Good morning, ladies and gentlemen, and welcome to the Calfrac Well Services Ltd. fourth quarter 2022 earnings release and conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. At any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, March 16th, 2023. I would now like to turn the conference over to Mike Olinek. Please go ahead.
Thank you, Joelle. Good morning, and welcome to our discussion of Calfrac Well Services fourth quarter 2022 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 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 fourth quarter 2022 results. Please note that all financial figures are in CAD 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 SEDAR filings, including our 2022 Annual Information Form, for more information on forward-looking statements and these risk factors. Lastly, as we disclosed during the first quarter earnings release, 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, and thank you everyone for joining the call today. Before Mike provides the financial highlights of the fourth quarter that he talked about, I'll offer some opening remarks. This past year was one of the most successful years in the company's history. I am proud of our financial and operational accomplishments, and I am impressed by our team's commitment and resilience as they overcame adversity during the first half of the year to capitalize on an improving market during the second half of 2022. Shortly after joining the company approximately nine months ago, I set three strategic priorities for the organization. First was to maximize consolidated net income and free cash flow through a disciplined return on invested capital focused pricing strategy, combined with a stringent focus on the management of all operating and overhead costs.
Number two was to dedicate all free cash flow to reducing the company's long-term debt and evaluate additional strategies to improve its capital structure. Third was we would invest in technology that enhance our service deliverability in the field and that also drives improved profitability into the future. Over the last two quarters, Calfrac has made considerable progress on each of these priorities. Firstly, the company delivered its best third quarter financial performance since 2012 and generated strong financial results in the fourth quarter, despite the impact of intense winter storms in December that affected our utilization in the US for approximately 10 days. We exited the year with a total of 14 active frac fleets in North America and are currently operating 15 spreads in the field today.
In Argentina, we have one large frac fleet servicing the Vaca Muerta shale play and six smaller fleets that are active in the conventional basins of southern Argentina. We also took the opportunity to align the company's executive team and corporate organizational structure over the past several months so that we can more effectively support our North American and Argentina operating divisions in this extremely competitive oilfield services market. We are driving continued improvement throughout all levels of the company by seeking out opportunities to streamline our processes and procedures across North America and Argentina. Our goal is to harmonize the company's best practices and to make small changes that can have significant impacts to our overall safety, service quality, and financial performance.
Since the end of the second quarter, Calfrac has made substantial headway with respect to reducing its long-term debt. In December 2022, the company completed its one and a half Lien Notes conversion program, which reduced the principal amount of the notes outstanding to approximately CAD 2.6 million at year-end, as compared to approximately CAD 57.4 million at the end of June. In addition to the 1.5 Lien Notes , the company generated significant free cash flow during the second half of 2022, which resulted in a CAD 30 million repayment of its revolving credit facility since June 30th, 2022. As the company is now expecting an inflection point with respect to its working capital requirements after the first quarter of this year, we are targeting an accelerated pay down of the company's revolving credit facilities beginning in the second quarter of 2023.
Lastly, the company recently announced a multi-year fracturing fleet modernization program, which will commence with the conversion of 50 Tier two pumping units into Tier four dual fuel-capable pumping units. This asset enhancement program will serve to increase Calfrac's service quality to its customers and supplements the delivery of nine Tier four pumping units, which were previously committed to. Four of these units will be going into service next week, three more before the end of the quarter, the last two following closely behind. The company is also upgrading its operating technology, which will allow for better real-time access to job data and serve to drive better fracturing performance in the field for our clients.
I am looking forward to building on the momentum of the last couple of quarters, and as the largest Canadian headquartered pressure pumping company, I feel that Calfrac's geological footprint leaves us well positioned to advance our strategic priorities during 2023. I will now pass the call over to Mike, who will present an overview of our quarterly financial performance.
Thank you, Pat. Calfrac's revenue from continuing operations during the fourth quarter of 2022 was CAD 447.8 million or 95% higher than the same period in 2021. For the full year, revenue totaled CAD 1.5 billion or 70% higher than last year. Adjusted EBITDA during the fourth quarter of 2022 increased to CAD 76 million versus CAD 8.4 million in the comparable quarter in 2021. As Pat mentioned, the financial results during the fourth quarter were achieved despite the company's operations in the United States being impacted by severe winter storms in December, which caused work stoppages for our crews in the Rockies region for approximately 10 days. For the full year, Calfrac generated Adjusted EBITDA of CAD 233.7 million, an increase of CAD 182.1 million from the prior year.
This significant improvement in financial performance was primarily due to better utilization and pricing for the company's fracturing fleets, combined with a larger operating footprint in North America. Calfrac recorded net income from continuing operations during the fourth quarter of CAD 14.8 million and CAD 35.3 million for the year end in December 31, 2022. These results included an impairment of property, plant, and equipment of CAD 10.7 million in the United States to permanently retire 54 obsolete fracturing pumps, and an impairment of inventory of CAD 8.5 million in North America to write down spare parts and product inventory to their net realizable value. Calfrac spent a total of CAD 35.8 million in capital expenditures from continuing operations in the fourth quarter, compared to CAD 14.9 million in the same period of 2021.
These expenditures were primarily related to maintenance and sustaining capital to support the company's fracturing operations, as well as CAD 8.3 million of reactivation costs related to Calfrac's United States division and CAD 3.5 million related to the Tier four fleet modernization program. In 2022, the company spent CAD 87.9 million as compared to CAD 66.6 million in the prior year, primarily due to higher maintenance capital required to support improved activity levels in North America. Calfrac's board of directors recently approved the company's 2023 capital budget of approximately CAD 155 million, which consists primarily of maintenance capital exclusive of fluid ends, as well as the fleet modernization program. Effective January 1st, 2023, Calfrac will expense all fluid ends. They will be reported as a component of operating expenses on a go-forward basis.
During the fourth quarter of 2022, the company completed the early conversion of its 1.5 Lien Notes. Result, CAD 44.8 million of notes were converted into common shares at a price of approximately CAD 1.33 per share. At the end of the year, the outstanding principal amount of 1.5 Lien Notes was CAD 2.6 million. Result of this program, the company issued 33.6 million new common shares and paid CAD 2.3 million in interest as an early conversion fee. To summarize the balance sheet at the end of the fourth quarter, the company had working capital of CAD 183.6 million from continuing operations, including CAD 8.5 million in cash.
During the fourth quarter, the company repaid CAD 30 million on its revolving credit facilities and exited the year with CAD 170 million of borrowings under those facilities, leaving approximately CAD 80 million in available borrowing capacity at the end of 2022. Before I turn the call back to Pat, I want to highlight the change in Calfrac's organizational structure that was disclosed in the other development section of the news release. As part of Calfrac's strategy to realign and streamline its structure, the company has decided to report the financial and operating performance for the United States and Canada under a single North America division, beginning with the interim financial statements and MD&A for the first quarter of 2023. I'll turn the call back to Pat to provide our outlook.
Thanks, Mike. Our operations in North America produced significant year-over-year improvement in financial results during the first quarter. This momentum has carried into the first quarter, visibility into the second quarter is still very strong. We expect the pressure pumping market to remain fairly tight throughout 2023. Everything is up, is a bit up in the air today with the recent bank issues and the drop in commodity prices. We are confident that we can manage our way through. Our customers continue to demand more intense completion designs, Calfrac meets these challenges by providing best-in-class operating performance that highlights our operational, technical, and supply chain expertise.
In the US, we leveraged our asset base with efficient job execution to generate superior Adjusted EBITDA per fleet versus the fourth quarter of last year, despite intense winter storms that significantly reduced activity in the Rockies during December. For 2023, we are anticipating steady demand for our 10 fracturing fleets in the United States as we continually monitor market opportunities to optimize our crew scheduling. In Canada, fourth quarter was impacted by weather and customer budget exhaustion. With exception of the normal seasonal slowdown in the second quarter, we expect consistent utilization for our five large fleets and six coiled tubing units into the second half of 2023. Like our competitors, we view the supply chain networks at near full capacity, especially as it relates to sand transportation and equipment rentals.
As a result, we continue to experience input cost inflation, but not at the rates witnessed earlier in 2022. However, we continue to communicate with our supply chain partners to understand the timing and drivers of these increases and, where possible, work to develop more cost-competitive solutions and/or negotiate price increases on our fracturing projects with up-to-date cost estimates. I wanna commend our supply chain teams for mitigating any potential disruptions to our fracturing operations thus far in 2023. We have not experienced any sand supply shortfalls in a busy start to the new year in North America. Make no mistake, sand is a continuing worry to us. So far, our guys are doing a great job.
We're also looking forward to deploying our new Tier four units into the field, as well as updating our fracturing operating system technology in North America during the first six months of the year, which will enhance our data capabilities and drive better decision-making on location. I'll now turn to Calfrac's Argentina operations. Calfrac's operations in Argentina generated improved year-over-year financial performance, and we expect this to continue into 2023, as higher utilization combined with improved pricing for our services is anticipated to produce enhanced financial returns. As the North American fracturing market transitions to Tier four or electric fleets, Calfrac's presence in Argentina provides it with a potential strategic opportunity to deploy good excess Tier two pumping equipment from North America into that country to generate incremental return on invested capital.
To do this, we will not only need a formal contractual commitment from an oil company in Argentina, but we will also need a change to the existing foreign currency restrictions in Argentina before this equipment would be transferred from North America. As we enter 2023, I believe that Calfrac is well-positioned to take advantage of the strong business outlook in North America and Argentina, while our operating and support teams will continue to make progress on our three strategic priorities. Firstly, we will leverage our geographical footprint and remain disciplined in our capital allocation approach to prioritize financial returns over market share gains. Excuse me. Next, we will dedicate all free cash flow to strengthen the company's balance sheet.
Lastly, we will seek to improve Calfrac's asset quality through timely targeted investments in next generation technology that will enhance our service quality and drive improved profitability into the future. 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. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear a three tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Keith Mackey with RBC Capital Markets. Please go ahead.
Hi, good morning, and thanks for taking my questions. Maybe just wanted to start out on the fluid ends, understand the new accounting treatment. Can you discuss what you might expect to spend on fluid ends through 2023?
Good morning, Keith. Yeah, our annualized spend, just given the footprint we have in North America and Argentina, is around CAD 30 million a year. That's, I would say a good proxy for an estimate for this year, provided everything stays as it is right now in the field.
Got it. Thanks, Mike. Just on the natural gas fleet footprint, I know there was some commentary in the release about that. Can you just kind of run through what your frac fleet footprint is through the U.S. Northeast? Have you seen any customer attrition yet? Just really what underpins the confidence you have in being able to redeploy or reduce your footprint for, you know, if you do see some turnover in that demand?
I would say, of our footprint in the U.S., a minor portion is really dedicated to the Marcellus area. you know, as we walk through the year, the dry gas side obviously has been impacted on a commodity price. We've all seen that in the last number of months. It's certainly well off the highs that we had last year. We're very mindful of that, we'll allocate our capital accordingly. you know, our limited fleet footprint there doesn't have a lot of exposure, I think, on an overall top line or EBITDA expectation for 2023. Right now, we are still active in that area. We have a dedicated customer through the middle of the year, and we're working towards solidifying that customer throughout the remainder of the year.
I think on our side, that's really the pure dry gas. We do have some operations in Colorado that are levered to the Piceance Basin that is also dry gas weighted. You know, that would be our main exposures operationally in the U.S. Otherwise, it's mainly oil-focused or liquids gas-focused.
Thanks for that color. Just finally, curious for some more detail on what you're seeing in the sand market. How tight is the supply-demand equation? You know, what markets are seeing the most tightness? What are you experiencing roughly in terms of tonnage pricing for sand?
The, you know, the sand has got multiple issues. One is the appetite for the different grades of sand changes. You know, where 40/70 was what everybody wanted a while ago, today they want a 100 mesh. That caused some troubles at the sand mines themselves. I believe there's still lots of sand. It's just getting the grades that the customer wants. Sometimes he has to switch from what he actually wants to a different grade. That's an issue. The sand mines only have so much of each grade.
You know, we're anticipating to probably pump, I'd say off the top of my head, another 25% more sand in 2023 than we did in 2022, just because of our first half of the year is quite a bit busier than it was last year. That's where we would be at it. You know, then of course there's rail availability that can cause issues. Sand is a big part of our business, so there is a bit of worry there.
Got it. I'll leave it there. Thanks very much.
Thanks.
Thanks, Keith.
Your next question comes from Cole Pereira with Stifel. Please go ahead.
Morning, all. Just to build on Keith's question a little bit. Can you talk about what you're seeing on the ground, with regards to supply and demand fundamentals in the U.S.? Are you seeing, you know, many, excess fleets around, looking to perhaps bid price a bit lower?
We're not seeing that today, but with the recent developments of, you know, the collapse of commodity prices to where they are today and the bank issues, it wouldn't surprise me going forward if there isn't some pricing issues coming. It just depends on how deep and how long this present situation goes.
Got it. On the Canadian side, can you talk about what, you know, that fifth fleet, how utilized was that in Q1? Do you kind of have a flexible approach to that fleet in the back half of the year, just given some of the uncertainty?
The fleet that we'd moved down to the US, brought back to Canada has been 100% basically utilized since we put it in the field. You know, it was parked against the fence, and it could go back against the fence again.
Got it.
If that answers.
Yeah, that's great. Thanks. You know, in Canada, are you seeing much in the way of, you know, customers talking about, you know, Blueberry or LNG-related development for the back half of the year?
You know what? I think it's a little slower than what I anticipated it might be. I was in conversations with a fellow the other day, and that company said they plan to be very busy in that Fort St. John area. I mean, that, take it for what it's worth, but it was a pretty good sign to me. I would think we'll see some improvement there, which maybe it'll take up some of the slack if we do get slack in our traditional pumping areas.
Got it. On the resegmentation, can obviously understand there's an administrative cost savings element, but can you just give some more details on the rationale? I mean, they're pretty distinct markets, both of which are material, pretty distinct drivers, et cetera.
Yeah, Cole, I think really where it is a focus internally on our North American business. I think prior to that, our leadership was focused more on a geographic basis. I think the way that Pat has viewed the business since he got here is that we're a North American business and there's a border in between. You know, from our perspective on performance, we're looking like we've got 15 fracturing fleets in North America that can be allocated in either market, understanding there's supply-demand dynamics. I would say right now, the financial metrics around those markets are relatively similar. It just felt like a good time to make that change at the start of this year.
Got it. That's all from me. Thanks. I'll turn it back.
Your next question comes from Waqar Syed with ATB Capital Markets. Please go ahead.
Thank you for taking my question. Pat, could you quantify the weather impact in terms of days that you've seen in Q1 in your U.S. operations, and how does that weather impact compare to the days you experienced in Q4?
Q1, I would say we had, Mike, what would you say? Roughly the same or a little less?
Waqar, I would say that we have had approximately 10 days thus far in the quarter, very similar. It's not all been in one month. It's been kind of shared between January and February. Unfortunately, when you look at the weather forecast for March, there's more storms blowing into our areas in Wyoming and North Dakota that have been principally impacted by some of this weather. I would say it's gonna be probably a bit more pronounced than it was in Q4, just 'cause it was only limited to one month.
You know, and to take that one step further, there can still be some major snow events in April, in that, you know, North Dakota, Wyoming areas. We're hoping it's behind us, and it should be, but there's no guarantees with the weather. That is a little bit out of our control.
Sure. Now, in terms of pricing, did you get any pickup in pricing Q1 versus Q4 for your North American fleet?
Not, not really. You know, of course, with what we've got going on today in the market, you know, I was hoping to get some pricing in Q1, but it's probably gonna be a difficult push today.
Okay. just to understand the pricing dynamics, so far, you haven't seen any declines in pricing. Is that fair?
Yeah, no decline and improved utilization. Utilization is just about.
Improved utilization.
Yeah. Utilization is, you know, is really just as important to us as pricing, so.
If you're looking at profitability, quarter-over-quarter profitability in the U.S. operations, you know, you'll have maybe a slightly higher fleet count, you know, 10 versus 9.5 or something in Q4, and then relatively similar number of days down. You expect EBITDA to be relatively flat in the U.S. quarter-over-quarter?
Yeah, relatively flat. I mean, again, it will ultimately depend on utilization in March. The trend that we're seeing thus far is pretty close to that. Yeah.
Okay. And then on the Canadian side, you will have an extra fleet and, you know, obviously, you know, better utilization otherwise as well. The pickup, any quarter-over-quarter change in EBITDA at the company level would primarily be driven by Canada?
Yeah, certainly there's a, I would say, a systemic change in our utilization between Q4 and Q1 in Canada, which is going to drive better results. I would say, you know, secondarily to that, I think we've got more consistent utilization as well in Argentina that will, I think, be a driver of quarter-over-quarter sequential growth.
You know, if I look at the consensus estimates right now for Q1, it's about CAD 93 million. How comfortable are you with that number out there, you know, relative to that, you know, your EBITDA in Q4 was around CAD 76 million?
Yeah, I mean, we can talk more after the call, but I would say that, you know, the weather challenges that we had in the U.S. that impacted us in Q4, we've talked about that already impacting Q1. I would suggest that the estimates are, I would say above what we think we can deliver. You know, it's a function again of utilization. I would say though, on a sequential basis, it's our estimates are that we're gonna have sequential improvement, but not to the degree that's in the estimates today.
Okay. fair enough. Now, you are introducing new Tier four systems into the field. There will be significant savings for the customer on the fuel side. Now, how would that translate to your own EBITDA per crew type improvement?
Well, we're of course, we're replacing a very experienced close to end of life equipment with new equipment. You know, I mean, just your breakdowns and for the first, you know, probably three years, that equipment once we get it in the field and get the few of the new bugs that you usually have with new equipment out of it, you know, it should run, you know, very cost effectively for the first three or four years before it comes up to kinda mid-life repairs. We would see a, we should see a major drop in our R&M on every pump that gets replaced.
Fair enough. Like, in terms of pricing, do you, do you see any pickup? Let me just throw out some numbers here that we're seeing, you know, for the US companies, we see EBITDA per crew in that, you know, $24 million-$28 million per crew annualized in the US for Tier four type equipment versus like closer to maybe, you know, $15 million-$18 million for Tier two dual fuel and Tier two diesel type equipment. Would we start to think about like, you know, your EBITDA per crew for those Tier four fleets going closer to that maybe $25 million US number?
They're certainly going to gravitate higher, EBITDA per fleet once we get to some level of scale. I think when you're dealing with nine pumps that we're putting in the field here in the next few months, I would say that's more of a realistic expectation coming out of 2023 into 2024. You're not wrong, there's gonna be incremental improvement stepping through the year as we activate those crews.
Okay. Just one final question. Are there any cost benefits of this single reporting for North America?
Yes, there are. I mean, I think that there's some synergies around that, and it's another reason why we're looking at our business that way. It's primarily driven by operations. Yes, there's an administrative, I would say synergy associated with that change.
Okay. Well, thank you very much. I appreciate the color.
Thanks, Waqar.
Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. There are no further questions at this time. Please proceed.
I think there's one more in the queue, Joelle, that we would like to take, please.
Okay. Your next question comes from John Daniel with Daniel Energy Partners.
I just wanna go back to the sand question. Is that the challenges, is that limited to one basin? Is that broad-based? The follow-up on that is, are you seeing more of your customers trying to self-source the sand, or are you taking on more of that process?
Kind of yes to all. I guess it's kind of, it's kind of in all basins a little bit, depending on where we're at. A lot of the U.S., they've been kinda switching to just domestic sand, which has helped down there a little more than, say, Canada. So that's, you know, so that's a bit of an issue. The E&Ps are taking on in some places more and more sand, but that'll probably switch as supplies get tighter, and they'll leave it up to us, I would think. We'll see what happens there. But
Okay
you know, to date, we have not ran out of sand. I, you know, this isn't something that I think is imminent, but it's something that has certainly been brought to my attention that, you know, we're getting by, but we don't have excess.
Fair enough. Then one of the refrains you hear from the E&P community is, you know, oil and gas prices are lower, but my service costs are really high. Therefore, you know, I need, as an operator, relief. I'm curious, as they deliver that message to you all, and obviously they're your customers, so you listen. Does the negotiation lend itself well to, "Okay, we can give some relief today, but, you know, oh, by the way, if oil goes back to $85, $90 WTI, we immediately reestablish the price." I'm curious if you can just elaborate on their willingness to give it back to you if the excuse is they gotta get a discount because price commodities have gone lower.
Well, first off, we haven't. In this cycle, we haven't, you know, really seen too much of it. I mean, they're kicking the ball around a little bit like they always do. I mean, they're always.
Sure
... trying to get pricing out of us. I would think that'll intensify here, going forward. You know, in reality, frackers on a whole, you know, we just kinda got back to a sustainable, pricing level. It's going to be a pretty big push.
Right.
You know, A company like Calfrac, you know, we have the ability to put stuff back on the fence, probably more so than we had in the past, just because of our debt levels. You know, at the end of the day, I mean, we're in a capital-intensive business that this stuff wears out.
Sure
... you know, we just, we have this Tier four conversion to meet the, you know, the climate change requirements of ourselves, of course, and our customers. You know, that all comes at a cost. It's gonna be a push. It'll be a battle, but we're kind of expecting it.
Okay. Well, thank you for letting me chime in with some questions. I appreciate it.
Yeah, thank you. Thanks, John.
Yes, sir.
There are no further questions at this time. Please proceed.
Thanks, Joelle. Well, thank you to everyone for joining our call today. We look forward to hosting our first quarter earnings call in early May. Thanks very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.