Calfrac Well Services Ltd.

Good afternoon and welcome to the CalFRAC WellServices Third Quarter 2024 earnings release conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Michael Olenek, Chief Financial Officer. Please go ahead.

Thank you, Gary. Good morning and welcome to our discussion of CalFRAC WellServices Third Quarter 2024 results. Joining me on the call today is Pat Powell, CalFRAC's 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. Pat will then provide an outlook for CalFRAC's business and some closing remarks. After the completion of these remarks, we will open the conference call to questions. In a news release issued earlier today, CalFRAC reported its Third 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 EBDA and net debt. 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 feeder filings, including our 2023 annual information forum, 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 help for sale and discontinued operations in the financial statements. As a result, the focus of the remainder of this call will be on CalFRAC's continuing operations in North America and Argentina, unless otherwise specified. Now, I will pass the call over to Pat. Thanks, Mike. Good morning and thanks for joining our call today. Before Mike provides the financial highlights for the first quarter, or the third quarter, I will offer some opening remarks. During the third quarter, CalFRAC generated consistent financial results with the second quarter. As growth in our frat coil and cement businesses, coupled with our new offshore coil tubing unit in Argentina, helped offset a decline in North American activity. The significant profitability increase in Argentina was enabled by the deployment of a second large fracturing fleet in the Vaca Morda and increased utilization of our offshore coil tubing equipment. This offshore coil tubing program had a zero non-productive time during the quarter, which is a significant milestone. Argentina continues to be an area of growth for CalFRAC and we look forward to providing market leading services to our customers for years to come. In North America, we remain focused on transitioning our fracturing equipment to next-gen technologies through our fleet modernization program. We are now operating 60 Tier 4 DGB pumps and anticipate operating the equivalent of five next-gen fleets in North America by early next year. Safety remains our top priority and through our continuous improvement, we have reduced our -over-year training 12-month trips from 1.14 in 2023 to 0.81 during the third quarter. These are excellent results. I am proud of how we safely and efficiently executed for our clients during the third quarter. I expect us to finish the year strong and carry that momentum into 2025 as we continue to focus on our strategic priorities. Lastly, as a part of our continued efforts to improve CalFRAC's operational and financial performance, I want to announce the recent leadership changes in our United States and Argentina businesses. Marco Arurgen has been appointed to the position of President of the United States Operations to replace Mark Rosen, who is no longer with the company. In conjunction with Marco's transfer, Adrian Martinez was appointed to the position of Director General, Argentina Division. Marco has been with CalFRAC since 2010 and has held several senior management roles, most recently as the Director General of the Argentina Division since 2019. His experience in Argentina was serving him well in his new role and position him to implement some new ideas to drive improved operational and financial improvements. Adrian joined CalFRAC in 2008 and has been a significant contributor throughout various senior operational roles, most recently as the Senior District Manager for our Newcombe District since 2017. We are happy for Adrian to lead our Argentina business and build on his tremendous successes. I believe that these recent management changes will enable CalFRAC to deliver on its strategic priorities in a much shorter timeframe. I will now pass the call back over to Mike, who will present an overview of our quarterly financial. Thank you, Todd. CalFRAC's revenue from continuing operations in the third quarter of 2024 was $430.1 million, a decrease of 11% from the same period in 2023, primarily due to lower activity and prices for the company services in the United States. Sequentially, revenue from continuing operations was relatively consistent with the second quarter as a second horizontal fracturing fleet and the commencement of our new offshore coral tubing unit in Argentina offset lower utilization in North America. Adjusted EBDA during the third quarter of 2024 was $65 million, a 29% decline from the same period last year, stemming from lower utilization in North America and pricing in the United States. Sequentially, adjusted EBDA from continuing operations was consistent with the second quarter as an increase in profitability generated by our Argentinian operations offset the decline in North America. CalFRAC's net loss from continuing operations was $6.7 million during the third quarter of 2024, versus net income of $97.5 million in the comparable quarter of 2023. Sequentially, the net loss from continuing operations was lower than the second quarter, primarily due to higher foreign exchange losses, income taxes, and depreciation expense. CalFRAC incurred capital expenditures of $22.5 million during the third quarter versus $50.8 million in the same period of 2023, as continued capital investments in Argentina were more than offset by decline in spending related to the company's tier four fleet modernization program. Moving to the balance sheet, the company had working capital of $307.1 million from continuing operations at the end of the third quarter, including $17.7 million in cash, of which approximately $13.6 million was held in Argentina. During the quarter, CalFRAC began receiving funds from Argentina related to the redemption of the company's FOPRIEL bonds and expects to receive the remaining monthly amounts through to the middle of 2025. At the end of the third quarter of 2024, CalFRAC used $3.6 million of its credit facilities for letters of credit and had $190 million of borrowing under its revolving term loan facility, which left the company with available credit of approximately $56 million. CalFRAC exited the third quarter with a net debt to adjust the B to DA ratio of 1.62. Now I would like to turn the call back to Pat to provide our outlook. Thanks, Mike. I will now present an outlook for CalFRAC's continuing operations across our geographic footprint. We expect to have a solid finish to the year in North America, as the strong momentum will be built in the third quarter from our operations in the United States has carried over into the fourth quarter. Barring the typical end of year seasonality, we anticipate that the increased utilization in the United States will drive improved sequential profitability in North America. The Argentina team achieved a record adjusted EBITDA during the third quarter, which was driven predominantly by our expanded operations. Fourth quarter activity is expected to return to a level consistent with the second quarter, but we look forward to strong profitability growth next year with our planned addition of a permanent second large fracturing fleet to serve as a growing development in the vacuum of play. I'm proud of the substantial effort exhibited by the entire CalFRAC team and I'm encouraged by our long-term opportunities. I know that our rigorous cost focus and prudent capital allocation will allow us to generate sustainable returns for CalFRAC and its shareholders. I will now turn the call back to Mike to begin the Q&A portion of this call. Thank you, Pat. I will now ask Gary to begin the Q&A portion of today's call.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.

Our first question

is from Keith Mackey with RBC Capital Markets. Please go ahead.

Hi, good morning. Maybe just to start out in Argentina, I think certainly had a very strong quarter in Q3 and I think I heard you expect Q4 to return kind of back to Q2 levels. Can you just talk to us about the general RBC capital markets and the capital markets in the region? And how do you see the earnings power of that business now that you've got two fleets in the Vaca Muerta? And do you expect that to continue through 2025? Is 20 to 30, say, million of EBITDA per quarter kind of the new norm, whereas historically it was kind of 15 to 20? Maybe just help us frame that up a little bit more in terms of what you're seeing in the country and your strategy to achieve that growth.

Good morning, Keith. Thanks for the question. It's Mike here. As we look at our Argentinian business, at least in the near term here through Q4 and maybe through Q1, we're just building out as a part of our capital program a permanent second fracturing fleet for the Vaca Muerta. We achieved very strong financial performance in the third quarter. Some of that was due to how we transitioned equipment from other parts of Argentina up into the Vaca Muerta operations as well as supplementing with some rental equipment. So as we go forward, we certainly see the earnings power of Argentina being able to maintain kind of the levels that we executed upon in the third quarter, but that's likely not to begin until the second quarter of next year. And as you can see, as we're messaging for the fourth quarter, things are going to return back to kind of a normal run rate and normal activity level here in the fourth quarter. And that's kind of what we see until we have that permanent second fleet operating under a contract in that

country. Got it. Okay, so you've got one in the Vaca Muerta under contract, and you're looking to finish up the second one and get that one under contract as well, is that right?

That's right, Keith, yeah. We certainly can't finalize the contract until all that equipment is in place and operational in the country, and we don't foresee that happening until the first quarter at the earliest.

Got it. How do the fleets and operations generally compare to North America in terms of the amount of horsepower needed per fleet, the pumping pressures just operationally? Does it look roughly similar or are there some big differences in the amount of horsepower required and generally the earnings per fleet for Argentina?

Keith, it's that. The fleet size is about the same as are the pressures. It's pretty high pressure pumping in Argentina also. So I'd say one of the differences is it's all unionized in Argentina, so maybe our crew size is a little higher, but the pump horsepower is about the same.

Got it. Okay. And maybe just finally for me on North America and the fleet upgrades, so it sounds like you're going to be at five fleets and 60 pumps by early next year. Can you just talk about your plans for the rest of the fleet? Do you keep what you've got or do you continue on and get that 60 pump number to 200 pumps or something like that, which I think was kind of what the original plan back when it was commenced was. So how do you think about further upgrades to the fleet in North America?

Well, the fleet counts today we have 60 pumps worth, and by early in the first quarter we will have 80. We still got 20 that are in the process of being built out. Now that was a fairly large capital spend, which I felt we needed to get us back in the game, in the Tier 4 game. We will be able to slow that down now, and I would expect another maybe 15 pumps, depending on how the year goes, hopefully maybe 20 to come in, which will put us at that close to the 100 mark by the end of 25. But we will definitely not be building another 80 pumps.

Yeah. Okay. Well, that's it for me. Thanks very much.

Thanks, Keith.

Again, if you have a question, please press star then 1. Please stand by as we poll for questions.

The next question is from Wakar Syed with

ATB Capital Markets. Please go ahead.

Thank you for taking my question. I have a couple of questions. So as you reduce your upgrade cadence next year, how do you see CapEx kind of shaking out next year?

Wakar, that's a very good question. I think we are certainly looking at capital spending being lower than we are going to exit this year with. It's largely due to the North American program. I think we are going to temper our investments. Argentina, though, the expansion there for the second unconventional fleet likely is going to need some additional capital that are ancillary to just the pure pumping requirements. That will be all funded through Argentina. I think overall as an enterprise we are looking at next year with a bit more caution just given the commodity price outlook. So our directive will be to continue to invest but certainly to bring overall leverage metrics lower than where we are today.

And then this quarter and year to date working capital has been absorbing cash. Do you expect any unwind in Q4? Is it mostly being driven by this strong growth in Argentina revenues?

I'm sorry, it broke up on my side here, Wakar. Could I get you to repeat the question please?

Sure, yes. So working capital absorbed cash by roughly about $21 million in the quarter and year to date as well as it has been absorbing cash. Do you expect some unwind in Q4? And then if Argentina is growing should we be assuming that working capital is going to be a drag on cash?

You're very correct. I think as we look at our North American business and the seasonal slowdown working capital should be an inflow in the fourth quarter. We'll likely see that out of Argentina as well just given how strong Q3 was. As we go forward the Argentinian business with a second fleet will likely need to grow working capital next year. But I would say North America should be relatively stable I think as we exit. We're certainly seeing relatively consistent utilization for our US-based fleets. And so overall we don't see a growth in working capital likely a small inflow coming from the fourth quarter and relatively stable thereafter. Given there may be some seasonality in the Canadian business as we always tend to have in the spring break-up period.

Sure, yes. And then your call tubing unit, offshore call tubing unit, what's the outlook for next year for that?

That rig is working and it's under contract right now. It's either working or it's on standby which also is fairly lucrative because it's not doing anything. But it's booked through until February and then after that we've got some other but nothing really solid for it after that.

And it continues to stay in Argentina or are you looking at prospects outside of Argentina as well after February?

Well, you know, we would of course we would prefer to keep it in Argentina. That just makes sense. But there is some talk of some work in Brazil and then just crossed my desk this morning when we were talking Mexico. So I mean there's just people kicking around about it. And

then this last question on the number of crews. Could you provide some color on the 13 crews? What's the number between US and Canada? And then next year Q1, how do you see that holding up?

I think, LaCarr, you know, we're certainly looking at our North American platform with our client base. You know, we're in that budget horizon right now. So it's tough to say what our fleet count will be as we get into next year and where those fleets will reside. What I can tell you is that we're going to put our Tier 4 fleets to work with customers that appreciate that equipment base and where we think we're going to get high utilization. So it's one of those things that today it's a little early to be able to give you much color on that.

Well, thank you very much. Appreciate all the color.

All right. Thank you, LaCarr.

This concludes our question and answer session. I would like to turn the conference back over to Michael Olenek for any closing remarks.

Thank you, Gary. And thank you everyone for joining the call today. We look forward to hosting our fourth quarter call in March of next year. Thanks very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.