Calfrac Announces Fourth Quarter Results
CALGARY, Feb. 26, 2013 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three months and year ended December 31, 2012.
| HIGHLIGHTS | ||||||||
| Three Months Ended December 31, | Years Ended December 31, | |||||||
| 2012 | 2011 | Change | 2012 | 2011 | Change | |||
| (C$000s, except per share and unit data) | ($) | ($) | (%) | ($) | ($) | (%) | ||
| (unaudited) | ||||||||
| Financial | ||||||||
| Revenue | 367,487 | 490,037 | (25) | 1,595,216 | 1,537,392 | 4 | ||
| Operating income(1) | 43,218 | 150,364 | (71) | 257,013 | 412,828 | (38) | ||
| EBITDA(2) | 46,866 | 149,146 | (69) | 264,471 | 398,682 | (34) | ||
| Per share - basic | 1.05 | 3.40 | (69) | 5.97 | 9.13 | (35) | ||
| Per share - diluted | 1.04 | 3.38 | (69) | 5.90 | 8.98 | (34) | ||
| Net income attributable to | ||||||||
| the shareholders of Calfrac | ||||||||
| before foreign exchange | ||||||||
| losses (gains)(3) | 8,073 | 78,388 | (90) | 89,931 | 199,097 | (55) | ||
| Per share - basic | 0.18 | 1.79 | (90) | 2.03 | 4.57 | (56) | ||
| Per share - diluted | 0.18 | 1.78 | (90) | 2.01 | 4.48 | (55) | ||
| Net income attributable to | ||||||||
| the shareholders of Calfrac | 11,243 | 78,921 | (86) | 97,146 | 187,451 | (48) | ||
| Per share - basic | 0.25 | 1.80 | (86) | 2.19 | 4.29 | (49) | ||
| Per share - diluted | 0.25 | 1.79 | (86) | 2.17 | 4.22 | (49) | ||
| Working capital (end of period) | 322,857 | 398,526 | (19) | |||||
| Total equity (end of period) | 780,759 | 700,569 | 11 | |||||
| Weighted average common | ||||||||
| shares outstanding (000s) | ||||||||
| Basic | 44,694 | 43,805 | 2 | 44,335 | 43,689 | 1 | ||
| Diluted | 45,073 | 44,091 | 2 | 44,808 | 44,393 | 1 | ||
| Operating (end of period) | ||||||||
| Pumping horsepower (000s) | 977 | 719 | 36 | |||||
| Coiled tubing units (#) | 29 | 29 | - | |||||
| Cementing units (#) | 26 | 23 | 13 | |||||
| (1) | Operating income is defined as net income (loss) before depreciation, interest, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment 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 how they are taxed. Operating income is a measure that does not have any standardized meaning under International Financial Reporting Standards (IFRS) and, accordingly, may not be comparable to similar measures used by other companies. |
| (2) | EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. EBITDA is presented because it is frequently used by securities analysts and others for evaluating companies and their ability to service debt. EBITDA is a measure that does not have any standardized meaning prescribed under IFRS and, accordingly, may not be comparable to similar measures used by other companies. |
| (3) | Net income attributable to the shareholders of Calfrac before foreign exchange gains or losses is defined as net income (loss) attributable to the shareholders of Calfrac before foreign exchange gains or losses on an after-tax basis. Management believes that net income attributable to the shareholders of Calfrac before foreign exchange gains or losses is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac without the impact of foreign exchange fluctuations, which are not fully controllable by the Company. Net income attributable to the shareholders of Calfrac before foreign exchange gains or losses is a measure that does not have any standardized meaning prescribed under IFRS and, accordingly, may not be comparable to similar measures used by other companies.. |
CEO's MESSAGE
I am pleased to present Calfrac's operating and financial highlights for 2012 and to discuss our prospects for 2013. During the fourth quarter, our Company:
- experienced a very active quarter in Canada despite lower overall industry activity;
- completed its new district facilities in North Dakota and Pennsylvania to better service the Bakken oil shale play as well as the Marcellus and Utica natural gas shale plays;
- commenced performing multi-stage fracturing treatments in Mexico and Western Siberia; and
- announced that its annual $1.00 per share dividend will be paid quarterly beginning in March 2013.
Financial Highlights
For the three months ended December 31, 2012, the Company recorded:
- revenue of $367.5 million, a decrease of 25 percent from the fourth quarter of 2011 driven primarily by lower pricing in the United States combined with reduced activity in Canada and the United States due to a decline in overall drilling and completion activity as customers continued to adjust their capital spending programs due to the weakness in natural gas prices. The revenue decline in Canada and the United States was partially offset by strong growth in Calfrac's Latin American operations;
- operating income of $43.2 million versus $150.4 million in the same quarter of 2011, mainly due to the impact of competitive pricing pressures in the United States market combined with lower equipment utilization in Canada and the United States; and
- net income attributable to shareholders of Calfrac of $11.2 million or $0.25 per share diluted, including a $3.8 million foreign exchange gain, compared to net income of $78.9 million or $1.79 per share diluted in the fourth quarter of 2011, which included a foreign exchange loss of $1.0 million.
For the year ended December 31, 2012, the Company generated:
- record revenue of $1.6 billion versus $1.5 billion in 2011, driven by strong growth in the Company's Latin America division;
- operating income of $257.0 million versus $412.8 million in 2011, a decrease of 38 percent, mainly as a result of lower activity in Canada combined with competitive pricing pressures and higher product costs in Canada and the United States; and
- net income attributable to the shareholders of Calfrac of $97.1 million or $2.17 per share diluted, which included a non-cash foreign exchange gain of $8.3 million, compared to results in 2011 of $187.5 million or $4.22 per share diluted, which included a primarily non-cash foreign exchange loss of $14.2 million.
Operational Highlights
Canada
Despite a significant reduction in drilling activity during the second half of 2012, Calfrac maintained high levels of equipment utilization throughout most of the fourth quarter as a result of its significant contract coverage combined with a strong customer mix which was made up of some of the more active operators in Western Canada. However, the Company did experience a greater reduction in activity during the Christmas holiday season than it had in the previous two years and also experienced some pricing weakness on callout work in western Canada during the fourth quarter.
The Company remained active in the development of many unconventional resource plays throughout the Western Canada Sedimentary Basin in the fourth quarter, including the Montney, Deep Basin, Duvernay, Cardium and Viking plays, as well as several emerging unconventional oil plays. Activity was particularly focused on the Duvernay and Cardium plays, both of which required a significant increase in horsepower from earlier in the year. Calfrac anticipates that the development of these reservoirs will drive further expansion of its Canadian division.
The Company continued to execute its 2012 capital program during the fourth quarter by deploying approximately 70,000 new pumping horsepower, exiting the year with approximately 375,000 horsepower in Canada. As a result, Calfrac maintains its position as one of the largest fracturing service providers in western Canada.
United States
Calfrac's fourth-quarter results were affected by lower-than-expected activity by some of its customers and additional pricing competition, which resulted in significantly lower revenue and operating margins than in the third quarter of 2012. The latter part of the fourth quarter brought particularly low equipment utilization for the industry as the United States rig count declined steadily in the Company's operating regions as the quarter progressed. The sharp decline in natural gas-oriented drilling and completion activity combined with the significant increase in fracturing capacity in the United States resulted in an increasingly predatory pricing environment in the fourth quarter in which the Company chose not to participate. In response to these market conditions, Calfrac instituted numerous cost reduction measures through the fourth quarter and early in the first quarter of 2013 to maintain profitability in this lower-revenue environment.
Calfrac's district operations in North Dakota and Pennsylvania service some of the most economic oil and natural gas producing plays in the United States. The Company recently completed its new district facility in Smithfield, Pennsylvania, which enables Calfrac to efficiently service the southwest portion of the Marcellus shale play and most of the emerging Utica shale play. In addition, Calfrac completed a new district facility in Williston, North Dakota during the fourth quarter which will serve the Company's expanding presence in that region. The completion of this infrastructure construction was required in order to maintain high levels of service quality for our clients in core operating areas. Calfrac is keenly aware of the continuing deterioration in the United States pumping business, and in conjunction with the completion of the build-out of core operating bases undertook several measures throughout the quarter to rationalize its cost structure. One-time charges associated with that process reduced reported fourth-quarter operating income.
Russia
Revenue and operating margins in the fourth quarter for Calfrac's Russian operations were lower than expected as a result of reduced fracturing activity during the quarter as some customers curtailed the scope of their projects. In addition, extremely cold temperatures in Western Siberia during December delayed planned coiled tubing projects. This decrease in activity combined with higher fuel and other costs related to operating in winter and increased travel requirements to remote locations reduced quarterly financial performance in Russia. On the positive side, the Company completed a number of multi-stage fracturing jobs in horizontal wells during the fourth quarter, with additional horizontal pressure pumping work performed in January, and anticipates this trend to accelerate in 2013.
Latin America
Calfrac's financial results in Mexico continued to improve during the fourth quarter of 2012. The Company passed a milestone in the development of its Mexican business, completing its first two multi-stage fracturing treatments in horizontal wells during the fourth quarter. Both wells were 16-stage completions that were supported by equipment from the Company's United States operations and incorporated many of the technologies that Calfrac provides in Canada and the United States. These technologies are now being deployed to improve Mexican production rates, and Calfrac is very pleased with this emerging trend and the initial successes that have been realized. The Company is optimistic that these technologies will provide a solid basis for growth in the Mexican market.
Cementing and coiled tubing activity in Argentina during the fourth quarter was consistent with Calfrac's plans as overall oilfield activity in Argentina continued to trend higher. During the fourth quarter, the Company deployed additional fracturing equipment into Argentina and plan to commence operations during the first quarter to service conventional and emerging unconventional shale natural gas and tight oil plays in Argentina. Calfrac also expanded its presence in Colombia through the deployment of additional cementing equipment, and currently operates six crews. The Company was successful in a recent long-term cementing services contract tender with one of the largest oil and gas producers in that country. This development is anticipated to be a growth driver for Calfrac's Colombian operations and it is expected that this emerging international market will grow.
Outlook and Business Prospects
With a mild winter in North America tempering natural gas price recovery and therefore gas-related drilling, combined with a relatively stable oil-focused rig count in North America, Calfrac is taking a conservative approach to the first half of 2013. Calfrac has demonstrated in previous cyclical oilfield service activity downturns that it is able to prudently manage operating and capital costs and, with its strong balance sheet, make strategic acquisitions that provide solid, accretive value to shareholders. The Company is presently focused on optimizing its cost structure and capital expenditures to provide a sustainable business model for long-term growth. As a result, Calfrac's 2013 capital has been reduced by $43.0 million for a total anticipated capital budget of $74.0 million, of which $20.0 million is expected to be carried over into 2014. The 2012 capital budget carryforward to 2013 is approximately $107.0 million and total capital expenditures in 2013 are estimated to be approximately $161.0 million.
Canada is the Company's largest operating segment and offers the greatest visibility on activity and revenue. Calfrac's Canadian business has been built on a strong customer base and long-term contractual arrangements. Although January started slower than expected, activity has increased substantially and is anticipated to remain very strong until spring break-up, supported by an increase in drilling activity in late 2012 that has continued into 2013.
The Company believes that well completion activity will continue to grow as many of the emerging plays in the Western Canada Sedimentary Basin, such as the Duvernay and liquids-rich Deep Basin and Montney areas, transition to full scale commercial development. Calfrac recognizes, however, that capital programs of its customer base may be restricted until there is greater certainty regarding the commodity price environment. As a result, Calfrac will closely monitor its customers' 2013 capital spending plans and proactively adjust its cost structure, particularly in the second quarter, as 2013 activity is anticipated to be lower overall than in 2011 and 2012.
The natural gas resource plays of northwest Alberta and northeast British Columbia are some of the most economic gas-producing areas in North America and activity is expected to increase with the continued influx of capital from foreign entities and large multi-national companies. The interest in Canada is largely predicated on a long-term liquefied natural gas (LNG) export strategy. Because sufficient natural gas production must be available on completion of LNG export facilities within the next five years, the associated increase in capital investment could have a meaningful impact on Calfrac's Canadian operations as early as the third quarter of this year, as a number of longstanding customers are involved in these plans.
The Company's leadership position in the development of the Montney and Horn River resource plays is expected to position it to participate significantly in the development of the resources needed to support LNG exports. Further operational efficiencies are expected to be achieved through the expanded use of 24-hour operations and multi-well pad development. Calfrac also believes that activity in the liquids-rich natural gas reservoirs of the Deep Basin and Duvernay plays will continue to be strong throughout 2013 and could generate significant future demand for its fracturing and coiled tubing services. Calfrac remains one of the most active service providers in these plays and anticipates that its positioning will form the basis of further growth opportunities in Canada during 2013.
In the United States, pricing has decreased in all of the basins in which Calfrac operates, although the decline has been mitigated by the Company's contract position. The Company recently rationalized its United States cost structure and initiated supply chain and logistical improvements to ensure improved profitability in a lower-revenue environment. Calfrac expects to begin realizing the benefits of these initiatives in the first quarter of 2013. Although the Company does not expect the United States pumping sector's dynamics to change significantly during the first half of 2013, it is cautiously optimistic that well drilling and completions activity will improve in the latter part of the year, leading to improved financial performance.
Calfrac believes that it is well-positioned to navigate through a period of uncertainty in the U.S. pressure pumping business. In addition to its contract position, Calfrac services some of the most active unconventional resource plays in the United States, including the Bakken oil shale play in North Dakota and the Marcellus shale gas play in Pennsylvania and West Virginia. Calfrac expects activity in North Dakota will increase as oil producers refine their completion programs to improve their well economics and develop other reservoirs in the region. The Company also believes that the Marcellus shale play is one of the most economic natural gas producing regions in the United States and will become significantly more active as the price of natural gas recovers. Calfrac currently operates three large fracturing spreads in this play, all supported by minimum commitment contracts. Calfrac's primary base of operations is close to the liquids-rich natural gas area of the Marcellus in southwest Pennsylvania, which is expected to become more active in 2013. The Company is also able to service a large portion of the emerging Utica shale play from its facility in Smithfield, Pennsylvania, and has fractured a number of wells in that play. As a result, Calfrac is anticipated to have a strong base level of activity in 2013 and to benefit from overall increases in United States oil and natural gas development.
Calfrac recently reorganized its senior management team in the United States to execute its growth strategy and better focus on profitable growth opportunities. The Company is pleased to announce the appointment of Lindsay Link as President of Calfrac's United States Division effective February 1, 2013. Mr. Link has 30 years of experience in pressure pumping, coiled tubing, cementing and general oilfield services in domestic and international markets. In addition, Chad Leier was promoted to Vice President, Sales, Marketing & Engineering for the United States Division effective February 11, 2013. Mr. Leier has 13 years of pressure pumping service experience, joining Calfrac in 2005 and progressing through a number of operational, sales, engineering and senior managerial roles.
Calfrac recently completed the 2013 contract tender process in Russia and expects that equipment utilization will improve over 2012. The Russian pricing environment is not anticipated to change significantly, due to competitive pressures. Consequently, the Company remains focused on streamlining its cost structure in an effort to improve future financial performance. In addition, the introduction of new drilling and completion technologies in Western Siberia, including horizontal drilling and multi-stage completions, provides significant future potential. The Company is very pleased to have initiated multi-stage fracturing of horizontal wells in 2012, which it sees as a driver of demand for its services over the short and long terms as Russia's producing sector gains confidence in this approach.
The Mexican oilfield service environment has improved over the last two years as its primary energy producer focused additional resources on onshore oil and natural gas development. Calfrac anticipates additional opportunities to apply horizontal technology to many of Mexico's producing regions. Calfrac expects that its initial horizontal fracturing jobs in Mexico will result in more work of this nature in 2013 and beyond. Several tenders are planned for 2013 which provide the opportunity for incremental work and, contingent on Calfrac's success in securing such work, the allocation of additional capital equipment to Mexico.
In Argentina, the Company remains optimistic about the development of unconventional resource plays, which is expected to drive oilfield activity over the longer term. Horizontal drilling combined with multi-stage fracturing will be key inputs to unlocking these resources. To date, there is very limited capacity in-country to service these emerging plays. Calfrac is in the midst of testing and preparing its recently deployed fracturing equipment, which is expected to commence operations during the first quarter of 2013. The Company entered the Colombian oilfield service market in late 2011 and is currently focused on building its customer base. While the pace of development in Colombia was slower than expected in 2012 due to permitting and infrastructure issues, Calfrac believes that this market has significant long-term growth opportunities.
On behalf of the Board of Directors,
Douglas R. Ramsay
Chief Executive Officer
February 26, 2013
2012 Overview
For the three months ended December 31, 2012, the Company recorded:
- revenue of $367.5 million, a decrease of 25 percent from the fourth quarter of 2011 driven primarily by lower pricing in the United States combined with reduced activity in Canada and the United States. This decrease was due to a decline in overall drilling and completion activity as customers continued to adjust their capital spending programs due to the weakness in natural gas prices. The revenue decline in Canada and the United States was partially offset by strong growth in Calfrac's Latin American operations;
- operating income of $43.2 million versus $150.4 million in the same quarter of 2011, mainly due to the impact of competitive pricing pressures in the United States market combined with lower equipment utilization in Canada and the United States;
- EBITDA of $46.9 million or $1.04 per share diluted versus $149.2 million or $3.38 per share diluted in the comparable quarter of 2011; and
- net income attributable to shareholders of Calfrac of $11.2 million or $0.25 per share diluted, which included a $3.8 million foreign exchange gain, compared to net income of $78.9 million or $1.79 per share diluted in the fourth quarter of 2011, which included a foreign exchange loss of $1.0 million.
In 2012, the Company:
- increased revenue by 4 percent to $1.6 billion from $1.5 billion in 2011, driven by strong growth in the Company's Latin America division;
- reported operating income of $257.0 million versus $412.8 million in 2011, a decrease of 38 percent, mainly as a result of lower volumes of work in Canada combined with competitive pricing pressures and higher product costs in Canada and the United States;
- reported net income attributable to the shareholders of Calfrac of $97.1 million or $2.17 per share diluted, which included a non-cash foreign exchange gain of $8.3 million, compared to results in 2011 of $187.5 million or $4.22 per share diluted, which included a primarily non-cash foreign exchange loss of $14.2 million;
- incurred capital expenditures of $279.0 million, principally to bolster the Company's fracturing operations in Canada and the United States;
- completed its new district facility in Smithfield, Pennsylvania, allowing it to efficiently service the southwest portion of the Marcellus shale play and most of the emerging Utica play. In addition, the Company completed a new district facility in Williston, North Dakota during the fourth quarter, which will serve its expanding presence in that region;
- increased its credit facilities from $250.0 million to $300.0 million with a syndicate of financial institutions, and extended their term to September 27, 2016;
- reported a period-end working capital decrease of 19 percent from December 31, 2011 to $322.9 million at December 31, 2012;
- increased its semi-annual dividend by 400 percent from $0.10 per share to $0.50 per share in February 2012, announced in December 2012 that dividend frequency will become quarterly commencing with a $0.25 dividend to be declared in the first quarter of 2013, and declared dividends of $44.6 million or $1.00 per share in 2012 compared to $7.7 million or $0.175 per share in 2011; and
- announced a capital budget for 2013 of $117.0 million in December 2012 and subsequently reduced it to $74.0 million in February 2013. It will focus on maintenance and support capital and further investment in logistics equipment. Approximately $25.0 million of capital is allocated to supporting Calfrac's growing Latin American operations, including an investment in coiled tubing and fracturing equipment. The 2013 capital program does not contemplate expansion capital for Calfrac's Canadian, United States or Russian operations. In addition, approximately $107.0 million remaining from Calfrac's 2012 capital program is expected to be spent in 2013.
Financial Overview - Three Months Ended December 31, 2012 Versus 2011
| Canada | ||||
| Three Months Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 201,573 | 237,286 | (15) | |
| Expenses | ||||
| Operating | 147,518 | 134,681 | 10 | |
| Selling, General and Administrative (SG&A) | 5,033 | 4,384 | 15 | |
| 152,551 | 139,065 | 10 | ||
| Operating income(1) | 49,022 | 98,221 | (50) | |
| Operating income (%) | 24.3% | 41.4% | (41) | |
| Fracturing revenue per job ($) | 192,600 | 183,063 | 5 | |
| Number of fracturing jobs | 1,001 | 1,181 | (15) | |
| Pumping horsepower, end of period (000s) | 375 | 285 | 32 | |
| Coiled tubing revenue per job ($) | 22,689 | 30,301 | (25) | |
| Number of coiled tubing jobs | 387 | 696 | (44) | |
| Coiled tubing units, end of period (#) | 21 | 21 | - | |
| (1) Refer to "Non-GAAP Measures" on page 18 for further information. |
Revenue
Revenue from Calfrac's Canadian operations during the fourth quarter of 2012 was $201.6 million versus $237.3 million in the comparable three-month period of 2011. The decrease in revenue was primarily due to the overall decline in natural gas drilling and completions activity in the Western Canada Sedimentary Basin. The average number of active drilling rigs in western Canada decreased by approximately 28 percent in the fourth quarter of 2012 from the same period in 2011. The decrease in activity was partially offset by an increase in average job sizes resulting from the shift in activity towards the oil and liquids-rich natural gas areas of western Canada.
Operating Income
Operating income in Canada decreased by 50 percent to $49.0 million during the fourth quarter of 2012 from $98.2 million in the same period of 2011. The decrease was primarily due to the lower revenue base and pricing pressure. In addition, lower equipment utilization contributed to the reduction in operating income. Wet weather conditions in the first half of October, and a greater slow down in activity during the Christmas holiday season were the main drivers.
| United States | ||||
| Three Months Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 109,975 | 202,511 | (46) | |
| Expenses | ||||
| Operating | 99,048 | 137,342 | (28) | |
| SG&A | 5,439 | 4,877 | 12 | |
| 104,487 | 142,219 | (27) | ||
| Operating income(1) | 5,488 | 60,292 | (91) | |
| Operating income (%) | 5.0% | 29.8% | (83) | |
| Fracturing revenue per job ($) | 52,347 | 88,471 | (41) | |
| Number of fracturing jobs | 1,943 | 2,200 | (12) | |
| Pumping horsepower, end of period (000s) | 492 | 364 | 35 | |
| Cementing revenue per job ($) | 30,678 | 30,360 | 1 | |
| Number of cementing jobs | 180 | 182 | (1) | |
| Cementing units, end of period (#) | 12 | 9 | 33 | |
| US$/C$ average exchange rate(2) | 0.9913 | 1.0231 | (3) | |
| (1) | Refer to "Non-GAAP Measures" on page 18 for further information. |
| (2) | Source: Bank of Canada. |
Revenue
Revenue from Calfrac's United States operations decreased during the fourth quarter of 2012 to $110.0 million from $202.5 million in the comparable quarter of 2011. The decrease was due primarily to a significant reduction in equipment utilization and increased pricing pressure as the decrease in natural gas drilling and completion activity created more competition in nearly all of the Company's operating regions. Completions activity in natural gas producing areas such as the Marcellus and Fayetteville shale plays as well as the Piceance Basin were significantly impacted as the number of active gas-focused drilling rigs in these areas decreased by 33 percent in the fourth quarter of 2012 from the same period in 2011.
Operating Income
Operating income in the United States was $5.5 million for the fourth quarter of 2012, a decrease of 91 percent from the comparative period in 2011. The decrease in operating income was primarily due to competitive pricing pressure and lower fracturing equipment utilization in the unconventional natural gas plays of the United States. SG&A expenses increased as a result of restructuring costs incurred during the fourth quarter of 2012.
| Russia | ||||
| Three Months Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 24,197 | 30,737 | (21) | |
| Expenses | ||||
| Operating | 22,707 | 25,534 | (11) | |
| SG&A | 1,744 | 1,385 | 26 | |
| 24,451 | 26,919 | (9) | ||
| Operating income (loss)(1) | (254) | 3,818 | (107) | |
| Operating income (loss) (%) | -1.0% | 12.4% | (108) | |
| Fracturing revenue per job ($) | 84,063 | 126,819 | (34) | |
| Number of fracturing jobs | 199 | 190 | 5 | |
| Pumping horsepower, end of period (000s) | 45 | 45 | - | |
| Coiled tubing revenue per job ($) | 54,117 | 54,442 | (1) | |
| Number of coiled tubing jobs | 138 | 122 | 13 | |
| Coiled tubing units, end of period (#) | 7 | 6 | 17 | |
| Rouble/C$ average exchange rate(2) | 0.0319 | 0.0328 | (3) | |
| (1) | Refer to "Non-GAAP Measures" on page 18 for further information. |
| (2) | Source: Bank of Canada. |
Revenue
During the fourth quarter of 2012, the Company's revenue from Russian operations decreased by 21 percent to $24.2 million from $30.7 million in the corresponding three-month period of 2011. Revenue declined due to smaller job sizes and the Company no longer providing proppant to a significant customer in Western Siberia. In addition, coiled tubing equipment utilization was reduced as a result of severe winter conditions toward the end of the fourth quarter.
Operating Income (Loss)
Russia incurred an operating loss of $0.3 million during the fourth quarter of 2012 compared to operating income of $3.8 million in the corresponding period of 2011. This decrease in operating income was primarily due to the lower revenue base combined with the higher cost of Arctic-grade diesel fuel due to the onset of winter.
| Latin America | ||||
| Three Months Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 31,742 | 19,503 | 63 | |
| Expenses | ||||
| Operating | 26,489 | 16,911 | 57 | |
| SG&A | 2,152 | 1,187 | 81 | |
| 28,641 | 18,098 | 58 | ||
| Operating income(1) | 3,101 | 1,405 | 121 | |
| Operating income (%) | 9.8% | 7.2% | 36 | |
| Pumping horsepower, end of period (000s) | 65 | 25 | 160 | |
| Cementing units, end of period (#) | 13 | 9 | 44 | |
| Coiled tubing units, end of period (#) | 1 | 1 | - | |
| Mexican peso/C$ average exchange rate(2) | 0.0766 | 0.0750 | 2 | |
| Argentine peso/C$ average exchange rate(2) | 0.2066 | 0.2211 | (7) | |
| (1) | Refer to "Non-GAAP Measures" on page 18 for further information. |
| (2) | Source: Bank of Canada. |
Revenue
Calfrac's Latin America operations generated total revenue of $31.7 million during the fourth quarter of 2012 versus $19.5 million in the comparable three-month period in 2011. The increase in revenue was primarily due to higher fracturing activity and pricing, larger job sizes and an increase in the scale of operations due to the commencement of multi-stage fracturing jobs in Mexico. Higher cementing and coiled tubing activity as well as larger cementing job sizes in Argentina combined with higher cementing activity in Colombia also contributed to this increase.
Operating Income
Operating income in Latin America for the three months ended December 31, 2012 was $3.1 million versus $1.4 million in the comparative quarter in 2011. The increase was primarily due to higher equipment utilization and pricing in Mexico. This increase was offset partially by start-up costs related to the planned commencement of fracturing operations in Argentina in early 2013 combined with lower than expected equipment utilization in Colombia. The Company operated a larger number of cementing crews in Colombia during the fourth quarter of 2012 than the comparative three-month period in 2011, but overall utilization was hindered by a slower than expected pace of development in that country due to permitting and infrastructure issues.
| Corporate | ||||
| Three Months Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Expenses | ||||
| Operating | 2,464 | 1,757 | 40 | |
| SG&A | 11,675 | 11,615 | 1 | |
| 14,139 | 13,372 | 6 | ||
| Operating loss(1) | (14,139) | (13,372) | 6 | |
| % of Revenue | 3.8% | 2.7% | 41 | |
| (1) Refer to "Non-GAAP Measures" on page 18 for further information. |
Operating Loss
The 6 percent increase in corporate expenses from the fourth quarter of 2011 was mainly due to an increase in the Company's global operations and procurement personnel to support its continued focus on service quality, operating efficiency and cost management. Higher stock-based compensation expenses related to the issuance of restricted stock units in 2012 also contributed to the increase in corporate expenses. This increase was offset partially by lower annual bonus expenses.
Depreciation
For the three months ended December 31, 2012, depreciation expense increased by 3 percent to $23.6 million from $23.0 million in the corresponding quarter of 2011. The increase was mainly a result of a larger fleet of equipment operating in North America, offset partially by the impact of fully depreciated componentized assets in Canada and the United States.
Foreign Exchange Losses or Gains
The Company realized a foreign exchange gain of $3.8 million during the fourth quarter of 2012 versus a foreign exchange loss of $1.0 million in the comparative three-month period of 2011. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in United States dollars in Canada, Russia and Latin America. The Company's foreign exchange gain recorded in the fourth quarter of 2012 was largely attributable to the translation of United States dollar-denominated debt held in Russia. The value of the United States dollar at December 31, 2012 weakened against the Russian rouble, resulting in a consolidated net foreign exchange gain.
Interest
The Company's net interest expense of $8.9 million for the fourth quarter of 2012 represented a decrease of $0.1 million from $9.0 million in the comparable period of 2011.
Income Tax Expenses
The Company recorded income tax expense of $3.3 million during the fourth quarter of 2012 compared to $38.2 million in the comparable period of 2011. The effective income tax rate for the three months ended December 31, 2012 was 23 percent compared to 33 percent in the same quarter of 2011. The decrease in total income tax expense was primarily due to lower profitability in Canada and the United States. Tax losses in the United States, which has a high statutory tax rate, were the main driver of the decline in the consolidated effective income tax rate.
| Summary of Quarterly Results | ||||||
| Quarters Ended | Mar. 31, | June 30, | Sept. 30, | Dec. 31, | Total | |
| (C$000s, except per share and operating data) | ($) | ($) | ($) | ($) | ($) | |
| (unaudited) | ||||||
| 2012 | ||||||
| Financial | ||||||
| Revenue | 474,107 | 335,780 | 417,842 | 367,487 | 1,595,216 | |
| Operating income(1) | 113,381 | 29,810 | 70,604 | 43,218 | 257,013 | |
| EBITDA(1) | 127,995 | 18,736 | 70,874 | 46,866 | 264,471 | |
| Per share - basic | 2.92 | 0.42 | 1.59 | 1.05 | 5.97 | |
| Per share - diluted | 2.87 | 0.42 | 1.58 | 1.04 | 5.90 | |
| Net income attributable to the shareholders of Calfrac | 70,841 | (11,855) | 26,917 | 11,243 | 97,146 | |
| Per share - basic | 1.62 | (0.27) | 0.60 | 0.25 | 2.19 | |
| Per share - diluted | 1.59 | (0.27) | 0.60 | 0.25 | 2.17 | |
| Capital expenditures | 84,075 | 75,286 | 63,962 | 55,694 | 279,017 | |
| Working capital (end of period) | 431,053 | 357,128 | 353,182 | 322,857 | 322,857 | |
| Total equity (end of period) | 779,426 | 747,591 | 783,091 | 780,759 | 780,759 | |
| Operating (end of period) | ||||||
| Pumping horsepower (000s) | 782 | 830 | 845 | 977 | ||
| Coiled tubing units (#) | 29 | 29 | 29 | 29 | ||
| Cementing units (#) | 23 | 23 | 25 | 26 | ||
| (1) Refer to "Non-GAAP Measures" on page 18 for further information. | ||||||
| Quarters Ended | Mar. 31, | June 30, | Sept. 30, | Dec. 31, | Total | |
| (C$000s, except per share and operating data) | ($) | ($) | ($) | ($) | ($) | |
| (unaudited) | ||||||
| 2011 | ||||||
| Financial | ||||||
| Revenue | 337,408 | 269,456 | 440,491 | 490,037 | 1,537,392 | |
| Operating income(1) | 88,000 | 47,937 | 126,527 | 150,364 | 412,828 | |
| EBITDA(1) | 96,897 | 50,597 | 102,042 | 149,146 | 398,682 | |
| Per share - basic | 2.23 | 1.16 | 2.33 | 3.40 | 9.13 | |
| Per share - diluted | 2.18 | 1.14 | 2.30 | 3.38 | 8.98 | |
| Net income (loss) attributable to the shareholders of Calfrac | 49,078 | 12,071 | 47,381 | 78,921 | 187,451 | |
| Per share - basic | 1.13 | 0.28 | 1.08 | 1.80 | 4.29 | |
| Per share - diluted | 1.11 | 0.27 | 1.07 | 1.79 | 4.22 | |
| Capital expenditures | 65,777 | 72,047 | 85,130 | 101,008 | 323,962 | |
| Working capital (end of period) | 356,370 | 324,832 | 375,823 | 398,526 | 398,526 | |
| Total equity (end of period) | 556,277 | 568,607 | 632,889 | 700,569 | 700,569 | |
| Operating (end of period) | ||||||
| Pumping horsepower (000s) | 530 | 584 | 656 | 719 | ||
| Coiled tubing units (#) | 29 | 29 | 29 | 29 | ||
| Cementing units (#) | 21 | 22 | 23 | 23 | ||
| (1) Refer to "Non-GAAP Measures" on page 18 for further information. |
Financial Overview - Year Ended December 31, 2012 Versus 2011
| Canada | ||||
| Years Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 732,880 | 755,333 | (3) | |
| Expenses | ||||
| Operating | 526,400 | 481,062 | 9 | |
| SG&A | 17,925 | 15,909 | 13 | |
| 544,325 | 496,971 | 10 | ||
| Operating income(1) | 188,555 | 258,362 | (27) | |
| Operating income (%) | 25.7% | 34.2% | (25) | |
| Fracturing revenue per job ($) | 197,062 | 165,666 | 19 | |
| Number of fracturing jobs | 3,441 | 4,165 | (17) | |
| Pumping horsepower, end of period (000s) | 375 | 285 | 32 | |
| Coiled tubing revenue per job ($) | 30,661 | 25,511 | 20 | |
| Number of coiled tubing jobs | 1,787 | 2,561 | (30) | |
| Coiled tubing units, end of period (#) | 21 | 21 | - | |
| (1) Refer to "Non-GAAP Measures" on page 18 for further information. |
Revenue
Revenue from Calfrac's Canadian operations was $732.9 million in 2012 versus $755.3 million in 2011. The decrease in revenue was primarily due to the overall decline in natural gas drilling and completions activity in the Western Canada Sedimentary Basin in the latter half of 2012. The average number of active drilling rigs in western Canada decreased by approximately 25 percent in 2012 from 2011. The decline in activity was partially offset by a 19 percent increase in average job size as a result of the continued shift in activity into the unconventional oil and liquids-rich natural gas regions of western Canada.
Operating Income
Operating income in Canada decreased by 27 percent to $188.6 million in 2012 from $258.4 million in 2011. The decline was primarily caused by a more competitive pricing environment combined with lower equipment utilization as a result of lower industry activity. Higher guar expenses resulting from a combination of cost inflation and the shift in activity into the unconventional oil and liquids-rich natural gas areas of western Canada also contributed to the decline in operating income.
United States
| Years Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 638,483 | 607,731 | 5 | |
| Expenses | ||||
| Operating | 512,482 | 408,657 | 25 | |
| SG&A | 20,872 | 14,865 | 40 | |
| 533,354 | 423,522 | 26 | ||
| Operating income(1) | 105,129 | 184,209 | (43) | |
| Operating income (%) | 16.5% | 30.3% | (46) | |
| Fracturing revenue per job ($) | 69,620 | 82,527 | (16) | |
| Number of fracturing jobs | 8,766 | 7,143 | 23 | |
| Pumping horsepower, end of period (000s) | 492 | 364 | 35 | |
| Cementing revenue per job ($) | 30,912 | 26,016 | 19 | |
| Number of cementing jobs | 661 | 611 | 8 | |
| Cementing units, end of period (#) | 12 | 9 | 33 | |
| C$/US$ average exchange rate(2) | 0.9996 | 0.9891 | 1 | |
(1) Refer to "Non-GAAP Measures" on page 18 for further information.
(2) Source: Bank of Canada.
Revenue
Revenue from Calfrac's United States operations increased by 5 percent to $638.5 million in 2012 from $607.7 million in 2011, primarily due to an expansion of fracturing operations in the Bakken play of North Dakota and higher fracturing and cementing activity in the Marcellus shale formation in Pennsylvania and West Virginia due to a larger fleet of equipment operating for a full year.
The increase in revenue was offset partially by a decrease in fracturing and cementing activity in the natural gas-focused plays in Arkansas and Colorado due to the impact of low natural gas prices. The sustained low natural gas price environment resulted in a 23 percent year-over-year decrease in gas-focused drilling rig activity in the areas that the Company operates in the United States. In addition, pricing pressure increased during the year's second half as competition and activity increased in most of the Company's United States operating districts.
Operating Income
Operating income in the United States was $105.1 million for 2012, a decrease of 43 percent from 2011. Operating income as a percentage of revenue decreased from 30 percent in 2011 to 17 percent in 2012. This was primarily due to the impact of competitive pricing pressures combined with a greater use of higher-cost proppants and guar-based chemical systems in North Dakota, which are more costly than traditional fluid systems used in shale gas development. In addition, the Company incurred higher SG&A expenses in order to expand its divisional organization to more effectively support Calfrac's larger operations in the United States.
Russia
| Years Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 112,765 | 116,105 | (3) | |
| Expenses | ||||
| Operating | 100,098 | 96,950 | 3 | |
| SG&A | 6,101 | 6,413 | (5) | |
| 106,199 | 103,363 | 3 | ||
| Operating income(1) | 6,566 | 12,742 | (48) | |
| Operating income (%) | 5.8% | 11.0% | (47) | |
| Fracturing revenue per job ($) | 92,791 | 114,541 | (19) | |
| Number of fracturing jobs | 826 | 751 | 10 | |
| Pumping horsepower, end of period (000s) | 45 | 45 | - | |
| Coiled tubing revenue per job ($) | 57,884 | 53,531 | 8 | |
| Number of coiled tubing jobs | 624 | 562 | 11 | |
| Coiled tubing units, end of period (#) | 7 | 6 | 17 | |
| Rouble/C$ average exchange rate(2) | 0.0322 | 0.0337 | (4) | |
(1) Refer to "Non-GAAP Measures" on page 18 for further information.
(2) Source: Bank of Canada.
Revenue
The Company's revenue from Russian operations decreased by 3 percent to $112.8 million in 2012 from $116.1 million in 2011. The decline was mainly due to smaller fracturing job sizes as a result of the Company no longer providing proppant to a significant customer in Western Siberia during 2012 combined with a 4 percent depreciation in the Russian rouble versus the Canadian dollar. This decline was partially offset by higher fracturing and coiled tubing activity combined with the completion of larger coiled tubing jobs.
Operating Income
Operating income in Russia was $6.6 million in 2012 compared to $12.7 million in 2011. The decrease in operating income was primarily due to the significant increase in chemical prices, primarily guar, during the first half of 2012. In addition, higher fuel consumption related to longer travel distances to job locations in Western Siberia and increased fuel prices also contributed to the decline in operating income during 2012.
Latin America
| Years Ended December 31, | 2012 | 2011 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 111,088 | 58,223 | 91 | |
| Expenses | ||||
| Operating | 95,494 | 54,479 | 75 | |
| SG&A | 6,755 | 3,732 | 81 | |
| 102,249 | 58,211 | 76 | ||
| Operating income(1) | 8,839 | 12 | - | |
| Operating income (%) | 8.0% | - | - | |
| Pumping horsepower, end of period (000s) | 65 | 25 | 160 | |
| Cementing units, end of period (#) | 13 | 9 | 44 | |
| Coiled tubing units, end of period (#) | 1 | 1 | - | |
| Mexican peso/C$ average exchange rate(2) | 0.0760 | 0.0798 | (5) | |
| Argentine peso/C$ average exchange rate(2) | 0.2201 | 0.2277 | (3) | |
(1) Refer to "Non-GAAP Measures" on page 18 for further information.
(2) Source: Bank of Canada.
Revenue
Calfrac's Latin American operations generated total revenue of $111.1 million during 2012, almost double the $58.2 million in 2011. Revenue generated from non-core services increased from $10.5 million in 2011 to $23.9 million in 2012. The increase in total revenue was primarily due to a 43 percent increase in fracturing activity combined with the completion of larger jobs and higher contract pricing. In addition, significantly higher cementing and coiled tubing activity in Argentina as well as a full year of cementing activity in Colombia also contributed to the increase.
Operating Income
During 2012, Calfrac's Latin America division generated operating income of $8.8 million versus a breakeven position in 2011. The sharp improvement was primarily due to improved pricing in Mexico and higher equipment utilization in Mexico and Argentina. This increase was partially offset by fracturing start-up costs in Argentina and lower than expected cementing equipment utilization in Colombia.
Corporate
| Years Ended December 31, | 2012 | 2011 | Change | |
| (C$000s) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Expenses | ||||
| Operating | 9,973 | 6,260 | 59 | |
| SG&A | 42,103 | 36,237 | 16 | |
| 52,076 | 42,497 | 23 | ||
| Operating loss(1) | (52,076) | (42,497) | 23 | |
| % of Revenue | 3.3% | 2.8% | 18 | |
(1) Refer to "Non-GAAP Measures" on page 18 for further information.
Operating Loss
The 23 percent increase in corporate expenses over 2011 was mainly due to an increase in the Company's global operations and procurement personnel to support the Company's larger scale of operations. These planned additions are designed to support Calfrac's continued focus on service quality, operating efficiency and cost management. Higher stock-based compensation expenses of $2.0 million resulting from the restricted share units granted in 2012, commencing during the first quarter also contributed to the increase in corporate expenses.
Depreciation
Depreciation expense increased by 3 percent to $90.4 million for 2012 from $87.5 million in 2011. The increase was mainly a result of a larger fleet of equipment operating in North America, offset partially by the impact of fully depreciated componentized assets in Canada and the United States.
Foreign Exchange Losses or Gains
The Company realized a foreign exchange gain of $8.3 million during 2012 versus a $14.2 million loss in 2011. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in United States dollars in Canada, Russia and Latin America. The majority of the Company's foreign exchange gain recorded in 2012 was attributable to the translation of United States dollar-denominated liabilities in Canada, Russia and Mexico. The value of the United States dollar depreciated significantly against the Canadian dollar, Russian rouble and Mexican peso during 2012 and was significantly lower at December 31, 2012, resulting in a foreign exchange gain related to these net monetary liabilities.
Interest
The Company's interest expense increased by $0.9 million to $36.4 million in 2012. The increase was related to short term borrowing costs in Latin America.
Income Tax Expenses
The Company recorded income tax expense of $41.4 million during 2012 versus $88.6 million during 2011. The effective income tax rate for 2012 was 30 percent compared to 32 percent in 2011. The decrease in total income tax expense was primarily due to lower profitability in the United States and Canada. The effective tax rate for 2012 was 2 percent lower than for 2011 primarily due to a lower percentage of taxable income in the United States, which has a higher average statutory tax rate.
Liquidity and Capital Resources
| Years Ended December 31, | 2012 | 2011 | |
| (C$000s) | ($) | ($) | |
| (unaudited) | |||
| Cash provided by (used in): | |||
| Operating activities | 196,251 | 258,787 | |
| Financing activities | (28,762) | (9,048) | |
| Investing activities | (259,184) | (335,906) | |
| Effect of exchange rate changes on cash and cash equivalents | 1,121 | 2,618 | |
| Decrease in cash and cash equivalents | (90,574) | (83,549) | |
Operating Activities
The Company's cash provided by operating activities for the year ended December 31, 2012 was $196.3 million versus $258.8 million in 2011. This decrease was primarily due to a decline in operating margins in Canada and the United States. At December 31, 2012, Calfrac's working capital was approximately $322.9 million, a decrease of 19 percent from December 31, 2011. The Company reviewed its accounts receivable in detail at December 31, 2012 and 2011 and determined that a provision for doubtful accounts receivable totalling $0.3 million and $1.4 million, respectively, was adequate. The $1.4 million provision in 2011 was written off in 2012 upon the completion of the customer's Chapter 11 restructuring proceedings. A $0.3 million provision was set up in 2012, which related primarily to a customer that filed a receivership order in Canada during the fourth quarter of 2012.
Financing Activities
Net cash used in financing activities for 2012 was $28.8 million compared to $9.0 million in 2011. During 2012, the Company issued $11.2 million of common shares, received bank loan proceeds of $2.7 million, paid cash dividends of $35.1 million, repaid $2.2 million of finance lease obligations and long term debt and repaid the $4.9 million bank loan in Colombia.
On October 10, 2012, the Company increased its credit facilities with a syndicate of Canadian chartered banks from $250.0 million to $300.0 million and extended the term to September 27, 2016. The maturity date may be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. The facilities consist of an operating facility of $20.0 million and a syndicated facility of $280.0 million. The interest rates are based on the parameters of certain bank covenants. For prime-based loans, the rate ranges from prime plus 0.50 percent to prime plus 1.25 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 2.25 percent above the respective base rates for such loans. As at December 31, 2012, the Company had used $8.7 million of its credit facilities for letters of credit, leaving $291.3 million in available credit.
Calfrac pays quarterly dividends to shareholders at the discretion of the Board of Directors, which qualify as "eligible dividends" as defined by the Canada Revenue Agency. In February 2012, the Company increased its semi-annual cash dividend from $0.10 to $0.50 per share, beginning with the dividend paid on July 16, 2012, thereby increasing the annualized dividend to $1.00 per share beginning in 2012. In December 2012, the Company announced that it would pay dividends quarterly commencing with a $0.25 dividend to be declared in the first quarter of 2013. Calfrac's Board of Directors declared dividends of $44.6 million or $1.00 per share in 2012, compared to $7.7 million or $0.175 per share in 2011.
Investing Activities
Calfrac's net cash used for investing activities was $259.2 million for 2012 versus $335.9 million for 2011. Capital expenditures were $279.0 million in 2012 compared to $324.0 million in 2011. Capital expenditures were primarily to support the Company's North American fracturing operations.
Calfrac's 2013 capital budget is projected to be $74.0 million, of which $25.0 million will be directed towards growing its Latin America operations, including an investment in coiled tubing and fracturing equipment. The remaining capital program will focus on maintenance and support capital and further investment in logistics equipment. In addition to the 2013 capital program outlined above, Calfrac expects that the carryover amount of approximately $107.0 million related to its 2012 capital program will be completed in 2013.
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 2012 was a gain of $1.1 million versus a gain of $2.6 million during 2011. These gains relate to cash and cash equivalents held by the Company in a foreign currency.
With its strong working capital position, available credit facilities and anticipated funds provided by operations, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for 2013 and beyond.
At December 31, 2012, the Company had cash and cash equivalents of $42.5 million.
Outstanding Share Data
The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan is equal to a maximum of 10 percent of the Company's issued and outstanding common shares. As at February 22, 2013, there were 45,315,803 common shares issued and outstanding, and 3,237,575 options to purchase common shares.
The Company has a Dividend Reinvestment Plan ("DRIP") that allows shareholders to direct cash dividends paid on all or a portion of their common shares to be reinvested in additional common shares that will be issued at 95 percent of the volume-weighted average price of the common shares traded on the Toronto Stock Exchange during the last five trading days preceding the relevant dividend payment date. During 2012, $13.8 million was reinvested under the DRIP into 625,080 common shares of the Company.
Normal Course Issuer Bid
The Company filed a Notice of Intention (the "Renewal Notice") to renew the Normal Course Issuer Bid (the "Renewed NCIB") with the TSX on November 1, 2012. Under the Renewed NCIB, the Company may acquire up to 3,318,738 common shares, which was 10 percent of the public float outstanding as at October 31, 2012, during the period November 12, 2012 through November 11, 2013. The maximum number of common shares that may be acquired by the Company during a trading day is 44,254, with the exception that the Company is allowed to make one block purchase of common shares per calendar week that exceeds such limit. All purchases of common shares will be made through the TSX, alternative trading systems or such other exchanges or marketplaces through which the common shares trade from time to time at the market price of the shares at the time of acquisition. Any shares acquired under the bid will be cancelled. A copy of the Renewal Notice may be obtained by any shareholder, without charge, by contacting the Company's Corporate Secretary at 411 - 8th Avenue S.W., Calgary, Alberta, T2P 1E3, or by telephone at 403-266-6000.
Advisories
Forward-Looking Statements
In order to provide Calfrac shareholders and potential investors with information regarding the Company and its subsidiaries, including management's assessment of Calfrac's plans and future operations, certain statements contained in this press release, including statements that contain words such as "anticipates", "can", "may", "could", "expect", "believe", "intend", "forecast", "will", or similar words suggesting future outcomes, are forward-looking statements. Forward-looking statements in this document include, but are not limited to, statements with respect to expected operating strategies, future capital expenditures, future financial resources, anticipated equipment utilization levels, future oil and natural gas well activity in each of the Company's operating jurisdictions, future costs or potential liabilities, anticipated benefits of the Company's competitive position, anticipated outcomes of specific events, trends in the oil and natural gas industry, the Company's growth prospects including, without limitation, its international growth strategy and prospects and the impact of changes in accounting policies and standards on the Company and its financial statements. These statements are derived from certain assumptions and analyses made by the Company based on its experience and interpretation 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 general stability of 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 oil and liquids rich plays in the current natural gas pricing environment in North America, 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. The most significant risk factors to Calfrac relate to prevailing economic conditions; commodity prices; the demand for fracturing and other stimulation services during drilling and completion of oil and natural gas wells; changes in legislation and the regulatory environment; liabilities and risks, including environmental liabilities and risks inherent in oil and natural gas operations; sourcing, pricing and availability of raw materials, components, parts, equipment, suppliers, facilities and skilled personnel; dependence on major customers; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; and regional competition. Readers are cautioned that the foregoing list of risks and uncertainties is not exhaustive. Further information about these and other risks and uncertainties may be found in the Company's most recently filed Annual Information Form.
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. 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 in this press release do not have any standardized meaning as prescribed under IFRS and are therefore considered non-GAAP measures. These measures include operating income and EBITDA. These measures may not be comparable to similar measures presented by other entities. These measures have been described and presented in this press release in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and its ability to generate funds to finance its operations. Management's use of these measures has been disclosed further in this press release as these measures are discussed and presented.
Additional Information
Further information regarding Calfrac Well Services Ltd., including the most recently filed Annual Information Form, can be accessed on the Company's website at www.calfrac.com or under the Company's public filings found at www.sedar.com.
Fourth Quarter Conference Call
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2012 fourth quarter results at 10:00 a.m. (Mountain Time) on Tuesday, February 26, 2013. 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 96180761). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.
| CONSOLIDATED BALANCE SHEETS | |||
| As at December 31, | 2012 | 2011 | |
| (C$000s) (unaudited) | ($) | ($) | |
| ASSETS | |||
| Current assets | |||
| Cash and cash equivalents | 42,481 | 133,055 | |
| Accounts receivable | 320,143 | 313,898 | |
| Income taxes recoverable | 292 | 1,340 | |
| Inventories | 118,713 | 94,344 | |
| Prepaid expenses and deposits | 10,697 | 10,148 | |
| 492,326 | 552,785 | ||
| Non-current assets | |||
| Property, plant and equipment | 1,005,101 | 825,504 | |
| Goodwill | 10,523 | 10,523 | |
| Deferred income tax assets | 16,871 | 16,309 | |
| Total assets | 1,524,821 | 1,405,121 | |
| LIABILITIES AND EQUITY | |||
| Current liabilities | |||
| Accounts payable and accrued liabilities | 168,250 | 149,740 | |
| Bank loan (note 3) | - | 2,309 | |
| Current portion of long-term debt (note 4) | 479 | 476 | |
| Current portion of finance lease obligations (note 5) | 740 | 1,734 | |
| 169,469 | 154,259 | ||
| Non-current liabilities | |||
| Long-term debt (note 4) | 441,018 | 450,545 | |
| Finance lease obligations (note 5) | - | 740 | |
| Other long-term liabilities | 435 | 774 | |
| Deferred income tax liabilities | 133,140 | 98,234 | |
| Total liabilities | 744,062 | 704,552 | |
| Equity attributable to the shareholders of Calfrac | |||
| Capital stock (note 6) | 300,451 | 271,817 | |
| Contributed surplus (note 8) | 27,546 | 24,170 | |
| Loan receivable for purchase of common shares (note 14) | (2,500) | (2,500) | |
| Retained earnings | 458,543 | 405,954 | |
| Accumulated other comprehensive (loss) income | (2,403) | 1,334 | |
| 781,637 | 700,775 | ||
| Non-controlling interest | (878) | (206) | |
| Total equity | 780,759 | 700,569 | |
| Total liabilities and equity | 1,524,821 | 1,405,121 | |
Contingencies (note 18)
See accompanying notes to the consolidated financial statements.
| CONSOLIDATED STATEMENTS OF OPERATIONS | |||||
| Three Months Ended Dec. 31, | Years Ended Dec. 31, | ||||
| 2012 | 2011 | 2012 | 2011 | ||
| (C$000s, except per share data) (unaudited) | ($) | ($) | ($) | ($) | |
| Revenue | 367,487 | 490,037 | 1,595,216 | 1,537,392 | |
| Cost of sales (note 15) | 321,860 | 339,221 | 1,334,828 | 1,134,864 | |
| Gross profit | 45,627 | 150,816 | 260,388 | 402,528 | |
| Expenses | |||||
| Selling, general and administrative | 26,043 | 23,448 | 93,756 | 77,157 | |
| Foreign exchange (gains) losses | (3,818) | 990 | (8,260) | 14,234 | |
| Loss (gain) on disposal of property, plant and equipment | 170 | 228 | 802 | (88) | |
| Interest | 8,933 | 9,053 | 36,354 | 35,489 | |
| 31,328 | 33,719 | 122,652 | 126,792 | ||
| Income before income tax | 14,299 | 117,097 | 137,736 | 275,736 | |
| Income tax expense | |||||
| Current | (344) | 297 | 4,733 | 1,542 | |
| Deferred | 3,662 | 37,942 | 36,642 | 87,037 | |
| 3,318 | 38,239 | 41,375 | 88,579 | ||
| Net income for the period | 10,981 | 78,858 | 96,361 | 187,157 | |
| Net income (loss) attributable to: | |||||
| Shareholders of Calfrac | 11,243 | 78,921 | 97,146 | 187,451 | |
| Non-controlling interest | (262) | (63) | (785) | (294) | |
| 10,981 | 78,858 | 96,361 | 187,157 | ||
| Earnings per share (note 6) | |||||
| Basic | 0.25 | 1.80 | 2.19 | 4.29 | |
| Diluted | 0.25 | 1.79 | 2.17 | 4.22 | |
See accompanying notes to the consolidated financial statements.
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||
| Three Months Ended Dec. 31, | Years Ended Dec. 31, | ||||
| 2012 | 2011 | 2012 | 2011 | ||
| (C$000s) (unaudited) | ($) | ($) | ($) | ($) | |
| Net income for the period | 10,981 | 78,858 | 96,361 | 187,157 | |
| Other comprehensive (loss) income | |||||
| Change in foreign currency translation adjustment | 460 | (4,627) | (3,856) | 5,713 | |
| Comprehensive income for the period | 11,441 | 74,231 | 92,505 | 192,870 | |
| Comprehensive income (loss) attributable to: | |||||
| Shareholders of Calfrac | 11,707 | 74,179 | 93,409 | 193,037 | |
| Non-controlling interest | (266) | 52 | (904) | (167) | |
| 11,441 | 74,231 | 92,505 | 192,870 | ||
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 |
Total | Non- Controlling Interest |
Total Equity |
||
| (C$000s) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |
| Balance - January 1, 2012 | 271,817 | 24,170 | (2,500) | 1,334 | 405,954 | 700,775 | (206) | 700,569 | |
| Net income for the year | - | - | - | - | 97,146 | 97,146 | (785) | 96,361 | |
| Other comprehensive income: | |||||||||
| Cumulative translation adjustment | - | - | - | (3,737) | - | (3,737) | (119) | (3,856) | |
| Comprehensive income for the year | - | - | - | (3,737) | 97,146 | 93,409 | (904) | 92,505 | |
| Stock options: | |||||||||
| Stock-based compensation recognized | - | 6,990 | - | - | - | 6,990 | - | 6,990 | |
| Proceeds from issuance of shares | 14,836 | (3,614) | - | - | - | 11,222 | - | 11,222 | |
| Dividend Reinvestment Plan shares issued (note 21) | 13,798 | - | - | - | - | 13,798 | - | 13,798 | |
| Dividends | - | - | - | - | (44,557) | (44,557) | - | (44,557) | |
| Non-controlling interest contribution | - | - | - | - | - | - | 232 | 232 | |
| Balance - December 31, 2012 | 300,451 | 27,546 | (2,500) | (2,403) | 458,543 | 781,637 | (878) | 780,759 | |
| Balance - January 1, 2011 | 263,490 | 15,468 | (2,500) | (4,252) | 229,865 | 502,071 | (39) | 502,032 | |
| Net income for the year | - | - | - | - | 187,451 | 187,451 | (294) | 187,157 | |
| Other comprehensive income: | |||||||||
| Cumulative translation adjustment | - | - | - | 5,586 | - | 5,586 | 127 | 5,713 | |
| Comprehensive income for the year | - | - | - | 5,586 | 187,451 | 193,037 | (167) | 192,870 | |
| Stock options: | |||||||||
| Stock-based compensation recognized | - | 8,500 | - | - | - | 8,500 | - | 8,500 | |
| Proceeds from issuance of shares | 9,656 | (2,109) | - | - | - | 7,547 | - | 7,547 | |
| Shares cancelled (note 8) | (105) | 105 | - | - | - | - | - | - | |
| Denison Plan of Arrangement (note 8) | - | 2,206 | - | - | - | 2,206 | - | 2,206 | |
| Shares purchased under Normal Course Issuer Bid (note 7) | (1,224) | - | - | - | (3,702) | (4,926) | - | (4,926) | |
| Dividends | - | - | - | - | (7,660) | (7,660) | - | (7,660) | |
| Balance - December 31, 2011 | 271,817 | 24,170 | (2,500) | 1,334 | 405,954 | 700,775 | (206) | 700,569 | |
See accompanying notes to the consolidated financial statements.
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
| Three Months Ended Dec. 31, | Years Ended Dec. 31, | |||||
| 2012 | 2011 | 2012 | 2011 | |||
| (C$000s) (unaudited) | ($) | ($) | ($) | ($) | ||
| CASH FLOWS PROVIDED BY (USED IN) | ||||||
| OPERATING ACTIVITIES | ||||||
| Net income for the period | 10,981 | 78,858 | 96,361 | 187,157 | ||
| Adjusted for the following: | ||||||
| Depreciation | 23,634 | 22,996 | 90,381 | 87,457 | ||
| Stock-based compensation | 1,926 | 2,342 | 6,990 | 8,500 | ||
| Unrealized foreign exchange (gains) losses | (2,462) | (1,297) | (10,895) | 11,945 | ||
| Loss (gain) on disposal of property, plant and equipment | 170 | 228 | 802 | (88) | ||
| Interest | 8,933 | 9,053 | 36,354 | 35,489 | ||
| Deferred income taxes | 3,662 | 37,942 | 36,642 | 87,037 | ||
| Interest paid | (16,883) | (17,668) | (34,596) | (35,738) | ||
| Changes in items of working capital (note 11) | (10,739) | (17,928) | (25,788) | (122,972) | ||
| Cash flows provided by operating activities | 19,222 | 114,526 | 196,251 | 258,787 | ||
| FINANCING ACTIVITIES | ||||||
| Bank loan proceeds | - | 1,051 | 2,734 | 2,309 | ||
| Debt issuance costs | (511) | - | (440) | (422) | ||
| Bank loan repayments | (4,948) | - | (4,948) | - | ||
| Long-term debt repayments | (125) | (115) | (461) | (7,882) | ||
| Finance lease obligation repayments | (135) | (372) | (1,734) | (1,335) | ||
| Denison Plan of Arrangement (note 8) | - | - | - | 2,206 | ||
| Net proceeds on issuance of common shares | 693 | 409 | 11,222 | 7,547 | ||
| Dividends paid | (16,431) | - | (35,135) | (6,545) | ||
| Shares purchased under Normal Course Issuer Bid (note 7) | - | (4,926) | - | (4,926) | ||
| Cash flows used in financing activities | (21,457) | (3,953) | (28,762) | (9,048) | ||
| INVESTING ACTIVITIES | ||||||
| Purchase of property, plant and equipment | (55,338) | (109,978) | (261,321) | (339,706) | ||
| Proceeds on disposal of property, plant and equipment | 392 | 255 | 1,905 | 3,644 | ||
| Other | 39 | 134 | 232 | 156 | ||
| Cash flows used in investing activities | (54,907) | (109,589) | (259,184) | (335,906) | ||
| Effect of exchange rate changes on cash and cash equivalents | 3,168 | (8,825) | 1,121 | 2,618 | ||
| Decrease in cash and cash equivalents | (53,974) | (7,841) | (90,574) | (83,549) | ||
| Cash and cash equivalents, beginning of period | 96,455 | 140,896 | 133,055 | 216,604 | ||
| Cash and cash equivalents, end of period | 42,481 | 133,055 | 42,481 | 133,055 | ||
See accompanying notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended December 31, 2012 and 2011
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Calfrac Well Services Ltd. (the "Company") was formed through the amalgamation of Calfrac Well Services Ltd. (predecessor company originally incorporated on June 28, 1999) and Denison Energy Inc. ("Denison") on March 24, 2004 under the Business Corporations Act (Alberta). The registered office is at 411 - 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1E3. The Company provides specialized oilfield services, including hydraulic fracturing, coiled tubing, cementing and other well completion services to the oil and natural gas industries in Canada, the United States, Russia, Mexico, Argentina and Colombia.
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and interpretations by the International Financial Reporting Interpretations Committee (IFRIC).
The Company has consistently applied the same accounting policies throughout all periods presented, as if these policies had always been in effect.
These financial statements were approved by the Board of Directors for issuance on February 25, 2013.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements follow the same accounting policies and methods of application as the most recent annual financial statements.
For purposes of calculating income taxes during interim periods, the Company utilizes estimated annualized income tax rates. Current income tax expense is only recognized when taxable income is such that current income taxes become payable.
3. BANK LOAN
The Company's Colombian subsidiary had an operating line of credit of which US$2,270 was drawn at December 31, 2011. The interest was LIBOR rate plus 4.50 percent and was secured by a Company guarantee.
4. LONG-TERM DEBT
| As at December 31, | 2012 | 2011 | |
| (C$000s) | ($) | ($) | |
| US$450,000 senior unsecured notes due December 1, | |||
| 2020, bearing interest at 7.5% payable semi-annually | 447,705 | 457,650 | |
| Less: unamortized debt issuance costs | (6,895) | (7,943) | |
| 440,810 | 449,707 | ||
| $280,000 extendible revolving term loan facility, secured | |||
| by Canadian and U.S. assets of the Company | - | - | |
| Less: unamortized debt issuance costs | (1,444) | (1,359) | |
| (1,444) | (1,359) | ||
| US$2,014 mortgage maturing May 2018 bearing interest | |||
| at U.S. prime less 1%, repayable at US$33 per month | |||
| principal and interest, secured by certain real property | 2,003 | 2,399 | |
| ARS633 Argentina term loan maturing December 31, 2013 | |||
| bearing interest at 18.25%, repayable at ARS61 per month | |||
| principal and interest, secured by a Company guarantee | 128 | 274 | |
| 441,497 | 451,021 | ||
| Less: current portion of long-term debt | (479) | (476) | |
| 441,018 | 450,545 | ||
The fair value of the senior unsecured notes, as measured based on the closing quoted market price at December 31, 2012, was $443,228 (December 31, 2011 - $446,209). The carrying values of the mortgage obligations, term loans and revolving term loan facilities approximate their fair values as the interest rates are not significantly different from current interest rates for similar loans.
The interest rate on the $280,000 revolving term loan facility is based on the parameters of certain bank covenants. For prime-based loans, the rate ranges from prime plus 0.5 percent to prime plus 1.25 percent. For LIBOR-based loans and Bankers' Acceptance-based loans the margin thereon ranges from 1.5 percent to 2.25 percent above the respective base rates for such loans. The facility is repayable on or before its maturity date of September 27, 2016, assuming the facility is not extended. The maturity date may be extended by one or more years at the Company's request and lenders' acceptance. The Company also has the ability to prepay principal without penalty. Debt issuance costs related to this facility are amortized over its term.
Interest on long-term debt (including the amortization of debt issuance costs and debt discount) for the year ended December 31, 2012 was $36,085 (year ended December 31, 2011 - $36,119).
The Company also has an extendible operating loan facility, which includes overdraft protection in the amount of $20,000. The interest rate is based upon the parameters of certain bank covenants in the same fashion as the revolving term facility. Drawdowns under this facility are repayable on September 27, 2016, assuming the facility is not extended. The term and commencement of principal repayments may be extended by one year on each anniversary at the Company's request and lender's acceptance. The operating facility is secured by the Canadian and U.S. assets of the Company.
At December 31, 2012, the Company had utilized $8,656 of its loan facility for letters of credit, leaving $291,344 in available credit.
5. FINANCE LEASE OBLIGATIONS
| As at December 31, | 2012 | 2011 | |
| (C$000s) | ($) | ($) | |
| Finance lease contracts bearing interest at 5.68%, repayable at | |||
| $49 per month, secured by certain equipment | 753 | 2,579 | |
| Less: interest portion of contractual payments | (13) | (105) | |
| 740 | 2,474 | ||
| Less: current portion of finance lease obligations | (740) | (1,734) | |
| - | 740 | ||
The carrying values of the finance lease obligations approximate their fair values as the interest rates are not significantly different from current rates for similar leases.
6. CAPITAL STOCK
Authorized capital stock consists of an unlimited number of common shares.
| Years Ended December 31, | 2012 | 2011 | ||
| Continuity of Common Shares | Shares | Amount | Shares | Amount |
| (#) | (C$000s) | (#) | (C$000s) | |
| Balance, beginning of year | 43,709,073 | 271,817 | 43,488,099 | 263,490 |
| Issued upon exercise of stock options | 686,488 | 14,836 | 434,250 | 9,656 |
| Dividend Reinvestment Plan shares issued (note 21) | 625,080 | 13,798 | - | - |
| Shares cancelled (note 8) | - | - | (16,476) | (105) |
| Purchased under Normal Course Issuer Bid | - | - | (196,800) | (1,224) |
| Balance, end of year | 45,020,641 | 300,451 | 43,709,073 | 271,817 |
The weighted average number of common shares outstanding for the year ended December 31, 2012 was 44,334,810 basic and 44,808,099 diluted (year ended December 31, 2011 - 43,688,744 basic and 44,393,234 diluted). The difference between basic and diluted shares is attributable to the dilutive effect of stock options issued by the Company as disclosed in note 9.
7. NORMAL COURSE ISSUER BID
The Company received regulatory approval to purchase its own common shares in accordance with a Normal Course Issuer Bid for the one-year period November 7, 2011 through November 6, 2012 and for the one-year period November 12, 2012 through November 11, 2013. There were no shares purchased under the Normal Course Issuer Bid for the year ended December 31, 2012. During the year ended December 31, 2011, 196,800 common shares were purchased at a cost of $4,926 and, of the amount paid, $1,224 was charged to capital stock and $3,702 to retained earnings. The common shares were cancelled prior to December 31, 2011.
8. CONTRIBUTED SURPLUS
| Continuity of Contributed Surplus | Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
|
| (C$000s) | ($) | ($) | |
| Balance, beginning of year | 24,170 | 15,468 | |
| Stock options expensed | 6,990 | 8,500 | |
| Stock options exercised | (3,614) | (2,109) | |
| Shares cancelled | - | 105 | |
| Denison Plan of Arrangement | - | 2,206 | |
| Balance, end of year | 27,546 | 24,170 | |
The Plan of Arrangement that governed the amalgamation with Denison in 2004 included a six-year "sunset clause" which provided that untendered share positions would be surrendered to the Company after six years. On January 19, 2011, 16,476 common shares of the Company previously held in trust for untendered shareholders were cancelled. In addition, the Company became entitled to approximately 517,000 shares of Denison Mines Corporation. These shares were sold on the Toronto Stock Exchange for net proceeds of approximately $2,189.
For accounting purposes, the cancellation of the 16,476 common shares was recorded as a reduction of capital stock and an increase in contributed surplus in the amount of $105, which represents the book value of the cancelled shares as of the date of amalgamation with Denison on March 24, 2004. The receipt and sale of the shares of Denison Mines Corporation is considered an equity contribution by the Company's owners. Consequently, the net proceeds from their sale, along with approximately $17 of cash received in respect of fractional share entitlements, have been added to contributed surplus in an amount totalling $2,206.
9. STOCK-BASED COMPENSATION
(a) Stock Options
| Continuity of Stock Options | 2012 | 2011 | |||
| Average | Average | ||||
| Exercise | Exercise | ||||
| Options | Price | Options | Price | ||
| (#) | (C$) | (#) | (C$) | ||
| Balance, January 1 | 3,198,475 | 23.31 | 2,583,825 | 17.50 | |
| Granted during the year | 704,200 | 27.71 | 1,179,800 | 34.09 | |
| Exercised for common shares | (686,488) | 16.35 | (434,250) | 17.38 | |
| Forfeited | (295,775) | 26.60 | (130,900) | 25.51 | |
| Balance, December 31 | 2,920,412 | 25.67 | 3,198,475 | 23.31 | |
Stock options vest equally over four years and expire five years from the date of grant. When stock options are exercised the proceeds, together with the amount of compensation expense previously recorded in contributed surplus, are added to capital stock.
(b) Stock Units
| Continuity of Stock Units | 2012 | 2011 | |||||
| Deferred | Performance | Restricted | Deferred | Performance | Restricted | ||
| Stock | Stock | Stock | Stock | Stock | Stock | ||
| Units | Units | Units | Units | Units | Units | ||
| (#) | (#) | (#) | (#) | (#) | (#) | ||
| Balance, January 1 | 35,000 | 40,000 | - | - | 55,000 | - | |
| Granted during the year | 35,000 | 45,000 | 270,135 | 35,000 | 55,000 | - | |
| Exercised | (35,000) | (40,000) | - | - | (62,500) | - | |
| Forfeited | - | - | (22,905) | - | (7,500) | - | |
| Balance, December 31 | 35,000 | 45,000 | 247,230 | 35,000 | 40,000 | - | |
The Company grants deferred stock 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 stock units is recognized equally over the vesting period, based on the current market price of the Company's shares. During the year ended December 31, 2012, $885 of compensation expense was recognized for deferred stock units (year ended December 31, 2011 - $998). This amount is included in selling, general and administrative expenses.
The Company grants performance stock units to its senior officers who do not participate in the stock option plan. The amount of the grants earned is linked to corporate performance and the grants vest on the approval of the Board of Directors at the meeting held to approve the consolidated financial statements for the year in respect of which performance is being evaluated. As with the deferred stock units, performance stock units are settled either in cash or Company shares purchased on the open market. During the year ended December 31, 2012, $1,296 of compensation expense was recognized for performance stock units (year ended December 31, 2011 - $1,330). This amount is included in selling, general and administrative expenses.
During the first quarter of 2012, the Company commenced granting of restricted share units to its employees. These units vest equally over three years and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the restricted share units is recognized over the vesting period, based on the current market price of the Company's shares. During the year ended December 31, 2012, $3,693 of compensation expense was recognized for restricted share units (year ended December 31, 2011 - $nil). This amount is included in selling, general and administrative expense.
Changes in the Company's obligations under the deferred and performance stock 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.
10. FINANCIAL INSTRUMENTS
The Company's financial instruments included in the consolidated balance sheets are comprised of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, bank loan, long-term debt and finance lease obligations.
The fair values of financial instruments included in the consolidated balance sheets, except long-term debt, approximate their carrying amounts due to the short-term maturity of those instruments. The fair value of the senior unsecured notes based on the closing market price at December 31, 2012 was $443,228 before deduction of unamortized debt issuance costs (December 31, 2011 - $446,209). The carrying value of the senior unsecured notes at December 31, 2012 was $447,705 before deduction of unamortized debt issuance costs (December 31, 2011 - $457,650). The fair values of the remaining long-term debt and finance lease obligations approximate their carrying values, as described in notes 7 and 8.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash operating assets and liabilities for the years ended December 31, 2012 and 2011 are as follows:
| Three Months Ended Dec. 31, | Years Ended Dec. 31, | |||
| 2012 | 2011 | 2012 | 2011 | |
| (C$000s) | ($) | ($) | ($) | ($) |
| Accounts receivable | (15,895) | (10,768) | (6,245) | (136,246) |
| Income taxes recoverable | (345) | 1,318 | 1,048 | 1,944 |
| Inventory | 4,887 | (4,499) | (24,369) | (36,123) |
| Prepaid expenses and deposits | 2,447 | 1,862 | (548) | (1,769) |
| Accounts payable and accrued liabilities | (1,782) | (5,662) | 4,666 | 49,510 |
| Other long-term liabilities | (51) | (179) | (340) | (288) |
| (10,739) | (17,928) | (25,788) | (122,972) | |
Purchase of property, plant and equipment is comprised of:
| Three Months Ended Dec. 31, | Years Ended Dec. 31, | ||||
| 2012 | 2011 | 2012 | 2011 | ||
| (C$000s) | ($) | ($) | |||
| Property, plant and equipment additions | (55,694) | (101,008) | (279,017) | (323,962) | |
| Change in liabilities related to purchase | |||||
| of property, plant and equipment | 356 | (8,970) | 17,696 | (15,744) | |
| (55,338) | (109,978) | (261,321) | (339,706) | ||
12. CAPITAL STRUCTURE
The Company's capital structure is comprised of shareholders' equity and long-term debt. The Company's objectives in managing capital are (i) to maintain flexibility so as to preserve the Company's access to capital markets and its ability to meet its financial obligations, and (ii) to finance growth, including potential acquisitions.
The Company manages its capital structure and makes adjustments in light of changing market conditions and new opportunities, while remaining cognizant of the cyclical nature of the oilfield services sector. To maintain or adjust its capital structure, the Company may revise its capital spending, adjust dividends paid to shareholders, issue new shares or new debt or repay existing debt.
The Company monitors its capital structure and financing requirements using, amongst other parameters, the ratio of long-term debt to cash flow. Cash flow for this purpose is calculated on a 12-month trailing basis and is defined below.
| Years Ended December 31, | 2012 | 2011 | |
| (C$000s) | ($) | ($) | |
| Net income for the year | 96,361 | 187,157 | |
| Adjusted for the following: | |||
| Depreciation | 90,381 | 87,457 | |
| Amortization of debt issuance costs and debt discount | 1,234 | 1,207 | |
| Stock-based compensation | 6,990 | 8,500 | |
| Unrealized foreign exchange (gains) losses | (10,895) | 11,945 | |
| Loss (gain) on disposal of property, plant and equipment | 802 | (88) | |
| Deferred income taxes | 36,642 | 87,037 | |
| Cash flow | 221,515 | 383,215 | |
The ratio of long-term debt to cash flow does not have any standardized meaning under IFRS and may not be comparable to similar measures used by other companies.
At December 31, 2012, the long-term debt to cash flow ratio was 1.99:1 (December 31, 2011 - 1.18:1) calculated on a 12-month trailing basis as follows:
| As at December 31, | 2012 | 2011 | |
| (C$000s, except ratio) | ($) | ($) | |
| Long-term debt (net of unamortized debt issuance costs and | |||
| debt discount) (note 4) | 441,497 | 451,021 | |
| Cash flow | 221,515 | 383,215 | |
| Long-term debt to cash flow ratio | 1.99:1 | 1.18:1 | |
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. The Company is in compliance with all such covenants.
The Company's capital management objectives, evaluation measures and targets have remained unchanged over the periods presented.
13. PURCHASE OBLIGATIONS
The Company has obligations for the purchase of products, services and property, plant and equipment over the next five years that total approximately $369,230.
14. RELATED-PARTY TRANSACTIONS
An entity controlled by a director of the Company provides ongoing real estate advisory services to the Company. The aggregate fees charged for such services during 2012 were $29 (2011 - $90), as measured at the exchange amount. This arrangement was discontinued in 2013.
In November 2010, the Company lent a senior officer $2,500 to purchase common shares of the Company on the Toronto Stock Exchange. The loan is on a non-recourse basis and is secured by the common shares acquired with the loan proceeds. It is for a term of five years and bears interest at the rate of 3.375 percent per annum, payable annually. The market value of the shares that secure the loan was approximately $2,119 as at December 31, 2012 (December 31, 2011 - $2,411). In accordance with applicable accounting standards regarding share purchase loans receivable, this loan is classified as a reduction of shareholders' equity due to its non-recourse nature. In addition, the shares purchased with the loan proceeds are considered to be, in substance, stock options.
The Company leases certain premises from an entity controlled by a director of the Company. The aggregative rent charged for these premises during 2012 was $356 (2011 - $312), as measured at the exchange amount.
15. PRESENTATION OF EXPENSES
The Company presents its expenses on the consolidated statements of operations using the function of expense method whereby expenses are classified according to their function within the Company. This method was selected as it is more closely aligned with the Company's business structure. The Company's functions under IFRS are as follows:
- operations; and
- selling, general and administrative.
Cost of sales includes direct operating costs (including product costs, direct labour and overhead costs) and depreciation on assets relating to operations.
Additional information on the nature of expenses is as follows:
| Years Ended December 31, | 2012 | 2011 |
| (C$000s) | ($) | ($) |
| Product costs | 490,222 | 401,522 |
| Depreciation | 90,381 | 87,457 |
| Amortization of debt issuance costs and debt discount | 1,234 | 1,207 |
| Employee benefits expense (note 16) | 356,844 | 310,085 |
16. EMPLOYEE BENEFITS EXPENSE
Employee benefits include all forms of consideration given by the Company in exchange for services rendered by employees.
| Years Ended December 31, | 2012 | 2011 |
| (C$000s) | ($) | ($) |
| Salaries and short-term employee benefits | 337,919 | 295,525 |
| Post-employment benefits (group retirement savings plan) | 3,587 | 2,914 |
| Share-based payments | 12,866 | 10,836 |
| Termination benefits | 2,472 | 810 |
| 356,844 | 310,085 | |
17. COMPENSATION OF KEY MANAGEMENT
Key management is defined as the Company's Board of Directors, Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer. Compensation awarded to key management included:
| Years Ended December 31, | 2012 | 2011 |
| ($C000s) | ($) | ($) |
| Salaries, fees and short-term benefits | 2,756 | 2,732 |
| Post-employment benefits (group retirement savings plan) | 34 | 32 |
| Share-based payments | 2,392 | 2,326 |
| 5,182 | 5,090 | |
In the event of termination, key management (excluding the Board of Directors) are entitled to one to two years of annual compensation. In the event of termination resulting from change of control, key management (excluding the Board of Directors) are entitled to two years of annual compensation.
18. 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 $8,981 (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. NAPC and the Company are assessing available rights of appeal to any other levels of court in any jurisdiction where such an appeal is warranted.
Several other smaller groups of former employees have filed similar cases in various courts in Greece. One of these cases was heard by the Athens Court of First Instance on January 18, 2007. By judgment rendered November 23, 2007, the plaintiff's allegations were partially accepted, and the plaintiff was awarded compensation for additional work of approximately $46 (35 euros), plus interest. The appeal of this decision was heard on June 2, 2009, at which time an additional claim by the plaintiff was also heard. A decision in respect of the hearing has been rendered which accepted NAPC's appeal of the initial claim and partially accepted the additional claim of the plaintiff, resulting in an award of approximately $14 (11 euros), plus interest.
Another one of the lawsuits seeking salaries in arrears of $168 (128 euros) plus interest, was heard by the Supreme Court of Greece on November 6, 2007, at which date the appeal of the plaintiffs was denied for technical reasons due to improper service. A rehearing of this appeal was heard on September 21, 2010 and the decision rendered declared once again the appeal inadmissible due to technical reasons. The remaining action, which is seeking salaries in arrears of approximately $576 (439 euros) plus interest, was scheduled to be heard before the Athens Court of First Instance on October 1, 2009, but has been postponed a total of four times, including the most recent postponement on February 22, 2013. No new date has been set for the postponed hearing.
The maximum aggregate interest payable under the claims noted above amounted to $15,263 (11,635 euros) as at December 31, 2012.
Management is of the view that it is improbable there will be an outflow of economic resources from the Company to settle these claims. Consequently, no provision has been recorded in these consolidated financial statements.
U.S. Litigation
A collective and class action claim was filed against the Company on September 27, 2012 in the United States District Court for the Western District of Pennsylvania. The direction and financial consequences of the complaint cannot be determined at this time and consequently, no provision has been recorded in the Company's financial statements.
19. SEGMENTED INFORMATION
The Company's activities are conducted in four geographic segments: Canada, the United States, Russia and Latin America. All activities are related to hydraulic fracturing, coiled tubing, cementing and other well completion services for the oil and natural gas industry.
The business segments presented reflect the Company's management structure and the way its management reviews business performance. The Company evaluates the performance of its operating segments primarily based on operating income, as defined below.
| Canada | United States | Russia | Latin America | Corporate | Consolidated | |
| (C$000s) | ($) | ($) | ($) | ($) | ($) | ($) |
| Three Months Ended December 31, 2012 | ||||||
| Revenue | 201,573 | 109,975 | 24,197 | 31,742 | - | 367,487 |
| Operating income (loss)(1) | 49,022 | 5,488 | (254) | 3,101 | (14,139) | 43,218 |
| Segmented assets | 707,663 | 568,665 | 126,564 | 121,929 | - | 1,524,821 |
| Capital expenditures | 22,216 | 26,351 | 2,454 | 4,673 | - | 55,694 |
| Goodwill | 7,236 | 2,308 | 979 | - | - | 10,523 |
| Three Months Ended December 31, 2011 | ||||||
| Revenue | 237,286 | 202,511 | 30,737 | 19,503 | - | 490,037 |
| Operating income (loss)(1) | 98,221 | 60,292 | 3,818 | 1,405 | (13,372) | 150,364 |
| Segmented assets | 710,143 | 534,294 | 118,197 | 42,487 | - | 1,405,121 |
| Capital expenditures | 35,415 | 61,006 | 3,140 | 1,447 | - | 101,008 |
| Goodwill | 7,236 | 2,308 | 979 | - | - | 10,523 |
| Year Ended December 31, 2012 | ||||||
| Revenue | 732,880 | 638,483 | 112,765 | 111,088 | - | 1,595,216 |
| Operating income (loss)(1) | 188,555 | 105,129 | 6,566 | 8,839 | (52,076) | 257,013 |
| Segmented assets | 707,663 | 568,665 | 126,564 | 121,929 | - | 1,524,821 |
| Capital expenditures | 124,902 | 138,328 | 6,173 | 9,614 | - | 279,017 |
| Goodwill | 7,236 | 2,308 | 979 | - | - | 10,523 |
| Year Ended December 31, 2011 | ||||||
| Revenue | 755,333 | 607,731 | 116,105 | 58,223 | - | 1,537,392 |
| Operating income (loss)(1) | 258,362 | 184,209 | 12,742 | 12 | (42,497) | 412,828 |
| Segmented assets | 710,143 | 534,294 | 118,197 | 42,487 | - | 1,405,121 |
| Capital expenditures | 139,459 | 170,956 | 10,601 | 2,946 | - | 323,962 |
| Goodwill | 7,236 | 2,308 | 979 | - | - | 10,523 |
| (1) | Operating income (loss) is defined as net income (loss) before depreciation, interest, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, and income taxes. |
| Three Months Ended Dec. 31, | Years Ended Dec. 31, | |||||
| Years Ended December 31, | 2012 | 2011 | 2012 | 2011 | ||
| (C$000s) | ($) | ($) | ($) | |||
| Net income | 10,981 | 78,858 | 96,361 | 187,157 | ||
| Add back (deduct): | ||||||
| Depreciation | 23,634 | 22,996 | 90,381 | 87,457 | ||
| Interest | 8,933 | 9,053 | 36,354 | 35,489 | ||
| Foreign exchange (gains) losses | (3,818) | 990 | (8,260) | 14,234 | ||
| Loss (gain) on disposal of property, plant | ||||||
| and equipment | 170 | 228 | 802 | (88) | ||
| Income taxes | 3,318 | 38,239 | 41,375 | 88,579 | ||
| Operating income | 43,218 | 150,364 | 257,013 | 412,828 | ||
Operating income does not have any standardized meaning under IFRS and may not be comparable to similar measures used by other companies.
The following table sets forth consolidated revenue by service line:
| Three Months Ended Dec. 31, | Years Ended Dec. 31, | |||
| Years Ended December 31, | 2012 | 2011 | 2012 | 2011 |
| (C$000s) | ($) | ($) | ($) | ($) |
| Fracturing | 1,436,279 | 449,137 | 1,436,279 | 1,406,444 |
| Coiled tubing | 100,239 | 30,496 | 100,239 | 98,639 |
| Cementing | 34,750 | 7,673 | 34,750 | 21,834 |
| Other | 23,948 | 2,731 | 23,948 | 10,475 |
| 1,595,216 | 490,037 | 1,595,216 | 1,537,392 | |
The Company's customer base consists of over 190 oil and natural gas exploration and production companies, ranging from large multinational publicly traded companies to small private companies. Notwithstanding the Company's broad customer base, Calfrac has four significant customers that collectively accounted for approximately 33 percent of the Company's revenue for the year ended December 31, 2012 (year ended December 31, 2011 - four significant customers for approximately 26 percent) and of such customers, one customer accounted for approximately 13 percent of the Company's revenue for the year ended December 31, 2012 (year ended December 31, 2011 - 7 percent).
20. SEASONALITY OF OPERATIONS
The Company's Canadian business is seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place and access to wellsites in Canada is reduced.
21. DIVIDEND REINVESTMENT PLAN
The Company has a Dividend Reinvestment Plan (DRIP) that allows shareholders to direct cash dividends paid on all or a portion of their common shares to be reinvested in additional common shares that are issued at 95 percent of the volume-weighted average price of the common shares traded on the Toronto Stock Exchange during the last five trading days preceding the relevant dividend payment date.
A dividend of $0.10 per common share was declared on December 8, 2011 and paid on January 31, 2012. Of the $4,376 in dividends declared, $1,771 was reinvested under the DRIP into 71,189 common shares of the Company.
A dividend of $0.50 per common share was declared on June 15, 2012 and paid on July 16, 2012. Of the $22,182 in dividends declared, $6,083 was reinvested under the DRIP into 298,459 common shares of the Company.
A dividend of $0.50 per common share was declared on December 14, 2012 and paid on December 21, 2012. Of the $22,375 in dividends declared, $5,944 was reinvested under the DRIP into 255,432 common shares of the Company.
SOURCE: Calfrac Well Services Ltd.
Douglas R. Ramsay
Chief Executive Officer
Telephone: 403-266-6000
Fax: 403-266-7381
Laura A. Cillis
Senior Vice President, Finance
and Chief Financial Officer
Telephone: 403-266-6000
Fax: 403-266-7381
Tom J. Medvedic
Senior Vice President,
Corporate Development
Telephone: 403-266-6000
Fax: 403-266-7381
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