Calfrac Well Services' (CFWFF) CEO Fernando Aguilar On Q2 2016 Results - Earnings Call Transcript

| About: Calfrac Well (CFWFF)

Calfrac Well Services Ltd. (OTCPK:CFWFF) Q2 2016 Earnings Conference Call July 28, 2016 12:00 PM ET

Executives

Fernando Aguilar - President and Chief Executive Officer

Michael Olinek - Vice President, Finance and Interim Chief Financial Officer

Analysts

Dan MacDonald - RBC Capital Markets

Greg Coleman - National Bank Financial

Ian Gillies - First Energy

Jon Morrison - CIBC World Markets

Sean Meakim - JPMorgan

Brian Purdy - PI Financial

Jeff Fetterly - Peters & Co

John Watson - Simmons & Company

Operator

Good afternoon. My name is Chris, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Calfrac Wells Services Second 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 conference.

Fernando Aguilar

Thank you, Chris. Good morning and welcome to our discussion of Calfrac Wells Services second quarter results. Before we get started, I would like to outline how this conference call will be conducted. Mike Olinek, 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, Mike, Ashley, and I will be available to answer questions that you may have.

I will now turn the call over to Mike.

Michael Olinek

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. In order to be able to identify the forward-looking statements in this conference call and understand the assumptions and material risk factors on relying such statements, I would encourage listeners to review the forward-looking statements advisory in our earnings release that we filed this morning, as well as the forward-looking statements and risk factors sections in our most recently annual information form.

During the second quarter of 2016, Calfrac recorded the following financial results in comparison to the second quarter of 2015. Consolidated revenue of 150.6 million, a 53% from the second quarter 2015 resulting primarily from lower activity and pricing in North America.

Adjusted EBITDA which is used for covenant purposes was negative 14.1 million versus negative 3.7 million in the second quarter of 2015. The year-over-year decrease was mainly a result of significantly lower equipment utilization in North America and Argentina, weaker pricing for the company’s services in Canada and the United States as well as the 4.9 million bad debt provision recorded during the second quarter of 2016.

Cost reductions implemented across the company partially mitigated the decline in adjusted EBITDA.

A net loss attributable to the shareholders of Calfrac of 41.7 million or $0.36 per share diluted compared to a net loss of 43.3 million or $0.45 per share diluted in the second quarter of 2015.

In the second quarter, Calfrac post the 200 million second lien senior secured term loan financing with the portion of the proceeds used to pay down the company’s borrowings on its credit facilities.

Subsequent to the end of the second quarter, Calfrac also repaid the entire amount outstanding on its Argentina bank loan and cancel the associated U.S. $25 million letter of credit that supported the loan.

The results from Calfrac’s operating segments are as follows. Revenue from Calfrac’s Canadian operations during the second quarter of 2016 was 45.4 million versus 66.9 million in the same period of 2015. The 32% decrease was primarily due to significantly lower activity and lower pricing for the company’s fracturing service. The number of fracturing jobs decreased by 34% while revenue per fracturing job decreased by 2% from the same period in the prior year as a result of lower pricing, offset by a change in the mix of completion treatments and greater service intensity.

The number of coiled tubing jobs increased by 6% from the second quarter in 2015 due to increased activity in the Montney shale gas play in northern Alberta partially offset by lower activity in the shallow oil plays of Saskatchewan and the shallow gas areas of southern Alberta.

The operating loss in Canada during the second quarter of 2016 was 4.7 million compared to 6.3 million in the same period of 2015. The company partially mitigated the impact of lower activity and pricing through the implementation of several cost reduction initiatives. Operating costs were 32% lower than the comparable quarter of 2015 primarily due to the decline in activity combined with the impact of cost savings realized during the quarter, including the closure of its Medicine Hat operating district at the beginning of March 2016.

SG&A expenses decreased by 28% year-over-year primarily due to workforce reductions that have totaled 17% since the end of the second quarter of 2015, combined with a lower compensation structure.

Revenue from Calfrac's United States operations decreased to 48.1 million during the second quarter of 2016 from 172.5 million in the comparable quarter of 2015 due to significantly lower fracturing activity across most of the company's operating regions, with the exception of Pennsylvania, as 42% fewer fracturing jobs were completed period-over-period.

The company made the decision to temporarily close its North Dakota operations during the second quarter of 2016. The company also closed its operations in the Fayetteville shale gas play during the second quarter of 2015, temporarily closed its south Texas operations and suspended all remaining cementing operations during the first quarter of 2016, all of which contributed to the year-over-year decline in revenue.

Revenue per job was 49% percent lower year-over-year due to significantly weaker pricing in all remaining operating regions combined with the completion of smaller jobs in the Marcellus shale gas play in Pennsylvania.

The company's United States operations had an operating loss of 0.8 million during the second quarter of 2016 compared to a loss of 0.7 million in the same period in 2015. The second quarter loss, although consistent with the comparative quarter in 2015, was primarily due to significantly lower equipment utilization and pricing in all of the company's operating regions.

The company's decision to temporarily close its south Texas operations during the first quarter resulted in a significantly lower operating loss in this district. SG&A expenses decreased by 26% in the second quarter of 2016 from the prior year primarily due to workforce reductions which have totaled 48% since the end of the second quarter of 2015. This was offset partially by a provision for bad debt expenses of 0.3 million that was recorded during the quarter.

Revenue from Calfrac's Russian operations decreased by 42% during the second quarter of 2016 to 22.4 million from 38.9 million in the corresponding three month period of 2015. The decline in revenue was largely attributable to the loss of an annual fracturing contract with a significant customer to which the company also supplied proppant and the 16% devaluation of the Russian rouble in the second quarter of 2016 as compared to the same quarter of 2015. The decline in revenue was partially offset by call out activity and activity with new customers.

Overall, the Company experienced lower activity due to a reduction in the number of stages performed as a result of geological conditions for one of its customers and delays in transporting equipment from Komi Republic to Western Siberia. Revenue per fracturing job declined by 26% primarily due to the currency devaluation combined with the impact of no longer providing proppant to one of its customers.

Operating income in Russia was $3.0 million during the second quarter of 2016 compared to $4.7 million in the corresponding quarter of 2015 primarily due to lower fracturing and coiled tubing utilization combined with the 16% devaluation of the rouble. Operating income as a percentage of revenue was 13% compared to 12% 2015 primarily due to a greater proportion of activity in Usinsk, which generated higher operating margins.

Calfrac's Latin American operations generated total revenue of 34.7 million during the second quarter of 2016 versus 41.3 million in the comparable three month period in 2015.

Revenue in Argentina was $5.3 million lower than the comparable quarter primarily due to lower activity resulting from union strikes that negatively impacted customer activity. In addition, adverse weather conditions in Neuquén also contributed to the decrease in revenue and customer activity.

In Mexico, revenue decreased primarily due to lower fracturing activity which was offset partially by higher coiled tubing activity.

The company's operations in Latin America incurred an operating loss of 4.4 million during the second quarter of 2016 compared to operating income of 4.1 million in the second quarter of 2015. This decrease was primarily due to lower equipment utilization in Argentina caused by union strikes which delayed the drilling schedules of Calfrac's customers combined with adverse weather conditions in the Neuquén region during the second quarter of 2016. In addition, the company recorded a bad debt provision of 4.6 million during the second quarter related to work that was performed in Mexico.

Corporate expenses for the second quarter of 2016 increased by 2% compared to the second quarter of 2015, which resulted from a $2.3 million increase in stock- based compensation expense resulting from a higher share price at the end of the quarter. Corporate cost reductions primarily related to corporate personal costs and discretionary spending partially offset the increase in stock-based compensation.

At quarter end, the company’s working capital was 306.3 million which included cash of 146.2 million. Long term debt was approximately 952 million all of that an insignificant amount of which has no due until 2020.

As at June 30, 2016, the company had used 35.1 million of its credit facilities for letters of credit and had no borrowings under its credit facilities. As I previously highlighted, subsequent to the end of the second quarter, Calfrac also repaid the entire amount outstanding on its Argentina bank loan and cancel the associated U.S. $25 letter of credit that supported that loan. Upon cancellation of the letter of credit, the company had approximately 297 million in available liquidity under its credit facilities.

Overall give the 2020 maturity of the company’s unsecured subordinated notes, the completed second lien financing also with 2020 maturity Calfrac’s amended bank covenants and the existence of a fully funded equity cure, we believe the Calfrac is well positioned to navigate this period of market weakness and capitalize on the opportunities expected to arise as market conditions recover.

The company is continuously reviewing ways to improve its liquidity position and will execute on those strategies which are in the best interest of its stakeholders.

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

Fernando Aguilar

Thank you, Mike. Although the Company is encouraged that North American activity appears to be increasing slightly with the land-rig count in the United States up from the lows recorded in May and Canadian activity levels improving post spring break-up, Calfrac expects that the second half of 2016 will remain fairly weak. The company believes that crude oil prices will have to show stability above 50 per barrel in order to realize a modest increase in activity. The company is optimistic that 2017 activity will improve year-over-year, but visibility remains uncertain at this time.

I will now provide an update on Calfrac’s division starting with Canada. Calfrac believes that completion activity in the third quarter will be significantly lower than the same period last year, but that utilization of its active fleets will be relatively strong throughout the quarter. However, pricing continues to be very low with current pricing down approximately 10% from the first quarter as a result of very strong competitive pricing pressures. Visibility remains limited past the end of the third quarter, but at this time, the company does not expect activity to lead to the reactivation of any idled equipment for the remainder of 2016. As such, operating results for the second half of the year are not expected to improve meaningfully.

In the United States, although land-based drilling rig count appears to have reached a historic low in the second quarter and is now trending higher, activity remains extremely low. In the second quarter, Calfrac temporarily suspended its fracturing operations in North Dakota and idled an additional fleet in Pennsylvania leaving only approximately 30% of its fleet currently active. Consequently, revenue in the third quarter is expected to decrease sequentially given the smaller active fleet and anticipated uneven activity levels throughout the quarter. Pricing has remained relatively stable since the first quarter of 2016 and while Calfrac expects it to be fairly consistent with current levels through the end of the year, further pricing pressure could arise should competitors attempt to add market share ahead of a recovery.

Calfrac remains focused on cost control and mitigating losses as it does not anticipate activity to increase significantly in 2016. That said, Calfrac has recently received customer increase for possible work in the second half of 2016 and into 2017 that may lead to the company reactivating equipment.

Overall activity in Russia has been fairly consistent with last year aside from some weather and customer-related challenges which caused some delays in the first half of 2016. In the remainder of the year, Calfrac expects operating results, both in terms of revenue and operating income, to improve from second quarter levels.

While not as severely impacted as North America, Argentina has not been immune to the challenging commodity price environment with the rig count down over 30% from the end of last year. In addition, select large multinational competitors have recently increased pricing pressure in an attempt to recover market share. Despite the challenging market conditions, Calfrac's activity in Argentina for the remainder of the year is expected to be relatively consistent with 2015, as higher activity with new customers in southern Argentina is expected to partially offset the decline in oil-focused activity in the Neuquén region. However, there is potential that new union strikes in southern Argentina could arise and cause further delays in the company's customers' work programs over the next few months.

In Mexico, activity across all regions remains low due to the delay in Pemex's budget process. While activity levels are expected to modestly increase over the coming months, Calfrac's focus is to continue to proactively manage its cost structure to generate breakeven margins in Mexico.

Throughout the current downturn, Calfrac has reshaped its short-to-medium term strategy to focus primarily on 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 and suppliers as well as expanding its customer base, all while ensuring the company has sufficient liquidity to navigate the cyclical downturn.

The second lien term loan financing that was recently announced in June leaves Calfrac well-positioned to navigate this period of market weakness and capitalize on the opportunities that are expected to arise as market conditions recover. This financing was completed with a reasonable cost of capital, limited dilution and no maintenance covenants associated with the new term loan.

I would 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 is from Dan MacDonald with RBC Capital Markets. Your line is open.

Dan MacDonald

Hi, good morning.

Fernando Aguilar

Good morning.

Dan MacDonald

Just one question really Fernando, we’ve heard commentary from the big three service companies in the U.S. that has basically said that they are ending further pricing concessions with one of them actually saying they are beginning to claw back some existing pricing concessions here in North America given the slight uptick in the U.S. Are you guys approaching the current environment I guess the same way from pricing perspective and have you seen sort of that trend, your comment indicate that you started to see that?

Fernando Aguilar

Thank you, Dan. So you know pricing is basically is a market situation and it’s based on supplying demand. And it is very true that pricing you know the way that we’re being experiencing pricing in our sector in the industry for the last I can say six quarters has only been very challenging because people try to generate cash and try to protect their activities and then price continued going down for some time.

But as we mentioned in our - you know Mike and I were mentioning earlier today, in the U.S. pricing is relatively stable compared to what we had before. So that means that companies are not, you know our competitors on our sales are not willing to continue, giving more concessions and pushing the companies to lose more money market that has very difficult for everybody as you know.

We believe that the pricing as we remain stable and all companies basically sized their operations to what they have in front of them. There will be some positive trends in front of us. And this is related to the stress and tension that is going to start happening with customer, they continue increasing their activity. You know we took about 15 rigs in the last couple of weeks in the U.S. and seven in Canada, does not materially important for the activity and companies to start bring equipment and people back. But that is positive news because that shows that there would be some sort of activity increase happening and then pricing has to start to getting into more let’s say reasonable level.

So we believe that yes, this is a positive note and I don’t think people will like to continue bringing pricing down in an environment like this. So the answer to your question is, yes we agree with that.

Dan MacDonald

Thank you very much. That’s all I have.

Fernando Aguilar

Thank you, Dan

Operator

[Operator Instructions] And the next question is from Greg Coleman with National Bank Financial. Your line is open.

Greg Coleman

Hi Fernando, Just a couple of quick ones here. We’ve heard commentary again from some of the seniors, the majors down in the U.S. regarding the portion of the fleet which is sitting on the sidelines and the cost to get it back up and running. I am wondering if you could comment with about running I believe in the U.S. and little bit over half in Canada. The stuff that’s sitting on the fences, what would be the cost if any associated with bringing it back into the field if you have the demand for it and if there is limited or no costs associated with it. At what point in the future would it start to become something that you know you would have to put some investments into it in order to get that capacity back in the field?

Fernando Aguilar

So you know in general, when you read reports and you try to understand how the industry is being run and operates today. A lot of people will tell you that is in pretty good shape. You can cross a couple of important industry reports in the last - I would say in the last month in which you will read that the numbers are have been stated by companies in different press releases and conferences has been all restated. And that means I think the industry as a whole is underestimating the amount of damage that has been done to equipment because of lack of repairs and maintenance.

I have you tell you and I think Greg you know we have these discussions before you know management is responsible for the assets of the company and in this company we are very serious about our people and our equipment. And we’ve been very careful in protecting our equipment. That doesn’t mean that we don’t have any important amount of money to expense in repair our equipment, but there is no substantially let’s say critical for the future of the financial situation of the company as we have managed to continue keeping our equipment in proper share and condition.

When we say that we park equipment, the equipment that we have been parking has been kept into some sort of warm status, so our maintenance groups are basically rotating throughout those equipment in the even areas that we operated and make sure that the maintenance that has to be provide to these equipments is going to accelerated as activity picks up again.

So it’s not substantial but it’s important considering that today when companies are not delivering any margins, so it’s going to be work capital is going to be required.

Greg Coleman

And so Fernando, what would be to - to come back to your statement, what would be your estimate as to capacity reduction industry wide both in Canada and the U.S.?

Fernando Aguilar

So you know, we’ve been saying in different meetings that the number, if we started two years ago with 20 million horsepower in the U.S. and 2 million in Canada, that number has - and the number that we said that was active in the U.S. was about 8 million. One of the - recent numbers that we’ve been reading and analyzing is about 7.5 out of which 6.5 are pretty active today. So that’s the U.S., it’s basically one third of the equipment that the U.S. have seen in operation today.

If you remember what I mentioned in my script, we have part 70% of the equipment, we have 30% of the equipment running which is very consistent with the market and we don’t try to keep any market share, we have kept the market according to how the activity has been reducing in the U.S. If you go through Canada, the numbers are basically 50% of that. So from 2 million we believe that the industry is running between 800,000 and 1 million horsepower. But what I have to tell you here is that the equipment is no running at 24 hour operations consistently and continually all over. So that’s the difference that I explain to you when I was telling about the 7.5 million that we were thinking about and the 6.5 that is pretty active.

So those numbers are because customers are basically not having the volumes that they were providing the industry before.

Greg Coleman

Got it. Switching gear a bit, just talking about the bad debt expense in Mexico, can you give us a bit more color on that, is that the entirety of the amount of withstanding from that customer, you know just wondering if there is any to bring up and hold any contagion risk with that spreading across into additional quarters or is that raped up?

Michael Olinek

Hi Greg, it’s Michael Olinek here. As far as our bad debt in Mexico, it’s really related to one customer and it’s the entire balance that we had outstanding with that customer so there will be no hangover effect into following quarters.

Greg Coleman

Reasonable to assume you are no longer with them?

Michael Olinek

That’s correct, yeah.

Greg Coleman

Great, thanks guys, that’s all. Sorry, go ahead Fernando.

Fernando Aguilar

Greg and maybe that customer is not really operating as he used to before, right. So that is - that’s very important mention because you know that still thinking about how the industry has turned in Mexico and how they - opportunities we go in front of us as the energy reform kicks in. I have to tell you that the MXE is going to have a more reduced activity but still most important customer in the country.

Greg Coleman

Got it. That’s it from me and thanks gentlemen.

Fernando Aguilar

Thanks Greg.

Operator

The next question is from Ian Gillies with First Energy. Your line is open.

Ian Gillies

Hello everyone.

Fernando Aguilar

Good morning.

Michael Olinek

Good morning, Ian.

Ian Gillies

I was just curious I mean we’re hearing an increase trend in producers’ direct sourcing frac, sand and chemicals, and I am just wondering how you guys making that effect maybe effect your U.S. and Canadian businesses from a margin standpoint and absolute revenue standpoint?

Fernando Aguilar

Yes, Ian, you know that when industry goes down and you have time to think about a lot of different things, you try to do those things. So in other words as customer having, you see they try to get into their suppliers and service company’s business for different reasons trying to understand if they save the money and order. But the reality in the industry and that has been basically 100 year story is that as activity picks up again, they will concentrate in getting their business back to where they have to be and concentrating in core business.

So this trend normally happens in downturn, some customers will try to do it, they obviously for the reasons that I explained earlier are not as efficient and cost effective that service companies are providing, so the reason because of the relationships and the way the business is conducted. So if the trend has been let’s say kicking that direction, I don’t believe there is going to - something is going to sustainable for the future and they will understand that they will have to had support, they have to - and then the efficient they get and the ways that the y produce will take them back to where they were.

You know 100 years ago when the industry started, the oil and gas companies were doing everything themselves and they realized that that was not cost effective for them and that’s the reason why they started creating the service industry that has been around since then based on that premise. And I believe that this is the case. So you’ll have maybe 10% of the industry you know doing their own thing and some customers and companies trying to run third own factories and buying their own materials and sourcing their own materials. But the bulk of the market in the 80%-90% they will continue running the business you know outsourcing the services to a service industry have in the case.

Ian Gillies

Okay, thanks, that’s helpful. I just wanted to go back to the topic moving equipment off fence and probably more specifically in Canada. Does pricing need to go higher before you move equipment off fence or do you expect you are going to have move equipment off the fence at current pricing to try and drive pricing higher?

Fernando Aguilar

So moving equipment is not an issue, because equipment is basically something that can be used on wheels and can just pull out and go to operations. I think the challenges are more related as you will put related to pricing and related to the ability of the industry to have a steady operation. I believe and this is the reason why the industry in Canada went into a more variable phase structure is because of the lack of visibility of the activity, number one and number two you know the cost pressure that the service companies were having in the market that was very stable as we understand.

I believe that as our customers will start bringing more rigs and having more completions available in front of us, the discussions are going to happen between the service companies and the operators and there will be some stress and sometimes even though discussions because of course they will like to keep all prices that are available here, but for the industry to go back to decent level of operating margin that will to let’s say to share that commodity price increase. So I think there would more recent community don’t go up, so they will start let’s say enjoying a better commodity pricing and part of that commodity pricing have to be share with the service companies.

It’s fairest statement because if you talk to customers and what we see today they don’t make any money and we are not making money. And the real is that the only thing that we need after all these cost efficiency that have been brought to an industry prices will have to recover somewhat just to mention that we can attract people back to industry, continue working on training the workforce and developing technologies and operating in a normal level. The way the industry is today is broken because nobody makes money from the customer’s point of view and the service company’s point of view, the amount of investment is very limited if not zero, right.

So I believe that stress is going to happen. And as that stress starts moving up with the number of rigs going back to the industry that pricing will start improving slightly and we are not thinking the pricing will go crazy because it take time due to that discussion that will happen ourselves and our customers as well.

Ian Gillies

Okay, that’s helpful, thanks very much. And the last question is had is how easily do you think it’s going to be to staff crews in Canada and in the U.S. and where do you think you have runway to right now based on what you know today of adding crews back and people?

Fernando Aguilar

So this is I think the most element of the recovery which is going to be I mentioned that equipment is not going to be an issue because you know but I say for a specific say or that we have prepared for that. But you - when you took our people, we were 5,200 people in the company and today we have half of that number, it’s not a little bit less. So - and I believe this is not only - this is industry, the industry has at least around 200,000 people in North America which is a big number. How can we attract them? And I think that’s a question that most in the industry and the human resources, Vice Presidents are thinking. It is about more stable market.

So you know you will bring people back to business only if there is stability and these people will see they have a medium to long term stability in the jobs that they get. I think it’s easier up to some sort of limit in Canada because you know there is a lot of people, we have a lot of people that lost their jobs in the province and surrounding provinces around Alberta. But you take the U.S., the U.S. was - economy is doing better, so went to different jobs.

And I believe there is going to different markets fighting for the same people, so you would above plant demand and the ability of the industry to be able to compensate these employees and attracting back to the industries, is going to be the challenge. So you know are you willing to pay more to employees in any of the two countries when the prices having recovered. So the only reason for that is if that supply demand from a personal point of view and ability to be able to pay them is going to be let’s say the main thing.

I think the industry is always attractive because it’s a very interesting place to be and I think it’s an exciting job and a lot of people love it. But of course this time that we went sold down and maybe one of the worst cases in the last 40 years you know the industry will need a stability and long term commitment for these people to come back.

Ian Gillies

Perfect. Thanks very much. I’ll turn the call back over.

Fernando Aguilar

Thank you, Ian.

Operator

The next question is from Jon Morrison with CIBC World Markets. Your line is open.

Jon Morrison

Good morning all.

Fernando Aguilar

Good morning, Jon.

Michael Olinek

Good morning, Jon.

Jon Morrison

Just a follow-on Dan’s question. Have you see a tempering in the aggressive bidding on pricing in Canada in the last couple of weeks in line of more companies comments about starting to total line and not getting aggressive and you are still seeing decent size discounts or what you preserve to be decent size discounts to breakeven field margins been at this stage?

Fernando Aguilar

I believe that - well we believe in the company that us, there has been some shuffling in the market related to all different companies have turned into more local presence and old companies disappearing and new companies are emerging, that market has been let’s say more active in that respect, you know you want people accommodate themselves to the new norm in the Canadian division, I don’t see that in the U.S.

In fact if you go to U.S. even though pricing has been let’s say worse than what was the case in Canada, the U.S. went two years, two and a half years or two years ago from 60 companies, a year ago 240 and today I don’t think we have more than 20 companies operating in the whole country. And in Canada has kept number of competitors and some of these companies are trying to accommodate, so that’s why the issues in pricing that we had before and the aggressively that some of these companies have still there and that’s why we say that there was a like 10% price reduction in the way. We still see because of the elements that I mentioned to you earlier.

So because the number of competitors is more in Canada, our activity picks up again. I believe there will more stability on people will go back to a more discipline market that was always a norm in our country.

Jon Morrison

Okay, so it’s fair to assume that you haven’t seen it yet but perhaps it’s coming in Q3 or maybe early Q4?

Fernando Aguilar

We have started in Q2 and you will some Q3 effect on that, yes.

Jon Morrison

Okay. Just a follow-on Ian’s question, I wonder if you could share how you are going to gauge, when is the right time to react with capacity and specifically is that a utilization base consideration or do you need to see some base level of pricing or embedded field margin before you will actually consider hiring guys and putting more equipment in the field?

Fernando Aguilar

You know it is a combination of everything that you said. So you think about yourself sitting as a manager of any of our operations and then there is a limited amount of work with very little pricing and then you have one or two customers that are basically increasing their activity. Us - customers started doing that. There will be some competition for that available work coming the competitors that we have in the country. So us that happens, they will realize very quickly that the amount because today most company have size their business to activity that is available here.

As you continue adding rigs and having more business available, they will try to secure let’s say fleets or crews for that activity that they are putting in front of the industry. That discussion is going to happen not only one company but maybe two or three to see exactly engaging like you are saying engaging or is happening. And at the end of the day what you need is and some of these let’s say competitors or ourselves taking these additional activity, we will open the ground for the more available work to be let’s say discussed with your customers. So that tension that is going to happen is related to the productivity, the continuity of the business, let’s say longer term commitments and also with that the pricing.

So I would say that there is no a single one indicator that we will use, we will basically all of them as you were putting in front of the question.

Jon Morrison

Okay. Within the U.S., do you have enough visibility in your current order book to say that incremental stacking of crew’s equipment is very unlikely at this point or you’ll just kind of take it week by week, month by month?

Fernando Aguilar

I would say yes, I would say that there is a more positive atmosphere and environment in front of us, more calls for RFPs, more interest in going back to business, in fact you know you say the commodity price is basically better than was before let’s say not today but in general and at the same time you have 15 more rigs in the last couple of weeks. So these have moment going in that direction.

But you know I think but this is not enough. I believe you know us to plan in mind from a commodity point of view are continues by lasting itself, it is going to give a better let’s say stability to industry. I have to tell you that one of my trips and has opportunity of attending the couple of meetings and conferences where you know I was looking at how the offshore market is basically going down very quickly. So let’s say the major investments in the industry are lower today and you know that this is the multibillion dollar environment maybe in the trillions, this is going to help the unconventional business in North America to recover faster than there is. That is one piece of the story.

And the other story is that I don’t think the industry, let’s say the industry analysts and people that are watching what is happening in the world are considering very seriously what happens with production the clients all over. And our view that you know the recent numbers in inventory especially refine products and all that is not giving and is misleading the information that is substantial. One example that came in one of our discussions recently is this is like you are - you open your fridge and it’s full of food but the problem is the farmers have not basically planting any crops. So you know that’s what happening in the industry and we will short by how that supply demand of oil in the world is going to be heat in the next few months. And some people will get surprise about that.

Jon Morrison

Okay. When things do turn more positive in the U.S., do you believe you are more likely to reopen North Dakota or Texas first, or it’s two related?

Fernando Aguilar

So you know what’s interesting from your question is that the interest and the number of our piece are coming are coming from all over. So they are coming from basins are coming from the oil basins. So it will depend on who the customer is and exactly what the opportunity is. But both North Dakota and Texas are critical and important to our strategy and unlike we were discussing earlier the U.S. is a very important market and customer has to be an important player in that operation.

Jon Morrison

I realize that your goal in Mexico is to maintain breakeven margins in the near term but is it moving to 2017 if energy reform doesn’t yield an increase in the opportunity setter, give some build in activity levels for Calfrac, do you have to start looking at permanently exiting the county at that point or?

Fernando Aguilar

Well, you know I still believe and we still believe in the company in Mexico’s opportunities and Mexico’s potential. And the reason for that is that Mexico needs their industry to become more effective and more efficient. So just to give you an example, a country that has the resources like Mexico is important from our sellers today. And that seems ridicules when you can develop your own resources, but they haven’t been to attract new investors because of this downturn.

The opportunities in Mexico and just talking to not only to let’s say Canadian companies interested to operate in the country are there, the only thing that they need is to make sure that the concessions that they government is going to make to new investors in the country will be balanced by a better commodity pricing that is not happening today.

So in the future, this is going to happen and we believe that you know Mexico is a place where there are many opportunities where company like ours not only in let’s say in the northern part of the country for gas but also when you go to south and you have good opportunities for oil. Oil in the south is lighter and they mix it with some of the offshore oil, so that is an area that Calfrac is basically looking at to make sure that we are participating in that market. So let’s protect our financial situation in the country today, frank to reach a breakeven position and as the market accepts, we will be able to share some of these markets in the future.

Jon Morrison

Within Argentina, can you give an update on the impact of worker strikes are having on operations right now?

Fernando Aguilar

Yes. Argentina, we still believe that Argentina is important place for our strategy, for the reasons that we have discussed in many of these conferences, but you have to understand some of the political implications of the dollar in change completely from party in a country like that. So you have the previous let’s say the previous President on part pushing very hard to make these new government look back, so - and because they were let’s say from left wing side, they support it and they develop a lot of these union, they been pumping them to make sure they has opportunity of docking some of the new program that the government is trying to do and say they wanted to achieve.

So I believe that this is normal in an environment like that. So that’s one situation that affected. And I think between American oil customer they will try to let’s say negotiate and navigate that strike activity decrease. But our - the situation was not only related to strikes, I believe that the pressure would continue there but the government has been let’s say strong to say that they need the industry and they need to move forward. So they would do some high level discussions between them to make sure that they reach an agreement in how things have to be managed.

The other two things that have been happening in Argentina is that you know very well that new government brought new management team to. So [indiscernible] was running both the CEO and President position of the company was fitting to, so you have now two people that are in charge of that and this changes plus some of the rigs that they released and they brought down has make competitor tougher because you have less activity for the same number of competitors. But we believe that all these things are a part of a transition and us the new government continues executing where they need have that activity will increase.

The other that is important is strategy that in the last few months Calfrac has been able to despite activity increase to penetrate new accounts with our technology that we’ve been executing in Argentina and this is for international customers that are, international and local customers that are opening the roads to us. So it’s not today, YPF operation only, today portfolio of customer is increasing and our ability to penetrate new customer have been based on ability to perform new technologies and good operation for them.

So we’re positive about that. This was difficult based on the competition point of view and also strikes and weather issues that we had in Q2 but we are positive how the second half the year is going to more on.

Jon Morrison

Perfect. Last one from me, just as follow-on to that. Within Argentina you referenced increased competition, it’s fair to assume that just the exact same of encumbrance fighting for less work, you haven’t seen any new migration of more equipment on the pumping side into Argentina in the last three or six months?

Fernando Aguilar

Yes, we saw some equipment from one part of major competitors, they brought some equipment from different region. And that basically that one company brought more equipment but the rest the number of competitors and equipment with the exception of that company remains similar to where we were before.

Jon Morrison

Okay, prefect, I appreciate the color. I’ll turn it back.

Fernando Aguilar

Thank you, Jon.

Operator

The next question is from Sean Meakim with JPMorgan. Your line is open.

Sean Meakim

Hi, good morning.

Fernando Aguilar

Good morning, Sean.

Sean Meakim

So just - most of my questions have been answered, but just I noted that you highlighted some relative strength in the quarter, how does deep gas activity factor in your forward outlook, should we expect any changes for the one FID delay that was announced or you continue to see enough activity on the deep gas to sustain work levels for now?

Fernando Aguilar

Sorry, you are talking about, have we see the money. Okay, yeah, so - yes, we have today more a lot of interest in our money operations because we see more customers are basically trying to plain their second half activity plus internal customers that we have today. So we play important role in the other area and I think the activity that we have today is quite positive. And we’re still positive that one or two projects will go.

Sean Meakim

Okay, fair enough. And then just on the balance sheet, do you risk the covenants and the maturity cadence is much improvement but your leverage is still relatively high on your term metrics of course and so how do you approach debt reduction overtime, is just a function of waiting for recovery for the EBITDA that grow into the enterprise value or anything else that you are targeting?

Fernando Aguilar

So this is a discussion that is normally part of all of our board meetings which is very relevant because if we have some on our balance sheet today is for one reason, we were investing in our company and we’re investing in the size that we have today that comfy the market in different counties and that is the reason why with the seven values fleet in 2014, we manage to get to a certain level in terms of revenues and operating margins in North America.

So yes, we went out and spent money and both from new equipment that was basically trying to support our growth plans for the rest of the world. So since then an understanding that the deliveries as you were mentioning, we think about how we are going to be able to go into more balance situation and it’s about you know - it is about - today is about extending our run way and making sure we protect the company for the future, so we exceed as the downturn finishers, but at the end of the day what we will - we will have today enough equipment to be able to try the market in all different geographies. So the amount of capital required for the future is going to be limited. So we will not spend all that money, trying to buy new equipment and will try to go back and fix our balance sheet.

We have in mind. And it will happening as activity improves and margins help us in that direction. There are many ways of doing other things like raising equity and all that but you understand that today with low share price that make any sense but those are things that are discussing in a routine manger in our board meetings and of course we watch out very carefully.

Sean Meakim

Understood, thanks very much.

Fernando Aguilar

No problem, Sean.

Operator

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

Brian Purdy

Good morning everyone. Just quick question, I was hoping you could outline any other cost savings booked generally in the press release, but I was just wondering if the transition to more variable cost structure Canada has met your expectation. And I mean obviously the industry is still suffering from a lack of profitability, do you see the opportunity to reduce cost for any more from your suppliers or from the labor side?

Fernando Aguilar

Brian, I think you know if you go and see the industry as I mentioned earlier as a whole from supplier to third parties to service companies and most customers is broken, nobody is making any money. So trying to go and squeeze more our suppliers that they also have been investing heavily in the industry to make sure that they are going to be able to provide the materials that we need. I don’t think there is a lot of room in that area. I can guarantee that companies like Calfrac are always working in parallel in two different areas. One is as you mentioned cost control, but the other one that is basically more important for the future is business transformation.

How can we with these cost base that we have today make sure that we move the company into a business that is transforming and I go back to something that I normally mention and I normally say, our industry is more about innovation than invention. And it’s set by a step improvement. And that by step improvement has been shown in our business since the service industry started and that’s why we are able to real longer horizontal wells today and have more stages per day, so our so efficiencies are coming every single day to the industry and I believe that’s what it making sure that the unconventional business is viable.

I don’t think there would be a lot of room from that area. I believe the savings will come more from business transformation than from cost control in today’s environment. And that’s basically what I can tell you variable pay that was an idea that was pushed by another competitors here in Canada is something that is interesting from a point of view that you are reducing your cost, but there are implications related to that. And one implication is about loyalty. You know in the province where you don’t have a lot of human resources available for our work and you have to attract new people again, are you going to bring people we are securing their pay, that can happen today when there is no employment available. But as it picks up and people get busier, I think that competition for employees is going to change or is going to challenge better the variable pay structure.

So going back to your question and trying to just to answer it the way that you posted. We didn’t see any savings in the variable pay in the quarter because we were busy, so all of our employees instead sitting home, they were operating in the field. So you have to have peers of non-continues activity to sit people in order to start analyzing how these savings are going to impact your P&L, but I believe that as I mentioned in one of the earlier question, the companies in our sectors have been sizing their operations and their business to activity they have in front on them so there is no excess. And when you don’t have excess, you are sent any people home, waiting for the next job to come. So we didn’t have that in Q2, so I cannot give you a number of the savings that we had because we had our crews busy in the field.

Brian Purdy

Okay, thanks for that.

Fernando Aguilar

No problem, Brian. Thank you.

Operator

The question is from Jeff Fetterly with Peters & Co. Your line is open.

Jeff Fetterly

Good morning, all.

Fernando Aguilar

Good morning, Jeff.

Jeff Fetterly

In your prepared remarks around the U.S. Fernando, did I hear correctly you talked about very recently having one some additional work?

Fernando Aguilar

We have additional calls - no, we have the same amount of work Jeff, but we’ve been having a lot of call for more work for regional work, yes.

Jeff Fetterly

Okay, and did you say that those could potentially extend into 2017?

Fernando Aguilar

Yeah, that is correct.

Jeff Fetterly

Okay. Any color you can provide around that or how you think about equipment reactivation around that?

Fernando Aguilar

Yes, so you know I think this is fundamental point in the market today. I don’t believe, I don’t say those very loud because hopefully you don’t share these with anybody. But basically the industry has not been paying a lot of attention to service quality and to safety lately because is in about price. And you know activity has been rising, comprise has been dominated position factor in the business. But we still believe that and we believe that service quality and safety and supporting our customers and technology are critical in our business. So we would have and we are having some new opportunities based on full performance from some of our competitors that are opening doors to us and that’s where it is coming from.

Jeff Fetterly

And I know you talked earlier about how bidding activity across all regions has increased but the work that you secure the more tangle stuff that you see, is that - is there a specific region, either Rockies, Marcellus or otherwise?

Fernando Aguilar

Yeah, it’s between those two, Rockies, Marcellus, correct.

Jeff Fetterly

Okay. The Argentinean side, I know you talk about how activities expected to be fairly consistent for the rest of the year compared to the second half of 2015, with the larger equipment based, does that imply that revenue is going to increase on year-over-year basis or is pricing going to offset that?

Fernando Aguilar

I think you know I think the revenue is going to remain similar to what we were saying 2015, today, right. I believe that you know as you remember may be in the last month we have two people taking - there are two things happening in Argentina Jeff. One is that the new management in YPF will have to understand exactly how they have to run it but YPF is now 100% of activity. And the second one is that as the current government continues establishing themselves and they will show the world that they are more stable, the international creators are going to be more active. So people XPO, people like Shell, people like Chevron will be - and Total will be interesting in penetrating the field and also the areas in the South.

So we have - we count on those two areas where our business to remain if not flat to improve a little bit but we don’t yet it depends how much interest, these non-players today will have as the government continue us stability that is required in the market for them to invest.

Jeff Fetterly

Okay. And just to clarify from the question earlier, in terms of union strikes or labor disruptions, is there anything in the current operations that disrupting you or was that more of a Q2 comment?

Fernando Aguilar

It was a Q2 comment.

Jeff Fetterly

Okay.

Fernando Aguilar

We don’t know what happen in future. So you know this is Q2 comment because that’s a fact that something that happen but we cannot predict what the future is going to bring. So we always hope that people concentrate in running the business rather than trying to deal with strikes. But hopefully there will more stable operation but you don’t know - that’s something that can happen or not.

Jeff Fetterly

Great, thank you for the color.

Fernando Aguilar

Thank you.

Operator

The next question is from John Watson with Simmons & Company. Your line is open.

John Watson

Good morning.

Fernando Aguilar

Good morning, John.

Michael Olinek

Good morning, John.

John Watson

I apologize if I miss this earlier but could you give additional color regarding the decision suspend in ideal fleets North Dakota and Pennsylvania, did pricing decline in those regions during the quarter but remain stable elsewhere?

Fernando Aguilar

Yes, John you know I think the overall objective is always been used not to get into negative territory from margins point of view but you have you know continues expenses that you have in those regions that will affect your business because we still think that those regions are going to come back.

So if you take the U.S. market today and I think that is something that you guys do in a routine basis, because your reports are pretty good, and we can read exactly what - how you interpret the market as well. The activity in the different basins in the U.S has been dropping between 70% and 90% in all the place, so that brings you down to let's say two-third of the rigs and fleets basically down as we speak. So if you go back to the North Dakota area and try to understand the level of activity when few - let's say a couple of years ago, you had 250 rig average more or less, you came down to the levels where you are today, the number of frac fleets that we are having in North Dakota today operating is between 9 and 11. So that is and I think you have like six or seven companies operating in that area today. So it's not enough work for you to come and basically add more competition to the region and getting to a situation. So we prefer to scale down our operation making sure we keep the flexibility and agility for us to move back again when activity picks up and that's what we wait. It is not - when we said that we closed it temporarily that doesn’t mean that we are - it's going to be very difficult for us to reopen. So we are in a situation or in a position whether that is going to be very quickly Calfrac to start operations in a basin like that.

John Watson

That's very helpful, thank you. I'll turn it back.

Fernando Aguilar

Thank you very much, John.

Operator

Showing no further questions at this time, I’ll turn the call back to the presenters.

Fernando Aguilar

Thank you, Chris. We like to thank everybody for participating in today's call. Good bye.

Operator

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

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