CALGARY, Oct. 29, 2015 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three and nine months ended September 30, 2015.

HIGHLIGHTS

 

 

Revenue in the third quarter of 2015 was $289.1 million, a decrease of 59 percent from the same period in 2014. The Company's fracturing job count decreased by 46 percent due to lower activity in Canada and the United States while consolidated revenue per fracturing job decreased by 29 percent primarily due to significantly lower pricing in Canada and the United States, lower activity in more service intensive operating areas, partially offset by the appreciation of the U.S. dollar. Cementing revenue per job increased by 28 percent primarily due to the completion of larger jobs in the Marcellus shale play in the United States.

Pricing in Canada declined on average by 25 percent in the third quarter of 2015 from the third quarter of 2014. In the United States, pricing was lower by an average of 35 percent compared to the third quarter of 2014. In Argentina, pricing was down by less than 10 percent following an agreed price reduction during the first quarter of 2015 in light of lower crude oil prices in that market. In Russia, pricing is determined by contract awards which resulted in the Company achieving a nominal pricing increase during the most recent contract renewal process.

Operating income for the third quarter of 2015 was $2.8 million, a decline of 98 percent from the comparable period in 2014. Operating income as a percentage of revenue declined from 18.1 percent to 1.0 percent compared to the same period last year due to significantly lower pricing in the United States and Canada, and to a lesser extent, Argentina, combined with lower utilization in North America.

Net loss attributable to shareholders of Calfrac was $24.2 million or $0.25 per share diluted, compared to net income of $44.5 million or $0.46 per share diluted in the same period last year, primarily due to significantly lower activity and pricing combined with the pre-tax write-off of $13.8 million and $9.5 million of deferred tax assets and goodwill, respectively, partially offset by a pre-tax $31.0 million net gain on acquisition recorded during the third quarter of 2015.

In the third quarter of 2015, Calfrac declared a quarterly dividend of $0.015625 per share.

Revenue in the third quarter of 2015 was $289.1 million, a decrease of 10 percent from the second quarter of 2015. Revenue per fracturing job decreased by 29 percent due to lower pricing in the United States and Canada combined with the completion of smaller jobs. The decrease in revenue per fracturing job was partially offset by the appreciation of the U.S. dollar. Operating income as a percentage of revenue increased by 320 basis points primarily due to higher activity in Canada as spring break-up ended combined with the impact of cost reduction initiatives in both the United States and Canada.

Pricing in Canada was consistent with the second quarter of 2015. In the United States, pricing was down approximately 5 percent from the second quarter of 2015. In Argentina and Russia, pricing was consistent with the previous quarter.

In Canada, revenue increased by 82 percent to $121.5 million in the third quarter of 2015 due to higher activity after spring break-up conditions ended in the second quarter offset partially by the completion of smaller jobs. Operating income as a percentage of revenue improved to 9 percent from negative 9 percent due to higher activity and cost reductions realized during the quarter.

In the United States, revenue in the third quarter of 2015 declined by 46 percent from the second quarter of 2015 to $93.1 million, mainly as a result of lower activity and, to lesser extent, pricing. The decline in reported revenue was partially offset by the strengthening of the U.S. dollar. Total proppant used declined by 51 percent sequentially while tons per fracturing job declined by 31 percent due to changes in geographical job mix. Operating income as a percentage of revenue decreased from a break-even position in the second quarter of 2015 to negative 7 percent in the third quarter due to lower equipment utilization and pricing offset partially by cost reductions.

In Russia, revenue decreased to $35.9 million in the third quarter of 2015 from $38.9 million in the second quarter of 2015. The decrease resulted from the rouble depreciating 11 percent. Fracturing activity was 12 percent lower primarily due to service rig issues and wet weather-related issues during the early part of the third quarter. The decline in activity was offset by the completion of larger jobs during the third quarter. Operating income as a percentage of revenue remained consistent at 12 percent.

In Latin America, revenue declined 7 percent to $38.6 million. The decrease was primarily due to lower activity in Mexico combined with a $1.1 million revenue reduction that related to prior years. Operating income as a percentage of revenue declined from 10 percent in the second quarter to 2 percent in the third quarter due to the one time revenue adjustment in Mexico combined with higher district overhead and SG&A in Argentina resulting from an expanded unconventional fracturing presence in that country.

OUTLOOK
Crude oil prices have remained at levels below what is required to generate increased activity in North America. In addition, depressed natural gas and liquids pricing continues to negatively impact the development of key natural gas plays in Canada and the United States. As a result, the Company anticipates that equipment utilization and pricing in the oilfield services industry will remain challenged for the balance of the year and throughout 2016.

In order to be profitable in the current low commodity price environment, Calfrac remains focused on aggressively managing its cost structure. Calfrac is encouraged with what has been achieved to date including roughly 48 and 59 percent reductions in fixed costs from the fourth quarter of 2014 in Canada and the United States, respectively. As a result of the current market, Calfrac has reduced its headcount by approximately 40 and 50 percent in Canada and the United States, respectively, since the end of 2014. The Company is making every effort to retain its best people in order remain operationally strong over the long-term and be better positioned to quickly respond when market conditions improve.

In addition, Calfrac believes that it is continuing to create a competitive advantage and deliver cost efficiencies through the ongoing implementation of various logistics initiatives which has offset the effects of a weakening Canadian dollar that has negatively impacted U.S. dollar-denominated chemical and proppant expenses. In working with the Company's key suppliers, the logistics group has reduced costs for key products including having realized reductions of approximately 25 percent for proppant, 22 percent for third party subcontractors and 12 percent for chemical costs year-to-date in Canada. In the United States, proppant costs including third party hauling have been reduced on average by 28 percent while chemical costs are down 25 percent from the beginning of the year. Calfrac continues to analyze all measures that it can employ to further lower its cost structure including process efficiencies and further cost mitigation strategies.

CANADA
In Canada, Calfrac expects strong equipment utilization, in the context of the current market, until the latter part of the fourth quarter with the Company anticipating an extended holiday break beginning in early to mid-December. Overall activity in 2016 is anticipated to be consistent with 2015 although visibility is limited and will be largely based on the outlook for crude oil and natural gas prices as the year progresses. Approximately 45 percent of Calfrac's Canadian fracturing equipment fleet remains idle and the Company will continue to prudently manage its future operating scale and cost structure in order to remain profitable in this challenging market.

Weak natural gas and natural gas liquids prices led to significantly lower gas-focused activity in the third quarter of 2015 compared to 2014 but it remained stronger than oil-focused activity. While the Company believes that gas-focused activity could represent a larger portion of Calfrac's work over the coming year, weak natural gas prices could keep overall activity levels subdued.

Calfrac expects oil-focused activity to be significantly lower for the fourth quarter of 2015 than in the comparative period of 2014 and does not anticipate a meaningful improvement in activity throughout 2016. However, should oil prices recover, the Company believes that the Viking play would experience a relatively quick increase in activity with the Cardium also contributing to a ramp in activity levels, albeit at a slightly slower pace.

UNITED STATES
In the United States, with the land-based rig count continuing to decline from third quarter levels, combined with Calfrac's view that activity is likely to fall sharply in late November, fourth quarter activity levels are expected to decline sequentially. In response to these difficult market conditions including lower levels of activity and weak pricing extending through 2016, as well as an overall lack of visibility, the Company has now idled approximately 50 percent of its fracturing equipment in the United States and will continue to reduce its operating scale if margins are not anticipated to meet the Company's required financial returns. Calfrac has a plan in place to ensure that the equipment is kept up to its high standards and can be reactivated quickly when industry activity recovers.

RUSSIA
Activity in Russia has been relatively consistent with 2014 and the Company expects that trend to continue into the fourth quarter, with the exception of the impact of normal winter weather operating conditions. The significant devaluation of the Russian rouble will decrease reported 2015 financial results versus 2014. Calfrac is currently in the early stages of the 2016 contract tender process with its customers and anticipates that activity will be comparable to 2015. While Calfrac's participation in the development of unconventional resource plays in Russia will be delayed due to the current economic sanctions, the long-term prospects remain encouraging as unconventional development has become a pillar of Russia's oil and natural gas growth plans.

LATIN AMERICA
In the third quarter, Argentina's presidential election interrupted what Calfrac would view to be otherwise normal levels of activity which negatively impacted the reported financial results for the quarter. Despite these short term issues, Calfrac continues to believe in the long-term potential of Argentina's conventional and unconventional oil and gas development. The majority of the additional 40,000 new build horsepower in Argentina has been deployed and it is expected that this equipment will contribute to Calfrac's 2016 operating results.

In Mexico, Calfrac expects activity in the longer term to increase as the national reform of the energy industry continues to proceed. As a result of the current low levels of activity and cautious approach to spending by PEMEX in the short to medium term, the Company is currently reevaluating its business strategy for that country.

DIVIDEND POLICY
Calfrac's Board of Directors reviews the Company's dividend policy on a quarterly basis. During the third quarter, Calfrac reduced its quarterly dividend by 75 percent to $0.015625 per share and suspended its Dividend Reinvestment Plan for its common shares until further notice. The Board of Directors will continue to monitor market conditions in order to determine whether further changes to Calfrac's dividend policy are required.

SUMMARY
Calfrac continues to believe that depressed prices for crude oil and natural gas and uncertainty as to the timing of a price recovery are likely to make the remainder of 2015 and 2016 challenging for the entire industry. As such, the Company is focused on what it can control, namely, managing its cost structure, employing further process efficiencies, retaining its best people, maintaining strong relationships with its existing customers as well as expanding its customer base, while ensuring the Company has sufficient liquidity to navigate the cyclical downturn. Calfrac has an experienced Board of Directors and management team that have been through a number of industry downturns, and while this is tracking to being one of the worst in decades, the Company believes that it is well-positioned to navigate the current cycle. Calfrac is determined to strengthen its operations and competitive position through the downturn, which we believe will have a positive effect on operational performance when industry activity has recovered. Calfrac believes that the pressure pumping services industry will remain an integral component of unconventional resource development over the long term and that the Company will be well-positioned given its focus on top-tier safety, service quality, logistics management and technology.

FINANCIAL OVERVIEW - THREE MONTHS ENDED SEPTEMBER 30, 2015 VERSUS 2014

CANADA

REVENUE

Revenue from Calfrac's Canadian operations during the third quarter of 2015 was $121.5 million versus $282.1 million in the same period of 2014. The 57 percent decrease was primarily due to significantly lower activity and lower pricing for the Company's fracturing services. Revenue per fracturing job decreased by 30 percent from the same period in the prior year as a result of significant pricing reductions and job mix offset partially by the impact of greater service intensity. Total proppant per reported fracturing job increased by 12 percent over the prior year. Coiled tubing jobs decreased by 30 percent from the prior year due to lower activity in all operating regions.

OPERATING INCOME
Operating income in Canada during the third quarter of 2015 was $10.6 million compared to $65.1 million in the same period of 2014. The Company was able to mitigate the impact of lower activity and pricing through the implementation of several cost reduction initiatives designed to remain competitive in a lower-price environment. Operating costs were 48 percent lower than in the comparable quarter of 2014, which is attributable to the decline in activity combined with the impact of cost savings realized during the quarter. Calfrac has realized reductions of approximately 25 percent for proppant, 22 percent for third party subcontractors and 12 percent for chemical costs year-to-date. The impact of a weaker Canadian dollar on the cost of proppant and chemicals that are primarily sourced from the United States partially offset the product cost reductions achieved through supply chain initiatives. During the quarter, the Company had approximately 195,000 horsepower temporarily idled in Canada rather than operate at margins that did not meet its required financial returns. SG&A expenses declined by 65 percent year-over-year, primarily due to workforce reductions, which have totaled approximately 40 percent since the end of 2014 and a lower compensation structure combined with a reclassification of $1.3 million of employee costs from SG&A to operating costs during the quarter. Overall, the Canadian division has reduced its fixed cost structure by roughly 48 percent since the end of 2014.

REVENUE

Revenue from Calfrac's United States operations decreased to $93.1 million during the third quarter of 2015 from $331.9 million in the comparable quarter of 2014 due to significantly lower fracturing activity in Pennsylvania, south Texas, North Dakota and Arkansas resulting in 59 percent fewer fracturing jobs period-over-period. Activity in the Rockies remained resilient during the quarter due to an active customer base in this region. Revenue per job was 35 percent lower year- over-year due to significantly weaker pricing and, to a lesser extent, job mix. Proppant per fracturing job decreased by 19 percent from the same period in the prior year due to lower activity in more service intensive regions such as the Marcellus shale gas play.

OPERATING INCOME (LOSS)
The Company's United States operations experienced an operating loss of $6.9 million for the third quarter of 2015 compared to operating income of $67.3 million in the same period in 2014. The decline was primarily due to significantly lower pricing and utilization. Operating income as a percentage of revenue declined materially from 20 percent in the third quarter of 2014 to a loss of 7 percent in 2015. The reversal in the operating income percentage from income to loss was due to intense pricing competition from many of the Company's major competitors and lower equipment utilization in Pennsylvania, south Texas and North Dakota. The closure of Calfrac's fracturing operations in Arkansas during the second quarter of 2015 also contributed to the operating loss. Mitigating the overall trend were pricing reductions for proppant on average by 28 percent while chemical costs were down 25 percent from the beginning of the year. In addition, Calfrac had approximately 338,000 horsepower idled in the United States during the quarter. SG&A expenses decreased by 39 percent in the third quarter of 2015 from the same period in the prior year due to cost reductions that were initiated towards the end of the first quarter and continued throughout the second and third quarters. Overall, the United States division has reduced its headcount by approximately 50 percent and its fixed cost structure by 59 percent since the end of 2014.

REVENUE

During the third quarter of 2015, revenue from Calfrac's Russian operations decreased by 18 percent to $35.9 million from $43.9 million in the corresponding three-month period of 2014. The decrease in revenue, which is generated in roubles, was primarily related to the 31 percent devaluation of the Russian rouble in the third quarter of 2015 from the third quarter of 2014. The decline in the rouble was partially offset by higher fracturing and coiled tubing activity in Nefteugansk. Revenue per fracturing job declined by 12 percent due to the currency devaluation offset partially by the completion of larger jobs in Nefteugansk where Calfrac provides proppant to its largest customer in the region.

OPERATING INCOME
Operating income in Russia was $4.3 million during the third quarter of 2015 compared to $5.9 million in the corresponding period of 2014, the decline being primarily due to the 31 percent devaluation of the rouble. Operating income as a percentage of revenue decreased from 13 percent to 12 percent due to Calfrac providing a large volume of proppant to a customer, which is priced at lower margins than completion service work. SG&A expenses declined by 65 percent in the third quarter of 2015 from the prior year's quarter due to the impact of the depreciation of the Russian rouble and cost reduction initiatives.

REVENUE

Calfrac's Latin American operations generated total revenue of $38.6 million during the third quarter of 2015 versus $39.6 million in the comparable three-month period in 2014. Revenue in Argentina increased by $4.2 million due to higher fracturing and cementing activity offset partially by a pricing decrease that was implemented during the first quarter of 2015. The increase in revenue in Argentina was more than offset by lower revenue in Mexico and Colombia during the quarter. Lower revenue in Mexico was the result lower year-over-year activity combined with a one-time revenue reduction of $1.1 million related to a final contractual settlement with its major customer. The Company completed its existing commitments in Colombia during the second quarter of 2015 and is in the process of closing operations.

OPERATING INCOME
Operating income in Latin America for the three months ended September 30, 2015 was $0.8 million compared to $5.4 million in the comparative quarter in 2014. Operating income in the third quarter of 2015 was lower due to a one-time revenue reduction totaling $1.1 million in Mexico combined with higher SG&A and district overhead costs in Argentina related to the Company's expanded unconventional fracturing operations.

 

OPERATING LOSS
The 65 percent decline in corporate expenses from the third quarter of 2014 includes a reduction in stock-based compensation expense of $4.5 million resulting from a significant decline in the Company's stock price at the end of the quarter. In addition, the Company greatly reduced its costs throughout the first nine months of 2015 to better align its cost structure with anticipated activity levels. These initiatives contributed approximately $7.0 million to the overall decrease in corporate expenses primarily by reducing corporate personnel costs and annual bonuses.

DEPRECIATION
For the three months ended September 30, 2015, depreciation expense increased by 11.3 percent to $39.5 million from $35.5 million in the corresponding quarter of 2014. The increase was mainly a result of a weaker Canadian dollar relative to the U.S. dollar.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $1.8 million during the third quarter of 2015 versus a loss of $5.8 million in the comparative three-month period of 2014. 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, Russia and Latin America. The Company's third-quarter 2015 foreign exchange loss was largely attributable to the translation of U.S. dollar-denominated liabilities held in Argentina and Russia as the value of the Argentinean peso and Russian rouble depreciated against the U.S. dollar during the third quarter. The foreign exchange loss was partially offset by U.S. dollar-denominated assets held in Canada as the U.S. dollar appreciated against the Canadian dollar during the third quarter.

INTEREST
The Company's net interest expense of $17.9 million for the third quarter of 2015 was $3.2 million higher than in the comparable period of 2014. Interest expense on U.S. dollar-denominated debt was higher due to a weaker Canadian dollar relative to the U.S. dollar. Amounts drawn on the Company's revolving credit facility were consistent with the comparable quarter in 2014.

INCOME TAXES
The Company recorded an income tax recovery of $9.4 million during the third quarter of 2015 compared to an expense of $24.7 million in the comparable period of 2014. The third quarter of 2015 results included the write-off of $13.8 million of deferred tax assets, an impairment of goodwill of $9.5 million as well as a gain on acquisition of $31.0 million. Excluding these one-time items the income tax recovery would have been $23.2 million leading to an effective tax rate of 42 percent.

SUMMARY OF QUARTERLY RESULTS

 

SEASONALITY OF OPERATIONS
The Company's North American business is seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break-up weather conditions and access to well sites in Canada and North Dakota is reduced (refer to "Business Risks – Seasonality" in the 2014 Annual Report).

FOREIGN EXCHANGE FLUCTUATIONS
The Company's consolidated financial statements are reported in Canadian dollars. Accordingly, the quarterly results are directly affected by fluctuations in the exchange rates for United States, Russian, Mexican and Argentinean currency (refer to "Business Risks – Fluctuations in Foreign Exchange Rates" in the 2014 Annual Report).

FINANCIAL OVERVIEW - NINE MONTHS ENDED SEPTEMBER 30, 2015 VERSUS 2014

REVENUE

Revenue from Calfrac's Canadian operations during the first nine months of 2015 was $409.8 million versus $646.0 million in the same period of 2014. The decrease was primarily due to a mix of lower pricing and lower activity for the Company's fracturing services. Revenue per fracturing job decreased by 6 percent from the same period in the prior year primarily due to lower pricing and job mix as unconventional oil fracturing activity, which is less service intensive, contributed a larger proportion of overall revenue. Coiled tubing jobs decreased by 17 percent from the prior year due to lower activity in all operating regions.

OPERATING INCOME
Operating income in Canada during the first nine months of 2015 was $24.8 million compared to $108.2 million in the same period of 2014. The decrease in operating income was the result of significantly lower pricing and utilization partially offset by cost reductions for proppant, third party subcontractors and chemical costs year-to-date. The impact of a weaker Canadian dollar on the cost of proppant and chemicals that are primarily sourced from the United States partially offset the product cost reductions achieved through supply chain initiatives. SG&A expenses declined by 56 percent year- over-year, primarily due to workforce reductions and a lower compensation structure combined with a reclassification of $4.2 million of employee costs from SG&A to operating costs during the first nine months of 2015.

REVENUE
Revenue from Calfrac's United States operations decreased to $570.7 million during the first nine months of 2015 from $858.9 million in the comparable nine-month period of 2014 due to significantly weaker pricing combined with lower activity. The number of fracturing jobs completed during the first nine months of 2015 decreased by 26 percent from the comparable period in 2014, primarily due to lower activity in Pennsylvania, Arkansas and south Texas, partially offset by higher activity in the Rockies. Revenue per job declined by 10 percent year-over-year as a stronger U.S. dollar was more than offset by lower pricing. In addition, the volume of proppant per fracturing job decreased by 8 percent over the same period in the prior year despite the continued trend of greater service intensity per wellbore as the Company experienced lower activity in higher service intensive regions such as the Marcellus.

OPERATING INCOME
Operating income in the United States was $3.8 million for the first nine months of 2015, a decrease of 97 percent from the comparative period in 2014. The decline was primarily due to significantly lower pricing in all markets and decreased utilization in the Marcellus and Fayetteville. Operating income as a percentage of revenue declined materially from the comparative period of 2014 to 1 percent. The decline in the operating income percentage was due to the impact of lower pricing combined with lower equipment utilization in Pennsylvania, south Texas and Arkansas. Mitigating the overall trend were pricing reductions for proppant and chemicals. SG&A expenses decreased by 23 percent in the first nine months of 2015 from the same period in the prior year due to cost reductions made towards the end of the first half of 2015, which continued throughout the third quarter.

REVENUE

During the first nine months of 2015, revenue from Calfrac's Russian operations decreased by 21 percent to $105.2 million from $134.0 million in the corresponding nine-month period of 2014. The decrease in revenue, which is generated in roubles, was primarily related to the 31 percent devaluation of the rouble in the first nine months of 2015 when compared to the same period of 2014. The decline in the rouble was partially offset by higher fracturing activity in Nefteugansk, where Calfrac provides proppant to its largest customer. Revenue per fracturing job declined by 24 percent due to the currency devaluation but was partially offset by an increase in average job size and a modest rouble-based pricing increase.

OPERATING INCOME
Operating income in Russia was $10.5 million during the first nine months of 2015 compared to $13.9 million in the corresponding period of 2014 primarily due to the 31 percent devaluation of the rouble offset by improved operational leverage in Nefteugansk. The operating income percentage declined slightly due to Calfrac providing a large volume of proppant to a customer, which is priced at lower margins than completion service work, offset partially by slight pricing increases. SG&A expenses declined by 44 percent in the first nine months of 2015 from the prior year's comparable period due to the devaluation of the rouble combined with cost reductions implemented during the year.

REVENUE

Calfrac's Latin American operations generated total revenue of $123.3 million during the first nine months of 2015 versus $109.2 million in the comparable nine-month period in 2014. The increase resulted from the significant growth in fracturing and coiled tubing activity in Argentina, which included the start-up of a second unconventional crew in December 2014. The Company also experienced revenue growth in the Las Heras region, which is more focused on conventional activity. Activity in Mexico was lower during the first nine months of 2015 than in the previous nine-month period and included a negative revenue adjustment of $1.1 million during the third quarter that related to prior years.

OPERATING INCOME
Operating income in Latin America for the nine months ended September 30, 2015 was $9.3 million compared to $15.0 million in the comparative period in 2014. Operating income was lower due to reduced pricing in Argentina combined with lower equipment utilization and higher SG&A and district overhead in Argentina related to the Company's expanded unconventional fracturing operations as well as the impact of the $1.1 million negative revenue adjustment in Mexico. Calfrac is also currently using subcontractors for services such as flowback and well testing more regularly than in the first nine months of 2014, which has had a negative impact on operating income as a percentage of revenue.

OPERATING LOSS

The 50 percent decline in corporate expenses for the first nine months of 2015 from the same period in 2014 includes a reduction in stock-based compensation expense of $14.5 million resulting from a significant decline in the Company's stock price. In addition, the Company reduced costs during the first nine months of 2015 to align its cost structure with anticipated activity levels. These initiatives contributed approximately $10.5 million to the overall decrease in corporate expenses primarily by reducing corporate personnel costs and annual bonuses.

DEPRECIATION
For the nine months ended September 30, 2015, depreciation expense increased by 13 percent to $116.4 million from $103.4 million in the comparable period of 2014. The increase was mainly a result of a weaker Canadian dollar relative to the U.S. dollar.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $3.5 million during the first nine months of 2015 versus a loss of $13.6 million in the comparative nine-month period of 2014. 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, Russia and Latin America. The Company's 2015 foreign exchange loss was largely attributable to the translation of U.S. dollar-denominated liabilities held in Argentina and Russia as the value of the Argentinean peso and Russian rouble depreciated against the U.S. dollar during the year. The foreign exchange loss was partially offset by U.S. dollar-denominated assets held in Canada as the U.S. dollar appreciated against the Canadian dollar during 2015.

INTEREST
The Company's net interest expense of $50.7 million for the first nine months of 2015 was $6.6 million higher than in the comparable period of 2014. Interest on U.S. dollar-denominated debt was higher due to a weaker Canadian dollar relative to the U.S. dollar. Loans on the Company's revolving credit facility were consistent with the comparable period in 2014.

INCOME TAXES
The Company recorded an income tax recovery of $42.1 million for the first nine months of 2015 compared to an expense of $31.2 million in the comparable period of 2014. The reversal to a recovery was the result of pre-tax losses incurred combined with a one-time goodwill impairment charge and deferred tax asset write-off totaling $23.3 million, offset by a $31.0 million net gain on acquisition recorded during the third quarter. The effective tax recovery rate excluding these one-time items was 38 percent during 2015.

OPERATING ACTIVITIES
The Company's cash provided by operating activities for the three months ended September 30, 2015 was $34.6 million versus $99.3 million in the comparable quarter in 2014. The decrease was primarily due to lower operating margins in the United States offset by the reduction of working capital during the quarter. At September 30, 2015, Calfrac's working capital was approximately $296.8 million, a 33 percent decrease from December 31, 2014.

FINANCING ACTIVITIES
Net cash used for financing activities for the three months ended September 30, 2015 was $9.9 million compared to $13.9 million provided by financing activities in 2014. During the three months ended September 30, 2015, the Company reduced its bank loan in Argentina by $1.2 million, paid cash dividends of $4.6 million, purchased $3.9 million of shares under the NCIB and paid $0.2 million in financing charges.

On October 1, 2014, the Company extended the term of its credit facilities by one year to September 27, 2018. The maturity may be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. On January 29, 2015, Calfrac exercised the accordion feature of its syndicated credit facility, which increased the total facility from $300.0 million to $400.0 million. The terms and conditions of the facility remained unchanged. The facilities consist of an operating facility of $30.0 million and a syndicated facility of $370.0 million. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 2.25 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.25 percent above the respective base rates. As at September 30, 2015, the Company had used $38.7 million of its credit facilities for letters of credit and had $60.7 million outstanding under its credit facility, leaving $300.6 million in available credit.

The Company's credit facilities contain certain financial covenants. Weakened market conditions attributable to the significant reduction in the price of oil and natural gas have required some oil and gas service companies to seek covenant relief from their lenders. Calfrac negotiated an increase to certain of its financial covenant thresholds prior to the end of the second quarter, as shown below.

As at September 30, 2015 the Company was in compliance with its financial covenants. Due to the expectation that activity and pricing in the North American pressure pumping market will remain low, Calfrac is currently negotiating with its banking syndicate for further changes to the Company's existing bank covenants. These covenants apply only to the Company's credit facilities and not to its unsecured subordinated notes. Calfrac's strong relationship with its banking syndicate, relatively insignificant draw on its revolving credit facility net of cash on hand, and the fact that the Company's unsecured subordinated notes do not mature until 2020 leave it well-positioned to favorably conclude these negotiations. Management is focused on negotiating a structure that will provide the flexibility to withstand a prolonged downturn and is confident that Calfrac will reach a mutually agreeable arrangement prior to year-end.

On June 2, 2014, the Company's common shares were split on a two-for-one basis to shareholders of record as of May 23, 2014. Calfrac pays a quarterly dividend to shareholders at the discretion of the Board of Directors. On June 17, 2015, the Company reduced its quarterly dividend from $0.125 to $0.0625 per share, beginning with the dividend paid on July 15, 2015. On September 24, 2015, the Company further reduced its quarterly dividend from $0.0625 to $0.015625 per share, beginning with the dividend paid on October 15, 2015. For Canadian income tax purposes, all dividends paid by Calfrac on its common shares are designated as "eligible dividends" unless otherwise indicated.

INVESTING ACTIVITIES
Calfrac's net cash used for investing activities was $40.9 million for the quarter ended September 30, 2015 versus $49.5 million for the comparable period in 2014. Cash outflows relating to capital expenditures were $32.8 million during 2015 compared to $49.9 million in 2014. Capital expenditures were primarily to support the Company's Argentinean, United States and Canadian fracturing operations. In addition, Calfrac used $9.5 million to finance a business combination during the third quarter of 2015.

Calfrac's 2015 capital program of $200.0 million includes approximately $175.0 million carried over from 2014. The Company's 2015 capital budget of $25.0 million is being used for sustaining, infrastructure and maintenance initiatives.

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during the third quarter of 2015 was a loss of $5.2 million versus $6.0 million during 2014. These losses relate to cash and cash equivalents held by the Company in a foreign currency.

With its strong working capital position, available credit facilities and anticipated funds provided by operations, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for 2015 and beyond.

At September 30, 2015, the Company had cash and cash equivalents of $54.9 million.

OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan is equal to 10 percent of the Company's issued and outstanding common shares. As at October 23, 2015, there were 95,209,232 common shares issued and outstanding, and 5,546,348 options to purchase common shares.

On September 24, 2015 the Company announced that the Dividend Reinvestment Plan (DRIP) would be suspended and all shareholders of record would receive cash on October 15, 2015. The DRIP allowed shareholders to direct cash dividends paid on all or a portion of their common shares to be reinvested in additional common shares that would be issued at 95 percent of the volume-weighted average price of the common shares traded on the Toronto Stock Exchange (TSX) during the last five trading days preceding the relevant dividend payment date.

NORMAL COURSE ISSUER BID
The Company filed a Notice of Intention (the "Notice") to make a Normal Course Issuer Bid (NCIB) with the TSX on December 12, 2014. Under the NCIB, the Company may acquire up to 7,177,721 common shares, which was 10 percent of the public float outstanding as at December 10, 2014, during the period commencing on December 17, 2014 and terminating on December 16, 2015. The maximum number of common shares that can be acquired by the Company during a trading day is 117,011, with the exception that the Company is allowed to make one block purchase of common shares per calendar week that exceeds such limit. All purchases of common shares will be made through the TSX, alternative trading systems or such other exchanges or marketplaces through which the common shares trade from time to time at the market price of the shares at the time of acquisition. Any shares acquired under the NCIB will be cancelled. During the nine months ended September 30, 2015, the Company purchased 1,517,700 common shares under the NCIB at a cost of $9.4 million. A copy of the Notice may be obtained by any shareholder, without charge, by contacting the Company's Corporate Secretary at 411 - 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1E3, or by telephone at 403-266-6000.

ADVISORIES

FORWARD-LOOKING STATEMENTS
In order to provide Calfrac shareholders and potential investors with information regarding the Company and its subsidiaries, including management's assessment of Calfrac's plans and future operations, certain statements contained in this press release, including statements that contain words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "forecast" or similar words suggesting future outcomes, are forward-looking statements.

In particular, forward-looking statements in this press release include, but are not limited to, statements with respect to expected operating strategies and targets, capital expenditure programs, future financial resources, anticipated equipment utilization levels, future oil and natural gas well activity in each of the Company's operating jurisdictions, results of acquisitions, the impact of environmental regulations and economic reforms and sanctions on the Company's business, future costs or potential liabilities, projections of market prices and costs, supply and demand for oilfield services, expectations regarding the Company's ability to maintain its competitive position, anticipated benefits of the Company's competitive position, expectations regarding the Company's ability to raise capital, treatment under government regulatory regimes, commodity prices, anticipated outcomes of specific events (including the Greek and U.S. litigation), trends in, and the growth prospects of, the global oil and natural gas industry, the Company's growth prospects including, without limitation, its international growth strategy and prospects, and the impact of changes in accounting policies and standards on the Company and its financial statements. These statements are derived from certain assumptions and analyses made by the Company based on its experience and perception of historical trends, current conditions, expected future developments and other factors that it believes are appropriate in the circumstances, including, but not limited to, the economic and political environment in which the Company operates, the Company's expectations for its current and prospective customers' capital budgets and geographical areas of focus, the Company's existing contracts and the status of current negotiations with key customers and suppliers, the focus of the Company's customers on increasing the use of 24-hour operations in North America, the effectiveness of the cost reduction measures instituted by the Company in response to the significant decrease in commodity prices and expected oilfield activity in 2015, the effect unconventional gas projects have had on supply and demand fundamentals for natural gas and the likelihood that the current tax and regulatory regime will remain substantially unchanged.

Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from the Company's expectations. Such risk factors include: general economic conditions in Canada, the United States, Russia, Mexico and Argentina; the demand for fracturing and other stimulation services during drilling and completion of oil and natural gas wells; volatility in market prices for oil and natural gas and the effect of this volatility on the demand for oilfield services generally; regional competition; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; changes in legislation and the regulatory environment; sourcing, pricing and availability of raw materials, components, parts, equipment, suppliers, facilities and skilled personnel; the ability to integrate technological advances and match advances by competitors; the availability of capital on satisfactory terms; intellectual property risks; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; dependence on, and concentration of, major customers; the creditworthiness and performance by the Company's counterparties and customers; liabilities and risks associated with prior operations; the effect of accounting pronouncements issued periodically; failure to realize anticipated benefits of acquisitions and dispositions; and currency exchange rate risk. Further information about these and other risks and uncertainties may be found under "Business Risks" above.

Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements and there can be no assurance that actual results or developments anticipated by the Company will be realized, or that they will have the expected consequences or effects on the Company or its business or operations. These statements speak only as of the respective date of this press release or the document incorporated by reference herein. The Company assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise, except as required pursuant to applicable securities laws.

BUSINESS RISKS
The business of Calfrac is subject to certain risks and uncertainties. Prior to making any investment decision regarding Calfrac, investors should carefully consider, among other things, the risk factors set forth in the Company's most recently filed Annual Information Form, which are specifically incorporated by reference herein. The Annual Information Form is available through the Internet on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR), which can be accessed at www.sedar.com. Copies of the Annual Information Form may also be obtained on request without charge from Calfrac at 411 - 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1E3, or at www.calfrac.com, or by facsimile at 403-266-7381.

NON-GAAP MEASURES
Operating Income in this press release does not have any standardized meaning as prescribed under IFRS and is therefore considered a non-GAAP measure. This measure may not be comparable to similar measures presented by other entities. This measure has been described and presented in this press release in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and its ability to generate funds to finance its operations. Management's use of Operating Income has been disclosed further in this press release as where it is discussed and presented.

ADDITIONAL INFORMATION
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.

THIRD QUARTER CONFERENCE CALL
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2015 third quarter results at 10:00 a.m. (Mountain Time) on Thursday, October 29, 2015. 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 58650611). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

 

    

 

    

 

 

       

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As at and for the three and nine months ended September 30, 2015 and 2014
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated) (unaudited)

1.        DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Calfrac Well Services Ltd. (the "Company") was formed through the amalgamation of Calfrac Well Services Ltd. (predecessor company originally incorporated on June 28, 1999) and Denison Energy Inc. ("Denison") on March 24, 2004 under the Business Corporations Act (Alberta). The registered office is at 411 - 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1E3. The Company provides specialized oilfield services, including hydraulic fracturing, coiled tubing, cementing and other well completion services to the oil and natural gas industries in Canada, the United States, Russia, Mexico and Argentina.

These condensed consolidated interim financial statements were prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and interpretations by the International Financial Reporting Interpretations Committee (IFRIC). They should be read in conjunction with the annual financial statements for the year ended December 31, 2014. The Company has consistently applied the same accounting policies throughout all periods presented, as if these policies were always in effect.

These financial statements were approved by the Audit Committee of the Board of Directors for issuance on October 28, 2015.

2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These condensed consolidated interim financial statements follow the same accounting policies and methods of application as the most recent annual financial statements.

For purposes of calculating income taxes during interim periods, the Company utilizes estimated annualized income tax rates. Current income tax expense is only recognized when taxable income is such that current income taxes become payable.

3.        PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are tested for impairment in accordance with the accounting policy stated in note 2 of the most recent annual financial statements. The Company reviews the carrying value of its property, plant and equipment at each reporting period for indicators of impairment. During the third quarter of 2015, the impact of the decline in oil and natural gas prices on the Company's current and future financial results were indicators of impairment and the Company estimated the recoverable amount of its property, plant and equipment.

The recoverable amount of property, plant and equipment was determined using multi-year discounted cash flows to be generated from the continuing operations of each cash-generating unit (CGU). Cash flow assumptions were based on a combination of historical and expected future results. The cash flows were prepared on a five-year basis, using a discount rate ranging from 14.0 percent to 24.0 percent depending on the CGU. Discount rates are derived from the Company's weighted average cost of capital, adjusted for risk factors specific to each CGU. Cash flows beyond that five-year period have been extrapolated using a steady 2.0 percent growth rate.

The main commodity price assumptions over the forecast periods were:

• WTI Crude Oil (US$/bbl) increased from $53 in 2016 to $75 in 2020
• Henry Hub Gas (US$/mmBtu) increased from $3.00 in 2016 to $4.25 in 2020
• AECO Gas (C$/mcf) increased from $3.30 in 2016 to $4.35 in 2020

Annual revenue and operating income growth rates for each CGU were based on a combination of commodity price assumptions, historical results and forecasted activity levels, which incorporated pricing, utilization and cost improvements over the period. Activity levels in 2016 are expected to be relatively consistent with 2015, with activity increasing in 2017 and reaching near 2014 levels by 2020.

A comparison of the recoverable amounts of each cash-generating unit with their respective carrying amounts resulted in no material impairment with respect to property, plant and equipment at September 30, 2015.

The Company will continue to monitor and update its assumptions and estimates with respect to property, plant and equipment impairment on an ongoing basis.

4.        GOODWILL

Goodwill is tested for impairment in accordance with the accounting policy stated in note 2 of the most recent annual financial statements. Goodwill acquired through a business combination is allocated to that operating segment (or segments) which represent the lowest level within the Company at which goodwill is monitored for internal management purposes.

During the third quarter of 2015, the impact of the decline in oil and natural gas prices on the Company's current and future financial results were indicators of impairment and the Company estimated the recoverable amount of its goodwill.

The fair value of each operating segment was compared to the carrying value of its net assets. The fair value of each operating segment was derived using an accepted valuation method, which utilizes a discounted cash flow approach. Such approaches are typically utilized in valuing oilfield service companies.

The discount rate used in the discounted cash flow approach ranged from 14.0 percent to 24.0 percent depending on the operating segment.

The Company completed its assessment of goodwill impairment and determined that the recoverable amounts of the operating segments were less than their carrying amounts, resulting in an impairment charge of $9,544 for the nine months ended September 30, 2015 (nine months ended September 30, 2014 - $nil).

The impairment losses by operating segment are as follows:

 

5.        BANK LOANS

The Company's Argentinean subsidiary has two operating lines of credit, and a total of ARS168,245 ($23,830) was drawn at September 30, 2015 (December 31, 2014 - ARS120,792 ($16,388)). The interest rate ranges from 26.75 percent to 48.0 percent per annum and both lines of credit are secured by letters of credit issued by the Company.

6.       LONG-TERM DEBT 

 

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at September 30, 2015, was $496,434 (December 31, 2014 - $595,131). The carrying values of the mortgage obligation, bank loans and revolving term loan facilities approximate their fair values as the interest rates are not significantly different from current interest rates for similar loans.

The interest rate on the $370,000 revolving term loan facility is based on the parameters of certain bank covenants. For prime-based loans, the rate ranges from prime plus 0.50 percent to prime plus 2.25 percent. For LIBOR-based loans and bankers' acceptance-based loans the margin thereon ranges from 1.50 percent to 3.25 percent above the respective base rates for such loans. The facility is repayable on or before its maturity of September 27, 2018, assuming it is not extended. The maturity may be extended by one or more years at the Company's request and lenders' acceptance. The Company may also prepay principal without penalty. Debt issuance costs related to this facility are amortized over its term.

Interest on long-term debt (including the amortization of debt issuance costs and debt discount) for the nine months ended September 30, 2015 was $47,364 (nine months ended September 30, 2014 - $39,943).

The Company also has an extendible operating loan facility, which includes overdraft protection in the amount of $30,000. The interest rate is based on the parameters of certain bank covenants in the same fashion as the revolving term facility. Drawdowns under this facility are repayable on September 27, 2018, assuming the facility is not extended. The term and commencement of principal repayments may be extended by one year on each anniversary at the Company's request and lenders' acceptance. The revolving term loan and operating facilities are secured by the Company's Canadian and U.S. assets.

On January 29, 2015, the Company exercised an "accordion" feature contained in the terms of its loan facility and increased the facility from $300,000 to $400,000. The facility's terms and conditions remained unchanged.

At September 30, 2015, the Company had utilized $38,667 of its loan facility for letters of credit and had $60,720 outstanding under its revolving term loan facility, leaving $300,613 in available credit.

7.        FINANCE LEASE OBLIGATIONS

 

The carrying values of the finance lease obligations in Argentina approximate their fair values as the interest rates are not significantly different from current rates for similar leases in Argentina.

8.         CAPITAL STOCK

Authorized capital stock consists of an unlimited number of common shares.

 

The weighted average number of common shares outstanding for the three months ended September 30, 2015 was 95,523,078 basic and 95,692,278 diluted (three months ended September 30, 2014 - 94,568,570 basic and 95,681,061 diluted). The weighted average number of common shares outstanding for the nine months ended September 30, 2015 was 95,453,017 basic and 95,622,217 diluted (nine months ended September 30, 2014 - 93,820,017 basic and 94,730,106 diluted). The difference between basic and diluted shares is attributable to the dilutive effect of stock options issued by the Company as disclosed in note 11.

On May 8, 2014, the Company's shareholders approved a split of its common shares on a two-for-one basis to all shareholders of record as of May 23, 2014. The weighted average numbers of shares, stock options and share-based plans (such as restricted share units, deferred share units and performance share units) for all periods presented have been adjusted for this two-for-one share split, without a corresponding change in dollar amounts. Earnings per share have been adjusted to reflect the impact of the two-for-one share split.

9.        NORMAL COURSE ISSUER BID

The Company received regulatory approval to purchase its own common shares in accordance with a Normal Course Issuer Bid (NCIB) for the one-year period December 17, 2014 through December 16, 2015. During the nine months ended September 30, 2015, 1,517,700 common shares were purchased at a cost of $9,414 and, of the amount paid, $6,093 was charged to capital stock and $3,321 to retained earnings. These common shares were cancelled prior to September 30, 2015 (nine months ended September 30, 2014 - $nil).

10.      CONTRIBUTED SURPLUS

 

On June 16, 2015, six common shares were returned to the Company for cancellation. For accounting purposes, the cancellation of these shares was recorded as a reduction of capital stock in the amount of twenty-four dollars, along with a corresponding increase to contributed surplus.

On November 10, 2009, the Company acquired all of the issued and outstanding shares of Century Oilfield Services Inc. ("Century"). The Plan of Arrangement that governed the acquisition included a five-year "sunset clause" which provided that untendered shares would be surrendered to the Company after five years. Effective November 10, 2014, 5,660 common shares of the Company previously held in trust for untendered shareholders were cancelled. In addition, residual proceeds of $21 previously held in trust for untendered shareholders were returned to the Company.

For accounting purposes, the cancellation of the 5,660 common shares was recorded as a reduction of capital stock in the amount of $45. Along with the residual cash received, a corresponding increase in contributed surplus was recorded in the amount of $66.

11.       STOCK-BASED COMPENSATION

(a)  Stock Options                                                                                                                              

 

Stock options vest equally over four years and expire five years from the date of grant. The exercise price of outstanding options ranges from $5.80 to $20.81 with a weighted average remaining life of 2.57 years. When stock options are exercised, the proceeds together with the compensation expense previously recorded in contributed surplus, are added to capital stock.

(b)  Share Units

 

 

 

Stock-based compensation expense is included in selling, general and administrative expenses.

The Company grants deferred share units to its outside directors. These units vest in November of the year of grant and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the deferred share units is recognized equally over the vesting period, based on the current market price of the Company's shares. At September 30, 2015, the liability pertaining to deferred share units was $168 (December 31, 2014 - $701).

The Company grants performance share units to a senior officer who does not participate in the stock option plan. The amount of the grants earned is linked to corporate performance and the grants vest on the approval of the Board of Directors at the meeting held to approve the consolidated financial statements for the year in respect of which performance is being evaluated. As with the deferred share units, performance share units are settled either in cash or Company shares purchased on the open market. At September 30, 2015, the liability pertaining to performance share units was $398 (December 31, 2014 - $868).

The Company grants restricted share units to its employees. These units vest equally over three years and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the restricted share units is recognized over the vesting period, based on the current market price of the Company's shares. At September 30, 2015, the liability pertaining to restricted share units was $1,657 (December 31, 2014 - $9,602).

Changes in the Company's obligations under the deferred, performance and restricted share unit plans, which arise from fluctuations in the market value of the Company's shares underlying these compensation programs, are recorded as the share value changes.

12.      FINANCIAL INSTRUMENTS

The Company's financial instruments included in the consolidated balance sheets are comprised of cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued liabilities, bank loans, long-term debt and finance lease obligations.

The fair values of these financial instruments, except long-term debt, approximate their carrying amounts due to their short-term maturity. The fair value of the senior unsecured notes based on the closing market price at September 30, 2015 was $496,434 before deduction of unamortized debt issuance costs (December 31, 2014 - $595,131). The carrying value of the senior unsecured notes at September 30, 2015 was $800,700 before deduction of unamortized debt issuance costs and debt discount (December 31, 2014 - $696,060). The fair values of the remaining long-term debt and finance lease obligations approximate their carrying values, as described in notes 6 and 7.

13.      SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash operating assets and liabilities are as follows:

 

Purchase of property, plant and equipment is comprised of:

 

14.      BUSINESS COMBINATION

On July 6, 2015, the Company acquired all of the outstanding shares of GASFRAC Energy Services Inc. ("GASFRAC") , an oil and gas well fracturing company specializing in gas fracturing technologies, operating in western Canada, for a total purchase price of $9,498. The purchase was recognized as a business combination and accounted for as such using the acquisition method of accounting under IFRS 3 Business Combinations.

The recognized amounts of identifiable assets acquired are as follows:

 

The composition of the business combination expenses reported in the statement of operations is as follows:

 

The gain of $31,965 was recognized in the statement of operations on the acquisition date and represents the excess of the fair value of identifiable assets over the consideration paid.

The Company has reassessed the fair value of the identifiable assets purchased and the fair value of the consideration transferred in determining the gain, as required under IFRS.

During the period July 7, 2015 to September 30, 2015, the acquisition contributed immaterial operating income to the Company. The pro-forma estimated effects on revenue and operating income, had the acquisition occurred on January 1, 2015, would have been immaterial.

Deferred tax assets in the amount of $34,000 were recognized on the acquisition of GASFRAC during the period. The Company recognizes the financial statement impact of a tax filing position when it is probable based on technical merits that the position will be sustained upon audit. To the extent that any interpretation of tax law is successfully challenged by the tax authorities and future tax assets will not be realized, the effect of such an adjustment will be recognized into income as part of income tax expense and could materially affect the Company's estimate of current and deferred income taxes.

15.      CAPITAL STRUCTURE

The Company's capital structure is comprised of shareholders' equity and debt. The Company's objectives in managing capital are (i) to maintain flexibility so as to preserve its access to capital markets and its ability to meet its financial obligations, and (ii) to finance growth, including potential acquisitions.

The Company manages its capital structure and makes adjustments in light of changing market conditions and new opportunities, while remaining cognizant of the cyclical nature of the oilfield services sector. To maintain or adjust its capital structure, the Company may revise its capital spending, adjust dividends paid to shareholders, issue new shares or new debt or repay existing debt.

The Company monitors its capital structure and financing requirements using, amongst other parameters, the ratio of net debt to operating income. Operating income for this purpose is calculated on a 12-month trailing basis and is defined as follows:

 

The ratio of net debt to operating income does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

At September 30, 2015, the net debt to operating income ratio was 5.63:1 (December 31, 2014 - 1.84:1) calculated on a 12-month trailing basis as follows:

 

The Company's net debt to operating income ratio has increased during 2015 due to a cyclical low in activity and pricing in the North American pressure pumping market.

The Company is subject to certain financial covenants relating to working capital, leverage and the generation of cash flow in respect of its operating and revolving credit facilities. These covenants are monitored on a monthly basis. The Company is in compliance with all such covenants. Prior to the end of the second quarter, the Company negotiated an increase to certain of its financial covenant thresholds.

The Company's capital management objectives and targets remain unchanged from prior periods. However, the evaluation measure was changed from prior periods as the net debt to operating income ratio was adopted in the third quarter of 2014.

16.      RELATED-PARTY TRANSACTIONS

In November 2010, the Company lent a senior officer $2,500 to purchase common shares of the Company on the Toronto Stock Exchange. The loan is on a non-recourse basis and is secured by the common shares acquired with the loan proceeds. The loan was amended in February 2015 to extend the term by five years to November 8, 2020 and change the interest rate to the prescribed rate under the Income Tax Act (Canada), which rate was 1.0 percent per annum at the time of the amendment. The market value of the shares that secure the loan was approximately $523 as at September 30, 2015 (December 31, 2014 - $1,694). In accordance with applicable accounting standards regarding share purchase loans receivable, this loan is classified as a reduction of shareholders' equity due to its non-recourse nature. In addition, the shares purchased with the loan proceeds are considered to be, in substance, stock options.

The Company leases certain premises from an entity controlled by a director of the Company. The rent charged for these premises during the nine months ended September 30, 2015 was $760 (nine months ended September 30, 2014 - $606), as measured at the exchange amount.

17.      PRESENTATION OF EXPENSES

The Company presents its expenses on the consolidated statements of operations using the function of expense method whereby expenses are classified according to their function within the Company. This method was selected as it is more closely aligned with the Company's business structure. The Company's functions under IFRS are as follows:

• operations; and
• selling, general and administrative.

Cost of sales includes direct operating costs (including product costs, direct labour and overhead costs) and depreciation on assets relating to operations.

Additional information on the nature of expenses is as follows:

 

18.       EMPLOYEE BENEFITS EXPENSE

Employee benefits include all forms of consideration given by the Company in exchange for services rendered by employees.

 

19.      CONTINGENCIES

GREEK LITIGATION

As a result of the acquisition and amalgamation with Denison in 2004, the Company assumed certain legal obligations relating to Denison's Greek operations.

In 1998, North Aegean Petroleum Company E.P.E. ("NAPC"), a Greek subsidiary of a consortium in which Denison participated (and which is now a majority-owned subsidiary of the Company), terminated employees in Greece as a result of the cessation of its oil and natural gas operations in that country. Several groups of former employees filed claims against NAPC and the consortium alleging that their termination was invalid and that their severance pay was improperly determined.

In 1999, the largest group of plaintiffs received a ruling from the Athens Court of First Instance that their termination was invalid and that salaries in arrears amounting to approximately $10,210 (6,846 euros) plus interest were due to the former employees. This decision was appealed to the Athens Court of Appeal, which allowed the appeal in 2001 and annulled the above-mentioned decision of the Athens Court of First Instance. The said group of former employees filed an appeal with the Supreme Court of Greece, which was heard on May 29, 2007. The Supreme Court of Greece allowed the appeal and sent the matter back to the Athens Court of Appeal for the consideration of the quantum of awardable salaries in arrears. On June 3, 2008, the Athens Court of Appeal rejected NAPC's appeal and reinstated the award of the Athens Court of First Instance, which decision was further appealed to the Supreme Court of Greece. The matter was heard on April 20, 2010 and a decision rejecting such appeal was rendered in June 2010. As a result of Denison's participation in the consortium that was named in the lawsuit, the Company was served with a payment order on March 24, 2015 relating to approximately $7,318 (4,907 euros) of the salaries in arrears noted above, together with associated interest of approximately $13,117 (8,795 euros). An opposition brief was filed on behalf of the Company on April 16, 2015 which opposes the payment order on the basis that it was improperly issued and is barred from a statute of limitations perspective. A hearing in respect of the Company's application is scheduled for November 24, 2015.

NAPC is also the subject of a claim for approximately $4,268 (2,862 euros) plus associated penalties and interest from the Greek social security agency for social security obligations associated with the salaries in arrears that are the subject of the above-mentioned decision.

The maximum aggregate interest and penalties payable under the claims noted above, as well as three other immaterial claims against NAPC, amounted to $24,483 (16,416 euros) as at September 30, 2015.

Management is of the view that it is improbable there will be a material financial impact to the Company as a result of these claims. Consequently, no provision has been recorded in these consolidated financial statements.

U.S. LITIGATION

A collective and class action complaint was filed against the Company in September 2012 in the U.S. District Court for the Western District of Pennsylvania, alleging failure to pay U.S. employees the amount of overtime pay required by the Fair Labor Standards Act (FLSA) and the Pennsylvania Minimum Wage Act. In May 2013, the plaintiffs amended their complaint to add a Colorado wage-hour claim. In June 2013, the parties stipulated to conditional certification of a putative class in the FLSA collective action. After notice of the right to opt-in was mailed to approximately 1,200 current and former employees, 359 individuals opted in. Pursuant to a court-approved discovery plan, discovery occurred as to a mutually agreed-upon sample of the conditionally-certified opt-in class.

The Company and the plaintiffs have reached a tentative settlement of all claims, including certain potential, related claims. The court preliminarily approved the settlement in August 2015. The settlement is subject to final court approval in December 2015. As part of the settlement, plaintiffs filed a second amended complaint to add Arkansas and North Dakota wage-hour claims. For settlement purposes only, the court conditionally certified classes for the FLSA claim and each of the four state law claims. The proposed settlement contemplates use of a claims procedure, pursuant to which each plaintiff and potential plaintiff would be required to file a claim to be entitled to receive money pursuant to the settlement. The US$4,000 provision recorded by the Company represents its current best estimate of the projected net cost of the settlement. The Company does not have insurance coverage for these claims.

20.      SEGMENTED INFORMATION

The Company's activities are conducted in four geographical segments: Canada, the United States, Russia and Latin America. All activities are related to hydraulic fracturing, coiled tubing, cementing and other well completion services for the oil and natural gas industry.

The business segments presented reflect the Company's management structure and the way its management reviews business performance. The Company evaluates the performance of its operating segments primarily based on operating income, as defined below.

 

       

Operating income does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

The following table sets forth consolidated revenue by service line:

 

21.      SEASONALITY OF OPERATIONS

Certain of the Company's Canadian and United States businesses are seasonal in nature. The lowest activity levels in these areas are typically experienced during the second quarter of the year when road weight restrictions are in place and access to wellsites in Canada and North Dakota is reduced.

22.      DIVIDEND REINVESTMENT PLAN

The Company's Dividend Reinvestment Plan (DRIP) allows shareholders to direct cash dividends paid on all or a portion of their common shares to be reinvested in additional common shares that are issued at 95 percent of the volume- weighted average price of the common shares traded on the Toronto Stock Exchange during the last five trading days preceding the relevant dividend payment date.

A dividend of $0.0625 per common share was declared on June 17, 2015 and paid on July 15, 2015. Of the total dividend of $6,066, $1,500 was reinvested under the DRIP into 219,549 common shares of the Company.

A dividend of $0.125 per common share was declared on March 18, 2015 and paid on April 15. 2015. Of the total dividend of $12,190, $5,645 was reinvested under the DRIP into 583,187 common shares of the Company.

A dividend of $0.125 per common share was declared on December 4, 2014 and paid on January 15, 2015. Of the total dividend of $11,907, $5,588 was reinvested under the DRIP into 671,643 common shares of the Company.

On September 24, 2015, the Company announced that the DRIP was suspended.

SOURCE Calfrac Well Services Ltd.