Welcome to the Calfrac Well Services Limited second quarter 2022 earnings release and conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Olinek, CFO. Please go ahead.
Thank you, Elaine. Good morning and welcome to our discussion of Calfrac Well Services second quarter 2022 results. Joining me on the call today are Pat Powell, Calfrac's Chief Executive Officer, and Lindsay Link, President and Chief Operating 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 unaudited second 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 disclosed during the first quarter earnings release, the company has 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. The company has made progress in relation to the sale of its Russian subsidiary.
However, in conjunction with the ongoing sales process and in light of the additional Canadian sanctions and restrictions that were issued in relation to the Russian oil and gas industry during the second quarter, the company has recorded an impairment of CAD 42.8 million to write down the Russian division's current and long-term assets to their expected recoverable amount. 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, and thanks everybody for joining the call. Today, before Mike provides the financial highlights for the second quarter, I'll offer a few opening remarks. First, let me introduce myself, a little bit about myself. I started my career over 40 years ago in our family oil field trucking business and worked my way up to CEO while growing that company into a large and diversified oilfield services business. After facilitating the sale of that company, I rounded out my business experience by serving as CEO or a board member for numerous other oilfield service companies. I plan on utilizing my business insight learned from past experience to help Calfrac solve its most pressing problems going forward.
As we anticipate commodity prices continuing to support strong pressure pumping fundamentals, my top priority is to leverage the current market cycle to expand margins by increasing the prices for our services while collaborating with customers to improve operational efficiencies to generate substantial net income and sustainable free cash flow. We are excited about the outlook for Calfrac, both in the near- term and as we enter the third quarter, which has historically been our most active and profitable quarter. As well as in the long- term, we believe that the market environment is similar to 2017 and that we are in the early stages of a multi-year energy upcycle.
Calfrac considers our position as a leader in North America and Argentina to bode well for us to meet customers' increasing demands for a high-quality service provider. With that said, I will now pass it back over to Mike, who will present an overview of our quarterly financial performance.
Thank you, Pat. Calfrac's revenue from continuing operations during the second quarter increased by 83% year-over-year to CAD 318.5 million. The revenue increase was due to improved fracturing revenue per job as well as higher fracturing job count. The 41% increase in fracturing revenue per job was due to passing through increased input costs to the customers across all operating divisions, combined with improved net pricing in North America. The 30% increase in fracturing job count was due to increased utilization per fleet, combined with a higher average fleet count in the United States. Adjusted EBITDA from continuing operations reported for the quarter was CAD 39.3 million, compared to a loss of CAD 1.1 million in the second quarter of 2021.
Operating income from continuing operations increased significantly to CAD 36.6 million from operating income from continuing operations of CAD 800,000 in the comparable quarter of 2021. These increases were primarily due to better utilization and improved pricing in the United States division. Sequentially, the company's revenue from continuing operations increased 8% from last quarter, or CAD 24 million. The revenue increase was due to the increased pricing in North America, as well as improved job mix in Canada and Argentina, as evidenced by 35% higher revenue per job, combined with significantly higher fracturing activity in the United States, offset by lower activity in Canada due to the onset of spring breakup. Sequentially adjusted EBITDA increased 88% or CAD 18.4 million from last quarter, primarily due to improved crew utilization combined with pricing increases in the United States.
The sequential adjusted EBITDA fall-through was 77%, revealing the company's operational torque. The net loss from continuing operations for the quarter was CAD 6.8 million versus a net loss from continuing operations of CAD 35.5 million in the same quarter of 2021. For the three months ended June 30th, 2022, depreciation expense from continuing operations was relatively consistent with the corresponding quarter in 2021. The slight decrease in second quarter depreciation expense was primarily due to the mix and timing of capital expenditures related to major components. Interest expense during the second quarter of 2022 increased by CAD 1.6 million from the same period in the prior year due to higher borrowings and interest rates 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 CAD 15.2 million on capital expenditures from continuing operations in the second quarter, compared to CAD 17.1 million in the same period of 2021. These expenditures were primarily related to maintenance and sustaining capital to support the company's United States fracturing operations. The consolidated company had an outflow of CAD 27.4 million from changes in working capital during the second quarter versus an inflow of CAD 15.8 million in the comparative quarter in 2021. This change was largely driven by an increase in revenue, combined with the impact of the nearly 70% appreciation of the Russian ruble during the second quarter. During the second quarter of 2022, cash proceeds of CAD 600,000 were received from the exercise of warrants and stock options.
To summarize the balance sheet as at the end of the second quarter, the company had working capital of CAD 144.5 million from continuing operations, including CAD 17.4 million in cash. At June 30th, 2022, the company had used CAD 900,000 of its credit facilities for letters of credit and had CAD 200 million of borrowings under its credit facilities, leaving CAD 49.1 million in available borrowing capacity at the end of the second quarter. The company's credit facilities are subject to a monthly borrowing base, which at June 30th, 2022, was above the maximum of CAD 250 million. During the quarter, the company repaid and canceled its CAD 25 million secured bridge loan, of which the company had drawn CAD 15 million prior to its repayment.
Also, Calfrac reduced its funded debt and total debt leverage to levels that will terminate the covenant relief period under its credit, revolving credit facility agreement upon the filing of its second quarter compliance certificate, which is anticipated to occur before the end of July. I'll now turn the call back to Pat to provide our outlook.
Thanks, Mike. I will now present an outlook of Calfrac's operations across our geographic footprint. Our North American market has experienced solid growth through the first half of the year. We expect the momentum to increase through 2023 as the industry remains undersupplied. Customers are already booking our pumping equipment for 2023. In the United States, our second quarter results showed meaningful sequential and year-over-year improvement, primarily due to regular price increases combined with the tremendous activity growth. Despite losing 24 operating rating days in April due to weather challenges in our largest district, we did anticipate or we did achieve full utilization of all nine fleets in June, which contributed to completing 56% more stages as compared to April.
Combining the activity increase with updated pricing allowed the company to deliver significantly better financial performance as it exited the quarter. We anticipate robust demand for our services to persist through 2023, while we continue to expand margins and optimize the fracturing schedule to produce strong financial results. We intend to maintain our current operational footprint of nine active fleets for the rest of the year. However, we are evaluating potential customer and pricing scenarios that would justify making further equipment investments. In Canada, second quarter results were impacted by spring breakup. However, our outlook is very strong for the second half of the year as we anticipate full utilization combined with improved pricing and steadied cost inflation for our four large fracturing fleets to generate substantially improved financial returns.
We expect increased demand through 2023, much the same as in the U.S. as customers are already seeking out our equipment to execute their next year's capital programs. While an additional fleet can be reactivated in Canada with minimal startup costs, finding labor to staff the crew remains a bigger hurdle. At this time, Calfrac will maintain its current operational footprint. However, we will continue to evaluate options regarding equipment expansion, and we'll put additional fleets into the field when the economics make sense. Now we'll go to the international operations. Even with the substantial currency devaluation and inflationary forces, combined with limitations on transferring capital out of the country, our outlook for operations in Argentina is very constructive.
We anticipate improved financial results as a multi-year contract goes into effect in the third quarter, increasing pricing for our dedicated fleets in Vaca Muerta Shale play, combined with increasing visibility for growth prospects in the Neuquén region of southern Argentina. We expect to maintain high utilization for our fleets throughout the rest of the year in Argentina. We will continue to leverage our geographical diversification with a focus on executing our work safely, right, and profitably to generate sustainable returns for our shareholders. I'd like to thank the Calfrac team for welcoming me into the company, and I'm looking forward to the rest of the year. Back to you, Mike.
Thank you, Pat. I'll now turn the call back to our operator for the Q&A portion of today's call.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Keith Mackey from RBC Capital Markets. Please go ahead.
Hi, good morning, and thanks for taking my questions. Just curious if we can start out with the U.S. EBITDA per fleet. You mentioned you pumped, I think it was 56% more stages in June than April. Can you maybe just help us delineate the EBITDA per fleet between those months and where you think that could then lead to in the back half of the year, please?
Good morning, Keith. It's Mike here. Certainly, we had very good progression on EBITDA per fleet throughout the second quarter. I think really where we exited was somewhere around CAD 15 million per fleet, and we probably were, you know, around that CAD 10 million per fleet earlier in the quarter. It varied quite dramatically. I think we see continued progression, you know, into the third quarter here on that EBITDA per fleet. Hoping to average somewhere between CAD 15 million-CAD 20 million in the third quarter here. Things are stepping in the right direction. Some of that is gonna be utilization driven, and some of that is again increased net pricing gains that we foresee happening and taking hold here in the third quarter.
Got it. Appreciate the comments, Mike. Pat, looking forward to certainly working more with you over the years here. Maybe if you could just give us a little bit more context into your goal of expanding margins and growing free cash flow. Do you think you have the right business footprint now to achieve that through the cycle as opposed to just in the next upcycle? Just your thoughts on you know where you'd like to take the company to achieve that goal.
Well, yeah, I've you know I haven't been here very long, so but I have been around the company a bit and I like the company, I like the people that are in the company. You know, our focus will certainly be on our balance sheet and secondly our you know our equipment. You know, we'll focus on pricing. I'm a firm believer that profitability shouldn't be a dirty word in a company. I think we're in the right market now to achieve that. It'll be the market that fixes balance sheets in this industry more than what we can do inside the company. That answers your question.
Yeah, it does. Thanks very much. That's it for me. I'll go back to the operator.
Thanks, Keith.
Once again, if you would like to ask a question, please press star one. We will take our next question from Cole Pereira from Stifel. Please go ahead.
Yeah, thanks, and good morning, everyone. Just wondering if we could get a bit more details on the Russia sale. Do you have a sort of a formal or maybe informal agreement in place, and you're just trying to figure out how you work with the sanctions and so on and so forth at this juncture?
Good morning, Cole. Mike here. Yeah, as I stated in my call notes, around Russia, you know, we've made some progress in the sale, but really at this point in time, I think we have some things to work out. We think this is something we're going to accomplish sooner than later. But it's still a process when you're dealing with a major disposition of a Russian sub in the context of the sanction environment that we have there. So no real extra color that I can provide at this point other than I think we made some inroads on that. You saw by the write-down of the asset that the valuation of the asset is reflective, I think, of the market that we're a part of there.
Really not much more to get into there.
Okay, great. That's good color. Thanks. Pat, you made some comments on looking at additional equipment reactivations in the U.S. I mean, is there? You know, does pricing have to move up maybe X percent to get you there? Or is it more a customer needs to lock in, or something like that? Like, what do you need to see to reactivate another spread in the U.S.?
You know, I think in the U.S., I think the pricing is getting pretty close to where we need to be, as long as inflation stays fairly steady. I've talked to our guys and said, "Look, if you know, any contract that we enter into, we have to have room if our sand prices, chemical prices, labor prices increase, the customer has to be readily acceptable to these price increases." I mean, if we get that, we would, you know, put a fleet back into the field, but it would, you know, have to be under a contract that we've got some longevity.
We do have, which I believe in the limited knowledge I've got and the length of time I've been here, that we have a bit of an advantage with the idle horsepower that we have sitting that can be put back into the field a lot more economically than buying new and probably quicker in this market. Does that answer your question?
Yeah. No, that's a great color. Just out of curiosity, what do you think the timeline would be if you were to reactivate another spread in the U.S.?
I would think by the time we crew it, five to six months, we would have one and, you know, we could be working in combination with the second fleet at that time. It's a little messy, but I would say it's probably five to six months. Yeah.
Okay, great. Thinking about 2023, obviously there's a wide range of outcomes for where activity could go, but it obviously seems biased higher. You kinda just touched on a little bit, but, you know, how do you think about what the right frac footprint is for Calfrac in the U.S. next year?
I think geographically, if that's what you're talking about, I think we're probably where we want to be right now. We've been getting calls from customers in the areas that we are, which looks like finances dictating course and contracts and stuff that we could put all our fleets to work in the areas that we're working in. That's where we'll focus.
Got it. I guess, sorry, maybe thinking as well, from a spread count, standpoint.
Yeah, I mean, Cole, as you know, we're in the broader Rockies in Colorado, we're in North Dakota, Wyoming, and the PA.
Marcellus.
Marcellus area. I think all of those Pat's referring to, we have the ability with our existing and maybe new customer base to expand in any of those areas. It will really be opportunity-based as to where those fleets go to work. It'll be based on the, you know, the customer, the visibility of work, the confidence that we have in that work, and then the ability to have it at the right price. I think that's kinda some of the optionality that Calfrac has. We have the ability to put some fleets back to work relatively quickly, and we've got some opportunities in all of those areas to put them to work. It's just where best those decisions will be made, and we'll see what happens as the year progresses in that way.
Okay, got it. That's all for me. Thanks. I'll turn it back.
Thanks, Cole.
We will take our next question from John Daniel from Daniel Energy Partners. Please go ahead.
Hey, guys. Thanks for including me. Just two quick questions. Hearing everything correctly, five to six months if you wanted to deploy the next fleet in the U.S.
Subject to utilization pricing scenarios that are acceptable to you. I mean, kind of, I think stating the obvious, everything is going in the right direction. It would seem logical that you probably have that opportunity sometime in Q3, but then, so if we're deploying end of year, early Q1. Am I off base with that?
No, I think you're right on John .
Okay.
With respect to that.
Fair enough. Then I got just one on the supply chain. You know, talking to some of the refurb shops and so forth, they keep talking about the inability to find or the challenges to find spare parts, particularly in things like engines. I'm just curious if you could weigh in on what your maintenance teams are telling you. Do you see a scenario where utilization on this equipment for the industry is just so hard, spare parts become even more challenged because of supply chain stuff that it could impact industry utilization next year? Kind of a big picture question, but just need your thoughts.
To stay with the Tier II fleet, you know, we have our challenges, but they're not insurmountable. As we progress to Tier IV engines and the dual fuel systems, it'll be more challenging for sure. There'll be a longer lead time. Right now we will start putting Tier IV pumpers into the field as we can get those engines, but we'll be fine for what we can see with Tier II.
Okay.
Tier IV as we get them.
John, you know, a large number of our rebuilds are done in-house as far as the-
Okay.
Pressure pumps themselves. We do the vast majority of that in-house. I think you saw a small little news release. You know, we're trialing a new frac transmission.
Right.
That's been out. You know, that holds a lot of promise for opening up the supply chain and maybe giving you know, an option to you know, especially one of the major suppliers because-
Yes.
That supply chain is long lead times, you know, 40 weeks plus on some of the things. You know, we're looking for alternatives. I mean, you have to believe that, you know, we've been kind of out of COVID for a good six to eight months. That at some point in time, that supply chain will start to loosen up. It may get a little bit tighter, but eventually it has to get back to a little more normal.
One would think. Last time you brought up the transmission. How long does a trial last before you say, "Hey, this is good and we wanna order some?" Is it one job, ten jobs? Just any color would be helpful.
No, you need at least 1000 hours on it.
Okay.
Make a determination on there. Even then, you know, you're not gonna go full steam ahead, but 1,000 hours of pumping, you should be able to see if there's bugs or no bugs. Then, you know, if you're trying to compete with some of the other industry offers out there, you know, that's gonna take several years to get you to that position, but.
Right. Okay.
It's working well and we've got a large number of those transmissions, so we're hoping that works out good in our favor.
Perfect. Thank you, gentlemen, for including me.
Thanks, John.
No, thanks, John.
Once again, if you would like to ask a question, please press star one. We will take our next question from Waqar Syed from ATB Capital. Please go ahead.
Thank you for taking my question. One of your competitors mentioned that they worry about shortages of sand and chemicals and disruption to activity in Canada because of that. How are you positioned, you know, with respect to that aspect, and do you think that's a real risk in Canada?
We're certainly concerned about the supply of sand. Calfrac, we do things a little bit differently, so I think we have a bit of an advantage. We buy right from the mine gate, and we still use third-party sand suppliers. We think we might have a bit of an advantage on the availability of the product. You know, we run our own unit trains and, like I said earlier in the call, I haven't been here long enough, but I believe it's an advantage and we will and hopefully it is so.
Sure. You know, in terms of your customers in the U.S. going to kind of close to leading edge pricing, are all your big customers now close to leading edge prices or are you still kind of, you know, working towards that goal?
On the pricing?
Yeah.
Well, you know, we continue to work with our major customers on pricing, but so far they've all been able to accept pricing increases.
Understand that with the inflationary costs that there will be more increases. I think they're getting increases, well I know they are, right across the whole spectrum of services provided to them. Yeah, it's, you know, that's always a battle, but I think we're doing a pretty good job. You know, utilization is probably as important to us as pricing increases. You know, they can really help with utilization and scheduling, which they are doing because they're just they know that there is probably going to be a fleet shortage of fleets. They're pretty accommodating on their schedules today.
I don't think we're quite finished on our, you know, our financial results aren't where we want them to be. They're much improved, but there's still a ways to go, Waqar.
Sure. One last question, Mike. You mentioned that EBITDA per fleet was 10 million in Q2. Could you remind again? Did you say CAD 10 million or $10 million?
Yeah. What I said, Waqar, just to clarify, the range I think that we saw at early part of Q2 in the U.S was CAD 10 million. I think we exited somewhere around CAD 15 million. I think where we're guiding, I think going forward with utilization as Pat alluded to, as well as improved net pricing with some of our client base, it's gonna start in that CAD 15 million and I think there's the ability to get as much as CAD 20 million per fleet as we're exiting the year. Things are moving in the right direction. But again, pricing and utilization have to work to get to the top end number, and those are the things that we're focused on.
Okay. That's helpful. You know, relative to that, EBITDA, what's the maintenance CapEx in the U.S. per fleet?
The maintenance capital per fleet's about CAD 4 million on an annualized basis.
That will be, Canadian as well? Canadian dollars or US dollars?
Yes, Waqar. Yeah.
Canadian dollars.
Canadian dollars.
Yeah. Okay. Thank you very much. Appreciate it.
No problem. Thanks, Waqar.
Once again, if you would like to ask a question or if you have a follow-up question, please press the star followed by the number one on your telephone. There appears to be no further questions. I would like to hand the call back over to Mike Olinek for any additional or closing remarks.
Thanks, Elaine. Yeah, I wanna thank everyone for joining us for today's call, and we look forward to our third quarter call later in the year. Thanks very much.
This concludes today's call. Thank you for your participation. You may now disconnect.