Calfrac Well Services Ltd (CFWFF) CEO George Armoyan on Q1 2022 Results - Earnings Call Transcript

Calfrac Well Services Ltd (OTCPK:CFWFF) Q1 2022 Earnings Conference Call May 3, 2022 12:00 PM ET

Company Participants

Michael Olinek - CFO

George Armoyan - Interim CEO & Director

Conference Call Participants

Keith MacKey - RBC Capital Markets

Cole Pereira - Stifel Nicolaus

John Gibson - BMO Capital Markets

Waqar Syed - ATB Capital Markets

Andrew Pelvic - Millennium

Operator

Good day, and welcome to the Calfrac Well Services Ltd. First Quarter 2022 Earnings Release and Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mike Olinek, Chief Financial Officer. Please go ahead, sir.

Michael Olinek

Thank you. Good morning, and welcome to our discussion of Calfrac Well Services first quarter 2022 results. Joining me on the call today are George Armoyan, Calfrac's Interim Chief Executive Officer and Lindsay Link, Calfrac's President and Chief Operating Officer.

This morning's conference call will be conducted as follows: George will provide some opening commentary, after which I will summarize the financial position and performance of the company. George will then provide an outlook for Calfrac's business and some closing remarks.

After the completion of our prepared remarks, we will open the conference call to questions.

In a news release issued earlier today, Calfrac reported its unaudited first quarter 2022 results. Please note that all financial figures are in Canadian dollars unless otherwise indicated.

Some of our comments today will refer to non-IFRS measures such as adjusted EBITDA and operating income. Please see our news release for additional disclosure on these financial measures. Our comments today will also include forward-looking statements regarding Calfrac's future results and prospects. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our results to differ materially from our expectations.

Please see this morning's news release and Calfrac's SEDAR filings, including our 2021 annual report for more information on forward-looking statements and these risk factors.

Lastly, as we have outlined in our press release, given the events that have occurred in Ukraine, the company has discontinued its operations in Russia, committed to a plan to sell those assets and designated the operations in Russia as held for sale.

The focus of this call will be on Calfrac's continuing operations. George, over to you.

George Armoyan

Thank you, Mike, and good morning, and thank you, everyone, for joining our call today. As you're probably aware, this is my first call, so please take it easy on me. So before Mike provides the financial highlights for the first quarter, I'd like to make a few opening remarks.

Right now is an interesting time at Calfrac with the tightening of North American market and the types of conversation that we start having with our customers. The market dynamics are more similar to 2017-'18 than 2021. We're enthusiastic about the opportunities and returns that we expect the business to generate for our stakeholders in 2022 and beyond.

The company created good momentum throughout the first quarter and expect to build upon it through the remainder of 2022. Our team fought through operational supply chain challenges to finish the quarter very strong. Calfrac has benefited from pricing improvements this year and has formed an understanding with our customers that while we pass through inflationary cost as close as to real time as possible.

We will also need to raise pricing to a level that provides sufficient return on our investment. This is paramount to us that we have to get returns. As we look towards the rest of 2022 and into 2023, we're confident that our renewed efforts towards generating sustainable financial returns.

And I emphasize that an operating efficiencies enable us to capitalize when the world's increased demand for oil and gas.

Now, I'll pass it on to Mike who will present the overview of our quarterly financial performance.

Michael Olinek

Thank you, George. Calfrac's consolidated revenue from continuing operations during the first quarter increased by 38% year-over-year to $294.5 million. The revenue increase was mainly due to the fracturing revenue per stage, increasing by 39%, resulting from higher input costs being passed through to the customers in all operating divisions, combined with improved pricing in North America.

Adjusted EBITDA from continuing operations reported for the quarter was $20.8 million compared to $10.8 million a year ago. Operating income from continuing operations increased by 83% to $21 million from operating income of $11.5 million in the comparable quarter of 2021.

These increases were primarily due to better utilization and improved pricing in the United States as well as higher equipment utilization for all service lines in Argentina.

The net loss from continuing operations for the quarter was $18 million versus a net loss from continuing operations of $23 million in the same quarter of 2021.

For the 3-months ended March 31, 2022, depreciation expense from continuing operations was relatively consistent with the corresponding quarter in 2021. The slight decrease in first quarter depreciation expense was primarily due to the mix and timing of capital expenditures related to major components.

Interest expense during the first quarter of 2022 increased by $0.7 million from the same period in the prior year due to higher borrowings under the company's revolving credit facilities, combined with interest expense related to draws made under the company's bridge loan.

Calfrac spent a total of $12.1 million on capital expenditures from continuing operations in the first quarter compared to $10.5 million in the same period of 2021. These expenditures were primarily related to maintenance capital and reflected the change in the amount of active equipment in North America between the 2 periods.

The company had an inflow of $9.2 million from changes in working capital during the first quarter versus an outflow of $20.8 million in the comparative quarter in 2021. This change was largely driven by the timing of accounts receivable collections and payments to vendors, offset partially by higher working capital due to an increase in revenue.

During the first quarter of 2022, $0.6 million of the company's 1.5 lien notes were converted into common shares and cash proceeds of $0.7 million were received from the exercise of warrants. To summarize the balance sheet as at the end of the first quarter, the company had working capital of $130.2 million from continuing operations, including $11.8 million in cash. At March 31, 2022, the company had used $0.9 million of its credit facilities for letters of credit and had $200 million of borrowings under its credit facilities, leaving $49.1 million in available borrowing capacity at the end of the first quarter.

The company's credit facilities are subject to a monthly borrowing base, which at March 31, 2022, was $243.8 million. Under the terms of the company's amended credit facility arrangement, Calfrac must maintain a minimum liquidity of $15 million during the covenant release period.

As of March 31, 2022, the company had drawn $15 million on its bridge loan and can request further draws up to an additional $10 million for maximum proceeds of $25 million. Subsequent to the end of the quarter, the maturity date of this loan was extended to June 28, 2022.

I'll now turn the call back to George to provide our outlook.

George Armoyan

Thanks, Mike. I will now present an outlook for Calfrac's operations across our geographic footprint. Our North American market continues to play out as we expected through the first half of the year with increased equipment demand from producers compounded with limited readily available supply.

We anticipate that the market continues to tighten some producers will be unable to complete their work, which bodes well for our ability to increase prices to earn a viable return on our deployed equipment.

In the United States, our first quarter results showed meaningful sequential and year-over-year improvement primarily due to the tremendous growth in utilization during the final 6 weeks of the quarter.

The first 6 weeks were not very good. We had improved utilization for all of our 8 fleets in March, where we completed 75% more stages as compared to January. The combination of higher utilization with pricing resets also in March, allowed the company to deliver significant better financial performance as it exited the quarter.

Our 9th fleet will begin in early May. And we intend to maintain that level for the rest of the year unless customer-driven demand and pricing justifies making any further equipment reactivations.

We have the ability to do a 10th fleet and maybe a little bit more depending on the pricing and the demand. In Canada, the first quarter results were tempered by start-up costs and rapidly increasing input costs that we are trying to recover from clients.

We activated the fourth fracking fleet and our fifth coiled tubing unit to meet growing customer demand, which positions us well for a strong second half of 2022. The second quarter is progressing as we expect with slow start due to seasonal breakup. But we anticipate robust utilization of our 4 large fracking fleets toward the end of the quarter, which will extend through to the end of the year.

To manage our fuel personnel cost during spring break-up, the Canadian division temporarily redeployed employees from Canada to United States to help with a large activity increase in the United States. Our operations in Argentina continue to be challenged by the significant currency devaluation and inflationary pressures as well as the capital controls surrounding the movement of cash out of the country.

However, we recently renewed a contract in Vaca Muerta shale play that integrates improved pricing for a dedicated fracking fleet and coiled tubing unit with an existing customer that commences in the second half of 2022.

We expect to maintain a high level of utilization through the rest of the year. In summary, we continue to capitalize on the early stages of the current demand cycle to generate sustainable return for our shareholders.

I would like to thank our team for their efforts in the past quarter. And I'm looking forward to the progression over the remainder of the year and next.

Thank you very much, back to Mike.

Michael Olinek

Thank you, George. I'll now turn the call back to our operator for the Q&A portion of today's call.

Question-and-Answer Session

Operator

[Operator Instructions]. And we'll go to our first question from Keith MacKey with RBC Capital Markets.

Keith MacKey

Now I just wanted to start out with the U.S. EBITDA per fleet, exited the quarter at certainly much stronger levels than it started the quarter. Where do you see that trending in the second half of the year? Do you think you can average, say, a $15 million EBITDA per fleet range in Q3, Q4? Or how should we see that trending?

George Armoyan

Look, I mean, look, we're trying to bench our -- this is George. We're trying to bench our market against our competitors. We're far from optimal numbers. We like to start with a $10 million first before we go to the $15 million. So we're trying to see progress. And right now, we're focusing on utilization and eliminating white space that -- in our schedules. But ultimately, yes, we like to be somewhere between $10 million and $15 million.

And we're going to thrive to do that as much as, as soon as we can.

Keith MacKey

No, that makes sense. Maybe just capital wise, if you were to activate a 10 fleet in the U.S. and what roughly do you think that would be capital-wise if you've got an estimate on that currently?

George Armoyan

$6 million. And we -- I mean we do have the ability to go to 13 fleets in total. But the fleet 11 and 12 and 13 will require more money than the $6 million. And we're trying to get the final numbers just in case the demand exceeds and people are starting to willing to pay for the utilization of equipment.

Keith MacKey

Got it. Appreciate that color. Just finally for me, you did mention that you had shifted some employees between Canada and the U.S. in Q1. And maybe just talk a little bit more about the supply chain in general, what you're seeing on the labor front? And what you're seeing on the sand front? We're hearing that's becoming a larger concern or was a larger concern at least in Q1 with respect to governing the pace of activity in the industry?

George Armoyan

Yes, I just wanted to -- I think we said we moved people not in the first quarter, in the second quarter because the U.S. is busy in the second quarter where there's breakup in Western Canada. I just wanted to clarify that. Look, there is challenges, supply chain challenges are being faced by every industry, everybody. And we're trying to make the best we can. There were sand issues in Canada in the first quarter. And we try to deal the best we can with it.

But it isn't evolving. It's a dynamic situation. And we have to stay on top of it like everyone else. But we're hoping these things will not hold us up from really being able to deliver good quality jobs to our customers.

Operator

And we'll go to our next question from Cole Pereira of Stifel.

Cole Pereira

I just wanted to go back to the comments that you made add another fleet or 2 in the U.S. I mean, just at a high level, is there sort of a percentage increase in pricing that you would need to reactivate those fleets? And if so, are you able to kind of set some goalposts around what that might be?

George Armoyan

So as we -- we're running 8 fleets right now. We start the 9th one on Monday, the 8th of October -- I'm sorry, the 8th of May. Look, I mean there's 2 things here. We want to be able to get the returns. And we want to be able to get the certainty of a commitment from the customers.

It's almost like a take-or-pay type of -- we're not going to go and deploy capital and make it a loose arrangement where they can get rid of us at any time that they want to. So there are a few factors taken into consideration for us to be able. We want a firm commitment and firm like -- and if they just change their mind and they have to pay us what the cost -- for the cost of deploying these things here.

But again, we have to be able to make sure we can get between the $10 million and $15 million of per fleet to be able to deploy these new things -- these new fleets or the extra fleets, I'm sorry.

I hope that answers.

Cole Pereira

So I guess maybe to restate, pricing is obviously getting to close to those levels. But it's more so you want to see a contracted commitment from a customer. Is that fair?

George Armoyan

100% because like the customer has gotten away with a lot of stuff in my opinion, over the last -- we would just want to change from being a charitable foundation to be in a business, right? Instead of subsidizing E&P companies, we want to just start making sharing with some of the benefits that they're getting.

Cole Pereira

No, that makes a lot of sense. And so just going back to your comments on maybe you get to 13 fleets in 2023, depending on how things shake out. I mean just sort of curiosity, do you think broader U.S. fracking activity could reach 2018 levels? Or do you think maybe it comes in a bit lower, but you can capture some market share?

George Armoyan

The demand for oil, like I'm bullish on hydrocarbons. I guess that's why I invested in it. So I believe there's a lot of momentum going -- as long as the prices stay over $85 or so for oil and maybe $4.50 for gas above that. I mean I heard gas this morning, hit like an $8. So I mean, as long as -- we're not counting on that. We're counting on $75, $80 oil for, then I think there will be a lot of demand.

And depending what happens with the Russian situation about the European countries trying to really boycotted by the end of the year and everything. We're going to -- I mean that supply has to come from somewhere. And between Canada and the U.S., we have to be able to do that. But things are looking. I mean the prices of the commodities today are as much as they were in 2018 or '17 and '18, even better.

So I still -- I think the sentiment about oil and gas is changing a lot. I was just this past week in New York in a financial conference and everybody is talking about oil and gas being the next best thing. People have forgotten about technology.

Cole Pereira

Well, that's great to hear. And I guess on the Russian divestiture, any details you're able to share around how you're thinking about time lines or anything you think on the likelihood of success for that?

George Armoyan

I think we can succeed. It depends how much -- we like to do it this year. So let's just -- we like to do it in fiscal 2022. And we are engaged in some conversations right now. And we're hoping to conclude it within a reasonable period of time. But we have an obligation to our shareholders to ensure also. We don't give things away, right? So I mean -- but I do -- but we're confident that we can do something in 2020.

Cole Pereira

Okay, got it. That makes sense. And on to the assets themselves, maybe I'm misunderstanding. But I mean I assume if you didn't impair the Russian assets, do you think you can sell them for greater than or equal to that $45 million net book value? It's just a little bit higher than I would have guessed. I mean do you have kind of a confidence in that figure based on some of the ongoing conversations?

George Armoyan

We're optimistic. Look, I mean I just want to give you a little bit of a background. I mean I just found out this -- you know how much we invested in Russia as a company, our shelf Calfrac, $175 million over the years.

And if we can recover some $40 million, some $45 million, then I don't think we're doing a good job. So even though it shows $45 million, but we have a lot more hut-sunk into this company or this enterprise. So it hasn't been a good experience.

Cole Pereira

Got it. Go ahead, Mike.

Michael Olinek

It's Mike here. I just want to remind you that we took a significant PPA impairment in the second quarter of 2020 related to our Russian division. And so, that really I think removed a lot of the capital -- the PP&E from the balance sheet at that point in time. So the remaining assets are predominantly related to working capital held in Russia.

Cole Pereira

Okay. I got it. That makes sense. That's all for me. Thanks. I'll turn it back.

Operator

And we'll go next to John Gibson with BMO Capital Markets.

John Gibson

Just looking at pricing dynamics, they appear to be stronger in the U.S. relative to Canada. And we've heard some comments from the larger players in the U.S. that they're sold off the year and pushing pricing higher. It seems like there is similar dynamics in Canada, but pricing isn't quite as strong. So can you maybe speak to the market dynamics in Canada with regards to pricing? And maybe are we now finally getting to a point where you could push the net pricing higher?

George Armoyan

I would say most of the players in Canada finally come into their sense is that they're going to stop their subsidy. And it's better to park the equipment than really to do it for a loss or just to change $1 for 4 quarters because 4 is more than 1.

So the -- I mean I do believe there is demand. I do believe there's going to be an increase capital expenditure by a lot of the producers.

And I mean, I'm involved with I'm involved personally in the E&P company. And we're seeing the pressures a lot -- I mean up to 29% on the services. So I think everybody is trying to do -- trying to come to their senses and trying to get some reasonable return for their shareholders.

So I'm not too worried about it. The prices -- I mean I hear some wells that are paying off in 4 weeks or 5 weeks or 6 weeks. There's nothing wrong with sharing some of that with some of the service providers.

Michael Olinek

John, I think also the -- in Canada, we exit Q1 of high activity and going into a low. So while the pricing pressures still are there, there's a little bit of softness at the same time. So we -- I would expect that as we get halfway through this Q2 that you'll see a catch up to the U.S. as far as the pricing activity goes.

John Gibson

I guess a follow-on, how much higher do you think pricing needs to go in order to get to more of the healthy full cycle returns you've kind of been referring to?

George Armoyan

We like to get the margins of 30%, 35% from the low 20s that we're getting right now. And just on -- I'm sorry, just -- I was going to say something else in Canada. We are preparing our 5th fleet in Canada just in case the demand exceeds the supply that's available there. And that's going to cost us roughly $2 million to have our fifth fleet on standby and ready to go if the demand warrants it. With the right margins, I reemphasize with the right margins.

John Gibson

Got it, yes. And that kind of leads to my last question. You obviously see opportunities to add equipment in Canada, but would you need to potentially upgrade a fleet in order to do so? Or could you even potentially move some biofuel equipment from the U.S. to Canada?

George Armoyan

Our fifth fleet is being prepared as we speak right now. So for roughly $2 million, we'll be ready. So -- and I think we're bringing a couple of mixers from the U.S. that we have to complete the fleet that we have, the fifth one in Canada. And that takes us to the optimal number that we can have in Canada 5 fleets without having to purchase or do any new equipment.

John Gibson

Okay, great. I appreciate the comments. I'll turn it back.

Operator

[Operator Instructions]. We'll go to Waqar Syed of ATB Capital Markets.

Waqar Syed

Thank you. George, what is your strategic vision for Calfrac going forward? This is the first meeting with you. So, maybe if you could highlight that? And how could -- what are some of the focus areas for you going forward? And how good -- or what kind of changes should we be expect in terms of strategy for the firm going forward?

George Armoyan

The biggest strategy is to make money. So that's really first and foremost here in -- I mean, it's a good platform. It has a good brand. We are working on addressing our margin. We're working -- and we're going to try to work on addressing our balance sheet there. I just want to make things as simple as possible. That's really what I want. I want to make them transparent so I can understand them as a Layman.

Look, I mean, it's not a big secret. I don't know much about oil and gas, right? But I know something about business. You need more revenues and expenses to be successful. And that's really the biggest focus is to take the complexity out of this business here and to make it as simple and transparent as possible.

So I'm working with the team. And we're trying to simplify things and working, again, as I said, on the balance sheet. And the balance sheet could be -- first, we have to produce good results and then ultimately, will be rewarded for that.

This is both a financial and a personal challenge for me. And I put more pressure on myself trying to see this being successful than anyone could put on me so especially where I don't know much about this space. So I'm not sure if I addressed your question or not?

Waqar Syed

No, no, you did. I appreciate that. Thank you very much. Now, could you give us like an updated CapEx number for this year given that Russia, you won't be investing in future? I know it was a small investment to begin within Russia. But maybe again, any updates with the CapEx.

George Armoyan

I'm going to let Michael answer the question, but how do you define CapEx anyway?

Waqar Syed

Well, what are the main CapEx is for the equipment plus some growth CapEx.

George Armoyan

I'm just -- and the reason I asked that question, I'm just learning in this industry. It's a different way people call CapEx than I'm used to. But anyway, I'll let Michael address it.

Michael Olinek

Thanks, George. Yes, Waqar, I would say that the reduction in our previous estimate for capital is really minimal as it pertains to our Russian operations. In our original budget, we had probably had between CAD 3 million and CAD 4 million of capital related to Russia. And I think right now, we're looking to minimize that spend here as we go forward. So that's really a very minor tweak to the estimate that we had provided on a consolidated basis.

Waqar Syed

Yes. And then, just one final question. Could you talk about the price increases in Canada, you seem very hopeful for the second half. And I think there were some comments made by George along those lines. But again, a little bit -- you seem a little bit more optimistic. Could you highlight that what drives the confidence that you'll be able to get net price increases in Canada in the second half?

George Armoyan

I think -- I mean, look, it's simple the demand is exceeding the supply. Everybody -- every oilfield service company is having challenges with personnel, with the equipment, with many different things. And with the prices where they are, we -- I do believe, and I'm starting to see it just by the calls I get from CEOs of some producer companies that they're all working right now on increasing their capital budget. All by it they're coming out and saying it as blatantly as they should. They're trying to keep a little bit the laid on pricing increases.

But we're starting to see it. And most of these producers are right almost -- I expect by September-October to have paid all of their debt. So -- and they have to start produce drilling activities and on some of the new -- some more production.

And just to maintain what they have and also to increase their production because at these prices, I mean, it is crazy not to be able to go and do some more -- more work or get extract more production there. So this is just a sixth sense sentiment. You're seeing it. And the people are a lot more optimistic. And there's a great amount of cash flow being generated by these companies. It's mind-boggling how much cash flow is being generated by these companies.

Michael Olinek

And I think look, on the ability for the suppliers, the other service companies to meet up with even a small general increase over what was projected in Q3, we'll start to push dates. And when you start to push dates and you can't get on that should bode well for an increase in price. And I think we're very confident that we will see that in Q3 for the Canadian market for sure.

Waqar Syed

Sure. And I agree, and I think there's a lot of anecdotal evidence you're seeing in numbers as well evidence of price increases. But one, just kind of some fruitful thoughts and something to think about in our supply-demand models. But like all the E&P companies that are reporting in the commentaries, they're talking about all these efficiency gains that they're seeing from their pumping providers.

And I think one company range just said that like they're now doing 16 frac stages a day. What's your thought about increasing these increased efficiency, creating this artificial supply that tends to start balancing demand?

Michael Olinek

I think you had the efficiency gains over the last several years, which probably exasperated the oversupply of the horsepower over the last several years as well. But so far, no one has got better at creating more than 24 hours in a day. So as you're approaching 20 hours a day, 22 hours a day, the 60 stages in a day that you're quoting is pretty well like a sleeve or a ball drop type job. You run through a physical -- there isn't any more time in the day to actually do more work.

And so, the efficiency gain is you can do it when you have inefficiencies. But if you don't have inefficiencies at the frac site, which I think are very difficult to more improve. The one piece that we've talked about, George brought it up too is white space, which is the time between the fracs that still potentially could be addressed and if our clients could start to minimize that.

Maybe there's some gains there. I'd like to think that there are some gains that could be achieved on a scheduling side. But short of that, I think on on-site, I think we've captured the majority. There always will be something better. But the big steps, I think have happened in the past.

George Armoyan

I was just going to add, we are adding a lot of efficiencies, but we're not being rewarded to us. That's the problem. We're not being compensated for.

Operator

And we'll go to our next question from Andrew Pelvic of Millennium.

Andrew Pelvic

Really appreciate the update having George on today. I wanted to ask revisit if there's any tax assets that you have from the restructuring or anything strategic around here in your tax situation that we should be thinking about?

George Armoyan

That's the biggest asset this company has. We have too much goddam tax losses, which is a good and bad thing, right? And so I think we got close to $1 billion of tax losses that -- so we can make a lot of money without having to pay taxes.

And honestly, with my other businesses that pay a lot of taxes, it's like a kid in -- I mean, this is exciting to me. And just as part of the strategy is how to make some money in cash flows that will be sheltered without having paid to the government.

And that's -- so it's a great hidden asset that we have in the company.

Andrew Pelvic

Is there any way to accelerate the utilization of that, whether it's with your core operations or some sort of mergers and acquisitions, bolt-on something outside the industry, just thinking outside the box a little bit.

George Armoyan

Look, we're looking at all alternative ways to enhance shareholder value. But right now, I mean, the easiest way to use them is to make money. That's the simplest way to do it is to make money on our operations. And some of the other things will add it on later on, but right now, that's really the big focus. We have to be laser-focused on trying to make margins that make money.

Operator

And it appears there are no further questions at this time. I'd now like to turn the conference back to Mike Olinek for any additional or closing remarks.

Michael Olinek

Thanks, Jenny. I just want to thank everyone for joining us for the call today. And we look forward to hosting the Q2 call in late July. Thanks very much.

Operator

And this concludes today's call. Thank you for your participation. You may now disconnect.