Calfrac Well Services Ltd.

Good day and welcome to the CalFRAC Wealth Services Limited third quarter 2023 earnings release and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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. Good morning and welcome to our discussion of CALFRAC's third quarter 2023 results. Joining me on the call today is Pat Powell, CALFRAC CEO. This morning's conference call will be conducted as follows. That will provide some opening commentary, after which I will summarize the financial performance and position of the company. That will then provide an outlook for CALFRAC's business and some closing remarks. After the completion of these remarks, we will open the call to questions. In a news release issued earlier today, CALFRAC reported its third 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 CDAR filings including our 2022 annual information form for more information on forward-looking statements and these risk factors. As we have disclosed for a number of quarters, 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 looking forward to completing 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. Now I will pass the call over to Pat.

Thanks, Mike. Good morning and thank you everyone for joining our call today. Before Mike provides the financial highlights of the third quarter, I'll offer some opening remarks. First, I want to take a minute and discuss the significant progress that we have made on our long-term financial and operational goals during the past year. The first strategic goal that I set for the company was to increase profitability. And we've made great strides in that regard. In 2023, our year-to-date net income from continuing operations normalized for the deferred tax asset and impairment reversals was approximately 8% of revenue, over five times higher than the same period last year. This significant improvement demonstrates the high quality of Calfrax customers who appreciate the quality of our services and our execution ability. The second goal was to lower our outstanding debt. The company has made significant progress in this initiative as it repaid approximately $30 million of long-term debt during the third quarter, and we continue to target further debt reduction in the fourth quarter. earlier earlier in the year the company was focused on funding its working capital requirements which have totaled approximately 135 million since the middle of 2022. and finally the third strategic initiative for calfrac was to upgrade our equipment in the field during the third quarter we have gained significant momentum with our tier 4 fleet modernization program and have deployed 23 Tier 4 DGB units so far this year, with more pumps being deployed every week. Reducing our outstanding debt while upgrading our equipment is our two-pronged approach to strengthen the balance sheet and improve our asset quality. None of this progress would have been possible without our dedicated teams across North America and Argentina. And for that, I want to commend them for their hard work and commitment to deliver on our brand promise. Now turning to the third quarter, I'm happy to report that we have navigated shifting frac schedules to generate the highest quarterly adjusted EBITDA margin thus far in 2023. Historically, the third quarter is our strongest period, and this year was no exception. One way that we were able to respond to a changing frac calendars by managing our costs, specifically our equipment repairs and maintenance. Now that we've refreshed everyone on where we've been, let's talk about where CALFRAC is going. Our Tier 4 EGB upgrade program remains on schedule and we expect to deploy 59 Tier 3 EGB pumps by the end of the first quarter of 2024 and to continue with the upgrade program beyond these initial units as finances and markets dictate. We pay close attention to the equipment transformation being happening in the industry and are excited about enhancing our position in the next generation fracturing market and meeting our customers' expectations and our ESG priorities. I believe that CalFrac's service quality is second to none and that we have the best team in the industry working together to achieve our long-term goals. As the largest Canadian headquartered pressure pumping company, we expect to leverage our geographical footprint and strong operational momentum to capitalize on the current market while remaining focused on our three strategic objectives. We do it profitably, not only for CalFrac, but also for our shareholders, employees, suppliers, and customers. And I'll pass the call over to Mike, who will present an overview of our quarterly financial performance.

Thank you, Pat. CalPRAC's revenue from continuing operations during the third quarter of 2023 was $483.1 million, or 10% higher than the same period in 2022. Adjusted EBITDA during the third quarter of 2023 was $91.3 million, or 3% lower than the same period last year. due mainly to higher operating expenses following the perspective change in estimate related to fluid ends during the first quarter of 2023. Fluid ends are now reported as a part of repairs and maintenance expense instead of as a component of capital expenditures. In 2023, fluid ends reduced adjusted EBDA by $11.9 million versus in 2022 where capital expenditures included $8 million related to fluid ends. CompFRAC's net income from continuing operations more than doubled to $97.5 million during the third quarter versus $45.4 million in the comparable quarter of 2022. The year-over-year improvement was mainly due to a $41.6 million reversal of impairment of property, plant, and equipment and a deferred tax recovery of $9 million. Both items related to an improved business outlook for the company's operations in Canada. CALFRAC incurred capital expenditures of $50.8 million during the third quarter versus $24.7 million in the same period of 2022. This increase in capital spending was primarily related to the company's previously announced Tier 4 fleet modernization program, which accounted for $33.2 million of the total capital expenditures during the third quarter. As we recently announced, the company amended its revolving credit facility agreement during the third quarter, which extended the maturity into late 2025 at the earliest. We believe that this extended runway will play an important role in enabling CALFRAC to fully execute on its long-term strategy. To summarize the balance sheet at the end of the third quarter, the company had working capital of $283.7 million from continuing operations. CALFREC had used $3.5 million of its credit facilities for letters of credit and had $150 million of borrowings under its revolving term loan facility, leaving approximately $96.5 million in available credit. CALFREC made further progress on reducing its net debt to adjusted EBITDA as it exited the quarter with a ratio of 0.92 times as compared to approximately 1.5 times at year end, which is the lowest in recent history. The company continues to project a $70 to $80 million reduction in total long-term debt by the end of the year. This decrease in debt is slightly lower than originally anticipated due to a delay related to a planned asset divestiture. Now I would like to turn the call back to Pat to provide our outlook.

Thanks, Mike. I will now present an outlook on CalFRAC's continuing operations across our geographic footprint. We have a positive outlook for our North American and Argentina operations and feel that each business unit helps us maximize shareholder returns and contributes to us reaching our long-term goals. Regardless of the operating area, we are driven by our strong safety-centered culture and employee buy-in to deliver on our brand promise. During the quarter, the market softness experienced in the United States was offset by strong utilization in Canada. For the fourth quarter, we expect the opposite to occur, where increased activity in the United States is anticipated to offset customer budget exhaustion in Canada. We believe that our focus on execution, combined with our diverse geographic footprint, will produce steady financial returns for our stakeholders. Our operations in Argentina produced another solid quarter of profitability. We expect that strong utilization will continue for the rest of this year and into 2024, as dedicated contract work across all service lines is expected to generate consistent financial returns. accomplishments so far this year and are looking forward to a solid finish in 2023 as we continue delivering on our brand promise and make progress on our three strategic priorities. First, maximizing on consolidated net income and free cash flow through a disciplined returns-focused approach. Secondly, dedicating free cash flow to reducing the company's long-term debt and And third, investing in new technologies that enhance CalFRAC service deliverability in the field. I will now turn the call back to Mike to begin the Q&A portion of this call.

Thank you, Pat. I'll now ask Abigail to begin the Q&A portion of today's call.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment for our first question.

Our first question comes from Cole Pieria with Stifel, your line is open.

Hi, good morning all. Thinking about Canada in Q1, there's obviously a lot of tailwinds, but you also have one of your competitors bringing up a spread from the U.S. Can you just add some color on how you're thinking about supply and demand, activity, pricing, etc.? ?

Well, Cole, it's Pat.

You know, we have also moved crews back and forth between Canada and the U.S. So, you know, it's kind of hard for me to comment on whether it should happen or not, I guess. You know, as long as the pricing... doesn't change and you have extra work, I guess, I mean, that's why we did it. So if that's what they've done, then it's fine. If they've, you know, brought the pricing down to bring a fleet up from the U.S., then I would say it's probably not good for them or the industry.

Sorry, I guess maybe to rephrase that, You know, based on those data points and, you know, what you see in your schedule, I mean, you know, it sounds like you don't really see a degradation of supply and demand at this point, acknowledging, I mean, there's still a few months to go.

I don't think one fleet will make that much difference. I don't believe it will make that much difference to CalPRAC.

I think our customer base is strong.

Got it. And then can you just add some color on how customer conversations in the U.S. have been going and what's the outlook like there for next year compared to right now or 2023 as a whole?

From where I see, I see a fairly strong 24 for CalFRAC in the areas that we operate in.

I think we're going to see a slight increase over what we did in 23 and 24 in the U.S.

Got it. Okay, that's all for me. Thanks.

I'll turn it back.

One moment for our next question.

Our next question comes from Keith Mackey with RBC Capital Markets. Your line is open.

Hi, good morning. I just wanted to start out with the Tier 4 equipment. So you've got, like you said, 23 pumps in the field now. So may or may not give you a chance yet to see how the profitability differs between some of this newer equipment and some of the older equipment. But Mike, what are you seeing on your as far as profitability goes on the fleets that are running the new pumps? Is there a noticeable uptick in the margins that you're getting on that equipment, or is it still hard to tell?

Keith, I'll take that question. It's Pat. You know, it's a little early for us to make a call on that right now, but we're quite happy that we have deployed a full fleet uh tier four dgb crew back into the marcellus so uh which just went to work here shortly so we will uh you know in the next month or two we will we will be able to answer that question for you but so far we're having uh you know good luck with the with the 23 that are out there we're seeing uh We can put a few less pumps on location when we have a number of Tier 4 pumps out there.

So it's all good.

All right. All right. Good to hear. And secondly for me, our best guess right now, I think, is you've got around five fleets running in Canada and 10 in the U.S. Based on what you know today, would you anticipate that mix changing through 2024 at all?

Not from what I see today. I think that that's pretty well where we'll be. Of course, as we build out our Tier 4 fleets, we will gain a couple of fleets, which at this time... You know, we will just – this would be way late in 24, so it's more of a 25 question. And at that time, we would have – I believe we'll probably gain a couple of fleets as we do this modernization.

There will be Tier 2 fleets, but we will gain a couple of fleets. Okay. That's helpful. Thanks very much.

Thank you. I'm showing no further questions at this time. I would like to turn the call back to Michael Olenek for closing remarks.

Well, thanks very much. And yeah, I'd just like to close today's call. Thank everyone for joining. And we look forward to hosting our Q4 call in Q1 of 2024. So thanks very much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.