Calfrac Well Services Ltd.

Good day and thank you for standing by. Welcome to the CalFRAC Well Services first quarter 2023 earnings release and conference call. At this time all participants are in a listen-only mode. After the presentation there will be a question and answer session. To ask a question during the session you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Olenek, Chief Financial Officer. Please go ahead.

Thank you, Liz. Good morning and welcome to our discussion of CALFRAC Wealth Services first quarter 2023 results. Joining me on the call today is Pat Powell, CALFRAC's Chief Executive Officer. This morning's conference call will be conducted as follows. Pat will provide some opening commentary, after which I will summarize the financial position and performance of the company. Pat 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 first quarter 2023 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. 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 CDAR filings, including our 2022 Annual Information Form, for more information on forward-looking statements and these risk factors. Lastly, as we have previously disclosed, The company is committed to a plan to sell its Russian division and has designated the assets, liabilities, and operations in Russia as held for sale and discontinued operations in the financial statements. CALFRAC is continuing to make progress to complete this transaction as soon as possible while complying with all applicable laws and sanctions. The focus of the remainder of this call will be on CALFRAC's continuing operations unless otherwise specified. Pat, over to you.

Thanks, Mike. Good morning. Thank everybody for joining our call today. Before Mike provides the financial highlights of the first quarter, I'll offer some opening remarks. CALFRAC executed on our brand promise during the first quarter as we overcame adverse weather conditions and delivered significant year-over-year financial improvement. In addition to increased utilization across our existing equipment and all operating divisions, we reactivated one large track fleet and one coil tubing unit in North America. Safety is not mentioned first in our brand promise by accident. We know that an excellent safety track record is paramount to being a high-quality service company. And as such, we appreciate that we must continually work to improve our safety performance across all locations. We ended the year with a rolling trip of 1.19. We improved to 1.13 in this quarter and look to continue that trend throughout the year. Another example of our safety-centered culture is that one of our operational districts has gone almost four years without a OSHA recordable incident. We understand that a strong safety record allows us to maintain our long-term customer relationships and successfully serve our clients across all business cycles. Our fleet modernization program is progressing on schedule. We have started to deploy our initial tier four DGB pumps and expect to have seven repowered and two new units rolled out onto location before the end of the quarter. We have five of those seven in the field today. Our long-term goal is to continue to be a best-in-class service company. So the current fleet modernization program is simply another step towards that objective. I am proud of what the CALFRAC team has been able to accomplish so far and excited about building upon it through the rest of this year and the strong financial and operational results have given us a solid start to the three priorities established for the company this year, which are maximizing consolidated net income and free cash flow through a disciplined returns-focused pricing strategy and stringent cost management. The second one is Dedicating all free cash flow to reducing the company's long-term debt and evaluating additional strategies to improve its capital structure. And thirdly, investing in new technologies that enhance CALFRAC service deliverability in the field and drive improved profitability into the future. I look forward to updating everybody on the progress of these objectives throughout the year. And as the largest Canadian headquartered pressure pumping company, I think that we are uniquely positioned to leverage our operating scale to accomplish our objectives in 2023. I'll now pass the call back to Mike, who will present the financials.

Thank you, Pat. As we disclosed on the last earnings call, the company has decided to report the financial and operating performance for the United States and Canada under a single North American division, beginning with the financial results discussed during this call. CALFRAC's revenue from continuing operations during the first quarter of 2023 was $493.3 million, or 67% higher than the same period in 2022. Adjusted EBITDA during the first quarter of 2023 increased to $83.8 million, versus $22.8 million in the comparable quarter in 2022. The financial results during the first quarter were achieved despite the company's operations in the United States being impacted by severe winter storms, which caused work stoppages in the broader Rockies region for approximately 54 days. This tremendous improvement in financial performance was primarily due to strong net pricing gains and a dedicated focus on cost control across both operating divisions combined with a larger operating footprint in North America. CALFRAC recorded net income from continuing operations during the first quarter totaling $36.3 million versus a net loss of $18 million in the comparable quarter of 2022. CALFRAC also spent $34.5 million on capital expenditures from continuing operations in the first quarter, compared to $12.1 million in the same period of 2022. These expenditures were primarily related to maintenance and sustaining capital to support the company's fracturing operations, as well as $17.3 million related to the Tier 4 fleet modernization program. To summarize the balance sheet at the end of the first quarter, The company had working capital of $232.4 million from continuing operations, including $23.2 million in cash. During the first quarter, the company had used $3.5 million of its credit facilities for letters of credit and had $180 million of borrowings under its revolving term loan facility, leaving approximately $66.5 million in available credit. CALFRAC exited the quarter with net debt to adjusted EBITDA of approximately 1.2 times as compared to approximately 1.5 times at year end. And the company expects to continue to make significant progress on reducing its leverage profile throughout the remainder of the year. Now I'll turn the call back to Pat to provide our outlook.

Thanks, Mike. I will now present an outlook for CELFRAC's continuing operations across our geographic footprint. Our operations in North America and Argentina produced significant year-over-year improvement in financial results during the first quarter as customers sought out high-quality service providers to execute on their development plans. We expect to leverage our operational expertise across all our operating areas through this year to maximize returns for our shareholders. In North America, despite losing six operational days per fleet in the United States due to adverse weather, we generated the highest first quarter adjusted EBITDA margins on a total company basis since 2012 and look to continue that momentum through the rest of the year as we expect full utilization for our 15 dedicated large frac fleets and our six coil tubing units. As a reminder, we recently streamlined our organizational structure and combined our United States and Canada operations into one reportable division to better leverage our operating scale to allow us to reposition our assets, if needed, to earn the highest return for our shareholders regardless of the country. I'll now turn to Argentina. CALFRAC's operations in Argentina generated improved year-over-year financial performance in the first quarter. We expect this momentum to continue through the rest of this year as increased utilization combined with dedicated contract work across all service lines is anticipated to produce enhanced financial returns. I would like to thank the entire CALFRAC team for executing on our brand promise. and providing high-quality service to our customers in the first quarter. I believe that the future is bright for the company, as it is strategically well-positioned to capitalize on the multi-year upcycle and continue to make progress on our three strategic priorities, which are as follows. Firstly, we will maximize consolidated net income and free cash flow through a disciplined returns-focused pricing strategy and stringent cost management. Next, we will dedicate all free cash flow to reducing the company's long-term debt and evaluate additional strategies to improve its capital structure. Lastly, we will invest in new technologies and projects that enhance CALFRAC service deliverability in the field and drive improved profitability into the future.

Back to Mike. Thank you, Pat. I will now turn the call back to Liz for the Q&A portion of today's call.

As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Keith Mackey with RBC Capital Markets.

I just wanted to start out with what you're seeing on the pricing front, and maybe it's different in both Canada and the US, but I guess the release talked about steady pricing in North America. So as far as, you know, should we be thinking about that as profitability per fleet as roughly flat throughout the rest of the year, maybe save Q2 in Canada, or is there a different better way to think about it?

No, I think you're pretty close. You know, we're Predominantly, we're kind of oil or liquid rich where we are, so I think we're a little bit insulated from the pricing that's going on down in the Permian and Haynesville. So from what we're seeing, I mean, there's a chance there will be some underutilized fleets from our competitors that are looking for a home, which might put a little bit of pressure on pricing, but we're well established with our customer base and feel fairly confident that the pricing will stay at least flat.

Got it. Okay. Okay. Thanks for that. And just to follow up on the Alberta wildfires, Can you just run through any exposure you might have and an update there to the best as you know right now?

Okay, so what we know right now is we have three fleets operating in Canada. They're all subject to the fires, for sure. We have one fleet shut down today. It has been for a couple of days, and the other two are still working. You know, I expect that The fleet that shut down should be back to work within a week, but it's pretty hard to gauge the weather and fires. But that's what we're expecting anyway. So it's certainly going to have an effect, but all it does is push the work later, which might cause us utilization problems down in the months to come. But right now, I think it'll be fairly minimal to the company.

Okay, I'll leave it there. Thanks very much.

Thanks, Keith.

Our next question comes from Cole Pereira with Stiefel.

Good morning, all. I was wondering if you could just start on talking about what you're seeing in terms of frack equipment supply and demand in Canada for the second half of the year, and then obviously how you see pricing in Canada specifically evolving as a follow-on of that.

We are, from what we see today, we're pretty much fully booked. And, you know, the pricing is, I don't think there'll be much of a pricing issue in Canada. I'm a little more, I would say I'm a little more concerned in the U.S. But Canada, I believe, will stay fairly steady.

Got it. And then just going back to Keith's question on EBITDA per fleet, I mean, you obviously had some weather issues in Q1 that would have degraded that metric a little bit. Are you kind of thinking that maybe you'll see some improvements across the board, but then you might see some weaker utilization in the next few quarters as a result that kind of impacts that? Or should we be seeing that trend higher? How should we think about that?

Hi, Cole. It's Mike. As we look at the EBITDA per fleet in North America, you're going to have some utilization issues north of the border in Canada, as you know, for the seasonal downturn. But once we resume, I think, normal operations in Canada, and I think we're hitting a much better weather pattern in the Rockies area of the US, I think you're going to see EBITDA per fleet creep up towards the end of Q2. And I would say the third quarter will be our best in that regard. And then there's always a bit of a tick downward in the fourth quarter. But we're looking to see some improvement here in Q2 and Q3 versus what we actually generated in Q1 in the US. So overall, I think we've got good visibility with our customers in North America. So other than this fire situation in Canada and the normal breakup, I think we're seeing things remain quite resilient despite some of the turmoil in commodity markets.

And just to add a little bit to that, I'd expect to see some marginal increase to EBITDA as we roll out these new Tier 4 pumps. There'll be some startup costs, of course, and a little bit of learning with our crews on how to operate these pumps, but We expect to have the bulk of those pumps out in the field before the end of the year. So I would expect we'll see some additional EBITDA from just new equipment in the field.

Okay, got it. Thanks. And then just sort of following on that out of curiosity, what's the lead time right now on Tier 4 pumps between putting in the order and getting them active in the field?

I would say by the time you order your pump until it's in the field, you're probably at 18 months. Maybe a little less. Maybe a little less than that, because we'll have these pumps. We'll be about a year, and I expect that gap to close a little bit. So let's just say a year.

Okay. Perfect. That's all for me. Thanks. I'll turn it back.

Thanks, Cole.

As a reminder, that is star 1-1 to ask a question. Our next question comes from Waqar Sayed with ATB Capital Markets.

Hello.

Hi, Waqar.

Oh, hi. Sorry. Yeah, it broke up here. Just a couple of questions. First of all, on the Tier 4 DGB upgrades, um you know in the in the uh news release mentioned the seven uh repurposed tf4 dgbs and two the new tf4 dgbs uh units so first of all what's the difference between the two and then do you mean by the units like nine pumps are in you know are going to be in the field soon or uh what exactly do you mean by by the units and how do you define them okay so so a refurb basically we

we might, you know, keep the transmission or we might keep the pump depending on the unit. The engine, of course, is gone. And the carrier, that would be a refurb. So, you know, a refurb could be all you're keeping is the carrier. Could be that you're going to keep the pump. It could be the pump and the transmission. The engine is gone for sure because it's tier two. And the radiator will be gone. And that's kind of the major four components to a to a pump. And then on a new pump, it's just everything's new. So that's the difference. So it would be probably $300,000 savings on a refurb to a brand new.

And then when you say units, you mean pumps, right? Individual pumps, pumping units, is that what you mean? So you've got nine units?

We'll have nine. We'll have seven that we've refurbed. So we've taken our old pumps and refurbed them. So they're basically a brand-new pump. And we have two that were brand-new that we built in Argentina that are in the field today. So five of those nine are working today, and the other four will be... We're just in the process of putting... idle reduction technology on these pumps to test it out for our fleet going forward. And if it pans out the way that it's been advertised to us, we will have idle controls on all our pumps.

Are you considering electrical blenders and other equipment at the well site based on electrical technology as well, or that's not in the works right now?

That wouldn't be, of course, for 2023, but it certainly is on the table for 2024. And we're just starting down that path right now.

So, you know, as you go towards your goal of about 65 units by the end of the year, maybe sometimes early next year, how many fleets would these units be distributed into? How would you distribute them? How many fleets would be affected?

Well, it's 50, not 65. Okay. Pumps and... You know, we would probably, I would say it'll affect five fleets. Well, we'd probably put 10 Tier 4 pumps on five different fleets. So a third of our fleets would be predominantly Tier 4.

Great. Usually when we're...

Usually when we're pumping, we pump with 10, 12 pumps, and we have three or four spares.

Now, in terms of your fluid and impact, obviously you've changed your methodology. What was the impact on OpEx from that accounting change in Q1? And if you could also give a number for 2022.

Well, Waqar, I think I referenced on the last call of kind of the full year impact being about $30 million for that change. So I think we're right on the stream of that here in Q1 on a quarterly basis. And I continue to think it's about the same impact for this year.

Great. That's all I have. Thank you very much. Thank you, Waqar. Yeah, thanks.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Michael Olenek for closing remarks.

Thanks very much, Liz. Yeah, I'd like to thank everybody for joining us for today's call and we look forward to presenting our results for the second quarter in early August. Thanks everybody and have a good day.

This concludes today's conference call. Thank you for participating. You may now