Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three months ended March 31, 2017.
Revenue in the first quarter of 2017 was $268.8 million, an increase of 24 percent from the same period in 2016. The Company's fracturing job count increased by 67 percent mainly due to higher activity in Canada and the United States. The Company pumped approximately 60 percent and 50 percent more proppant in Canada and the United States, respectively, compared to the first quarter in 2016 as a result of greater service intensity.
Consolidated revenue per fracturing job decreased by 22 percent primarily due to job mix in Canada and Argentina offset partially by the completion of larger jobs in the United States. Cementing revenue per job decreased by 5 percent due to the impact of large cementing jobs completed in Pennsylvania in 2016 prior to suspending operations.
Pricing in Canada increased modestly and in the United States pricing was mostly consistent with the comparative quarter. Pricing in Argentina was negatively impacted by the lower rig count in that country and the resulting competitive pricing pressure experienced from certain multinational competitors. In Russia, pricing was consistent with the first quarter of 2016.
Adjusted EBITDA of $21.6 million for the first quarter of 2017 increased from negative $5.9 million in the comparable period in 2016 due to significantly higher utilization in the United States and Canada. The improvement in Adjusted EBITDA was partially offset by weaker results in Argentina due to lower pricing and utilization.
The net loss attributable to shareholders of Calfrac was $19.5 million or $0.14 per share diluted compared to a net loss of $54.1 million or $0.47 per share diluted in the same period last year.
Based on stronger demand for equipment than previously contemplated, Calfrac is increasing its 2017 capital budget to $45.0 million from $25.0 million, largely focused on sustaining capital for the Company's North American fracturing operations.
Revenue in the first quarter of 2017 was $268.8 million, an increase of 39 percent from the fourth quarter of 2016 primarily due to higher activity and pricing in Canada and the United States. The Company pumped approximately 60 percent more proppant in Canada and the United States compared to the fourth quarter as a result of greater service intensity. Revenue per fracturing job decreased by 3 percent due to a change in customer mix in Canada that resulted in smaller average job sizes offset by better pricing in North America and larger jobs in the United States. Pricing in Canada improved in the range of 10 to 15 percent while the U.S. experienced modest pricing improvements. Pricing in Argentina and Russia was consistent with the fourth quarter of 2016.
In Canada, revenue increased by 53 percent to $111.0 million in the first quarter of 2017 due to higher fracturing and coiled tubing activity offset partially by the completion of smaller jobs resulting from changes in job mix and completion design. Operating income as a percentage of revenue was 11 percent, which was up from 2 percent in the fourth quarter, primarily due to higher utilization and better pricing.
In the United States, revenue in the first quarter of 2017 increased by 69 percent from the fourth quarter to $98.0 million, mainly as a result of higher activity in Colorado. The division significantly improved its results sequentially, moving from an operating loss of 12 percent of revenue in the fourth quarter to operating income of 10 percent in the first quarter of 2017. The improvement in sequential results was primarily driven by operational efficiencies with customers in Colorado and Pennsylvania.
In Russia, revenue of $27.7 million in the first quarter of 2017 was 14 percent higher than the fourth quarter of 2016 primarily due to cold weather in Usinsk which allowed activity to continue to the end of the quarter. Operating income as a percentage of revenue declined to near breakeven from 4 percent primarily due the impact on utilization of extremely cold weather in Western Siberia and higher fuel costs.
In Latin America, revenue decreased by 16 percent to $32.0 million primarily due to lower cementing activity in Argentina. Operating income recorded in the fourth quarter of 2016 included restructuring costs of $3.4 million. Excluding these one-time costs, operating income in the fourth quarter of 2016 as a percentage of revenue was 1 percent compared to 7 percent in the first quarter of 2017. This improvement was primarily due to improved utilization and continued cost reduction measures.
The first quarter of 2017 marked the beginning of a transition away from unsustainable pricing and very low activity in our key operating geographies. Throughout the first quarter, the Company reactivated equipment and achieved modest pricing gains which both contributed to the improvement in reported results. The Company has been adding field personnel, and based on current demand levels, expects to continue hiring throughout the remainder of the year.
The outlook for the Company's operations in Canada remains positive, although spring break-up in western Canada will likely affect Calfrac's ability to service work through a portion of the second quarter. Client demand remains high, and with substantial pad work underway or scheduled in the second quarter, the Company remains confident of strong results for Canada relative to 2016.
The Company continues to evaluate opportunities to reactivate additional equipment in Canada throughout the summer, however pricing and labour availability remain key challenges for the industry at large. The Company continues to recruit aggressively and will examine all opportunities to expand its field labour force.
Cost inflation impacted operations during the first quarter and Calfrac expects a continuation of this trend throughout the remainder of 2017. Specifically, third-party services such as trucking as well as sand and chemicals have seen price escalations, although the Company is managing this as proactively as possible through several supply chain initiatives.
The Montney resource play has been very active to date in 2017 although client interest is increasing across the Western Canadian Sedimentary Basin, in both natural gas and oil plays such as the Duvernay, Deep Basin, Viking and Cardium.
With increasing activity and intensity, the Company believes that the demand for proppant will continue to stress current infrastructure in western Canada this year. However, Calfrac's investment in a comprehensive supply chain network that internally manages the vast majority of its operational requirements should allow the Company more flexibility in responding to increasing client demand, with cost and reliability of supply as key differentiators.
Pricing has improved in Calfrac's Canadian operations although the second quarter typically represents a pause in pricing discussions due to lower work volumes. Although financial results have improved, investing for growth and a sustainable business model will require further pricing improvement going forward.
The United States division has been the most challenged market throughout the downturn, but has shown strong improvement over the first quarter. Expectations of higher demand were realized and the consistency of work volumes exceeded forecasts which was responsible for the significant improvement in this segment's financial results. Pricing levels have also improved, but more material pricing improvement is required to achieve sustainable business returns.
The Company is in the final stages of reactivating two incremental fleets in Colorado with contributions expected for at least half of the second quarter. Calfrac continues to engage with clients in existing and legacy operating areas as well as in areas where the Company has no operating history. While further reactivations in Calfrac's U.S. operations are likely, it will not sacrifice short-term profitability or Calfrac's operating and safety culture to secure incremental work.
In the short-term, the Company believes that its U.S. operations will continue to transition to more normalized operating margins and that robust client demand for incremental equipment in all operating districts will provide additional opportunities in the second half of the year.
As in Canada, general cost inflation has begun to occur in the U.S. across a number of fronts. The Company has been successful to date in passing through these inflation drivers to customers. With further increases to the land rig count in the United States and ongoing tightness in the labour market, Calfrac believes the U.S. fracturing market will remain supply constrained through the remainder of 2017 which would be expected to drive further improvements in pricing and margins.
Over and above these factors, Calfrac has observed a move by customers away from low-cost services to a focus on execution, efficiency and safety. This is a trend which plays to the Company's strengths.
The first quarter was slightly behind the Company's expectations due to weather and ground conditions in Western Siberia, but was largely in line with previous first-quarter results. Overall, activity and pricing are expected to remain relatively flat on a year-over-year basis with financial results projected to remain stable when compared to 2016.
The efforts of the Argentinean government to attract investment into the country's oil and gas sector appear to be moving forward. With multiple E&P companies having announced significant investment plans for the country, the Company believes that it will benefit from increasing activity this year. However, shifts in client-specific work programs and labour issues may both continue to impact results in the short-term.
In Mexico, the business environment remains challenging with very limited onshore pressure pumping activity. Calfrac will continue to evaluate the market while maintaining a small scale operating presence with a minimal cost structure.
With improving operating results and client demand, Calfrac's focus in the short-term is on managing the reactivation of its assets in a safe, efficient and profitable manner, while in the medium-term, the goal of generating free cash flow remains unchanged. With fundamental improvement in the operational and financial performance of the Calfrac's businesses, opportunities to address the long-term structure of the Company's balance sheet will manifest themselves and management will seek to combine flexibility and low cost in its actions ahead.
As a result of increased activity and demand for equipment, the Company is announcing an increase in its 2017 capital budget from $25.0 million to $45.0 million. The incremental spend will be largely focused on capital components related to its North American fracturing operations.
Revenue from Calfrac's Canadian operations during the first quarter of 2017 was $111.0 million versus $72.7 million in the same period of 2016. The 53 percent increase in revenue was due to fracturing job count increasing by more than 100 percent offset partially by the completion of smaller jobs resulting from changes in job mix and completion design. The number of fracturing jobs increased due to an overall increase in completion activity in the Western Canadian Sedimentary Basin combined with the reactivation of two additional crews that were operational during the quarter. The number of coiled tubing jobs more than doubled from the first quarter in 2016 as a result of the reactivation of four coiled tubing units, which supported the increased demand for the Company's fracturing services. Revenue per fracturing job decreased by 26 percent from the same period in the prior year as the Company's job mix included a higher proportion of less intensive fracturing jobs and smaller stage sizes.
Operating income in Canada during the first quarter of 2017 was $12.4 million compared to $0.3 million in the same period of 2016. The Company was able to achieve an operating margin of 11 percent due to higher utilization compared to the first quarter in 2016 which more than offset operating cost increases. Operating costs were 37 percent higher than the comparable quarter of 2016 primarily due to the increase in activity combined with higher subcontractor and proppant costs. In the first quarter of 2017, the Company incurred reactivation costs of approximately $0.4 million.
Revenue from Calfrac's United States operations increased to $98.0 million during the first quarter of 2017 from $76.0 million in the comparable quarter of 2016 primarily due to higher fracturing activity in Colorado as 32 percent more fracturing jobs were completed period-over-period. Revenue per job was consistent year-over-year due to the completion of larger jobs in the Marcellus shale gas play in Pennsylvania and the Bakken shale oil play in North Dakota offset by the completion of smaller jobs in Colorado. This increase in revenue was partially offset by a four percent depreciation in the U.S. dollar versus the Canadian dollar.
OPERATING INCOME (LOSS)
The Company's United States operations generated operating income of $10.0 million during the first quarter of 2017 compared to an operating loss of $12.2 million in the same period in 2016. The turnaround to positive operating income was primarily the result of improved utilization in Colorado and Pennsylvania which was offset partially by $1.7 million in reactivation costs incurred during the quarter. SG&A expenses decreased by 56 percent in the first quarter of 2017 as the comparable quarter contained $3.1 million in restructuring costs associated with the temporary closure of the Company's south Texas operations and a reduction in crews operating in Pennsylvania.
Revenue from Calfrac's Russian operations increased by 22 percent during the first quarter of 2017 to $27.7 million from $22.7 million in the corresponding three-month period of 2016. The increase in revenue was largely attributable to the 23 percent appreciation of the Russian rouble during the quarter as well as cold weather in Usinsk which allowed activity to continue to the end of the quarter in 2017. Revenue per fracturing job increased by 13 percent primarily due to the appreciation of the Russian rouble offset partially by the completion of smaller jobs due to customer and job mix.
OPERATING (LOSS) INCOME
The Company's Russian operations incurred an operating loss of $0.1 million during the first quarter of 2017 compared to income of $0.8 million in the corresponding period of 2016. The operating loss resulted primarily from lower utilization due to extremely cold weather in Western Siberia and higher fuel costs. SG&A expenses were 22 percent higher than the comparable quarter in 2016 due to the 23 percent appreciation of the Russian rouble.
Calfrac's Latin American operations generated total revenue of $32.0 million during the first quarter of 2017 versus $44.7 million in the comparable three-month period in 2016. Revenue in Latin America was 28 percent lower than the comparable quarter primarily due to lower pricing, the completion of smaller fracturing jobs and less coiled tubing activity in Argentina. Cementing revenue in Argentina was consistent with the comparable quarter in 2016. In Mexico, revenue decreased by $3.1 million primarily due to lower fracturing activity with Calfrac's major customer.
The Company's operations in Latin America generated operating income of $2.2 million during the first quarter of 2017 compared to operating income of $6.9 million in the first quarter of 2016. This decrease was primarily due to lower pricing and a shift in activity from northern Argentina, which typically has larger jobs, to southern Argentina where the average job size is smaller.
Corporate expenses for the first quarter of 2017 decreased by 43 percent compared to the first quarter of 2016. Operating expenses were 34 percent lower as a result of lower district personnel costs. SG&A expenses were $2.7 million lower primarily due to a decrease in stock-based compensation expense. The Company reversed a portion of its stock-based compensation expense relating to Restricted Share Units and Performance Share Units during the quarter, which resulted in a recovery of $3.5 million. The expense relating to stock options was $0.8 million higher due to additional options granted during the period.
For the three months ended March 31, 2017, depreciation expense decreased by 10 percent to $32.0 million from $35.6 million in the corresponding quarter of 2016. The decrease in depreciation was primarily due to a larger portion of the Company's asset base being fully depreciated combined with a weaker U.S. dollar.
FOREIGN EXCHANGE GAINS AND LOSSES
The Company recorded a foreign exchange gain of $3.7 million during the first quarter of 2017 versus a loss of $18.2 million in the comparative three-month period of 2016. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada and Latin America and liabilities held in Canadian dollars in Russia.
The Company's net interest expense of $21.3 million for the first quarter of 2017 was $2.1 million higher than in the comparable period of 2016. The main driver of this increase was interest expense related to the Company's $200.0 million secured second lien term loan as it contributed to an increase in debt levels and the interest rate on this loan was higher than the interest rate on the credit facility borrowings that were repaid.
The Company recorded an income tax recovery of $10.8 million during the first quarter of 2017 compared to a recovery of $28.9 million in the comparable period of 2016. The recovery position was the result of pre-tax losses incurred during the quarter in Canada and the United States. The effective tax recovery rate was 36 percent during the first quarter of 2017 compared to a tax recovery rate of 34 percent in the comparable quarter in 2016. The effective tax recovery rate in 2017 was higher primarily due to a greater proportion of the consolidated losses being incurred in the United States, which has a higher statutory tax rate, compared to 2016.
The Company's cash used by operating activities for the three months ended March 31, 2017 was $33.1 million versus cash provided by operating activities of $2.6 million in the comparable period in 2016. The decrease was primarily due to working capital requiring $48.8 million of cash in the first quarter of 2017 compared to a contribution of $15.9 million in the comparable period in 2016. The decrease was partially offset by higher operating margins driven by better utilization in Canada and the United States. At March 31, 2017, Calfrac's working capital was approximately $278.8 million compared to $271.6 million at December 31, 2016.
Calfrac's net cash used for investing activities was $9.0 million for the three months ended March 31, 2017 versus $17.4 million in the comparable period in 2016. Cash outflows relating to capital expenditures were $13.0 million during the first quarter in 2017 compared to $7.7 million in 2016. Capital expenditures were primarily to support the Company's North American fracturing operations.
Based on stronger demand for equipment than previously contemplated, Calfrac is increasing its 2017 capital budget to $45.0 million from $25.0 million, largely focused on the Company's North American fracturing operations.
Further information regarding Calfrac Well Services Ltd., including the most recently filed Annual Information Form, can be accessed on the Company's website at www.calfrac.com or under the Company's public filings found at www.sedar.com.
FIRST QUARTER CONFERENCE CALL
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2017 first quarter results at 10:00 a.m. (Mountain Time) on Wednesday, April 26, 2017. The conference call dial-in number is 1-888-231-8191 or 647-427-7450. The seven-day replay numbers are 1-855-859-2056 or 416-849-0833 (once connected, enter 2315390). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.
SOURCE: Calfrac Well Services Ltd
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