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Edited Transcript of CFW.TO earnings conference call or presentation 31-Oct-19 4:00pm GMT

Q3 2019 Calfrac Well Services Ltd Earnings Call

CALGARY Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Calfrac Well Services Ltd earnings conference call or presentation Thursday, October 31, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lindsay Robert Link

Calfrac Well Services Ltd. - President, COO & 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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* Andrew Ginsburg

R.W. Pressprich & Co. - Associate Director

* Greg R. Colman

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

* Jason Darren Mandel

RBC Capital Markets, Research Division - Head of U.S. Credit Research

* Jeffrey Eric Fetterly

Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst

* Konstantin Manoukian

Independent Credit Research LLC - Founder and CEO

* Michael Mazar

BMO Capital Markets Equity Research - Equity Analyst of Oil and Gas Services

* Waqar Mustafa Syed

AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Calfrac Well Services Ltd. Third Quarter 2019 Earnings Release and Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) Thank you. I would now like to hand the conference over to your speaker today, Scott Treadwell, Vice President, Capital Markets and Strategy. Please go ahead.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [2]

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Thanks, Melissa. Good morning, everyone, and welcome to our discussion of Calfrac Well Services Third Quarter Results. Also on the call today are Lindsay Link, Calfrac's President and Chief Operating Officer; and Mike Olinek, our Chief Financial Officer.

This morning's conference call will be conducted as follows. Lindsay will provide some introductory remarks, after which Mike will provide an overview of the financial performance of the company.

Lindsay will then close the presentation with an outlook for Calfrac's businesses. After the presentation, we will open the call to questions.

In our news release issued earlier today, Calfrac reported its third quarter 2019 results. Please note that all 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, including our 2018 annual report for more information on forward-looking statements and these risk factors. Lindsay, over to you.

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [3]

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Good morning. Thank you, Scott, and thank you for joining our call today. Before Mike summarizes the financial performance in the quarter, I'd like to offer a few opening remarks. The third quarter was characterized by a general slowdown in producer activity across our operating footprint. While activity coming out of breakup was strong in Canada, as the quarter progressed, we saw lower activity and pricing for all of our operations. Some of this slowdown was outside industry control like the pipeline contamination in Russia and the election results in Argentina.

However, much of it is due to continued capital discipline on the part of our customers and an uncertain market for commodities that does not incentivize significant growth capital. Specifically, in the third quarter, we saw a shift in our United States operations where significantly more of the sand and chemicals we pumped were provided by clients. This shift drove almost the entire sequential drop in revenue.

Once again, Calfrac has adapted to changing market conditions. We have now begun marketing the supply of sand and Calfrac chemical solutions to clients in a stand-alone context. It's our view that our customers gain maximum value when Calfrac provides more technical and logistical support through their operations. But for those clients that choose to pursue separate vendors for consumables, we are very well positioned to bid on and win that work.

In Argentina, the results of the presidential primary in August were a surprise to markets and the rapid depreciation in the peso caused ripples throughout the country, including a significant slowdown in activity with a number of our clients.

With the general election now complete, we expect better visibility on work programs for 2020 in the weeks ahead. And while we do not expect significant growth in our operations in Argentina in 2020, we believe the development of a world-class resource like the Vaca Muerta can be a significant driver of wealth creation in the country for the years to come, regardless of government ideology.

Now I'll 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 [4]

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Thank you, Lindsay, and thank you, everyone, for joining us for today's call. Consolidated revenue in the third quarter decreased by 37% year-over-year, primarily due to lower activity levels and pricing across all our operating divisions. And this decline was accentuated by higher levels of customer-supplied proppant and chemicals in the United States.

Adjusted EBITDA reported for the quarter was $43 million compared to $111.6 million a year ago. Operating income was down 59% to $47 million from $115.3 million in 2018. These weaker results were mainly driven by lower activity and pricing in North America, offset partially by a smaller operating footprint and cost base.

In Canada, third quarter revenue was down 43% from the same quarter in 2018 due to a smaller fracturing footprint and lower pricing in spite of higher coiled tubing activity. Calfrac's Canadian operations had a total of 305,000 horsepower and 11 coiled tubing units in its operations in the third quarter, down 14% and flat, respectively, from the prior year. With the changes to our field work schedule, we are effectively able to deploy approximately 250,000 horsepower and 8 coiled tubing units in the Canadian market.

Operating income in Canada during the third quarter decreased by 44% to $15.4 million, and this decline was primarily due to lower pricing and activity as well as a bad debt charge of $1.3 million that was recorded during the quarter. This decrease was partially offset by proactive cost management measures that were enacted earlier in the year.

In the United States, fracturing job count was up 4% sequentially, which was in line with our expectations. However, lower pricing for our services, combined with significantly lower revenue generated from sand and chemicals drove a 38% reduction in revenue compared to the prior year.

The company's United States operations generated operating income of $27.8 million during the third quarter of 2019 versus $88.5 million in the same period in 2018. This 69% decrease in operating income was mainly due to lower pricing and lower fixed cost absorption.

Revenue from Calfrac's Russian operations of $23.8 million was 7% lower than the corresponding period of 2018. This decrease in revenue was largely driven by lower field activity across the country as pipeline egress issues continue to impact drilling and completion spending. Despite the decline in revenue, Calfrac's Russian operations managed a breakeven quarter, as cost control measures, including a smaller active footprint, matched lower field activity levels.

Calfrac's Argentinian operations generated revenue of $46.3 million during the third quarter of 2019, a decrease of 24% from the prior year. This decrease was primarily due to job mix and the reduction in spending and activity seen after the presidential primary election in August.

The company's operations in Argentina reported operating income of $11.7 million compared to $9.4 million in the third quarter of 2018. This result was aided by $3.4 million of contract termination revenue that was received during the quarter.

The company's corporate division recorded total cost of $7.7 million during the third quarter, a decrease of $4.1 million from the prior year. The decrease was due to lower stock-based compensation and bonus expenses.

The company also recorded an interest expense of $21.6 million during the quarter, which was $0.2 million below the prior year due to a lower draw in the company's syndicated credit facility.

In December 2018, Calfrac's Board of Directors approved the company's 2019 capital budget of $149 million due to lower levels of activity and overall prudent capital allocation, we have been able to reduce our 2019 budget by $10 million to $139 million, which includes $17 million for the purchase of assets in Argentina that was not contemplated in the original capital budget.

To summarize the balance sheet, the company had working capital of $257.2 million at September 30, which included approximately $44 million of cash.

In addition, Calfrac had used $0.9 million of its credit facilities for letters of credit and had borrowings of $124.9 million on its credit facilities, leaving $249 million in potential borrowing capacity at the end of the third quarter.

As at September 30, 2019, the company was in full compliance with its financial covenants.

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

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [5]

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Thanks, Mike. I will now present an outlook for Calfrac's operations across our geographical footprint. As we close 2019, we expect activity to slow sharply across our U.S. operations, largely due to project completion. This slowdown will accelerate in the last weeks of the year, and will negatively impact our fourth quarter results, though likely not as dramatic a reduction as was seen in the prior year.

I'd like to take a minute to run through our footprint in the U.S. In our disclosure, you will note that we reported 877,000 horsepower active in the United States. In our view, active assets are ones that are physically capable of performing work. In addition to this data point, we have disclosed that we are only marketing 15 fleets in the U.S. for a total of just over 700,000 horsepower as 2 of the fleets are smaller in scale.

From late last year, when we were marketing 18 fleets, we've reduced our overall supply to the market by approximately 20%. Some of our peers have reported a permanent retirement of a portion of their United States fleet. And while we have some older equipment, our ongoing maintenance program and broader footprint, including lower intensity operations in Colorado and Canada, gives us options to deploy older assets without incremental operating risk, allowing us to capture better returns than otherwise would be possible.

Our results in the third quarter were in line with our expectations. But as previously mentioned, we experienced a significant shift in the percentage of customer-supplied sand and chemicals, which drove most of the sequential revenue decline. We did see further pricing deterioration, especially in the Texas market during the quarter, which also hurt profitability.

We have begun discussions with clients surrounding work programs for 2020 in the United States.

And as of now, we expect to maintain our market footprint. We believe managing supply in a choppy market is the simplest way to signal inadequate returns and protects the value of the assets under our management.

In Canada, our outlook remains neutral. And although we believe the worst of the market conditions are behind us, we expect a slowdown in the fourth quarter, similar to the forecast for the United States. Activity in the third quarter was in line with our expectations, although weather conditions and drilling delays resulted in roughly $20 million of revenue being deferred into October. These delays took the shine off what was otherwise an excellent result. We expect our crews based out of Red Deer to be busy through the middle of November, when weather normally impacts operations. In Grand Prairie, we expect activity to persist into late November or early December. But activity levels will be significantly below those seen in October.

We are engaged with a number of clients on 2020 programs; many of our existing clients are messaging activity levels slightly below those seen in 2019. While some incremental work programs of various -- varying size are also in the market. In addition to these, we are engaged with a number of clients in discussions for the supply of products in 2020.

Now a few words on our Calfrac's International operations. In Russia, the third quarter was below our expectations as field activity levels remain depressed due to the lingering impacts of the pipeline contamination issues seen earlier in the year. On a positive note, we have seen a recent uptick in lease construction and rig activity, which should drive higher activity levels as 2020 begins. We expect the current activity levels to persist until winter weather impacts operations later in the quarter.

Our results in Argentina were strong. Especially in light of the political and economic shifts that have taken place since the presidential primary in August. Capital spending was reduced by our clients and our team did a great job in maintaining cost focus and seeking out diverse revenue streams. We do not yet have full clarity on how the change in government may impact the spending plans of our clients in 2020, but we remain strongly convinced of the potential of the energy development in Argentina.

To wrap up, our third quarter results were a fair reflection of the challenging marketing conditions in the North American oilfield industry. While activity and pricing remain depressed and returns are below what we consider sustainable, Calfrac remains focused on managing our operating footprint, along with cost and capital in order to preserve our assets and position the company to take advantage of improved market conditions.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from the line of Greg Colman from National Bank Financial. .

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [2]

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Congratulations guys on some solid results in really challenging conditions. I wanted to start by talking about the discussion on the U.S. supply side situation, which you did address in some of your prepared comments. Acknowledging that you and peers are parking or idling equipment.

We're hearing between 10% and 20% of fleets depending on who and who you're talking to. How much of that artificial supply decrease do you think is being offset by efficiency improvements? I guess I'm poking on, like, what's your estimate of how much more efficient a spread is today in the U.S. on average than, say, a year ago?

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [3]

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Thanks, Greg. Thanks for the comments. The question on how much more efficient we are becoming, it's actually getting less and less. We're almost at the top of the curve, if you're talking plug-and-perf completions. We're starting to run 18 to 20 hours pumping time. So I think that a reduction of 20% of the fleets won't be offset by further efficiency gains. I think that you will see an actual reduction in available horsepower or available horsepower to do more stages.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [4]

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Got it. And Lindsay, I know you guys have been very forthright and open about your efficiencies. In fact, I think some of your recent investor material includes kind of stats on that. But do you believe that, that's representative of sort of the industry in average or your competitors? Or is that more isolated to your fleets in particular?

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [5]

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No, I'm talking in industry in general.

In particular -- if you go particularly fleet-by-fleet basis, there still will be some efficiencies, either through our operations or through our customer operations. So I think there will be still some marked pickup in certain areas. But in other areas, you're getting closer to the edge. And the more money that you need to spend may not offset the cost to get that additional efficiency. Plus, of course, the pricing for services is such that it isn't as attractive to do a capital outlay for an efficiency gain when you're not going to get the return back for it, right?

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [6]

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No, that makes sense. Okay. That's on the supply side. On the pricing side, you mentioned a few comments about how pricing is continued to be challenged, especially, I believe you said in Texas. Is that the case as we go into Q4? Or were you seeing, at the risk of sounding foolish, anything approaching sort of bottoming or leveling out of pricing? Or does it continue to deteriorate as we go into the end part of the year?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [7]

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Yes, Greg, I think we've been sort of pretty consistent in saying pricing momentum has continued to be something that's negative. It does appear to be slowing. But I'll go back to kind of basic physics, an object in motion will stay in motion.

I think until there's a catalyst to really tighten the market. And obviously, the supply response has been a good first step. You probably need budgets to reload in January, see what the lay of the land is as programs pick back up. And then you would likely see some kind of calibration, whether that means pricing moves higher, I know that's probably a little bit optimistic, but I think you need that demand response to really understand what the market looks like and to stop the sort of grinding lower of pricing. I think we're done with the big steps down, but now it's all the nickels and dimes and to Lindsay's point on efficiency, every time you find some costs there's obviously now a discussion about how much of that cost gets shared. And ideally, that further efficiencies would accrue more to service companies going forward. But again, that's a work in progress.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [8]

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No, that's a fair point, especially on the momentum side there. And then I just had 2 quick ones on the balance sheet and liquidity. On liquidity, we've seen big increases in liquidity under your borrowing base in Q2 of '18, Q3 of '18 and similar in '17. But we saw a slight decrease here in the third quarter, which was a little unexpected for us. Can you provide us a little bit of color regarding that? And what was the driver behind it? And should we expect that sort of trend of decreased liquidity to reverse going into the winter as budget exhaust and you collect some AR, et cetera, et cetera?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [9]

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Yes. Thanks, Greg. Mike here. Certainly, I think we did get a contribution from working capital here in the third quarter, probably not as large as maybe what we are used to seeing. We do expect that to probably be at the same level, probably, maybe even larger than that, depending on what the drop is in revenue from the fourth quarter. Again, as far as the overall line is concerned, we're certainly well within the covenant limitations, and we did reduce debt in the quarter on the line, so we're down to $125 million. So things are certainly tightening up and getting better on that aspect. But it really, obviously, is going to depend what the fourth quarter does operationally. We are focused on what we can control, which is trying to work our working capital more efficiently and manage our CapEx as tightly as we can. So certainly making progress to

that.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [10]

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I'm sorry, I guess what I was focusing on was available liquidity, pulled back from $166 million to $146 million which is just -- it's the opposite direction that we were expecting. And I'm wondering if the inflection on liquidity is based on what you're seeing in Q4, should that available liquidity start to move up, regardless of kind of where the line is sitting?

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

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Sorry. Yes. No, on that, I would say that the trend likely won't reverse all that much because I would say, AR likely is going to drop, which is a major component of the borrowing base. So it will be at that level or maybe slightly lower, but not too much lower than where it is at the end of the third quarter.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [12]

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Got it. Great. And then last for me, and then I'll turn it back. The $10 million capital budget reduction, can you give us some color as to where that's coming from? And moving into 2020, how should we be thinking about capital spend based on sort of what you're seeing with early indications from customers and activity levels, knowing that, that's, obviously, capital spend and how active your fleet are closely linked?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [13]

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Yes, I would say the $10 million is really coming out of maintenance capital out of our North American operations, primarily. And I would say that, that trend will continue. I think, going into 2020, the CapEx likely will be lower on a year-over-year basis, just due to some onetime items that we're expanding for this year, one being the Argentinian purchase, the other being the ERP, which certainly won't be a part of the equation next year. But we're certainly looking at CapEx very closely as we enter our budget cycle here in the fall, and we'll have more to report on that later in the quarter.

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Operator [14]

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Your next question comes from the line of Waqar Syed from AltaCorp Capital.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [15]

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A couple of questions here. Number one, in terms of your CapEx for next year, any early thoughts if activity stays at -- your active count stays at current level in terms of crews. What could be the maintenance CapEx? And what do you think overall CapEx could be in 2020?

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

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Yes, Waqar, it's Scott. I think the easiest thing to do is to kind of look at this year's budget now at $140 million, remove the onetime items, which total about $27 million. And I think, just leave it at that. There's potentially some downside if your activity is a little lower but there's potentially upside if things do pick up. So I wouldn't want to handicap that either side. I think the simple math is just take out the onetime stuff. We've already made the sort of revision to the budget, and that gets you pretty close for a first cut.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [17]

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Okay. Great. And then second, in terms of pricing for the first quarter in the U.S., where do you see current bids coming in, are they below the fourth quarter level pricing? Or they're closer to where the pricing was in the third quarter, any early thoughts on that?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [18]

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I think Waqar, again, remember that our business in the U.S. is far more focused on the dedicated fleet model and sort of relationship-based work.

I think in that context, the pricing is pretty flat. We don't see much in the way of incremental downward pressure, a good number of our fleets have been extended through the middle of the year. And in some cases, a little bit longer. As I said, pricing, kind of where you see it today is what you should expect. Look, if your costs suggest, you've always got that mechanism if the market changes, there's obviously ongoing discussions. But today, we don't see much in the way of downside risk. And that's probably buttressed by the fact that, really, our U.S. business is 80% outside of Texas. And Texas is definitively the most competitive market in terms of pricing. So I think our exposure there is quite low at this point.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [19]

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Great. And then just one final question. The debt has been an issue, high debt levels. What's the kind of next, I would say, 12 to 36-month plan in terms of how to handle that?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [20]

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Hi, Waqar, it's Mike. Yes, certainly, what we're doing is, as I said on the prior question, we're focused on what we can control to manage our operations as tightly as possible. We are focused, as an enterprise, in generating free cash flow from the enterprise and using that to retire debt.

I think that stays the course here for the next 12 to 18 months, and we're certainly focused principally on that.

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Operator [21]

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Your next question comes from the line of Andrew Ginsburg from R.W. Pressprich.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [22]

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I just wanted to get a better idea of how much of a contribution really, think just selling only sands, for example, could really help on the top line, especially when you take into consideration some of these pure-play sand guys who are really feeling our crunch as well? Just trying to get some of your thoughts around that.

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [23]

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Andrew, it's Lindsay. I don't think we're expecting to recover all of the pricing or all of the revenue that we saw fall off in Q3. It's more to present to our customers that there is an alternative to still getting good value for their products and services and giving them an option. So it will take some time because you're absolutely right, there are some fairly large providers and what do you provide, there is basically effectively an integrated service from the gates of the sand all the way to the perforation of the well.

So I think there's some value in that, it's going to take some customers maybe a little bit of self-reflection to see if their operations are truly benefiting in that way and that there is an incremental value for having one company giving the actual service and the products. And that's what we're providing. So I think we're going to see. We hope it will give us, I don't know, an expectation. I'd love to get back 1/3 of what we lost.

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Operator [24]

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(Operator Instructions) Your next question comes from the line of Jason Mandel from RBC Capital Markets.

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Jason Darren Mandel, RBC Capital Markets, Research Division - Head of U.S. Credit Research [25]

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I actually have 2. So I'll just throw them both at you and let you go for it. On the cost-cutting side, for the $21 million of realignment cost cuts. Can you just clarify, and I may have missed because I dropped off for a moment, if there's any cost related to getting those cost cuts? And over what time frame we should expect those to roll through? And then secondly, on the liquidity, which you've kind of touched on already, but what other levers you may see as being available to the company, whether they be asset sales or secured paper, et cetera?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [26]

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Yes. Thanks, Jason. Certainly, on the first one, I think the costs are as we disclosed in the press release. Those are the real cost, the outflows that we see happening. What we're seeing then, obviously, is the annualized benefits of that coming to the forefront next year. And as far as what other measures that we can have as far as liquidity, we always look at asset sales as being a part of that equation. But obviously, it would have to make sense for us as far as the actual value that we're receiving as well as the strategic benefit of the assets and where they're located. So we manage all those factors as best we can to look at those decisions. But really, again, as I said on the prior call, we're really focused on what we can control with our operating business. And as part of that, obviously, and then unfortunately, was part of this realignment exercise.

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Operator [27]

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Your next question comes from the line of Stan Manoukian from Independent Credit.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [28]

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I just have one. I want to understand to what extent your strategy has changed compared to the last industry crisis, how do you sort of plan your fleet sort of parking and employment of your fleet compared to what happened 2 years ago?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [29]

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Hi, Stan, it's Scott. I think, broadly, the strategy really hasn't changed. We've always been a very customer-focused organization and tried to build a book of work that way. Tactically, look, 2016 was a generational or worse downturn, I think you basically got to a point where you had to do what you had to do to maintain cash flow and maintain employment levels. And so I'm not sure I would sort of look back to 2016 as a playbook for how you handle challenging industry conditions.

As we look at it today, I think that this is far more indicative of how we're going to approach things going forward. You've got to make sure your operating footprint is rightsized and you've got the right customers. And then on top of that, that the cost footprint, both operationally and support is rightsized, and that you're allocating capital judiciously. I don't think that strategy changes in good times or bad. You obviously take on a little bit of risk in growth when things get better and you try and be as prudent as possible as things tighten up, but really, there's no broad change in the strategy from years ago to today.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [30]

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But is there any hope sort of when you're parking or anyone else is parking a portion of their fleet, is there any hope that sort of the number of rigs will restore next year? Because clearly, there is a glut of equipment -- of rigging equipment in North America. So the idea is either your park it with the hope that number of rigs will increase or you will sort of start selling a portion of your redundant fleet. What is the -- and that compares with, like, 3 years ago, the idea was that, well, yes, definitely, this is not sustainable. This oil price level is not sustainable. And as a result, it will definitely improve. I mean, do we have the same kind of idea frame or it has changed?

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

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Yes, Stan, I would say, look, we're -- obviously, the industry is not in as bad a shape as it was in 2016. So I don't think you can point to a certain rebound coming. And again, that goes to our strategy. We're -- to use the golf term, we're playing it as it lies. We know what's in front of us. We know what our clients are spending and how they're approaching their capital budgets. And so we're responding in kind.

We look at our footprint from an asset and people perspective all the time. If the right decision became -- you look at monetizing assets, we'll obviously consider that. I would tell you at this point we do believe activity is going to pick up, both seasonally in North America and structurally, as U.S. production, I think, struggles to grow and maybe doesn't grow and maybe shrinks at an 800 rig count. So we certainly think the ingredients are in place for things to get better, but I really don't like the word hope because that's not kind of how we think about things. We react to what's in front of us. We make, hopefully, smart plans for how things could turn out, but I don't think hope is part of the equation for us.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [32]

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So based on your relationships with your customers and sort of observation of the market and the industry, you have a strong belief that the demand for your services will rebound in the first quarter of next year. Is that an accurate statement?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [33]

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In the first quarter, yes, I think it will definitely rebound. Canada is always quite busy in the first quarter. As we talked about, we're a little more exposed up north in the U.S., and that can have impacts from weather. But certainly, as you get through -- ignoring any weather impacts, yes, the cyclical seasonal rebound should be pretty nice in Q1. And I don't think that's materially different from anyone's view of North America.

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Operator [34]

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(Operator Instructions) Your next question comes from the line of Jeff Fetterly from Peters & Company.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [35]

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Just a few clarification questions. The cost reduction measures, where are those focused, either regionally or by segment or division?

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [36]

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I think it was fairly consistent amongst corporate Canada and the United States.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [37]

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And do you expect to see the full benefit of those measures in 2020 or starting in the first quarter of 2020?

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [38]

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Yes.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [39]

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On the U.S. side, Lindsay, your comments about marketing 15 fleets or just over 700,000 horsepower versus the 877,000 you talked about. Is the delta between the 2 only crews or labor capacity? Or are there any other factors there?

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [40]

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It's mainly crews that we have staffed to a level to run the equipment. We have had some need for additional rotational equipment on certain clients. Some clients have decided to go 135 barrels a minute, which takes a few more pumps on there, but they're a little bit one-off evaluating type concerns. So we have pulled back. We -- I think we wouldn't be able to get to 18 fleets in a quick process, if that's what you're asking, Jeff.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [41]

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And in terms of Q4, I know you talked about 15 crews running on average in Q3, how many crews do you expect to run in Q4? And then what's your visibility for Q1?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [42]

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Yes. I mean, today, Jeff, we're still running kind of 13, 14, 15 crews, depending on the day. It's really a bit early to try and even think about late November and December time frames. We certainly know December is going to slow down across North America. But there are still some moving parts. We've heard guys kind of reference, does it look a bit like last year? I think in some areas, it will look like last year. And in other areas, it might look a little better or a little worse. But again, it's a bit too early to handicap that. But yes, for Q1, we see a good start to the year across North America. And again, the only caveat to that is, like we saw this year, weather can disrupt the operations as you go further north, so you're always on the lookout for that. But certainly, the calendar looks quite strong for Q1 at this point.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [43]

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And that calendar would be consistent with that 15 crew, give or take number that you're at today or were in Q3?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [44]

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Yes, 15 in the U.S., 5 in Canada would be the way we're sort of positioning at this point for Q1.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [45]

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Okay. And then lastly, on the debundling side. So just so I understand, you're going to be selling or marketing proppants and chemicals on a stand-alone basis from the pumping services?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [46]

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Yes. So like maybe a slight differentiation. I don't think you're going to see us out there knocking on every door sort of trying to start a new significant revenue stream. I think where customers have debundled those services and where we think it can create value, you're likely to see us take that opportunity. Sand is much more likely to be a Canadian phenomenon just given our network and our expertise there. We feel we can compete with client-supplied sand, with third-party supplied sand in a number of sub-basins within Canada.

And chemistry is much more likely to be cross-border, but maybe a little bit more in the U.S. where that debundling has been maybe a bit more prevalent. But as I said, we're not dedicating sales resources to this on a stand-alone basis. We're empowering our guys to find those opportunities, bring them to the divisional management and where we think it makes sense, we'll take advantage of it and try to put a bid in that makes sense for everybody, but certainly not trying to, as I said, start up a new business by any means.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [47]

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Okay. And is the intent to provide these on a stand-alone basis for customers or jobs where you're providing the pumping services? Or could they be completely independent?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [48]

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Yes, both. I don't think we'd have a preference either way. Obviously, if we're on location, there might be some benefits. But with a lot of the large customers, it's -- the logistical side of it is managed very differently from the sort of pumping side of it, and you're almost engaging with 2 separate bodies in a lot of cases. So yes, if we're selling to someone where we're on location, great. And if the opportunity is there for us to sell when someone else is pumping, we'll look at that as well.

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [49]

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I think, Jeff, we've seen some really good results with some of our chemistry systems. And we've seen and had good results or good success where we haven't supplied the chemistry, issues have developed. The water sources can change at a moment's notice on some of these large pads, and you do have problems with -- especially with some of these high-viscosity friction reducers. And we have found a lot of our systems to be more robust than some of the third-party solutions. And we're more reactive to the clients' needs. One, we're there. We have field engineers there. And we have labs that are very capable of determining issues and problems and giving solutions to those problems. And we have obtained or reclaimed the chemistry sales back again.

So I think focusing a little bit more that we can compete on some of their product and system sales gives our guys a little bit more to sort of focus on that, it's not just about pressure pumping equipment services. There is actually some technology that can bring some pretty good value to you for really no additional cost to the other than the material itself, right.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [50]

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Okay. Mike, last clarification. In terms of availability under the borrowing facility. You had $125 million drawn at the end of Q3 and you had $146 million of incremental availability. Is that correct?

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

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Yes, that's right.

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Operator [52]

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(Operator Instructions) Your next question comes from the line of Andrew Ginsburg from R.W. Pressprich.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [53]

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So just wanted to get quick thoughts on. So a lot of people are talking about the Argentinian elections, but I was kind of interested to get your perspective in terms of the recent Canadian elections on the overall Canadian market and do the results make you more optimistic, pessimistic? Or are you guys kind of indifferent to the results?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [54]

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I think there's -- obviously, there's a personal sense about this. But look, as managers of the company, again, you have to play the ball where it lies. I don't think in our heart of hearts, we were expecting a significant change in government in Canada, many of -- although many of us may have hoped for it. We're certainly, I guess, encouraged by early days of what we've heard out of Ottawa, but words are just that. And again, we're just going to focus on running the business in whatever jurisdiction and under whatever regulatory and government oversight there is. So yes, really, I think it's more a stay-tuned. I think Alberta's and the West has made their feelings relatively well known. There's not much more we can do except get our heads back down and just continue to work as hard as we can.

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Operator [55]

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Your next question comes from the line of Mike Mazar from BMO Capital Markets.

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Michael Mazar, BMO Capital Markets Equity Research - Equity Analyst of Oil and Gas Services [56]

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Just a quick thing on this, the $21 million of cost savings. I'm just wondering how much of that is sort of cyclical versus structural. In other words, you're obviously kind of reducing the overall amount of equipment you're kind of actively deploying in the U.S. If, for whatever reason, market conditions were such that you could suddenly deploy that or a chunk of that back, would you have to then kind of abandon some of these savings? Or is this something that you could still scale up from this new lower base?

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Lindsay Robert Link, Calfrac Well Services Ltd. - President, COO & Director [57]

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Yes. Mike, it's Lindsay. I'll kind of take this one for you. I honestly believe a lot of it is structural. A good chunk of it. We went, as Mike earlier stated, into the corporate and into the district itself, into the overhead part of the business. And then we looked at our operational side to try and streamline. So in your question, if we get more activity, will we have some additional costs to put -- to run that activity? The answer is yes, but we'll be running it at a -- for example, at 95% level rather than the 100% level that we were before from a staffing and from an equipment and from a cost to provide the services. So I would expect actually to get more benefit from more activity based upon this realignment that we actually did. So it should stay, although you're not wrong, if you do add activity, you will have maybe some additional transactional type costs in there, but that transactional cost should be at a lower rate than where we were, say, or where we are to date.

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Operator [58]

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There are no further questions at this time. Mr. Treadwell, I turn the call back over to you.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [59]

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Thanks, Melissa. So thanks, everybody, for your time and questions today. We've enjoyed the 45 minutes, and we look forward to giving you our fourth quarter results in February of next year. Thanks very much.

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Operator [60]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.