George Armoyan, CEO of Calfrac Well Services Ltd (CFWFF), on Q1 2022 results

Good day and welcome to Calfrac Well Services Ltd. First Quarter 2022 Earnings Release and Conference Call.Today’s meeting is being recorded.
At this time, I would like to turn the meeting over to Chief Financial Officer Mike Olinek.Please go on, sir.
Thank you.Good morning and welcome to our discussion of Calfrac Well Services’ first quarter 2022 results.Joining me on the call today are Calfrac’s interim CEO George Armoyan and Calfrac’s President and COO Lindsay Link.
This morning’s conference call will proceed as follows: George will make some opening remarks, and then I will summarize the company’s financials and performance.George will then provide Calfrac’s business outlook and some closing remarks.
In a press release issued earlier today, Calfrac reported its unaudited first quarter 2022 results.Please note that all financial figures are in Canadian dollars unless otherwise stated.
Some of our comments today will refer to non-IFRS measures such as Adjusted EBITDA and Operating Income.For additional disclosures on these financial measures, please see our press release.Our comments today will also include forward-looking statements regarding Calfrac’s future results and prospects.We remind 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 refer to this morning’s press release and Calfrac’s SEDAR filings, including our 2021 Annual Report, for additional information regarding forward-looking statements and these risk factors.
Finally, as we stated in our press release, in light of the events in Ukraine, the company has ceased operations in Russia, committed to a plan to sell these assets, and designated operations in Russia for sale.
Thank you, Mike, good morning, and thank you all for joining our conference call today.As you may know, this is my first call, so take it easy.So before Mike provides the financial highlights for the first quarter, I’d like to make a few opening remarks.
It’s an interesting time for Calfrac as the North American market tightens and we’re starting to have various conversations with our customers.Market dynamics are more similar in 2017-18 than in 2021.We are enthusiastic about the opportunities and rewards we expect this business to generate for our stakeholders in 2022 and beyond.
The company generated good momentum in the first quarter and is on track to continue growing through the rest of 2022.Our team overcame the challenges of operating the supply chain to finish the quarter in very strong fashion.Calfrac has benefited from this year’s pricing improvements and has developed an understanding with our customers that while we pass inflationary costs as close to real-time as possible.
We also need to increase pricing to a level that will provide an adequate return on our investment.It’s important to us and we have to be rewarded.Looking ahead to the remainder of 2022 and into 2023, we believe we will once again strive to achieve sustainable financial returns.
I emphasize that when the world’s demand for oil and gas increases, operational efficiencies allow us to take advantage.
Thank you, George.Calfrac’s first-quarter consolidated revenue from continuing operations rose 38% year over year to $294.5 million.The revenue increase was primarily due to a 39% increase in fracturing revenue per stage due to higher input costs passed on to customers across all operating segments, as well as improved pricing in North America.
Adjusted EBITDA from continuing operations reported for the quarter was $20.8 million, compared to $10.8 million a year ago.Operating income from continuing operations increased 83% to $21.0 million from operating income of $11.5 million in the 2021 comparable quarter.
These increases were primarily due to higher utilization and pricing in the U.S., as well as higher equipment utilization across all service lines in Argentina.
Net loss from continuing operations for the quarter was $18 million, compared to a net loss from continuing operations of $23 million in the same quarter of 2021.
For the three months ended March 31, 2022, depreciation expense from continuing operations was in line with the same period in 2021.The slight decrease in depreciation expense in the first quarter was primarily due to the mix and timing of capital expenditures related to major components.
Interest expense in the first quarter of 2022 increased by $0.7 million from a year earlier due to higher borrowings under the company’s revolving credit facility and interest expense related to the company’s bridge loan drawdown.
Calfrac’s total continuing operating capital expenditures in the first quarter were $12.1 million, compared to $10.5 million in the same period in 2021.These expenditures are primarily related to maintenance capital and reflect changes in the number of in-service equipment in North America over 2 periods.
The company saw an inflow of $9.2 million in working capital changes in the first quarter, compared with an outflow of $20.8 million in the same period in 2021.The change was primarily driven by the timing of receivables collections and payments to suppliers, partially offset by higher working capital due to higher revenue.
In the first quarter of 2022, $0.6 million of the company’s 1.5 lien notes were converted into common stock and a cash gain of $0.7 million was received from the exercise of warrants.Summarizing the balance sheet at the end of the first quarter, the company’s funds from continuing operations were $130.2 million, including $11.8 million in cash.As of March 31, 2022, the company had a credit facility of $0.9 million for letters of credit and had $200 million in borrowings under its credit facility, leaving $49.1 million in available borrowing capacity at the end of the first quarter.
The company’s line of credit is limited by a monthly borrowing base of $243.8 million as of March 31, 2022.Under the terms of the company’s revised credit facility, Calfrac must maintain liquidity of at least $15 million during the release of the covenant.
As of March 31, 2022, the company has drawn down $15 million from the bridge loan and may request further drawdowns of up to $10 million, with a maximum benefit of $25 million.At the end of the quarter, the maturity of the loan was extended to June 28, 2022.
Thanks, Mike.I will now present Calfrac’s operational outlook across our geographic footprint.Our North American market continued to function in the first half of the year, as we expected, with increased demand for equipment from manufacturers coupled with limited off-the-shelf supply.
We expect the market to continue to tighten and some producers will not be able to do their jobs, which bodes well for our ability to raise prices to get a viable return from the equipment we deploy.
In the U.S., our first quarter results showed meaningful sequential and year-over-year improvement, primarily due to the huge increase in utilization in the last six weeks of the quarter.
The first 6 weeks were not very good.We increased utilization across all 8 fleets in March and we are 75% complete compared to January.Higher utilization combined with a pricing reset in March allowed the company to end the quarter with a significantly better financial performance.
Our 9th fleet will start in early May.We intend to maintain this level for the rest of the year unless customer-driven demand and pricing justify any further device reactivations.
We have the ability to build a 10th fleet, maybe even more, depending on pricing and demand.In Canada, first quarter results were impacted by start-up costs and rapidly increasing input costs that we were trying to recover from customers.
We have a strong second half of 2022 with the launch of our fourth fracturing fleet and our fifth coiled tubing unit to meet growing customer demand.The second quarter progressed as we expected, with a slow start due to seasonal disruptions.But we expect strong utilization of our 4 large fracking fleets by the end of the quarter, which will continue into the end of the year.
To manage our fuel staffing costs during Spring Break, the Canadian division temporarily redeployed staff from Canada to the United States to help significantly increase activity in the United States.Our operations in Argentina continue to be challenged by significant currency depreciation and inflationary pressures, as well as capital controls surrounding cash outflows from the country.
However, we recently renewed a contract in the Vaca Muerta shale that will combine increased dedicated fracturing fleet and coiled tubing unit pricing with existing customers, starting in the second half of 2022.
We expect to maintain a high level of utilization for the remainder of the year.In conclusion, we continue to leverage the early stages of the current demand cycle to generate sustainable returns for our shareholders.
I want to thank our team for their hard work over the past quarter.I look forward to the rest of the year and next year.
Thank you, George.I will now turn the call back to our operator for the Q&A portion of today’s call.
[Operator Instructions].We’ll answer the first question from Keith MacKey of RBC Capital Markets.
Now I just want to start with the U.S. EBITDA per team, the exit level this quarter is definitely much higher than when the quarter started.Where do you see the trend in the second half of the year?Do you think you can average per fleet-wide EBITDA of $15 million in Q3 and Q4?Or how should we view this trend?
Look, I mean, look, we’re trying to get our — this is George.We are trying to compare our market with our competitors.We are far from the best numbers.We like to start with $10 million and work your way up to $15 million.So we’re trying to see progress.Right now, we’re focused on exploiting and eliminating the gaps in our schedules.But ultimately, yes, we want to be somewhere between $10 million and $15 million.
No, it makes sense.Maybe just in terms of capital, if you’re going to start 10 fleets in the U.S., if you have an estimate for that at the moment, what do you think that’s going to be in terms of capital?
$6 million.We — I mean we do have the capacity to go to a total of 13 fleets.But the 11th, 12th and 13th fleets will require more than $6 million.We’re working on getting the final numbers in case demand exceeds and people start paying for the use of the device.
Got it.Appreciate that color.Finally to me, you did mention that you moved some employees between Canada and the US in the first quarter.Maybe just talk more about supply chain in general, what do you see in terms of labor?What did you see on the beach?We’ve heard that’s becoming a bigger issue, or at least a bigger issue in terms of controlling the pace of industry activity in the first quarter?
Yeah, I just thought — I think we said we moved not in the first quarter but in the second quarter because the U.S. was busy in the second quarter and there was a split in Western Canada.I just wanted to clarify.Look, every industry, everybody faces challenges, supply chain challenges.We are trying to be our best.There was a sand problem in Canada in the first quarter.We will try our best to deal with it.
But it didn’t evolve.This is a dynamic situation.We have to stay ahead like everyone else.But we hope these things don’t prevent us from really being able to provide quality work to our clients.
I just wanted to go back to your comment about adding another or 2 fleets in the US, I mean, just on a higher level, do you need to reactivate those fleets for a percentage increase in pricing?If so, could you put some goal posts around the possible situation?
So we are now running 8 fleets.We start Game 9 on Monday, October 8th – sorry, May 8th.Look, I mean there are two things here.We hope to be rewarded.We want the certainty of promise from our customers.
It’s almost like a take-or-pay form – we’re not going to deploy capital and make it a loose arrangement where they can get rid of us anytime they want.Therefore, we can consider some factors.We want a firm commitment and unwavering support — if they just change their minds, they have to pay us — the cost of deploying these things here.
But again, we have to be able to make sure that each fleet can get between $10 million and $15 million to be able to deploy these new things — these new fleets or additional fleets, I’m sorry.
So I thought maybe it’s okay to reiterate that pricing is clearly getting close to those levels.But more importantly, you want to see a contractual commitment from your customers.Is this fair?
100% because it seems to me like the client has gotten rid of a lot of stuff in the past – we just wanted to go from a charitable foundation to a business, right?Instead of subsidizing E&P companies, we want to start sharing some of the benefits they get.


Post time: May-17-2022