July 25, 2018 - 6:00 AM EDT
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Calfrac Announces Record Second Quarter Results

Canada NewsWire

CALGARY, July 25, 2018 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three and six months ended June 30, 2018.

HIGHLIGHTS


Three Months Ended June 30,

Six Months Ended June 30,


2018

2017

Change

2018

2017

Change

(C$000s, except per share and unit data)

($)

($)

(%)

($)

($)

(%)

(unaudited)







Revenue

544,602

325,344

67

1,127,440

594,159

90

Operating income(1)

66,528

36,740

81

134,502

57,134

135


Per share – basic

0.46

0.27

70

0.94

0.42

124


Per share – diluted

0.45

0.27

67

0.92

0.41

124

Adjusted EBITDA(1)

81,910

39,913

105

154,863

61,497

152


Per share – basic

0.57

0.29

97

1.08

0.45

140


Per share – diluted

0.56

0.29

93

1.06

0.45

136

Net loss attributable to the shareholders of Calfrac







before foreign exchange gains or losses(2)

(14,571)

(9,731)

50

(12,666)

(31,390)

(60)


Per share – basic

(0.10)

(0.07)

43

(0.09)

(0.23)

(61)


Per share – diluted

(0.10)

(0.07)

43

(0.09)

(0.23)

(61)

Net loss attributable to the shareholders of Calfrac

(32,838)

(20,349)

61

(29,604)

(39,896)

(26)


Per share – basic

(0.23)

(0.15)

53

(0.21)

(0.29)

(28)


Per share – diluted

(0.23)

(0.15)

53

(0.21)

(0.29)

(28)

Working capital (end of period)




361,613

293,411

23

Total equity (end of period)




507,607

463,180

10

Weighted average common shares outstanding (000s)








Basic

143,911

136,600

5

143,817

136,579

5


Diluted                                                    

146,715

137,929

6

146,673

138,181

6

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

(2) Net income (loss) attributable to the shareholders of Calfrac before foreign exchange (FX) gains or losses is on an after-tax basis. Management believes that this is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac without the impact of FX fluctuations, which are not fully controllable by the Company. This measure does not have any standardized meaning prescribed under IFRS and, accordingly, may not be comparable to similar measures used by other companies.

 

CEO MESSAGE
Fernando Aguilar, Calfrac's President & Chief Executive Officer commented, "The record results delivered by Calfrac in the second quarter are due once again to the hard work of our employees, from field to district to office. I would like to thank everyone at Calfrac for their ongoing efforts to deliver safe and efficient service to our clients while managing costs prudently."

During the quarter, Calfrac:

  • reported record second-quarter revenue and operating income;
  • executed a strategic refinancing of the Company's long-term indebtedness; and
  • reactivated one fleet in its San Antonio district, which is expected to commence work in August.

SECOND QUARTER 2018 OVERVIEW

CONSOLIDATED HIGHLIGHTS

Three Months Ended June 30,


2018

2017

Change

(C$000s, except operational information)


($)

($)

(%)

(unaudited)





Revenue


544,602

325,344

67

Expenses






Operating


453,751

275,932

64


Selling, general and administrative (SG&A)


24,323

12,672

92



478,074

288,604

66

Operating income(1)


66,528

36,740

81

Operating income (%)


12.2

11.3

8

Adjusted EBITDA(1)


81,910

39,913

105

Adjusted EBITDA (%)


15.0

12.3

22

Fracturing revenue per job ($)


46,830

35,858

31

Number of fracturing jobs


10,817

8,132

33

Active pumping horsepower, end of period (000s)


1,313

874

50

Idle pumping horsepower, end of period (000s)


80

443

(82)

Total pumping horsepower, end of period (000s)


1,393

1,317

6

Coiled tubing revenue per job ($)


30,189

28,805

5

Number of coiled tubing jobs


876

704

24

Active coiled tubing units, end of period (#)


22

21

5

Idle coiled tubing units, end of period (#)


8

11

(27)

Total coiled tubing units, end of period (#)


30

32

(6)

Cementing revenue per job ($)


47,290

43,158

10

Number of cementing jobs


68

114

(40)

Active cementing units, end of period (#)


11

12

(8)

Idle cementing units, end of period (#)


12

13

(8)

Total cementing units, end of period (#)


23

25

(8)

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

 

Revenue in the second quarter of 2018 was $544.6 million, an increase of 67 percent from the same period in 2017. The Company's fracturing job count increased by 33 percent mainly due to a larger scale of operations and higher activity in Canada and the United States. During the quarter, Calfrac pumped approximately 560,000 tons of sand in the United States and 227,000 tons in Canada, representing 56 percent and 6 percent growth from the prior year, respectively. Consolidated revenue per fracturing job increased by 31 percent primarily due to a combination of better pricing, larger job sizes and job mix. The number of cementing jobs decreased by 40 percent due to lower cementing activity in northern Argentina.

Pricing in Canada and the United States increased while pricing in Russia was consistent with the second quarter of 2017. In Argentina, the transition to more unconventional activity does not allow for a meaningful pricing comparison to the second quarter in 2017 as the style of job is significantly different than conventional activity.

Adjusted EBITDA of $81.9 million for the second quarter of 2018 increased from $39.9 million in the comparable period in 2017 primarily due to significantly higher utilization in the United States and Canada. This was offset partially by higher personnel costs and higher stock-based compensation costs, which at $5.0 million were higher by $6.7 million than the second quarter in 2017. Additionally, the second quarter in 2018 included a realized foreign exchange gain of $8.3 million primarily related to the settlement of U.S. dollar-denominated receivables in Argentina.

Net loss attributable to shareholders of Calfrac was $32.8 million or $0.23 per share diluted compared to a net loss of $20.3 million or $0.15 per share diluted in the same period last year. These net losses included largely unrealized foreign exchange losses of $32.5 million and $16.3 million in the second quarter of 2018 and 2017, respectively.

Three Months Ended


June 30,

March 31,

Change



2018

2018


(C$000s, except operational information)


($)

($)

(%)

(unaudited)





Revenue


544,602

582,838

(7)

Expenses






Operating


453,751

490,106

(7)


SG&A                                                 


24,323

24,758

(2)



478,074

514,864

(7)

Operating income(1)


66,528

67,974

(2)

Operating income (%)


12.2

11.7

4

Adjusted EBITDA(1)


81,910

72,953

12

Adjusted EBITDA (%)


15.0

12.5

20

Fracturing revenue per job ($)


46,830

36,783

27

Number of fracturing jobs


10,817

14,752

(27)

Active pumping horsepower, end of period (000s)


1,313

1,259

4

Idle pumping horsepower, end of period (000s)


80

134

(40)

Total pumping horsepower, end of period (000s)


1,393

1,393

Coiled tubing revenue per job ($)


30,189

33,283

(9)

Number of coiled tubing jobs


876

729

20

Active coiled tubing units, end of period (#)


22

22

Idle coiled tubing units, end of period (#)


8

8

Total coiled tubing units, end of period (#)


30

30

Cementing revenue per job ($)


47,290

37,728

25

Number of cementing jobs


68

69

(1)

Active cementing units, end of period (#)


11

12

(8)

Idle cementing units, end of period (#)


12

11

9

Total cementing units, end of period (#)


23

23

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

 

Revenue in the second quarter of 2018 was $544.6 million, a decrease of 7 percent from the first quarter of 2018, primarily due to lower activity in Canada as a result of the normal seasonal slowdown during spring break-up. Revenue per fracturing job decreased by 27 percent due to job mix and customer mix in Canada. Pricing in all operating regions was largely consistent with the first quarter of 2018.

In Canada, second-quarter revenue decreased by 30 percent from the first quarter to $131.9 million. The second quarter began at a slow pace as spring break-up conditions impacted operations in April. In May and June, activity picked up significantly, including a number of multi-well pad operations that provided consistent activity and revenue. As road conditions improved throughout May, the Company was able to maintain high utilization across its Canadian operations. Operating income as a percentage of revenue was 8 percent versus 17 percent in the first quarter primarily due to lower equipment utilization combined with higher costs for diesel fuel, rail transportation and sand.

In the United States, revenue in the second quarter of 2018 increased by 8 percent from the first quarter to $342.0 million, mainly as a result of the two additional fleets that were activated towards the end of the first quarter. The U.S. division's operating income margin increased to 20 percent in the second quarter from 17 percent in the first quarter of 2018. The U.S. division did not encounter similar delays driven by weather and sand delivery issues that it did in the first quarter.

In Russia, revenue of $25.0 million in the second quarter of 2018 was 20 percent lower than the first quarter due to a reduction in fracturing activity in Noyabrsk with one of its key customers. The operating loss position in the second quarter was primarily due to lower equipment utilization.

In Argentina, revenue was consistent sequentially at $45.7 million while operating income of $2.1 million improved compared to the loss of $3.0 million incurred in the first quarter. The turnaround to positive operating income was achieved through a combination of improved utilization and cost management during the quarter.

BUSINESS UPDATE AND OUTLOOK
Calfrac's second-quarter results reflect continued strength in the Company's United States operations, combined with a very active quarter in Canada.

CANADA
In Canada, the second quarter began at a slow pace as spring break-up conditions impacted operations in April. However, activity increased significantly in May and June, which included a number of multi-well pad operations that provided consistent activity and revenue. As road conditions improved throughout May, the Company was able to realize high utilization across its Canadian operations.

Calfrac's coiled tubing service line continues to grow in 2018, supported by incremental assets redeployed from the United States. In addition to supporting the Company's fracturing operations, Calfrac expects to be able to provide a greater amount of well servicing work for new and existing clients, incremental to existing work associated with its fracturing operations.

Cost inflation has continued to impact Calfrac's Canadian operations, driven mainly by higher product and fuel costs. The Company continues to work with its customer base to share in these cost increases.

Continued strength in oil and liquids pricing should support strong activity levels through the third quarter and early into the fourth quarter across Calfrac's Canadian client base. With increasing intensity across existing plays and meaningful acceleration in the East Duvernay oil play, Calfrac believes that demand for fracturing services will grow and should result in constructive market dynamics. Based on current visibility, the Company anticipates a slowdown in the fourth quarter, albeit with a more typical pattern than the sharp decrease experienced in 2017.

UNITED STATES
The United States showed sequential improvement in the second quarter as a result of fleet reactivations, aided by improved productivity and no material impact from the industry sand network challenges that occurred in the first quarter. This growth was tempered by some breaks in completion schedules in Texas and New Mexico. The Company reactivated a 17th fracturing fleet in San Antonio which is now expected to commence work in August due to customer scheduling changes.

Of the 17 fracturing fleets active in the United States, 14 are large fleets while the remaining three fleets are approximately half the size of a standard fleet. With recent commentary surrounding the impact of production take-away capacity on the fracturing market in the United States, the Company continues to work closely with its clients to manage any issues that may arise. Calfrac expects that up to three of its fleets may experience lower utilization during the third quarter due to changes in client well completion schedules resulting in possible redeployments of fracturing crews into different operating districts. A number of opportunities for short and long-term work exist in most of Calfrac's U.S. operating districts, and the Company will seek to balance risk and growth when looking at any asset reallocation.

Cost inflation in the U.S. continued in the second quarter, with products and fuel experiencing the largest increases. Calfrac's work in the United States is covered by agreements that provide regular opportunities to pass through cost increases to clients, and the Company manages this as part of the normal course of business.

In the U.S., the horizontal rig count has increased by over 15% since the beginning of the year, and with continued improvement in oil prices, the Company's outlook for fracturing fundamentals remains optimistic despite the short-term issues related to take-away capacity in the Permian Basin.

RUSSIA
Calfrac's Russian operations experienced continued challenging operating conditions during the second quarter of 2018 which impacted activity levels through April and May. The majority of work not executed in the quarter has been rescheduled through the summer months and into the autumn, which should drive stronger results in Calfrac's Russian operations over this time frame.

ARGENTINA
Calfrac's operations in Argentina delivered a significant improvement in profitability in spite of a high level of variability in client work programs during the quarter. Internal cost control and a focus on field productivity remain central to short-term improvements, and should be aided by an expected increase in activity levels through the remainder of the year as producers ramp up activity in the Vaca Muerta shale basin.

Subsequent to the end of the second quarter, Calfrac purchased the 20 percent non-controlling interest in its Argentinean operations.

CORPORATE
Having completed a refinancing of the Company's long-term indebtedness, which included the repayment of the second lien term loan, Calfrac's focus at the Corporate level will be building free cash flow to reduce debt levels while examining opportunities to manage its fleet and client base for the long-term benefit of all stakeholders.

FINANCIAL OVERVIEW – THREE MONTHS ENDED JUNE 30, 2018 VERSUS 2017

CANADA

Three Months Ended June 30,


2018

2017

Change

(C$000s, except operational information)


($)

($)

(%)

(unaudited)





Revenue


131,872

111,313

18

Expenses






Operating


117,439

95,947

22


SG&A                                                     


3,283

2,176

51



120,722

98,123

23

Operating income(1)


11,150

13,190

(15)

Operating income (%)


8.5

11.8

(28)

Fracturing revenue per job ($)


26,618

25,475

4

Number of fracturing jobs


4,478

3,957

13

Active pumping horsepower, end of period (000s)


322

250

29

Idle pumping horsepower, end of period (000s)


33

157

(79)

Total pumping horsepower, end of period (000s)


355

407

(13)

Coiled tubing revenue per job ($)


20,223

22,181

(9)

Number of coiled tubing jobs


624

457

37

Active coiled tubing units, end of period (#)


11

9

22

Idle coiled tubing units, end of period (#)


4

4

Total coiled tubing units, end of period (#)


15

13

15

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

 

REVENUE
Revenue from Calfrac's Canadian operations during the second quarter of 2018 was $131.9 million versus $111.3 million in the same period of 2017. Completions activity in Canada during the second quarter of 2018 began slowly as spring break-up conditions impacted operations in April. In May and June, activity increased significantly, which included a number of multi-well pad operations that provided consistent activity and revenue. As road conditions improved through May, the Company was able to maintain high utilization across its Canadian operations. Since the end of the second quarter of 2017, the Company reactivated 72,000 horsepower and two deep coiled tubing units were transferred from the United States. Through a combination of this broader operating scale and better pricing, the Company increased its revenue in the second quarter of 2018 by 18 percent from the comparative quarter in 2017. The number of fracturing jobs increased by 13 percent mainly due to a more active and efficient customer base versus the same period in 2017. The number of coiled tubing jobs increased by 37 percent from the second quarter in 2017, primarily due to higher equipment utilization and larger operating scale.

OPERATING INCOME
Operating income in Canada during the second quarter of 2018 was $11.1 million compared to $13.2 million in the same period of 2017. The decrease in operating income was primarily due to increased costs for fuel and products during the quarter, which the Company was not able to fully pass through to all of its customers. In addition, the Company operated under a larger fixed cost structure due to the additional two fracturing crews and two coiled tubing units compared to the same quarter in 2017. The $1.1 million increase in SG&A expenses compared to the second quarter in 2017 was primarily due to the reinstatement of compensation that was scaled back through the downturn. Additionally, the Company allocated a greater proportion of its corporate SG&A costs to its operating divisions during the quarter.

UNITED STATES

Three Months Ended June 30,

2018

2017

Change

(C$000s, except operational and exchange rate information)

($)

($)

(%)

(unaudited)




Revenue

342,036

153,946

122

Expenses





Operating

268,407

125,407

114


SG&A                                                                

4,605

3,362

37


273,012

128,769

112

Operating income(1)

69,024

25,177

174

Operating income (%)

20.2

16.4

23

Fracturing revenue per job ($)

58,298

41,292

41

Number of fracturing jobs

5,845

3,606

62

Active pumping horsepower, end of period (000s)

806

432

87

Idle pumping horsepower, end of period (000s)

47

286

(84)

Total pumping horsepower, end of period (000s)

853

718

19

Active coiled tubing units, end of period (#)

Idle coiled tubing units, end of period (#)

2

5

(60)

Total coiled tubing units, end of period (#)

2

5

(60)

Active cementing units, end of period (#)

Idle cementing units, end of period (#)

10

11

(9)

Total cementing units, end of period (#)

10

11

(9)

US$/C$ average exchange rate(2)

1.2911

1.3449

(4)

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

(2) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's United States operations increased to $342.0 million during the second quarter of 2018 from $153.9 million in the comparable quarter of 2017. The Company recorded a 62 percent increase in the number of fracturing jobs completed period-over-period, driven by higher demand and more active equipment operating in the field as compared to the same period in 2017. Revenue per job increased 41 percent year-over-year due to improved pricing combined with the impact of job mix as the Company's operations in Texas and New Mexico resulted in the completion of larger overall job sizes. The 4 percent depreciation in the U.S. dollar versus the Canadian dollar partially offset the increase in revenue.

OPERATING INCOME
The Company's United States operations generated operating income of $69.0 million during the second quarter of 2018 compared to $25.2 million in the same period in 2017. The significant increase was primarily the result of improved utilization and pricing in Colorado, North Dakota and Pennsylvania, as well as the addition of operations in Texas and New Mexico that did not commence until the third quarter of 2017. Operating results included $5.0 million of costs associated with the reactivation of one fleet that will be deployed in the third quarter of 2018. SG&A expenses increased by 37 percent in the second quarter of 2018 due to higher personnel costs combined with growth in business scale and increased activity. Additionally, the Company allocated a greater proportion of its corporate SG&A costs to its operating divisions during the quarter.

RUSSIA

Three Months Ended June 30,

2018

2017

Change

(C$000s, except operational and exchange rate information)

($)

($)

(%)

(unaudited)




Revenue

25,025

31,492

(21)

Expenses





Operating

25,069

25,710

(2)


SG&A                                                                      

751

943

(20)


25,820

26,653

(3)

Operating (loss) income(1)

(795)

4,839

NM

Operating (loss) income (%)

(3.2)

15.4

NM

Fracturing revenue per job ($)

81,392

72,041

13

Number of fracturing jobs

256

366

(30)

Pumping horsepower, end of period (000s)

77

70

10

Coiled tubing revenue per job ($)

39,894

44,181

(10)

Number of coiled tubing jobs

105

116

(9)

Active coiled tubing units, end of period (#)

6

6

Idle coiled tubing units, end of period (#)

1

1

Total coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0208

0.0235

(11)

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

(2) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's Russian operations decreased by 21 percent during the second quarter of 2018 to $25.0 million from $31.5 million in the corresponding three-month period of 2017. The decrease in revenue was largely attributable to a decrease in fracturing activity in Noyabrsk combined with the discontinuation of operations in Usinsk. Revenue per fracturing job increased by 13 percent primarily due to the impact of providing sand to a significant customer during the second quarter of 2018 and not in the comparable quarter. Coiled tubing activity decreased by 9 percent, primarily due to lower utilization than expected with one of its customers. The 11 percent depreciation of the Russian rouble in the second quarter in 2018 versus the same period in 2017 also contributed to the decrease in reported revenue.

OPERATING (LOSS) INCOME
The Company's Russian division had a operating loss of $0.8 million during the second quarter of 2018 compared to an operating income of $4.8 million in the comparable quarter in 2017. The operating loss was primarily due to lower equipment utilization in Noyabrsk. Weather-related delays in moving equipment from Usinsk to Western Siberia further impeded utilization. SG&A expenses were $0.2 million lower than the comparable quarter in 2017 primarily due to a reduction in personnel costs.

ARGENTINA

Three Months Ended June 30,

2018

2017

Change

(C$000s, except operational and exchange rate information)

($)

($)

(%)

(unaudited)




Revenue

45,669

28,593

60

Expenses





Operating

41,221

28,122

47


SG&A                                                                      

2,367

2,712

(13)


43,588

30,834

41

Operating income (loss)(1)

2,081

(2,241)

NM

Operating income (loss) (%)

4.6

(7.8)

NM

Total pumping horsepower, end of period (000s)

108

122

(11)

Active cementing units, end of period (#)

11

12

(8)

Idle cementing units, end of period (#)

2

2

Total cementing units, end of period (#)

13

14

(7)

Active coiled tubing units, end of period (#)

5

6

(17)

Idle coiled tubing units, end of period (#)

1

1

Total coiled tubing units, end of period (#)

6

7

(14)

Argentinean peso/C$ average exchange rate(2)

0.0551

0.0854

(35)

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

(2) Source: Bank of Canada and Bloomberg.

 

REVENUE
Calfrac's Argentinean operations generated total revenue of $45.7 million during the second quarter of 2018 versus $28.6 million in the comparable three-month period in 2017. Revenue in Argentina was 60 percent higher than the comparable quarter primarily due to higher fracturing activity in all operating areas, including the Vaca Muerta shale play. The increase in revenue was partially offset by lower cementing activity in northern Argentina combined with the impact of union strikes in southern Argentina during the early part of the quarter. Coiled tubing revenue in Argentina increased year-over-year due to the completion of larger coiled tubing jobs during the second quarter of 2018 in unconventional gas plays.

OPERATING INCOME (LOSS)
The Company's operations in Argentina generated operating income of $2.1 million during the second quarter of 2018 compared to a loss of $2.2 million in the second quarter of 2017. The Company achieved modest positive operating income through a combination of improved utilization and cost controls during the quarter as it continued to transition to unconventional operations in Argentina. The comparable quarter in 2017 included $1.4 million in one-time costs that were not repeated in 2018. SG&A expenses were 13 percent lower during the second quarter in 2018 compared to the second quarter in 2017 primarily due to lower personnel expenses.

CORPORATE

Three Months Ended June 30,




2018

2017

Change

(C$000s)




($)

($)

(%)

(unaudited)







Expenses








Operating




1,615

745

117


SG&A                         




13,317

3,480

283





14,932

4,225

253

Operating loss(1)




(14,932)

(4,225)

253

% of Revenue




2.7

1.3

108

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

 

OPERATING LOSS
Corporate expenses for the second quarter of 2018 were $14.9 million compared to $4.2 million in the second quarter of 2017. Operating expenses were $0.9 million higher primarily due to higher personnel costs during the quarter. SG&A expenses increased by $9.8 million primarily due to a $6.7 million increase in stock-based compensation expense recorded during the quarter. The remaining increase related to the reinstatement of compensation that was scaled back through the downturn, offset partially by the allocation of costs that were attributed to the Company's operating divisions.

DEPRECIATION
For the three months ended June 30, 2018, depreciation expense increased by $7.3 million to $39.0 million from $31.7 million in the corresponding quarter of 2017. The increase in depreciation was primarily due to the $76.3 million impairment reversal that was recorded during the fourth quarter of 2017 combined with capital expenditures related to the continued activation of fleets in North America during 2017 and 2018.

FOREIGN EXCHANGE GAINS AND LOSSES
The Company recorded a foreign exchange loss of $32.5 million during the second quarter of 2018 versus a loss of $16.3 million in the comparative three-month period of 2017. 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 and Argentina, and liabilities held in Canadian dollars in Russia. The Company's foreign exchange loss for the second quarter of 2018 was largely attributable to the translation of U.S. dollar-denominated liabilities held in Argentina as the value of the Argentinean peso depreciated 44 percent against the U.S. dollar during the second quarter. U.S. dollar-denominated assets held in Canada partially offset the foreign exchange loss during the quarter.

INTEREST
The Company's net interest expense of $43.1 million for the second quarter of 2018 was $21.0 million higher than in the comparable period of 2017. This increase was partially due to the repayment of the Company's second lien term loan during the period and resulted in the write-off of deferred financing costs of $5.8 million. In addition, the Company closed a private offering of US$650.0 million aggregate principal amount of its 8.50 percent senior notes during the second quarter, which were used to repay all of its outstanding 7.50 percent senior notes due 2020. The early repayment of these notes resulted in a make-whole interest payment of $10.4 million during the second quarter in 2018 and the write-off of the remaining $5.0 million unamortized deferred finance costs.

INCOME TAXES
The Company recorded an income tax recovery of $19.4 million during the second quarter of 2018 compared to a recovery of $12.4 million in the comparable period of 2017. The recovery position was the result of pre-tax losses incurred during the quarter in Canada, Russia and Argentina which partially offset positive income in the United States. The effective tax recovery rate of 33 percent was slightly lower than the tax recovery rate of 36 percent in the comparable quarter in 2017.

SUMMARY OF QUARTERLY RESULTS

Three Months Ended

Sep. 30,

Dec. 31,

Mar. 31,

Jun. 30,

Sep. 30,

Dec. 31,

Mar. 31,

Jun. 30,


2016

2016

2017

2017

2017

2017

2018

2018

(C$000s, except per share and operating data)

($)

($)

($)

($)

($)

($)

($)

($)

(unaudited)









Financial









Revenue

174,925

192,846

268,815

325,344

448,090

485,456

582,838

544,602

Operating income (loss)(1)

(12,392)

(18,291)

20,395

36,740

78,196

44,789

67,974

66,528


Per share – basic

(0.11)

(0.15)

0.15

0.27

0.57

0.32

0.47

0.46


Per share – diluted

(0.11)

(0.15)

0.15

0.27

0.57

0.31

0.46

0.45

Adjusted EBITDA(1)

(11,055)

(13,717)

21,584

39,913

81,113

49,213

72,953

81,910


Per share – basic

(0.10)

(0.11)

0.16

0.29

0.59

0.35

0.51

0.57


Per share – diluted

(0.10)

(0.11)

0.16

0.29

0.59

0.34

0.50

0.56

Net income (loss) attributable to the









shareholders of Calfrac

(40,862)

(61,493)

(19,547)

(20,349)

7,822

38,013

3,234

(32,838)


Per share – basic

(0.35)

(0.51)

(0.14)

(0.15)

0.06

0.27

0.02

(0.23)


Per share – diluted                              

(0.35)

(0.51)

(0.14)

(0.15)

0.06

0.26

0.02

(0.23)

Capital expenditures

6,907

15,708

12,965

22,358

22,093

34,518

51,334

42,404

Working capital (end of period)

269,081

271,581

278,818

293,411

334,606

327,049

360,654

361,613

Total equity (end of period)

501,926

497,458

485,452

463,180

477,188

543,645

546,018

507,607










Operating (end of period)









Active pumping horsepower (000s)

644

659

727

874

1,057

1,115

1,259

1,313

Idle pumping horsepower (000s)

578

563

493

443

338

280

134

80

Total pumping horsepower (000s)

1,222

1,222

1,220

1,317

1,395

1,395

1,393

1,393

Active coiled tubing units (#)

20

19

20

21

21

21

22

22

Idle coiled tubing units (#)

12

13

12

11

11

9

8

8

Total coiled tubing units (#)

32

32

32

32

32

30

30

30

Active cementing units (#)

14

14

12

12

12

12

12

11

Idle cementing units (#)

11

11

13

13

13

11

11

12

Total cementing units (#)

25

25

25

25

25

23

23

23

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

 

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 2017 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 and Argentinean currency (refer to "Business Risks - Foreign Exchange Fluctuations" in the 2017 Annual Report).

FINANCIAL OVERVIEW – SIX MONTHS ENDED JUNE 30, 2018 VERSUS 2017

CANADA

Six Months Ended June 30,


2018

2017

Change

(C$000s, except operational information)


($)

($)

(%)

(unaudited)





Revenue


321,600

222,331

45

Expenses






Operating


271,881

192,400

41


SG&A                                                    


6,859

4,298

60



278,740

196,698

42

Operating income(1)


42,860

25,633

67

Operating income (%)


13.3

11.5

16

Fracturing revenue per job ($)


21,762

19,983

9

Number of fracturing jobs


13,408

10,023

34

Active pumping horsepower, end of period (000s)


322

250

29

Idle pumping horsepower, end of period (000s)


33

157

(79)

Total pumping horsepower, end of period (000s)


355

407

(13)

Coiled tubing revenue per job ($)


22,891

21,585

6

Number of coiled tubing jobs


1,119

1,004

11

Active coiled tubing units, end of period (#)


11

9

22

Idle coiled tubing units, end of period (#)


4

4

Total coiled tubing units, end of period (#)(2)


15

13

15

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

 

REVENUE
Revenue from Calfrac's Canadian operations during the first six months in 2018 was $321.6 million versus $222.3 million in the same period in 2017. Completions activity in Canada during the first six months of 2018 improved when compared to the same period in 2017. The number of fracturing and coiled tubing jobs increased by 34 percent and 11 percent, respectively, due to a larger operating scale combined with a more active and efficient customer base as compared to the same period in 2017. Revenue per fracturing job increased by 9 percent from the prior year while coiled tubing revenue per job was up 6 percent primarily due to higher pricing and job mix.

OPERATING INCOME
The Company's Canadian division generated operating income of $42.9 million during the first half of 2018 compared to $25.6 million in 2017. The increase was due to significantly improved utilization and better pricing compared to the same period in 2017. The 13 percent operating income margin was negatively impacted by higher than expected third-party sand transportation costs during the first quarter, due primarily to temporary industry-wide logistical conditions that required the transportation of sand from outside Calfrac's optimal logistics network. Higher costs for diesel fuel and products also reduced operating income margins. The $2.6 million increase in SG&A expenses compared to the first half of 2017 was primarily due to the full reinstatement of compensation. Additionally, the Company allocated a greater proportion of its corporate SG&A costs to its operating divisions during the period, and the implementation of IFRS 9, as described in note 2 of the interim consolidated financial statements, resulted in a higher reported bad debt expense.

UNITED STATES

Six Months Ended June 30,

2018

2017

Change

(C$000s, except operational and exchange rate information)

($)

($)

(%)

(unaudited)




Revenue

658,016

251,990

161

Expenses





Operating

526,013

211,148

149


SG&A                                                                  

9,730

5,665

72


535,743

216,813

147

Operating income(1)

122,273

35,177

248

Operating income (%)

18.6

14.0

33

Fracturing revenue per job ($)

58,798

39,055

51

Number of fracturing jobs

11,154

6,323

76

Active pumping horsepower, end of period (000s)

806

432

87

Idle pumping horsepower, end of period (000s)

47

286

(84)

Total pumping horsepower, end of period (000s)

853

718

19

Active coiled tubing units, end of period (#)

Idle coiled tubing units, end of period (#)

2

5

(60)

Total coiled tubing units, end of period (#)

2

5

(60)

Active cementing units, end of period (#)

Idle cementing units, end of period (#)

10

11

(9)

Total cementing units, end of period (#)

10

11

(9)

US$/C$ average exchange rate(2)

1.2779

1.3340

(4)

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

(2) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's United States operations increased to $658.0 million during the first six months in 2018 from $252.0 million in the comparable period in 2017 due to significantly higher fracturing activity and improved pricing. Completions activity in the United States significantly improved year-over-year, which allowed the Company to reactivate equipment throughout 2017 and 2018, including the start-up of operations in Texas and New Mexico. The result was a 76 percent increase in the number of fracturing jobs completed period-over-period. Revenue per job increased 51 percent year-over-year due to improved pricing combined with the impact of job mix as the Company's operations in Texas resulted in higher overall job sizes. The 4 percent depreciation in the U.S. dollar versus the Canadian dollar partially offset the increase in revenue.

OPERATING INCOME
The Company's United States division generated operating income of $122.3 million during the first six months in 2018 compared to $35.2 million during the same period in 2017. The significant increase was primarily the result of improved utilization and pricing in Colorado, North Dakota and Pennsylvania, as well as the addition of operations in Texas and New Mexico that did not commence until the third quarter of 2017. The operating income of 19 percent during the first half of 2018 was negatively impacted by market-driven logistical issues that resulted in higher than normal transportation and sand costs during the first three months of the year. These conditions abated during the second quarter; however, cost inflation continued, with products and fuel experiencing the largest increases. In addition, operating results included $10.0 million of reactivation costs during the first half of 2018. SG&A expenses increased by 72 percent in the first half of 2018 due to higher personnel costs combined with growth in business scale and increased activity. Additionally, the Company allocated a greater proportion of its corporate SG&A costs to its operating divisions during 2018, and the implementation of IFRS 9, as described in note 2 of the interim consolidated financial statements, resulted in a higher reported bad debt expense.

RUSSIA

Six Months Ended June 30,

2018

2017

Change

(C$000s, except operational and exchange rate information)

($)

($)

(%)

(unaudited)




Revenue

56,260

59,218

(5)

Expenses





Operating

56,386

52,877

7


SG&A                                                                     

1,627

1,628


58,013

54,505

6

Operating (loss) income(1)

(1,753)

4,713

NM

Operating (loss) income (%)

(3.1)

8.0

NM

Fracturing revenue per job ($)

84,827

75,647

12

Number of fracturing jobs

561

663

(15)

Pumping horsepower, end of period (000s)

77

70

10

Coiled tubing revenue per job ($)

38,716

45,779

(15)

Number of coiled tubing jobs

224

198

13

Active coiled tubing units, end of period (#)

6

6

Idle coiled tubing units, end of period (#)

1

1

Total coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0215

0.0230

(7)

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

(2) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's Russian operations during the first six months in 2018 decreased by 5 percent to $56.3 million from $59.2 million in the comparable period in 2017. The decrease in revenue, which is generated in roubles, was partially related to lower fracturing activity combined with the 7 percent depreciation of the Russian rouble in 2018 versus 2017. Revenue per fracturing job increased by 12 percent due to the impact of providing sand to a significant customer during the first half of 2018 and not in the comparable period in 2017. The decrease in fracturing revenue was partially offset by higher coiled tubing activity.

OPERATING (LOSS) INCOME
The Company's Russia division incurred an operating loss of $1.8 million during the first six months in 2018 compared to income of $4.7 million in the same period in 2017 primarily due to lower fracturing crew utilization. Calfrac's operations during the first six months of 2018 were impacted by weather-related delays and lower activity with one of its customers in Western Siberia.

ARGENTINA

Six Months Ended June 30,

2018

2017

Change

(C$000s, except operational and exchange rate information)

($)

($)

(%)

(unaudited)




Revenue

91,564

60,620

51

Expenses





Operating

86,784

55,447

57


SG&A                                                                      

5,717

5,191

10


92,501

60,638

53

Operating loss(1)

(937)

(18)

NM

Operating loss (%)

(1.0)

0.0

NM

Total pumping horsepower, end of period (000s)

108

122

(11)

Active cementing units, end of period (#)

11

12

(8)

Idle cementing units, end of period (#)

2

2

Total cementing units, end of period (#)

13

14

(7)

Active coiled tubing units, end of period (#)

5

6

(17)

Idle coiled tubing units, end of period (#)

1

1

Total coiled tubing units, end of period (#)

6

7

(14)

Argentinean peso/C$ average exchange rate(2)

0.0597

0.0850

(30)

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

(2) Source: Bank of Canada and Bloomberg.

 

REVENUE
Calfrac's Argentinean operations generated total revenue of $91.6 million during the first half of 2018 versus $60.6 million in the comparable six-month period in 2017. Revenue in Argentina was 51 percent higher than the comparable quarter primarily due to higher activity in the Vaca Muerta shale play. The increase in revenue was partially offset by lower cementing activity in northern Argentina combined with the impact of union strikes in southern Argentina during the first quarter of 2018. Coiled tubing revenue in Argentina increased year-over-year due to increased activity in unconventional resource plays in Neuquen which also resulted in higher revenue per job.

OPERATING LOSS
The Company's operations in Argentina generated an operating loss of $0.9 million during the first six months of 2018 compared to near break-even in the comparable period in 2017. Although the Company improved its revenue during the first half in 2018, operating margins were negatively impacted by the continued transition to unconventional operations in Argentina. The Company also incurred higher maintenance and sand management costs than the comparable period in 2017, which contributed to the decrease in operating income. Additionally, there were a number of one-time costs recorded during the first half of 2018 including $0.8 million in restructuring charges, a $0.4 million inventory write-down and $0.2 million in bad debt expense. Similarly, the Company had $1.0 million in one-time costs during the first six months of 2017 related to the retrofitting of equipment and $0.4 million of restructuring costs.

CORPORATE

Six Months Ended June 30,




2018

2017

Change

(C$000s)




($)

($)

(%)

(unaudited)







Expenses








Operating




2,793

1,735

61


SG&A                    




25,148

6,635

279





27,941

8,370

234

Operating loss(1)




(27,941)

(8,370)

234

% of Revenue




2.5

1.4

79

(1) Refer to "Non-GAAP Measures" on pages 21 and 22 for further information.

 

OPERATING LOSS
Corporate expenses for the first six months in 2018 were $27.9 million compared to $8.4 million in the comparable period in 2017. Operating expenses were $1.1 million higher primarily due to higher personnel costs during the period. SG&A expenses increased by $18.5 million primarily due to a $14.1 million increase in stock-based compensation expense recorded during the first half of 2018. The remaining increase related to the full reinstatement of compensation, offset partially by the allocation of costs that were attributed to the Company's operating divisions.

DEPRECIATION
Depreciation expense for first six months in 2018 increased by 21 percent to $77.3 million from $63.7 million in the comparable period in 2017. The increase in depreciation was primarily due to the $76.3 million impairment reversal that was recorded during the fourth quarter of 2017 combined with capital expenditures related to the continued activation of fleets in North America during 2017 and 2018.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $33.1 million during the first six months in 2018 versus a loss of $12.6 million in the same period in 2017. 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 and Argentina, and liabilities held in Canadian dollars in Russia. The Company's foreign exchange loss for the first six months of 2018 was largely attributable to the translation of U.S. dollar-denominated liabilities held in Argentina as the value of the Argentinean peso depreciated 56 percent against the U.S. dollar during the first half of 2018. U.S. dollar-denominated assets held in Canada partially offset the foreign exchange loss during the period.

INTEREST
The Company's interest expense was $63.8 million during the first six months in 2018 versus $43.4 million in 2017. The $20.4 million increase was partially due to the repayment of the Company's second lien term loan during the period which resulted in the write-off of the remaining deferred financing costs of $5.8 million. In addition, the Company closed a private offering of US$650.0 million aggregate principal amount of 8.50 percent senior notes during the second quarter, which were used to repay all of its outstanding 7.50 percent senior notes due 2020. The early repayment of these notes resulted in a make-whole interest payment of $10.4 million during the second quarter in 2018 and the write-off of the remaining $5.0 million unamortized deferred finance costs. The increase was offset partially by the impact of a stronger Canadian dollar relative to the U.S. dollar compared to the same period in 2017, which resulted in lower reported interest on the Company's U.S. dollar-denominated unsecured notes.

INCOME TAXES
The Company recorded an income tax recovery of $20.0 million during the first six months in 2018 compared to a recovery of $23.2 million in the comparable period in 2017. Positive income in the United States was more than offset by pre-tax losses incurred during the period in Canada, Russia and Argentina, which resulted in the tax recovery position. The effective tax recovery rate of 35 percent was consistent with the tax recovery rate of 36 percent in the comparable six-month period in 2017.

LIQUIDITY AND CAPITAL RESOURCES


Three Months Ended June. 30,

Six Months Ended June 30,


2018

2017

2018

2017

(C$000s)

($)

($)

($)

($)

(unaudited)





Cash provided by (used in):






Operating activities

22,718

(35,076)

14,485

(68,165)


Financing activities

9,799

28,009

39,082

42,544


Investing activities

(33,650)

(19,388)

(80,957)

(28,398)


Effect of exchange rate changes on cash






and cash equivalents

(16,057)

(9,962)

(12,353)

(6,525)

Decrease in cash and cash equivalents

(17,190)

(36,417)

(39,743)

(60,544)

 

OPERATING ACTIVITIES
The Company's cash provided by operating activities for the three months ended June 30, 2018 was $22.7 million versus cash used of $35.1 million in the second quarter of 2017. The increase in cash provided by operations was primarily due to significantly improved operating results in the United States and a lower working capital requirement ($11.3 million versus $36.6 million). At June 30, 2018, Calfrac's working capital was approximately $361.6 million compared to $327.0 million at December 31, 2017.

FINANCING ACTIVITIES
Net cash provided by financing activities for the three months ended June 30, 2018 was $9.8 million compared to $28.0 million in the comparable period in 2017. During the three months ended June 30, 2018, the Company received net funds from the issuance of senior notes of $822.1 million, had net borrowings under its credit facilities of $157.2 million, proceeds of $0.8 million from the issuance of common shares, repaid senior notes totalling $773.8 million and made principal payments under its term loan of $196.5 million.

On May 31, 2018 the Company repaid in full the remaining $196.5 million principal amount of its second lien senior secured term loan facility with AIMCo. The term loan, which had a maturity date of September 30, 2020 provided Calfrac the right to prepay the loan prior to June 10, 2018 with a nominal prepayment premium.

On May 30, 2018, Calfrac closed a private offering of US$650.0 million aggregate principal amount of 8.50 percent senior notes due 2026. Fixed interest on the notes is payable on June 15 and December 15 of each year. The notes will mature on June 15, 2026, and provide Calfrac with the option to redeem up to 10% of the aggregate principal amount of the notes at a redemption price of 108.50% of the principal amount using the proceeds of asset sales at any time prior to December 15, 2019. The Company used a portion of the net proceeds from the offering of the notes to repay all of its outstanding 7.50 percent senior notes due 2020.

On May 9, 2018, Calfrac amended its credit facilities to exercise $100.0 million of accordion capacity which increased its total facility capacity from $275.0 million to $375.0 million. The facilities consist of an operating facility of $27.5 million and a syndicated facility of $347.5 million. The Company's credit facilities mature on June 1, 2020 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. 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 2.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.50 percent above the respective base rates. The accordion feature of the syndicated facility was reduced to $100.0 million, and is available to the Company during the term of the agreement. The Company incurs interest at the high end of the ranges outlined above if its net Total Debt to Adjusted EBITDA ratio is above 4.00:1.00. Additionally, in the event that the Company's net Total Debt to Adjusted EBITDA ratio is above 5.00:1.00, certain restrictions would apply including the following: (a) acquisitions will be subject to majority lender consent; (b) distributions will be restricted other than those relating to the Company's share unit plans, and no increase in the rate of dividends will be permitted; and (c) the Company will be prohibited from utilizing advances under the credit facilities to redeem or repay subordinated debt. As at June 30, 2018, the Company's net Total Debt to Adjusted EBITDA ratio was 3.75:1.00.

Advances under the credit facilities are limited by a borrowing base. The borrowing base is calculated based on the following:

      1. Eligible North American accounts receivable, which is based on 75 percent of accounts receivable owing by companies rated BB+ or lower by Standard & Poor's (or a similar rating agency) and 85 percent of accounts receivable from companies rated BBB- or higher;
      2. 100 percent of unencumbered cash of the parent company and its U.S. operating subsidiary, excluding any cash held in a segregated account for the purposes of a potential equity cure; and
      3. 25 percent of the net book value of property, plant and equipment (PP&E) of the parent company and its U.S. operating subsidiary. The value of PP&E excludes assets under construction and is limited to $125.0 million.

At June 30, 2018, the Company had used $0.9 million of its credit facilities for letters of credit and had $215.0 million of borrowings under its credit facilities, leaving $159.1 million in available capacity under its credit facilities. As described above, the Company's credit facilities are subject to a monthly borrowing base calculation, which at June 30, 2018 resulted in a liquidity amount of $88.0 million.

The Company's credit facilities contain certain financial covenants as shown below.






Working capital ratio not to fall below




1.15x

Funded Debt to Adjusted EBITDA not to exceed(1)(2)




3.00x

Funded Debt to Capitalization not to exceed(1)(3)




0.30x

(1) Funded Debt is defined as Total Debt excluding all outstanding senior unsecured notes. Total Debt includes bank loans and long-term debt (before unamortized debt issuance costs and debt discount) plus outstanding letters of credit. For the purposes of the Total Debt to Adjusted EBITDA ratio, the Funded Debt to Capitalization Ratio and the Funded Debt to Adjusted EBITDA ratio, the amount of Total Debt or Funded Debt, as applicable, is reduced by the amount of cash on hand with lenders (excluding any cash held in a segregated account for the purposes of a potential equity cure).

(2) Adjusted EBITDA is defined as net income or loss for the period adjusted for interest, taxes, depreciation and amortization, non-cash stock-based compensation, non-controlling interest, and gains and losses that are extraordinary or non-recurring.

(3) Capitalization is Total Debt plus equity attributable to the shareholders of Calfrac.

 

Proceeds from equity offerings may be applied, as an equity cure, in the calculation of Adjusted EBITDA towards the Funded Debt to Adjusted EBITDA covenant for any of the quarters ending prior to and including June 30, 2020 subject to certain conditions including:

      1. the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;
      2. the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;
      3. the maximum proceeds of each common share issuance permitted to be attributed to Adjusted EBITDA cannot exceed the greater of 50 percent of Adjusted EBITDA on a trailing four-quarter basis and $25.0 million; and
      4. if proceeds are not used immediately as an equity cure they must be held in a segregated bank account pending an election to use them for such purpose, and if they are removed from such account but not used as an equity cure they will no longer be eligible for such use.

On December 6, 2016, Calfrac closed a bought deal private placement of 21,055,000 common shares for net proceeds of approximately $56.6 million. On December 22, 2015, Calfrac closed a bought deal private placement of 20,370,370 common shares for net proceeds of approximately $25.2 million. $50.0 million of the net proceeds from these offerings were held in a segregated account pending an election to use them as an equity cure. On April 3, 2017, the Company elected to use the first of its two fully-funded $25.0 million equity cures effective as of the quarter ending on June 30, 2017. The September 2017 amendments to the credit facilities provided that the Company can utilize two equity cures during the term of the credit facilities subject to the conditions described above, and confirmed that the previously funded $25.0 million equity cure could continue to be held in a segregated account to be used as an equity cure if required at a future date. To utilize an equity cure, the Company must provide notice of any such election to the lending syndicate at any time prior to the filing of its quarterly financial statements for the applicable quarter on SEDAR. Amounts used as an equity cure prior to June 30, 2020 will increase Adjusted EBITDA over the relevant twelve-month rolling period and will also serve to reduce Funded Debt. The funds that were removed from the segregated account and utilized as an equity cure for the quarter ending on June 30, 2017, as described above, were used for general working capital and corporate purposes. On April 30, 2018, the remaining $25.0 million was removed from the segregated account without being designated as an equity cure. This decision was based on the Company's Adjusted EBITDA performance during its most recent four-quarter period prior to such removal, combined with the supportive commodity price environment and visibility on future activity at the time. The funds were used to reduce outstanding indebtedness.

As shown in the table below, at June 30, 2018, the Company was in compliance with the financial covenants associated with its credit facilities.




Covenant

Actual

As at June 30,



2018

2018

Working capital ratio not to fall below



1.15x

2.43x

Funded Debt to Adjusted EBITDA not to exceed



3.00x

0.75x

Funded Debt to Capitalization not to exceed



0.30x

0.13x

 

The Company's credit facilities also contain certain restrictions with respect to dispositions of property or assets in Canada and the United States. For such dispositions occurring on or prior to December 31, 2018, majority lender consent is required if the aggregate market value exceeds $40.0 million and for such dispositions occurring in a calendar year commencing January 1, 2019, majority lender consent is required if the aggregate market value exceeds $20.0 million. There are no restrictions pertaining to dispositions of property or assets outside of Canada and the United States, except that to the extent that advances under the credit facilities exceed $50.0 million at the time of any such dispositions, Calfrac must use the resulting proceeds to reduce the advances to less than $50.0 million before using the balance for other purposes.

The indenture governing the senior unsecured notes, which is available on SEDAR, contains restrictions on the Company's ability to pay dividends, purchase and redeem shares of the Company and make certain restricted investments, that are not defined as Permitted Investments under the indenture, in circumstances where:

      1. the Company is in default under the indenture or the making of such payment would result in a default;
      2. the Company is not meeting the Fixed Charge Coverage Ratio(1) under the indenture of at least 2:1 for the most recent four fiscal quarters, with the restricted payments regime commencing once internal financial statements are available which show that the ratio is not met on a pro forma basis for the most recently ended four fiscal quarter period; or
      3. there is insufficient room for such payment within a builder basket included in the indenture.

(1) The Fixed Charge Coverage Ratio is defined as cash flow to interest expense. Cash flow is a non-GAAP measure and does not have a standardized meaning under IFRS and is defined under the indenture as net income (loss) attributable to the shareholders of Calfrac before depreciation, extraordinary gains or losses, unrealized foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment or reversal of impairment of assets, restructuring charges, provision for settlement of litigation, stock-based compensation, interest, and income taxes. Interest expense is adjusted to exclude any non-recurring charges associated with redeeming or retiring any indebtedness prior to its maturity.

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20.0 million. As at June 30, 2018 this basket was not utilized. The indenture also restricts the ability to incur additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $375.0 million or 30 percent of the Company's consolidated tangible assets.

As at June 30, 2018, the Company's Fixed Charge Coverage Ratio of 3.37:1 was higher than the required 2:1 ratio so the aforementioned prohibitions will not be applicable as long as the Company remains above this ratio.

INVESTING ACTIVITIES
Calfrac's net cash used for investing activities was $33.7 million for the three months ended June 30, 2018 versus $19.4 million in the comparable period in 2017. Cash outflows relating to capital expenditures were $36.6 million during the second quarter in 2018 compared to $21.4 million in 2017. Capital expenditures were primarily to support the Company's North American fracturing operations. The Company disposed of assets during the second quarter for proceeds of $2.9 million compared to $2.0 million in the comparable quarter in 2017.

Calfrac's Board of Directors has approved a 2018 capital budget of $155.0 million.

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 three months ended June 30, 2018 was a loss of $16.1 million versus a loss of $10.0 million during the comparable period in 2017. These losses relate to cash and cash equivalents held by the Company in a foreign currency.

With its 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 2018 and beyond.

At June 30, 2018, the Company had cash and cash equivalents of $13.0 million.

OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of common shares. Employees have been granted both performance share units as well as options to purchase common shares under the Company's shareholder-approved equity compensation plans. The number of shares reserved for issuance under the stock option plan and performance share unit plan is equal to 10 percent of the Company's issued and outstanding common shares. As at July 20, 2018, there were 144,453,957 common shares issued and outstanding, 313,644 equity-based performance share units issued and outstanding and 9,996,845 options to purchase common shares.

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, use of funds held in the Company's segregated bank account (as an equity cure or otherwise), 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 financing activities and restrictions including with regard to its credit agreement and the indenture pursuant to which its senior notes were issued and its ability to raise capital, treatment under government regulatory regimes, commodity prices, anticipated outcomes of specific events (including exposure under existing legal proceedings), expectations regarding trends in, and the growth prospects of, the global oil and natural gas industry, the Company's 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 cost reduction measures instituted by the Company, 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: excess oilfield equipment levels; regional competition; the availability of capital on satisfactory terms; restrictions resulting from compliance with debt covenants and risk of acceleration of indebtedness; direct and indirect exposure to volatile credit markets, including credit rating risk; currency exchange rate risk; risks associated with foreign operations; operating restrictions and compliance costs associated with legislative and regulatory initiatives relating to hydraulic fracturing and the protection of workers and the environment; changes in legislation and the regulatory environment; dependence on, and concentration of, major customers; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; liabilities and risks associated with prior operations; failure to maintain the Company's safety standards and record; failure to realize anticipated benefits of acquisitions and dispositions; the ability to integrate technological advances and match advances from competitors; intellectual property risks; sourcing, pricing and availability of raw materials, component parts, equipment, suppliers, facilities and skilled personnel; and the effect of accounting pronouncements issued periodically. Further information about these and other risks and uncertainties may be found under "Business Risks" below.

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
Certain supplementary measures presented in this press release do not have any standardized meaning under IFRS and, because IFRS have been incorporated as Canadian generally accepted accounting principles (GAAP), these supplementary measures are also non-GAAP measures. These measures have been described and presented in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and ability to generate funds to finance its operations. These measures may not be comparable to similar measures presented by other entities, and are explained below.

Operating income (loss) is defined as net income (loss) before depreciation, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment of inventory, interest, and income taxes. Management believes that operating income is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac's business segments prior to consideration of how these segments are financed or taxed. In addition, management believes this measure allows investors to more accurately compare the Company's performance with its peers by providing an indication of its financial results prior to consideration of the age or size of its asset base, or the investment and accounting policies associated with its assets. Operating income (loss) for the period was calculated as follows:


Three Months Ended June 30,

Six Months Ended June 30,


2018

2017

2018

2017

(C$000s)

($)

($)

($)

($)

(unaudited)





Net loss

(38,689)

(22,370)

(37,593)

(41,963)

Add back (deduct):






Depreciation

39,008

31,748

77,289

63,703


Foreign exchange losses

32,471

16,304

33,149

12,618


Loss on disposal of property, plant and equipment

7,991

1,391

15,764

2,668


Impairment of inventory

2,058

2,058


Interest

43,060

22,101

63,814

43,354


Income taxes

(19,371)

(12,434)

(19,979)

(23,245)

Operating income

66,528

36,740

134,502

57,135

 

Adjusted EBITDA is defined in the Company's credit facilities for covenant purposes as net income or loss for the period adjusted for interest, income taxes, depreciation and amortization, unrealized foreign exchange losses (gains), non-cash stock-based compensation, non-controlling interest, and gains and losses that are extraordinary or non-recurring. Adjusted EBITDA is presented because it is used in the calculation of the Company's bank covenants. Adjusted EBITDA for the period was calculated as follows:


Three Months Ended June 30,

Six Months Ended June 30,


2018

2017

2018

2017

(C$000s)



($)

($)

(unaudited)





Net loss

(38,689)

(22,370)

(37,593)

(41,963)

Add back (deduct):






Depreciation

39,008

31,748

77,289

63,703


Unrealized foreign exchange losses

41,075

16,003

42,116

12,394


Loss on disposal of property, plant and equipment

7,991

1,391

15,764

2,668


Impairment of inventory

1,479

2,058


Provision for settlement of litigation

(139)


Restructuring charges

11

174

779

355


Stock-based compensation

1,495

1,279

2,626

2,303


Losses attributable to non-controlling interest

5,851

2,021

7,989

2,067


Interest

43,060

22,101

63,814

43,354


Income taxes

(19,371)

(12,434)

(19,979)

(23,245)

Adjusted EBITDA

81,910

39,913

154,863

61,497

 

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.

SECOND QUARTER CONFERENCE CALL
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2018 second-quarter results at 10:00 a.m. (Mountain Time) on Wednesday, July 25, 2018. 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 2593728). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS



June 30,

December 31,



2018

2017

(C$000s) (unaudited)


($)

($)

ASSETS




Current assets





Cash and cash equivalents (note 1)


13,006

52,749


Accounts receivable


408,071

359,955


Income taxes recoverable


2,995

1,759


Inventories


172,271

145,072


Prepaid expenses and deposits


18,746

16,803



615,089

576,338

Non-current assets





Property, plant and equipment


1,128,002

1,114,685


Deferred income tax assets


100,581

86,943

Total assets


1,843,672

1,777,966

LIABILITIES AND EQUITY




Current liabilities





Accounts payable and accrued liabilities


253,295

246,943


Current portion of long-term debt (note 2)


2,169


Current portion of finance lease obligations


181

177



253,476

249,289

Non-current liabilities





Long-term debt (note 2)


1,051,165

958,825


Finance lease obligations


646

737


Deferred income tax liabilities


30,778

25,470

Total liabilities


1,336,065

1,234,321

Equity attributable to the shareholders of Calfrac




Capital stock (note 3)


503,204

501,456

Contributed surplus


37,285

35,094

Loan receivable for purchase of common shares


(2,500)

(2,500)

(Deficit) retained earnings


(8,336)

21,268

Accumulated other comprehensive (loss) income


(649)

2,728



529,004

558,046

Non-controlling interest


(21,397)

(14,401)

Total equity


507,607

543,645

Total liabilities and equity


1,843,672

1,777,966

Contingencies (note 6)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF OPERATIONS 


Three Months Ended June 30,

Six Months Ended June 30,


2018

2017

2018

2017

(C$000s, except per share data) (unaudited)

($)

($)

($)

($)

Revenue

544,602

325,344

1,127,440

594,159

Cost of sales

492,759

307,680

1,021,146

577,310

Gross profit

51,843

17,664

106,294

16,849

Expenses






Selling, general and administrative

24,323

12,672

49,081

23,417


Foreign exchange losses

32,471

16,304

33,149

12,618


Loss on disposal of property, plant and equipment

7,991

1,391

15,764

2,668


Impairment of inventory

2,058

2,058


Interest

43,060

22,101

63,814

43,354


109,903

52,468

163,866

82,057

Loss before income tax

(58,060)

(34,804)

(57,572)

(65,208)

Income tax expense (recovery)






Current

(569)

708

(319)

1,544


Deferred

(18,802)

(13,142)

(19,660)

(24,789)


(19,371)

(12,434)

(19,979)

(23,245)

Net loss

(38,689)

(22,370)

(37,593)

(41,963)






Net loss attributable to:






Shareholders of Calfrac

(32,838)

(20,349)

(29,604)

(39,896)


Non-controlling interest

(5,851)

(2,021)

(7,989)

(2,067)


(38,689)

(22,370)

(37,593)

(41,963)






Loss per share (note 3)






Basic

(0.23)

(0.15)

(0.21)

(0.29)


Diluted

(0.23)

(0.15)

(0.21)

(0.29)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


Three Months Ended June 30,

Six Months Ended June 30,


2018

2017

2018

2017

(C$000s) (unaudited)

($)

($)

($)

($)

Net loss

(38,689)

(22,370)

(37,593)

(41,963)

Other comprehensive income (loss)





Items that may be subsequently reclassified to profit or loss:






Change in foreign currency translation adjustment

(2,061)

(1,195)

(2,384)

5,107

Comprehensive loss

(40,750)

(23,565)

(39,977)

(36,856)

Comprehensive loss attributable to:






Shareholders of Calfrac

(35,883)

(21,566)

(32,981)

(34,803)


Non-controlling interest

(4,867)

(1,999)

(6,996)

(2,053)


(40,750)

(23,565)

(39,977)

(36,856)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


Equity Attributable to the Shareholders of Calfrac




Share
Capital

Contributed
Surplus

Loan
Receivable
for Purchase
of Common
Shares

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings
(Deficit)

Total

Non-
Controlling
Interest

Total Equity

(C$000s) (unaudited)

($)

($)

($)

($)

($)

($)

($)

($)

Balance – Jan. 1, 2018

501,456

35,094

(2,500)

2,728

21,268

558,046

(14,401)

543,645

Net loss

(29,604)

(29,604)

(7,989)

(37,593)

Other comprehensive income (loss):










Cumulative translation adjustment

(3,377)

(3,377)

993

(2,384)

Comprehensive loss

(3,377)

(29,604)

(32,981)

(6,996)

(39,977)

Stock options:










Stock-based compensation recognized (note 4)

2,205

2,205

2,205


Proceeds from issuance of shares

1,748

(435)

1,313

1,313

Performance share units:










Stock-based compensation recognized (note 4)

421

421

421

Balance – Jun. 30, 2018

503,204

37,285

(2,500)

(649)

(8,336)

529,004

(21,397)

507,607

Balance – Jan. 1, 2017

466,445

36,040

(2,500)

(8,736)

15,329

506,578

(9,120)

497,458

Net loss

(39,896)

(39,896)

(2,067)

(41,963)

Other comprehensive income (loss):










Cumulative translation adjustment

5,093

5,093

14

5,107

Comprehensive income (loss)

5,093

(39,896)

(34,803)

(2,053)

(36,856)

Stock options:










Stock-based compensation recognized (note 4)

2,303

2,303

2,303


Proceeds from issuance of shares

350

(75)

275

275

Balance – Jun. 30, 2017

466,795

38,268

(2,500)

(3,643)

(24,567)

474,353

(11,173)

463,180

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS


Three Months Ended June 30,

Six Months Ended June 30,


2018

2017

2018

2017

(C$000s) (unaudited)

($)

($)

($)

($)

CASH FLOWS PROVIDED BY (USED IN)





OPERATING ACTIVITIES






Net loss

(38,689)

(22,370)

(37,593)

(41,963)


Adjusted for the following:







Depreciation

39,008

31,748

77,289

63,703



Stock-based compensation

1,495

1,279

2,626

2,303



Unrealized foreign exchange losses

41,075

16,003

42,116

12,394



Loss on disposal of property, plant and equipment

7,991

1,391

15,764

2,668



Impairment of inventory

2,058

2,058



Interest

43,060

22,101

63,814

43,354



Interest paid

(43,224)

(35,510)

(47,838)

(40,430)



Deferred income taxes

(18,802)

(13,142)

(19,660)

(24,789)



Changes in items of working capital

(11,254)

(36,576)

(84,091)

(85,405)

Cash flows provided by (used in) operating activities

22,718

(35,076)

14,485

(68,165)

FINANCING ACTIVITIES






Issuance of long-term debt, net of debt issuance costs

1,019,367

28,729

1,048,848

43,729


Long-term debt repayments

(1,010,368)

(629)

(1,010,992)

(1,256)


Finance lease obligation repayments

(44)

(105)

(87)

(204)


Proceeds on issuance of common shares

844

14

1,313

275

Cash flows provided by financing activities

9,799

28,009

39,082

42,544

INVESTING ACTIVITIES






Purchase of property, plant and equipment

(36,553)

(21,385)

(85,774)

(31,768)


Proceeds on disposal of property, plant and equipment

2,903

1,997

4,824

3,370


Other

(7)

Cash flows used in investing activities

(33,650)

(19,388)

(80,957)

(28,398)

Effect of exchange rate changes on cash and cash equivalents

(16,057)

(9,962)

(12,353)

(6,525)

Decrease in cash and cash equivalents

(17,190)

(36,417)

(39,743)

(60,544)

Cash and cash equivalents, beginning of period

30,196

85,790

52,749

109,917

Cash and cash equivalents, end of period (note 1)

13,006

49,373

13,006

49,373

See accompanying notes to the consolidated financial statements.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the three and six months ended June 30, 2018 and 2017
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated)

1.  CASH AND CASH EQUIVALENTS
During 2016, the Company received net proceeds of $56,636 from a private placement offering of 21,055,000 common shares for total gross proceeds of $60,007. Share issuance costs for the transaction were $3,371, resulting in net proceeds of $56,636.

Prior to April 3, 2017, $50,000 of the net proceeds from the private placement was held in a segregated account. These funds were available for use at the Company's discretion and were eligible to be transferred to its operating bank account at any time. The Company could also elect to use the proceeds as an equity cure. When the proceeds are utilized as an equity cure, the funds are transferred to the Company's operating bank account and are available for use at the Company's discretion. In addition, proceeds used in this manner would be applied as a reduction of Funded Debt and included in the calculation of EBITDA for purposes of the Company's Funded Debt to EBITDA bank covenant.

On April 3, 2017, the Company elected to use the first of its two fully-funded $25,000 equity cures effective as of the quarter ending on June 30, 2017. On April 30, 2018, the remaining $25,000 was transferred from the segregated account without being designated as an equity cure.

2.  LONG-TERM DEBT


June 30,

December 31,


2018

2017

(C$000s)

($)

($)

US$650,000 senior unsecured notes (December 31, 2018 – US$600,000) due June 15, 2026,



bearing interest at 8.50% payable semi-annually

855,920

752,700

$200,000 second lien senior secured term loan facility due September 30, 2020, bearing



interest at 9% payable quarterly, secured by the Canadian and U.S. assets of the Company



on a second priority basis

197,000

$347,500 extendible revolving term loan facility, secured by Canadian and U.S. assets of the Company

215,000

25,000

Less: unamortized debt issuance costs

(19,755)

(13,875)


1,051,165

960,825

US$nil mortgage matured on May 2018 bearing interest at U.S. prime less 1%, repayable at



US$33 per month principal and interest, secured by certain real property

169


1,051,165

960,994

Less: current portion of long-term debt

(2,169)


1,051,165

958,825

 

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at June 30, 2018, was $861,021 (December 31, 2017 – $743,111). The carrying value of the revolving term loan facility approximates its fair value as the interest rate is not significantly different from current interest rates for similar loans.

On May 30, 2018, the Company closed a private offering of US$650,000 aggregate principal amount of its 8.50 percent senior notes due 2026. Fixed interest on the notes is payable on June 15 and December 15 of each year. The notes will mature on June 15, 2026, and provide the Company with the option to redeem up to 10% of the aggregate principal amount of the notes at a redemption price of 108.50% of the principal amount with the proceeds of asset sales at any time prior to December 15, 2019. The Company used a portion of the net proceeds from the offering of the notes to repay all of its outstanding 7.50 percent senior notes due 2020. The early repayment of these notes resulted in a make-whole interest payment of $10,403 and the write-off of the remaining $5,023 unamortized deferred finance costs.

On May 31, 2018, the Company repaid in full the remaining $196,500 principal amount of its second lien senior secured term loan facility. The term loan, which had a maturity date of September 30, 2020, provided the Company the right to prepay the loan prior to June 10, 2018 with a nominal prepayment premium. The repayment of the second lien senior secured term loan facility resulted in the write-off of the remaining unamortized deferred finance costs of $5,787.

On May 9, 2018, the Company amended its credit facilities to exercise $100,000 of accordion capacity, bringing the total facilities from $275,000 to $375,000. The facilities consist of an operating facility of $27,500 and a revolving term loan facility of $347,500. The Company's credit facilities mature on June 1, 2020 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. 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 2.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.50 percent above the respective base rates. The accordion feature of the revolving term loan facility was reduced to $100,000, and is available to the Company during the term of the agreement. The Company incurs interest at the high end of the ranges outlined above if its net Total Debt to Adjusted EBITDA ratio is above 4.00:1.00. Additionally, in the event that the Company's net Total Debt to Adjusted EBITDA ratio is above 5.00:1.00, certain restrictions would apply including the following: (a) acquisitions will be subject to majority lender consent; (b) distributions will be restricted other than those relating to the Company's share unit plans; and (c) the Company will be prohibited from utilizing advances under the credit facilities to redeem or repay subordinated debt. As at June 30, 2018, the Company's net Total Debt to Adjusted EBITDA ratio was 3.75:1.00.

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 six months ended June 30, 2018 was $64,023 (six months ended June 30, 2017$43,446).

The following table sets out an analysis of long-term debt and the movements in long-term debt for the periods presented:





2018

(C$000s)




($)

Balance, January 1




960,994


Issuance of long-term debt, net of debt issuance costs




1,048,848


Long-term debt repayments




(1,010,992)


Amortization of debt issuance costs and debt discount




14,050


Foreign exchange adjustments




38,265

Balance, June 30




1,051,165

 

At June 30, 2018, the Company had utilized $856 of its loan facility for letters of credit and had $215,000 outstanding under its revolving term loan facility, leaving $159,144 in available credit, subject to a monthly borrowing base calculation, which at June 30, 2018 resulted in a liquidity amount of $88,033.

See note 5 for further details on the covenants in respect of the Company's long-term debt.

3.  CAPITAL STOCK
Authorized capital stock consists of an unlimited number of common shares.



Six Months Ended

Year Ended,



June 30, 2018

December 31, 2017

Continuity of Common Shares


Shares

Amount

Shares

Amount



(#)

($000s)

(#)

($000s)

Balance, beginning of period


143,755,741

501,456

136,634,590

466,445

Issued upon exercise of stock options


460,999

1,748

186,375

472

Issued upon exercise of warrants (note 4)


6,934,776

34,539

Balance, end of period


144,216,740

503,204

143,755,741

501,456

 

The weighted average number of common shares outstanding for the three months ended June 30, 2018 was 143,911,177 basic and 146,715,448 diluted (three months ended June 30, 2017 – 136,600,189 basic and 137,928,808 diluted). The weighted average number of common shares outstanding for the six months ended June 30, 2018 was 143,817,285 basic and 146,673,124 diluted (six months ended June 30, 2017 – 136,579,187 basic and 138,180,906 diluted). The difference between basic and diluted shares is attributable to the dilutive effect of stock options and warrants issued by the Company as disclosed in note 4.

4.  SHARE-BASED PAYMENTS
(a)  Stock Options

Six Months Ended June 30,



2018


2017

Continuity of Stock Options


Options

Average
Exercise Price

Options

Average
Exercise Price



(#)

($)

(#)

($)

Balance, January 1


9,616,173

5.30

7,246,386

6.62


Granted during the period


1,411,719

5.79

4,114,200

4.76


Exercised for common shares


(460,999)

2.85

(138,125)

1.99


Forfeited


(324,398)

5.64

(682,214)

8.57


Expired


(95,650)

12.56

(61,500)

13.39

Balance, June 30


10,146,845

5.40

10,478,747

5.79

 

Stock options vest equally over three to four years and expire five years from the date of grant. The exercise price of outstanding options range from $1.34 to $20.81 with a weighted average remaining life of 2.94 years. When stock options are exercised, the proceeds together with the compensation expense previously recorded in contributed surplus, are added to capital stock.

The weighted average fair value of options granted during 2018, determined using the Black-Scholes valuation method, was $2.55 per option (six months ended June 30, 2017$2.12 per option). The Company applied the following assumptions in determining the fair value of options on the date of grant:

Six Months Ended June 30,




2018

2017

Expected life (years)




3.00

3.50

Expected volatility




63.54%

64.10%

Risk-free interest rate




1.91%

0.89%

Expected dividends




$0.00

$0.00

 

Expected volatility is estimated by considering historical average share price volatility.

(b)  Share Units

Six Months Ended June 30,

2018

2017

Continuity of Stock Units

Deferred Share
Units

Performance

Share Units

Restricted
Share Units

Deferred Share
Units

Performance
Share Units

Restricted
Share Units


(#)

(#)

(#)

(#)

(#)

(#)

Balance, January 1

145,000

683,665

4,275,183

145,000

639,330

2,757,850


Granted during the period

145,000

754,700

145,000

124,000

2,461,500


Exercised

(145,000)

(232,249)

(866,933)

(145,000)


Forfeited

(102,516)

(181,500)

(79,665)

(619,140)

Balance, June 30

145,000

1,103,600

3,226,750

145,000

683,665

4,600,210

 


Three Months Ended June 30,

Six Months Ended June 30,


2018

2017

2018

2017


($)

($)

($)

($)

Expense (recovery) from:






Stock options

1,149

1,279

2,205

2,303


Deferred share units

191

44

441

204


Performance share units

994

(565)

1,712

(1,560)


Restricted share units

2,623

(2,527)

5,690

(4,995)

Total stock-based compensation expense

4,957

(1,769)

10,048

(4,048)

 

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 June 30, 2018, the liability pertaining to deferred share units was $405 (December 31, 2017 – $867).

The Company grants performance share units to a senior officer. 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 June 30, 2018, the liability pertaining to performance share units was $870 (December 31, 2017 – $1,389).

In 2018, the Company expanded its performance share unit plan to its employees. These performance share units contain a cash-based component and an equity-based component. The cash-based component vests over three years based on corporate financial performance thresholds and are settled either in cash (equal to the market value of the underlying shares at the time of vesting) or in Company shares purchased on the open market. The equity-based component vests over three years without any further conditions and are settled in treasury shares issued by the Company. At June 30, 2018, the liability pertaining to the cash-based component of performance share units was $388 (December 31, 2017 – $nil).

Prior to 2018, the Company granted restricted share units to its employees. These units vest 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 June 30, 2018, the liability pertaining to restricted share units was $5,752 (December 31, 2017 – $5,096).

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.

(c)  Warrants

In conjunction with the second lien senior secured term loan facility as disclosed in note 2, 6,934,776 warrants to purchase common shares of the Company were issued during 2016, entitling the holder to acquire up to 6,934,776 common shares at a price of $4.14 per common share. On November 6, 2017, all the warrants were exercised, for total proceeds of $28,709.

5.  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, if any, 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:



June 30,

December 31,

For the Twelve Months Ended


2018

2017

(C$000s)


($)

($)

Net income


4,956

586

Adjusted for the following:





Depreciation


144,379

130,793


Reversal of impairment of property, plant and equipment


(76,296)

(76,296)


Foreign exchange losses


54,804

34,273


Loss on disposal of property, plant and equipment


26,135

13,039


Impairment of inventory


2,058


Interest


105,910

85,450


Income taxes


(4,459)

(7,725)

Operating income


257,487

180,120

 

Net debt for this purpose is calculated as follows:



June 30,

December 31,

As at


2018

2017

(C$000s)


($)

($)

Long-term debt, net of debt issuance costs and debt discount (note 2)


1,051,165

960,994

Finance lease obligations


827

914

Less: cash and cash equivalents


(13,006)

(52,749)

Net debt


1,038,986

909,159

 

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 June 30, 2018, the net debt to operating income ratio was 4.04:1 (December 31, 2017 – 5.05:1) calculated on a 12-month trailing basis as follows:





June 30,

December 31,

For the Twelve Months Ended




2018

2017

(C$000s, except ratio)




($)

($)

Net debt




1,038,986

909,159

Operating income




257,487

180,120

Net debt to operating income ratio




4.04:1

5.05:1

 

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. At June 30, 2018 and December 31, 2017, the Company was in compliance with its covenants with respect to its credit facilities.





Covenant

Actual

As at June 30,




2018

2018

Working capital ratio not to fall below




1.15x

2.43x

Funded Debt to Adjusted EBITDA not to exceed(1)(2)




3.00x

0.75x

Funded Debt to Capitalization not to exceed(1)(3)




0.30x

0.13x

(1) Funded Debt is defined as Total Debt excluding all outstanding senior unsecured notes. Total Debt includes bank loans and long-term debt (before unamortized debt issuance costs and debt discount) plus outstanding letters of credit. For the purposes of the Total Debt to Adjusted EBITDA ratio, the Funded Debt to Capitalization Ratio and the Funded Debt to Adjusted EBITDA ratio, the amount of Total Debt or Funded Debt, as applicable, is reduced by the amount of cash on hand with lenders (excluding any cash held in a segregated account for the purposes of a potential equity cure).

(2) Adjusted EBITDA is defined as net income or loss for the period adjusted for interest, taxes, depreciation and amortization, non-cash stock-based compensation, non-controlling interest, and gains and losses that are extraordinary or non-recurring.

(3) Capitalization is Total Debt plus equity attributable to the shareholders of Calfrac.

 

Advances under the credit facilities are limited by a borrowing base. The borrowing base is calculated based on the following:

      1. Eligible North American accounts receivable, which is based on 75 percent of accounts receivable owing by companies rated BB+ or lower by Standard & Poor's (or a similar rating agency) and 85 percent of accounts receivable from companies rated BBB- or higher;
      2. 100 percent of unencumbered cash of the parent company and its U.S. operating subsidiary, excluding any cash held in a segregated account for the purposes of a potential equity cure; and
      3. 25 percent of the net book value of property, plant and equipment (PP&E) of the parent company and its U.S. operating subsidiary. The value of PP&E excludes assets under construction and is limited to $125,000.

The indenture governing the senior unsecured notes contains restrictions on the Company's ability to pay dividends, purchase and redeem shares of the Company, and make certain restricted investments in circumstances where

      1. the Company is in default under the indenture or the making of such payment would result in a default;
      2. the Company is not meeting the Fixed Charge Coverage Ratio(1) under the indenture of at least 2:1 for the most recent four fiscal quarters; or
      3. there is insufficient room for such payment within a builder basket included in the indenture. 

(1)  The Fixed Charge Coverage Ratio is defined as cash flow to interest expense. Cash flow is a non-GAAP measure and does not have a standardized meaning under IFRS and is defined under the indenture as net income (loss) attributable to the shareholders of Calfrac before depreciation, extraordinary gains or losses, unrealized foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment or reversal of impairment of assets, restructuring charges, provision for settlement of litigation, stock-based compensation, interest, and income taxes. Interest expense is adjusted to exclude any non-recurring charges associated with redeeming or retiring any indebtedness prior to its maturity.

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20,000. As at June 30, 2018, this basket was not utilized.

The indenture also restricts the incurrence of additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $375,000 or 30 percent of the Company's consolidated tangible assets.

As at June 30, 2018, the Company's Fixed Charge Coverage Ratio of 3.37:1 was higher than the required 2:1 ratio and the aforementioned prohibitions will not be applicable as long as the Company remains above this ratio.

The Company has measures in place to ensure that it has sufficient liquidity to navigate the cyclical nature of the oilfield services sector and safeguard the Company's ability to continue as a going concern. The Company negotiated amendments to its credit facilities to provide increased financial flexibility. These amendments include an "Equity Cure" feature pursuant to which proceeds from equity offerings may be applied as both an adjustment in the calculation of Adjusted EBITDA and as a reduction of Funded Debt towards the Funded Debt to Adjusted EBITDA ratio covenant for any of the quarters ending prior to and including June 30, 2020, subject to certain conditions including:

      1. the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;
      2. the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;
      3. the maximum proceeds of each common share issuance permitted to be attributed to Adjusted EBITDA cannot exceed the greater of 50 percent of Adjusted EBITDA on a rolling four-quarter basis and $25,000; and
      4. if proceeds are not used immediately as an equity cure they must be held in a segregated bank account pending an election to use them for such purpose, and if they are removed from such account but not used as an equity cure they will no longer be eligible for such use.

In addition, to the extent that proceeds from an equity offering are used as part of the Equity Cure, such proceeds are included in the calculation of the Company's borrowing base.

On April 3, 2017, the Company elected to use the first of its two fully-funded $25,000 equity cures effective as of the quarter ending on June 30, 2017. On April 30, 2018, the remaining $25,000 was removed from the segregated account without being designated as an equity cure.

6.  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 $10,515 (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 has been served with three separate payment orders, one on March 24, 2015 and two others on December 29, 2015. The Company was also served with an enforcement order on November 23, 2015.  Oppositions have been filed on behalf of the Company in respect of each of these orders which oppose the orders on the basis that they were improperly issued and are barred from a statute of limitations perspective. The salaries in arrears sought to be recovered through these orders are part of the $10,515 (6,846 euros) cited above and the interest being sought in respect of these orders is part of the $27,489 (17,896 euros) cited below. Provisional orders granting a temporary suspension of any enforcement proceedings have been granted in respect of all of the orders that have been served. The order served on March 24, 2015 was heard on November 24, 2015 and a decision was issued on November 25, 2016 accepting the Company's opposition on the basis that no lawful service of Judgment No 4528/2008 had taken place until the filing of the opponents' petition and/or the issuance of the payment order. The plaintiffs have filed an appeal against the above decision which has been scheduled to be heard on October 16, 2018. A hearing in respect of the order served on November 23, 2015 was adjourned until October 31, 2018. A hearing in respect of the orders served in December of 2015 scheduled for September 20, 2016 was adjourned until November 21, 2016 and two decisions were issued on January 9, 2017 accepting the Company's oppositions on a statute of limitations basis. The plaintiffs have filed appeals against the above decisions, which are scheduled to be heard on October 16, 2018.

NAPC is also the subject of a claim for approximately $4,396 (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 totaling $888 (578 euros), amounted to $27,489 (17,896 euros) as at June 30, 2018.

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.

7.  SEGMENTED INFORMATION
The Company's activities are conducted in four geographical segments: Canada, the United States, Russia and Argentina. 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.



Canada

United States

Russia

Argentina

Corporate

Consolidated

(C$000s)


($)

($)

($)

($)

($)

($)

Three Months Ended June 30, 2018








Revenue


131,872

342,036

25,025

45,669

544,602

Operating income (loss)(1)


11,150

69,024

(795)

2,081

(14,932)

66,528

Segmented assets


635,880

965,905

101,248

140,639

1,843,672

Capital expenditures


11,807

27,974

1,693

930

42,404









Three Months Ended June 30, 2017








Revenue


111,313

153,946

31,492

28,593

325,344

Operating income (loss)(1)


13,190

25,177

4,839

(2,241)

(4,225)

36,740

Segmented assets


625,264

741,006

107,640

148,198

1,622,108

Capital expenditures


10,754

10,336

791

477

22,358











Canada

United States

Russia

Argentina

Corporate

Consolidated

(C$000s)


($)

($)

($)

($)

($)

($)

Six Months Ended June 30, 2018








Revenue


321,600

658,016

56,260

91,564

1,127,440

Operating income (loss)(1)


42,860

122,273

(1,753)

(937)

(27,941)

134,502

Segmented assets


635,880

965,905

101,248

140,639

1,843,672

Capital expenditures


23,929

65,556

1,762

2,491

93,738









Six Months Ended June 30, 2017







Revenue


222,331

251,990

59,218

60,620

594,159

Operating income (loss)(1)


25,633

35,177

4,713

(18)

(8,370)

57,135

Segmented assets


625,264

741,006

107,640

148,198

1,622,108

Capital expenditures


14,893

18,023

940

1,467

35,323

(1) Operating income (loss) is defined as net income (loss) before depreciation, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment of inventory, interest, and income taxes.

 


Three Months Ended June 30,

Six Months Ended June 30,


2018

2017

2018

2017

(C$000s)

($)

($)

($)

($)

Net loss

(38,689)

(22,370)

(37,593)

(41,963)

Add back (deduct):






Depreciation

39,008

31,748

77,289

63,703


Foreign exchange losses

32,471

16,304

33,149

12,618


Loss on disposal of property, plant and equipment

7,991

1,391

15,764

2,668


Impairment of inventory

2,058

2,058


Interest

43,060

22,101

63,814

43,354


Income taxes

(19,371)

(12,434)

(19,979)

(23,245)

Operating income

66,528

36,740

134,502

57,135

 

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

8.  SUBSEQUENT EVENT
Subsequent to June 30, 2018, the Company entered into an agreement to acquire the 20 percent non-controlling interest in its subsidiary Calfrac Well Services (Argentina) S.A.

SOURCE Calfrac Well Services Ltd.

View original content: http://www.newswire.ca/en/releases/archive/July2018/25/c5469.html

Fernando Aguilar, President & Chief Executive Officer; Mike Olinek, Chief Financial Officer; Scott Treadwell, Vice-President, Capital Markets & Strategy; Telephone: 403-266-6000, Fax: 403-266-7381, www.calfrac.comCopyright CNW Group 2018


Source: Canada Newswire (July 25, 2018 - 6:00 AM EDT)

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