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Welcome to the CES Energy Solutions Corp. Fourth Quarter 2018 Results Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mr. Tony Aulicino, Chief Financial Officer. Please go ahead, sir.
Thank you. Good morning, everyone, and thank you for attending today's call. I'd like to note that in our commentary today, there will be forward-looking financial information, and that our actual results may differ materially from the expected results due to various risk factors and assumptions. These risk factors and assumptions are summarized in our fourth quarter MD&A and press release dated March 12, 2019, and in our Annual Information Form dated March 12, 2019. In addition, certain financial measures that we will refer to today are not recognized under current generally -- general accepted accounting policies. And for a description and definition of these, please see our fourth quarter MD&A. At this time, I'd like to turn the call over to Tom Simons, our President and CEO.
Good morning. Thank you, Tony, and thank you to listeners for joining our Q4 conference call. On today's call, we'll provide an operations update on Q4. We'll update listeners on activity to date in Q1. And as we go through each business line, we're going to share our outlook on 2019 by business line. We're going to give a detailed CapEx plan for 2019. We're going to talk about what we spent to date, which we think substantiates what our overall spend will be in the year. We're also going to summarize what we build in 2018 and how we see that benefiting the company in the future. We're going to talk about financial matters for the quarter. How we plan to manage the balance sheet and finances for the company in 2019 as it turns the corner and starts to generate significant free cash flow. I'll start with our operations update in the U.S. For Q4, U.S. sterling fluids had a nice quarter. We averaged 119 jobs across the U.S. in the quarter. The Permian naturally led the way with about 75 jobs; South Texas, which includes the Eagle Ford, contributed 17 jobs on average through the quarter; Mid-Con, so SCOOP and STACK was a dozen; and the Northeast U.S. ran 13 jobs. We had stragglers in the Rockies and the Gulf Coast to round out the count. I'd like to highlight on technology. Today, AES, which is our U.S. sterling fluid business, is working with a couple of key customers on a generation-3 technology for the Delaware Basin. So that's part of the Permian. The objective for the customer is to run 3 strings of casing instead of 4, while allowing reduced use of diesel and creating the option to recycle water that's used to build the drilling the fluid in the intermediate section of the well. To date for 2019, AES has averaged 123 jobs with the nudge mostly coming up in the Delaware, which is why we expanded our mud plant in Kermit in 2018. For 2019, we see AES showing fairly steady activity at around 125 jobs in the first half with room to grow in the Permian in the second half as pipeline capacity for the operators could possibly bolster activity in that market. Between our mud plant expansion and new technology, we believe we can make market share gains in the U.S. while preserving or enhancing margins, but this is going to take discipline. Today, we continue to have about 12% of the U.S. market for drilling. Our Northeast barite mill for AES is on pause. We walked away from the land parcel we'd identified right after Christmas. We think that in 1.5 to 3 years, if drilling activity stays at current levels in the U.S. as we take disciplined market share growth, we're going to need increased supply of weight material or barite. So we're exploring all options to cost-effectively expand our supply. All options are on the table, including working with third parties. What listeners should expect is that at some point in the next couple of years, we're going to undertake expansion of our capacity, spend $10 million to $12 million on the construction and then whatever the additional land cost is, which you should expect to be around $5 million to $8 million. So roughly $20 million sometime in the next 18 to 24 months to expand throughput unless we can come up with some sort of compelling supply agreement with somebody. Some of that spend may happen in the second half of '19 or get pushed all the way into '20. The project will take 15 to 18 months once it's started. U.S. production chemicals had an excellent fourth quarter. We had our greatest growth in the Permian where customers continued to grow production in Q4. We continue to benefit in the Rockies from increased water cuts, which require higher treating rates. Mid-Con's doing very well as a business unit for U.S. chemicals and our California market is growing. We had 2 customers in Q4 have significant issues with H2S. We managed to change for manufacturing process to increase throughput of H2S scavenger and then also came up with novel ways to apply the chemistry in the field, which allowed a couple of customers not to shut in a couple of fields that had become sour. Effectively, they solved the problem through chemistry until they can change the equipment on surface to deal with H2S. This was high-volume, low-margin work, but the contribution margin came without increased CapEx, it just took more work on the part of our people. While dilutive to margins, the outcome was a win-win. JACAM Catalyst solved the problem for 2 leading customers, which always increases or improves your relationship of trust so you can do future business with that operator. The level of treating is tapering off as we speak and eventually would go to nothing. Sometime solving unique problems is high-volume, high-margin or sometimes it's like this situation. But the important outcome is that your relationship of trust is strengthened. 2018 CapEx at JACAM and Catalyst largely included increasing rolling stocks of trucking, both trader trucks, light-duty delivery trucks and pickups for field people. It also included increasing our throughput in the Permian by increasing the size of our yard and our lab, so that we can carry the required inventory and run an increased fleet or growing fleet of trucks in that market. We will continue to take a very disciplined approach to CapEx in the U.S. chemical market. Across the company, we expect CapEx on rolling stock. So maintaining vehicles or adding new vehicles for new business to be in the range of $40 million for 2019. $20 million to $25 million of that is doing maintenance, so either maintaining trucks or replacing trucks as they mile out and $15 million to $20 million would be growth. So new trucks for new business, and the majority of that spend will happen in the U.S. inside JACAM Catalyst. I'll move to Canada now. Canadian drilling fluids had good results in the quarter, particularly in October and November. Thanks to our leader in Ottawa in my view, drilling fell off a cliff in December. Overall, we continue to be the market leader in Canada at about 35% of the market with a greater market share in the deep long-reach horizontal place like the Montney and in the SAGD market. In Q4 of '18, our average job count was 66 jobs. December brought that average down from low 70s. In 2019, to date, January and February, our average was 80. Breakup has already begun. We have got 54 jobs running in Western Canada today, and we expect to run through Q2 with around 20 jobs. So these would be deep pads getting drilled or SAGD wells. And we've got a variable cost structure in the Canadian drilling business that can allow us at 20 jobs to breakeven or even contribute a little bit of positive EBITDA. The second half of '19 looks weak. The Enbridge news out of Minnesota is a negative for the industry. We'll continue to dominate market share. However, Western Canada desperately needs pipelines. I'll make light of the fact that maybe your midstream friends need to quit being good corporate citizens and break some loss, so they can show up on Justin's radar, and he can help save jobs because he cares about jobs. In production chemicals in Canada, we've made great strides on market share. We've penetrated the deep treating market for the Montney, which we think sets up well because we completed our Grand Prairie facility. We think that facility secures our position in that market and allows us to grow as LNG builds out in Western Canada. That is a lucrative market for us. Volumes to treat are significant. Problems are very complex, which makes that price significant. We have been pinched by curtailment in our oil treating markets. We have, in response, restructured in PureChem, you can see some severance cost contained in our financials. We continue to remain focused on this business because the end market for our customers is tiny, they can't grow because of politics. So we need to remain very disciplined on costs and disciplined on pricing on pursuing new business but make no mistake that's a tough market. Each of our 4 business lines is creating free cash flow with PureChem being the laggard. We have all hands on deck on how to preserve the culture of problem-solving through better technology and application, which means qualified people with know-how while growing cash flow through reduce costs. Smaller business lines for the company Clear, Sialco and StimWrx all continue to make positive financial contributions. StimWrx is actively moving into the U.S. It's successfully been in the Rockies since last year, and is looking to penetrate the Permian through '19. We continue -- Sialco continues to contribute technology to all 4 main business lines and has had a very strong start financially itself to 2019. Overall, as an op summary for Q4, we had strong contribution from 3 of the 4 main business lines. December was weak in Canada for drilling. We began working on PureChem in the quarter to protect the culture and capability while adjusting to the new reality in Canada, which is flat production until egress happens. We expanded infrastructure in 2018 to allow for future growth and improved efficiencies to drive margin. I'll now turn it over to Tony for a financial update.
Thank you, Tom. As you know, Q4 and 2018 demonstrated continuation of strong revenue growth with revenue of $347.9 million and $1.3 billion, respectively, representing record quarterly and annual results for the company. Also, of note, is a fact that it -- adjusted EBITDAC of $42.1 million for Q4 and $167.6 million for 2018, also represented increases over prior year respective periods. 2018 adjusted EBITDAC represented the highest level of EBITDAC achieved by this -- by CES post downturn, and it also represented a return towards our record EBITDAC of $177.2 million set in 2014. U.S. revenue continue to grow in robust markets, generating $239.8 million for the quarter and $847.8 million for the year, representing increases of 34% and 30% over respective 2017 comparative periods. This growth was underpinned by increased activity, improved market share and completed strategic investments in key U.S. infrastructure and operations in the Permian, Eagle Ford, Bakken and Marcellus. The U.S. represented 69% of revenue for the quarter and 67% for the year as we continue to grow our presence in this very important market. Canadian revenue of $108.2 million for the quarter and $423 million for the year represented increases of 8% and 12% over comparative periods in 2017. Both Canadian drilling fluids and PureChem made significant contributions throughout the year but were negatively affected in the fourth quarter by deteriorating markets, resulting from heightened market uncertainty around lack of current oil and gas takeaway capacity, record price differentials and scaling back of capital spending in drilling programs. Adjusted EBITDAC for the quarter of $42.1 million included adjustments of $0.8 million for PureChem severance and management transition cost, resulting in a 12.1% margin. EBITDAC margin for the quarter was also affected by elevated Canadian staffing levels on a lower revenue base before reductions were implemented and realized later in the quarter. We continue to focus on improving margins through optimizing cost structures, product mixes and pricing structures. During Q4, $18.7 million of cash was spent on CapEx with significant expenditures, including expansion of the Kermit blending plant in the Permian Basin, construction and design cost related to increased barite grinding capabilities in the U.S. and PureChem's Grand Prairie buildout completion. For 2018, a total of $83.1 million of cash was spent on CapEx to complete significant expansion of our infrastructure, both in the U.S. and in Canada. As Tom mentioned, we expect 2019 CapEx to be approximately $60 million and include key strategic investments of USD 2.3 million in our Permian Basin mud plant and some additional committed capital related to the expansion of our U.S. barite grinding capabilities that in the interim until we complete our plants for the Northeast barite facility, can and will be used to support and potentially augment our barite grinding capabilities in our Corpus facility. As at December 31, 2018, we had a net draw of $161.5 million on our senior facility, representing a $12.1 million increase from $149.4 million on September 30, 2018. This increase was driven by working capital builds, capital expansion incurred during the quarter and opportunistic share repurchases through our NCIB program. As of yesterday, that net draw is closer to $150 million. In Q4, we repurchased 2.1 million common shares at an average of $3.42 per share for a total of $7.2 million. Since the commencement of our NCIB program on July 17, 2018, we've repurchased 4.8 million common shares at a weighted average price of $4.07 per share for total amount of $19.5 million and representing approximately 1.8% of the outstanding share count on the day that the NCIB program commenced on July 17, 2018. Having completed significant CapEx programs in 2018, we will continue to refocus on increasing free cash flow generation and return metrics through execution in key markets, prudent capital expenditures and improve the working capital efficiencies. In 2019, we expect that EBITDAC will materially exceed the sum of cash expenditures on CapEx, on interest, taxes and allowing us adequate surplus free cash flow to reduce debts, pay our dividend and continue our share buyback program. Our financial strategy remains aligned with prudent capital allocation of capital, including debt reduction, share repurchases, dividend repayments and accretive investments in operations. With that, operator, that concludes our prepared remarks and we open it up to potential questions.
[Operator Instructions] The first question comes from Greg Colman of National Bank Financial.
Just have a couple of quick pointed ones here. To start off, Tony, you mentioned the $60 million CapEx level for 2019. Is that including the potential contribution from the 20 to -- $18 million to $20 million barite spend? Or would that be added into that $60 million, if it goes through?
Yes. Yes, good question. So to be clear, as per that additional more transparent disclosure in our MD&A, we identified USD 8.8 million of spend related to that project. We very intentionally and deliberately ensured that whatever capital we spent on that project and have committed to spend on that project, which all adds up to approximately USD 4.0 million, to be able to be consistent with our Corpus facility, and that's why we're able to say that, that spend and that commitment could be used to support and potentially augment our grinding capability in the U.S. in general out of Corpus. And to be crystal clear on that question, of the actual committed capital to date that we will be incurring in 2019 as per our commitments on that generic equipment, that number is about USD 3 million versus that $8.8 million that's in our disclosure. And that's why that $8.8 million could go up or down, depending on when we decide to accelerate and continue with that project.
Got it. So we could see that $60 million trend a little bit higher depending on your decisions?
No, no. To be clear, we could see that $8.8 million getting a little bit lower this year, for sure.
So Greg, if we spud building that facility, we think we probably spend half the money this year and half of it next year. And if we spend half this year, CapEx is $60 million. That barite mill is at this point just on the drawing board, although the parts could be used in the future in Corpus, if we wanted to either expand it or replace stuff in the future as it wears out. If we don't start the mill, CapEx will be around $50 million. If we get the mill started, it will be around $60 million.
Got it. That was the opposite of what I was thinking, so I'm glad I asked for clarity. Okay, just moving on to the margins for a minute. You mentioned, Tom, in your comments, that all 4 business lines are contributing, which is great. Can you give us an idea of the spread between the best contributing line to the worse in Q4 was narrowing relative to Q3? Or was it sort of unchanged and it was the same as what we saw in Q3 period as well?
It was unchanged from Q3, Greg. Drilling in both countries is carrying its weight. It's at or around the 15% sort of minimum target we have for EBITDA for business lines. U.S. production chemicals is right there as well, like it was in Q3. We took a hit in Canada on drilling or drilling might have outperformed its Canadian production where the market is so beat-up. For obvious reasons, we built out talent to step into a growing market and the market stalled. So we're rightsizing the group, everything's on the drawing board to find ways to save money without blowing up the culture or doing a bad job on the work we have.
Okay, appreciate that clarity. And then excluding the sort of problem -- the low-margin problem-solving you did in the quarter, which is going to be my last question. Excluding that, if you think about the pricing and the input cost environment in Q4, can you give us an idea of how this looks versus Q3? Was it improving? Was it deteriorating? Was it exactly the same? Just trying to get an understanding of that trajectory.
Well, oil was collapsing in the quarter. And the whole industry was on egg shells, Greg. So as our big competitor in production Nalco Champion, we've tried to go live with the price increase, everyone's customer were on the window ledge. So through the quarter for us, we saw input cost stop going up because oil quit going up and went down, but there was no ability to get pricing at that point at all. And in fact, we were becoming concerned that there'd be further price concessions in '19, if oil kept going down. Thank goodness it sort of bounced off the bottom, and is in the range now where the operators making decent money. So I think how to look at the quarter is margins in the main 4 parts of the business were consistent with Q3. The way we're going to get overall EBITDA margin up is to remain disciplined, not take work that doesn't justify the commitment of working capital and people. Improve PureChem and then increase free cash flow by having limited CapEx, squeezing receivables and squeezing working capital.
Okay. I actually changed my last question because you mentioned the free cash flow there. To your point, you've mentioned that cash flow in 2019, you're not quantifying it, you're telling us that you expect it to be materially above your commitments. Can you give us an idea as to what your sort of waterfall use of capital after commitment is? Would you be putting it towards more growth? Would you be buying back more shares, accelerating the NCIB? Would you look at debt reduction? What should we be thinking about for use of that excess cash flow?
We don't need to put the cash flow into CapEx to grow. We did that last year. So we kind of blew our brains out last year. The machine is bigger than ever. Grand Prairie is spectacular. We had our biggest production account, and I guess, our biggest drilling account in that facility in the last month. I think that their confidence in us went up a lot when they saw the commitment to solving problems locally. So I'll maybe turn over the rest of the answer to Tony. But it doesn't have to be CapEx, Greg. It can be ways that I think can improve the value of the equity.
Yes. Look, it's pretty clear, Greg. We have -- we're going to be focusing on 3 things in that order. Number one, paying down debt with that surplus free cash flow generation. We like where we are from a leverage perspective. You all know that the vast majority of our debt is represented by working capital that gets harvested Q1 to Q2 and gets harvested if there is ever a downturn, which we've demonstrated before. And after that we will, obviously, honor and support our dividend. We're very comfortable with that and that decision is based off of the steady cash flow, relatively steadier cash flow that we get from production chemical sales and cash flow, and the last one is opportunistic share buybacks. We have that plan in place for a reason and we find our share price very attractive at these levels as a prudent allocation of capital.
And Tony, what's more attractive for you today, a temporary debt reduction by putting it against the revolver? Or a more permanent one by potentially making opportunistic market purchases on the bonds?
Well, we -- the first step would definitely be on the bank debt. Secondly, you've seen how our debt has been trading. We're an outlier to the positive versus the paper of many others in the sector. If there was a significant opportunity to buy back undervalued debt, we would absolutely take advantage of that.
Our next question comes from Aaron MacNeil with TD Securities. [Operator Instructions]
In the disclosures, you mentioned that you may see gross margin improvement in 2019. But in terms of more granular timing, do you see Q4 as a potential trough on gross margin performance? And maybe on the last quarter's conference call, you talked about an expansion of 100 basis points per year. And I guess I'm just wondering if you still think that's reasonable, given the challenges in Canada and maybe moderating growth in the Permian.
If December hadn't went off a cliff for drilling in Canada, and you kind of got squeezed in general on the production market because [indiscernible] curtailment was coming, differentials are blowing out in Canada. We'd had a little better quarter for margin and for EBITDA. I think it -- I don't know if Q4 is the trough, I think, is my answer. I think it depends on what the circumstances are for the customers, and it's different in the half-dozen big markets that we work in to create our business. I think we can make margin on our cost side. We've done that in the last 2 years very significantly. If we want to grow the market share quick, I think we would throw away margin expansion. So I'd kind of standby the maybe 100 basis points comment that we talked about in January. Our big focus is generating a lot more EBITDA than we need to put back into the business through the dividend, servicing the bond, working capital or taxes and try and create value for the equity with that money, which is going to be pay debt down, pay the dividend, which we're not going to increase, and then be in the market with money over and above that buying stock or if the stocks trading really cheap, be in the market.
Okay. Make sense. And then maybe on Canadian Treatment Points this quarter. I presume they grew on the back of the Grand Prairie expansion. But maybe can you comment on some of the types of newer incremental work you're getting? And what types of products you might be displacing and why?
Yes, treating the Montney -- we're probably the biggest cheerleader for LNG in the city because we do very well on the drilling of that work. Our brine technology has helped us to work in basically every shop that's drilling the Montney in the city. And then treating that production, there's condensate in that gas, that condensate has wax in it. There's acid gas coming in with that production. So trace amounts of H2S or CO2. That wax wants to come out of solution and solidify in the hole as it comes up the well and cools. We design paraffin dispersants to prevent that. So that wax stays as liquid. You get paid for that condensate if it stays liquid, otherwise you share production and have shrinkage of what you sell and get paid for. So the opportunity set in the Montney for us is staggering. It's why we built Grand Prairie. It's a long-term call. We think that egress for natural gas is probably a lot more likely than oil coming out of here. It's received differently by the provincial government in BC, obviously. So that's a big opportunity for us. Sorry. Go ahead, Aaron.
I was just thinking maybe to ask the question a bit differently. Like, you obviously had sequential treatment plant growth, the market was pretty challenged in Q4. I guess, I'm just wondering like on a more granular level, who are you displacing? Is it because you're kind of right in Grand Prairie and you can compete on relative cost structure or what's the change there?
Treatment Points are a good indicator for the production business. We continue to talk about internally other ways to show people how that business is doing. But not every well is, obviously, the same. A 20-year-old vertical producer, which is kind of how we built scale in the business to create credibility and get people. Those wells are low volume and they're not that complex to solve the down-hole problems. These deep horizontal wells, that's where we need to grow. You could put 20x the product in a deep Montney well that you wouldn't on a shallow vertical well out on the plains. So that needs to be the growth of the business. We're taking some work from Baker and Nalco, but we're also growing with production growing in that market. Now that we've got into that play with some of the major producers. And the customers at the wellhead for us, they're the same customers who are on the rig 4.
Got it. And then maybe just switching gears to the Permian for my last question. Obviously, we've seen a little bit of weakness in Q4 and Q1. Your average active job count was up, you're guiding to a slightly higher job count going forward. So I guess the question would be, what kind of conversations are you having with your customers? And what kind of outlook do they have? And maybe you could just give us a bit more granularity there.
Sure. For drilling in the U.S., we're looking at public disclosure and talking to our customers continuously. It looks like, probably, Aaron, the year for our customers is flat in the U.S. We need to get into some new accounts to grow the business. We think we can do that through our expansion in the Delaware of our facility by this third generation mud system to drill that salt and water flows that you need to go through in the intermediate section in the Delaware. That's why we're going to need this barite mill. We can supply all the rigs we have now with our own mill in the U.S., but if we're going to grow the business in the U.S. over the next few years, which we think we can, then at some point, we're going to need increased supply for the Texas market, which means we want to pull that out of Corpus and self-supply in the Northeast, whether it's with the minerals company supplying us or us operating our own mill. But we've got to quit pulling out of Corpus for the Northeast and supply it there, it'll drive the cost down, which obviously makes money and on its own justifies the project. But really, it's so that we can supply growth in the Texas market in the future. On production in the Permian, very granular business. We continue to grow with our customers in that market and continue to add some new blue-chip customers there that we think we can take a bigger part of their business as they grow that market.
The next question comes from Jeff Fetterly with Peters & Co.
Tom, circling back to your previous comment. So if margins for each of the main business units was relatively flat in Q4 versus Q3. How do I reconcile that with the 200 basis point compression in overall operating margins for the business?
Costs have gone up a little bit and our Canadian production business hasn't gone up, and we need to improve the results and we can't raise prices. So lose a basis point or a little bit of point in the different businesses. But U.S. chemicals, Jeff, I think might have been a point under 15. But we see that variability month-to-month depending on product mix and just timing of filling tanks.
And when you think about Q1 and Q2, you've made obviously, cost reductions on the PureChem side. You have GP in place, you're ramping up the Kermit expansion. Are all of those measures in your mind going to be positive when you think about Q1 margins and Q2 absent seasonality?
I don't think they change margins this quick, Jeff. You've got to work through the inventory you have. We could get a giggler on a couple of wells your drilling where you take big loss circulation and suddenly you're putting away semi loads of product by the day. And that can bump things up. The reason we highlighted treating all this H2S for these 2 customers in the States is it's kind of that version on the production side except it's low margin. But it allowed those people to keep those fields on where we're mixing all the other products to solve corrosions, scale, paraffin, asphaltene, all the other problems with different chemistries that pay more. I think it takes all year to start creating margin. And it's in fits and starts.
Just 2 clarification questions. On the U.S. drilling fluid side, you said you expect at about [ 125 ] is your visibility through the first half of 2019?
Yes.
And what do you think could be available on the second half of the year? Do you expect that you'll see incremental activity on the Delaware and/or Midland side in the Permian?
I think we can take share or close with some places. We've got a rig with a handful of bigger independents to show them what we can do. So I think if the market just stays flat because people are going to work out of cash flow, then I think we got going to take share to grow, Jeff. But I think we can do that without cutting our own throat on margin and then just tying a bunch of working capital up to take lower-margin work. So I think maybe we can exit the year at [ 135 ] in the U.S. for drilling, without the market getting bigger. If people put more money to work because egress helps pricing in the Permian, maybe we can beat that. But I don't think people should count on that. I think [ 135 ] is realistic. More would mean the market would have to grow.
But your base level assumption for the second half of the year is fairly stable, overall land activity in the U.S. it's focused on market share and customers specific opportunities.
Yes. And people need to be aware that, that can change fast. Look at how fast things changed in the fourth quarter for the whole industry. Our biggest competitor thought the timing was right to go for an 8% to 15% price increase and oil collapsed in 60 days. So it could go both ways. If drilling activity went way down, our balance sheet would look brilliant because we'd collect the receivables and shrink inventory. We're not hoping that happens. But from a balance sheet perspective, it would temporarily be pretty nice.
Last thing, just to clarify on the CapEx side. So the USD 8.8 million, that was previously allocated for the Northeast grinding facility, how quickly or realistically if you were to put any expansion capital into Corpus Christi? Is that something that you could get off the ground this year? Or would that be more of a 2020 type of time frame?
We'd have to get, I assume, Jeff, permitting to expand the facility, but the equipment's already on the ground there. So I think if we wanted to expand Corpus, that could be done by the end of the year. Best outcome is that we have a mill operating in the Northeast. We want to spend as little as we can. But we need to preserve our future upside. So it's unlikely. It's an expansion in Corpus because that doesn't lower our cost of goods in the Northeast. It just increases our supply. So you kind of get 1 out of 2, and we want to get 2 out of 2. And I want to de-risk for the business, Jeff. That hurricanes happened in the Gulf Coast. So while that place is built to withstand hurricanes, and we got through the hurricane, I guess, 18 months ago. Having 2 facilities that are far apart is nice for risk.
[Operator Instructions] Our next question comes from Steve Kammermayer with Clarus Securities.
Just back to the production chemicals and how you built it out on the vertical wells. You said in the past that you're around 85% to 90% of that business is vertical. Is it still up around that ratio? And how do you see that changing as you see growth over the next 12 to 18 months?
The ratio is getting better. The horizontal wells, that will be what changes the margin as well as us being very disciplined on cost and how we run these older vertical well markets. So the ratio is getting better, Steve. It's just a slow change.
Okay. So are you still around that 85% vertical now?
So on -- well, on Treatment Points, it would be like that ratio. But on -- where you make the money and revenue and margin contribution, it's disproportionate to the horizontals. That's why we went all-in in the Permian, that market was the last -- yes, but obviously, for other listeners, last market to go horizontal in the U.S. stacked formations. So you've got 4 to 6 benches or formations, not 1. And these horizontal wells, you're treating for scale and corrosion the second they open the taps and flow the frac water back because it's brackish and causes a bunch of problems. So the Treatment Point is a good indicator. But it's how many big horizontal wells can we be treating, that's where the money is.
No -- yes, I understand that. I'm just curious, if the ratio changes from 85% currently to down to 75% by the end of 2019. I'm just trying to garner how much additional product -- you mentioned 20x more product goes down the vertical is used on a horizontal. So I wondered if we could -- if you could say where you think the ratio could get to by the end of the year, we'd be able to have a better sense on how much more product you could sell by the end of the year.
We're not limited by manufacturing your throughput in Grand Prairie. So it's all about our ability, Steve, to win new business. It's hard to predict. So I don't want to guide for people. It's easier to estimate how many rigs we think we can take in a known market. How much of this we're going to win, how fast? Hard for us to gauge. I can assure people, we are all-in trying to win that work. We're attracting talented people from competitors. We're training our own people to handle that kind of work and we've got a foot in the door with some very big well-known producers, which is what the next customer you go to see wants to know. That's the first thing they asked. "Do you know what you're doing in the play?" And so to be working for the blue-chip players, I think you can have growth come faster than getting your foot in the door in the first place, if that's any help.
Right. No, it is. It is. That's great. Okay. And then just moving over to the free cash flow that you were touching on earlier. So the majority of the growth infrastructure is in place, you've built out all of that you need to do in 2018. So you talked about not increasing the dividend possibly continuing on the share buybacks. Is there more opportunities to return the focus perhaps to M&A and use free cash flow in that way?
We've never quit looking, but we don't have any holes in the line-up anymore of what used to, in terms of products or geography. We were pretty interested in the frac market 2 or 3 years ago, Steve. That market's been completely destroyed. So it's possible. We're going to use the money to strengthen the balance sheet. And hopefully, in turn, improve the value of the equity.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Tom Simons for any closing remarks.
Thank you. So in conclusion, we believe the company is poised to generate substantial free cash flow in 2019. CapEx spends are -- that are significant are largely behind us. We can contain CapEx to $50 million to $60 million this year and continue to have a great future, with the barite mill being on the drawing board but not consuming capital today. Use of free cash flow will be used in this order to repay our line to opportunistically buy our shares and to pay the dividend, which we don't intend to increase. We have the business primed to make much more money than it consumes for the foreseeable future. If oil stays over $50, if LNG builds out around North America, we have a business that's in a financial position that can allow us to continue to pay down debt and buy shares while expanding market share in a disciplined way that protects or improves margins. Our focus is on using our expanded infrastructure, our primary manufacturing capabilities, our best-in-class workforce, which includes over 80 scientists and labs across North America to win and hold business by solving problems. We think we can drive free cash flow with limited CapEx of approximately 5% of revenue. We can improve working capital metrics. We think we can improve our billing processes and exhibit relentless discipline around cost and pricing to customers to create value for shareholders. With that, I'll wrap up the call. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.