Calfrac Well Services Ltd
TSX:CFW
Earnings Call Analysis
Q4-2023 Analysis
Calfrac Well Services Ltd
Calfrac's journey in the past year has been marked by significant strides toward their enduring financial and operational objectives. The company's robust culture and unwavering commitment to safety have been cornerstone attributes, contributing to their lowest Total Reportable Incident Frequency (TRIF) since 2022 and a record annual net income from continuing operations of $197 million. As a dazzling testament to their fiscal prudence, Calfrac has achieved its lowest level of long-term debt since 2009 at $250.8 million, with a correspondingly favorable net debt-to-adjusted EBITDA ratio of 0.74, emphasizing their strategic resolve in fortifying the balance sheet through purposeful debt reduction and asset enhancement in the forthcoming years.
Calfrac's insatiable appetite for innovation is evident in their deployment of Tier IV DGB fleets in North America, answering the growing demand for environmentally conscientious and emission-reduced equipment. Moreover, their rapid enhancement of field data and telecommunications infrastructure has facilitated more agile data interpretation, underpinning the swift and informed decision-making process that their customers increasingly rely on. This investment in technology is designed to give Calfrac a competitive edge, allowing them to navigate through the intricate pressure pumping market with dexterity and command.
The fourth quarter of 2023 painted a nuanced financial picture for Calfrac, with revenues hitting $421.4 million, modestly trailing the prior year by 6%. This was primarily attributed to a surge in customer-provided sand in North America, which led to a stark 29% dip in revenue per job. The full year, however, saw a more encouraging 24% uptick in revenues, amounting to nearly $1.9 billion. Adjusted EBITDA for Q4 was reported at $62.6 million, ebbing by 18% from the previous year, chiefly due to altered accounting estimates linked to fluid ends now being accounted for as repairs rather than capital expenditure. This accounting maneuver impacted adjusted EBITDA by a reduction of $12.6 million.
Looking ahead, Calfrac maintains a bullish projection for operations in both North America and Argentina. Despite the U.S. operations’ slow start - provoked by an extended low in natural gas prices prompting a fleet idling decision - there is an expectation of enhanced demand and subsequent fleet utilization acceleration from Q2 onwards through the end of 2024. The Canadian operations are forecasted to mirror the stable financial performance of 2023 with a consistent deployment stretch across all service sectors. In light of these disparate market conditions, Calfrac is considering a possible deferment of up to $50 million in capital expenditure as a strategic contingency in their fleet modernization program. Conversely, the vibrant Argentine market carries forth a strong momentum from last year, with optimism radiating from the political atmosphere becoming more conducive to business investment.
Calfrac has unveiled a strategy to end 2024 with 100 Tier IV pumps in North America. However, given market uncertainties, they've accounted for flexibility, including the potential to halt approximately $50 million in equipment builds. The aim is still to meet their original target depending on market conditions but grants a buffer to adjust to possible shifts in demand throughout the year. There is also a cautious approach to market share competition, with a preference for maintaining profitability and sustainable business practices over aggressive price undercutting.
While the company has significantly progressed on debt repayment in the previous year, formal guidance for 2024 remains undeclared. The balance between investing in updated equipment and retiring existing debt is being carefully weighted as Calfrac aims to continue reducing its debt, though concrete figures are yet to be determined.
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Good day, and thank you for standing by. Welcome to Calfrac Well Services Limited Fourth 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, Mike Olinek, Chief Financial Officer. Please go ahead.
Thank you, Good morning and welcome to our discussion of Calfrac Well Services Fourth Quarter 2023 results. Joining me on the call today is Pat Powell, Calfrac's Chief Executive Officer. 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 conference call to questions. In a news release issued earlier today, Calfrac reported its fourth 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 year filings, including our 2023 annual information form for more information on forward-looking statements and these risk factors. As we have disclosed for several quarters, the company is committed to sell its Russian division and has designated the assets [Technical Difficulty] in Russia as held for sale and discontinued in the financial statements. Calfrac is looking to complete 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 thanks for joining our call today. Before Mike provides the financial highlights of the fourth quarter and the full year, I will offer some opening remarks. Last year was a great year for Calfrac as we made important progress towards our long-term financial and operational goals. We could not have achieved these results without our strong company culture and commitment to safety. Our safety-focused culture is demonstrated on all our job sites where we remind everyone that our brand promise begins with do it safely. Our commitment to safety is evident in the decrease in our TRIF from 1.19 in 2022 to 1.05 in 2023. By remaining focused on the third part of our brand promise, which is do it profitably, we were able to deliver the best annual net income from continuing operations in Calfrac's history of $197 million. High-quality execution and strong customer relationships continue to contribute to Calfrac's success. 2023 was also a significant year of reduction in Calfrac's long-term debt. We made great progress and exited the year with a long-term debt balance of $250.8 million, which was the lowest -- which was the company's lowest debt level since 2009. And a net debt to adjusted EBITDA from continuing operations of 0.74, which is also the lowest in many years. We remain focused on strengthening the balance sheet through debt reduction and asset improvement in 2024. We also continue to invest in our technologies that enhance our services in the field. We crossed an important milestone in the fourth quarter as we developed -- as we deployed the equivalent of 2 Tier IV DGB fleets in North America to meet the growing customer demand for next-generation lower emissions equipment. In addition, we upgraded the field data and telecom systems in North America to improve data transmission speed and quality, enabling us to interpret data quicker to make better decisions for our customers. In conclusion, 2023 was a successful year that leaves Calfrac in a much better financial and operational position to safely and profitably navigate the challenging pressure pumping market. For that, I want to commend our dedicated teams throughout our company for their hard work and commitment to continually meet and exceed our company and customers' expectations. I will now pass the call over to Mike, who will present an overview of our quarterly financial performance.
Thank you, Pat. Calfrac's revenue from continuing operations during the fourth quarter of 2023 was $421.4 million or 6% lower than the same period in 2022, primarily due to a proportional increase in the number of jobs with customer-provided sand in North America. This resulted in a 29% reduction in revenue per job compared to the same period in 2022. For the full year, revenue totaled approximately $1.9 billion, 24% higher than the prior year, due to increased activity across all operating areas. Adjusted EBITDA during the fourth quarter of 2023 was $62.6 million, 18% lower than the same period last year, mainly due to a reduction in operating margins following the prospective change in accounting estimates related to fluid ends that was adopted at the beginning of 2023. Fluid ends are now reported as a part of repairs and maintenance expense instead of as a component of capital expenditures. In the fourth quarter of 2023, fluid ends reduced adjusted EBITDA by $12.6 million versus in 2022, where capital expenditures included approximately $9 million related to fluid ends. In 2023, Calfrac generated adjusted EBITDA of $325.5 million, 39% higher than 2022, due to significant improved utilization across all operating divisions and a larger operating footprint in North America. For the full year of 2023, fluid ends reduced adjusted EBITDA by approximately $44 million versus in 2022, where approximately $29 million of fluid end purchases were included in capital expenditures. Calfrac's net income from continuing operations decreased by 11% to $13.2 million during the fourth quarter versus $14.8 million in the comparable quarter of 2022. The company generated net income of $197.6 million in 2023, a record, versus $35.3 million in 2022 and the results this year included an impairment reversal related to property, plant and equipment of $41.6 million, offset partially by a foreign exchange loss of $22.4 million, mainly related to Argentina. Calfrac incurred capital expenditures of $49.4 million during the fourth quarter versus $35.8 million in the same period of 2022. For the full year 2023, Calfrac spent $165.4 million as compared to $87.9 million in the prior year. A large portion of the increase in capital spending was related to the company's Tier IV fleet modernization program. Moving to the balance sheet. The company had working capital of $236.4 million from continuing operations at the end of the year. Calfrac used $3.4 million of its credit facilities for letters of credit and had $95 million of borrowings under its revolving term loan facility, leaving approximately $152 million in available credit. Calfrac exited the year with a net debt to adjusted EBITDA ratio of 0.74, which was its lowest in recent history and a significant improvement from the previous year. The reduction in net debt was $105 million versus the previously announced guidance of $70 million to $80 million. Now I would like to turn the call back to Pat.
Thanks, Mike. I will now present an outlook for Calfrac's continuing operations across our geographic footprint. We have a positive long-term outlook for our North American and Argentina operations. And we believe that providing high-quality services in both areas, benefits Calfrac and its stakeholders. We look forward to continuing to safely and efficiently deploy our assets to maximize value for our shareholders. This year, activity in the United States began slower than expected for Calfrac as our customers changed their completion programs in anticipation of an extended period of low natural gas prices. As a result, Calfrac idled 2 frac fleets in early February, and expects to have an average of 5 fleets working in the first quarter. We anticipate that customer demand for our services will increase starting in the second quarter through to the end of 2024. Our operations in Canada are expected to deliver consistent financial results with 2023 with the deployment of our 5 large frac fleets and 6 well tubing units throughout the year. The slow start to the year will generate lower year-over-year financial results for our North American operations. In response to the changing market conditions in North America, Calfrac may defer up to $50 million of the planned 2024 capital spend related to the fleet modernization program. We will closely monitor the market to determine the right path forward. Our operations in Argentina carried strong momentum from last year into 2024, and we anticipate robust utilization through the rest of this year across all our service lines. We continue to watch the country's political environment and believe that it is becoming more accepting towards business investment. We are excited about our future in Argentina and expect to generate consistent financial returns going forward. Despite the volatility in the pressure pumping market, Calfrac still remains focused on its 3 key strategic priorities: First one will be maximizing consolidated net income and free cash flow through a disciplined return-focused approach; the second is 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'll now turn the call back to Mike to begin the Q&A portion of this call.
Thank you, Pat. I will now ask our operator to begin the Q&A portion of today's call.
[Operator Instructions] Our first question comes from the line of Keith MacKey from RBC Capital Markets.
Can you just talk a little bit about the status of the Tier IV upgrade program. I think you mentioned you've got 2 fleets in the field. Just can you run through how much equipment pumps this represents? And then ultimately, how much you think you could get to through 2024? And I know that the potential capital deferral might affect some of that, but can you just sort of walk through a little bit more about that, please?
Sure. We were expecting to have 100 Tier IV pumps in the field in North America at the end of '24. And with the -- which is still the plan, but just to be prudent with what we're seeing in the U.S. today and our first quarter not being where I would like it as we put our refurb program in motion, I made sure that we had some off ramps, if needed. And that would mean that if the market doesn't do what we'd like to see it do over the last 3 quarters, I have the ability now to stop the build on about $50 million worth of equipment, which we would defer in the later in the year when we get better visibility in Q3 or Q4. But the plan is still depending on the market to exit 2024 with 100 pumps. But I just thought it was prudent that we set up our build program and if things didn't go the way they were, I was not stuck with supply contracts that I had to meet.
Okay. Got it. So you still like, I guess, for modeling purposes, should we still be including the full CapEx in our models and plans given where you think the market will go and the potential deferral is just an if scenario. Is that a fair way to think about it?
Yes. It's a fair way to think about it. I don't know what to tell you to put in your models because obviously, I'm not 100% confident that the drilling will allow us to meet our forecast, if that answers your question.
Yes, yes. No, that's appreciated.
But I guess the worst case scenario is we would end with 80 pumps instead of 100.
And how many do you have upgraded now, Pat?
We would have like 37 in the U.S. and our first pumps will start to arrive in Canada either this week or -- they're actually just stuck at the border right now. So it will be this next week or early next week, and we plan to exit 2024 with 40 frac pumps in Canada, no DGB pumps.
Got it. Okay. Okay. Fair enough. And can you just remind us of your I guess, base case debt repayment plan for 2024. I think it was somewhere around that $70 million to $80 million number. But if you could just give us a bit of an update on that would be appreciated as well.
Yes. I'll just let Mike answer that question.
Yes, Keith, it's Mike here. I'm not sure that we've come out with formal guidance around debt repayment for '24. I think, ultimately, what we're looking to do corporately is to continue to make progress on the debt front. We, as announced, made considerable progress last year. And we are balancing the investment in new equipment with debt retirement. And I think we're confident that we're going to continue to grind that lower. We're just not sure what that number looks like at this point.
Our next question comes from the line of Waqar Syed from ATB Capital Markets.
Mike, you mentioned that there's going to be like 5 average crews working in the U.S. in Q1. And then the 2 were kind of dropped off in February. Now does it mean that in Q4, there were 7 working or they were actually 10 working? And just -- 2 is just like a drop in February and you expect more crews to be dropped?
I think as we reported our Q4 results, Waqar, I think in North America, we probably ran an average of 12 to 13 fleets in the fourth quarter. And I think where we're at right now is that a total is likely down about 2 on average, so kind of [indiscernible] for Q1. And then going back to somewhere in that 12 to 13 range for the -- probably around 12 for the second quarter as well. So that's kind of just where things are going. And that's just differences with the breakup in Canada as well as we expect to start up -- significant start-up of operations in the U.S. to begin early in the second quarter.
And why are you confident that its activity is going to pick up in Q2? And could you -- what my understanding would be that like most of your crews are not really levered to natural gas. Maybe one is in the U.S. market in Appalachia and the remaining probably more leveraged to oil, unless I'm mistaken. And so may have been -- should have less limited impact from the gas prices.
So we're -- of course, as we get closer to the second quarter, we have -- we always have more visibility of the work that's going to take place, but that doesn't always mean that it happens. But right now, we don't have much white space for our North American fleets for the 13 that we have left. So we're fairly confident today that these fleets -- the13 fleets will be all up and running.
Okay. And there was -- one of your competitors in the U.S. came out, had the earnings call yesterday and spoke about that they were pretty aggressive about market share gains, and obviously, then they're probably lowering prices. Are you seeing that impact in your markets?
Well, we're always -- of course, as service companies we're always under pressure for pricing, but I'm not going to say that it won't affect us, but I don't think it's a very effective way to run a business. So if we have a competitor that wants to work for nothing, well, I guess his stuff will go to work first and hopefully, our good long-term customers and customer relationships will see through this and stick with us is what I would think. It's been tried quite a few times, and I don't think anybody has been very successful in that model. So we burn up a lot of equipment, and we need to be paid a fair rate or there's not much sense being in the business. Market share doesn't work.
Sure. Yes. And then Pat for -- in Canada, in general, Q1, how does Q1 look on a year-over-year basis?
Q1 is looking fine for us in Canada. We were -- Canada had a bit of a disappointing fourth quarter of last year. But Q1, we went back to work, and we're pretty much -- I would say by the end of the half, we're kind of going to be right kind of where we want to be in Canada.
Sure. But like the rig count is running about 7%, 8% lower year-over-year. Are you seeing similar trends on the pumping side and I know pumping is flat to up year-over-year.
Yes. I would think that's fair, flat. Pretty much flat I think, yes. We're just seeing more of our customers supplying their own sand and stuff, which is always a good thing for us.
And why is that happening? Why are customers supplying their own sand, like sand jobs are getting -- more sand is being pumped per well, logistics getting more complicated. So why are your customers taking that on themselves?
I think they can get the -- they just buy sand cheaper than we're willing to sell it to.
Okay. So you see that to be like a trend that will continue going forward?
I would think we're going to see more of it, yes.
Our next question comes from the line of John Daniel from Daniel Energy Partners.
Just 2 questions. The first is a follow-up to Waqar's question. I mean it sounds like reading the press release and from your prepared remarks, the fleet reduction was more a function of customer-specific slowdowns as opposed to you lost to work to someone. I just want to make sure that's right.
Yes, I would say that's right, John. And there's also as we're doing our refurb program and then you hit a hiccup, we're trying to balance these pumps to get as close to end of life as we possibly can out of them as we drop them off into the rebuild. So it's -- so as our -- the main component is our engines as we lose an engine, you know it's kind of like if you rebuild that engine back to a Tier II, you've got a Tier II pump for another 5 years. So some of this is customers, but it's also some of it is because of the refurb program. I don't want to have a whole bunch of pumps with good engines that I'm going to have to part before end of life because I can't find work for Tier II down the road a couple of years. So there's a little bit of bulk going on. I always say we're kind of balancing on a beach ball here, and we're going to try to get it as right as we can. But I know that we'll never be right, right? So, impossible.
I think a lot of analysts listen to calls. So the next one is just can you provide any color on pumping hours per day the trends that you've seen over the last few quarters?
I would say our pumping hours have stayed fairly consistent. As we're getting in more -- of course, as we're getting more of this newer pumps, there -- we're seeing some efficiencies there. So we're getting more hours pumping with our newer pumps than we are with the older ones, which is of course why we're rebuilding to start.
Thank you. At this time, I would now like to turn the conference back over to Mike Olinek for closing remarks.
Thank you, Gigi. And thanks, everyone, for joining the call today, and we look forward to hosting our Q1 call in a couple of months. Thanks very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.