Calfrac Well Services Ltd
TSX:CFW
Earnings Call Analysis
Summary
Q3-2023
In the third quarter of 2023, Calfrac's revenue rose 10% year-over-year to $483.1 million, although adjusted EBITDA decreased by 3% due to higher operating expenses and a new reporting method for fluid ends expenses. Net income more than doubled to $97.5 million, significantly helped by a reversal of impairment and deferred tax recovery. The company carried out a Tier IV fleet modernization, which drove capital expenditures up to $50.8 million. Calfrac adjusted its credit facility, extending its maturity to late 2025, aligning with the long-term strategy. It aims to reduce long-term debt by $70 to $80 million, but projections are slightly reduced due to delays in asset sales. The lower net debt to EBITDA ratio of 0.92x and the focus on maximizing net income, reducing debt, and investing in new technologies underpin a solid strategic outlook. Looking ahead, strong utilization across service lines is expected, bolstered by diverse operations in North America and Argentina, ready to deliver consistent financial returns into 2024.
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Good day, and welcome to the Calfrac Well Services Limited's Third Quarter 2023 Earnings Release and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Olinek, Chief Financial Officer. Please go ahead.
Thank you. Good morning, and welcome to our discussion of Calfrac's Third Quarter 2023 Results. Joining me on the call today is Pat Powell, Calfrac's CEO. This morning's conference call will be conducted as follows: Pat will provide some opening commentary, after which I will summarize the financial performance and position of the company. Pat will then provide an outlook for Calfrac's business and some closing remarks. After the completion of these remarks, we will open the call to questions. In a news release issued earlier today, Calfrac reported its third quarter 2023 results. Please note that all financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-IFRS measures such as adjusted EBITDA. 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 this morning's news release and Calfrac's SEDAR filings, including our 2022 annual information form for more information on forward-looking statements and these risk factors. As we have disclosed for a number of quarters, the company is committed to a plan to sell its Russian division and has designated the assets, liabilities and operations in Russia as held for sale and discontinued operations in the financial statements. Calfrac is looking forward to completing this transaction as soon as possible, while complying with all applicable laws and sanctions. The focus of the remainder of this call will be on Calfrac's continuing operations unless otherwise specified. Now I will pass the call over to Pat.
Thanks, Mike. Good morning, and thank you, everyone, for joining our call today. Before Mike provides the financial highlights of the third quarter, I'll offer some opening remarks. First, I want to take a minute and discuss the significant progress that we have made on our long-term financial and operational goals during the past year. The first strategic goal that I set for the company was to increase profitability, and we've made great strides in that regard. In 2023, our year-to-date net income from continuing operations normalized for the deferred tax asset and impairment reversals was approximately 8% of revenue, over 5x higher than the same period last year. The significant improvement demonstrates the high quality of Calfrac's customers, who appreciate the quality of our services and our execution ability. The second goal was to lower our outstanding debt. The company has made significant progress in this initiative as it repaid approximately $30 million of long-term debt during the third quarter, and we continue to target further debt reduction in the fourth quarter. Earlier in the year, the company was focused on funding its working capital requirements, which have totaled approximately $135 million since the middle of 2022. And finally, the third strategic initiative for Calfrac was to upgrade our equipment in the field. During the third quarter, we have gained significant momentum with our Tier IV fleet modernization program and have deployed 23 Tier IV DGB units so far this year with more pumps being deployed every week. Reducing our outstanding debt while upgrading our equipment is our two-pronged approach to strengthen the balance sheet and improve our asset quality. None of this progress would have been possible without our dedicated teams across North America and Argentina. And for that, I want to commend them for their hard work and commitment to deliver on our brand promise. Now turning to the third quarter. I'm happy to report that we have navigated shifting frac schedules to generate the highest quarterly adjusted EBITDA margin thus far in 2023. Historically, the third quarter is our strongest period, and this year was no exception. One way that we were able to respond to a changing frac calendar is by managing our costs, specifically our equipment repairs and maintenance. Now that we've refreshed everyone on where we've been, let's talk about where Calfrac is going. Our Tier IV DGB upgrade program remains on schedule, and we expect to deploy 59 Tier IV DGB pumps by the end of the first quarter of 2024 and to continue with the upgrade program beyond these initial units as finances and markets dictate. We pay close attention to the equipment transformation being happening in the industry and are excited about enhancing our position in the next-generation fracturing market and meeting our customers' expectations and our ESG priorities. I believe that Calfrac's service quality is second to none and that we have the best team in the industry working together to achieve our long-term goals. As the largest Canadian headquartered pressure pumping company, we expect to leverage our geographical footprint and strong operational momentum to capitalize on the current market, while remaining focused on our 3 strategic objectives. We [Audio Gap] not only for Calfrac, but also for our shareholders, the employees, suppliers and customers. I will now pass the call over to Mike, who will be [Technical Difficulty] an overview of our quarterly financial performance.
Thank you, Pat. Calfrac's revenue from continuing operations during the third quarter of 2023 was $483.1 million or 10% higher than the same period in 2022. Adjusted EBITDA during the third quarter of 2023 was $91.3 million or 3% lower than the same period last year, due mainly to higher operating expenses following the prospective change in estimate related to fluid ends during the first quarter of 2023. Fluid ends are now reported as a part of repairs and maintenance expense instead of as a component of capital expenditures. In 2023, Fluid ends reduced adjusted EBITDA by $11.9 million versus in 2022 where capital expenditures included $8 million related to Fluid ends. Calfrac's net income from continuing operations more than doubled to $97.5 million during the third quarter versus $45.4 million in the comparable quarter of 2022. The year-over-year improvement was mainly due to a $41.6 million reversal of impairment of property, plant and equipment and a deferred tax recovery of $9 million. Both items related to an improved business outlook for the company's operations in Canada. Calfrac incurred capital expenditures of $50.8 million during the third quarter versus $24.7 million in the same period of 2022. This increase in capital spending was primarily related to the company's previously announced Tier IV fleet modernization program, which accounted for $33.2 million of the total capital expenditures during the third quarter. As we recently announced, the company amended its revolving credit facility agreement during the third quarter, which extended the maturity into late 2025 at the earliest. We believe that this extended runway will play an important role in enabling Calfrac to fully execute on its long-term strategy. To summarize the balance sheet at the end of the third quarter, the company had working capital of $283.7 million from continuing operations. Calfrac had used $3.5 million of its credit facilities for letters of credit and had $150 million of borrowings under its revolving term loan facility, leaving approximately $96.5 million in available credit. Calfrac made further progress on reducing its net debt to adjusted EBITDA as it exited the quarter with a ratio of 0.92x as compared to approximately 1.5x at year-end, which is the lowest in recent history. The company continues to project a $70 million to $80 million reduction in total long-term debt by the end of the year. The decrease in debt is slightly lower than originally anticipated due to a delay related to a planned asset divestiture. Now I would like to turn the call back to Pat to provide our outlook.
Thanks, Mike. I will now present an outlook on Calfrac's continuing operations across our geographic footprint. We have a positive outlook for our North American and Argentina operations and feel that each business unit helps us maximize shareholder returns and contribute to us reaching our long-term goals. Regardless of the operating area, we are driven by our strong safety-centered culture and employee buy-in to deliver on our brand promise. During the quarter, the market softness experienced in the United States was offset by strong utilization in Canada. For the fourth quarter, we expect the opposite to occur where increased activity in the United States is anticipated to offset the customer budget exhaustion in Canada. We believe that our focus on execution, combined with our diverse geographic footprint, will produce steady financial returns for our stakeholders. Our operations in Argentina produced another solid quarter of profitability. We expect that strong utilization will continue for the rest of this year and into 2024, as dedicated contract work across all service lines is expected to generate consistent financial returns. [Audio Gap] accomplishments so far this year and are looking forward to a solid finish in 2023 as we continue delivering on our brand promise and make progress on our 3 strategic priorities. First, maximizing on consolidated net income and free cash flow through a disciplined returns-focused approach. Secondly, dedicating free cash flow to reducing the company's long-term debt and third, investing in new technologies that enhance Calfrac's service deliverability in the field. I will now turn the call back to Mike to begin the Q&A portion of this call.
Thank you, Pat. I'll now ask Abigail to begin the Q&A portion of today's call.
[Operator Instructions] Our first question comes from Cole Pereira with Stifel.
Thinking about Canada in Q1, there's obviously a lot of tailwinds, but you also have 1 of your competitors bringing up a spread from the U.S. Can you just add some color on how you're thinking about supply and demand, activity, pricing, et cetera?
Well, Cole, it's Pat. We have also moved crews back and forth between Canada and the U.S. So it's kind of hard for me to comment on whether it should happen or not. I guess, the -- as long as the pricing doesn't change and you have extra work, I guess -- I mean, that's why we did it. So if that's what they've done, then it's fine. If they've brought the pricing down to bring a fleet up from the U.S., then I would say it's probably not good for them or the industry.
Sorry, I guess maybe to rephrase that. Based on those data points and what you see in your schedule, I mean, it sounds like you don't really see a degradation of supply and demand at this point, acknowledging, I mean, there's still a few months to go?
I don't think 1 fleet will make that much difference. I don't believe it will make that much difference to Calfrac. I think our customer base is strong.
Got it. And then can you just add some color on how customer conversations in the U.S. have been going? And what's the outlook like there for next year compared to right now or 2023 as a whole?
From where I see, I see a fairly strong '24 for Calfrac in the areas that we operate in. The work we're -- I think we're going to see a slight increase over what we did in '23 and '24 in the U.S.
Our next question comes from Keith MacKey with RBC Capital Markets.
I just wanted to start out with the Tier IV equipment. So you've got, I think you said 23 pumps in the field now. So may or may not give you a chance yet to see how the profitability differs between some of this newer equipment and some of the older equipment. But Mike, what are you seeing on your -- as far as profitability goes, on the fleets that are running the new pumps? Is there a noticeable uptick in the margins that you're getting on that equipment? Or is it still hard to tell?
Keith, I'll take that call -- that question. It's Pat. It's a little early for us to call -- to make a call on that right now, but we're quite happy that we have deployed a full Tier IV DGB crew back into the Marcellus. So -- which just went to work here shortly. So we will -- in the next month or 2, we will be able to answer that question for you. But so far, we're having good luck with the 23 that are out there. We're seeing -- we can put a few less pumps on location when we have a number of Tier IV pumps out there. So it's all good.
All right. All right. Good to hear. And secondly for me, our best guess right now, I think, is you've got around 5 fleets running in Canada and 10 in the U.S. Based on what you know today, would you anticipate that mix changing through 2024 at all?
Not from what I see today. I think that that's pretty well where we'll be. Of course, as we build out our Tier IV fleet, we will gain a couple of fleets, which at this time, we will just -- this would be way late in '24. So it's more of a '25 question. And at that time, we would have -- I believe we'll probably gain a couple of fleets as we do this modernization. There will be Tier II fleets, but we will gain a couple of fleets.
I'm showing no further questions at this time. I would like to turn the call back to Michael Olinek for closing remarks.
Well, thanks very much. And yes, I would just like to close today's call. Thank everyone for joining, and we look forward to hosting our Q4 call in Q1 of 2024. So thanks very much.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.