Canyon Services Group's (CYSVF) CEO Brad Fedora on Q3 2016 Results - Earnings Call Transcript

| About: Canyon Services (CYSVF)

Canyon Services Group, Inc. (OTC:CYSVF)

Q3 2016 Earnings Conference Call

November 4, 2016 11:00 AM ET

Executives

Barry O'Brien - CFO

Brad Fedora - President & CEO

Todd Thue - COO

Analysts

Scott Treadwell - TD Securities

Brian Purdy - PI Financial

Westley MacDonald-Nixon - National Bank Financial

Jon Morrison - CIBC World Markets

Jason Zhang - Cormark Securities

Operator

Good morning. My name is Melissa and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Canyon Services Group, Inc.'s Third 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. Mr. Barry O'Brien, Chief Financial Officer you may begin your conference.

Barry O'Brien

Thank you and good morning and welcome to Canyon’s third quarter conference. My name is Barry O'Brien, chief financial officer. With me today is Brad Fedora, our President and CEO and other members of Canyon’s executive team.

I will address the key financial highlights in the current quarter while Brad will comment on the market and the outlook and then we will open the floor for questions.

Before I start I wish to refer you to the forward looking statement disclaimer in our investor presentation on our website at www.canyontech.ca. For the most part I will take as read the condensed consolidated interim financial statements and the MD&A for the quarter and nine months ended September 30, 2016 which are now on SEDAR.

Firstly, by way of background, industry activity levels improved in Q3 2016 but the pricing environment remained largely unchanged from that previously described in Canyon’s last conference call in August. Recall that prolonged lower industry activity levels and intense competition among service providers has led to pricing levels reaching unsustainable levels which is evident from the overall negative financial results experienced by the pressure pumping industry in 2016.

Where Canyon is concerned we started Q3 with a very busy July, we’re at the previously discussed low pricing levels. In August and September, Canyon was expecting to be also busy with its customer base where industry activity was negatively affected by wet weather conditions covering the entire Western Canadian sedimentary basin as rainfall was the highest recorded in several years. The continuing wet weather delays combined with the higher customer activity in Q3, the continuing growth in frac intensity per well that demands more equipment on location and an industry pressure pumping fleet that is currently only about 50% operational, all points towards an improving supply and demand balance for pressure pumping equipment in Canada. As a result, Canyon did introduce a modest price increase in mid September with mixed results so far. It's fair to say that the customer price increase that we brought on in September did not have a material impact on third quarter 2016 financial results.

In the case of pressure pumping, our pressure pumping job count was up 4% in Q3 to 787 jobs. Cementing jobs completed for the three months ended September 30 increased by 35% over the same quarter last year primarily due to Canyon’s focus on expanding its market share in Saskatchewan which has led to long term contract based work since July of 2015.

In the current quarter, higher revenue hydraulic fracturing jobs completed decreased by 9% over the same quarter last year mostly due to lower industry activity and job mix, partially offset by administrative changes in how our customers have requested their billings, resulting in more invoices per well.

On the cost side, the significant reductions gained by Canyon in input costs of materials, including the transition to a variable pay structure for field staff has not overcome the dramatic reduction in pressure pumping pricing. As a result, pressure pumping services revenue decreased by 42% to $58 million in Q3 2016 from $100 million in Q3 2015, while for the nine months ended September 30, 2016 pressure pumping services revenue decreased by 48% to $144 million from $275 million in the same period last year.

With the industry conditions Q3 2016 adjusted EBITDA for pressure pumping decreased to a negative $4.7 million and also includes a commodity tax provision of $2.2 million resulting from tax authority reassessments relating to prior years.

In the case of fluid management services, industry conditions also impacted this division's results with Fraction contributing revenue of $4.6 million and $15.4 million in revenue for the three and nine months ended September 30, 2016. In the current quarter the fluid management's division contributed EBITDA of $300,000. Over the past 18 months Fraction has also implemented significant cost cutting measures in response to the lower activity levels on pricing.

In terms of consolidated results, consolidated revenues for the quarter totaled $62 million, down 44% from $111 million in Q3 2015 when industry activity and pricing were much higher. Also, EBITDA was negative $5.1 million in the current quarter and includes a provision for commodity tax reassessments of $2.2 million as referred to above.

On the balance sheet, Canyon continues to maintain a very strong financial position with net bank debt of $13.7 million at the end of the period September 30, that is $15 million drawn under its credit facility, less cash on hand of $1.3 million. In addition, Canyon has $85 million available under its bank facility.

Where Canyon’s capital program is concerned on September 8, 2016 we announced a $16.5 million expansion to the program, primarily to upgrade the capability of existing pressure pumping equipment, add ancillary equipment for support services to the pressure pumping, most notably coil tubing and expand our fluid management equipment. This will bring Canyon's consolidated budget for the 2016 year to about $28 million, comprising $16.5 million of growth capital and $11.5 million for maintenance capital.

In terms of the recently announced $16.5 million expansion program, the main component of this program is the equipment upgrade of 11 of our 2500 horsepower pumps. The equivalent upgrade basically addresses our two largest costs which are labor and R&M. The manufacturer of the pumps built 2 QEM 3000s, that is the new pump in 2015 when they realized that the impact of increasing frac intensity on the 2500 horsepower pumps was causing significant damage to the two most vulnerable components of the pump which is the power end and the fluid end.

For field testing they gave one of those pumps to Canyon at the beginning of this year and we've been testing that pump since February in the field at pressures ranging from 40 to 85 mpa. Up to 70 mpa R&M costs are relatively linear but after 70 mpa, R&M costs begin to spiral upwards. So we were able to test this pump right up to 85 mpa for extended periods of time. Post testing the pumps were dismantled and found to be in really good condition. Particularly the power end and the fluid end, they were well able to withstand the intense pressures and this was the catalyst for Canyon approving the $16.5 million expansion.

The economics for this decision are mostly based on cost savings in the areas of manpower, fuel and R&M. For example, three of the existing 2500 horsepower pumps can now be replaced by 2 QEM 3000 pumps on location. At completion of the retrofit, Canyon would have 12 QEM 3000s which will represent 14% of our total pressure pumping fleet.

The growth capital also included the purchase of 10 inch and 12 inch hosing for the fluid management division as well as coiled tubing injectors and monitoring equipment.

And I will now return the presentation back to Brad.

Brad Fedora

Thanks, Barry. I am going to make some just general and brief market commentary and then we'll take questions at the end of the call. So Q3 obviously was another tough quarter. Activity year over year is down, pricing is down but all things considered we had a relatively active quarter considering the overall industry activity. Most significantly as we witnessed a big shift in frac intensity early in the summer and adding water that comes from the U.S. companies that are active in Canada and they have land and comparisons in the Permian and the Eagle Ford and they've really taken what they're doing there and brought it to Canada sort of in an accelerated pace. Normally Canada has been dragging behind the U.S. a year or two with reference to frac intensity. But we saw a big jump this summer. We -- in the past we were looking at 2500 to 4000 tons of sand in a typical Montney well, almost overnight in Q3 our customers were trying to push that beyond 5000 tons per well and trying to figure out how to get as much as 10,000 tons per well. So that is going to drive more frac demand, more equipment on location for longer and all of that intensity is really just another way of saying the number of stages per well and the amount of sand in each particular stage and we've seen growth in both of those.

So when we look forward over the next couple years we're excited about what we see from a supply and demand perspective in Canada. We think that the frackers, Canyon in particular, will be very busy in 2017 and 2018 and we're looking forward to a couple of really good years.

The lateral portion of the well continues to grow. Again the trends are becoming more of a logistics exercise. Getting your logistics right or conducting our operations efficiently is a big opportunity to drive profitability or to lose profitability if you're not good at that. Unfortunately that doesn't mean that more of our capital will go to logistics equipment like sand trucks, sand storage et cetera. But in the end that will drive more profitable operations.

And other things in the quarter was, as Barry mentioned, a very wet quarter. The good side of that is it's pushed a lot of work into late September and now into Q4 and it's caused, finally, some tension in the system. And we used that tension finally to get some price recovery. I think in mid September we put in about a 10% price increase and that evolves over the following weeks. Finally I think our competitors have followed along, they are a little slow to join the party. But I can say for the most part the other large Canadian companies operating in the basin have followed our lead on pricing and I think we -- for the most part everybody's busy and we had some pricing traction. And generally we expect that we will get another 10% by the end of this year. Given where we are today and given how busy the job board is, we expect that by the end of -- by Christmas or early January, we will receive another 10% price increase. And this is of course needed. The industry or the frac sector is operating at unsustainable levels for almost exclusively we’re all cash flow negative. And clearly that is not sustainable.

I want to touch now on just our equipment situation. I will spend a few minutes just maybe clarifying some of the issues that I've seen come out of some of the analysts commentary. And so Canyon for the last few years had about 10% of our equipment parked, so out of the 255,000, we have about 225,000 working. But I want to just highlight that year to date in 2016 the most equipment we've had in the field is about 175,000 horsepower. And so out of the 255000, or out of the 225000 that we have active, it’s very rare that we're using even close to all of it and it's purely from a people perspective. We picked the staffing level early in the year that we thought would sustain us through 2016 and just given the structure of these frac spreads now we've never had 225,000 horsepower in the field yet in 2016. Our maximum is 175,000. And really our typical day from equipment in the field is somewhere between 100,000 and 150,000 horsepower.

So I know there's been a lot of commentary that Canyon doesn't have any equipment upside or spare capacity going into a more active market. And clearly when you hear those numbers that's not true. The issue will just be can we staff and how quickly can we add frac crews to our equipment fleet. But we have a lot of upside or a lot of ability to absorb more activity going into 2017 and 2018. So I hope that clears up some of the capacity issues that, when people are looking at Canyon and where we stand from a utilization perspective.

For the rest of the quarter, we are basically sold out. In fact, I think we're basically sold out until break up give or take and of course all my commentary, I will point you back to our corporate presentation on page 2 about future statements. The commodity -- the activity levels are very sensitive to commodity prices. Obviously the phone really starts to ring when oil is at 50 and the phone kind of goes silent when oil approaches 40. So but in general I think we're very active for the winter and in fact we're looking to add crews as soon as possible to make sure that we can complete the work that we've made commitments to.

Our areas of focus are still northeast BC and northwest Alberta and 40% of our revenue comes in Alberta, 40% in BC and 20% in Saskatchewan. The basin is still very much divided into two, which is Montney, Duvernay and Saskatchewan light oil. About 50% of our revenue comes from the Montney. We've grown our Duvernay position to about 25% of our revenue. A year ago that might have been 15% at the most and we've grown our Saskatchewan revenue to about 20% which is up from sort of 10% or 12% a year ago.

We're finally starting to make inroads into the Viking. So far the bulk of our Saskatchewan operations is split pretty evenly between the Bakken and Shaunavon and just year to date we finally started to get some traction in the Viking and we continue to explore that part of the basin and try to add market share.

From a work crew perspective, this time last year we would have been almost exclusively 24 hour operations and just given the nature of the activity levels and the reduced capital expenditures that has come down to about 55% of operations, and clearly that's not good from a revenue perspective. But we expect that as the winter gets busier we'll go back to a more consistent 24 hour operation style of work much like we had in 2014 and 2015.

And we're still evenly split between Ottawa White and domestic sand. The basin has the amount of Ottawa White sand that comes out of the Northeast U.S. has come down just due to the costs. We're anticipating and as commodity prices improve we expect that there will be more pressure on US sand but right now we're pumping about 50:50. The amount of profit per well has grown and it's continued to grow. It's basically 20% a year and so right at this time we're expecting that some time in 2017 and 2018 there will be fairly significant proppant supply issues and certainly we're working with our suppliers now in anticipation of that to make sure that we can supply our customers with the proppants that they need.

From a staffing perspective we're running sort of nine to ten crews today. We're looking to add a few crews by year end and we expect to run fairly consistently with 12 crews until the end of Q1. Staffing has been more difficult than we had anticipated. I've discussed at many meetings so far this fall, we've been trying to add 100 people since June and we've actually had some difficulty doing that. And we're actually able to add people but we're still losing our current staff to other sectors or other industries outside of the oil and gas business. And that has brought sort of a different management style to bear here because typically we've never had sort of turnover problems with two and three year people but for the first time we're starting to realize that there's a been a lot of damage done to the workers in the oil patch and so they've been looking at other alternatives. And so we're trying to encourage them to stay and work with us and make sure that we can staff our equipment going forward.

And this is all based on the fact that, given the growth in frac intensity we expect that the Canadian frackers or the equipment in Canada will be sold out at around 6000 wells. It used to take 11,000 well to use up all the equipment in Canada. But just given how much frac intensity has grown that number has been reduced to somewhere between 5500 and 7000 wells, so we just say generally 6000 wells. And that's just a matter of more equipment on location for longer given that the stages are growing and the amount of proppant per stage has grown slightly as well.

So that certainly puts a lot of stress on the suppliers in an active year. So we're making sure that from a chemicals and sand perspective that we're set up to be able to provide product to our customers when the market gets very busy.

On the supply chain side, we have not seen any price increases yet. We do expect that given the tightness of the sand market that we will see changes to sand pricing by year end this year or early next year. And clearly we're going to have to manage that with our customers but we would expect that we would pass those costs on to our customers just given our state of profitability.

So far our changes to variable pay remain intact. Thankfully our Canadian competitors have -- did finally follow our lead on the move away from field salaries to a day rate. And we plan on keeping that structure in place regardless of how busy it gets or regardless of the demand on people. Clearly it's a more appropriate model given the volatility and the seasonality of this business. And so we fully expect that that pay structure will remain intact through both the busy times and slow times.

On the capital front, I think Barry gave you a good summary, we start to receive pumps starting in December. I expect that half of the pump upgrades will be done by the end of January and that the full fleet will be – or the full upgrade will be completed by the end of March. We're very much looking forward to this upgrade and once we have the chance to test our assumptions on a broader scale, we'll make a big capital investment decision at that point but we fully expect that if our assumptions are correct we will continue to invest in upgrading our pumps in the remainder of 2017. We still believe that it's our best use of capital from our returns perspective. So we're very much looking forward to that putting that fleet to work this winter.

We continue to look at acquisitions but as we all know finding the right deal is very difficult. The timing to do a deal right now is very good. Given that we expect 2017 and 2018 to be busier but clearly we will continue to look -- continue to turn over stones until we find the right deal. We want to keep our balance sheet in a pristine shape and we don't want to stress the company given the uncertainty of the future. But we think the timing is good to look at transactions and we'll continue to look to see what we could find anything interesting. I will stop there and we will take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Scott Treadwell from TD Securities.

Scott Treadwell

Thanks, morning guys. Brad, I just wanted to pick up on your sand commentary. We heard an E&P company yesterday talk about experimenting with brown sand in all of their key plays. I'm just wondering operationally if you guys have seen that where domestic brown sand is taking over fully displacing white sand. And do you have any early operational feedback on that from the pumping side?

Brad Fedora

The answer is yes but people are experimenting with brown sand in all parts of the basin. To say that we get -- has it taken over? No. There's still the deeper higher pressure parts of the Montney and Duvernay, of course. They want Ottawa white sand, it has a higher crush strength, better conduct conductivity, et cetera but everybody's looking at ways to reduce costs. And when you're putting this much sand into a stage now, I mean there is some opinions out there that the more sand you put in the less issue there is from a quality perspective. Because certainly it's the most permeable part of the well is the sand pack. So we are seeing people experiment with brown sand but to say that there's a trend of a complete shift, I mean we'd be way too early to say that. And from a production perspective we just get anecdotal commentary from our customers. So we wouldn't be in a position to comment on that as a shift.

Scott Treadwell

I want to turn to your guys' inventory in terms of consumables and things like that. As you've seen activity picked up I'm sure you've started to pull on the supply chain. Can you just comment how far away do you think you are from third party cost inflation? And maybe more importantly how robust do you think that supply chain is? If there was a 20% or 30% uptick in frac activity, sequentially from Q4 into Q1, would the supply chain be in a position to kind of match that in such a short time scale?

Brad Fedora

Yes, there's a lot of excess capacity in third party trucking. More -- the assets are there. It's just a matter of, is the staff there. As you know the basin or the service sector in general is built out for much higher levels of activity from an asset perspective, it's just that there's been obviously tens of thousands of people laid off. And so do they come back is the question or what time of the year are they prepared to come back? Clearly it's going to be difficult to get an employee in February when they're looking six weeks down the road to break up. But we've done it before and I'm sure we'll do it again. And will there be cost inflation? Of course. Where all the pricing not just at fracking companies but many service providers pricing is at absolute survival levels. And so for the first chance anybody has to put in a price increase, they'll take it. So there will be inflation for sure.

Scott Treadwell

Okay. I wanted to circle back your comments on equipment upside. Can you just refresh for us -- and I think I know the number but when you're not constrained by labor and there's sort of more work than you can handle, over an average month how much equipment on a percentage basis which you have in the field, I think remember it was something like 80% or 85%.

Brad Fedora

Yeah, that's what's available. So we have 10% parked which is not available to work, it's not -- it's not in a state that's workable. So out of that 90% that's available to work, there'd be another 10% to 15% of that that’s down receiving some type of material repair at any given time. So I guess that takes us down to about 75% of our 255,000 is generally available to work every day. Now when you factor in travel and set up and take down all that kind of stuff I mean it's not -- there's considerable room for revenue growth here and I think that's -- I didn't do a very good job of maybe explaining that when some of the commentary started to come out about what was the equipment upside or capacity upside in everybody's fleet. What we report as a being available to work every day we're clearly at these activity levels, we're not putting that equipment to work on a daily basis.

Scott Treadwell

Okay, the point -- the number I was thinking of, was just that stuff that's down for repair and maintenance, that 10% or 15% no matter what you do, that won't go to work every single day.

Brad Fedora

Yes and that will never change. Yes, in fact the harder it gets work, obviously the higher that number may be.

Scott Treadwell

And you probably don't have an indication yet, switching to the 3000s, would that structurally reduce that number where you might be able to say no, it's more like 7% to 10% that's always in for repair, because you got the better quality pumps?

Brad Fedora

Yes, that's certainly one of the drivers but one of the main drivers behind the pump upgrade is the reduced down time and the reduced fluid and the power and replacements et cetera, which takes equipment out of the field for you days at a time, right.

Scott Treadwell

Last one for me, I don't want to put you on the spot for guidance. But you've talked about getting some traction on pricing and the potential for some more. If you assume you've seen activity now through almost half the quarter, if you assume a normal December and I don't know that there is such a thing to call it a ten day holiday shutdown, does the activity and pricing look today like you can get back to EBITDA breakeven in Q4?

Brad Fedora

Yes. We’ll give you a soft yes.

Operator

Your next question comes from the line of Mike Majer [ph] from BMO Capital Markets.

Unidentified Analyst

Hey good morning guys. Just a quick question on the labor commentary that you talked about, that’s kind of 100 people that you guys have been talking about for a quarter or so now. I guess I'm just curious, not a direct competitor but another oilfield services company here, it seems like within a quarter, one of the contract drillers sort of talked about how they ramped up a thousand people relatively quickly. How come they were able to do that? And on the pumping side you're struggling. Is it a matter of the folks in your industry were used to getting paid a certain way and now it's different, so they're a little more reluctant or is it just a different skill set that there is harder to get? Or do you have any thoughts on that?

Brad Fedora

Well, that would be part of it but they are looking at adding people North America wide. And we're looking at adding people clearly just for the most part Grand Prairie, Red Deer and Medicine Hat. So they're adding people to a much larger operation. And I think the drilling staff is more used to being laid off, then they come back and they get sent home and they come back, it's more a part of their work culture. Whereas I think what's been unsettling for the frac industry was that everybody had been on salary, they were used to slow times but they weren't necessarily used to being sent home for what is now a year or six months depending on which person you are but. So there was just -- it's a different culture and that's one of the reasons why we went to the day rate was we wanted to -- we wanted to get away from maybe some of the past cultural issues of the frac industry and get and move toward sort of the drilling culture where when times are good you work a lot, you make a lot of money and when times are bad you spend some of that money. So it's going to take time to transition.

We're only a year into this change. Not even in some cases. So in general we're pretty happy with the way it's gone. And so we expected there to be turnover and we've had it and I wouldn't say we're any worse off or any better off than we had expected. What has been a surprise was I guess the jump in frac intensity this summer and so when you look at a 5000 to a 7000 well scenario the trickle-down effect is that we need a lot of staff in a short period of time. And we maybe had assumed there'd be a gradual, a more gradual ramp up on staffing. And we just -- we're going to have to act accordingly given what's happening here and be a little bit more focused on making sure that we retain at the same time as erratic, whereas before we had kind of factored in dealing with the turnover with new adds and given the staffing demands now we're trying to -- maybe trying to slow some of that turnover down with our existing staff. But there are two very different service lines from a people perspective and it's going to take time for that to shake out.

Operator

Your next question comes from the line of Brian Purdy from PI Financial.

Brian Purdy

I am just trying to figure out a little bit here, how much revenue you could have done here in Q3 ex the weather impact. I mean can you give us an assessment of how much you think that impacted your revenue on the top line at least?

Brad Fedora

Round numbers 10-ish.

Brian Purdy

In terms of Christmas breakup looking into Q4, some years it's been a fairly material break. I'm just wondering it sounds like you guys are pretty impressed with the activity level. I'm just wondering if you can, that's going to be on the shorter side this year than maybe it wasn't in the past few years?

Brad Fedora

Christmas is impossible to predict. Everybody for the last ten years has predicted that we would shut down on the fifteenth of December and we never have. So I don't make Christmas predictions anymore because they never seem to come true. There always seems to be a year end push on activity. Even last year there was a year end push on activity and we have some customers in our schedule now that are discussing working in and around Christmas certainly between Christmas and New Year. So it will -- for sure it'll slow down. I think Christmas is a Monday this year. So your last day of field operations will likely be Friday the 23rd. But we expect it will be back to work between Christmas and New Year's. But on a small scale, we're not going to have ten crews running between Christmas and New Years but I expect to -- when you're trying to model it I would use a 23 day month.

Brian Purdy

And then you made some comments around 24 hour operations and thinking you're going to get back there. I'm just wondering are you seeing customers or at least the bigger customers put a longer programs where you can stay on one path, is that what you're waiting for and you’re getting some visibility to that?

Brad Fedora

Yeah, that's -- I mean certainly the larger customers are more pad focused. And just given the activity levels we had to go to where the work was and there's no -- at these activity levels there's not a lot of tension in the system. Service pricing is low. There's no standby being charged by many service providers. And so we found that some of our customers sort of the incentives to run 24 hours were not necessarily there. And they wouldn't -- they weren't forced to organize themselves in that manner because there's lots of equipment regardless of what service you're talking about. So things were maybe just a little less efficient than they would -- we would normally expect them to be. But all of our customers, all these completions departments, they've run 24 hour operations over the last few years and so there won't be any difficulty in going back to that way of doing things when times get busy.

Brian Purdy

You mentioned the pricing increase and I think if it – I missed it exactly but somewhat successful. What's the pushback or the response been from customers as you try to put your first pricing increase?

Brad Fedora

Well,, low prices are good, high prices are bad when you're a customer. And so I think it was pretty much that simple. So they fought the price increase as long as they could and of course the service providers were all pushing the pricing differently from a timing perspective, which complicates things. And so we've lost some customers, our competitors have lost some customers, there's been some juggling. But it's been six, seven weeks now since we initiated that price increase. I would say generally the industry's accepting it now and we're still getting some crazy pricing from one of our private competitors. That's complicating things but even that's starting to go away.

So it's just maybe a more coordinated approach to a higher pricing would have reduced the transition period. But all things considered it went about as smoothly as you could have been could have expected.

Brian Purdy

Do you think there was any material revenue impact by being the first mover on the pricing side? Obviously we get a benefit from any price increases you've got. But was that offset by lost revenue from customers who left for other service providers?

Barry O'Brien

Brian, I don't think there was any significant impact on revenue in Q3 at all as a result of the price increase.

Brad Fedora

Weather has dominated. Weather was such an issue and continues to be an issue, that dominated any changes to pricing or any gains or losses of customers. The amount of downtime we've suffered as a result of weather is significant.

Brian Purdy

And then I just wanted to ask about the commodity tax reassessments -- I don't usually see from service providers. I just wondered if you could comment on that, whether you expect to see any future impact from that?

Brad Fedora

No, I do not expect to see any future impact on it, it relates to an audit relating to prior years and it's commodity tax in British Columbia.

Operator

Your next question comes from the line of Westley Nixon from National Bank Financial.

Westley MacDonald-Nixon

Morning guys. This is Wesley filling in for Greg Coleman. I was wondering so what do you guys think about in terms of the working capital requirements, as activity ramps back up? Are you thinking about it on a per horsepower basis, on a per spread basis or on a per dollar basis and how do you think about the intensity in the capital requirements as we start moving into 2017?

Barry O'Brien

I think on a per dollar basis, and when we enter the second quarter of every year, as you know there's an unwinding of working capital and then we wind it back up again in Q3 and that has already happened. And as the industry gets busier and we start earning more revenue there will be an increase in working capital between Q4 and Q3 and usually Q4 and Q1 that working capital requirements stay the same. And so from the unwinding level in Q2 to probably of the end of the year, it’s usually about 10 million or so is the increase in working capital between these two periods.

Westley MacDonald-Nixon

So we're thinking to there and others in the industry talking about perhaps a $0.25 of working capital investment in each incremental dollar and activity ramps back up, do you guys sort of think about that in similar terms or --?

Brad Fedora

No, probably it’d be high for us because part of the issues we didn't have the balance sheet issues that some of our competitors would have. So we weren't maybe as aggressive in mining working capital and we'd always run very lean working capital as it was. So that would be high for us.

Westley MacDonald-Nixon

And I was curious, what is the nature of the long term cementing agreements in Saskatchewan, like the size, what proportion of your fleet is there, and if you can tell me how like the duration of these contracts, and maybe you could some additional clarity on those?

Brad Fedora

No, we wouldn't provide any more clarity on the call.

Westley MacDonald-Nixon

And then I guess my last one would be we're expecting I guess closer to $10 million in CapEx in the quarter, and it only came in at three, is that a timing issue, is there any sort of read-through there or is it, just sort of it's a timing?

Barry O'Brien

It's pure timing.

Operator

Your next question comes from Jon Morrison from CIBC World Markets.

Jon Morrison

Just following your comment about the early price increase coming with a mixed response. How much of your September work would have been realized at a higher price than August? Like, was it 5% to 10% a year work actually, realized at higher price or is it something more than that?

Brad Fedora

I don't have that information in front of us but I’d just do the quick math in my head here.

Jon Morrison

Like, is it just more of your more marginal work that was accepting of it at the very early stage and then it becomes a harder sail as you get into your bigger customers?

Brad Fedora

No, no, I know what you're asking. I am just – yes, wouldn't have been material because any work booked in September at the old pricing we would have honored. If it was on the dispatch, even in the dispatch system we would have honored the pricing. So yeah, it might have been 10% or 20% of September's revenue or something. We’d have to dig through the information but yeah I think your instincts are correct. It's not half -- it's not half of September. Because there is -- it takes time before the new pricing becomes effective.

Jon Morrison

So when you say that you expect to see a further price increase in Q4, does that mean that you expect to see a price pump at some point during the quarter and therefore it impacts 2017? Or do you actually expect Q4 results to positively reflect that price increase? I'm just trying to get a sense of whether it really impacts Q4 or it’s more of a forward phenomenon from there on?

Brad Fedora

Well, conservative approach would be that, yes, it affects Q1 2017 given that we're almost the middle of November here. There will be some impact in December but it's too early to tell here and from a modeling perspective I would just start January 1.

Jon Morrison

So is it fair to assume that it's already taken hold today or it's unfolding in the next three, four, five weeks?

Brad Fedora

Yes, it’s unfolding in the next few weeks.

Jon Morrison

This might be a good question for Todd but given what you know today about the work you're doing and what your customers are talking about doing on a go forward basis, how much more sand would you expect to pump per well ’17 over ’16? High level, I am not looking for an exact response but just an order of magnitude.

Todd Thue

Probably 30%.

Jon Morrison

On the sand side where you talk about the logistics expected to become some sort of an issue. Do you expect it to be an issue getting the sand from the mine to the transload facility in Canada or is that more getting in from the transload facility to a well site? I guess is it a trucking issue that you foresee unfolding?

Todd Thue

It would probably be -- it would be both, just because of pure demand. If everybody's drawing at the same time it would be a pinch point at terminals as well as the third party truck themselves. Like Brad had mentioned earlier for one of the questions there is room in the system, there's quite a bit of room in the system for percentage of increase in activity.

Jon Morrison

Are you seeing where customers start to look to procure their own sand in the past few months or that really hasn't changed in the last while?

Brad Fedora

Well, the big companies there certainly have done that and there's a few others that are with larger programs considering going direct. So we would expect to see more of that happen over the next -- the over the coming years would be my guess. Short term probably not as much.

Jon Morrison

I believe internalization of trucking was a decent cost savings for you guys and I think the broader industry in the past year. As you look out to ‘17 do you expect to need to outsource more and does that make a meaningful change in your cost structure go forward?

Brad Fedora

We always have some third party hauling sand for us. So as activity does ramp up we would require more third party resources. So I mean we just would control those costs as best we could.

Jon Morrison

Just a last one for me and it's just a point of a clarification about reactivating a capacity. You talked about in the past meeting upper teens to 20% EBITDA margin, started thinking about reactivating your truly parked capacity. Do you need to see that get realized across the fleet? Or do you -- if you ultimately believe it's on the come, would you move early and think about getting that capacity out in the field to win over customers?

Brad Fedora

We might repair the equipment in anticipation and start working towards staffing it. I think the good news is even when that decision is made, it's going to be a few months. And so if we had activated the equipment and the pricing wasn't there, it would just -- it would stay parked.

Operator

[Operator Instructions] Your next question comes from the line of Jason Zhang from Cormark.

Jason Zhang

Thanks. Good morning guys. I just wanted a little bit more clarity on your comments around being sold out here in Q4 and Q1. How should we be thinking about how much horsepower might be active under that scenario given some of the comments around effective horsepower?

Barry O'Brien

That's a good question. So our crews are sold out, certainly our horsepower is not for Q4. Now when we look to Q1, the 90% of our fleet that's active or the 225,000 is basically sold out if we can staff it. And so when you think about -- so I'm going back up to Q4 again here. So when you about Q4, your average daily equipment deployed would be in that 150,000 to 175,000 range. Probably at the highest. So we're running out of people way before we're running out of equipment.

Jason Zhang

That's helpful. And then maybe in terms of margin profile. If you could help us understand a little bit better about how a 10% increase in pricing might affect margins. I understand it's still early on the supply chain side but all else equal, does a 10% increase in price result in a 10% increase in margin or is it even better because of the better activity against fixed costs?

Barry O'Brien

Well, a 10% increase in pricing is not a 10% increase to field margin -- double field margin, right, depending on pricing. So it’s doubling a very small number. Is that what you meant?

Jason Zhang

Yeah, I think I am just better trying to understand how margins may improve from here as pricing gets a bit better, notwithstanding impacts from higher cost on the supply chain side.

Barry O'Brien

You will have to make your own assumptions because we don't give guidance. But clearly you can't ever look at EBITDAR or EBITDA margins or cash flow margins without making both the pricing and the activity assumption. I think the good news is that both are increasing right now. But we're picking ourselves up off the floor. So we need a good lift in both pricing and activity before we're back to anything that even remotely looks like normal business environment.

Brad Fedora

I guess, Jason, another way of looking at it is Q3. If that 10% pricing increase had been in effect for all of Q3, then we would have roughly broken even on EBITDA.

End of Q&A

Operator

There are no further questions at this time. Mr. Fedora, I turn the call back over to you.

Brad Fedora

Thank you everyone. And we will see you next conference call.

Operator

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

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