Calfrac Well Services' (OTCPK:CFWFF) CEO Fernando Aguilar on Q1 2016 Results - Earnings Call Transcript

| About: Calfrac Well (CFWFF)

Calfrac Well Services Ltd. (OTCPK:CFWFF) Q1 2016 Earnings Conference Call April 28, 2016 12:00 PM ET

Executives

Fernando Aguilar – President and Chief Executive Officer

Mick McNulty – Chief Financial Officer

Analysts

Sean Meakim – JPMorgan

Brian Purdy – PI Financial

Jon Morrison – CIBC World Markets

Ian Gillies – First Energy

Operator

Good afternoon. My name is Leanne, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Calfrac Wells Services Limited First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Fernando Aguilar, President and Chief Executive Officer, you may begin your call.

Fernando Aguilar

Thank you, Blare. Good morning and welcome to our discussion of Calfrac Wells Services first quarter results for 2016. Before we get started, I would like to outline how this conference call will be conducted. Mick McNulty, our VP Finance and Interim Chief Financial Officer, will begin with an overview of our quarterly financial performance. I will then discuss our outlook for 2016, after which, Mick, Ashley, and I will be available to answer questions that you may have.

I will now turn the call over to Mick.

Mick McNulty

Thank you, Fernando, and thank you everyone for joining us for today’s call. Before I begin my discussion this morning, I’d like to note that this conference call will contain certain statements and expressions that are considered to be forward-looking statements under applicable securities legislation. Our assessment of future plans and operations is based on expectations that involve a number of business risks and uncertainties.

These risks are set out in detail in our annual information form and include, but aren't limited to, commodity prices for oil and natural gas, equipment inventory levels, national and international economic conditions, political uncertainties and government regulation, the ability of our customers to access credit and capital markets, the concentration of our customer base, competition in the markets where we operate, product and supply availabilities, risks associated with our foreign operations, weather conditions, outcome of legal proceedings, currency exchange rates and labor shortages. These conditions could cause the company's actual results to differ materially from our current expectations.

During the first quarter of 2016, Calfrac achieved the following financial results in comparison to the first quarter of 2015. Consolidated revenue of $216.1 million, a 64% year-over-year decrease, resulting primarily from lower activity and pricing in North America as well as lower activity in Russia.

Adjusted EBIT which is used for purposes of covenant calculation was negative $5.9 million compared to positive $25.6 million in the comparable period in 2015, due to significantly lower utilization and weaker pricing in the United States and Canada, which was offset by cost reduction initiatives carried out during 2015 and the first quarter of 2016. A net loss attributable to shareholders of Calfrac of $54.1 million or $0.47 per share diluted compared to a net loss of $12.6 million or $0.13 per share diluted in the same period last year.

The year-over-year decrease was primarily due to significantly lower activity and pricing in North America combined with $18.2 million of foreign exchange losses and $3.7 million of pretax restructuring charges, primarily related to the U.S. operation. As these restructuring efforts are ongoing, I am unable to provide additional details at this time.

The results from Calfrac's operating segments are as follows; revenue from Calfrac's Canadian operations during the first quarter of 2016 was $72.7 million versus $221.4 million in the same period of 2015. The 67% decrease was primarily due to significantly lower activity and lower pricing for the company's fracturing services. The number of fracturing jobs decreased by 41%, while revenue per fracturing job decreased by 46% from the same period in the prior year as a result of a change in the mix of completion types as well as lower pricing. This was offset partially by greater service intensity as total proppant per reported fracturing job increased by 18% over the prior year. Coiled tubing jobs decreased by 40% from the first quarter in 2015 due to lower activity in the shallow oil plays of Saskatchewan and the shallow gas areas of southern Alberta.

Operating income in Canada during the first quarter of 2016 was $0.3 million compared to $20.5 million in the same period of 2015, primarily due to lower equipment utilization and pricing. In response to these difficult market conditions, the company implemented several cost reduction initiatives in order to maintain its competitiveness. Operating costs was 65% lower than in the comparable period of 2015, which is attributable to the decline in activity combined with the impact of cost savings realized during the quarter.

SG&A expenses during the first quarter of 2015 included a recovery of $1.1 million related to annual bonus expenses from 2014. Excluding this recovery, SG&A expenses decreased 31% year-over-year, primarily due to workforce reductions, which have totaled approximately 21% since the end of the first quarter of 2015, combined with a lower compensation structure. The Company closed its Medicine Hat operating district at the beginning of March 2016, which resulted in approximately $0.3 million of savings during the first quarter.

In relation to the impairment of property, plant and equipment taken a year in 2015, Calfrac identified approximately 15,000 horsepower and five coiled tubing units as impaired from its Canadian division. This equipment was deemed to be obsolete and has been permanently retired from Calfrac fleet. Revenue from Calfrac's United States operations decreased to $76 million during the first quarter of 2016 from $305.1 million in the comparable quarter of 2015 due to significantly lower fracturing activity across all of the company's operating districts as 59% fewer fracturing jobs were completed period-over-period. Revenue per job was 39% lower year-over-year due to significantly weaker pricing.

Fracturing job sizes were consistent with the same period in the prior year. The Company closed its cementing operations in the Fayetteville shale gas play during the second quarter of 2015, and temporarily suspended all remaining cementing operations during the first quarter of 2016, which contributed to the year-over-year decline in revenue.

The company's United States operations incurred an operating loss of $12.2 million during the first quarter of 2016, which included restructuring costs totaling $3.1 million, compared to operating income of $11.4 million in the same period in 2015. These restructuring costs relate to organizational changes that are planned across the U.S. division during the remainder of 2016. Excluding these one-time costs, the operating loss would have been $9.1 million, primarily due to significantly lower equipment utilization and pricing in all of the company's operating regions. Although the company has undertaken numerous cost reduction initiatives, its south Texas district operated at levels that were uneconomic for the company during the quarter. In response to these challenging market conditions, Calfrac made the decision to temporarily close its south Texas operations during the first quarter.

Utilization levels in Pennsylvania were down versus the comparable quarter in 2015, which combined with significantly lower pricing, resulted in the Company not generating positive operating income in this region during the first quarter.

SG&A expenses in the first quarter of 2016 decreased by 22% from the prior year due to cost reductions that were initiated towards the end of the first quarter of 2015 and continued through the first quarter of 2016.

As a result of the impairment evaluations performed for the yearend 2015, Calfrac identified approximately 60,000 horsepower and seven cementing units as permanently impaired from its fleet in the U.S. division. This equipment was determined to be obsolete and the company has no plans to bring it back into service once activity levels increase.

Revenue from Calfrac's Russian operations decreased by 25% during the first quarter of 2016 to $22.7 million from $30.5 million in the corresponding three-month period of 2015. The decline in revenue was largely attributable to the loss of a fracturing contract with a significant customer to which the company also supplied proppant. The 7% devaluation of the Russian ruble in the first quarter of 2016 as compared to the same quarter of 2015 also contributed to the decrease in reported revenue. The decline in revenue was partially offset by activity with new customers, however, the majority of the expected activity is anticipated to commence in the second quarter of 2016.

Revenue per fracturing job declined by 10% primarily due to the currency devaluation combined with the impact of no longer providing proppant to any of its customers. The reduction in reported revenue per job was partially offset by higher fracturing activity in Usinsk, which is accessible by ice roads in the winter, where colder weather in the first quarter of 2016 permitted more activity than the previous year.

Operating income in Russia was $0.8 million during the first quarter of 2016 compared to $1.5 million in the corresponding period of 2015, primarily due to lower fracturing and coiled tubing crew utilization combined with the 7% devaluation of the ruble. Operating income as a percentage of revenue was 4% compared to 5% in 2015 due to lower equipment utilization. SG&A expenses declined by 58% in the first quarter of 2016 from the prior year's quarter due to the impact of the depreciation of the Russian ruble combined with the impact of cost reduction initiatives.

Calfrac's Latin American operations generated total revenue of $44.7 million during the first quarter of 2016 versus $43.4 million in the comparable three-month period in 2015. Revenue in Argentina was consistent with the comparable quarter as higher coiled tubing activity in unconventional plays offset a decrease in fracturing and cementing activity. In Mexico, revenue increased by $2.4 million primarily due to higher fracturing activity, which was offset partially by lower pricing.

Operating income in Latin America for the three months ended March 31, 2016 was $6.9 million, which included $0.4 million of restructuring costs, compared to $4.4 million in the comparative quarter in 2015. The improvement in operating income during the first quarter of 2016 was primarily due to lower SG&A expenses in Argentina arising from the significant devaluation of the Argentinean peso.

Calfrac's corporate expenses for the first quarter of 2016 included $0.2 million in restructuring costs related to planned organizational changes. Despite these additional restructuring costs, corporate expenses decreased by 26% compared to the first quarter of 2015, which resulted from the company significantly reducing its costs throughout 2015 and the first quarter of 2016 to better align its cost structure with current and anticipated activity levels. These initiatives contributed approximately $1.9 million to the quarterly decrease in corporate expenses, primarily by reducing personnel costs and discretionary spending. The company has reduced its corporate headcount by 38% since the end of the first quarter of 2015. Stock-based compensation costs were $0.6 million lower during the first quarter of 2016 compared to the same period of 2015, primarily due to the decline in the company’s share price.

The company recorded an income tax recovery of $28.9 million during the first quarter of 2016 compared to a recovery of $13.1 million in the same period of 2015. The recovery position was the result of pre-tax losses incurred during the quarter in Canada, the United States and Argentina. The effective tax recovery rate was 34% during the first quarter of 2016 compared to 50% in the first quarter in 2015. This decrease was primarily due to a higher percentage of taxable losses in Canada during the first quarter of 2016, which has a lower average statutory tax rate than the United States, which constituted the majority of the losses in the comparable period in 2015.

In light of the current environment, the company has further reduced its 2016 capital budget by approximately $5 million to $10 million. In addition, carryover capital expenditures are expected to decrease from $35 million to $30 million, mainly due to the impact of the weakening U.S. dollar. In total, Calfrac now expects to spend approximately $40 million on capital expenditures throughout 2016.

At quarter end, the company's working capital was approximately $261 million, which included $97 million in cash and long-term debt was approximate $878 million, the vast majority of which is not due until 2020. As of March 31, 2016, the company had used approximately $36 million of its credit facilities for letters of credit and had $110 million outstanding under its credit facility. The company is continuously reviewing ways to improve its liquidity position and will execute on those strategies that are in the best interest of its stakeholders.

Given the recent amendments to the company's bank covenants, which included the addition of up to $400 million of second lien capacity combined with the existence of a fully funded equity cure and the fact of the company’s unsecured subordinated notes do not mature until 2020, Calfrac believes that it will be able to navigate through the current industry downturn.

I would now like to turn the call back to Fernando for an outlook on the company's operations.

Fernando Aguilar

Thank you, Mick. Given that the North American oil field service industry continues to deteriorate, cost management remains Calfrac's primary focus. In early March 2016, Calfrac restructured its Canadian, United States and Corporate segments further to align with current and expected activity levels. In total, approximately 500 employees were affected by this initiative which decreased the company's global headcount to around 2,600. The company's Canadian, United States, and Corporate headcount have declined by approximately 60%, 70% and 35%, respectively, since the beginning of 2015. Calfrac will continue to make the necessary changes to its operating scale across all divisions in response to the evolving industry outlook.

Overall, we expect activity levels in the United States starting to translate into more meaningful production declines, which we expect to continue as the year progresses and help lower record high $2 inventories. That in conjunction with a meaningful pullback in global exploration and production spending including the cancellation and/or delay of long-term projects should result in a more balance supply demand environment. While these long-term has perhaps lasted longer than expected, there are many reasons including those I just outlined, which lead me to believe that the market will improve in the coming 12 to 18 months.

I will now provide an update across Calfrac’s division starting with Canada. Completion activity is expected to be down meaningfully year-over-year throughout the spring break, with the rig count across the Western Canadian Sedimentary Basin down over 50% so far in the second quarter. In mid April, Calfrac transitioned the majority of its fracturing and coiled tubing field employees to a variable compensation model and temporarily altered work schedules, which is expected to help mitigate losses in the second quarter.

While visibility remains limited past the end of the second quarter, the company does not expect activity to increase as sharply as in prior years given the current commodity price environment and anticipated capital spending plans. Approximately 50% of Calfrac's Canadian fracturing equipment is idle and the company will continue to manage its operating scale to match expected activity levels. Pricing continues to be challenging, although Calfrac does not expect it to decline much further from current levels.

The United States land-based drilling rig continues to decrease and currently stands at around 400 rigs. The company has idled 60% of its fracturing equipment and temporarily suspended its cementing and coiled tubing operations. In connection with such operating scale changes, the company has exited Arkansas and temporarily suspended operations in Texas. The company will continue to restructure the division and adjust its cost structure in order to match anticipated activity.

Broadly speaking, pricing appears to have stabilized however the company continues to see predatory pricing from some of our competitors in the region. Overall, while the United States oilfield services industry remains the most challenging market for Calfrac as it navigates through one of the worst downturns in decades, the company believes it will be amongst the first markets to recover. As such, Calfrac continue to focus its efforts on generating break-even operating margins at the United States, the largest pressure pumping market in the world, is an integral part of the company's long-term growth strategy.

Turning to Russia, activity for the remainder of the year in Western Siberia is expected to be relatively consistent with 2015. However, revenue is expected to decrease year-over-year primarily as a result of the depreciation in the Russian ruble, as well as a change in customer mix with Calfrac no longer providing proppant in any of its contracted work commitments. Given that proppant is priced at lower margins than completion services work, Calfrac's operating income on a percentage basis is anticipated to improve slightly as compared to 2015.

Despite the Argentinean government supporting crude oil prices and providing subsidies for crude exporters, exploration and development companies have been slow to resume drilling and completions activity in 2016 since suspending capital programs in December of last year as a result of uncertainty surrounding the country's general election. Throughout 2016, Calfrac expects natural gas completions activity to increase as producers reallocate their capital spending. As a result, the company anticipates that higher activity in new customers in southern Argentina during the remainder of 2016 will offset any decline in oil-focused activity in the Neuquén area.

Despite the near-term challenges, Calfrac expects overall activity in Argentina to remain consistent with 2015 with year-over-year margins on a percentage basis, increasing slightly due to the impact of job mix and cost control measures. Overall, Calfrac continues to believe that foreign investment will increase over the medium-to-long term and contribute to the development of Argentina's conventional and unconventional oil and gas resources.

In Mexico, Pemex has significantly reduced its operating budget and, as a result, drilling and completions activity is currently at historic lows. While the company believes activity could increase a slightly in the second half of the year, it remains focused on proactively managing its cost structure to match anticipated revenue.

Throughout the current downturn, Calfrac has had to reshape its short-to-medium term strategy focused around managing its cost structure, employing further process efficiencies, retaining as many of its best people as possible given the expected activity levels, maintaining strong relationships with its existing customers as well as expanding its customer base, all while ensuring the company has sufficient liquidity to navigate the cyclical downturn. Those initiatives will continue through what is expected to be a challenging year ahead. Calfrac is determined to navigate through this cycle and will continue to evaluate all alternatives available to the company that are in the best interests of its key stakeholders.

I will now turn the call back to the operator for questions. Thank you all very much for listening.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Sean Meakim from JPMorgan. Your line is open.

Sean Meakim

Hey, good morning.

Fernando Aguilar

Good morning.

Mick McNulty

Good morning, Sean.

Sean Meakim

So Fernando, I guess I just wanted to start off talking about Canada a little bit. You know, as we went to the quarter, just trying to get a better sense of how pricing unfolded and as we think about breakup, just I guess rates have changed; it would be interesting to hear more about? And I guess, trying to get a sense of when do you think you'll start to have a better sense of visibility coming out of breakup?

Fernando Aguilar

Okay, that’s a good question, Sean. You know the situation in Canada this year was – we had a very slow start in Q1 as we were mentioning earlier, due to commodity pricing uncertainty, customers delayed their initial projects in the first quarter of the year. And then due to weather and also low commodity prices, we had a very early breakup period. So, activity in the south part of the provinces where we operate stopped around mid-February, beginning of February and that didn’t really help – having a very strong end of Q1 and entering Q2.

So as we continue in today’s environment, you see that Canada today is running around 40 rigs, which is one-third of what we used to have in normal years in the past. So of course, that didn’t really help when you have around 1.8 million horsepower of our sales and our competitors fighting for the market is available there unless available work in the market. So I think the positive piece of what we’ve been hearing is use the couple of customers as we’ve been mentioning in some of our discussion, have heard their plans for the second part of the year. We’d like to see more of those discussions happening; I think people are very cautious about how the second part of the year will unfold. I think you reads what Synovus was saying today in a news where people are basically now used to a very, very low levels of activity that we are experiencing, but I think the visibility of the second part of the year is going to happen around the June, July time, when customers are going to start firming up their commitments and their capital plans as they enter the second part of the year with better commodity pricing, if that happens.

Sean Meakim

Got, yeah, that makes sense. Thank you. And then I guess just a broader question about M&A salvation to markets, et cetera. We’ve seen kind of slow start, it seems like bids are starting to narrow, but we’ve had – we obviously had the big U.S. sale of TRICAN's U.S. fleet we had just this week we heard that the coiled tubing sales from extreme drilling of Slumber J, just some interesting data points out there, so we’re going to see some equipment of size getting moved. I am just curious how you think about that from Calfrac's perspective in both U.S. and Canada would be quite helpful I think?

Fernando Aguilar

So we’ve seen equipment changing hands. Basically TRICAN and sand situations are very issue for us to follow-up because so far Canadian companies in the market. And then what we saw yesterday from extreme on Slumber J, that’s a surprise, I believe what Slumber is trying to do there is basically get some of the, let’s say high-tech stuff, especially for longer horizontal sections and the type of tools that it was developing. So, it’s good to see that there has been some rationalization of some of the assets in the market.

However, I still believe that let’s say the bigger consolidations that the market is expecting, we don’t see them yet. And I think our belief is that this is due to different reasons, companies operate in different geographical areas, number one, and number two what makes this more complicated today is a combination of equipment that is not in very good shape because the attrition is increasing as we speak, number one, and number two is to bring in people together.

It is time to marriage cultures when you have companies that are trying to operate from different regions, and although will end up losing the people and losing the culture of the company and getting equipment is most probably not in very good condition today, even though the price that people are auctioning those piece of equipment is pretty low in the market environment. So I still believe that we will see more of these things, but as the business opportunities will present themselves in front of the market.

Sean Meakim

Understood. And then just as – on net, would you say that sort of consolidation, makes you feel better about market conditions and a recovery? Or does it give you pause in as much as some of this equipment that’s been dragging a bit is now in some ways moved on to better capitalized hands?

Fernando Aguilar

In our discussion Sean, we talk to our division presidents and we go through sort of the facts that we have in front of us and the transactions that have happened in the last few weeks, we believe that this is good for the market. We believe that the company that are basically taking access or having access to the old piece of equipment are more disciplined from the pricing point of view. We believe that what has been happening in the last, let’s say three quarters in the market from those two or three companies that are basically size down or exited the market, will bring more let’s say discipline in the pricing and operational phase.

Like Mick was referring to in his notes, we still see some events where some competitors basically on isolated cases go over there, aggressive for one or two contracts or puds here and there, but I don’t think the industry and our sector in the industry can continue using prices because there is no more room. And I don’t think, you know when you see that everybody reporting pumping service numbers and showing like this, an old CEO was saying this morning brutal results, there is no room for that. And I think if we want to have this business available for the future, both service companies and oil and gas companies have to make money, and to do that pricing has to improve. And it’s not only the matter of pricing itself, it’s just a combination between the efficiencies that we had in the market in 2014 that keep high utilization of the assets and the people that will make the profitability improve. So is a combination of pricing and efficiencies that will come back to the market once activity shows up again.

Sean Meakim

Fair enough. Thanks for the detail. I appreciate it.

Fernando Aguilar

You're welcome.

Operator

The next question comes from the line of Brian Purdy with PI Financial. Your line is open.

Brian Purdy

Good morning everyone.

Fernando Aguilar

Good morning, Brain.

Mick McNulty

Good morning

Brian Purdy

I just wanted to ask a couple of questions here. First on the just accounting question, on the restructuring charges that you guys took in the quarter, where would those rollup to? Are they part of your operating costs or should be, are they in SG&A or they’re mixture. Can you give us some detail there?

Mick McNulty

Yeah. It’s Mick McNulty here, Brian. As far as we go on the restructuring cost, they will go into the line to which the personnel are sort of aligned with, so there is some SG&A, certainly when we are dealing with our corporate segment, and then it’s a blend of that when we are dealing with our division, so it will be a mixture of operating and SG&A in that case.

Brian Purdy

Okay. I mean would you have an idea or ballpark of how much went into SG&A for example?

Mick McNulty

Around one-third.

Brian Purdy

Okay. That’s great. And I want to ask you, you mentioned in your U.S. comments here about some undisciplined bids from – or predatory pricing I guess from larger competitors. I am just wondering if you are continuing to see that, do you see it as part of Calfrac strategy to price and try and put some of your smaller competitors out of business.

Fernando Aguilar

No. You know, I don’t think we want to go into bids that are basically, we’ll lose money. There were some charges as you are good observing our presentations that affected our performance in the first quarter. But as we continue progressing our financial situation in the U.S. is getting clear and is improving. And the overall plan for us, Brian, is basically to at least break even in a market like that. We don’t really want to continue, you know use – bidding for work and losing money, I think is more reasonable for the company, the equipment and wait for better time. We still believe as we were mentioning earlier that the market in the U.S. is going to basically go faster than anywhere else in the world. We believe that this is the case because it’s going to take time for – to mobilize offshore rigs again, to go into a long-term project and initialize those operations that were topped in the places like Brazil, Angola and Nigeria.

So, North America is a big machine and in the completions point of view when you see what is happening and the impact that production is going to give the market. This is the place where activity is going to pick up again. And you know very well that the price will fall, plus the efficiencies that the industry has been bringing, still – we are still far from the price of commodity that will make companies get the incentive to go back to work. So, as the price of oil continues to improving and the inventories go down and the same thing happen, we will have risk going back to work and most probably our customers are going to start using the inventory of uncompleted wells. So that the combination of those two is going to bring the fleets back to work with hopefully better pricing and high utilization and more productivity than the one that we have currently in the market.

Brian Purdy

Okay. Thanks for that, that’s useful. And then just last I wanted to ask, obviously you’ve retired a bit of equipment here in the quarter. I am just wondering is there a ballpark you guys have in terms of the equipment that you’ve got parked where it becomes worthwhile to just retire it. I mean would it be 10% a year or more than that, if it’s just parked in the yard?

Fernando Aguilar

No. You know, we have retired 75,000 horsepower in this last quarter. And I think what we are basically – what we believe is happening, this is equipment that was basically part of the original company and pumps that are basically not aligned to the technology that we are using today. So in general, I would say that as we move back into some level of activity, we’ll continue with our rotational maintenance and also with a republishing plan that we normally have. So I wouldn’t say 10% is going to be a number, but as you continue going back to that plan, the fleet is going to be pulled back again in operations.

Brian Purdy

Okay. I mean when you look forward 12 months, you don’t see any further retirements coming from your fleet?

Fernando Aguilar

If there is something, I don’t see 10%, but I can already tell you a number now, because it depends how quickly in equipment back to operation.

Brian Purdy

That’s all I had, thanks very much.

Fernando Aguilar

Thanks Brian.

Operator

The next question comes from the line of Jon Morrison from CIBC World Markets. Your line is open.

Jon Morrison

Good morning, all.

Mick McNulty

Good morning, Jon.

Fernando Aguilar

Good morning, Jon.

Jon Morrison

In the release you talked about oil pricing appearing to have hit a trough at this stage. Is that based on trailing bid flow that you are seeing or more of a high level observation that it couldn’t or shouldn’t get much worse, just given where margins are at this stage across the industry right now?

Fernando Aguilar

Jon, I would say a combination of the two.

Jon Morrison

Just to follow-on Sean’s earlier question, the 10% sequential decline that you guys referenced in Canada for pricing this quarter. Was that an average or an exit? And was the exit much worse than the average? And I guess what I am really getting at is, is it getting worse and are you seeing pricing come down again in Q2?

Ashley Connolly

So, it was an average for the quarter, I’d say it kind of got up to as much as 15%, probably the exit was worse than the entry of the quarter. In Q2, I mean you're definitely not seeing the degradation pricing you normally see, it’s got a bit weaker, but nothing to write down [ph] about and we think it’s going to stay fairly consistent, there is I think facilitative potential for default, but nothing of a magnitude that we saw in Q1.

Jon Morrison

Okay. So it’s fair to assume that seasonal discounts that traditional comes from in Q2 might not be the same magnitude that you normally give them just the starting point that you're coming into the quarter?

Ashley Connolly

Correct.

Fernando Aguilar

That is correct, because the price was already low.

Jon Morrison

Okay. On the equipment side, how much of the decision to retire the North American capacity that you did was driven by expected evaluated R&M costs associated with running that equipment or CapEx to put it back to work once you reactivate it versus the market overall just needing to balance supply and demand and Calfrac wanting to play its part in that rebalancing effort?

Fernando Aguilar

I don’t think we – we just try to rebalance the market that way. I think one of the most important responsibility that our management team has is to make sure that they or we take care of our assets which are basically equipment and people, and we have to be very careful that we don’t misuse our people and our equipment in operation. I would say that we are talking about piece of equipment that were getting old and where we’re requiring higher repairs, maintenance, costs as you were saying, Jon.

Jon Morrison

Is it fair to assume then the majority of stuff that was retired was probably upwards of 10 years old at this point?

Fernando Aguilar

That is correct.

Jon Morrison

Okay. So based on your earlier comments in the Greenfield program that you had that’s going on, that’s ultimately the one that underpin the decision to say ultimately we don’t think, we have a lot of retirements to come over the next 12 to 18 months above and beyond what you’ve done.

Fernando Aguilar

That is correct.

Jon Morrison

Okay.

Fernando Aguilar

I have to say, so sorry, Jon, just to complement what you are saying, because when you start trying to analyze how the numbers of capacity in our industry and let’s say that we take the US in around 5 million horsepower and then you have different numbers for Canada, some people are talking about 400,000 horsepower and some people are talking about 200,000 horsepower, we really believe that the number is around 200,000 horsepower. The operations in Canada are more benign to equipment because first of all, the intensity of the business is not as high as the one that is – it has been happening in the US. So I believe that retirement in Canada is going to happen in a slower pace than the one that happens in the US operations.

Jon Morrison

Okay. I appreciate the clarification there. Mick, is it fair to assume that the asset impairment that you guys have previously disclosed will capture all of these retirements that came through this quarter or should we be thinking about incremental write downs coming on the back of these retirements?

Mick McNulty

No. The asset impairments that we took at year end really were the driver for that. So when we did that exercise, some of it is at an asset specific level, which we disclosed and have sufficiently impaired in the others accounting write-down, essentially on the remaining assets, and that’s really specific to the US impairment we took at year end.

Jon Morrison

Okay. Fernando, can you talk about what will drive your decision to temporarily idle a market like Texas, but keep a footprint like Mexico active. I realized that they are both good long-term markets that probably have structural growth ahead of them. But when I think about a response time, I have to think that the Eagle Ford will come back before you see a material ramp up in Mexican volume – Mexican activity all those in volume. So I am just trying to get your sense of why you had ultimately decide to idle that market versus another one at this stage?

Fernando Aguilar

Because of the very, very low pricing, Jon. When you see what level pricing that is available in the Eagle Ford today is pretty low compared to what we still have in Mexico. When you take Mexico, you know Mexico for Calfrac has been an operation that traditionally has been always happening in the north. As we continue with our plan and strategy to penetrate this out, where better margins are available, I believe this is going to give us the opportunity to position the company in an area that is ready to take a company like Calfrac participate in a market has been kept only by the big two companies today and that market is very interesting due to a technology required and we are very interested in participating with the new chemicals, new products and new type of acid frac operations that we have available. And then the last piece there is that we have – is a matter of a scale as well, the operations in Mexico are not as larger the ones that can happen in the Eagle Ford, so it’s a scale as well.

Jon Morrison

In your preamble and the outlook section in the release you talked about focusing your efforts on generating breakeven margins in the US being a near-term goal. Is that achievable from a current activity and pricing perspective given what’s going on in the market or do you need pricing or activity to go up to cover your fixed cost at this point?

Fernando Aguilar

It is a challenge, as you were saying, is a challenge that we have been taking very seriously and we will continue pushing our sales team to achieve that situation. That is the main idea to make sure that our company is not going to continue losing money in areas that are now basically generating the margins just to at least break even. So, I know it’s not simple because when you read all the reports coming from our competitors in different areas where we operate, the challenge remains active, but I believe that’s an objective that we have put to ourselves and that’s exactly what we are trying to do.

Jon Morrison

Okay, perfect. Last one just from me. Mick, can you talk about what actually got pulled out of this 2016 CapEx program both in terms of maintenance spend in 2015 rollover. I realized it’s a small number, but just trying to get a sense of if anything was cancelled from an addition perspective?

Mick McNulty

Yeah. Okay. So, what was cancelled to all related to 2016 capital budget items, so that was stopped that we’ve not even commissioned any projects on yet and nothing really related to the carryover, the carryover capital, which was all related to FX changes, related to projects that were initiated in 2015.

Jon Morrison

Perfect. Thanks for the color. I’ll turn it back.

Mick McNulty

Thanks Jon.

Operator

[Operator Instructions] The next question comes from the line of Ian Gillies from First Energy. Your line is open.

Ian Gillies

Hey, everyone.

Fernando Aguilar

Morning Ian.

Ian Gillies

I wanted to follow on Jon's question, about getting to breakeven in the US, can you provide any additional detail on what levers might be left from a cost side, assuming pricing stays flat for the remainder of the year?

Fernando Aguilar

So, this is the fine line that you have to walk, you know when you’re reminding an operation, Ian, you need just to make sure that you go down to a lowest level of expense that you can afford to run your business. So, what room we have, yeah, you can always continue, use basically closing more places or reducing more of your headcount. But at the end of the day, we believe that this balance in the supply and demand for oil in the world is going to turn in the next six to nine months, it’s very, very difficult to manage that piece without sacrificing the numbers that you have. So we have reduced our headcount a lot, but we have been trying to keep us – it was mentioned in the notes, the core of the expertise that is required to run this business.

And let’s say that we have initiated – this is a two-year story that we are talking about here and that is what basically becoming tough for the industries to continue the slowing value that was generated by building a workforce and a technology offering portfolio that has been available in the industry in the last, I don’t know, five to seven years that translate and that gave basically the US energy independent has managed to make sure that US was going to be able to export oil and gas, and basically reduce the ability of – I mean their ability – increase their ability to not to depend from all countries. So this is the place where we believe that we have to be very, very careful because if we think and we have – like you saw with restructuring charges that we have taken some actions for Q2 what we call the phase six in cost control or cost reduction. We have to make sure that we walk that line very, very carefully and how far we go into that. So this is the room that we have as you are asking.

Ian Gillies

Okay. Thanks very much.

Mick McNulty

And Ian, it’s Mick here. Just to chime in a little bit on that, I mean from our perspective we always continue to work closely with our customers and our suppliers to try to mitigate our cost as best we can through this downturn, and we hope that that obviously translates into getting to that breakeven spot throughout the year.

Ian Gillies

Oaky, perfect. With respect to the Eagle Ford, South Texas, are you able to provide a sense of what percentage of your US jobs came from that region in Q1?

Fernando Aguilar

I would say maybe 15% to 20% without checking, I mean views from my head, but I will be checking those numbers and we will go back to you, 15% could be close to what we are, we will check and come back to you.

Ian Gillies

Perfect. And with respect to Latin America and you noted the shift in development to southern Argentina, how does the equipment deploy do a well site differ in that part of the country relative to Neuquen?

Fernando Aguilar

Sorry, Ian. You're asking what type of equipment we are using.

Ian Gillies

Yeah. So how big of a refractory would it be relative to Neuquen?

Fernando Aguilar

Well, you know, it’s very difficult to answer because Calfrac in Argentina is different to what happens in North America. We operate in all the markets. We operate in oil and gas, shale, tight, conventional and unconventional. So you know, we have basically a three markets, conventional business are basically, I don’t know, from two to four pumps depending on the job size, and then you go to places like Neuquen shale where you have maybe between 10 and 15 pumps. So there has been in the new play in Comoro river area, some let’s say, in the price and phase of the Block B1/29 where is varying between 7 and 12 pumps all for the shale. So it is very, very similar shale versus shale Neuquen and Comoro equipment job size. But then when you go to a conventional and tight, tight is a little bit smaller than shale, but then conventional is even smaller, because that smaller job that had a tradition in the country.

Ian Gillies

Okay. That’s helpful. Thank you very much. I wanted to turn to the balance sheet for a moment and I just wanted to see if I could get a bit of an update on how you’re thinking about deploying the equity care provision you have in your debt covenants.

Mick McNulty

Well, Ian, that’s really going to depend on how the results of the operations for the balance of the year playout. So, we really can’t give you a whole lot of color on that.

Ian Gillies

And then, a bit more of a I guess medium to long term thought, I mean with where the balance sheet is today, I mean what sort of debt-to-EBITDA ratios what the firm like to be targeting over the medium to long term as we think about trying to deleverage the balance sheet and potentially EBITDAs growth in go-forward years?

Mick McNulty

Well, I think our strategy on that is two-fold, right. I mean, we have to note that our unsecured notes aren’t due until 2020, so from that aspect and the US dollar denominated notes to fluctuate with the external currency, so the leverage goes up and down on those depending on that exchange rate. Our main concern right now is probably more on our credit facility bank debt and for that, we have that fully funded equity care, which we like is one of our alternatives. We certainly have that $400 million of second lien capacity, so that’s another alternative address any issues that we may have there.

Fernando Aguilar

So in summary what Mick is trying to convey to you is that we still have many options in front of us, and I think the area that the board management are taking together is basically to analyze what is the best way for the company to execute. So as we continue progressing throughout the year, we evaluate how activity is developing, we will be able to use one or the other, or the third one or the fourth one according to the options that we have, so we don’t really want to rush into taking decisions that will jeopardize our ability to move in a market at a later time.

Ian Gillies

Okay. Thanks very much. I will turn the call back over.

Fernando Aguilar

Thank you very much Ian.

Operator

And I will now turn the call over to the presenters for closing remarks.

Fernando Aguilar

Thank you, Blare. So, Calfrac wants to thank you all for participating in our Q1 2016 conference call. Goodbye.

Operator

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

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