Calfrac Well Services Ltd.

Good day, everyone, and thank you for standing by. Welcome to CalFrag Wealth Services' second quarter 2024 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 participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. to withdraw your questions, simply press star 11 again. Please be advised that today's conference is being recorded. Now I will hand the call over to the Chief Financial Officer, Michael Olenek. Please proceed.

Thank you, Carmen. Good morning and welcome to our discussion of CalFRAC's second quarter 2024 results. Joining me on the call today is Pat Powell, CalFRAC CEO. This morning's conference call will be conducted as follows. Pat will provide some opening commentary, after which I will summarize the financial performance and position of the company, after which Pat will then provide an outlook for Calfrex Business and some closing remarks. Following the completion of these remarks, we will open the conference call to questions. In a news release issued earlier today, CALFRAC reported its second quarter 2024 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 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 CEDAR filings, including our 2023 Annual Information Form, for more information on forward-looking statements and these risk factors. 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. As a result, the focus of the remainder of this call will be on Calfract's continuing operations in North America and Argentina, unless otherwise specified. Now, I will pass the call over to Pat.

Thanks, Mike. Good morning. Thanks for joining our call today. Before Mike provides the financial highlights for the second quarter, I'll offer some opening remarks. During the second quarter, we were able to generate increased results mainly by our customers transitioning to a more level loading of programs throughout the year, especially in Canada. The more traditional shutdown over spring breakups seems to be becoming more of a thing of the past. This has been made possible because of the better road infrastructure in the areas where we now work and, of course, by the use of off-road and location matting that is being more widely used today. The quarter was also impacted by our customers' decision to move more of their programs into the early spring. to not have to deal with the forest fires that caused many unplanned shutdowns last year, and the chance of a dry summer and prolonged drought conditions effect on the available water supply to complete the frac. Helping our Canadian crews to look after this condensed workload was our centrally located located Gold Creek transload facilities, which are south of Graham Prairie, right kind of in the middle of where a lot of our work is done. So coupled with these facilities is we had invested in a new fleet of 30 Super B large volume sand hauling units. This investment in the equipment gave us the ability to not only look after our customers' needs, but also enabled us to set company records for the amount of prop and pump during our fracking operations for two consecutive months. Another record was attained by our coil tubing group, which milled out the most plugs in a 12-hour period in its history. It's these types of well-run, improving operations that make our long-term customers want to continue to do business with us and hopefully attract customers. other customers to use our services. As part of our strategic objective to improve the quality of our assets in the field, we have 49 Tier 4 DGB cat-on-cat pumps serving our customers today and anticipate operating the equivalent of five dual-fuel fleets in North America by early next year. As we modernize our equipment, safety remains top priority as evidenced by the reduction in our 12-month trailing TRIF from 0.87 to 0.77 during the quarter. I'm proud of the way that our team executed for our customers during the second quarter and look forward to making progress on our strategic priorities. I will now pass the call back over to Mike who will present our quarterly financial performance.

Thank you, Pat. Calfrex revenue from continuing operations during the second quarter of 2024 was $426 million, a decrease of 9% from the same period in 2023, primarily due to lower activity and pricing for the company's services in the United States. Sequentially, revenue from continuing operations increased 29% or approximately $96 million versus the first quarter, primarily due to significantly higher activity in North America. Adjusted EBITDA during the second quarter of 2024 was $65.4 million, a 26% decline from the same period last year, stemming from lower utilization and pricing levels in the United States. Sequentially, though, adjusted EBITDA from continuing operations increased by over $39 million from the first quarter, driven by significantly higher activity and profitability in North America. CALFRAC's net income from continuing operations was $24.6 million during the second quarter of 2024 versus net income of $50.5 million in the comparable quarter of 2023. However, net income from continuing operations increased $27.5 million from the first quarter. CALFRAC incurred capital expenditures of $66.8 million during the second quarter versus $30.7 million. This increase was mainly related to the company's Tier 4 fleet modernization program, deployment of new sand transportation equipment in Canada, and continued capital investments in Argentina. During the quarter, the company spent $36.7 million on the Tier 4 modernization program, as compared to $12.8 million in 2023. On July 31st, the Board of Directors approved a reinstatement of $40 million of its original capital budget, mainly to facilitate the expansion of the company's fracturing fleet in the Baca Merta play, as well as also to fund some incremental maintenance capital requirements in North America. Moving to the balance sheet, the company had working capital of approximately $304 million from continuing operations at the end of the second quarter, including $43.7 million in cash, of which approximately $40 million was held in Argentina. CalFREC expects to begin repatriating a portion of this cash from Argentina to Canada on a monthly basis, beginning in the third quarter of 2024. At the end of the second quarter, CalFREC had used $3.7 million of its credit facilities for letters of credit and had borrowings of $200 million under its revolving term loan facility, which left the company with available credit of approximately $46 million. Calfrac exited the second quarter with a net debt to adjusted EBITDA ratio of 1.39. In June, the company also amended its revolving credit facility agreement to reflect changes to certain financial covenants and accommodate the benchmark rate reforms that occurred in the quarter as the Canadian dollar offered rate ceased publication on June 28th and was replaced by the Canadian overnight repo rate average. Now I would like to turn the call back to Pat to provide our outlook. Thank you, Mike.

Activity in North America progressed better than expected in the second quarter, well down from last year, which Mike has discussed in his financial overview, which while a good thing for 24, it will impact on the third quarter. as some of the anticipated work programs were completed in the second quarter. Today we're expecting for the second half of the year to be in line with the first half outside the typical end of year weather interruptions and some unplanned customer exhaustion, which also depends on the commodity price. We are very excited about Argentina. The impressive progress that is being made in that country is giving us the optionality to deploy additional capital and equipment. The adoption of our North American best practices have made us a leading service provider in this region. Our teams routinely set internal activity and financial records. Our reputation as a high performance service provider has caused demand for our services to exceed the local supply in country. So to meet the request of the operators, we are in a process of moving some good tier two dual fuel frac pumps from North America where they are not optimal to Argentina where they are in high demand. We have also commissioned our first offshore coil tubing rig, which is under contract and creating revenue and profit as we speak. So we're excited about the long-term future of CalFRAC and anticipate continuing to invest prudently to improve our assets on location. While at the same time, we expect to leverage our safe and efficient operations with stringent cost management to maximize net income and free cash flow for the benefit of CalFRAC and its stakeholders. With that, I'll turn back to Mike to begin the Q&A portion.

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

Thank you so much. And as a reminder, to ask a question, simply press star 11 on your telephone and wait for your name to be announced. To remove yourself from the queue, press star 11 again. Our first question comes from Waqar Saeed with ATB Capital Markets. Please proceed.

Thank you for taking my question. So Mike, what's the capex number for the year now?

The overall guidance is around $200 million on a full year basis, with a lot of that increase being borne by the Argentinian segment.

Great. In Q2, we saw a nice pickup in coil tubing revenues in Argentina. I'm assuming that's for the offshore coil tubing unit. Is that $20 million type quarterly number in coil tubing in Argentina kind of sustainable in future quarters as well?

I think a bit of the uptake was certainly that coil tubing offshore rig, but generally we are just busier in Argentina with the equipment that we have there. And expect to continue. And expect to continue.

So, yeah, we added a new coil tubing rig, a large one onshore late last year, and we're just starting to hit our stride with those operations in the back of Merita. As well, the offshore did have an impact on the second quarter revenue for sure.

Okay, that's great. And then in terms of fleet renewals, do you feel upgrades, so you're at 49 units at the end of Q2, is that base in line with your expectations or is it a little bit, it feels a little bit slower than I think, you know, what we were modeling at least?

I would I would say it's a little bit slower than... We just kind of slowed it down a little bit to have a look. We always build off-ramps into our builds. Just if we're not quite liking what we see, we can slow them down or speed them up a little bit. And we chose to kind of slow that back a little bit from what we were seeing in the first quarter, but... We plan to finish the year where we're today. We now plan to finish the year as anticipated with 80 pumps tier four in North America.

OK. And just one last question. For the US Rockies, I think I read in the MD&A that some of the work is being pushed into the second half. So you expect U.S. revenues to kind of improve from two levels?

Well, we're sure hoping so. But, yeah, we expect to have eight fleets operating here In the next week, we should be up to eight fleets, which is pretty much fully utilized for us right now. And it looks fairly steady from what we have on the book right through to the fourth quarter and into the fourth quarter.

Okay, great. Well, thank you very much. Appreciate the color. Thanks, Richard.

Thank you. Our next question comes from the line of Keith McKay with RBC Capital Markets. Please go ahead.

Perfect. Hi, good morning. I'm just hoping we can start out on the Argentina fleet. I think it was around $30 million or a little bit less that you're going to spend on taking that Tier 2 fleet down there. Can you just talk about the market dynamics you're seeing that justifies the investment and the move Is the fleet contracted? Things of that nature would be helpful. Put some context around the earnings impact from the investment.

So the south of Argentina has slowed down dramatically. YPF is kind of pulled out of the south, which allowed us to pull some of our equipment back from the south, which also allowed us to put together a second large fleet in Argentina. It's not optimal. We've rented some pumps and a few things like that to make this happen. So the work is there. It's under contract. And we will shore that up with this equipment that is not optimal in the U.S. anymore, where it's in high demand in Argentina. So it's kind of what I've been saying for quite a while. It's a bit of an advantage, I believe, that Calfrack has, is we have the ability to send some of this equipment that's not at end of life and actually wear it out down there.

Got it. So you'll be operating two full fleets in the Vacamorta net of this. Okay. And maybe just on capital more generally. So understand the $200 million you're going to spend this year. We're already trying to get a handle on what we think you might spend in 2025. I know it's early, but can you just help us think about the pieces of the capital spend? You know, what's maintenance? What type of... tier 4 upgrades you might think about for 2025, and then ultimately where that should land you for 2025. We're thinking somewhere between 1 and 200 is probably the right place to be, but help us think about those pieces. Certainly would be nice to have.

Hi Keith, it's Mike. As you can appreciate, we're evaluating market opportunities and we're going to get into the budget cycle in the fall. So it's a bit early for us to be looking at next year and capital, understanding that the Tier 4 modernization program is still a priority for the company. But we also want to look at what's the best allocation of capital, so it's a bit early to give guidance around capital spending for next year. So Sorry to soft-pedal the question. It's a bit early to be looking that far ahead for us. Ultimately, I think what we're trying to do is optimize capital spending and see where we're going to get proper returns. That's certainly the justification of the increase for the Argentina capital for this year. And we'll look at opportunities and what we want to do closer to next year. So it's probably a question that's better suited for our call after the third quarter.

Fair enough. Okay. Thanks a lot. That's it for me.

Thank you. And as I see no further questions in queue, I will turn the call back to Michael Olenek for his final comments.

Thank you, Carmen. And thank you, everyone, for joining us on the call today. We look forward to hosting our third quarter call in November. Thanks very much.

And thank you all who participated in today's conference. And you may now disconnect.