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Calfrac Announces First Quarter Results

CALGARY , May 1, 2019 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three months ended March 31, 2019 .

HIGHLIGHTS

On January 1, 2019 , Calfrac applied IFRS 16 using the modified retrospective approach under which comparative information has not been restated and continues to be reported under IAS 17 and related interpretations. Please refer to note 1 of the financial statements for additional information on the impact to the Company's financial information.

Three Months Ended March 31,

2019


2018


Change

(C$000s, except per share and unit data)

($)


($)


(%)

(unaudited)






Financial






Revenue

475,012


582,838


(19)

Operating income (loss)(1)

43,623


67,974


(36)

Per share – basic

0.30


0.47


(36)

Per share – diluted

0.30


0.46


(35)

Adjusted EBITDA(1)

44,086


72,953


(40)

Per share – basic

0.31


0.51


(39)

Per share – diluted

0.30


0.50


(40)

Net income (loss) attributable to the shareholders of Calfrac before foreign
exchange gains or losses(2)

(35,105)


1,905


NM

Per share – basic

(0.24)


0.01


NM

Per share – diluted

(0.24)


0.01


NM

Net income (loss) attributable to the shareholders of Calfrac

(36,334)


3,234


NM

Per share – basic

(0.25)


0.02


NM

Per share – diluted

(0.25)


0.02


NM

Working capital (end of period)

276,785


360,654


(23)

Total equity (end of period)

481,675


546,018


(12)





Weighted average common shares outstanding (000s)




Basic

144,404


143,722


Diluted

146,239


146,624


(1)  Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

(2)  Net income (loss) attributable to the shareholders of Calfrac before foreign exchange (FX) gains or losses is defined as net income (loss)
attributable to the shareholders of Calfrac before FX gains or losses on an after-tax basis. Management believes that this
is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac without the
impact of FX fluctuations, which are not fully controllable by the Company. This measure does not have any standardized
meaning prescribed under IFRS and, accordingly, may not be comparable to similar measures used by other companies.

 

CEO MESSAGE
Calfrac's President and Chief Executive Officer, Fernando Aguilar commented on the results: "Despite very challenging weather conditions across a number of operating areas, Calfrac delivered results underlined by the strength of our North American platform while showing again the potential of our operations in Argentina . I'd like to extend my thanks to all our employees for their ongoing dedication to executing on our Brand Promise - Do it Better, Do it Safely, Do it on Time."

During the quarter, Calfrac:

  • generated $72.7 million in operating cash flow, enabling a further reduction in its credit facility borrowings by $20.0 million ;
  • secured incremental contracted work volumes in Argentina with a major client in that region; and
  • commenced work to extend the Company's revolving credit facility, which was executed subsequent to
    the quarter. 

Update on Canadian Divisional Management
Near the end of the first quarter, Calfrac implemented a change in the management of its Canadian Division. Tom Medvedic , the former President of Calfrac's Canadian Division, left the Company in March to pursue a new career opportunity in the pipeline infrastructure industry. Tom joined Calfrac in 2004 and occupied a number of senior management roles at the Company, including Chief Financial Officer, Vice President, Corporate Development and, most recently, as President of Calfrac's Canadian Division.

"On behalf of everyone at Calfrac, I would like to thank Tom for his many years of outstanding service across a number of key senior management roles and for the leadership that he provided during his time at the Company." -  Fernando Aguilar , Calfrac President and CEO.

"I would also like to thank Tom for his partnership and efforts over the past 15 years and for being such an integral part of the Calfrac family. His focus on details and an unwavering commitment to safety and service quality have helped make Calfrac the company it is today. " - Doug Ramsay , Calfrac Vice Chairman and Co-Founder.

On Tom's departure, Chad Leier has assumed the role of President of Calfrac's Canadian Division. Chad joined Calfrac in 2005 and has worked in a number of sales and marketing roles in both Canada and the United States , most recently as Vice-President of Sales and Marketing for the Canadian Division.

"Chad's long tenure at Calfrac and strong relationships with our customer base and within our organization position him well to lead the Canadian Division, and he will benefit greatly from the support of the strong divisional and corporate team around him." - Fernando Aguilar , Calfrac President and CEO.

CONSOLIDATED HIGHLIGHTS

Three Months Ended March 31,

2019


2018


Change

(C$000s, except operational information)

($)


($)


(%)

(unaudited)






Revenue

475,012


582,838


(19)

Expenses






Operating

412,185


490,106


(16)

Selling, general and administrative (SG&A)

19,204


24,758


(22)


431,389


514,864


(16)

Operating income(1)

43,623


67,974


(36)

Operating income (%)

9.2


11.7


(21)

Adjusted EBITDA(1)

44,086


72,953


(40)

Adjusted EBITDA (%)

9.3


12.5


(26)

Fracturing revenue per job ($)

33,093


36,783


(10)

Number of fracturing jobs

13,100


14,752


(11)

Active pumping horsepower, end of period (000s)

1,344


1,259


7

Idle pumping horsepower, end of period (000s)

36


134


(73)

Total pumping horsepower, end of period (000s)

1,380


1,393


(1)

Coiled tubing revenue per job ($)

30,463


33,283


(8)

Number of coiled tubing jobs

843


729


16

Active coiled tubing units, end of period (#)

21


22


(5)

Idle coiled tubing units, end of period (#)

8


8


Total coiled tubing units, end of period (#)

29


30


(3)

Cementing revenue per job ($)

39,389


37,728


4

Number of cementing jobs

118


69


71

Active cementing units, end of period (#)

11


12


(8)

Idle cementing units, end of period (#)

12


11


9

Total cementing units, end of period (#)

23


23


(1) Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

 

Revenue in the first quarter of 2019 was $475.0 million , a decrease of 19 percent from the same period in 2018. The Company's fracturing job count decreased by 11 percent while consolidated revenue per fracturing job decreased by 10 percent. The number of cementing jobs increased by 71 percent due to higher cementing activity in northern Argentina , while coiled tubing activity was 16 percent higher due to better utilization in Canada and Argentina .

Pricing in Canada and the United States decreased while pricing in Russia was consistent with the first quarter of 2018. In Argentina , the transition to more unconventional activity does not allow for a meaningful pricing comparison to the first quarter in 2018 as the type of job is significantly different than conventional activity.

Adjusted EBITDA of $44.1 million for the first quarter of 2019 decreased from $73.0 million in the comparable period in 2018 primarily due to lower utilization and pricing in Canada and the United States .

Net loss attributable to shareholders of Calfrac was $36.3 million or $0.25 per share diluted compared to income of $3.2 million or $0.02 per share diluted in the same period last year. The first quarter of 2019 included higher depreciation of $23.2 million primarily due to a change in depreciation policy and the adoption of IFRS 16.

Three Months Ended

March 31,


December 31,


Change


2019


2018



(C$000s, except operational information)

($)


($)


(%)

(unaudited)






Revenue

475,012


498,858


(5)

Expenses






Operating

412,185


416,886


(1)

SG&A

19,204


19,980


(4)


431,389


436,866


(1)

Operating income(1)

43,623


61,992


(30)

Operating income (%)

9.2


12.4


(26)

Adjusted EBITDA(1)

44,086


62,914


(30)

Adjusted EBITDA (%)

9.3


12.6


(26)

Fracturing revenue per job ($)

33,093


38,264


(14)

Number of fracturing jobs

13,100


12,068


9

Active pumping horsepower, end of period (000s)

1,344


1,328


1

Idle pumping horsepower, end of period (000s)

36


42


(14)

Total pumping horsepower, end of period (000s)

1,380


1,370


1

Coiled tubing revenue per job ($)

30,463


29,567


3

Number of coiled tubing jobs

843


715


18

Active coiled tubing units, end of period (#)

21


22


(5)

Idle coiled tubing units, end of period (#)

8


7


14

Total coiled tubing units, end of period (#)

29


29


Cementing revenue per job ($)

39,389


46,403


(15)

Number of cementing jobs

118


130


(9)

Active cementing units, end of period (#)

11


11


Idle cementing units, end of period (#)

12


12


Total cementing units, end of period (#)

23


23


(1) Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

 

Revenue in the first quarter of 2019 was $475.0 million , a decrease of 5 percent from the fourth quarter of 2018, primarily due to lower pricing in North America offset partially by increased fracturing and coiled tubing activity. Revenue in Russia and Argentina was higher sequentially due to increased activity and job sizes. Revenue per fracturing job decreased by 14 percent primarily due to lower pricing and job mix in Canada and the United States .

In Canada , first-quarter revenue decreased by 9 percent from the fourth quarter to $131.4 million despite a 14 percent increase in the number of fracturing jobs completed, primarily due to lower average pricing and the completion of smaller jobs.  Operating income as a percentage of revenue was 10 percent versus 11 percent in the fourth quarter.

In the United States , revenue in the first quarter of 2019 decreased by 7 percent from the fourth quarter to $259.1 million , mainly as a result of lower pricing as activity was fairly consistent on a sequential basis. The U.S. division's operating income margin decreased to 15 percent in the first quarter from 18 percent in the fourth quarter of 2018.

In Russia , revenue of $29.1 million in the first quarter of 2019 was 17 percent higher than the fourth quarter due to a seasonal increase in fracturing and coiled tubing activity. The operating loss position in the first quarter was primarily due to higher costs associated with extremely cold weather during parts of the quarter while the closing of one facility also impacted profitability.

In Argentina , revenue in the first quarter of 2019 increased by 12 percent from the fourth quarter to $55.4 million , while operating income improved to $4.9 million from $4.4 million in the fourth quarter. The improvement was due to higher activity in Neuquén as better operational efficiencies were achieved in the first quarter.

BUSINESS UPDATE AND OUTLOOK
Calfrac's first-quarter results are a result of strong execution across the platform, impacted by weather-related delays in Canada , the United States and Russia .

CANADA
In Canada , the first quarter unfolded largely as planned despite periods of extreme cold weather in February, which impacted the pace of operations during the quarter. Although some industry players reported delays in delivering sand to location, Calfrac's internal supply chain network delivered an exceptional result with little to no time lost in its operations.

Although commodity prices have strengthened during the first quarter, Calfrac believes producers will remain cautious in their outlook for the second half of 2019. Based on lower drilling activity in the first quarter, Calfrac expects near-term utilization to continue to be lower than levels experienced in 2018. In response, Calfrac has idled one incremental fleet in its Canadian operations and has adjusted second quarter field labour schedules to prudently manage its operating costs while maintaining experienced field personnel.

Calfrac expects activity to increase from current levels through the remainder of second quarter and has secured a number of large pad fracturing operations that provide consistent activity levels. Calfrac has not offered any seasonal discounts for second-quarter work as current pricing remains below levels needed to deliver acceptable returns on investment.

Calfrac remains committed to the Canadian market and its long-standing client base, and will focus on delivering exceptional execution and ongoing innovation, while managing its footprint and costs in the best long-term interests of the Company.

UNITED STATES
Activity during the first quarter was expected to be consistent with the prior quarter but extended periods of cold weather in North Dakota and Pennsylvania delayed work for significant portions of February. Temperatures in North Dakota were approximately 20 degrees colder than normal and resulted in utilization levels materially lower than typical. Utilization during the first quarter in the Company's operating districts in the southern United States was as expected.

Due to pricing erosion in the fourth quarter, the Company experienced limited customer turnover into the beginning of the year and expects some further turnover in the months ahead. Calfrac will continue to focus on clients whose long-term focus on safety, productivity and returns aligns with the Company's strategy.

Based on steady rig activity, improved commodity prices and a growing inventory of uncompleted wells, the Company's outlook in the United States remains strong as oil takeaway capacity additions in the Permian Basin are expected to increase completion activity in that basin during the second half of the year. Calfrac's strong presence throughout multiple basins in the United States and across several top-tier producers should lead to strong utilization over the short-run, and the Company will monitor producer plans for opportunities to further optimize its operational and financial performance in the United States .

RUSSIA
Calfrac's operations in Russia delivered a sequential improvement in revenue but the higher costs of winter operations and the costs associated with the closing of one district facility during the first quarter impacted profitability. Contracted work volumes are anticipated to result in improved levels of utilization and profitability during the second quarter and the remainder of 2019.

ARGENTINA
Calfrac's operations in Argentina again delivered strong year-on-year improvement in operating and financial results due to higher activity and utilization.

Calfrac's outlook for Argentina in 2019 remains positive due to the recent addition of a substantial fracturing contract in the Neuquén district which is expected to commence during the second half of 2019. This higher level of utilization is expected to improve profitability throughout the upcoming quarters.

CORPORATE
Despite a sequential decline in overall activity, Calfrac generated positive free cash flow during the first quarter and reduced its credit facility borrowings by $20.0 million to $100.0 million . Prudent management of capital spending as well as a release of cash from working capital enabled the incremental debt reduction. The Company is continuing to pursue efficiencies in its capital program and remains focused on further debt reduction throughout 2019.

FINANCIAL OVERVIEW – THREE MONTHS ENDED MARCH 31, 2019 VERSUS 2018

CANADA

Three Months Ended March 31,

2019


2018


Change

(C$000s, except operational information)

($)


($)


(%)

(unaudited)






Revenue

131,395


189,728


(31)

Expenses






Operating

114,668


154,442


(26)

SG&A

3,001


3,576


(16)


117,669


158,018


(26)

Operating income(1)

13,726


31,710


(57)

Operating income (%)

10.4


16.7


(38)

Fracturing revenue per job ($)

15,466


19,326


(20)

Number of fracturing jobs

7,474


8,930


(16)

Active pumping horsepower, end of period (000s)

301


322


(7)

Idle pumping horsepower, end of period (000s)

5


51


(90)

Total pumping horsepower, end of period (000s)

306


373


(18)

Coiled tubing revenue per job ($)

24,585


26,255


(6)

Number of coiled tubing jobs

602


495


22

Active coiled tubing units, end of period (#)

11


10


10

Idle coiled tubing units, end of period (#)

3


5


(40)

Total coiled tubing units, end of period (#)

14


15


(7)

(1) Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

 

REVENUE
Revenue from Calfrac's Canadian operations during the first quarter of 2019 was $131.4 million versus $189.7 million in the same period of 2018 primarily due to lower activity and pricing. In the first quarter of 2019, the number of fracturing jobs was 16 percent lower than the comparable period in 2018 due to lower activity in the Viking and Cardium oil plays, combined with delays caused by extremely cold weather in February. Revenue per job decreased 20 percent due to a combination of lower pricing and job mix. The number of coiled tubing jobs increased by 22 percent from the first quarter in 2018 mainly due to a larger operating scale combined with higher utilization throughout the quarter.

OPERATING INCOME
Operating income in Canada during the first quarter of 2019 was $13.7 million compared to $31.7 million in the same period of 2018. The decrease in operating income was due to lower utilization and pricing experienced during the quarter. The Company made the decision to suspend operations for one fleet at the beginning of the quarter based on weaker demand for its fracturing services and reduced its fixed cost structure accordingly. Despite certain reductions in costs for logistics and materials, overall pricing was lower on a net basis quarter-over-quarter. The reported operating income was impacted by the adoption of IFRS 16 at the beginning of 2019 which resulted in $2.2 million of lease payments no longer being recognized as operating costs during the first quarter of 2019. In addition, the $0.6 million decrease in SG&A expenses compared to the first quarter in 2018 was primarily due to a lower bonus accrual being recorded in the first quarter of 2018.

UNITED STATES

Three Months Ended March 31,

2019


2018


Change

(C$000s, except operational and exchange rate information)

($)


($)


(%)

(unaudited)






Revenue

259,125


315,980


(18)

Expenses






Operating

216,714


257,606


(16)

SG&A

4,667


5,125


(9)


221,381


262,731


(16)

Operating income(1)

37,744


53,249


(29)

Operating income (%)

14.6


16.9


(14)

Fracturing revenue per job ($)

50,806


59,348


(14)

Number of fracturing jobs

5,095


5,309


(4)

Active pumping horsepower, end of period (000s)

858


752


14

Idle pumping horsepower, end of period (000s)

31


83


(63)

Total pumping horsepower, end of period (000s)

889


835


6

Active coiled tubing units, end of period (#)



Idle coiled tubing units, end of period (#)

2


1


100

Total coiled tubing units, end of period (#)

2


1


100

Active cementing units, end of period (#)



Idle cementing units, end of period (#)

10


9


11

Total cementing units, end of period (#)

10


9


11

US$/C$ average exchange rate(2)

1.3295


1.2647


5

(1) Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

(2) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's United States operations decreased to $259.1 million during the first quarter of 2019 from $316.0 million in the comparable quarter of 2018 due to lower pricing and a 4 percent decrease in the number of fracturing jobs completed period-over-period. Activity in North Dakota and Pennsylvania was impacted by weather-related delays during the first quarter of 2019 while activity in Colorado was also down relative to the same period in 2018. These declines were partially offset by an increase in activity in Pennsylvania due to a larger operating scale while activity in Texas was flat year-over year. The 14 percent decrease in revenue per job year-over-year was primarily due to lower pricing and the impact of job mix. The 5 percent appreciation in the U.S. dollar versus the Canadian dollar partially offset the decrease in revenue.

OPERATING INCOME
The Company's United States operations generated operating income of $37.7 million during the first quarter of 2019 compared to $53.2 million in the same period in 2018. The year-over-year decline in operating results was primarily due to lower realized pricing and decreased utilization on a larger operating footprint and fixed cost structure. Overall activity was 4 percent lower, however, the Company operated two additional crews compared to the same quarter in 2018. Activity in North Dakota and Pennsylvania was negatively impacted by extended periods of cold weather within the quarter while Texas and Colorado experienced more scheduling gaps than in the same period in 2018. Operating results in the first quarter of 2019 did not include any fleet reactivation costs, while $5.0 million was incurred in the comparable quarter in 2018. The reported operating income was impacted by the adoption of IFRS 16 at the beginning of 2019, which resulted in $3.5 million of lease payments no longer being recognized as operating costs during the first quarter of 2019. SG&A expenses decreased by 9 percent in the first quarter of 2019 primarily due to a lower bonus accrual recorded in the first quarter in 2019.

RUSSIA

Three Months Ended March 31,

2019


2018


Change

(C$000s, except operational and exchange rate information)

($)


($)


(%)

(unaudited)






Revenue

29,078


31,235


(7)

Expenses






Operating

30,866


31,317


(1)

SG&A

988


876


13


31,854


32,193


(1)

Operating loss(1)

(2,776)


(958)


NM

Operating loss (%)

(9.5)


(3.1)


NM

Fracturing revenue per job ($)

89,290


87,710


2

Number of fracturing jobs

290


305


(5)

Pumping horsepower, end of period (000s)

77


77


Coiled tubing revenue per job ($)

43,618


37,678


16

Number of coiled tubing jobs

73


119


(39)

Active coiled tubing units, end of period (#)

5


6


(17)

Idle coiled tubing units, end of period (#)

2


1


100

Total coiled tubing units, end of period (#)

7


7


Rouble/C$ average exchange rate(2)

0.0202


0.0222


(9)

(1) Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

(2) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's Russian operations decreased by 7 percent during the first quarter of 2019 to $29.1 million from $31.2 million in the corresponding three-month period of 2018. The decrease in revenue was attributable to a decrease in fracturing activity in Noyabrsk and Usinsk, offset partially by higher activity in Khanty-Mansiysk. Revenue per fracturing job increased by 2 percent primarily due to job mix. Coiled tubing activity decreased by 39 percent, primarily due to cold weather-related delays combined with lower utilization than expected with one of Calfrac's customers. The 9 percent depreciation of the Russian rouble in the first quarter of 2019 versus the same period in 2018 also contributed to the decrease in reported revenue.

OPERATING LOSS
The Company's Russian division generated an operating loss of $2.8 million during the first quarter of 2019 versus a loss of $1.0 million in the comparable quarter in 2018. The increased operating loss was primarily due to lower equipment utilization resulting from extremely cold temperatures experienced for portions of January and February combined with higher equipment repair expenses. In addition, the Company closed its operations in Noyabrsk during the quarter and incurred mobilization costs to transfer equipment to Khanty-Mansiysk to work for an existing customer in that region. SG&A expenses were $0.1 million higher than the comparable quarter in 2018 due to higher personnel costs.

ARGENTINA

Three Months Ended March 31,

2019


2018


Change

(C$000s, except operational and exchange rate information)

($)


($)


(%)

(unaudited)






Revenue

55,414


45,895


21

Expenses






Operating

48,486


45,563


6

SG&A

2,073


3,350


(38)


50,559


48,913


3

Operating income (loss)(1)

4,855


(3,018)


NM

Operating income (loss) (%)

8.8


(6.6)


NM

Active pumping horsepower, end of period (000s)

108


108


Idle pumping horsepower, end of period (000s)



Total pumping horsepower, end of period (000s)

108


108


Active cementing units, end of period (#)

11


12


(8)

Idle cementing units, end of period (#)

2


2


Total cementing units, end of period (#)

13


14


(7)

Active coiled tubing units, end of period (#)

5


6


(17)

Idle coiled tubing units, end of period (#)

1


1


Total coiled tubing units, end of period (#)

6


7


(14)

US$/C$ average exchange rate(2)

1.3295


1.2647


5

(1) Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

(2) Source: Bank of Canada and Bloomberg.

 

REVENUE
Calfrac's Argentinean operations generated total revenue of $55.4 million during the first quarter of 2019 versus $45.9 million in the comparable three-month period in 2018. Revenue in Argentina was 21 percent higher than the comparable quarter primarily due to a 16 percent increase in the number of fracturing jobs completed. The Company's fracturing revenue per job was consistent with the same period in 2018. Coiled tubing revenue increased from the first quarter in 2018 due to higher activity in northern Argentina while cementing revenue also improved as the Company did not experience similar labour-related disruptions in 2019 as it did in 2018.

OPERATING INCOME (LOSS)
The Company's operations in Argentina generated operating income of $4.9 million during the first quarter of 2019 compared to a loss of $3.0 million during the first quarter in 2018. The Company achieved positive operating income through a combination of improved utilization and crew efficiencies during the quarter as it continued to transition to unconventional operations in Argentina . SG&A expenses were $1.3 million lower during the first quarter in 2019 compared to the first quarter in 2018. This was mainly due to $1.6 million of one-time costs recorded during the first quarter of 2018.

CORPORATE

Three Months Ended March 31,

2019


2018


Change

(C$000s)

($)


($)


(%)

(unaudited)






Expenses






Operating

1,451


1,178


23

SG&A

8,475


11,831


(28)


9,926


13,009


(24)

Operating loss(1)

(9,926)


(13,009)


(24)

% of Revenue

2.1


2.2


(5)

(1) Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

 

OPERATING LOSS
Corporate expenses for the first quarter of 2019 were $9.9 million compared to $13.0 million in the first quarter of 2018. The decrease was primarily due to lower stock-based compensation expense of $2.8 million versus the same period in 2018. The reduction in stock-based compensation was mainly due to a lower number of restricted share units outstanding. The implementation of IFRS 16 also resulted in lower reported corporate expenses as lease payments related to corporate office space are no longer recorded in SG&A.

DEPRECIATION
For the three months ended March 31, 2019, depreciation expense increased by $23.2 million to $61.5 million from $38.3 million in the corresponding quarter of 2018. The increase was primarily due to the Company decreasing its useful life estimate and salvage value, effective January 1, 2019 , for certain components of its fracturing equipment. This resulted in a one-time depreciation charge of $9.5 million during the first quarter relating to assets in use at the end of the prior quarter.  The resulting accelerated depreciation rate on these components combined with additions during the quarter increased depreciation expense by a further $7.1 million . In addition, the adoption of IFRS 16 at the beginning of 2019 resulted in a $5.0 million increase to depreciation expense. The 5 percent appreciation in the U.S. dollar relative to the Canadian dollar also contributed to the increase in reported depreciation expense.

FOREIGN EXCHANGE GAINS AND LOSSES
The Company recorded a foreign exchange loss of $0.5 million during the first quarter of 2019 versus a loss of $0.7 million in the comparative three-month period of 2018. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada , net monetary assets or liabilities that were held in pesos in Argentina , and liabilities held in Canadian dollars in Russia . The Company's foreign exchange loss for the first quarter of 2019 was largely attributable to U.S. dollar-denominated assets held in Canada as the U.S. dollar depreciated against the Canadian dollar during the quarter.

INTEREST
The Company's net interest expense of $21.2 million for the first quarter of 2019 was $0.5 million higher than the comparable period of 2018 despite a reduction in overall debt levels. The higher interest rate on its US$650.0 million 8.50 percent senior notes during the first quarter compared to its US$600.0 million 7.50 percent senior notes that were repaid during the second quarter of 2018 resulted in an increase in reported interest expense. The stronger U.S. dollar during the first quarter in 2019 compared to the same period in 2018 also contributed to the higher reported interest expense related to its senior notes. Additionally, the adoption of IFRS 16 resulted in a further $0.6 million in interest expense. These increases were partially offset by the impact of replacing its $200.0 million second lien term loan that carried an interest rate of 9.0 percent with lower interest rate credit facility borrowings.

INCOME TAXES
The Company recorded an income tax recovery of $13.4 million during the first quarter of 2019 compared to a recovery of $0.6 million in the comparable period of 2018. The recovery position was the result of pre-tax losses during the quarter in Canada and the United States . The effective recovery rate was 27 percent during the first quarter of 2019.

LIQUIDITY AND CAPITAL RESOURCES


Three Months Ended Mar 31,


2019


2018

(C$000s)

($)


($)

(unaudited)




Cash provided by (used in):




Operating activities

72,748


(8,233)

Financing activities

(26,538)


29,283

Investing activities

(35,825)


(47,307)

Effect of exchange rate changes on cash and cash equivalents

(2,122)


3,704

Increase (decrease) in cash and cash equivalents

8,263


(22,553)

 

OPERATING ACTIVITIES
The Company's cash provided by operating activities for the three months ended March 31, 2019 was $72.7 million versus cash used of $8.2 million in the first quarter of 2018. The significant improvement in cash provided by operations was primarily due to working capital providing $31.9 million versus using $72.8 million in the same period of 2018. This was partially offset by weaker operating results in Canada and the United States in the first quarter of 2019. At March 31, 2019, Calfrac's working capital was approximately $276.8 million compared to $329.9 million at December 31, 2018 .

FINANCING ACTIVITIES
Net cash used by financing activities for the three months ended March 31, 2019 was $26.5 million compared to cash provided of $29.3 million in the comparable period in 2018. During the three months ended March 31, 2019 , the Company had net repayments under its credit facilities of $20.0 million , lease principal payments of $5.4 million and debt issuance costs of $1.2 million .

On May 31, 2018 , the Company repaid in full the remaining $196.5 million principal amount of its second lien senior secured term loan facility with Alberta Investment Management Corporation (AIMCo). The term loan, which had a maturity date of September 20, 2020 provided Calfrac the right to prepay the loan prior to June 10, 2018 with a nominal prepayment premium.

On May 30, 2018 , Calfrac closed a private offering of US$650.0 million aggregate principal amount of its 8.50 percent senior notes due 2026. Fixed interest on the notes is payable on June 15 and December 15 of each year. The notes will mature on June 15, 2026 . The Company used a portion of the net proceeds from the offering of the notes to repay all of its outstanding 7.50 percent senior notes due 2020.

Subsequent to the end of the first quarter, Calfrac amended and extended its credit facilities while maintaining its total facility capacity at $375.0 million . The facilities consist of an operating facility of $40.0 million and a syndicated facility of $335.0 million . The Company's credit facilities were extended by a term of two years and mature on June 1, 2022 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 2.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.50 percent above the respective base rates. The accordion feature of the syndicated facility remains at $100.0 million, and is available to the Company during the term of the agreement. The Company incurs interest at the high end of the ranges outlined above if its net Total Debt to Adjusted EBITDA ratio is above 4.00:1.00. Additionally, in the event that the Company's net Total Debt to Adjusted EBITDA ratio is above 5.00:1.00, certain restrictions would apply including the following: (a) acquisitions will be subject to majority lender consent; and (b) distributions will be restricted other than those relating to the Company's share unit plans, and no increase in the rate of dividends will be permitted. As at March 31, 2019 , the Company's net Total Debt to Adjusted EBITDA ratio was 3.10:1.00.

Advances under the credit facilities are limited by a borrowing base. The borrowing base is calculated based on the following:

i.        

Eligible North American accounts receivable, which is based on 75 percent of accounts receivable owing by companies rated BB+ or lower by Standard & Poor's (or a similar rating agency) and 85 percent of accounts receivable from companies rated BBB- or higher;

ii.       

100 percent of unencumbered cash of the parent company and its U.S. operating subsidiary, excluding any cash held in a segregated account for the purposes of a potential equity cure; and

iii.     

25 percent of the net book value of property, plant and equipment (PP&E) of the parent company and its U.S. operating subsidiary. The value of PP&E excludes assets under construction and is limited to $150.0 million.

 

At March 31, 2019, the Company had used $0.9 million of its credit facilities for letters of credit and had $100.0 million of borrowings under its credit facilities, leaving $274.1 million in available capacity under its credit facilities. As described above, the Company's credit facilities are subject to a monthly borrowing base, as determined using the previous month's results, which at March 31, 2019 , when calculated on a proforma basis for the amendments made subsequent to the quarter, resulted in a liquidity amount of $246.3 million .

The Company's credit facilities contain certain financial covenants as shown below.



Working capital ratio not to fall below

1.15x

Funded Debt to Adjusted EBITDA not to exceed(1)(2)

3.00x

Funded Debt to Capitalization not to exceed(1)(3)

0.30x

(1) Funded Debt is defined as Total Debt excluding all outstanding senior unsecured notes and lease obligations.
Total Debt includes bank loans and long-term debt (before unamortized debt issuance costs and debt discount)
plus outstanding letters of credit. For the purposes of the Total Debt to Adjusted EBITDA ratio, the Funded Debt
to Capitalization Ratio and the Funded Debt to Adjusted EBITDA ratio, the amount of Total Debt or Funded Debt,
as applicable, is reduced by the amount of cash on hand with lenders (excluding any cash held in a segregated
account for the purposes of a potential equity cure).

(2) Adjusted EBITDA is defined as net income or loss for the period adjusted for interest, taxes, depreciation and
amortization, non-cash stock-based compensation, non-controlling interest, and gains and losses that are
extraordinary or non-recurring.

(3) Capitalization is Total Debt plus equity attributable to the shareholders of Calfrac.

 

Proceeds from equity offerings may be applied, as an equity cure, in the calculation of Adjusted EBITDA towards the Funded Debt to Adjusted EBITDA covenant for any of the quarters ending prior to and including June 30, 2022 , subject to certain conditions including:

i.        

the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;

ii.       

the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;

iii.     

the maximum proceeds of each common share issuance permitted to be attributed to Adjusted EBITDA cannot exceed the greater of 50 percent of Adjusted EBITDA on a trailing four-quarter basis and $25.0 million; and

iv.     

if proceeds are not used immediately as an equity cure they must be held in a segregated bank account pending an election to use them for such purpose, and if they are removed from such account but not used as an equity cure they will no longer be eligible for such use.

 

The Company can utilize two equity cures during the term of the credit facilities subject to the conditions described above. To utilize an equity cure, the Company must provide notice of any such election to the lending syndicate at any time prior to the filing of its quarterly financial statements for the applicable quarter on SEDAR. Amounts used as an equity cure prior to June 30, 2022 will increase Adjusted EBITDA over the relevant twelve-month rolling period and will also serve to reduce Funded Debt.

As shown in the table below, at March 31, 2019 , the Company was in compliance with the financial covenants associated with its credit facilities.


Covenant

Actual

As at March 31,

2019

2019

Working capital ratio not to fall below

1.15x

2.25x

Funded Debt to Adjusted EBITDA not to exceed

3.00x

0.15x

Funded Debt to Capitalization not to exceed

0.30x

0.03x

 

The Company's credit facilities also require majority lender consent for dispositions of property or assets in Canada and the United States if the aggregate market value exceeds $20.0 million . There are no restrictions pertaining to dispositions of property or assets outside of Canada and the United States , except that to the extent that advances under the credit facilities exceed $50.0 million at the time of any such dispositions, Calfrac must use the resulting proceeds to reduce the advances to less than $50.0 million before using the balance for other purposes.

The indenture governing the senior unsecured notes, which is available on SEDAR, contains restrictions on the Company's ability to pay dividends, purchase and redeem shares of the Company and make certain restricted investments, that are not defined as Permitted Investments under the indenture, in circumstances where:

i.        

the Company is in default under the indenture or the making of such payment would result in a default;

ii.       

the Company is not meeting the Fixed Charge Coverage Ratio(1) under the indenture of at least 2:1 for the most recent four fiscal quarters, with the restricted payments regime commencing once internal financial statements are available which show that the ratio is not met on a pro forma basis for the most recently ended four fiscal quarter period; or

iii.     

there is insufficient room for such payment within a builder basket included in the indenture.

 

(1) The Fixed Charge Coverage Ratio is defined as cash flow to interest expense. Cash flow is a non-GAAP measure and does not have a standardized meaning under IFRS and is defined under the indenture as net income (loss) attributable to the shareholders of Calfrac before depreciation, extraordinary gains or losses, unrealized foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment or reversal of impairment of assets, restructuring charges, provision for settlement of litigation, stock-based compensation, interest, and income taxes. Interest expense is adjusted to exclude any non-recurring charges associated with redeeming or retiring any indebtedness prior to its maturity.

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20.0 million . As at March 31, 2019 this basket was not utilized. The indenture also restricts the ability to incur additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $375.0 million or 30 percent of the Company's consolidated tangible assets.

As at March 31, 2019 , the Company's Fixed Charge Coverage Ratio of 3.51:1 was higher than the required 2:1 ratio so the aforementioned prohibitions will not be applicable as long as the Company remains above this ratio.

INVESTING ACTIVITIES
Calfrac's net cash used for investing activities was $35.8 million for the three months ended March 31, 2019 versus $47.3 million in the comparable period in 2018. Cash outflows relating to capital expenditures were $28.2 million during the first quarter in 2019 compared to $51.3 million in 2018. Capital expenditures were primarily to support the Company's North American fracturing operations.

As announced in December 2018 , Calfrac's Board of Directors have approved a capital budget of $149.0 million, which includes $126.0 million of maintenance capital, $11.0 million of refurbishment capital and $12.0 million related to corporate initiatives. In addition, approximately $6.0 million remaining from Calfrac's 2018 capital program is expected to be spent in 2019.

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during the three months ended March 31, 2019 was a loss of $2.1 million versus a gain of $3.7 million during the comparable period in 2018. These gains and losses relate to movements of cash and cash equivalents held by the Company in a foreign currency during the period.

With its working capital position, available credit facilities and anticipated funds provided by operations, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for 2019 and beyond.

At March 31, 2019, the Company had cash and cash equivalents of $60.2 million .

OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of common shares. Employees have been granted both performance share units as well as options to purchase common shares under the Company's shareholder-approved equity compensation plans. The number of shares reserved for issuance under the performance share unit plan and stock option plan is equal to 10 percent of the Company's issued and outstanding common shares. As at April 26, 2019 , the Company had issued and outstanding 144,586,072 common shares, 732,253 equity-based performance share units and 10,690,819 options to purchase common shares.

SUMMARY OF QUARTERLY RESULTS

Three Months Ended

Jun. 30,


Sep. 30,


Dec. 31,


Mar. 31,


Jun. 30,


Sep. 30,


Dec. 31,


Mar 31,


2017


2017


2017


2018


2018


2018


2018


2019

(C$000s, except per share and operating data)

($)


($)


($)


($)


($)


($)


($)


($)

(unaudited)
















Financial
















Revenue

325,344


448,090


485,456


582,838


544,602


630,128


498,858


475,012

Operating income(1)

36,740


78,196


44,789


67,974


66,528


115,331


61,992


43,623

Per share – basic

0.27


0.57


0.32


0.47


0.46


0.80


0.43


0.30

Per share – diluted

0.27


0.57


0.31


0.46


0.45


0.79


0.42


0.30

Adjusted EBITDA(1)

39,913


81,113


49,213


72,953


81,910


111,631


62,914


44,086

Per share – basic

0.29


0.59


0.35


0.51


0.57


0.77


0.44


0.31

Per share – diluted

0.29


0.59


0.34


0.50


0.56


0.76


0.43


0.30

Net income (loss) attributable to the
shareholders of Calfrac

(20,349)


7,822


38,013


3,234


(32,838)


14,878


(3,462)


(36,334)

Per share – basic

(0.15)


0.06


0.27


0.02


(0.23)


0.10


(0.02)


(0.25)

Per share – diluted

(0.15)


0.06


0.26


0.02


(0.23)


0.10


(0.02)


(0.25)

Capital expenditures

22,358


22,093


34,518


51,334


42,404


34,542


31,484


28,218

Working capital (end of period)

293,411


334,606


327,049


360,654


361,613


386,843


329,871


276,785

Total equity (end of period)

463,180


477,188


543,645


546,018


507,607


516,899


513,820


481,675

































Operating (end of period)
















Active pumping horsepower (000s)

874


1,057


1,115


1,259


1,313


1,344


1,328


1,344

Idle pumping horsepower (000s)

443


338


280


134


80


49


42


36

Total pumping horsepower (000s)

1,317


1,395


1,395


1,393


1,393


1,393


1,370


1,380

Active coiled tubing units (#)

21


21


21


22


22


22


22


21

Idle coiled tubing units (#)

11


11


9


8


8


8


7


8

Total coiled tubing units (#)

32


32


30


30


30


30


29


29

Active cementing units (#)

12


12


12


12


11


11


11


11

Idle cementing units (#)

13


13


11


11


12


12


12


12

Total cementing units (#)

25


25


23


23


23


23


23


23

(1) With the adoption of IFRS 16, the accounting treatment for operating leases when Calfrac is the lessee, changed effective January 1, 2019. Calfrac adopted IFRS 16 using the
modified retrospective approach and the comparative information was not restated. As a result, the Company's 2019 Operating Income and Adjusted EBITDA are not comparable
to periods prior to January 1, 2019.
 Refer to "Non-GAAP Measures" on pages 16 and 17 for further information.

 

SEASONALITY OF OPERATIONS
The Company's North American business is seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break-up weather conditions and access to well sites in Canada and North Dakota is reduced (refer to "Business Risks - Seasonality" in the 2018 Annual Report).

FOREIGN EXCHANGE FLUCTUATIONS
The Company's consolidated financial statements are reported in Canadian dollars. Accordingly, the quarterly results are directly affected by fluctuations in the exchange rates for United States , Russian and Argentinean currency (refer to "Business Risks - Fluctuations in Foreign Exchange Rates" in the 2018 Annual Report).

 

ADVISORIES
FORWARD-LOOKING STATEMENTS
In order to provide Calfrac shareholders and potential investors with information regarding the Company and its subsidiaries, including management's assessment of Calfrac's plans and future operations, certain statements contained in this press release, including statements that contain words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "forecast" or similar words suggesting future outcomes, are forward-looking statements.

In particular, forward-looking statements in this press release include, but are not limited to, statements with respect to expected operating strategies and targets, capital expenditure programs, future financial resources, anticipated equipment utilization levels, future oil and natural gas well activity in each of the Company's operating jurisdictions, results of acquisitions, the impact of environmental regulations and economic reforms and sanctions on the Company's business, future costs or potential liabilities, projections of market prices and costs, supply and demand for oilfield services, expectations regarding the Company's ability to maintain its competitive position, anticipated benefits of the Company's competitive position, expectations regarding the Company's financing activities and restrictions, including with regard to its credit agreement and the indenture pursuant to which its senior notes were issued, and its ability to raise capital, treatment under government regulatory regimes, commodity prices, anticipated outcomes of specific events (including exposure under existing legal proceedings), expectations regarding trends in, and the growth prospects of, the global oil and natural gas industry, the Company's growth strategy and prospects, and the impact of changes in accounting policies and standards on the Company and its financial statements. These statements are derived from certain assumptions and analyses made by the Company based on its experience and perception of historical trends, current conditions, expected future developments and other factors that it believes are appropriate in the circumstances, including, but not limited to, the economic and political environment in which the Company operates, the Company's expectations for its current and prospective customers' capital budgets and geographical areas of focus, the Company's existing contracts and the status of current negotiations with key customers and suppliers,  the effect unconventional gas projects have had on supply and demand fundamentals for natural gas and the likelihood that the current tax and regulatory regime will remain substantially unchanged.

Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from the Company's expectations. Such risk factors include: excess oilfield equipment levels; regional competition; the availability of capital on satisfactory terms; restrictions resulting from compliance with debt covenants and risk of acceleration of indebtedness; direct and indirect exposure to volatile credit markets, including credit rating risk; currency exchange rate risk; risks associated with foreign operations; operating restrictions and compliance costs associated with legislative and regulatory initiatives relating to hydraulic fracturing and the protection of workers and the environment; changes in legislation and the regulatory environment; dependence on, and concentration of, major customers; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; liabilities and risks associated with prior operations; failure to maintain the Company's safety standards and record; failure to realize anticipated benefits of acquisitions and dispositions; the ability to integrate technological advances and match advances from competitors; intellectual property risks; sourcing, pricing and availability of raw materials, component parts, equipment, suppliers, facilities and skilled personnel; and the effect of accounting pronouncements issued periodically. Further information about these and other risks and uncertainties may be found under "Business Risks" below.

Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements and there can be no assurance that actual results or developments anticipated by the Company will be realized, or that they will have the expected consequences or effects on the Company or its business or operations. These statements speak only as of the respective date of this press release or the document incorporated by reference herein. The Company assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise, except as required pursuant to applicable securities laws.

BUSINESS RISKS
The business of Calfrac is subject to certain risks and uncertainties. Prior to making any investment decision regarding Calfrac, investors should carefully consider, among other things, the risk factors set forth in the Company's most recently filed Annual Information Form, which are specifically incorporated by reference herein. The Annual Information Form is available through the Internet on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR), which can be accessed at www.sedar.com. Copies of the Annual Information Form may also be obtained on request without charge from Calfrac at 411 - 8th Avenue S.W., Calgary, Alberta, Canada , T2P 1E3, or at www.calfrac.com, or by facsimile at 403-266-7381.

NON-GAAP MEASURES
With the adoption of IFRS 16, the accounting treatment for operating leases when Calfrac is the lessee, changed effective January 1, 2019 . Calfrac adopted IFRS 16 using the modified retrospective approach and the comparative information was not restated. As a result, the Company's 2019 operating income and adjusted EBITDA are not comparable to periods prior to January 1, 2019 .

Certain supplementary measures presented in this MD&A do not have any standardized meaning under IFRS and, because IFRS have been incorporated as Canadian generally accepted accounting principles (GAAP), these supplementary measures are also non-GAAP measures. These measures have been described and presented in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and ability to generate funds to finance its operations. These measures may not be comparable to similar measures presented by other entities, and are explained below.

Operating income (loss) is defined as net income (loss) before depreciation, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment of inventory, impairment of property, plant and equipment, interest, and income taxes. Management believes that operating income is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac's business segments prior to consideration of how these segments are financed or taxed. In addition, management believes this measure allows investors to more accurately compare the Company's performance with its peers by providing an indication of its financial results prior to consideration of the age or size of its asset base, or the investment and accounting policies associated with its assets. Operating income (loss) for the period was calculated as follows:

Three Months Ended March 31,

2019


2018

(C$000s)

($)


($)

(unaudited)




Net (loss) income

(36,334)


1,096

Add back (deduct):




Depreciation

61,528


38,281

Foreign exchange losses

513


678

Loss on disposal of property, plant and equipment

10,135


7,773

Interest

21,230


20,754

Income taxes

(13,449)


(608)

Operating income

43,623


67,974

 

Adjusted EBITDA is defined as net income or loss for the period less interest, taxes, depreciation and amortization, unrealized foreign exchange losses (gains), non-cash stock-based compensation, non-controlling interest, and gains and losses that are extraordinary or non-recurring. Adjusted EBITDA is presented because it gives an indication of the results from the Company's principal business activities prior to consideration of how its activities are financed and the impact of foreign exchange, taxation and depreciation and amortization charges. Adjusted EBITDA for the period was calculated as follows:

Three Months Ended March 31,

2019


2018

(C$000s)




(unaudited)




Net (loss) income

(36,334)


1,096

Add back (deduct):




Depreciation

61,528


38,281

Unrealized foreign exchange losses

144


1,041

Loss on disposal of property, plant and equipment

10,135


7,773

Impairment of inventory


579

Restructuring charges

20


768

Stock-based compensation

812


1,131

Losses attributable to non-controlling interest


2,138

Interest

21,230


20,754

Income taxes

(13,449)


(608)

Adjusted EBITDA

44,086


72,953

(1) For bank covenant purposes, EBITDA includes an additional $5.8 million
of lease payments that would have been recorded as operating expenses
prior to the adoption of IFRS 16.

 

ADDITIONAL INFORMATION
Further information regarding Calfrac Well Services Ltd., including the most recently filed Annual Information Form, can be accessed on the Company's website at www.calfrac.com or under the Company's public filings found at www.sedar.com.

FIRST QUARTER CONFERENCE CALL
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2019 first-quarter results at 10:00 a.m. (Mountain Time) on Wednesday , May 1, 2019. The conference call dial-in number is 1-888-231-8191 or 647-427-7450. The seven-day replay numbers are 1-855-859-2056 or 416-849-0833 (once connected, enter 3958399). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS


March 31,


December 31,


2019


2018

(C$000s) (unaudited)

($)


($)

ASSETS




Current assets




Cash and cash equivalents

60,164


51,901

Accounts receivable

310,013


349,431

Income taxes recoverable

95


582

Inventories

142,601


150,123

Prepaid expenses and deposits

14,892


17,527


527,765


569,564

Non-current assets




Property, plant and equipment

1,066,932


1,116,677

Right-of-use assets (note 5)

39,439


Deferred income tax assets

105,172


96,416

Total assets

1,739,308


1,782,657

LIABILITIES AND EQUITY




Current liabilities




Accounts payable and accrued liabilities

234,439


239,507

Current portion of lease obligations (note 5)

16,541


186


250,980


239,693

Non-current liabilities




Long-term debt (note 2)

952,384


989,614

Lease obligations (note 5)

22,515


552

Deferred income tax liabilities

31,754


38,978

Total liabilities

1,257,633


1,268,837

Equity attributable to the shareholders of Calfrac




Capital stock (note 3)

509,015


508,276

Contributed surplus

40,550


40,453

Loan receivable for purchase of common shares

(2,500)


(2,500)

Accumulated deficit

(65,305)


(28,971)

Accumulated other comprehensive loss

(85)


(3,438)

Total equity

481,675


513,820

Total liabilities and equity

1,739,308


1,782,657

Contingencies (note 7)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF OPERATIONS 

Three Months Ended March 31,

2019


2018

(C$000s, except per share data) (unaudited)

($)


($)

Revenue

475,012


582,838

Cost of sales

473,713


528,387

Gross profit

1,299


54,451

Expenses




Selling, general and administrative

19,204


24,758

Foreign exchange losses

513


678

Loss on disposal of property, plant and equipment

10,135


7,773

Interest

21,230


20,754


51,082


53,963

(Loss) income before income tax

(49,783)


488

Income tax expense (recovery)




Current

1,645


250

Deferred

(15,094)


(858)


(13,449)


(608)

Net (loss) income

(36,334)


1,096





Net (loss) income attributable to:




Shareholders of Calfrac

(36,334)


3,234

Non-controlling interest


(2,138)


(36,334)


1,096





(Loss) earnings per share (note 3)




Basic

(0.25)


0.02

Diluted

(0.25)


0.02

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

Three Months Ended March 31,

2019


2018

(C$000s) (unaudited)

($)


($)

Net (loss) income

(36,334)


1,096

Other comprehensive (loss) income




Items that may be subsequently reclassified to profit or loss:




Change in foreign currency translation adjustment

3,353


(323)

Comprehensive (loss) income

(32,981)


773

Comprehensive (loss) income attributable to:




Shareholders of Calfrac

(32,981)


2,902

Non-controlling interest


(2,129)


(32,981)


773

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


Equity Attributable to the Shareholders of Calfrac






Share
Capital


Contributed
Surplus


Loan
Receivable
for Purchase
of Common
Shares


Accumulated
Other
Comprehensive
Income (Loss)


Retained
Earnings
(Deficit)


Total


Non
Controlling
Interest


Total Equity

(C$000s) (unaudited)

($)


($)


($)


($)


($)


($)


($)


($)

Balance – Jan. 1, 2019

508,276


40,453


(2,500)


(3,438)


(28,971)


513,820



513,820

Net loss





(36,334)


(36,334)



(36,334)

Other comprehensive income (loss):














Cumulative translation
adjustment




3,353



3,353



3,353

Comprehensive income (loss)




3,353


(36,334)


(32,981)



(32,981)

Stock options:
















Stock-based compensation
recognized (note 4)


611





611



611

Proceeds from issuance of shares
(note 3)

32


(7)





25



25

Performance share units:
















Stock-based compensation
recognized (note 4)


200





200



200

Shares issued (note 3)

707


(707)











Balance – Mar. 31, 2019

509,015


40,550


(2,500)


(85)


(65,305)


481,675



481,675

Balance – Jan. 1, 2018

501,456


35,094


(2,500)


2,728


21,268


558,046


(14,401)


543,645

Net income (loss)





3,234


3,234


(2,138)


1,096

Other comprehensive income (loss):














Cumulative translation adjustment




(332)



(332)


9


(323)

Comprehensive income (loss)




(332)


3,234


2,902


(2,129)


773

Stock options:
















Stock-based compensation
recognized (note 4)


1,056





1,056



1,056

Proceeds from issuance of shares

627


(158)





469



469

Performance share units:
















Stock-based compensation
recognized (note 4)


75





75



75

Balance – Mar. 31, 2018

502,083


36,067


(2,500)


2,396


24,502


562,548


(16,530)


546,018

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

2019


2018

(C$000s) (unaudited)

($)


($)

CASH FLOWS PROVIDED BY (USED IN)




OPERATING ACTIVITIES




Net (loss) income

(36,334)


1,096

Adjusted for the following:




Depreciation

61,528


38,281

Stock-based compensation

812


1,131

Unrealized foreign exchange losses

144


1,041

Loss on disposal of property, plant and equipment

10,135


7,773

Interest

21,230


20,754

Interest paid

(1,573)


(4,614)

Deferred income taxes

(15,094)


(858)

Changes in items of working capital

31,900


(72,837)

Cash flows provided by (used in) operating activities

72,748


(8,233)

FINANCING ACTIVITIES




Issuance of long-term debt, net of debt issuance costs

(1,192)


29,481

Long-term debt repayments

(20,000)


(624)

Lease obligation principal repayments

(5,371)


(43)

Proceeds on issuance of common shares

25


469

Cash flows (used in) provided by financing activities

(26,538)


29,283

INVESTING ACTIVITIES




Purchase of property, plant and equipment

(33,013)


(49,221)

Proceeds on disposal of property, plant and equipment

(2,812)


1,921

Other


(7)

Cash flows used in investing activities

(35,825)


(47,307)

Effect of exchange rate changes on cash and cash equivalents

(2,122)


3,704

Increase (decrease) in cash and cash equivalents

8,263


(22,553)

Cash and cash equivalents, beginning of period

51,901


52,749

Cash and cash equivalents, end of period

60,164


30,196

See accompanying notes to the consolidated financial statements.


 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the three months ended March 31, 2019 and 2018
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated)

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Except as noted below, these condensed consolidated interim financial statements follow the same accounting policies and methods of application as the most recent annual financial statements.

For purposes of calculating income taxes during interim periods, the Company utilizes estimated annualized income tax rates. Current income tax expense is only recognized when taxable income is such that current income tax becomes payable.

(a)     Changes in Accounting Policies and Disclosure

The IASB issued IFRS 16 Leases, which requires that lessees recognize lease liabilities and right-of-use (ROU) assets related to its lease commitments on the balance sheet. IFRS 16 is effective for annual periods beginning on or after January 1, 2019 .

In accordance with the transition provisions in IFRS 16, the Company elected to adopt the new standard using the modified retrospective approach by recognizing the cumulative effect of initially applying the new standard on January 1, 2019 using the simplified right-of-use asset measurement method. Comparatives for the prior reporting period are not restated, as permitted under the specific transitional provisions in the standard. Lease liabilities are measured at the present value of the remaining lease payments, discounted using the Company's incremental borrowing rate as of January 1, 2019 . The associated ROU asset is measured at the lease liability amount on January 1, 2019 , resulting in no adjustment to the opening balance of retained earnings.

The Company elected to use the following practical expedients permitted under the new standard:

  • Leases with a remaining lease term of twelve months or less as at January 1, 2019 are considered short-term leases. As such, payments for such leases will be expensed as incurred.
  • Leases of low dollar value based on the value of the asset when it is new, regardless of the age of the asset, will be expensed as incurred.


Several key judgments and estimates were made such as assessing whether an arrangement contains a lease, determining the lease term, calculating the incremental borrowing rate and whether to account for the lease and any non-lease components as a single lease component.

The Company is subject to financial covenants relating to working capital, leverage and the generation of cash flow in respect of its operating and revolving credit facilities. The adoption of IFRS 16 has no impact on the Company's reported bank covenants as the effects of the new standard are excluded from the covenant calculations.

See note 5 for further information on leases.

(b)     Changes in Accounting Estimates

Depreciation of the Company's property, plant and equipment incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change, thereby affecting the value of the Company's property, plant and equipment.

Effective January 1, 2019 , the Company revised its useful life depreciation estimate and salvage value for certain of its components relating to field equipment. This change was adopted as a change in accounting estimate on a prospective basis, which resulted in a one-time depreciation charge of $9,540 to the statement of operations for the three months ended March 31, 2019 .

2.  LONG-TERM DEBT


March 31,


December 31,


2019


2018

(C$000s)

($)


($)

US$650,000 senior unsecured notes due June 15, 2026, bearing interest at 8.50% payable




semi-annually

868,595


886,730

$347,500 extendible revolving term loan facility, secured by Canadian and U.S. assets of




the Company

100,000


120,000

Less: unamortized debt issuance costs

(16,211)


(17,116)


952,384


989,614

 

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at March 31, 2019, was $670,321 (December 31, 2018 – $661,492 ). The carrying value of the revolving term loan facility approximates its fair value as the interest rate is not significantly different from current interest rates for similar loans.

On May 30, 2018 , the Company closed a private offering of US$650,000 aggregate principal amount of its 8.50 percent senior notes due 2026. Fixed interest on the notes is payable on June 15 and December 15 of each year. The notes will mature on June 15, 2026 , and provide the Company with the option to redeem up to 10 percent of the aggregate principal amount of the notes at a redemption price of 108.50 percent of the principal amount with the proceeds of asset sales at any time prior to December 15, 2019 . The Company used a portion of the net proceeds from the offering of the notes to repay all of its outstanding 7.50 percent senior notes due 2020. The early repayment of these notes resulted in a make-whole interest payment of $10,403 and the write-off of the remaining $5,023 unamortized deferred finance costs, recorded during 2018.

On May 31, 2018 , the Company repaid in full the remaining $196,500 principal amount of its second lien senior secured term loan facility. The term loan, which had a maturity date of September 30, 2020 , provided the Company the right to prepay the loan prior to June 10, 2018 with a nominal prepayment premium. The repayment of the second lien senior secured term loan facility resulted in the write-off of the remaining unamortized deferred finance costs of $5,787 , recorded during 2018.

Subsequent to March 31, 2019 , the Company amended and extended its credit facilities while maintaining its total facility capacity at $375,000 . The facilities consist of an operating facility of $40,000 and a revolving term loan facility of $335,000 . The Company's credit facilities were extended by a term of two years and mature on June 1, 2022 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 2.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.50 percent above the respective base rates. The accordion feature of the revolving term loan facility remains at $100,000 , and is available to the Company during the term of the agreement. The Company incurs interest at the high end of the ranges outlined above if its net Total Debt to Adjusted EBITDA ratio is above 4.00:1.00. Additionally, in the event that the Company's net Total Debt to Adjusted EBITDA ratio is above 5.00:1.00, certain restrictions would apply including the following: (a) acquisitions will be subject to majority lender consent; and (b) distributions will be restricted other than those relating to the Company's share unit plans; and no increase in the rate of dividends will be permitted. As at March 31, 2019, the Company's net Total Debt to Adjusted EBITDA ratio was 3.10:1.00.

Debt issuance costs related to this facility are amortized over its term.

Interest on long-term debt (including the amortization of debt issuance costs and debt discount) for the three months ended March 31, 2019 was $20,726 (three months ended March 31, 2018 – $20,690 ).

The following table sets out an analysis of long-term debt and the movements in long-term debt for the periods presented:


2019

(C$000s)

($)

Balance, January 1

989,614

Issuance of long-term debt, net of debt issuance costs

(1,192)

Long-term debt repayments

(20,000)

Amortization of debt issuance costs and debt discount

1,768

Foreign exchange adjustments

(17,806)

Balance, March 31

952,384

 

At March 31, 2019, the Company had utilized $869 of its loan facility for letters of credit and had $100,000 outstanding under its revolving term loan facility, leaving $274,131 in available credit, subject to a monthly borrowing base, as determined using the previous month's results, which at March 31, 2019, when calculated on a proforma basis for the amendments made subsequent to the first quarter, resulted in a liquidity amount of $246,319 .

See note 6 for further details on the covenants in respect of the Company's long-term debt.

3.  CAPITAL STOCK
Authorized capital stock consists of an unlimited number of common shares.


Three Months Ended


Year Ended


March 31, 2019


December 31, 2018

Continuity of Common Shares

Shares


Amount


Shares


Amount


(#)


($000s)


(#)


($000s)

Balance, beginning of period

144,462,532


508,276


143,755,741


501,456

Issued upon exercise of stock options

12,425


32


483,974


1,820

Issued upon vesting of performance share units

104,865


707



Issued on acquisition



222,817


1,250

Balance, end of period

144,579,822


509,015


144,462,532


504,526

Shares to be issued

668,449


3,750


668,449


3,750


145,248,271


512,765


145,130,981


508,276

 

The weighted average number of common shares outstanding for the three months ended March 31, 2019 was 144,404,051 basic and 146,238,510 diluted (three months ended March 31, 2018 – 143,722,349 basic and 146,623,676 diluted). The difference between basic and diluted shares is attributable to the dilutive effect of stock options issued by the Company as disclosed in note 4, and the shares to be issued.


4.  SHARE-BASED PAYMENTS
(a)     Stock Options

Three Months Ended March 31,

2019


2018

Continuity of Stock Options

Options


Average
Exercise Price


Options


Average
Exercise Price


(#)


($)


(#)


($)

Balance, January 1

9,392,095


4.70


9,616,173


5.30

Granted during the period

1,542,000


2.48


1,356,150


5.78

Exercised for common shares

(12,425)


1.99


(172,950)


2.71

Forfeited

(239,401)


3.94


(207,248)


5.06

Expired

(5,200)


18.02


(95,250)


12.56

Balance, March 31

10,677,069


4.39


10,496,875


5.34

 

Stock options vest equally over three to four years and expire five years from the date of grant. The exercise price of outstanding options range from $1.34 to $20.81 with a weighted average remaining life of 2.70 years. When stock options are exercised, the proceeds together with the compensation expense previously recorded in contributed surplus, are added to capital stock.

The weighted average fair value of options granted during 2019, determined using the Black-Scholes valuation method, was $1.02 per option (three months ended March 31, 2018 – $2.54 per option). The Company applied the following assumptions in determining the fair value of options on the date of grant:

Three Months Ended March 31,

2019


2018

Expected life (years)

3.00


3.00

Expected volatility

59.83%


64.72%

Risk-free interest rate

1.75%


1.82%

Expected dividends

$0.00


$0.00

 

Expected volatility is estimated by considering historical average share price volatility.

(b)     Share Units

Three Months Ended March 31,

2019


2018

Continuity of Stock Units

Deferred Share
Units


Performance
Share Units


Restricted
Share Units


Deferred Share
Units


Performance
Share Units


Restricted
Share Units


(#)


(#)


(#)


(#)


(#)


(#)

Balance, January 1

145,000


1,108,300


3,139,150


145,000


683,665


4,275,183

Granted during the period

145,000


1,098,368



145,000


737,200


Exercised

(145,000)


(244,683)


(1,998,600)


(145,000)



(876,683)

Forfeited


(44,969)


(54,700)



(10,000)


(76,300)

Balance, March 31

145,000


1,917,016


1,085,850


145,000


1,410,865


3,322,200

 

Three Months Ended March 31,

2019


2018


($)


($)

Expense from:




Stock options

611


1,056

Deferred share units

112


250

Performance share units

765


718

Restricted share units

783


3,067

Total stock-based compensation expense

2,271


5,091

 

Stock-based compensation expense is included in selling, general and administrative expenses.

The Company grants deferred share units to its outside directors. These units vest in November of the year of grant and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the deferred share units is recognized equally over the vesting period, based on the current market price of the Company's shares. At March 31, 2019, the liability pertaining to deferred share units was $81 (December 31, 2018 – $354 ).

The Company grants performance share units to a senior officer. These performance share units contain a cash-based component and an equity-based component. The cash-based component vests over three years based on corporate financial performance thresholds and are settled either in cash (equal to the market value of the underlying shares at the time of vesting) or in Company shares purchased on the open market. The equity-based component vests over three years without any further conditions and are settled in treasury shares issued by the Company. At March 31, 2019, the liability pertaining to performance share units was $1,107 (December 31, 2018 – $761 ).

In 2018, the Company expanded its performance share unit plan to its employees. These performance share units contain a cash-based component and an equity-based component. The cash-based component vests over three years based on corporate financial performance thresholds and are settled either in cash (equal to the market value of the underlying shares at the time of vesting) or in Company shares purchased on the open market. The equity-based component vests over three years without any further conditions and are settled in treasury shares issued by the Company. At March 31, 2019, the liability pertaining to the cash-based component of performance share units was $231 (December 31, 2018 – $200 ).

Prior to 2018, the Company granted restricted share units to its employees. These units vest over three years and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the restricted share units is recognized over the vesting period, based on the current market price of the Company's shares. At March 31, 2019, the liability pertaining to restricted share units was $909 (December 31, 2018 – $3,158 ).

Changes in the Company's obligations under the deferred, performance and restricted share unit plans, which arise from fluctuations in the market value of the Company's shares underlying these compensation programs, are recorded as the share value changes.

5.  LEASES
The Company's leasing activities comprise of: buildings and various field equipment including railcars and motor vehicle leases.

From January 1, 2019 , leases are recognized as a right-of-use (ROU) asset and a corresponding liability at the date at which the leased asset is available for use by the Company. Each lease payment is allocated between the liability (principal) and interest. The interest is charged to the statement of operations over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The ROU asset is depreciated on a straight-line basis over the shorter of the asset's useful life and the lease term on a straight-line basis.

The Company recognizes a ROU asset at cost consisting of the amount of the initial measurement of the lease liability, plus any lease payments made to the lessor at or before the commencement date less any lease incentives received, the initial estimate of any restoration costs and any initial direct costs incurred by the lessee. The provision for any restoration costs is recognized as a separate liability as set out in IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

The Company recognizes a lease liability equal to the present value of the lease payments during the lease term that are not yet paid. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the Company's incremental borrowing rate.

Payments associated with short-term leases and leases of low-value assets are recognized as an expense in the statement of operations. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise I.T. equipment and small items of office equipment.

On initial application of IFRS 16 on January 1, 2019 , the Company recorded ROU assets and lease obligations of $44,917 on the balance sheet. The weighted average incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 5.31 percent.

The following table summarizes the reconciliation between the Company's operating lease commitments as at December 31, 2018 to the lease obligations recognized on January 1, 2019 upon the adoption of IFRS 16.

(C$000s)

($)

Operating lease commitments disclosed as at December 31, 2018

34,564

Add: leases disclosed as purchase obligations as at December 31, 2018

14,667

Less: leases that do not meet the definition of a lease under IFRS 16

(9,259)

Less: low-value leases recognized as an expense

(857)

Less: short-term leases recognized as an expense

(540)

Add: residual value guarantees on leases

8,801

Less: discounted using the Company's incremental borrowing rate at January 1, 2019

(3,197)

Add: finance lease obligations recognized as at December 31, 2018

738

Lease liability recognized as at January 1, 2019

44,917



Current lease liability

24,318

Non-current lease liability

20,599

Lease liability recognized as at January 1, 2019

44,917

 

The recognized right-of-use assets relate to the following types of assets:


March 31,


January 1,


2019


2019

(C$000s)

($)


($)

Buildings

9,665


11,215





Field equipment

29,774


33,702


39,439


44,917

 

For the three months ended March 31, 2019 , depreciation expense on right-of-use assets was $5,037 .

6.  CAPITAL STRUCTURE
The Company's capital structure is comprised of shareholders' equity and debt. The Company's objectives in managing capital are (i) to maintain flexibility so as to preserve its access to capital markets and its ability to meet its financial obligations, and (ii) to finance growth, including potential acquisitions.

The Company manages its capital structure and makes adjustments in light of changing market conditions and new opportunities, while remaining cognizant of the cyclical nature of the oilfield services sector. To maintain or adjust its capital structure, the Company may revise its capital spending, adjust dividends, if any, paid to shareholders, issue new shares or new debt or repay existing debt.

The Company monitors its capital structure and financing requirements using, amongst other parameters, the ratio of net debt to operating income. Operating income for this purpose is calculated on a 12-month trailing basis and is defined as follows:


March 31,


December 31,

For the Twelve Months Ended,

2019


2018

(C$000s)

($)


($)

Net income

(63,607)


(26,177)

Adjusted for the following:




Depreciation

183,565


160,318

Foreign exchange losses

37,882


38,047

Loss on disposal of property, plant and equipment

32,679


30,317

Impairment of property, plant and equipment

115


115

Impairment of inventory

7,167


7,167

Interest

107,106


106,630

Income taxes

(17,433)


(4,592)

Operating income

287,474


311,825

 

Net debt for this purpose is calculated as follows:


March 31,


December 31,

As at

2019


2018

(C$000s)

($)


($)

Long-term debt, net of debt issuance costs and debt discount (note 2)

952,384


989,614

Lease obligations

39,056


738

Less: cash and cash equivalents

(60,164)


(51,901)

Net debt

931,276


938,451

 

The ratio of net debt to operating income does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

At March 31, 2019, the net debt to operating income ratio was 3.24:1 (December 31, 2018 – 3.01:1) calculated on a 12-month trailing basis as follows:


March 31,


December 31,

For the Twelve Months Ended

2019


2018

(C$000s, except ratio)

($)


($)

Net debt

931,276


938,451

Operating income

287,474


311,825

Net debt to operating income ratio

3.24:1


3.01:1

 

The Company is subject to certain financial covenants relating to working capital, leverage and the generation of cash flow in respect of its operating and revolving credit facilities. These covenants are monitored on a monthly basis. At March 31, 2019 and December 31, 2018, the Company was in compliance with its covenants with respect to its credit facilities.


Covenant

Actual

As at March 31,

2019

2019

Working capital ratio not to fall below

1.15x

2.25x

Funded Debt to Adjusted EBITDA not to exceed(1)(2)

3.00x

0.15x

Funded Debt to Capitalization not to exceed(1)(3)

0.30x

0.03x

(1) Funded Debt is defined as Total Debt excluding all outstanding senior unsecured notes and lease obligations. Total Debt includes bank loans and long-term debt (before unamortized debt issuance costs and debt discount) plus outstanding letters of credit. For the purposes of the Total Debt to Adjusted EBITDA ratio, the Funded Debt to Capitalization Ratio and the Funded Debt to Adjusted EBITDA ratio, the amount of Total Debt or Funded Debt, as applicable, is reduced by the amount of cash on hand with lenders (excluding any cash held in a segregated account for the purposes of a potential equity cure).

(2)  Adjusted EBITDA is defined as net income or loss for the period adjusted for interest, taxes, depreciation and amortization, non-cash stock-based compensation, non-controlling interest, and gains and losses that are extraordinary or non-recurring.

(3) Capitalization is Total Debt plus equity attributable to the shareholders of Calfrac.

 

Adjusted EBITDA is defined as net income or loss for the period less interest, taxes, depreciation and amortization, unrealized foreign exchange losses (gains), non-cash stock-based compensation, non-controlling interest, and gains and losses that are extraordinary or non-recurring. Adjusted EBITDA is presented because it gives an indication of the results from the Company's principal business activities prior to consideration of how its activities are financed and the impact of foreign exchange, taxation and depreciation and amortization charges. Adjusted EBITDA for the period was calculated as follows:

For the Three Months Ended March 31,

2019


2018

(C$000s)

($)


($)

Net (loss) income

(36,334)


1,096

Add back (deduct):




Depreciation

61,528


38,281

Unrealized foreign exchange losses

144


1,041

Loss on disposal of property, plant and equipment

10,135


7,773

Impairment of inventory


579

Restructuring charges

20


768

Stock-based compensation

812


1,131

Losses attributable to non-controlling interest


2,138

Interest

21,230


20,754

Income taxes

(13,449)


(608)

Adjusted EBITDA

44,086


72,953

(1) For bank covenant purposes, EBITDA includes an additional $5,843 of
lease payments that would have been recorded as operating expenses prior
to the adoption of IFRS 16.

 

Advances under the credit facilities are limited by a borrowing base. The borrowing base is calculated based on the following:

i.        

Eligible North American accounts receivable, which is based on 75 percent of accounts receivable owing by companies rated BB+ or lower by Standard & Poor's (or a similar rating agency) and 85 percent of accounts receivable from companies rated BBB- or higher;

ii.       

100 percent of unencumbered cash of the parent company and its U.S. operating subsidiary, excluding any cash held in a segregated account for the purposes of a potential equity cure; and

iii.     

25 percent of the net book value of property, plant and equipment (PP&E) of the parent company and its U.S. operating subsidiary. The value of PP&E excludes assets under construction and is limited to $150,000.

 

The indenture governing the senior unsecured notes contains restrictions on the Company's ability to pay dividends, purchase and redeem shares of the Company, and make certain restricted investments in circumstances where

i.        

the Company is in default under the indenture or the making of such payment would result in a default;

ii.       

the Company is not meeting the Fixed Charge Coverage Ratio(1) under the indenture of at least 2:1 for the most recent four fiscal quarters; or

iii.     

there is insufficient room for such payment within a builder basket included in the indenture. 

 

(1)  The Fixed Charge Coverage Ratio is defined as cash flow to interest expense. Cash flow is a non-GAAP measure and does not have a standardized meaning under IFRS and is defined under the indenture as net income (loss) attributable to the shareholders of Calfrac before depreciation, extraordinary gains or losses, unrealized foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment or reversal of impairment of assets, restructuring charges, provision for settlement of litigation, stock-based compensation, interest, and income taxes. Interest expense is adjusted to exclude any non-recurring charges associated with redeeming or retiring any indebtedness prior to its maturity.

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20,000 . As at March 31, 2019, this basket was not utilized.

The indenture also restricts the incurrence of additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $375,000 or 30 percent of the Company's consolidated tangible assets.

As at March 31, 2019, the Company's Fixed Charge Coverage Ratio of 3.51:1 was higher than the required 2:1 ratio and the aforementioned prohibitions will not be applicable as long as the Company remains above this ratio.

The Company has measures in place to ensure that it has sufficient liquidity to navigate the cyclical nature of the oilfield services sector and safeguard the Company's ability to continue as a going concern. The Company negotiated amendments to its credit facilities to provide increased financial flexibility. These amendments include an "Equity Cure" feature pursuant to which proceeds from equity offerings may be applied as both an adjustment in the calculation of Adjusted EBITDA and as a reduction of Funded Debt towards the Funded Debt to Adjusted EBITDA ratio covenant for any of the quarters ending prior to and including June 30, 2022 , subject to certain conditions including:

i.        

the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;

ii.       

the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;

iii.     

the maximum proceeds of each common share issuance permitted to be attributed to Adjusted EBITDA cannot exceed the greater of 50 percent of Adjusted EBITDA on a rolling four-quarter basis and $25,000; and

iv.     

if proceeds are not used immediately as an equity cure they must be held in a segregated bank account pending an election to use them for such purpose, and if they are removed from such account but not used as an equity cure they will no longer be eligible for such use.

 

In addition, to the extent that proceeds from an equity offering are used as part of the Equity Cure, such proceeds are included in the calculation of the Company's borrowing base.

7.  CONTINGENCIES

GREEK LITIGATION
As a result of the acquisition and amalgamation with Denison in 2004, the Company assumed certain legal obligations relating to Denison's Greek operations.

In 1998, North Aegean Petroleum Company E.P.E. ("NAPC"), a Greek subsidiary of a consortium in which Denison participated (and which is now a majority-owned subsidiary of the Company), terminated employees in Greece as a result of the cessation of its oil and natural gas operations in that country. Several groups of former employees filed claims against NAPC and the consortium alleging that their termination was invalid and that their severance pay was improperly determined.

In 1999, the largest group of plaintiffs received a ruling from the Athens Court of First Instance that their termination was invalid and that salaries in arrears amounting to approximately $10,270 ( 6,846 euros ) plus interest were due to the former employees. This decision was appealed to the Athens Court of Appeal, which allowed the appeal in 2001 and annulled the above-mentioned decision of the Athens Court of First Instance. The said group of former employees filed an appeal with the Supreme Court of Greece , which was heard on May 29, 2007 . The Supreme Court of Greece allowed the appeal and sent the matter back to the Athens Court of Appeal for the consideration of the quantum of awardable salaries in arrears. On June 3, 2008 , the Athens Court of Appeal rejected NAPC's appeal and reinstated the award of the Athens Court of First Instance, which decision was further appealed to the Supreme Court of Greece . The matter was heard on April 20, 2010 and a decision rejecting such appeal was rendered in June 2010 . As a result of Denison's participation in the consortium that was named in the lawsuit, the Company has been served with three separate payment orders, one on March 24, 2015 and two others on December 29, 2015 . The Company was also served with an enforcement order on November 23 , 2015.  Oppositions have been filed on behalf of the Company in respect of each of these orders which oppose the orders on the basis that they were improperly issued and are barred from a statute of limitations perspective. The salaries in arrears sought to be recovered through these orders are part of the $10,270 ( 6,846 euros ) cited above and the interest being sought in respect of these orders is part of the $27,454 ( 18,300 euros ) cited below. Provisional orders granting a temporary suspension of any enforcement proceedings have been granted in respect of all of the orders that have been served. The order served on March 24, 2015 was heard on November 24, 2015 and a decision was issued on November 25, 2016 accepting the Company's opposition on the basis that no lawful service of Judgment No 4528/2008 had taken place until the filing of the opponents' petition and/or the issuance of the payment order. The plaintiffs have filed an appeal against the above decision which was heard on October 16, 2018 and a decision in respect of this appeal is currently pending. A hearing in respect of the order served on November 23, 2015 took place on October 31, 2018 and a decision in respect of such order is currently pending. A hearing in respect of the orders served in December of 2015 scheduled for September 20, 2016 was adjourned until November 21, 2016 and two decisions were issued on January 9, 2017 accepting the Company's oppositions on a statute of limitations basis. The plaintiffs filed appeals against the above decisions which were heard on October 16, 2018 and decisions in respect of such appeals are pending.

NAPC is also the subject of a claim for approximately $4,294 ( 2,862 euros ) plus associated penalties and interest from the Greek social security agency for social security obligations associated with the salaries in arrears that are the subject of the above-mentioned decision.

The maximum aggregate interest and penalties payable under the claims noted above, as well as three other immaterial claims against NAPC totaling $867 ( 578 euros ), amounted to $27,454 ( 18,300 euros ) as at March 31, 2019.

Management is of the view that it is improbable there will be a material financial impact to the Company as a result of these claims. Consequently, no provision has been recorded in these consolidated financial statements.

8.  SEGMENTED INFORMATION
The Company's activities are conducted in four geographical segments: Canada , the United States , Russia and Argentina . All activities are related to hydraulic fracturing, coiled tubing, cementing and other well completion services for the oil and natural gas industry.

The business segments presented reflect the Company's management structure and the way its management reviews business performance. The Company evaluates the performance of its operating segments primarily based on operating income, as defined below.


Canada


United States


Russia


Argentina


Corporate


Consolidated

(C$000s)

($)


($)


($)


($)


($)


($)

Three Months Ended March 31, 2019












Revenue

131,395


259,125


29,078


55,414



475,012

Operating income (loss)(1)

13,726


37,744


(2,776)


4,855


(9,926)


43,623

Segmented assets

566,199


916,136


107,339


149,634



1,739,308

Capital expenditures

3,921


19,428


2,179


2,690



28,218













Three Months Ended March 31, 2018












Revenue

189,728


315,980


31,235


45,895



582,838

Operating income (loss)(1)

31,710


53,249


(958)


(3,018)


(13,009)


67,974

Segmented assets

649,582


970,698


117,662


168,997



1,906,939

Capital expenditures

12,122


37,582


69


1,561



51,334

(1) Operating income (loss) is defined as net income (loss) before depreciation, foreign exchange gains or losses, gains or losses on disposal of
property, plant and equipment, impairment of inventory, impairment of property, plant and equipment, interest, and income taxes.

 

Three Months Ended March 31,

2019


2018

(C$000s)

($)


($)

Net (loss) income

(36,334)


1,096

Add back (deduct):




Depreciation

61,528


38,281

Foreign exchange losses

513


678

Loss on disposal of property, plant and equipment

10,135


7,773

Interest

21,230


20,754

Income taxes

(13,449)


(608)

Operating income

43,623


67,974

 

Operating income does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

SOURCE Calfrac Well Services Ltd.


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