issue still within the industry overall with railcars and trucking and trans-loading, and it was an area where we didn't get much cost improvement on in the second quarter. We are anticipating that we're – and we've got some initiatives in place to improve that throughout the third quarter, but I would say we're a little behind on where we wanted to be in the second quarter on our cost improvement, in particular in relation to trucking and trans-loading, and probably mostly in the Permian, and a little bit due to the increased Marcellus activity too.

So there are some areas of improvement there yet, it's still a big issue for us and I suspect for the whole industry, but I wouldn't say it's related to shortages. We were able to pass on sand price increases and some trucking increases in a lot of our areas, in most of our areas, kind of late in the second quarter. So, we would get some of that back but we don't get all of the cost back of trans-loading and everything else.

Dana Benner - Altacorp Capital

Great. One of the other issues that naturally creeps up at a time like this when we see capacity additions, there's chatter out there that there's maybe 1 million horsepower moving into the U.S. market let's say on a base of 17 million, if we could agree on those numbers, however what's interesting is how much of that is in fact complete net additions versus replacement. So I'd be curious to get your sense as to the impact that you think 1 million horsepower will have in the U.S. and whether it stifles in any way the recovery that is underway?

Dale M. Dusterhoft

So the first thing is that we really don't know how much is replacement and how much is going into the market new, it's a hard number to get a handle on because no one really talks about it. So the net effect we don't know. I think the other thing we do know is that most of the horsepower that's being added is probably being added primarily to the Permian and maybe a little bit to some other areas that are fairly active like the Marcellus. At the present time, I'd say a lot of it also is coming into the '15 market more than the '14 market. So we're not seeing too much of an effect immediately in the U.S.

I wouldn't say we're happy with any horsepower additions in the U.S. because we still think that on an overall market basis it's still very competitive market and there's horsepower out there in a lot of areas and we haven't seen a lot of pricing traction yet across the whole U.S. basin. So we're not happy with it and can't really comment yet on what kind of effect it will have on '15. There's just too many variables in terms of what the '15 activity level is.

Dana Benner - Altacorp Capital

Sure. Just one last question if I may, in talking about Russia, and you say that the impact has been minimal, and for those of us who are paid to obsess over words, minimal isn't zero, or maybe it is and that's just another way of saying it. So was there any impact whatsoever in Q2?

Dale M. Dusterhoft

There was minimal impact. Kidding. It was very slight. To give a little bit better color, there are some issues in regards to a couple of vendors that we had and the banks that they were dealing with. So that's where it came through. But it did not slow down any of our jobs, did not have any issues with dealing with our vendors, and really had no financial impact on the quarter at all.

Dana Benner - Altacorp Capital

Okay, that's outstanding. Thank you.

Operator

The following question is from Marc Bianchi of Cowen. Please go ahead.

Marc Bianchi - Cowen Securities

Just a follow-up on some of the U.S. commentary with 90,000 horsepower idle for Trican. Could you talk through kind of the potential of putting that back to work before the end of the year, what are some of the concerns you have, maybe it's on the logistics side, maybe it's on the crew side, curious to hear your thoughts?

Dale M. Dusterhoft

Good question, Marc. Essentially that 90,000 is after we've already deployed some Canadian equipment and got our Bakken crew in that running and the Permian crew back up and running. Our view right now is that we would like to place that into the market in the second half of the year, kind of going into '15, and we haven't decided where that equipment will be placed yet. It depends on where we're going to get the best return on capital for Trican.

The Canadian equipment, a lot of that equipment, not all of it but a lot of that equipment can go to Canada and the Canadian market, maybe a stronger market, as well as regionally within the U.S. The Marcellus is certainly a strong market. The Permian will be strong but it would be lower margins for us than say the Marcellus. So it's a little bit up in the area but I will say it's going to go in the area that would help Trican the most.

And the other aspect, and you hit the nail on the head, that we have to look at is making sure that our operational quality doesn't suffer by us putting equipment into any region, and that a lot of that has to do with hiring people, and in Canada it's still a tight, very tight people market. We are adding one crew in Q4 and we'll have to evaluate whether we could add another one for kind of January '15 and it's still early to say.

And the same with Marcellus, Permian regions which are the two strong areas, the people side of it, and in particular in the Permian, the sand logistics side of it are things we'd have to weigh in as well.

Marc Bianchi - Cowen Securities

Just as you go through the budgeting analysis of that, if you look at sort of where current pricing is and thinking about these additional costs that you may incur to put that equipment to work, do you need higher prices from where they stand today and maybe the good markets like the Permian or the Marcellus to justify bringing that equipment in, or is it are they satisfactory at this point, it's just a matter of finding the work?

Dale M. Dusterhoft

Yes, I think we're comfortable with Canada, we're comfortable with the Marcellus because those areas were meeting our return on capital criteria. And the other areas, we'd like to see some improvement in before we added equipment in there.

Marc Bianchi - Cowen Securities

Got it. Thanks, Dale, I'll turn it back.

Operator

The following question is from Kevin Lo of FirstEnergy. Please go ahead.

Kevin Lo - FirstEnergy Capital

Can I maybe touch on something really, really small which is, why did you guys bothered with a $20 million in debentures that you guys issued during the quarter? [It appears to be] (ph) small, inconsequential, but why do it?

Dale M. Dusterhoft

We placed it with an existing debt-holder. Basically when we were taking a look at refinancing the $75 million that we repaid in June, we took a look at our existing facility obviously and talked to the majority of our existing debt-holders just to say, we're looking at this. And so, at the end of the day, this is a very good business relationship with a strong lender and it basically just fell into place. So we took advantage of it and placed it.

Kevin Lo - FirstEnergy Capital

Okay. In terms of your gassier basins like the Haynesville and the Barnett which the commentary seems to be that pricing still is relatively weak and whatnot, what do you think it will take to get those basins moving again?

Dale M. Dusterhoft

We're of the opinion that if the utilization delivers as we anticipate in both the Barnett Shale as well as the Oklahoma area, then they're where we want to be kind of for the short-term, mainly for the rest of this year. The Haynesville one clearly is under contract but the utilization of that contract hasn't been as high as we anticipate, and if the utilization doesn't improve then I think you're looking at either relocating or looking for additional work or additional contracts for that crew throughout East Texas. If that crew does work, it's based along East Texas, so it can work in the Haynesville but it can also work in other parts as well.

So that one I still think we want to see some improvement in. And we'll let the Barnett and Oklahoma crews run now under these new contracts for a period of time and make sure that the utilization comes in where we're at. If we don't see that, then we've got to work at what we're going to do with them, and we've kind of messaged for some time that if we can't get the weak areas fixed, then we either have to shut them down or move those crews to areas that are higher profitability.

Kevin Lo - FirstEnergy Capital

Okay. Now as you're pushing through the price increase, particularly in the U.S., I mean what kind of pushback are you getting from your clients, and compared to maybe your historical experience, do you think there's more to go or has there been sufficient capacity added in the more hotter basins that this might be it for the next say six months or so?

Dale M. Dusterhoft

No, I think there's more to go across the U.S. So there's a tightening of the market as we go forward, and I mean Dana alluded to the Halliburton call, we didn't listen to it but I saw the highlights that all you guys write up, and they were certainly messaging that they are seeing kind of the early stages of pricing improvement across the U.S., and that's always encouraging for us if they are seeing that. So, I would anticipate that at the present time our view is, there's probably some pricing improvement yet to come. What we've had so far is pretty minimal really, it's getting back some costs increases that we've had over the last while, so we need to see more yet.

Kevin Lo - FirstEnergy Capital

Okay. That's it for me. Great, thanks.

Operator

(Operator Instructions) The following question is from Jon Morrison of CIBC World Markets. Please go ahead.

Jon Morrison - CIBC World Markets

In the release, you talked about marketing the Woodward crew in the Permian for an acceptable contract term in the back half of the year. Can you give any color on what an acceptable contract term would look like, and given that I would say that we're going in an improving scenario for pricing in the U.S., is your bias to contract either it or the U.S. Bakken crew that you're putting in for shorter-term contract relative to what you typically go after?

Dale M. Dusterhoft

It depends on the financial terms quite honestly, and as much as anything right now, it really depends on utilization because pricing has moved up but it's still relatively low year-over-year and certainly since the peak. So acceptable contract for us is one where the utilization is high, the customer commitment to that utilization is fairly high, and I guess the margins to Trican are improving and it's an improvement over what we are currently doing. So, all those are things that we kind of look at.

In terms of term, we would do a one year term if we thought the returns are as good as we're going to get or over an average of that year, but if we think it's at the lower end of our return scale, then we would be looking to do it something a little bit shorter term.

Jon Morrison - CIBC World Markets

In the release you also talk about, you referenced no significant fixed cost reductions contemplated in the second quarter in Canada in anticipation of stronger activity levels. What's that actually referencing? Is that just that you didn't reduce staffing during spring break-up because you thought it was coming back so quick?

Dale M. Dusterhoft

Yes, we were actually hiring some staff in anticipation of a little bit of increase and kind of hiring in the July or even June timeframe in particular as we – basically we're adding another fracturing crew later this year in Canada plus just general activity levels are a little bit higher. So it was primarily related to people.

Jon Morrison - CIBC World Markets

Where did the additional crew in Russia actually come from?

Dale M. Dusterhoft

Just out of our existing equipment. And one thing we always have to remember is, crews slice and dice every day, and if you happen to work on a project that has a little bit less horsepower requirement, that means that you might have the ability to have another crew working on another project with a little less horsepower requirement. So, that's something that's just always fluid for us but that's how we've done in the quarter for us.

Jon Morrison - CIBC World Markets

So that was specifically from within Russian capacity not capacity outside of the country coming in?

Dale M. Dusterhoft

That's right, yes.

Jon Morrison - CIBC World Markets

Okay. How do you think about adding capacity in that market in the context of call it the geopolitical headwinds, because I'd have to assume there are some fairly big tenders out there for large unconventional work in the market and you guys are an industry leader in that country?

Dale M. Dusterhoft

The tenders aren't out yet, the tenders will be coming out here shortly for '15 works. If everything is pretty well, yearly tenders in Russia or three-year deals, but they still talked about annually. So we haven't seen anything for the '15 yet, we're having just kind of early discussions with some customers on what their plans are. And our view on the whole Russia market is, there has to be a return on capital criteria first of all, so the economic returns have to be there. And then there is, if the political risk situation does go up in there, then we're going to want a little bit of a premium on that return to compensate us for political risk. So, too early for us to comment at all on whether we're comfortable adding equipment in there right now.

Jon Morrison - CIBC World Markets

Just on the Saudi side, you referenced doing industrial services in country. What are you actually doing on the industrial side?

Dale M. Dusterhoft

We have an industrial services division in Canada that is heat exchanger cleaning, plant cleaning and pipeline work, and in Saudi Arabia we've brought in heat exchanger cleaning services.

Jon Morrison - CIBC World Markets

Okay, so it's the same thing as Canada?

Dale M. Dusterhoft

Yes.

Jon Morrison - CIBC World Markets

Last one for me, I just wanted to get a sense of how much of your work was 24-hour basis in the U.S. in Q2, and whether there's been any step change over the last call it three or four quarters?

Gary Summach

Q2 we were about 65% 24-hour ops. The new Marcellus crew is on 24-hours and then the Bakken crew, the second Bakken crew that we're adding right around now is going to be 24 hours. So we should be close to 70% going forward in Canada. We're at about 50% 24-hours right now. That seems to be fairly stable. I can't see that number going up by the end of the year.

Jon Morrison - CIBC World Markets

Appreciate the color, guys.

Operator

There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Dusterhoft.

Dale M. Dusterhoft

Thank you very much for your questions today and your interest in Trican and we certainly look forward to talking to you after our third quarter results are published. Thank you and have a great summer day.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.

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Source: Trican Well Service's (TOLWF) CEO Dale Dusterhoft on Q2 2014 Results - Earnings Call Transcript
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