Calfrac: Financial Highlights – Higher Multi Stage Fracturing in Russia
Calfrac‘s Financial Highlights For the three months ended September 30, 2013, the Company recorded:
- revenue of $388.7 million, a decrease of 7 percent from the third quarter of 2012, driven primarily by lower pricing in the United States and Canada combined with lower fracturing and coiled tubing activity in western Canada and lower fracturing activity in the Chicontepec Basin in Mexico. The decrease was offset partially by higher fracturing activity in the Marcellus and Fayetteville unconventional natural gas shale plays, increased multi-stage fracturing activity in Russia and the commencement of fracturing operations in Argentina;
- operating income of $51.7 million versus $70.6 million in the same quarter of 2012, a decrease of 27 percent, mainly as a result of competitive pricing pressure in Canada and the United States, combined with lower fracturing and coiled tubing activity in western Canada and lower fracturing activity in the Chicontepec Basin in Mexico, partially offset by improved results in the United States driven mainly by lower costs; and
- net income attributable to shareholders of Calfrac of $6.1 million or $0.13 per share diluted, including a foreign exchange loss of $5.0 million, compared to $26.9 million or $0.60 per share diluted, which included a $0.4 million foreign exchange gain, in the third quarter of 2012. Net income attributable to shareholders of Calfrac, excluding the impact of foreign exchange gains and losses, was $0.21 per share diluted compared to $0.60 per share diluted in the third quarter of 2012.
For the nine months ended September 30, 2013, the Company generated:
- revenue of $1.1 billion, a decrease of 10 percent from the first nine months of 2012, driven primarily by competitive pricing pressure in the United States and Canada, lower fracturing and coiled tubing activity in the unconventional plays in western Canada, smaller fracturing job sizes in the Bakken oil shale play in North Dakota and lower fracturing activity in the Chicontepec Basin in Mexico, offset partially by higher multi-stage fracturing activity in Western Siberia and the commencement of fracturing operations in Argentina;
- operating income of $130.7 million versus $213.8 million in the same period of 2012, a decrease of 39 percent, mainly as a result of competitive pricing pressure in Canada and the United States, higher logistical costs associated with the completion of larger fracturing jobs in Canada, a slowdown in fracturing activity in the Chicontepec Basin in Mexico beginning in the second quarter and start-up costs associated with the commencement of fracturing operations in Argentina; and
- net income attributable to shareholders of Calfrac of $16.2 million or $0.35 per share diluted, including a foreign exchange loss of $2.7 million, compared to $85.9 million or $1.92 per share diluted, which included a $4.4 million foreign exchange gain, in the same period of 2012.
Russia
The third quarter results for Calfrac’s Russian operations were positively affected by the increase in horizontal multi-stage fracturing activity in Western Siberia. While this technology is still in the early stages of development, Calfrac remains optimistic that it will gain further acceptance and be a driver of future growth in operating and financial performance in Russia. During the third quarter, in excess of 30 percent of Calfrac’s work in Russia was performed on horizontal wellbores, which represents a major shift in this market segment that is expected to continue. In late September, the Company increased its fleet to six fracturing spreads operating in Western Siberia, opening a new district in the Usinsk region with a major new customer. Also during the third quarter, Calfrac successfully introduced two-inch coiled tubing services into its Russian service offering. The expansion into larger diameter coiled tubing services will provide another platform for growth in this market segment.
Outlook and Business Prospects
The Company expects that the current commodity price environment in North America will result in stable oilfield activity in the unconventional resource plays of Canada and the United States during the fourth quarter of 2013 and into 2014. While the industry trend towards larger pad designs, longer horizontal legs and greater stimulation intensity continues to result in higher horizontal completions activity, increases in operating efficiencies and a more competitive price environment have mitigated some of these gains. In Calfrac’s international markets, the use of multi-stage completion technology within horizontal wellbores is expected to increase and drive higher equipment utilization in those markets over the short and long term.
Fracturing and coiled tubing activity in western Canada is expected to be strong over the long term with the development of liquids-rich gas plays, such as the Duvernay and Deep Basin, and the movement towards liquefied natural gas (LNG) export capability being the primary drivers of higher anticipated future demand for the Company’s services. Calfrac expects equipment utilization to increase in the remainder of the fourth quarter, with further improvement projected for the first quarter of 2014. Calfrac expects that oil-focused activity will remain stable for the rest of the year with the introduction of higher-rate treatments in certain plays, such as the Cardium, driving higher equipment utilization. The Company has a strong and active customer base as well as a number of long-term relationships with large customers in the Deep Basin and Duvernay plays. Calfrac expects that well completion activity will continue to grow in Canada as many of these plays transition from delineation to development. Recent results from both of these plays provide significant optimism about their future development. The Duvernay play, in particular, represents one of the most capital-intensive formations in western Canada and has the potential to materially increase the demand for completion services in that region over the longer term. Further operational efficiencies are expected to be achieved through the expanded use of 24-hour operations and multi-well pad development. Calfrac has been one of the most active service providers in this play and anticipates that its positioning will form the basis for further growth opportunities.
In addition to the liquids-rich gas plays, another driver of anticipated long-term growth for Calfrac is the emergence of LNG export opportunities, which is expected to increase with the influx of capital from foreign entities and large multi-national companies. The Company’s leadership position in the development of the Montney, Duvernay and Horn River resource plays is expected to position it to participate significantly in the development of the natural gas reserves required to support these LNG initiatives. Several long-standing customers are in the forefront of development in this area, which is expected to be a conduit to a significant increase in demand for Calfrac’s services over the longer term. As previously announced, Calfrac has entered into a multi-year minimum commitment contract for the provision of three fracturing spreads to Progress Energy Canada Limited for its Montney project in northeast British Columbia. Progress is leading one of the largest and most advanced of the LNG projects being proposed for the West Coast of British Columbia.
The operational improvements that were initiated in the United States in late 2012 and 2013 resulted in improved financial performance during the first three quarters of 2013 in the midst of challenging market conditions. Calfrac continues to be focused on prudently managing its cost structure, improving its supply chain and logistics capabilities and expanding its customer relationships in order to maximize profitability. Near-term uncertainty remains, however, as the U.S. pressure pumping market is oversupplied and pricing remains competitive. While the Company does not expect market conditions to change dramatically during the remainder of the year, it will continue to monitor the capital programs of its customers as the quarter progresses.
Consistent with its philosophy of pursuing acquisitions in an opportunistic but financially disciplined manner, combined with a view to expanding its presence in the U.S. pressure-pumping market, Calfrac recently acquired all of the operating assets of Mission Well Services, LLC, a privately-held hydraulic fracturing and coiled tubing service provider that was focused in the Eagle Ford shale play of Texas. The acquisition was achieved at a substantial discount to equipment replacement cost, and provides Calfrac a strategic presence in the Eagle Ford shale play with the addition of locations in Houston, San Antonio and Fairfield, Texas. Calfrac has been able to utilize a significant majority of the acquired assets in the Eagle Ford play, and has transferred the remaining assets to other active operating areas in the United States, thereby maximizing utilization of the acquired assets.
Calfrac remains well-positioned in the U.S. pressure pumping business. The Company services three of the most active unconventional resource plays in the United States, the Bakken oil shale play in North Dakota, the Marcellus shale natural gas play in Pennsylvania and West Virginia and, now, the Eagle Ford shale play in Texas. Calfrac believes that the Marcellus will remain very active due to its low cost structure and proximity to markets. Activity in the Fayetteville shale play of Arkansas is anticipated to remain stable year-over-year due to the Company’s strong and active customer base in this market. Calfrac’s longstanding presence in the Rocky Mountain region provides additional growth prospects in the Niobrara shale oil play, as many producers have begun using longer-reach horizontal wells and greater stimulation intensity with encouraging results.
Calfrac’s year-to-date operating and financial results in Russia are consistent with expectations from its 2013 contract tender process. Future growth and improved profitability in Russia will be based on the expanded use of new technologies in Western Siberia, such as horizontal drilling and multi-stage completions. The pace of adoption of this new methodology has far exceeded Calfrac’s expectations thus far in 2013. Over the last two quarters, the number of multi-stage fracturing jobs completed in Russia increased significantly, to the point that in excess of 30 percent of Calfrac’s fracturing work is now focused on horizontal wells and multi-stage completions. Calfrac expects that this trend will continue to increase demand for its services over the short and long term as Russia’s producing sector gains confidence with this well completion approach. The Company also recently added a significant new customer in a new operating area. Calfrac commenced fracturing operations in the Usinsk region in October 2013 and expects that this new district will become a growth platform for 2014 and beyond.
The Company expects the use of multi-stage fracturing technology within horizontal wellbores in Mexico to become more prominent as capital budgets are reinstated. Based on tender documents received to date, much of the onshore activity will be focused on horizontal wells and multi-stage completions, which should be a catalyst for future demand for Calfrac’s services. In the short term, the previously mentioned budget constraints by Calfrac’s major customer in Mexico is expected to curtail the Company’s equipment utilization for the rest of the year. In response to these new market conditions, Calfrac remains focused on prudently managing its Mexican operating cost structure to align with its expected near-term activity. Calfrac anticipates that multi-stage fracturing activity in the Burgos field will remain relatively strong for the remainder of 2013. The Company continues to monitor the business and operating environment closely and will proactively manage this segment as more information becomes available.
With Calfrac’s successful entry into the Argentinean fracturing market during the second and third quarters of 2013 it believes that it is well-positioned to take advantage of opportunities related to the development of unconventional resource plays in Argentina. The Company expects that horizontal drilling combined with multi-stage fracturing will be key inputs to unlocking these resources. As there is very limited in-country pressure pumping capacity to service these emerging unconventional plays, the Company believes that its best-in-class service and technical expertise will allow it to capitalize on these opportunities as they develop. Calfrac’s recently announced contract with YPF S.A. is an example of this strategy in action, and Calfrac views the contract as providing a strong foundation from which to grow the Company’s hydraulic fracturing, coiled tubing and cementing services in Argentina. Activities related to this contract began in the fourth quarter.
Regarding the Colombian market, Calfrac is committed to its Colombian operations, continues to work on expanding its customer base, and believes that there will be solid long-term growth opportunities in this region as this market matures and activity levels increase.
On the corporate front, subsequent to the end of the quarter the Company completed an add-on to its senior unsecured notes maturing in 2020. This effectively termed out the draw taken from Calfrac’s revolving credit facility to fund the Mission acquisition. As a result, Calfrac’s capital structure continues to provide ample liquidity as it continues to execute on its business strategy.
