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Edited Transcript of CFW.TO earnings conference call or presentation 28-Feb-19 5:00pm GMT

Q4 2018 Calfrac Well Services Ltd Earnings Call

CALGARY May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Calfrac Well Services Ltd earnings conference call or presentation Thursday, February 28, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jose Fernando Aguilar

Calfrac Well Services Ltd. - President, CEO & Non-Independent Director

* Michael D. Olinek

Calfrac Well Services Ltd. - CFO

* Scott Treadwell

Calfrac Well Services Ltd. - VP of Capital Markets & Strategy

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Conference Call Participants

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* Greg R. Colman

National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst

* Ian Brooks Gillies

GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure

* Jon Morrison

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Kurt Kevin Hallead

RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst

* Taylor Zurcher

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research

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Presentation

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Operator [1]

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Good morning. My name is Lindsey and I will be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Ltd. Fourth Quarter 2018 Earnings Release and Conference Call. (Operator Instructions) Thank you. Fernando Aguilar, President and Chief Executive Officer, you may begin your conference.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [2]

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Thank you, Lindsey. Good morning, and welcome to our discussion of Calfrac Well Services fourth quarter results. Joining me today on the call are Mike Olinek, Calfrac's Chief Financial Officer; and Scott Treadwell, our Vice President of Capital Markets and Strategy. This morning's conference call will be conducted as follows. I will provide a summary of the quarter after which Mike will provide an overview of the financial performance of the company. I will then close the presentation with an outlook for Calfrac's business.

After the presentation, we will open the call to questions. In a news release earlier today, Calfrac reported its fourth quarter 2018 results. Please note that these financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-IFRS financial measures such as adjusted EBITDA and operating income. Please see our news release for additional disclosure on these financial measures.

Our comments today will also include forward-looking statements regarding Calfrac's future results and prospects. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on forward-looking statements and these risk factors.

Calfrac results in the fourth quarter show that in spite of higher levels of volatility in our industry, a business model based on the safety executing programs for top-tier clients while managing capital prudently is one that can deliver compelling results in spite of the volatility of our industry. 2018 has been an eventful and successful year for Calfrac, and on behalf of the Board and the management team, I would like to offer my sincere thanks and congratulations to all of our employees on a job well done.

The fourth quarter was witnessed to substantial changes in commodity prices, both globally and in the Canadian market. These changes caused ripples of uncertainty through the plans of our clients, including the slowing of activity seen in the fourth quarter and a more cautious approach to 2019 budgeting, while uncertainty is a part of our industry, the fact that the North American E&P group continues to budget and spend rationally is a fundamentally good development for the industry.

The cyclical nature of our industry is magnified when full capital allocation becomes a norm. But the rational behavior witnessed in our core clients and some of the peers bodes well for returns over the longer term. Activity levels in North America were weaker than expected, largely due to a volatility in commodity prices as you spoke off. This volatility was magnified by a widening of Canadian oil differentials and this combination caused significant slowdowns through the last 2 weeks of the quarter.

We were able to make some minor adjustments to cost, but with a prospect to the relatively solid schedule for the first quarter, our Canadian division had to endure the lack of activity in the latter half of the December. Our operations in the United States were also impacted by the volatility in commodity prices. However, the impact was less severe and was largely defined by program deferrals rather than cancellations. Our operations in Argentina continued to show elevated levels of activity and good profitability in spite of some client program delays that resulted in some sequential reaction in results. In Russia, our operations continue to struggle with client-based program delays and changes how impacted the entire year in that country.

Now I will pass the call over to Mike who will present an overview of our quarterly financial performance.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [3]

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Thank you, Fernando. And thank you, everyone, for joining us for today's call. I'm pleased to report that in addition to the strong operational results announced this morning, the company generated almost CAD 110 million in discretionary cash flow after funding CAD 40 million in interest payments along with CAD 35 million in capital. This cash flow was used to reduce borrowings by CAD 75 million, as well as increase cash by approximately CAD 35 million.

Calfrac's ability to generate free cash flow remains strong, as does our focus in 2019 on deploying those funds towards further debt reduction. Consolidated revenue in the fourth quarter increased by 3% year-over-year, primarily due to higher activity levels in Canada and larger job sizes in the United States.

Adjusted EBITDA reported for the quarter was CAD 62.9 million compared to CAD 49.2 million a year ago. Operating income was up 38% to CAD 62 million from CAD 44.8 million in 2017. These improved results were driven mainly by a larger active fleet in the United States and improved profitability in Argentina as well as the accrual of full year bonus compensation in the fourth quarter of 2017.

In Canada, fourth quarter revenue was up 6% from the same quarter in 2017 as a higher job count and more active equipment was offset by slightly lower revenue per fracturing job. Calfrac's Canadian operations deploy 289,000 horsepower and 11 coiled tubing units in its operations in the fourth quarter, up 4% and 22% respectively from the prior year.

Operating income of CAD 16.7 million rose 13% from 2017, primarily due to the larger equipment base combined with strong cost management and the absence of a full year bonus accrual that was recorded in the fourth quarter of 2017. In the United States, operations continued at a solid pace and generated revenue of CAD 279.3 million. Although as many as 4 of the company's 17 fleets experienced scheduling gaps and impacted activity during the quarter.

Fracturing job count in the United States decreased by 5%. while fracturing revenue per job increased by 10%, driven primarily by the growth of operations in Texas, which have larger average job sizes, as well as a 4% improvement in the value of the U.S. dollar. The company's United States operations generated operating income of CAD 51.5 million during the fourth quarter of 2018 compared to CAD 49.5 million in the same period in 2017.

Similar to Canada, the U.S. division's results in the fourth quarter of 2017 included a full year bonus accrual. The overall similarity and financial performance, despite the increase in operating equipment, as a result of more variable utilization during the quarter and in 2017.

Revenue from Calfrac's Russian operations of CAD 24.9 million was 29% lower than the corresponding period of 2017. The decrease in revenue was primarily due to lower activity levels but was also impacted by the completion of smaller average jobs. The decrease in activity in revenue in the company's Russian division resulted in breakeven operating income compared to CAD 4 million in the prior year. Previously disclosed operational and weather impacts and a 9% depreciation of the Russian ruble were the largest drivers of this change. Calfrac's Argentinian operations generated revenue of CAD 49.6 million during the fourth quarter of 2018, an increase of 8% from the prior year.

The revenue increase is mainly due to higher work volumes across the division, but particularly in the Vaca Muerta shale play. The company's operations in Argentina reported operating income of CAD 4.4 million compared to a loss of CAD 3.1 million in the fourth quarter of 2017. Improved utilization and cost control at all levels were the main drivers of the improved profitability. The company's corporate division recorded total costs of CAD 10.3 million during the fourth quarter, a decrease of CAD 10.1 million from the prior year. The decrease was largely driven by the accrual of compensation costs throughout the year as opposed to the full year accrual that occurred in the fourth quarter of 2017. The company also recorded interest expense of CAD 21 million during the quarter, which was consistent with the previous year.

In December, Calfrac's Board of Directors approved the company's 2019 capital budget of CAD 149 million. The company will continue to monitor market conditions and adjust spending as required. With the CAD 75 million reduction in borrowings during the fourth quarter, Calfrac made excellent progress towards its stated goal of debt reduction. While forecast for 2019 include a large amount of uncertainty, particularly in the Canadian market, we expect that the company will generate positive cash flow during the year and further reduce leverage, as a result.

To summarize the balance sheet, the company had working capital of CAD 329.9 million at December 31st, which included approximately CAD 51.9 million of cash. In addition, Calfrac had used CAD 0.9 million of its credit facilities for letters of credit and had borrowings of CAD 120 million on its credit facilities, leaving CAD 254.1 million in potential borrowing capacity at the end of the fourth quarter, As of December 31, 2018, the company was in full compliance with its financial covenants.

I would now like to turn the call back to Fernando to provide our outlook.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [4]

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Thank you, Mike. Before I give a detailed outlook, I would like to update our review on industry fundamentals. The early part of 2019 has seen a solid recovery in oil prices globally, as well as narrowing of Canadian differentials. There remain significant uncertainty in the global oil picture specifically events unfolding in Venezuela and Nigeria.

On the supply side, the OPEC plus group appears to be pursuing a policy of balancing global markets likely supporting prices near current levels. Should global macro uncertainty around trade be resolved, we expect commodities to benefit from higher consensus demand, estimates and an overall tighter market.

Turning to more specific outlooks in the Permian Basin, incremental pipeline capacity is targeted to come on stream in the latter part of 2019 and we expect this capacity to require higher completion activity beginning in the middle of the year. In fact, we have begun to see an uptick in this flow in Texas for program starting in the next 3 months.

We do not foresee any meaningful change in activity levels in the short term and expect that we will range between 13 and 17 fleets active through the first and second quarter. To date, in the first quarter, winter weather conditions have resulted in clients pausing operations in North Dakota and Pennsylvania, resulting in reduced utilization for up to 5 fleets during parts of February. With improved weather expected, we expect to see those to return to high levels of activity in March.

Our outlook remains cautious. While differentials have narrowed, we still believe that our client base remains hesitant to invest significant growth capital due to political and regulatory issues that introduced significant uncertainty into long-term assumptions. Activity in the first quarter has been solid, also Calfrac, it is removed from service [wantedly] at the beginning of January. Most of the people and equipment have been redeployed to the United States in support of operations there.

As in the Northern United States, winter weather conditions have slowed operations in Canada for parts of February and ground conditions remain the largest unknown through March that would ultimately dictate how the first quarter finishes. Beyond that, while our second quarter schedule continues to improve, the general level of visibility on programs is lower than normal.

We expect that visibility to improve in the months ahead and we will contemplate adjustments to our fleet disposition based on our outlook at that time. My task will be to balance the need to deliver acceptable financial returns while maintaining the support and service Calfrac is known for in our Canadian franchise.

In the longer term, for Canada to be a growth market for Calfrac, it must be a growth market for investors and our clients. The Canadian energy industry is a world leader in environmental stewardship and the [well] generated goes to citizens in a democratic country that respects human rights, equality of opportunity and the rule of law. Growth in our industry has the potential to displace oil and gas from countries that have no respect for human rights of [overriding] environment.

Furthermore, Canada can be a significant contributor to growth in developing nations by supplying clean natural gas, which will have far more impact on global emissions than handcuffing our industry at the behest of -- and for the benefit outside (inaudible) that promote a singular goal of killing our industry.

Now I would like to discuss Calfrac's international operations. In Russia, the fourth quarter was below our expectations, largely due to our decision to cease operations in Usinsk and a number of client program delays. However, on the back of our successful tendering campaign, we expect operations in Russia to trend closer to 2017 levels than those in last year. We expect the winter conditions and associated costs will impact profitability in the first quarter in line with prior years.

Also down sequentially, revenue in Argentina remains strong in the fourth quarter as a result of higher activity in the Vaca Muerta shale play. Profitability remained positive in the fourth quarter and our visibility through the early part of 2019 remains strong. While individual client programs can have a large impact on short-term results in smaller operation, we believe Calfrac's operations in Argentina are very poised to deliver growth in activity, while posting strong margins in the year ahead.

To summarize, Calfrac is successfully navigating the uncertainties in our business and remains well positioned to respond to these events, and will possibly advantage of our portfolio of operations to mitigate risk and enhance returns. We will continue to focus on executing safe and efficient operations for our employees and clients with a corporate objective to generate cash flow from operations in 2019 to further reduce leverage.

Thank you all very much for joining us today and I will now turn the call back to Lindsey for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Kurt Hallead with RBC.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [2]

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So my follow-up question would be regarding your -- you made some commentary here that you're starting to get some indications of a pickup in frac activity and completion activity in the U.S. and maybe, in particular, the Permian. Can you just kind of talk to that a little bit more and what kind of indications are you getting and gives you the conviction and confidence about the pickup in activity starting in mid-year?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [3]

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This is basically related to how we see our marketing and sales group, Kurt, are related to receiving tenders and responding to them and this is -- it is happening in Texas and also in the area -- this is where we are operating. So more bidding activity happening as we speak. That is going to translate into activity in the next 3 months or so.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [4]

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And in the context of that increase in bidding activity, you get a sense that there could be some improvement in pricing as well in the U.S.?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [5]

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Well, I think today we are basically looking at a little bit of flattish environment in terms of the pricing we see today. Because this reduced activity in the U.S.in Q4 and what we see today in Q1 is basically keeping some idle equipment in the market. So I don't see -- I see that this is the beginning of that activity trend that is going to pick up, but we also see, as well as these activities, -- these bids become reality and they are translated into work. There will be, let's say, less inventory parked in the horsepower available in the country. So pricing could be basically moving higher in the second part of the year.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [6]

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Great. Appreciate that. Maybe on a follow-up on the debt dynamic, if you mentioned the reduction for the year, I didn't really pick up on it, but just kind general sense of what you -- what we could expect potentially for debt reduction in '19?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [7]

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Kurt, it's Mike here. Yes, we certainly believe that we're going to monitor our capital spend and working capital quite closely. And with that, we believe we can generate cash from the business over a large range of cash flow scenarios. Obviously, the uncertainty is still out there in our business, I think obviously mainly in the Canadian segment, but overall, I think we're devoted to generating free cash flow and using that to pay down our debt as the year progresses.

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Operator [8]

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Our next question comes from Taylor Zurcher with Tudor, Pickering & Holt.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [9]

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You guys have taken a bit of a different tact and some of your peers as it relates to proactively redeploying horsepower from Canada, the U.S. and so kind of a 2-part question there. One, if the weak sort of environment persist in the back half of the year, do you envision or do you have an appetite to move more horsepower down to the U.S., if need be and then secondarily, I think you said in the script that this additional horsepower is going to be more supplementary. But do you envision assembling an 18 fleet with some of the idle horsepower you already have in the U.S. and then this additional horsepower coming down to the U.S.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [10]

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So this is always a very interesting and important question because you are talking about how to allocate their resources in our portfolio. Right. And of course, every time there is an opportunity for the company could be international outside of North America or it could be between the U.S. and Canada. There is a very detailed analysis on how we will deploy those resources. We like our markets and that's the reason why we have kept them and when we see, for example, that there are opportunities or issues in any of our geographies, we have to act accordingly.

So normally, what we would like to see is how the year continues evolving related to the opportunities that can happen in Canada and also how the market is going to continue pushing into the U.S., as we discussed in the previous question, how we see that bidding activity translating into more work in the 2nd, 3rd and 4th quarter of the year. If the market remains soft in Canada, we will evaluate those opportunities and see exactly where to deploy our equipment. So, it is always a portfolio allocation and understanding the risk but trying to make sure that our Canadian market and presence is very important for the company and I will try to protect our markets.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [11]

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And then, a follow-up in the U.S., you've given us several variables to think about, as it relates to Q1 pricing, at least on a realized basis is probably going to be lower sequentially and then you talked about 13 to 17 active fleets through Q2. But as we compare Q1 of '19 versus Q4, you frame for us -- do you expect to see utilization of your active equipment potentially higher sequentially in Q1 versus Q4 or how do you think about that.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [12]

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Yes, Taylor, it's Scott. I think if you'd asked us to that question 5 weeks ago, I think we would have been pretty confident that we'd show higher activity through the first quarter. I think with the slowdowns in North Dakota and Pennsylvania, it's going to be much more of a push. Obviously, there still 4 weeks left to go in the quarter. So, still looks to play for, but I would say that where we were supremely confident of sequential growth, that confidence has eroded here through February.

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Operator [13]

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Our next question comes from the line of Greg Colman with National Bank.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [14]

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Congrats guys on the solid performance in that pretty volatile time. I wanted to start by talking a little bit about Canada. You're talking about poor visibility into or so -- I guess the on spring break-up not too surprising there, but just wondering based on the conversations you're having with customers, when would you expect to see your Canadian activity -- your Canadian visibility start to firm up. Is this something that we need to wait till we get back in the field after the break up or is it potentially little bit earlier? And then just like directly on the back of that, is there room for additional redeployment into the US. I realize Fernando, I’m building on the previous question, but just wanted to readdress that and see how much could flow down so for the border.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [15]

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Well, it is -- these weather issues are -- I mean, I'm just going to start answering how this quarter is evolving and what would happen in Q2. So weather issues that we've been experiencing in -- we read all the news about how the weather has been very tough in North America and also in Russia for example. And, you see that activity has been -- is not -- is disappearing, but it has been pushed into Q2. So we will see that Q2 taking a better shape today than what we were expecting a few weeks ago. But what happens after the breakup is something that we feel worth in discussing with our customers.

Isn't very clear yet exactly how they're going to deploy their programs, but let's say that 50% to 60% of our core customers we know and understand the activity, but then there is the remaining 40% where customers are -- thinking or planning on their capital plans and how the commodity price is basically shaping up throughout the year.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [16]

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Yes, Greg, it's Scott. Just to add maybe a little color. If we rewind a year -- by the middle end of January or into February, I think the Canadian division had outstanding clarity on the first half of the year and with some customers even beyond into the third quarter. What I would say is, this year, we got very late visibility on the first quarter and it was an evolving day-to-day situation for the Canadian division.

The second quarter has benefited by some of this weather where delays in projects have pushed things into the second quarter. So that's naturally helped some second quarter visibility and we've gotten some visibility over the last, let's say, 4 weeks on pads for the second quarter that again a year ago, we would have known in January -- almost down to the week when we're going to hit that. But as we move to the third quarter, I think to Fernando's point, we've had some customers that have outlined their program in the broad strokes, but there's still remains more uncertainty than obviously, we would like.

In terms of when that gets resolved, I wish I had something in my calendar that told us that, I think it's going to be incremental day to day as our customers get confidence in their budgets. They may have to go back to their Board for second half approvals. So there still remains a fair bit of uncertainty and if that leads to us needing to make a supply adjustment in Canada, we'll take that decision at the time. But then there is a secondary decision if does that equipment stay in Canada or go to the U.S. and to Fernando's point, that will depend on the risk and reward of that decision, but those are 2 separate steps of do you make a supply adjustment in Canada and does that supply move to the US.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [17]

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I appreciate that. And I realize it's a bit of an unfair question, so I appreciate the color there. Can you just remind us how much horsepower has moved to the U.S.to date and I mean we're just trying -- I’m just trying to frame potential colpos here, is there any reason that in a scenario where you have demand in the U.S. and don't have in Canada, you could move twice that or 3 times that to the U.S. if the opportunity arose.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [18]

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I mean, everything's on wheels. So yes, more horsepower could move, and to your point, if the market drives it, we'll probably respond as we need to. Obviously, we're not going to abandon Canada by any means. It's where the company started and it's a home to some great relationships. So we'll have to adjust with that in mind, how much could move, I think it really will depend on the visibility we have, I don't think you see us want to become an also ran in the Canadian market. We're very proud of our market position and we want to maintain it.

We have to adjust because we work for the shareholders our asset base to deliver the returns, but I don't think you'd see a sort of theological change in our approach to North America, that portfolio has worked for us. There's been times that Canada has far outperformed the US, the tables have turned somewhat these days, but at some point, this too shall pass.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [19]

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And then not to hog the time here, but just quickly on the US. Your commentary on the U.S. continues to be more notably -- notably a little bit more positive than what we're hearing from some of your entirely U.S. focused peers and you pointed to Q1 kind of being flat, I think it's your earlier commentary. So asking a little bit more directly, but based on your fleet deployment, customer indications and the pipeline of work, is it your internal expectations when you're doing your budgeting for the U.S. division to contribute more, revenue and EBITDA in 2019 or are you looking for sort of flattish to down small year? I'm just try to gauge where your commentary overall for the year is relative to what we're seeing in the market.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [20]

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Yes, you're probably getting a little bit too close to forward guidance, but I would say we're certainly not thinking that the U.S.is going to shrink in 2019. Now whether that's sort of a flat to down or flat or up or up meaningfully, we'll stay away from answering that, but we certainly believe that 2018 you really didn't see the power of our U.S. division until the third quarter. Now, obviously pricing has come off, that's kind of out control, but we think the customers, we've got the districts and the leadership teams, we've got really didn't hit their stride till the third quarter. To be honest, we're pretty excited that if we get those same conditions, we can post some very strong numbers in the US, but I wouldn't go so far as to kind of paint a year-on-year picture at this point.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [21]

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No problem. That's good incremental color there and then building on that and my last question is that points to if a fairly decent 2019, not necessarily great. But certainly nothing bad. In Q4, you pay down CAD 75 million of your senior debt, which is great to see. But your junior debt -- your subordinated debt is15% to 20% off right now. And I'm just wondering at what point would you look at stepping to the market and retiring some of that structural debt there at a material discount to par.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [22]

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Greg, it's Mike here. Yes, certainly, obviously, the trading levels of our senior debt are quite attractive. I think the company though is focused on obviously reducing its covenant bearing debt to a lower level, but we certainly acknowledge that there is a compelling opportunity there and maybe at a smaller level that would be considered, but certainly nothing we're quite focused on -- we're mainly focused on our bank debt right now on reducing that.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [23]

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So Mike, with your bank debt now at CAD 120 million, which I think is a half turn versus consensus and you know consensus could be way wrong, but probably not wrong by 50%. What would be a level of senior debt where you would look to allocate funds towards the term debt?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [24]

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Yes, it's approaching that level for sure, Greg. I mean, I'm not going to give numbers that's just not sort of the guidance I want to provide. But ultimately, I do agree that we're getting to a point where that would be considered.

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Operator [25]

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Your next question comes from the line of Ian Gillies with GMP.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [26]

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In Argentina, with all your frac horsepower fully deployed, you've had 3 quarters of stronger performance. I mean, are you able to provide some goalpost for what it would take to either attract additional investment or equipment redeployment into that region for fracturing equipment specifically?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [27]

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So this is appropriate timing to answer to answer the question, Ian, because I just came from Argentina a couple of weeks ago and there is, let's say, a very, very strong position for YPF, specifically speaking, keeping an increase in the activity in the country. So, of course, we are sitting and watching how these contracts and opportunities are developing. But our objective in 2018 was basically to make sure that the utilization was going to reach a very high level and our business was going to be properly managed. I remember that a year ago when we had this meeting, we told the market and we've told you guys that we were going through some management changes in the country and that's basically what is happening and has happened as we speak.

So strong performance, I am very happy to report to you that our performance continues going in the right way, our reputation and visibility in the eyes of the customers continue being very, very strong and that is positioning the company in a way that for the opportunities that are going to be put in front of Calfrac, we will analyze very closely to see what type of investment we will think of.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [28]

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And Ian, just to add a little bit of color, I mean obviously you understand that a decision to put capital or assets into Argentina is not one that's easily undone and so we've got to be very cognizant not just with the rewards which do seem to have improved over the last months or a year, but what the risk is and how do we shelter ourselves from that. And so I think when those come together, you'd see a pretty compelling equation for anybody to deploy capital there. But yeah, it's not going to be simply chasing returns. It's going to be mitigating the risk as well and so that's probably in a lot of these scenarios, lot of these discussions whether it's North America or Latin America, it's mitigating the risk that really is the key to that equation.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [29]

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Yes, and Scott to follow on to that question a little bit on that comment. From a broad strokes basis are there still a significant amount of complexities with moving equipment into Argentina and that do create I guess a competitive advantage for Calfrac and quite frankly other operators who are already there?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [30]

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Yes, it is. Sorry, I know you were asking this to Scott, but I'm jumping in. It is complicated because you have a local industry being developed and that local industry is trying to supply the market with equipment, equipment that can be assembled and then put together in the country. So, that is basically forcing the companies who are importing equipment to the country to build new equipment. So you have the commitment of bringing equipment that you need for an operation, but then there is an additional commitment -- financial commitment to build equipment locally in Argentina. So that if you are going to think of an investment of, I would say, just to give you a number, Ian, CAD 50 million, you'd end up investing CAD 70 million or bit more right, because of those commitments. So, of course, it's not a matter of transferring equipment from geographies or the companies or peers have idle equipment is basically looking to opportunities I can translate into something that is going to make business and some financial performance.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [31]

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And follow -- a bit of a different track here, but as the growth has slowed in North America and you get a bit of a better chance to look at what the run rate business looks like. Has anything become readily apparent to you that you think you can say that on the cost side or through operational efficiencies that maybe you weren't expecting before to offset some of the pricing declines that you're seeing in Canada and the US?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [32]

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Yes, I mean I think over the last year, Ian, you certainly heard sand being in the news a lot. And what we would characterize that as a cyclical cost reduction. I think on the structural side, the guys in the divisions and the corporate support groups have worked pretty tirelessly to try and find those efficiencies. I think that's -- you've seen some of it, you'll see more of it to come. I don't think there's any large step functions there. The only thing I would point to in terms of fundamental changes is the implementation of the ERP system that's ongoing, that will go live later this year. And so as we move into 2020, it gives us access to data that to your question will allow us to really examine in real time, how the business is performing and where those nickels and dimes lie. Right now, our saving money is hard work and smart ideas from our people. If we can add not to over-use the phrase, but big data and analytics to that mix, there's probably more to come. But again we won't know that until the switch turns on.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [33]

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Okay. With respect to your operations or as you look to industry, can you provide an update on I guess fracs per day and how that may be reducing the demand for equipment and how you consider those concepts in the context of I guess how much potential oversupply and how you -- how that I guess plays out over the course of next 12 months to 18 months?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [34]

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Yes. So really good point if one that does get brought up relatively consistently. And I guess the way I would look at it is, there's 2 sides to that. Doing more fracs per day, the first impact obviously is that you get through more stages and more wells in a given time period. But we've gone from pumping 12-hour days and now we operate 24-hour days and good crews will pump 18 or 20 hours a day, but the push is on to pump 24 hours a day and our operation has largely grown up with so many pieces of rolling stock that you need 45 minutes between stages. If you're going to do on the fly maintenance or swap something out and that's only possible when you're pumping 18 hours a day. If you're going to pump 21, 22, 23 hours a day, you don't have time between stages to pull pumps out of line or to replace line or any of the stuff that happens sort of opportunistically today. And so, yes, the same equipment can do more stages per day, but you're going to need more redundant equipment to support that operation, and in my mind, it actually ends up creating more demand than it cannibalizes in those sort of medium to longer term.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [35]

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Maybe you can speak about the docs have been increasing as well.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [36]

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Yes, and from a sort of macro perspective with the uncompleted well count as high as it is approaching 9,000 wells in the US, not only are you going to see that push for productivity , but just the inventory workdown phase, whether it's a high productivity or not, certainly in the short to medium term 12-18 months could be a pretty significant tailwind for our industry given that a lot of those docs are relatively young demographic. And so I think they have a high chance of being completed.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [37]

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And just to sneak one last one in. You know the maintenance CapEx number you guys have been pretty clear on and the variability there. But there also -- there has been a bid in new build equipment in your fleet. But do we need to be concerned about major refurbishments at any point over the next 2 years to 3 years, as you cycle the equipment through and works so many hours and it is working so much?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [38]

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It's part of our routine care of the equipment, Ian. We are -- the equipment is basically analyzing our maintenance programs related to number of hours of operation and we have programs that are basically, basic maintenance and then going to refurbishment. So the classification of these activities are related to a number of hours that our equipment goes through and the refurbishing program is always happening as we speak.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [39]

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Okay. That's helpful.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [40]

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Yes. So, to add that, Ian, just as part of our maintenance CapEx that we reported by the Board. There are some funds allotted in that that deal with refurbishment on a smaller scale, so we are going through what we think are the most critical components that really rely and need on that extra TLC to make sure that we're not going to be in a situation where there's a balloon payment coming in the future from a CapEx standpoint.

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Operator [41]

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(Operator Instructions) Our next question comes from the line of Jon Morrison with CIBC Capital Markets.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [42]

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You realize meaningfully different margins in Canada and your peers in the quarter, can you just talk about whether you believe that was a function of price or just more regularity in your work program. And I guess the follow-on, you were expected that Q3 spillover into Q4, was that a major factor for the difference in financial performance.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [43]

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Yes, John, it's Scott. I think, yes, you partially answered your first question, I think the spillover from September into October gave us pretty much sold out in October, in fact, I think on a monthly basis October of 2018 was the best month Canada has had and certainly since the end of the downturn and there probably wasn't a lot of price impact of the downside on the October numbers, but we certainly started to see it as you got into November and December. What I think it comes down to is having a -- the right list of clients. I don't know if it's necessarily better or worse , but certainly the clients that are going to spend on a more steady basis and then having sales and marketing team that goes out and fills the holes when you need to fill the holes and sometimes that's because we supply sand, sometimes it's because we've got some chemistries we develop, sometimes it's because of our expertise in annular fracking. But I think you sell to the conditions and we didn't see having to go buy work as sort of the day to day reality until you really got into sort of the last part of December, but at that point there was so little work on offer that was really not worth going out trying to buy it.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [44]

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So it's fair to assume that the embedded margins on the spillover work were decently different than the rest of the work in the quarter, especially in the last 6 weeks.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [45]

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Yes, certainly the last few weeks of the quarter, I'd say there is a difference, I don't know if the spillover work would have been meaningfully different from the rest of the stuff in October though.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [46]

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Our seasonal discount for the table for Q2 at this point or you believe that pricing is already at a level where incremental spring breakup pricing discounts just don't make sense?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [47]

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Yes, I don't know if I want to necessarily get into forward price strategy. Our Canadian sales and marketing guys have a tough enough job of me trying to [hamp] this my way into it. From a financial perspective though, I mean you've seen margins deteriorate for -- in some cases worse for some of our peers. I would say that at this point seasonal discounts if they exist in the second quarter, would be pretty small given that it's pretty easy to see zero EBITDA from where some of the industry is today.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [48]

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You had moved 26,000 horsepower down to the U.S. and then idled one additional crew post quarter end. Have the remaining Canadian fleets largely been utilized to date since you made those changes?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [49]

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Yes. Other than the sort of Grande Prairie cold weather through a few weeks in February, I think that the utilization has been pretty good bolt in those sort of Southern smaller job size and in the larger stuff, but yes the winter weather has certainly slowed things down in February, but really deferrals rather than cancellations.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [50]

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Mike, just a point of clarification around the free cash flow harvest in the coming period, is the bias to simply pay down the revolver or is there a base level of cash that we should be assuming that you want to keep on the balance sheet just from a financial flexibility perspective?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [51]

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Yes, I think the assumption to go forward with is really that it would go on the bank line.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [52]

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Okay. Maybe just a last one for me. On Argentina considering there was talk about adding incremental capacity to the market at some point. Just as a point of clarification, is it fair to assume that although it feels good today, you'd really need to see 12 or perhaps even 18 months a very steady work and no real change in the outlook in that market before you'd really contemplate putting more capacity into that market just considering some of the choppiness that you've seen over the years and arguably what's been a couple of false starts along the way?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [53]

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Yes, I think as I said, the mitigation of risk is the secret sauce to getting the capital allocation right in our business and I think to your point, you need to have some confidence both that past results weren't a fluke and that they can be sustained and ideally improved. Part of that is around the portfolio plans, part of it certainly in a country like Argentina can be the larger customers, and the contracts that you might have with them, but yeah, there is definitely the risk mitigation is the hurdle you have to get through before you can get comfortable with putting real capital -- significant capital to work in a foreign country.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [54]

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Sorry, I'm going to ask one more, just to be annoying. Fernando, just a point of clarification, you said you expect the U.S. pricing to be largely flattish from this point forward. Is the reference point that you're making there, Q4 or where we're at in the market today. I guess the question is, is there a major change in your pricing?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [55]

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I'm just basically going to repeat what I said before, Jon. We can enter into these cycle of new bidding and more activity, prices could be firming up in the second part of the year.

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Operator [56]

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Our next question comes from the line of Greg Colman with National Bank.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [57]

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Sorry guys, I forgot one more.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [58]

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Extra questions are $1 apiece.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [59]

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Hey, I got 7 then, no just one. In prior quarters, you've talked about the potential for disposition of non-core assets, and pretty sure in fact you've got a provision in your bonds, where you can do a bulk buyback 10% of the principal, just meaning that it's not just fluff comment that you're thinking about there. But with your international assets performing quite well, Argentina that was positive and you're putting to Russia being like a teenage EBITDA contributor versus a slight EBITDA loss in 2018. Is it fair to assume that the bid/ask spread on your international assets is widening, not shrinking mainly because the ask your perceived value of the assets is rising, or am I interpreting that completely wrong.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [60]

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Yes, there is you're putting the cart before the horse a little bit there. I think our default position is to run the portfolio and generate the right returns. Now, when it comes to potential dispositions, I don't think our minds made up. There's certainly no mandate to harvest out or carve out the international segments either collectively or individually. Now that being said, if someone saw value in our operations and wanted to approach us, we'll always listen. It's our job to listen on behalf of the shareholders.

As our value expectation gone up in the last 6 months, that's probably too short a time period to put a pin in something like that. But you've highlighted a good point that with growth in Argentina and a recovery in Russia, those are both likely to generate free cash flow this year, which is certainly valuable to us and our shareholders in terms of reducing leverage. But if someone can construct strategic reality where it makes more sense and is more valuable in somebody else's hands and they want to pay our shareholders for it, then we absolutely have to look at that, but yes-- there is no mandate to go and do that. But as you said, we've got something in the bonds that if something was to come along and the option made sense for our shareholders, then we have a pathway to substantially reduce the bond balance ,if at all played out, overriding all that though the bonds are trading at 75, I don't know what the right answer would be if you happen to come into a significant piece of liquidity on an asset sale.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [61]

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And I mean just interpreting your MD&A guidance on Russia, you lost CAD 0.5 million in EBITDA in 2018, like a small negative loss. But in 2017, it was over $13 million, am I correct, when you pointed it to 2017 as the goalpost there that you're talking about sort of that low teens EBITDA Russia potential in 2019?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [62]

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It is always our objective, Greg, to go through a good performance where we operate. So a mandate that all of our managers have is basically performance. We were affected by weather, we were affected by a combination of companies in Russia in 2018 at the beginning, but we will basically fight back very, very hard to make sure that we get to a level of 2017, this is our objective for the year.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [63]

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Yes, Greg, it's Mike here, just to add a little bit extra color. I mean I think what we are pointing to is contractually we certainly feel very strongly that the activity we have in front of us more correlates closely with '17 than '18. And if we get better utilization, obviously we think the results will trend closer to '17 than what we experienced last year. Having said that, obviously in the first quarter, it's been extremely cold in Siberia. So it will have the normal seasonal fluctuations associated with that quarter. But obviously, as the year progresses, we do see better financial performance coming forward.

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Operator [64]

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There are no further questions at this time, I'll hand the call back over to Fernando Aguilar for closing comments.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [65]

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Thank you, Lindsey. Thank you, everyone, who participated in today's call. And we'll see you in our Q1 release in a few weeks down the road. Thank you, again. Bye.

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Operator [66]

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This concludes today's conference call. You may now disconnect.