Calfrac Well Services Ltd. (TSX-CFW) has announced record 2Q revenue and operating income results today, showing $544.6 million and $66.5 million, respectively.

2Q Highlights

  • Revenue: $544 million (67% YOY increase)
  • Operating Income: $66 million (81% YOY increase)
  • 560,000 tons of sand pumped in the US (56% YOY increase)
  • 227,000 tons of sand pumped in Canada (6% YOY increase)

Calfrac’s Canadian operations were in line with seasonal patterns, as spring break-up slowed operations in April. Activity accelerated as road conditions improved in May and June, and Calfrac ended the quarter with high utilization rates.

Cost inflation is not just a consideration for E&P companies, as Calfrac reports it is currently being impacted by cost inflation. Product and fuel costs are on the rise, but Calfrac is currently attempting to pass these increases on to its E&P customers. The rest of the year appears normal for Calfrac’s Canadian operations, with strong activity through late Q4.

In the U.S. Calfrac reactivated a 17th fleet, which will begin operations in August. Like all other players in the U.S. oil and gas market, Calfrac is keeping a close eye on operations in the Permian. The company expects that up to three of its fleets may see lower utilization rates during Q3, as operators may redeploy capital to other basins. Despite the current takeaway problems in the Permian, Calfrac is optimistic regarding fracturing fundamentals, as rig activity and oil prices remain strong.

Calfrac’s international activity showed mixed results. In Russia, “challenging operating conditions” hindered activity in April and May, so work was often delayed. Operations in Argentina showed a significant improvement in profitability, as the company’s focus on cost controls and field productivity began to have an effect. In July Calfrac also purchased the 20% non-controlling interest in its Argentinean operations.


Selected Q&A from CalFrac’s 2Q call:

Q: So on the quarter, I mean, cash burn was pretty light for 2Q. Working capital needs were pretty restrained. Just how are you looking at free cash for the back half of the year? Maybe just walk us through some of those moving pieces in terms of working capital, CapEx, and just how you think about free cash going into the back half of the year.

CalFrac CFO Michael D. Olinek: All right, Sean, thanks. Mike here. Yeah, as you mentioned, I think Q3 is probably going to be the best quarter that we have in 2018. So there will be some working capital requirements, but I think they are going to be relatively muted. I mean, obviously, Canada is coming out of a spring breakup, so there is going to be an uptick there for any requirement. On the CapEx side, we see that being fairly level with where we’ve been in Q2. And I will remark that, obviously, as we get into the back half, we do believe that free cash flow is something that we’re going to generate for the business. So we’re up to, I think, all of our fleets being up and running and active. And so from a cash flow generation point, we see free cash flow being a real possibility here in H2.

Q: You mentioned that there is three fleets that are operating, they are about half the size of the standard fleet. On what basin are those operating in and what sort of work are they actually doing, given their size?

CalFrac VP, Capital Markets and Strategy Scott Treadwell: Yeah. Evan, it’s Scott. They’re working in Grand Junction, which is the Piceance Basin. And essentially they are half the size there. They’re actually doing very specific kind of fracturing sort of 12-hour days for private customers that I won’t disclose. But it’s essentially fracturing where you don’t need to pump propane and it’s essentially just high rate water and a little bit of chemicals, so you don’t need all the equipment that’s out there; really compelling returns, great customers, and we really like that work. Obviously, it’s not enough to deploy 800,000 horsepower into, but it’s a nice piece of the business.

Q: Can you give us just a quick breakdown of where those 17 fleets are running just by region?

CalFrac VP, Capital Markets and Strategy Scott Treadwell: Sure. So as of today we’re running three in Smithfield in the Marcellus, we’re running five in Williston for the Bakken, we’re running one in Platteville, which is just outside Denver, and then the three in Grand Junction in Colorado. And then we’re running three in Artesia, New Mexico for the Permian, and we’re running one going to two in San Antonio for the Eagle Ford.

Q: And you spoke about quality crews in the U.S. being in short supply. Can you help us think about what constitutes a quality crew and then maybe the size of that market, if it is becoming bifurcated between quality and lesser quality?

CalFrac President and CEO Fernando Aguilar: It’s a combination of how you execute the work related to not only qualified workers and people who are very well dedicated to execute. So the people piece is very critical and is very important.

The other piece that is important as well, and is also related to people, is the maintenance programs. As the market has been increasing the volumes and the amount of work that is performed on a daily basis, you go from 14 to 18, you are basically bumping between four to six hours additional time. That is consuming, let’s say, more maintenance on the equipment and you have to be very, very good at keeping your preventive maintenance programs up to speed and making sure that the quality of that work and the quality of the repairs and the quality of the refurbishing of the equipment is up to the amount of time that is happening in a daily basis.

So it’s a combination of how you execute that. And then when you go to a quality piece of the work, Calfrac being one of the only company that is fully API Q2, which is the new standard on quality, all the standards that are related to the way that we execute and we operate have to be followed very closely. Not all companies have done it or have access to that. And when you talk to customers and the way they want to execute, that basically translated in the calls, additional calls that we get to replace competitors are basically failing to the same level of work at the same – at the quality that they demand.

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