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Edited Transcript of CFW.TO earnings conference call or presentation 1-May-19 4:00pm GMT

Q1 2019 Calfrac Well Services Ltd Earnings Call

CALGARY May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Calfrac Well Services Ltd earnings conference call or presentation Wednesday, May 1, 2019 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 & Special Situations Analyst

* Ian Brooks Gillies

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

* Jason Darren Mandel

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

* 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

* Kurt Kevin Hallead

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

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Calfrac Well Services Ltd. First Quarter Earnings Release. (Operator Instructions) Thank you. Fernando Aguilar, President and CEO, 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, Jason. 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 of Calfrac's business. After the presentation, we will open the call to questions.

In a news release earlier today, Calfrac reported its first quarter 2019 results. Please note that these financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-IFRS financial measures, such as adjusted EBITDA and operating income. Please see our news release for additional disclosure on these financial measures.

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

Calfrac results in the first quarter show that, despite challenges due to weather and competitive pricing, our broad operational footprint provides a level of risk [classification] and risk mitigation that allow us to manage through transient issues such as what we would see in the quarter.

Once again, our results would not have been possible without the dedicated efforts of our employees across the organization who make Calfrac a catalyst for success everywhere we operate. Also, oil and liquids prices improved substantially during the first quarter. The impact of lower pricing at the end of 2018 resulted in a cautious start to the year in North America. In addition, the impacts of severe winter weather in the Northern United States, Canada and Russia limited our operational rhythm through parts of the quarter and resulted in the deferral of lower volumes into March and beyond.

Outside these weather impacts, activity levels in North America were in line with our expectations, as was pricing, which moved lower as then negotiated at the end of 2018 came to force during the quarter. In general, we expect pricing to stabilize and eventually improve, given the supply response seen across the North American market and the improvement in commodity pricing. Our international operations showed mix results with a good quarter in Argentina contrasting weaker results in Russia with Russian results being impacted by approximately 2 weeks of weather shutdowns.

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

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

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Thank you, Fernando, and thank you, everyone, for joining us for today's call.

I'm pleased to report the Calfrac was able to generate over $72 million of operating cash flow during the first quarter of 2019, which enabled a further $20 million reduction of debt drawn on the company's credit facility. We have now reduced the company's balance on the revolving term loan facility by $150 million over the past 3 quarters, and we continue to focus on the generation of sustainable free cash flow to further reduce leverage going forward.

I would now like to take a moment to explain the impacts of 2 accounting changes at Calfrac that commenced on January 1, 2019. Firstly, we adopted IFRS 16, which applies the leases that were previously recorded as operating expenses. As noted in our release today, this change resulted in the recognition of all material leases as assets and liabilities. And consequently, this increased depreciation expense by $5 million during the quarter, which we also expect will be the quarterly impact to the company's depreciation expense moving forward.

In addition, we reassessed the assumptions related to the useful lives and salvage values of certain fracturing equipment components. Eliminating the salvage value of assets previously in service resulted in a onetime charge to depreciation of $9.5 million, while the reduction in the estimated useful lives increased depreciation expense by a further $7.1 million.

Consolidated revenue in the first quarter decreased by 19% year-over-year primarily due to lower activity levels and pricing in Canada and United States, including the impact of weather-related delays in North Dakota, Pennsylvania and Grande Prairie. Adjusted EBITDA reported for the quarter was $44.1 million compared to $73 million a year ago. Operating income was down 36% to $43.6 million from $68 million in 2018. These weaker results were due primarily to lower pricing in North America but also due to lower activity in our key markets.

In Canada, first quarter revenue was down 31% from the same quarter in 2018 due to a smaller active fleet combined with lower utilization and pricing. Calfrac's Canadian operations deployed 301,000 horsepower and 11 coiled tubing units in its operation in the first quarter, down 4% and up 10%, respectively, from the prior year. This includes the idling of one small fleet in Canada during the first quarter.

Operating income of $13.7 million fell 57% from 2018 primarily due to the lower revenue generated during the quarter. As expected, pricing concessions had a disproportionately negative impact on field margins and operating income during the first quarter.

In the United States, operations continued at a solid pace. The lower pricing and weather-related client delays in North Dakota and Pennsylvania resulted in a revenue decrease of 18% from the same quarter in 2018. The company's United States operations generated operating income of $37.7 million during the first quarter of 2019 versus $53.2 million in the same period in 2018. This 29% decrease in operating income was mainly due to lower pricing and activity as compared to the same quarter in 2018.

Revenue from Calfrac's Russian operations of $29.1 million was 7% lower than the corresponding period of 2018. The decrease in revenue was primarily due to lower activity levels resulting from a change in client mix and an extended weather delay during February. The decrease in activity and revenue in the company's Russian division resulted in an operating loss of $2.8 million compared to a loss of $1 million in the first quarter of the prior year. As discussed, significant periods of extremely cold winter weather combined with a 9% depreciation in the Russian ruble were the largest drivers of this change.

Calfrac's Argentinian operations generated revenue of $55.4 million during the first quarter of 2019, an increase of 21% from the prior year. This increase was mainly due to higher work volumes across the division but particularly in the Bakken America shale play. The company's operations in Argentina reported operating income of $4.9 million compared to a loss of $3 million in the first quarter of 2018. Improved utilization and cost control at all levels were the main drivers of the improved profitability.

The company's Corporate division recorded total cost of $9.9 million during the first quarter, a decrease of $3.1 million from the prior year. The decrease was largely driven by lower SG&A costs, primarily stock-based compensation. The company also recorded interest expense of $21.2 million during the quarter, which was $0.5 million above the prior year.

In December, Calfrac's Board of Directors approved the company's 2019 capital budget of $149 million. The company will continue to monitor the evolving market conditions and adjust spending as required. With a further reduction in borrowings of $20 million in the first quarter, Calfrac continues to make progress on its debt reduction plan. With elevated levels of uncertainties surrounding the operating environment in North America, we will maintain our focus on managing capital spending and working capital as aggressively as we can in order to maximize cash generation and further debt repayments.

To summarize the balance sheet, the company had working capital of $276.8 million at March 31, which included approximately $60.2 million of cash. In addition, Calfrac had used $0.9 million of its credit facilities for letters of credit and had borrowings of $100 million on its credit facilities, leaving $274.1 million in potential borrowing capacity at the end of the first quarter. As at March 31, 2019, the company was in full compliance with its financial covenants.

On April 30, 2019, the company formally agreed to extend its syndicated bank credit facility to June 2022. The terms of this extension are essentially unchanged from the previous agreement and provide Calfrac with further stability to its capital structure.

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. As I mentioned in our fourth quarter call, the global oil market remains strong with demand growth and supply risk contributing to improved pricing. Cash flows for our customers have really improved, and we expect that, sooner or later, that incremental cash flow will be deployed into measured increases in capital spending.

In our U.S. operations, we continue to see strength in our North Dakota operations, driven by a top-tier client base and improving overhead economics. Likewise, we have seen increase the traffic in Texas as contractual commitments for new pipeline capacity will require an increasing completion activity through the second half of the year.

Given the state of the North American national gas market, we are more cautious on the outlook in the Marcellus in the near term. That said, an excellent performance record and top-tier customer base positions Calfrac well [endure] to any impacts on activity levels in the region. As mentioned in our -- on our last call, we expect utilization in our U.S. operation to improve going forward as weather impacts abate with further gains possible in the second half of the year. Pricing in the U.S. market appears to have bottomed, and we will monitor the market for tightness as the year progresses for opportunities to regain lost ground.

In Canada, our outlook remains cautious, but there is some cause for optimism. The recent provincial election has improved sentiment and confidence in Alberta and Calgary, specifically. And with the incremental tailwind of the weaker Canadian dollar, we believe the ingredients are present for improved activity levels past the breakup. Activity in the first quarter was largely in line with expectations. Also weather slowdowns during the quarter (inaudible) pushing into April. As in the U.S., we believe pricing has bottomed in Canada due to lower supply and improved visibility.

As the first quarter wrapped up, Calfrac further adjusted its Canadian footprint. We have idled an incremental fleet in Canada, which reduced our active fleet count to 6 and made a temporary scale change, which allows Calfrac to run 4 fleets in a seasonally slow period of the second quarter. We anticipate running 6 fleets through the second half of the year. But as always, we will monitor the health of the market and make adjustments as we deem fit. The idle equipment will remain in Canada for the time being, which will provide us with the option of adding a fleet back into the U.S. or Canada when market conditions warrant.

Now I would like to discuss Calfrac's international operations. In Russia, the first quarter was below our expectations largely due to extended periods of cold weather that hampered operations while many costs remain unchanged. Work volumes and their contract remains strong, and we expect their operational and financial results will improve from first quarter levels as Russia moves through breakup into summer.

Argentina delivered strong results again as increased work volumes and improved field productivity are reflected. Near the end of the quarter, Calfrac secured a contract with a major client in the country for incremental completion work in the Vaca Muerta field. This incremental work will begin early in the third quarter and further cements Calfrac as the leading service provider in the country.

To summarize, while our first quarter results were below our expectations, our business model remains robust, focusing on delivering excellent service to top-tier clients (inaudible) on the wall, continuing to deliver free cash flow to reduce our debt outstanding while managing the ups and downs of our industry remains a focus of our team, and I look forward to continued successes in the future.

Thank you all very much for joining us today, and I would 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 Sean Meakim from JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [2]

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So maybe starting in Canada. I think it sounds like you'll say yes. Does it sound like the first quarter is going to be the low point in terms of year-on-year activity comps? And I'm trying to get a sense for how that -- that job mix was a little bit dilutive it seemed like during the quarter. And naturally, you're going to try to take work where you can get it. Where do you think -- how do you feel about your prospects for -- if you're going through a breakup here? But then more importantly in the back half in terms of being able to try to get ahead of the opportunity set to drive some better margin work and kind of aligning with right projects, right customers, et cetera, in order to -- so the 2 parts of the question is basically what's not within your control? And then the back half has what's within your control given that opportunity set?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [3]

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Sure. Thanks, Sean. It's Scott. I would say, trying to forecast the year-on-year comps is pretty tough. Obviously, Q2 is really challenging with the vagaries of weather. But I think as you look into the back half, we're setting up to run 6 fleets. That's down roughly 25% from where we would have been a year ago. Pricing today is definitely down from where it was a year ago. So it's lining up like it could be lower.

Now that being said, I think, as we spoke to in Fernando's script, that the ingredients are definitely there. There is -- the fundamentals are good for the Canadian producer base. It's really just a question of confidence here at this point and if there's market appetite for any incremental capital for the Canadian producer group. And I think that certainly, given the initial budgets, there's room for that capital to move higher.

In terms of our positioning, as we've always said, I think it's the hallmark of our Canadian business that we've got -- we put up our client list against anybody and have a high level of confidence that it would be better than anyone else's. I think the relationships we've got and the models that our big clients run are very good when times are good, and they're still okay when times aren't so good. And I think we've seen that through the first half of the year.

And then in the second half, I think there's definitely some back-half weighting to some of the clients we've got. So we're certainly expecting Q3 to, certainly weather depending, kick off at a pretty good level. And then really, it comes down to Q4. How does the end of the year shape up? Last year, obviously, we kind of tripped and stumbled our way in as an industry into the end of the year. I think this year, it could possibly be a little bit of the opposite. If fundamentals hold up and the confidence continues to build, you might see a very steady back-half work program that doesn't see as much of a slowdown in Q4, and that's probably the plus or minus in Canada right now.

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

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Given the -- given -- just adding one little thing to Scott's comment is, given the flexibility of adding fleets accordingly, it's likely to fix up by the end of the year, Sean.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [5]

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Understood. That's what I was looking for. In the U.S., you mentioned specifically the Permian in the press release, in your prepared comments. Could you maybe give us a sense of how you think you're positioned? It'll be -- it's our supposition that you're going to see incremental activity coming in the back half from private E&P if you're going to see much of it at all? And so how do you feel Calfrac's positioned in terms of -- if the incremental demand is coming from private E&Ps, how that will read through into your opportunity set for the back half of the year?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [6]

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Yes, this is based on discussions that we've been having with our customers in the areas where we operate, specifically the Delaware. So lately, it's been called the ground zero area for the Permian. We see it's very prolific, and customers are basically getting ready for an increase of activity in the second part of the year. That's the reason why we're presently optimistic or cautiously optimistic about how that positioning that we have in the area is going to start the same proving toward the second part of 2019.

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

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And Sean, in terms of the customer mix, public versus private, we're certainly in the flow no matter who the customary is largely in the Delaware part of the Permian. I think our business has always been focused more around the public side. But in the Permian, where round number is 1% of the market, we understand our competitive position there. And so as we work to build our reputation -- I don't know that we would say we'd take any work we could find. Because obviously, that's not the case. But we're going to have to find the right relationships, and that may be private. That may be sticking to more of the public companies, the sort of mid-cap and larger guys that we try to align with. But obviously, that's a work in progress in the Permian for us.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [8]

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Got it. And one last quick side I was hoping to ask about on international. In Argentina, you highlighted that some of the work is moving towards unconventional from conventional. Didn't see much uplift on the margins. I would think that, that type of work would be more accretive to be some trends toward cost running through. It'd be great to look a little bit more the understanding of that margin progression in Argentina, specifically as some of that workflow changes.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [9]

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Yes. So I think what you've seen -- comparing Q1 2018 and 2019, you've seen a level of progression in our margins and our activity levels. So this is positive. But what you read in our press release, and we mentioned in the script, is basically that we will have additional activity in Vaca Muerta in the second part of the year, which is a contract that we just finished executing with a large customer in the area, and we see that activity continue progressing throughout the year and getting into 2020 as well. So we are very positive about the progress and the good level of contracts and activity that Calfrac is entering in the country.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [10]

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And Sean, I don't think you're seeing in Argentina the significant difference in economics for pressure pumpers between conventional and unconventional. Obviously, conventional is very well entrenched in Argentina. Everyone can do it, and it's been done for a long time. So not just the pumpers, but the customers and all the third-party services understand how that part of the business works. We're still in the early days of the learning curve in the unconventional, and so you're getting some losses of productivity that you're -- we're seeing improvements in every month and every quarter, so it's moving in the right direction. But the gap between what we could do in a North American context and what we do in Argentina is still enough that it impacts the margin progression. And I think, as you see that learning curve improve or that -- the state of the industry improve, you should see a lift on margins simply because you're getting that better productivity.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [11]

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So it's about getting the efficiency curve and sharing that with your customers as opposed to maybe, in the early stages where you're less efficient gathering stage is priced where you're getting compensated for that inefficiency.

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

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Well, yes, all I would say is that you're -- the Argentine market certainly isn't tight enough where you could demand significant enough standby charges to make up for the gap in inefficiencies. Maybe at some point you will, but that's certainly not been the case over the last 18 months.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [13]

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And I would say that -- sorry, just an addition related to activity, not to the operation. But you will see that there is more, let's say, more interest coming from the international companies to become active in the play, in Vaca Muerta play. So you see companies -- for example, the companies that have been dealing with activity in Argentina up to now are the local Argentinian companies. People -- those are the companies that are exposed to that play. But then you have the international companies that are becoming more interested in Vaca Muerta, have been investing as well. And you have new companies in the basin as well, like [Vista], for example, that are investing as well and growing the market. So we see an increased activity level in Vaca Muerta in the months to come and into 2020, as I mentioned earlier.

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Operator [14]

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Your next question comes from the line of Kurt Hallead from RBC.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [15]

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I was looking for maybe a little bit more insight and/or clarity on the pricing dynamics maybe in particular in the U.S. I know you're involved in a number of different basins and not just in the Permian. So when you look at those varying basins, where do you think you have an opportunity to maybe get better pricing as the year goes on? And is there any particular basin where you think there could be still some, say, pricing risk as you get out through the rest of the year?

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

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Yes, Kurt. What I would say is as we look forward, what you'll see I think in the U.S. pricing is that, just due to the timing of things coming on, there's not much chance at all for pricing to move up in the U.S. in Q2 in terms of what we would report.

As you get into Q3 and start looking at basins, the Permian, I think, has certainly got the industry's focus but certainly has loss of equipment. So I don't know that it would necessarily be the first one to move on supply/demand fundamentals for frac. But what I do think is if the Permian starts to really ramp up, where you'll see pinch points is on other service lines, labor, bed space, hotel space availability. And it will just creep into the cost structure that way. And so what I think you might find is if the Permian starts to tighten up, it'll be kind of a cost push inflation, where you can go to your customer with a number of cost driver increases, and if the market is tightening, you might be able to get a cost-plus-type increase.

Outside of the Permian, I would say that the health of North Dakota and the Bakken would probably suggest that if activity picks up there, our footprint and just the basin in general would tell you that it's probably a potential basin where you could see improved economics. The Marcellus is probably at the back of that list just given the uncertainty around gas. And then the Eagle Ford is probably a little bit in the middle of it.

If the Permian really starts to rip, you could see equipment exit South Texas, which could tighten the market very quickly. But at the same time, that's the most challenged market, I think, we are in, in the U.S., and so it may have a little further to go before you get significant pricing improvement there. So that's probably the best rundown we can give you at present.

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Kurt Kevin Hallead, RBC Capital Markets, LLC, Research Division - Co-Head of Global Energy Research and Analyst [17]

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No, that's fantastic. And then maybe on a broader dynamic, when you look -- you had very -- as you mentioned -- as Mike mentioned, very strong free cash flow in the first quarter. Is the expectation for the remainder of the year to be able to at least sustain that level of cash flow? And then in the context of the utilization of that cash flow, is it still very much geared toward debt reduction first?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [18]

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Yes. Kurt, it's Mike. Certainly, our focus on the use of free cash flow is on debt repayment. So yes, organizationally, we are focused on that. There's going to be some ups and downs as we see the year progress as far as the uses of cash. Obviously, Q1 is a light quarter for us from an interest payment perspective, and Q2 and Q4 are when our most notes payment on interest is due. So those quarters are going to be heavy from that standpoint.

Certainly from a CapEx and a working capital, we are focused on minimizing or maximizing those investments, and we believe that we can generate free cash flow over a wide range of different cash flow scenarios for the enterprise. But there's going to be some puts and takes here, certainly, that Q1 was a good quarter for us in that regard. I would say Q2 likely is going to give some of that back. And then, on balance, I think, depending on how the back half looks, I think Q4 will be a good quarter for us as well, similar to last year.

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Operator [19]

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(Operator Instructions) Your next 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 [20]

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Just a couple of quick ones. When we look at your crystal ball going out to the second half in the U.S., is your optimism on sort of a recovery in pricing there, citing your commentary that pricing has probably hit a bottom? Is that entirely driven from a demand perspective? And in that, demand is likely to pick up as we see (inaudible) issues kind of relaxing? Or have you also seen a supply response? And if you have seen a supply response, could you quantify that all at all for us?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [21]

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Yes. It is a combination, Greg. It is a combination between that. I would say -- we mentioned that we got more traffic of tenders coming out in Texas, as we speak, so that's an indication that the market is picking up. Our customers are getting busier.

And the second piece that is related to this is that we've seen in a way the comment about pricing basically bottom is coming from the part that, including on our sales, a lot of companies are basically -- have idled equipment and are becoming a bit more discipline related to activity in front of the sector in the industry.

So we believe that increased bidding activity plus a little bit more discipline is going to give us the opportunity of being more optimistic in the second part of 2019.

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

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And I think just to add color to that, Greg, is you're seeing the activity from the market leaders in the U.S., the guys with the largest share of the market adopting a sort of returns-focused strategy and sort of drawing a line and suggesting that pricing has gone too far down, given where the commodity pricing is. So we're 4% of the U.S. market, less than that in Texas so even more so than in other markets, where we're really a price taker. So it's good to see the market leaders acting rationally. And obviously, that gives us some confidence on the supply side. And as Fernando said, we're pretty confident on the demand picking up. I don't know that we'd quantify it just yet, but we certainly think it's positive in the second half.

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

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And to rephrase just to make sure I understand properly, it doesn't sound necessarily that supply has decreased. However, at current pricing levels, the price leaders have indicated that it would be unpalatable to keep supply in the field.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [24]

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Yes, they have taken supply out of the field. And so I think by doing that signaled that pricing is not acceptable. It's I think the message that needs to get sent. We've done something very similar in Canada, I think a lot of the players have. We've now idled about 25% of our capacity in Canada from where it would've peaked in the fourth quarter of last year, and I think we're sending a very similar signal in the Canadian market because that's part of the responsibility of being a market leader.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [25]

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Got it. Okay. And just staying on pricing as well, and not to get too granular but sticking with your comment that it has bottomed, has it been effectively sideways for you year-to-date in 2019 in the U.S. pricing, that is? Or has it been sort of a downward trend and now it's stabilized at this lower level?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [26]

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Yes. So what I would say is that the sharp end of the stick, it hasn't really gotten any worse in 2019. But to my earlier point, just given the timing of when these agreements come into force, you've seen a sequential drop in pricing in Q1. You'll probably see a small decrease in Q2 just given Q2 will be the first quarter where everything we do is at the lower price. And then in Q1, maybe 80% or 90% of our work was at a lower price.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [27]

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Okay. That's helpful. And then offsetting that, do you have a feel for what your sort of weather-related impact was? I know it's almost an unfair question. But just trying to normalize if you did have your schedule play out in the U.S. as it was intended to, do you have a feel for what kind of impact that would have been on your results there?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [28]

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Yes. I mean I don't want to necessarily give you a number, but let me paint a picture this way. North Dakota was where it was largely felt. I mean there was some in Pennsylvania. A little bit in Colorado. But North Dakota round numbers is about 1/3 of our U.S. franchise in terms of activity and revenue. That 1/3 was down for about 1/3 of the quarter, wasn't quite to 0, but it was down for about 1/3 of the quarter. So you can kind of do the math and get to about 10% of the revenue we generated in Q4 went away in Q1. And then you can make an assumption about decremental margins and things like that. But just to paint the picture, that's how you should think about it.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [29]

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No, that's great. That gives me just enough to be dangerous there. So I appreciate it. And then just lastly on Argentina, great to see incremental work there. I think there I caught your prepared remarks that it's coming -- kicking -- the new contracts or the new activity is kicking on in the back part of 2019, but please correct me if I'm wrong there, just looking for some color on that. Is that incremental to the activity you're doing currently? Or is it a continuation of an existing project that is just kind of carrying on?

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

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No. Greg, this is incremental work. It's new work. And we referred to only about fracturing work, but we've been adding as well more cementing and polishing work in Argentina. So you'll see not only additional revenues and margins coming from fracturing but also from the other product lines.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [31]

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And Fernando, could you give us an idea as to the size of that opportunity there whether in terms of equipments or dollar value? Just something for us to wrap are arms around there.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [32]

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Yes. We'll give you details a little bit later in time as we're preparing for that. The activity is starting the second part of the year. We are ramping up the personnel equipment and everything, Greg, so we prefer to talk to you about -- once we kick off that contract.

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Operator [33]

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Your next question comes from the line of Jason Mandel from RBC Capital Markets.

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Jason Darren Mandel, RBC Capital Markets, LLC, Research Division - Head of U.S. Credit Research [34]

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I actually have 2 quick ones that you've touched on already but just to clean up a little bit. The cash flow throughout the rest of the year or where you're generating free cash flow quarter-wise, is the focus still going to be on continuing to repay revolver or build cash? And is there any other debt repayment? Or is that just sort of the pure focus?

And then secondly, on the kind of the -- running some of the machines a little bit more consistently or I should say running a little bit harder, are we seeing any -- expecting to see any increase in maintenance CapEx per unit going forward? And are you potentially cannibalizing any of the idled assets for some of that maintenance?

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Michael D. Olinek, Calfrac Well Services Ltd. - CFO [35]

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All right. On -- certainly on the cash flow and debt focus or debt repayment focus, is that unchanged? I think -- obviously, I think our strategy is fairly clear-cut and well spoken on the previous calls. We're -- our priority is really paying down our credit facility to kind of be 0 net of cash before we kind of look to do anything different on that end. We are trying to balance, obviously, our liquidity through the outlook with structurally deleveraging our balance sheet. Overall, though, I think, to answer your question, I believe the free cash flow we've generated mainly focused on a revolver in 2019, but we'll certainly look at other means if those are attractive and financially compelling.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [36]

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And Jason, on the equipment side of things, I don't think you would look in 2019 for CapEx to move higher either on a consolidated basis or even just on the maintenance and sustaining side. I do think we're running the equipment not necessarily harder, but we are -- the trend is to pumping more hours per day. And so you're not seeing necessarily that the hours between failures decrease. It's just that those hours get accumulated in fewer months than they would have been in the past. We feel like we're managing that appropriately. So as I said, I don't think there's much risk in 2019.

As you look further out, obviously, equipment ages. You can do some refurbs. You're obviously replacing components. But at some point, you need to invest in your fleet over and above just the components. And then plainly put, that's going to be a capital allocation investment decision that goes through the management team and before the Board.

If the returns justify rejuvenating the fleet or building new equipment to replace aging and retiring equipment, we'll do it. But if the returns don't, then I don't think it's a stretch to say that, yes, you wouldn't see our equipment footprint grow. And over time, anyone's footprint would shrink when you've got finite lives of assets.

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Operator [37]

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Your next question comes from the line of John Daniel from Simmons.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [38]

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Kind of a follow-up on Greg's question. So let's assume an RFP comes out today for frac services, and this RFP would be for dedicated work. Are you likely to bid higher, lower or the same right now?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [39]

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Higher.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [40]

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Higher.

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

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Yes.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [42]

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Okay. And does that strategy vary between an RFP from an existing customer versus a potential new customer? Or...?

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

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No, no, no, it's not changing. I mean because remember the approach that we have for our customers is basically the customers we want to work for are part of [ours] left in the country, John.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [44]

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Got it. Okay. And have any customers reached out to you yet about their 2020 frac requirements?

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

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Yes, some initial discussions are happening as we speak.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [46]

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And when you -- in those discussions, is it calling for higher demand for services or the same as this year?

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

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It's basically the same as we have for the second part of the year. So it is slightly higher than what we had in the first half of 2019.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [48]

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Got it. Okay. Cool. That's what I -- good to know. The last one from me, just kind of a modeling one. So Scott, just can you tell us what the active fleets were in the U.S. for Q1? And sort of what the effective fleets were? Just distinguish between those 2.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [49]

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Yes. So we had 17 active, and I would say really there was one that you could call idle in San Antonio for a good chunk of the first quarter. So it would have been 16 of 17. Today, still running the 17 and essentially getting all 17 out the door. If not today, then within the next couple of weeks, we'll be kind of fully deployed. But again, you've got some holes in the schedule that will drag you back down again.

Yes, and just for color if you want like just a sense as I said, you had that probably 10% impact on the top line. You could take that sort of out of your fleet count for Q1. If we had sort of 16 active for the month of February, we were down, say, 3 or 4 fleets. They've probably averaged out around 13 or so for the quarter.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [50]

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I assume you know where you change it.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [51]

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Yes, John, (inaudible) it's very important to take that into consideration because it's different to our competitors. We have a lot of exposure in the northern part of the continent, which is exposed to weather, right? So those 3, 4 fleets are importantly remote.

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

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Okay. It's safe to assume -- I mean I'm putting words in your mouth here. But overall, Q2 revenues for U.S. are up slightly given better utilization, offset with a slightly lower pricing?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [53]

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Yes. I mean, I wouldn't say they'll be down significantly. There, you still got 2 months to go. You always end up worrying about some windows that kind of creep into stuff, but there's certainly not a potential for significant down lag in Q2. And I would say if you're thinking about activity kind of being flat to up, you're not out by an order of magnitude for sure.

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Operator [54]

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

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [55]

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On the ancillary services side, I mean, Canadian coiled tubing on a year-over-year basis was pretty strong in context of everything that happened in Canada. I mean has there been a noted effort or a change in strategy there to improve that business? I mean there's obviously a large competitor who has a large part of the market there. But it appears you're making pretty good progress there.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [56]

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The answer is yes.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [57]

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Yes. If you kind of rewind 12 months, we had talked about bringing in a couple of coil units up from the U.S. where they'd been idle. We put a very small amount of capital towards refurbishing them and getting them to work in the Canadian market and shifting the focus from our coil business being essentially tagging along with frac to do annular or frac-through coil work and branching out into doing some specific well service type operations, so the mill-outs and some of the drilling operations that coil does and even on the larger hat operations actually having coil on standby, which in the past, we would never have done. We would have only had coil rigged in and active on an annular or a fracture coil. So now with plug-and-perf and some of that stuff, you've got a couple opportunities to deploy units as part of an integrated package, and that's really the delta.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [58]

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Got it. And similarly in Argentina, I mean we spend a lot of time focusing on frac, but there's obviously a lot of coil and a lot of cementing in that country as well. I mean what's the outlook for some of those services looking like at this point in time? And I guess is there any incremental demand for more equipment at this point in time?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [59]

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Yes, Ian, it's -- I think I tried to explain that a little bit earlier in the call. We have increased demand and activity for both cementing and coil tubing services in Argentina, and you will see that increase happening as we speak throughout the year.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [60]

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Right. I guess as a follow-on. I mean I'm not quite certain, but I mean could you move equipment from the U.S. into Argentina to service that?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [61]

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It's not very simple, but it's possible, and we'll do it. Yes.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [62]

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Okay. And I mean last one, I guess, is more of a bit of a broad-based question. But I mean with the capitalization of fluid ends, IFRS 16, I mean even using EBITDA as an operational measure is getting less relevant. So I mean when you guys look at your business and how it's performing, how are you looking at it now given some of these accounting changes?

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

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Yes, I think the way we look at it is EBITDA less our CapEx and trying to manage our spend on that side, so really on a free cash flow basis in this market. Of course, we'd like to look at it on a net income basis. That's really the drive of any business is to have positive net income. But given the trough that we're in from a pricing standpoint in North America, it makes it very difficult to look at it that way. So yes, in short, really, it's on a free cash flow basis.

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Operator [64]

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Your next question comes from the line of Jon Morrison from CIBC.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [65]

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Just a point of clarification. In Argentina, in terms of the incremental contract award, is it fair to assume that, that is a existing customer and not a new customer?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [66]

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That is correct.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [67]

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And that's one that you've worked for, for an extended period of time, so you'd be very comfortable with the commercial arrangement that you signed?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [68]

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Absolutely.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [69]

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Yes. The terms and conditions are very similar to everything else we have in Argentina, so there is no major stepout in terms of the risk on either side of that contract.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [70]

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Okay. What would have to happen for pricing to materially change in Canada or the U.S. in the coming period? Like is it -- would it have to be a material step-down in activity levels? Or do you get concerned about just contract rule? Because obviously, you guys have some. Your competitors have some. And producers will be keen to play each other off of each other for bidding activity. Does that give you any heartburn? Or you feel that mostly your peers will be disciplined?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [71]

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I think at this present, we'd be confident in a level of rationality that wasn't there 12 months ago. Now that being said, we don't have pricing like we had 12 months ago, so it's easy to be disciplined when there's no more to give. I think what I would say is the conversations we've had with our Canadian customer base over the last -- over the first part of this year have indicated an acknowledgment that they're obviously very happy with where pricing is not, but I haven't gotten the sense that they feel like there's an opportunity to get any more. And really, I think at this point, your best customers, your maybe most forward-thinking guys are looking to lock in the economics as best they can. You've still got your cost inflation clauses, so if sand or fuel or labor move up, you can pass that through. But in terms of moving margin on price, you've seen the discussion turn from that playing one against the other to trying to lock in what's there. So to me, that's further indication that there's an acknowledgment the pricing is not going to get much worse.

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [72]

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I think you're asking, Jon, about what is going to be required for that to improve, and it's related to activity. You need more activity in order for the prices as well to go up.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [73]

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And that would be where you have a higher degree of confidence in U.S. momentum than Canada, at this stage?

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [74]

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Yes. It's a larger market, and the opportunities are larger there. But we have in a sense above the optimism in Canada due to the recent changes in the provincial government, right, as we mentioned earlier.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [75]

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I think, Jon, everybody is aware of what the ingredients are there in the U.S. for things to get better, the takeaway capacity. It's all very visible. I think in Canada, there's not a lot of visibility. And so if Canada is going to be a positive surprise, it will actually be quite surprising. It'll be probably more for the pumpers late Q3 and Q4 because there's not a big duck inventory to chew through. But you could see Canada, as I said, sort of be second half at a certain tempo for the entire second half instead of a big slowdown in Q4 just because of those fundamentals, whereas -- and they're still plus or minus around that. But I think in the U.S., it's -- there's a little more consensus agreement about how things look.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [76]

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Just in terms of the coil momentum in Canada, as you kind of shift that away from being a true ancillary line to a secondary service line that you're trying to grow, has it forced you to look at new customers and pursue new customers? Or it's really just expanding the amount of work go with your core clients at the end of the day?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [77]

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No, what I would say is that, again, if we grew out a year ago, part of the rationale for the expansion was that we were having to turn down clients where we were out on location doing, let's say, an annular frac job, so we had coil and frac out there, and they wanted us to stick around and do some clean-outs or do something else on that location. But we couldn't because we only had enough coil to support the frac spreads, and that frac spread was going to another annular job down the road. And so we had to respectfully, politely decline that work, and there was definitely money left on the table as I think back to sort of 2017 time frame. And now we're just in a position where, whether it's standby on a large sort of plug-and-perf or bell drop pad or a coil unit that can come out by itself, it's not flexibility that now allows us to engage with essentially the same client base as we would have had before.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [78]

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So it truly was a capacity issue. And would you have incremental capacity to move into Canada if that momentum continues?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [79]

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No, everything that's worth having in Canada is in Canada today, so it would be -- if we were going to add capacity, it would either be increasing our crews or looking at other options for some of our internal work, whether it's third party or potentially building or buying new equipment. But I don't think the returns are anywhere near the point where you'd consider deploying incremental capital yet.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [80]

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Just one last one from me. Are you seeing any increased marketing of fleets in the U.S. from some of the smaller competitors that are left out there as we do see a decent downdraft in activity? Are you starting to get shop more opportunities? And can you give any comment around pricing expectations if you are?

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [81]

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Sorry, are you talking about like frac services or guys shopping fleets in a transaction sense?

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [82]

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Transaction sense, shopping fleets.

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Scott Treadwell, Calfrac Well Services Ltd. - VP of Capital Markets & Strategy [83]

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No, I don't think as much. I think certainly, as you got through Q4 and the pricing downdraft was out there, you saw some of those really small guys scramble, gloat and essentially bid work at really unsustainable levels and then sort of try to pivot towards some sort of transaction. But I think, that's quite a, down as we've exited through the first quarter. So yes, there's not as much flow in there as there was 6 months ago.

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Operator [84]

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(Operator Instructions)

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [85]

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Okay.

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Operator [86]

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

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Jose Fernando Aguilar, Calfrac Well Services Ltd. - President, CEO & Non-Independent Director [87]

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Thank you, Jason. So thank you, everyone, for participating in Calfrac's First Quarter 2019 Conference Call. Goodbye.

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Operator [88]

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