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Edited Transcript of CFW.TO earnings conference call or presentation 1-May-18 4:00pm GMT

Q1 2018 Calfrac Well Services Ltd Earnings Call

CALGARY May 4, 2018 (Thomson StreetEvents) -- Edited Transcript of Calfrac Well Services Ltd earnings conference call or presentation Tuesday, May 1, 2018 at 4:00:00pm 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 and Special Situations Analyst

* Ian Brooks Gillies

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

* John Matthew Daniel

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

* Jon Morrison

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

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Presentation

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Operator [1]

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Good morning. My name is Kim, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Ltd. First Quarter 2018 Results 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, Kim. Good morning, and welcome to our discussion of Calfrac Well Services' first quarter results. Joining me on the call today 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 the news release earlier today, Calfrac reported its first 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.

As shown in our result this morning, 2018 has started off well for Calfrac with strong performances in North America in spite of a number of industry-wide issues surrounding logistics. While Calfrac is not immune to such issues, our investments in the supply chain network have delivered, which validates our approach in this area of the business.

On behalf of the board and the senior management team, I would like to thank everyone on Calfrac for their continued efforts in the field, in the districts and in our support offices. Our business is a people business, and I know we're second to none when it comes to quality of our people.

Global oil fundamentals continued to improve through the first quarter, and we believe many of our clients have begun the planning needed to expand their spend in plants while remaining disciplined in terms of cash flow. This measured approach to growth by our clients is ultimately a good thing for the entire energy complex and one that mirrors our own approach to future expansion.

A colder-than-normal winter has helped natural gas fundamentals, and we remain optimistic on the long-term health of North American natural gas, including further prospects for LNG exports. As a result, activity in the U.S. and Canada was up meaningfully compared to both Q4 levels and those seen in the first quarter in 2017. Combined with improved pricing and higher levels of efficiency, these higher activity levels have allowed Calfrac to reactivate almost all our North American fracturing equipment with further growth expected in the quarters ahead.

While our view on North American pressure pumping remains optimistic through the next 12 to 18 months, we will not change our strategy of managing risk with a focus on generating cash flow through a strong client base, safe and outstanding fleet service and constant cost management.

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. Consolidated revenue in the first quarter increased by 117% year-over-year, primarily due to a 62% increase in fracturing job count in North America. Adjusted EBITDA reported for the quarter was $73 million compared to $21.6 million a year ago. These improved results were driven primarily by significantly higher and more consistent utilization in the United States and Canada.

In Canada, first quarter revenue was up 71% from the same quarter in 2017, mainly as a result of improved fracturing activity and higher pricing. The number of fracturing jobs was higher due to the company having 56% more equipment in the field as compared to the first quarter of 2017.

The number of coiled tubing jobs, however, fell by 10% from the first quarter in 2017, primarily due to a slower start to activity as compared to the prior year. Revenue per fracturing job increased by 18% from the same period in 2017, due mainly to job mix and improved pricing for the company's services. Operating income of $31.7 million improved 155% from 2017, which was aided by higher pricing and productivity, but offset somewhat by increased sand transportation costs incurred to overcome sand logistics challenges encountered during the quarter.

In the United States, the company's planned reactivations continued, but at a faster pace than expected. The deployment of a 16th fracturing spread into the U.S. occurred in March, which was over 2 months ahead of schedule. These reactivations, combined with strong utilization and improved pricing, drove a 222% increase in revenue from the comparative quarter in 2017. The 4% depreciation in the U.S. dollar versus the Canadian dollar partially offset the improvement in revenue.

Revenue per job increased 64% year-over-year due to improved pricing aided partially by larger average job sizes. This increase was offset slightly by 2 of Calfrac's fracturing fleets in the United States using customers' flight proppant while another used -- another 3 used -- 12 of our fleets in Colorado did not use any sand at all.

The company's United States operations generated operating income of $53.2 million during the first quarter of 2018 compared to $10 million in the same period in 2017. The improved profitability was driven by higher pricing as well as better fixed costs absorption, but was offset by $5 million in reactivation costs during the quarter as well as an increase in personnel costs.

Revenue from Calfrac's Russian operations increased by 13% during the first quarter of 2018 to $31.2 million from $27.7 million in the corresponding period of 2017. The increase in revenue was largely attributable to a 10% increase in fracturing job revenue as well as 45% increase in the number of coiled tubing jobs completed.

Consistent with the first quarter of 2017, the company's Russian operations operated at a level of profitability typical for this time of year. Although revenue increased from prior year levels, the high level of variability in activity from week to week drove several inefficiencies and costs that impacted profitability. In addition, increased personnel costs were largely responsible for the year-over-year increase in SG&A costs in Russia.

Calfrac's Argentinian operations generated total revenue of $45.9 million during the first quarter of 2018, an increase of 43% from the prior year. The revenue increase was primarily due to higher work volumes in the Vaca Muerta shale play. The improvement was partially offset by lower cementing activity in the northern area of the country and several labor disruptions in the southern area.

The company's operations in Argentina reported an operating loss of 3 million compared to income of 2.2 million in the first quarter of 2017. The transition to unconventional operations is chiefly responsible for the operating loss, but this result included 1.6 million in onetime overhead costs that were incurred during the quarter.

The company's corporate division recorded total costs of $13 million during the first quarter, up 214% from the prior year. A $7.4 million increase in stock-based compensation accruals were the primary driver of this increase, although higher personnel costs were also a factor.

From a cash flow perspective, the company's cash balance fell by 200 -- by $22.6 million during the quarter, with capital spending and working capital investments representing the largest uses of cash during the quarter.

Turning to the balance sheet. On March 31, the company had approximately $30.2 million of cash, including one fully funded $25 million equity cure as well as working capital of approximately $361 million. In addition, Calfrac had used only $0.8 million of its credit facilities for letters of credit and had borrowings of $55 million on its credit facilities, leaving $219.2 million in available liquidity at the end of the first quarter. Subsequent to the end of the quarter, the company released the segregated funds and reduced its credit facility borrowings partially due to the material improvement in the operating and financial performance of our business. As at March 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 view on industry fundamentals in North America. The rig count in the United States is up by 9% in the beginning of 2018, although the horizontal rig count is up almost 12% in the same time frame. The addition of almost 100 horizontal rigs over the last 4 months has not yet fully been felt in terms of completion demand as many basins have moved to larger piles that can take many months to fully drill.

Based on our current industry dynamics, the added rigs require approximately 45 to 50 spreads to service or at least 2 million horsepower. We believe that as producers recalibrate budgets on a higher assumed price deck. Incremental regulation should occur in the near term, setting up higher fracturing demand through the summer and to the end of the year.

Much has been written about the material growth in supply of fracturing assets, although our view remains unchanged. With higher activity and intensity, we believe demand levels remain at current supply, and a minimum portion of the new additions are not additive to industry's activity potential. It is our belief that up to half of the announced new builds and reactivations are slated to add capacity to the existing spreads, right, and representing incremental free additions.

It remains our view that with WTI pricing in the range of $65 per barrel, the U.S. frac market is unlikely to achieve supply-demand balance before the latter part of 2019. Should commodity prices move substantially beyond that level, then we will expect the balance to be pushed further into the future. Given the age and condition of much of the North American fleet, we do not expect the need to refurbish fleets to subside for several years, potentially resulting in a tight market for an extended period.

In Canada, our outlook remains slightly cautious, but greenshoots are certainly appearing. First and foremost is the rapid acceleration of interest and activity in the East shale area of the Duvernay. While Calfrac has been advising clients and performing work in this area for an extended period, the pace of change has been surprising and is certainly cause for some optimism.

Secondly, activity in the Montney and Kaybob, Duvernay areas appears robust through the remainder of the year driven by a strong condensate economics, but also increased activity by several large producers who previously focused capital spending in the oil sands or across North American or global asset base. To broaden the revenue base from our coiled tubing operation in Canada, we are in the process of reactivating 2 previously idle coiled tubing rigs deployed from the United States. The first rig was activated at the end of the first quarter, and we expect the second to be online later this year.

As we expected, activity in April was materially slower than was seen in March due to the onset of spring breakup conditions. However, we expect a material increase in activity levels in the coming weeks, and we have bookings for a busy May and June. However, as is always the case, weather and road conditions will ultimately dictate how much work can be serviced in the second quarter.

Further ahead, indications and commitments remain strong for the summer into fall, but visibility on activity in the fourth quarter remains low.

On both sides of the border, the sand issues should improve with warmer weather ahead. So we do not expect sand logistics to impact our operations in the near term. I'm very happy to see the performance of our Canadian operations during a challenging winter season, largely due to our investments in logistics and supply chain expertise.

The outlook for the company's operations in the United States remains positive, with all 16 of our spreads working today and a 17th spread coming to the fleet late in the second quarter. We continue to fill requests for equipment from clients in different areas. And our management team will endeavor to balance geographic and client exposure while delivering ongoing improvement in profitability. While our operations and profitability in the United States were impacted by some logistics issues in the first quarter, I am confident that as our organic growth rates slows in the upcoming quarters, our ability to deliver sand and chemicals as required will improve, over and above any industry improvements.

I have already spoken to our view on the supply and demand balance in the U.S. frac market, though additionally, I believe that Calfrac's ability to execute a safe and efficient operation will continue to deliver a strong value to both our clients and our shareholders.

Now I would like to discuss Calfrac's international operations.

In Russia, the first quarter was slightly behind our expectations as were issues weren't typical, were more varied in -- than in past year -- in the years past, meaning more stops and starts for our operation, which impacted both activity and costs. Our outlook for 2018 is for operational and financial results to be relatively similar to 2017 in Russia, aside from currency exchange impacts.

Revenue in Argentina was flat sequentially in the first quarter as activity levels overall were largely unchanged. Profitability levels were likewise flat, reflecting some improvement in the field profitability offset by some onetime costs in the overhead. We expect that with continued high levels of activity in Vaca Muerta, our operations should see improvement in profitability in the quarters ahead.

The company has announced an increase to its capital budget for 2018 of $23 million, bringing to total of $155 million, with the incremental spend largely focused on the reactivation and deployment of previously idled fracturing assets into our North American operations.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first 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 [2]

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With respect to the CapEx increase, I guess, announced in the quarter, as you guys went through that process, would it have been done with -- would there have been a commensurate increase, I guess, in your budgeted EBITDA? Or is R&M or some other piece of the business, I guess, is it running a bit harder than expected from a CapEx perspective?

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

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It's Mike here. To answer your question, it really relates to the larger scale of equipment we have operating and the fact that we've got that equipment operating in the U.S. a lot earlier than we had originally planned for. On top of that, I think if you look at it, we certainly believe that our components are fluid and ultimately are hanging in to the useful life that we're accustomed to, so really nothing to speak to on that end.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [4]

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Okay, that's helpful. And with respect to, I guess, assessing opportunities in the U.S. versus Canada and the movement of equipment, I mean, is there any timelines around when you hope to make those sorts of decisions? Or do you need to see what some of your Canadian customers want to do in the back half of the year first?

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

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That continues -- it's the continuous approach of our U.S. team, Ian. We normally assess continuously our opportunities and our portfolio. And as -- normally, as Scott puts it in front of the investors community, our business is like our customers. We have to -- we have portfolio of opportunities, and we have to calculate the risks associated with those opportunities and how the company faces them. So I can't tell you today because if there isn't a specific move in one direction or the other because it's a continuous job that we do.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [6]

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Yes. And Ian, I guess to add to that, and to reiterate, I guess, we probably said it a few times, we won't make any decisions simply based on a macro input whether it's rig count or implied fracturing demand. It'll be a specific business case brought to us by a geography with the customer and a district beside it and with pretty decent visibility on what the economics look like. And so when you think about the time required to reactivate a spread, you're talking about a significant amount of lean time. And so those opportunities, those business cases have to be developed before we jump into the next level of reactivations.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [7]

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Perfect. And with respect to the Permian, I mean, you have 3 crews that are going now, or what I think to be 3 crews. How do you -- how has Calfrac gone about managing, I guess, the infrastructure piece of that [through the] logistics piece, I mean, given I guess the infancy in your operations in that area and some of the areas that you've been able to access success?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [8]

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It's the same approach that we use everywhere, consistent with our modus operandi. We started operations in the latter part of 2017 in the Permian. And we ramped up to 3 frac fleets. We moved into a facility that accommodated our equipment and our people. And we started establishing the networks related to supply chain for materials, for -- materials like sand and chemicals and also spare parts for our equipment implemented a very strong maintenance setup in that area and started operating. In fact, 3 weeks ago, Scott and I were visiting the Permian, and we had the opportunity of looking at our new facility and how we were serving an area that you can see more rigs coming into -- where we operate today, which is it was a good thing for Calfrac. It was a good decision that the company made moving into that area and working for a top-tier customer that is very efficient and is as well providing us with a possibility of not only being able to penetrate the market where we want it to be in the past, but also be able to grow our business and have a strong presence, and continue growing our presence in that area.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [9]

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Okay. And last one for me, it was pretty bullish outlook on U.S. as a whole, and there isn't a ton of spare capacity left in the North American fleet. Have you started to tinker with the idea of newbuild fleets, given where the margins are and where returns are? Or is it -- do you feel like you're a long way from that today?

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

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No, Calfrac is a company that try to optimize the assets that we have. And today, our priority is continue executing on our reactivations and making sure that all our equipment is not only in top shape, but also to the level of operation that requires these higher intensity and productivity market where we operate today. We still have equipment to be reactivated. We'll continue with our plan. And later in the year, once we see our market is developing and how things are happening, we can have that discussion. But for the time being, we will continue optimizing the usage of our assets.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [11]

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And I guess just to reiterate it, that will be similar to reactivations or redeployments. it's going to be a specific business case to be brought forward to management and then to the board for approval. And again, you might be able to get your head around newbuild economics at the margin on a macro sort of viewpoint. But we're going to take the view of it. It has to be a specific customer, what are terms and conditions, cost recoveries. All of those things will go into it before we make that decision. And to Fernando's point, we still got some dry powder with existing assets before really get to that level.

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Operator [12]

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In your next question comes from the line of Greg Colman with National Bank Financial.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services and Special Situations Analyst [13]

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Just want to stay in the U.S. for a little bit here. Can you -- do you mind giving us a sense for the cadence of the U.S. and for the U.S. margin performance in the quarter? Was it relatively flat? Or was the duration or with you sort of see that revenue going up in the end based on the reactivation of spreads and how pricing was playing out and how demand was playing out?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [14]

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Well, before Mike or Scott jump into the question, Greg, the quarter as you've been reading, some of our competitors in the U.S. were affected by 2 different things. Depending on where you operate, but basically, in Pennsylvania and also the North Dakota and weather-related issues and also sand disruptions. They affected everybody's performance. Some companies got more affected than others. But the reality is those 2 things got into the operations and generated some of the inefficiencies in the system. I'm just going back to the numbers. Mike, go ahead and make the comment about the comparison.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [15]

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Yes, I mean, I would say that if you exclude the reactivation costs that we had in the U.S., we had a very strong quarter as far as overall margins. I wouldn't say that there much of an increase from what we saw in Q4. I think as we get forward and we get more utilization out of the fleets we added kind of late in the quarter, we should see some better run rates, as we had better fixed costs absorption in some of our districts. So I can see it incrementing slightly, but really not getting a lot of net pricing movement at this point in time.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services and Special Situations Analyst [16]

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Sorry if I missed this -- sorry if I missed any of your disclosure. But did you provide us with any sort of normalized margin in the U.S. excluding reactivation?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [17]

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No, we didn't, but we did reference the reactivation costs.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services and Special Situations Analyst [18]

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Would you be so kind as to opine as to what it would look like if you were to back that out?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [19]

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It's going to be roughly about 18.5%.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services and Special Situations Analyst [20]

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Great. And then just talking about the reactivations and the 23 million that Ian was talking about too. Is that entirely related to the 30,000 horsepower that's being redeployed now? Or is it some additional move or some additional reason? It just seems a little bit high on a per-truck basis if it related to that 30,000?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [21]

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No, it's not just related to the 30,000. It's kind of related to the overall fleet and the fact that we've reactivated a lot of our U.S. horsepower earlier than we had originally planned to do. So as a result, sort of the component cadence of replacement changes slightly. And then obviously, you have some other components related to our fleet that are getting changed out on their normal age cycle, and that's hitting us a little bit on the capital side as well.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [22]

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The only other thing to remember, Greg, is that when we announced in the fourth quarter call that we were moving the 30,000 horsepower, we really referenced that as backfiling existing capacity. We haven't contemplated the [17th spread]. And so it's due in large part to that 30,000 horsepower. But obviously it spreads upon more than just pumps. So part of the CapEx is turning that 30,000-plus spares into a real spread, which obviously includes more than just pumps.

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

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Great. Good point, okay. And then just lastly on that, you are transferring the 30,000 down. But we also have 83,000 horsepower sitting idle in the U.S. How do we think about that? What was the decision to bring Canadian equipment down to the U.S. as opposed to reactivating idle but present equipment in the U.S.?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [24]

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It's the geographical location, Greg. U.S. is a big country and we have operations all over. So it's a matter of blending equipment with the different basins that we operate. So it is nothing related to specific conditions in our equipment. Our equipment is, as we've been saying in previous conference call, having kept at very high level from our people. And it's just how close you are from a basin or another in the way that you deploy your equipment.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [25]

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And Greg, that 80,000, obviously the 17th spread isn't included in the active horsepower. So that number is going to drop in the second quarter, leaving us with something less than that by the time we report our next results.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services and Special Situations Analyst [26]

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Good point. And then this is just the last one for me, and then I'll leave it there. Fernando, in your concluding remarks, you mentioned the North American fleet has substantial refurbishment needs and the potential for an undersupply for several years, depending obviously on the demand side. How much of your fleet, would you say, needs that potential refurbishment to stay active? And related to that, would you consider your fleet to be indicative of sort of the average of the overall basin, especially as we look at the U.S.?

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

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It depends how you maintain your equipment, Greg, and the actions that people take related to the way you operate and how -- I mean, this business continues increasing its intensity, and some companies do a better job than others related to that. And you can see that in the non [active] reported by customers who have multiple competitors working for the multiple customers. so we normally keep between 10% and 20% of our equipment rotating for maintenance, for let's say, for heavy maintenance more than conventional -- a preventive part of the maintenance plan. So I would say that in the same amount of equipment will be basically relating to refurbishment, which is basically 10% to 20%.

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

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Greg, I mean, at a high level, every piece of frac gear needs refurbishment at some point in its life, whether it's 3 years, 5 years, 7 years, 10 years. It's just that because that refurbishment was essentially stopped for 3 years, there's a picture of a catch-up. So I think at a high level, we believe the next couple of years in the industry will be probably an increase above sort of the run rate for refurbishment spending. But I think as you bring new equipment to the fleet, as you tackle that refurbishment spending, you should see a drop. Although with intensity, to Fernando's point, what used to be 10% spare is now closer to 20%, and that may structurally just increase the refurbishment spending across the industry.

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Operator [29]

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And your 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 [30]

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Can you talk about the regional dispersion that you're seeing in pricing in the U.S. right now? And are the majority of markets starting to converge on fairly similar pricing independent of basin? I realize that you might not want to get into specifics of where one basin is versus another, but is it quickly becoming fairly universal across the U.S.?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [31]

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Yes. Jon, it's Scott. I don't think there's massive dislocation in pricing across basins, all of the equipment's on wheels. I think you certainly did see during Q4, some spreads come out of, say, the MidCon region into Texas. And I think part of that was maybe due to some local oversupply and resulting pricing. But I think those things trend to normalize themselves quite quickly. And we certainly don't -- if you look at our geographic footprint of equipment, I don't think that you would see a meaningful difference in pricing on an apples to apples basis. Customer-specific or program-specific is always going to be a little bit different, but I don't think you can assign any big difference in geography at this point.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [32]

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Okay. You talked about the plan to hold firm at 8 marketed fleets in Canada for the balance of the year, which seems very pragmatic. But is there anything that could change that? And would that essentially need to be take-or-pay base at this point to reactivate another crew, if you're getting pressured to add more capacity from a customer?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [33]

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It's again -- again, Jon, the way that we analyze our business and we see opportunities, we would like to see our fleet fully operational, fully booked and active, and also good pricing in the marketplace. So again, it's a portfolio allocation of assets, and we will decide in front of the activity or the customer the actions to take. So we don't see -- the way we see the market today, the uncertainties had been basically on top of the Canadian market, are basically giving us the confidence of the activity level and fleet level that we have today. So we don't really see how that changed, unless there is a big pickup in the activity.

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

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Yes. And to add to that, Jon, I think the only thing that I would say is that with the emergence of the East shale basin on the Duvernay side a little faster than we thought, and probably a bit more attention on the Kaybob area of the Duvernay and a strong Montney outlook, it's possible that would you could see is more demand for the larger spreads. And that may cause you to bring pumps into the business rather than add actual spreads. Just maybe take a midsize spread, say, 25,000 horsepower and make it 35,000 horsepower, and just give you a little more flexibility to meet your customers' needs. But Fernando's, it's exactly the way how we think about. It's going to be a specific business case. And in terms of what the terms are, I don't think we'll negotiate in public on that. But certainly, we're going to make sure we get, for our shareholders, the value they deserve for the equipment.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [35]

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With incremental pumps coming into the fleet, obviously, you would have to add a decent amount of people to go with those. Is the labor situation in Canada concerning from an incremental staffing perspective at this point? Or it's all just a function of timing and planning?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [36]

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No, John. I think we have basically gone through that human resource issue many times. In the notes this morning, we were talking about we are a people's business. And without people, we can't operate. So it's our responsibility as a management team to make sure that we find the right people with the right culture to join our company and be operational. So even though it could be challenging in some areas depending on the economy and how the industry is basically behaving throughout the years, we still believe that Calfrac is a company that is very good at attracting people who are participating in our activities and enjoy our culture and our way of living and life. So we are confident that whatever we need in terms of people and equipment to activate and bring equipment and people back to operations is something that, as a management team, we're responsible for, and we make it happen.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [37]

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When you look at the busy bookings that you referenced in May and June in Canada, are those highly dependent upon positive weather conditions unfolding? Or the clients that you have soft booked in there have been fairly forward thinking in terms of matting locations or planning work near accessible roads? Like is the optimistic Q2 outlook all dependent on weather at this point?

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

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No. Weather always has an effect, and I think we mentioned that earlier. Even the weather effect can basically give you sometimes nasty surprises. And mother nature is very difficult to predict, as you know. But the Canadian industry and the Western Sedimentary Basin has evolved into a more controlled environment for the operations in breakup, as we demonstrated last year in Q2, and we hope we can demonstrate again in Q2 2018.

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [39]

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Yes, I would say that between the large pads that we've got either we're working on today and sort of have line of sight to deploy to in the next little while, most of that extends well into June. But again, the cherry on top to Fernando's point is, is going to be weather and road conditions and what that lets you get you really more in central and southern Alberta than further north. But obviously, it's that -- the steady level of utilization that you're going to get through, is it 2 weeks in June or is it 4 weeks in June? Certainly, last year, it was 4 weeks in June and then some, which was a big tailwind for us in that Q2. And again, that's just the delta right now between being really optimistic and sort of, I think, as we are, optimistic but we're not going to jump up and down about how good Q2 could be at this point.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [40]

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Okay. Fernando, when you think about the path towards better financial performance in Argentina as the year progresses, is it underpinned by higher activity levels and more regular work, and as a result, better fixed costs absorption? Or do you believe that the vast majority of improvements will come on the cost side as the year progresses?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [41]

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No. This is a good point and a good question, John. Thank you. Our COO, Lindsay, and I, just came back from Argentina during the weekend. And we basically had an opportunity of visiting with customers and looking at how the market is going -- is getting tighter and tighter as we move on. The efficiency levels and the logistics are not at the level of North America, and it's going to take some time for them to get there. But we see more rigs in the market. We see more activity happening as we speak. And customers are basically changing some of the completion designs in order to get to that level of efficiency where you can have more stages per day and improve their operations, so by using sleeves and using different techniques. But I have to tell you that this time, compared to my trips in 2017, was more positive. And we are confident that market's going to continue increasing and improving for Calfrac in the quarters to come.

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

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Okay. Last one, just for me, thoughts on the labor cost in the Permian right now? And would you expect your own labor rates to exit the year much different than you're realizing right now?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [43]

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No. We see them as they are. And we haven't had any issues in that respect, and they are very flat. Entering the quarter, what we did is going to happen at the end of the quarter. You'll remember that the pay is -- has different components. And the way we see that today is still going to change.

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Operator [44]

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(Operator Instructions) Your next question comes from the line of John Daniel with Simmons & Company.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [45]

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Fernando, I guess the first one would be, if could just provide a little bit more color on just inquiry levels in Latin America and just general color on the market over there?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [46]

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Okay. So for Argentina, you mean, John?

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [47]

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Yes, yes.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [48]

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So what is happening is that as we continue progressing and comparing towards what was happening in 2017 to today, you see some of the operators that were basically trying or testing the market becoming more active. So people -- for example, people like -- customers in general like Shell, Tecpetrol, Pluspetrol, even bigger players like YPF and also Pan-American and including a very important customer, Total, are basically will be coming this year and are bringing additional rethink to their operation today. So that's what is basically generating that activity increase. And we can see that when some companies are not capable of providing services because they are, let's say, fully operational-related. In the North American market, when you have that level of activity because of efficiency, that horsepower should be enough to operate today. It's going to require some additions for increased number of rigs. But because of those inefficiencies that you have in the system today, you need more, let's say, more equipment from the service companies to operate. So you are not, let's say, able to provide them with amount of equipment that is required to have, let's say, a smooth operation. So you'll have a little bit of an unstable level of operations today that are giving us opportunities to penetrate some of the markets, become very busy in the south, in the Comodoro Rivadavia, Las Heras area, and also making sure that all of our equipment is going to be fully active in Vaca Muerta and Neuquen.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [49]

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Okay. I know you generally don't like giving specific guidance, but just conceptually, if oil prices in the market are staying where they are, let's just call it, sustainable here for the next several quarters, would you see a faster acceleration down there in Argentina in '19 versus what you're seeing in '18 over '17?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [50]

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I believe so. I think there is something really happening in Argentina. In fact, while we were in the country, President Macri was talking about -- this is the time in Argentina where they have to start eliminating or reducing this subsidies that they have for energy in the country. And they were promoting that the industry has to continue improving efficiency and making sure that this -- the energy between gas and oil are going to be available for Argentinian people. So we believe that, that trend supported by the government, it is going to continue. There is a challenge, John, and I think the 2 of us have the opportunity of discussing that in the past. It's the country where the unions that were basically created by previous governments are still very strong, and that doesn't really help the deployment of efficiency -- efficient operations in the markets. And so we will have to navigate through those situations, to make sure that customers are not going to get an interrupted operation, and we continue executing as we normally do. So it is challenging, but I believe the government is supporting the direction of the industry.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [51]

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And John, it's Scott. I guess, to add to that, the biggest torque lever that we have from a profitability view is still going to be productivity and efficiency in the operation. The rig count could, I guess, in theory, double. But I can tell you very honestly that the industry could be twice as productive as it is today in almost any metric you think about. So I'd really rather the rig count stay flat and everybody get much better at their jobs than add a bunch more rigs to an inefficient situation.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [52]

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Makes sense. Okay. And then final one for me, that's just -- it's hard to get specific, but as we hear the term increasingly about dedicated agreements, arrangements with customers for frac work, can you say if the terms in these dedicated agreements are getting stickier today than maybe what they were a few quarters ago? And just what type of duration are customers seeking when they want to entertain a dedicated (inaudible)

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [53]

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I think -- no, that is a fair question, John. And the markets feel like, we were saying today, is not fully saturated. You still have equipment that is showing up. We believe that new rigs are going to make the market tighter. And it's -- this is going to create some tension. And that tension is going to bring customers trying to secure fleets, like they have done in the past. But today, the way it's happening is about a year arrangement where you provide a frac fleet to a customer for a number of pads and wells and stages. And that is the most common thing that we're seeing today is 1 year.

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Operator [54]

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(Operator Instructions) And there are no further questions at this time.

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

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Okay, Kim. Thank you very much. So I'd like to thank everybody who participated in this conference call, and I look forward for the next quarter report in the near future. So thank you, everybody. Goodbye.

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Operator [56]

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Thank you, ladies and gentlemen. This concludes today's conference call, and you may now disconnect.