Calfrac Announces Second Quarter Results and Contract Award
CALGARY, July 31, 2013 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three and six months ended June 30, 2013.
| HIGHLIGHTS | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||
| 2013 | 2012 | Change | 2013 | 2012 | Change | |||
| (C$000s, except per share and unit data) | ($) | ($) | (%) | ($) | ($) | (%) | ||
| (unaudited) | ||||||||
| Financial | ||||||||
| Revenue | 288,701 | 335,780 | (14) | 712,098 | 809,887 | (12) | ||
| Operating income(1) | 16,307 | 29,810 | (45) | 78,977 | 143,191 | (45) | ||
| EBITDA(2) | 16,235 | 18,736 | (13) | 81,404 | 146,731 | (45) | ||
| Per share - basic | 0.36 | 0.42 | (14) | 1.79 | 3.33 | (46) | ||
| Per share - diluted | 0.35 | 0.42 | (17) | 1.78 | 3.29 | (46) | ||
| Net income (loss) attributable to | ||||||||
| the shareholders of Calfrac | ||||||||
| before foreign exchange | ||||||||
| losses or gains(3) | (14,969) | (4,294) | (249) | 7,707 | 54,971 | (86) | ||
| Per share - basic | (0.33) | (0.10) | (230) | 0.17 | 1.25 | (86) | ||
| Per share - diluted | (0.33) | (0.10) | (230) | 0.17 | 1.23 | (86) | ||
| Net income (loss) attributable to | ||||||||
| the shareholders of Calfrac | (14,584) | (11,855) | (23) | 10,061 | 58,986 | (83) | ||
| Per share - basic | (0.32) | (0.27) | (19) | 0.22 | 1.34 | (84) | ||
| Per share - diluted | (0.32) | (0.27) | (19) | 0.22 | 1.32 | (83) | ||
| Working capital (end of period) | 319,982 | 357,128 | (10) | 319,982 | 357,128 | (10) | ||
| Total equity (end of period) | 784,247 | 747,591 | 5 | 784,247 | 747,591 | 5 | ||
| Weighted average common | ||||||||
| shares outstanding (#) | ||||||||
| Basic | 45,616 | 44,270 | 3 | 45,392 | 44,040 | 3 | ||
| Diluted | 45,904 | 44,684 | 3 | 45,725 | 44,610 | 3 | ||
| Operating (end of period) | ||||||||
| Pumping horsepower (000s) | 1,025 | 830 | 23 | |||||
| Coiled tubing units (#) | 29 | 29 | - | |||||
| Cementing units (#) | 30 | 23 | 30 | |||||
| (1) | Operating income is defined as net income (loss) before depreciation, interest, foreign exchange gains or losses, gains or losses on disposal of capital assets 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 (loss) 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 the three and six months ended June 30, 2013 and to discuss our prospects for the remainder of 2013 and beyond. During the second quarter, the Company:
- had an active quarter in western Canada despite wet weather conditions delaying some planned completions activity until the third quarter of 2013;
- experienced strong equipment utilization in the unconventional natural gas resource plays of the United States;
- commenced fracturing operations in Argentina; and
- experienced further increases in the number of horizontal multi-stage fracturing treatments performed in Mexico and Western Siberia.
Financial Highlights
For the three months ended June 30, 2013, the Company recorded:
- revenue of $288.7 million, a decrease of 14 percent from the second quarter of 2012 due primarily to lower pricing in Canada and the United States combined with lower activity in Canada due to unseasonably wet weather in western Canada. The decrease was offset partially by higher fracturing activity in the Marcellus and Fayetteville unconventional natural gas shale plays in the United States, increased multi-stage fracturing activity in Russia and the commencement of fracturing operations in Argentina;
- operating income of $16.3 million versus $29.8 million in the same quarter of 2012, due mainly to competitive pricing pressures in Canada and the United States and lower activity in western Canada due to adverse weather conditions; and
- a net loss attributable to shareholders of Calfrac of $14.6 million or $0.32 per share diluted compared to a net loss of $11.9 million or $0.27 per share diluted in the second quarter of 2012, which included a foreign exchange loss of $9.8 million.
For the six months ended June 30, 2013, the Company generated:
- revenue of $712.1 million, a decrease of 12 percent from the first six months of 2012, driven primarily by competitive pricing pressures in Canada and the United States and lower fracturing and coiled tubing activity in the unconventional plays of the Western Canada Sedimentary Basin due to inclement weather during the second quarter, offset partially by higher multi-stage fracturing activity in Western Siberia;
- operating income of $79.0 million versus $143.2 million in the same period of 2012, the decrease of 45 percent being mainly a result of competitive pricing pressures in Canada and the United States, higher transportation costs associated with the completion of larger fracturing jobs in Canada and start-up costs associated with the commencement of fracturing operations in Argentina; and
- net income attributable to shareholders of Calfrac of $10.1 million or $0.22 per share diluted compared to net income of $59.0 million or $1.32 per share diluted in the same period of 2012.
Operational Highlights
Canada
During the second quarter of 2013, fracturing and coiled tubing activity in western Canada was significantly affected by unseasonably wet weather which culminated in record flooding in southern Alberta in late June. These conditions severely hampered Calfrac's ability to execute all of its planned projects for the second quarter and, as a result, this work was deferred until the third quarter. Despite this, the Company was very active in the Montney unconventional resource play and completed several large multi-well pad projects in this region.
In the midst of challenging operating conditions in Canada during the second quarter and Calfrac's continued focus on managing its cost structure, the Company assigned a significant number of Canadian field employees to the United States. This served to provide the United States division with experienced field employees during a very active quarter in the Marcellus natural gas resource play.
United States
Calfrac's United States operations sustained the positive momentum generated in the first quarter of 2013 as revenue and operating income both increased on a quarter-over-quarter basis. These improvements were primarily driven by increased equipment utilization in the Marcellus natural gas play and the impact of cost-saving initiatives implemented in late 2012 and early 2013. Equipment and personnel were transferred from Canada during the second quarter to meet the strong customer demand in the Marcellus play. The benefits of the increased activity in this region was offset only partially by lower than expected fracturing activity in the Bakken oil shale play in North Dakota, resulting from a longer than anticipated spring break-up period and similar wet weather to that hampering operations in western Canada. Activity in the Fayetteville shale play met the Company's expectations as its fracturing fleet remained active. Development of the Niobrara play in Colorado continued and Calfrac was active in several projects during the second quarter. While still in the early stages of development, the initial success of the Niobrara oil play provides optimism for increased industry activity in the future.
Russia
Activity in Calfrac's Russian operations during the second quarter of 2013 met expectations as the onset of spring weather provided the environment for increased equipment utilization and lower operating costs. As a result, revenue and operating income increased from the first quarter of 2013. The improvement in equipment utilization was partially due to an increase in the number of horizontal multi-stage completions in Western Siberia. While still in the early stages of development, Calfrac remains optimistic that the adoption of this technology will gain further acceptance and create a driver of future growth in operating and financial performance in Russia.
Latin America
Budget reductions implemented by Calfrac's main customer in Mexico during the second quarter of 2013 significantly decreased activity in that country from the first quarter. The Company responded by rationalizing its operating cost structure while maintaining strong market share in the northern region of Mexico. Some of this work included horizontal multi-stage completions in the Burgos field which were not affected by the budget cutbacks. Calfrac has adjusted its cost structure for the expected level of activity in the short term and, if required, will proactively implement further reductions.
Calfrac's commencement of fracturing operations in Argentina during May 2013 was a major milestone for the Company. The start-up phase has gone exceptionally well and mitigated the impact of the slowdown in Mexico during the second quarter. While most of its initial projects were focused on completions within conventional reservoirs, the Company expects to commence fracturing operations in unconventional plays in the near future. Calfrac believes that the move to unconventional plays could provide the basis for significant growth over the longer term.
In Colombia, challenging market conditions persisted in the second quarter of 2013, resulting in lower than expected equipment utilization and financial performance. Permitting and infrastructure issues remain barriers to greater oilfield activity. The Company expects that these issues will be resolved in the future, but continues to closely manage its operating costs while focusing on expanding its customer base. Calfrac currently operates four cementing units in Colombia and does not intend to deploy any additional equipment until market conditions improve.
Outlook and Business Prospects
The Company expects that the strength in North American commodity prices will result in higher oilfield activity in the unconventional resource plays of Canada and the United States during the second half of 2013 and into 2014. This industry trend is anticipated to result in larger multi-well pad designs, longer horizontal legs and greater stimulation intensity. In addition, the use of multi-stage completion technology in horizontal wellbores in Mexico, Argentina and Russia is expected to continue to increase equipment utilization in those markets over the short and long term.
Fracturing and coiled tubing activity in western Canada remains very strong. Calfrac expects that oil-focused activity will remain stable for the remainder of the year with the introduction of higher rate treatments in certain plays, such as the Cardium, driving higher equipment utilization. The development of natural gas for future liquefied natural gas (LNG) export projects is anticipated to drive significant growth for Calfrac. The Company has a strong and active customer base as well as a number of long-term relationships with large customers in the Montney, Deep Basin and Duvernay plays. Calfrac expects that well completion activity will continue to grow in Canada as many of these plays transition from delineation to development. Positive initial production results, particularly with regard to natural gas liquids, provide significant optimism about the future development of the Duvernay play. The Duvernay resource play represents one of the most capital intensive plays in western Canada and has the potential to materially increase the demand for completion services in western Canada over the longer term. Calfrac is one of the most active service providers in this play and anticipates that its positioning will form the basis for further growth opportunities. Over the longer term, further operational efficiencies are expected to be achieved through the expanded use of 24-hour operations and multi-well pad development.
Looking beyond the Duvernay play, a broader key driver of long-term growth for Calfrac is the emergence of LNG export projects, a number of which have been proposed and some of which have to date received key regulatory approvals. The prepatory activity is expected to increase with the influx of capital from foreign entities and large multi-national companies. As sufficient natural gas production and reserves must be available to support the construction of LNG export facilities and future LNG exports, the related increase in capital investment should provide a significant platform for growth for Calfrac's Canadian operations, as a number of longstanding customers are involved in the associated projects. The Company's leadership position in the development of the Montney, Duvernay and Horn River resource plays is expected to enable it to participate significantly in the development of the natural gas reserves required to support these LNG initiatives. In relation to this trend, Calfrac is pleased to announce that it has entered into a multi-year minimum commitment contract for the provision of three fracturing spreads to Progress Energy Canada Ltd. for its Montney project in northeast British Columbia, and has also executed a right of first call agreement for an additional spread in respect of Progress' non-Montney work. These agreements represent another major milestone in the long-term relationship between Progress and Calfrac, and the Company looks forward to working closely with the Progress team to assist it in the development of its world class assets in the Montney play. In anticipation of securing this contract and to service the growth anticipated in the Canadian marketplace, Calfrac has increased its Canadian horsepower by approximately 34 percent over the past 12-month period, and has been actively securing the additional employee base required to meet the anticipated work commitments under the agreements while continuing to meet the increasing demand for its services with other customers. As a result, Calfrac expects to be able to meet the increased demand for its services with its existing equipment fleet, but will continue to closely monitor market conditions and is well positioned with its critical suppliers to efficiently augment its previously announced capital budget as may be required in the context of the evolving Canadian market.
The operational improvements that were implemented in the United States in late 2012 and early 2013 resulted in improved financial performance during the first half of 2013 in the midst of very challenging market conditions in some key markets. Calfrac continues to be focused on prudently managing its cost structure and expanding its customer relationships in order to maximize profitability. There continues to be near-term uncertainty, however, as the United States pressure pumping market remains oversupplied. While the Company does not expect market conditions to change significantly in the third quarter, activity may decline in the fourth quarter as producers evaluate their capital budgets. That said, Calfrac believes that the strength in commodity prices may lead to increased activity in the regions where it operates as the Company looks toward 2014 and beyond.
Calfrac remains well-positioned in the United States pressure pumping market. The Company services two of the most active unconventional resource plays in the United States, the Bakken oil shale play in North Dakota and the Marcellus shale natural gas play in Pennsylvania and West Virginia. Calfrac believes that the Marcellus shale play will continue to be a primary region for natural gas development due to its low cost structure and proximity to markets. Calfrac currently operates four fracturing crews in this region and, based on a recent tender award, expects to deploy a fifth crew late in 2013. Due to the Company's strong customer base in the Fayetteville shale play of Arkansas, activity is anticipated to remain stable despite recent reductions in overall oilfield activity in this region. Calfrac's longstanding presence in the Rockies region provides additional growth prospects in the Niobrara shale oil play as many producers have begun using longer reach horizontal wells and greater stimulation intensity with encouraging results.
Calfrac's year-to-date operating and financial results in Russia are consistent with expectations from the 2013 contract tender process. Future growth and improved profitability in this division will be based on the expanded use of new technologies in Western Siberia, such as horizontal drilling and multi-stage completions. The Company believes that there is significant future potential in Russia given the country's position as a leading producer of oil and natural gas. Over the last few quarters, the number of multi-stage fracturing jobs completed in Russia has increased significantly. Consequently, Calfrac expects that this trend will continue to drive demand for its services over the short and long term as Russia's producing sector gains confidence in this completion strategy.
The Company expects the use of multi-stage fracturing technology within horizontal wellbores in Mexico to become more common over the longer term as capital budgets are replenished. The budget constraints introduced by Calfrac's customer in Mexico during the second quarter, however, are expected to curtail the Company's equipment utilization in the third quarter and, potentially, the remainder of the year. In response to these new market conditions, Calfrac reduced its Mexican operating cost structure during the second quarter to align with expected levels of activity. The Company continues to monitor the business environment closely and will take further actions, if required.
With Calfrac's successful entry into the Argentinean fracturing market during the second quarter, the Company believes that it is well-positioned to take advantage of opportunities related to the development of significant unconventional resource plays in that country. Calfrac believes that horizontal drilling combined with multi-stage fracturing will be key to unlocking these resources. As there is very limited in-country capacity to service these emerging unconventional plays, the Company's strategy to lever its longstanding reputation for technical expertise and a strong commitment to safety and service quality is anticipated to provide the foundation for long-term growth in Argentina.
The Colombian oilfield service market remains challenging due to lower than expected industry drilling activity caused by permitting and infrastructure issues. The Company currently operates four cementing units in Colombia and remains focused on expanding its customer base as well as managing its cost structure to improve future financial performance.
In closing, I would like to thank Calfrac's employees for their efforts to assist the communities that were hit by the flooding in southern Alberta at the end of June. Through your hard work and commitment the Company was able to navigate the evacuation of its corporate head office without detrimental effect on its operations. I also want to thank-you for the outstanding job you did illustrating firsthand the volunteerism that sets this region and this company apart through your assistance with preventative sand bagging in Red Deer and Medicine Hat prior to the flooding, and through the operation of pump trucks and the formation of volunteer work crews to assist affected homeowners in Calgary, High River and Medicine Hat in the days following the flooding. The Company recognizes that the rebuild from this disaster will take a great deal of time, and hopes that your efforts and the efforts of the thousands of other volunteers has in some small way assisted in that process.
On behalf of the Board of Directors,
Douglas R. Ramsay
Chief Executive Officer
July 30, 2013
2013 Overview
In the second quarter of 2013, the Company:
- generated revenue of $288.7 million, a decrease of 14 percent from the second quarter of 2012 due primarily to lower pricing in Canada and the United States combined with lower activity in Canada due to unseasonably wet weather in western Canada. The decrease was offset partially by higher fracturing activity in the Marcellus and Fayetteville natural gas shale plays, increased multi-stage fracturing activity in Russia and the commencement of fracturing operations in Argentina;
- reported operating income of $16.3 million versus $29.8 million in the same quarter of 2012, due mainly to competitive pricing pressures in Canada and the United States and lower activity in western Canada due to adverse weather conditions;
- reported a net loss attributable to shareholders of Calfrac of $14.6 million or $0.32 per share diluted compared to a net loss of $11.9 million or $0.27 per share diluted in the second quarter of 2012, which included a foreign exchange loss of $9.8 million;
- incurred capital expenditures of $46.6 million, principally related to the Company's fracturing operations in Canada, the United States and Argentina; and
- declared a quarterly dividend of $0.25 per share.
In the six months ended June 30, 2013, the Company:
- generated revenue of $712.1 million, a decrease of 12 percent from the first six months of 2012 driven primarily by competitive pricing pressures in Canada and the United States, plus lower fracturing and coiled tubing activity in the unconventional plays of the Western Canada Sedimentary Basin due to inclement weather during the second quarter, offset partially by higher multi-stage fracturing activity in Western Siberia;
- reported operating income of $79.0 million versus $143.2 million in the same period of 2012, a decrease of 45 percent, mainly as a result of competitive pricing pressures in Canada and the United States, higher transportation costs associated with the completion of larger fracturing jobs in Canada and start-up costs associated with the commencement of fracturing operations in Argentina;
- reported net income attributable to shareholders of Calfrac of $10.1 million or $0.22 per share diluted compared to net income of $59.0 million or $1.32 per share diluted in the same period of 2012; and
- incurred capital expenditures of $90.6 million primarily to bolster the Company's fracturing operations in Canada, the United States and Argentina.
Financial Overview - Three Months Ended June 30, 2013 Versus 2012
| Canada | ||||||
| Three Months Ended June 30, | 2013 | 2012 | Change | |||
| (C$000s, except operational information) | ($) | ($) | (%) | |||
| (unaudited) | ||||||
| Revenue | 80,719 | 104,720 | (23) | |||
| Expenses | ||||||
| Operating | 74,751 | 95,083 | (21) | |||
| Selling, General and Administrative (SG&A) | 3,932 | 3,808 | 3 | |||
| 78,683 | 98,891 | (20) | ||||
| Operating income(1) | 2,036 | 5,829 | (65) | |||
| Operating income (%) | 2.5% | 5.6% | (55) | |||
| Fracturing revenue per job ($) | 195,191 | 185,377 | 5 | |||
| Number of fracturing jobs | 402 | 512 | (21) | |||
| Pumping horsepower, end of period (000s) | 404 | 302 | 34 | |||
| Coiled tubing revenue per job ($) | 27,128 | 36,594 | (26) | |||
| Number of coiled tubing jobs | 83 | 268 | (69) | |||
| Coiled tubing units, end of period (#) | 21 | 21 | - | |||
| (1) | Refer to "Non-GAAP Measures" on page 17 for further information. |
Revenue
Revenue from Calfrac's Canadian operations during the second quarter of 2013 was $80.7 million versus $104.7 million in the comparable three-month period of 2012. The 23 percent decrease in revenue was primarily due to no fracturing and coiled tubing activity in the Horn River area of northeast British Columbia combined with a more competitive pricing environment offset partially by the completion of larger fracturing jobs. During the second quarter of 2012, a significant Horn River project was completed, but the Company had no activity in that region in 2013. In addition, extremely wet weather in June in western Canada, specifically in southern and central Alberta, delayed planned completion projects until the third quarter contributing to the decrease in fracturing activity.
Operating Income
Operating income in Canada decreased by 65 percent to $2.0 million during the second quarter of 2013 from $5.8 million in the same period of 2012 due to a more competitive pricing environment, combined with lower overall equipment utilization.
| United States | ||||||
| Three Months Ended June 30, | 2013 | 2012 | Change | |||
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |||
| (unaudited) | ||||||
| Revenue | 146,275 | 175,136 | (16) | |||
| Expenses | ||||||
| Operating | 116,916 | 136,795 | (15) | |||
| SG&A | 4,184 | 5,478 | (24) | |||
| 121,100 | 142,273 | (15) | ||||
| Operating income(1) | 25,175 | 32,863 | (23) | |||
| Operating income (%) | 17.2% | 18.8% | (9) | |||
| Fracturing revenue per job ($) | 61,649 | 76,187 | (19) | |||
| Number of fracturing jobs | 2,254 | 2,207 | 2 | |||
| Pumping horsepower, end of period (000s) | 501 | 456 | 10 | |||
| Coiled tubing units, end of period (#) | - | 1 | (100) | |||
| Cementing revenue per job ($) | 32,670 | 33,149 | (1) | |||
| Number of cementing jobs | 224 | 157 | 43 | |||
| Cementing units, end of period (#) | 17 | 11 | 55 | |||
| US$/C$ average exchange rate(2) | 1.0233 | 1.0104 | 1 | |||
| (1) | Refer to "Non-GAAP Measures" on page 17 for further information. |
| (2) | Source: Bank of Canada. |
Revenue
Revenue from Calfrac's United States operations decreased during the second quarter of 2013 to $146.3 million from $175.1 million in the comparable quarter of 2012. The decrease was due primarily to competitive pricing pressures in the United States market and the completion of smaller fracturing jobs in the Bakken play of North Dakota, offset partially by higher fracturing and cementing activity. Fracturing activity in the Marcellus and Fayetteville shale plays was significantly higher in the second quarter of 2013 than in the same period in 2012. This increase was offset partially by lower activity in the Bakken oil shale play of North Dakota, due to a longer than expected spring break-up period and unseasonably wet weather similar to that in western Canada.
Operating Income
Operating income in the United States was $25.2 million for the second quarter of 2013, a decrease of 23 percent from the comparative period in 2012 primarily due to lower overall revenue. The decrease in operating income was limited by reductions in labour and maintenance expenses resulting from cost-saving initiatives implemented by the Company in late 2012 and early 2013, combined with supply chain and logistical improvements and declines in the cost of certain materials such as guar.
| Russia | ||||||
| Three Months Ended June 30, | 2013 | 2012 | Change | |||
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |||
| (unaudited) | ||||||
| Revenue | 37,305 | 29,244 | 28 | |||
| Expenses | ||||||
| Operating | 32,259 | 26,070 | 24 | |||
| SG&A | 1,689 | 1,402 | 20 | |||
| 33,948 | 27,472 | 24 | ||||
| Operating income(1) | 3,357 | 1,772 | 89 | |||
| Operating income (%) | 9.0% | 6.1% | 48 | |||
| Fracturing revenue per job ($) | 98,337 | 89,026 | 10 | |||
| Number of fracturing jobs | 312 | 223 | 40 | |||
| Pumping horsepower, end of period (000s) | 48 | 45 | 7 | |||
| Coiled tubing revenue per job ($) | 52,158 | 58,699 | (11) | |||
| Number of coiled tubing jobs | 127 | 160 | (21) | |||
| Coiled tubing units, end of period (#) | 7 | 6 | 17 | |||
| Rouble/C$ average exchange rate(2) | 0.0323 | 0.0329 | (2) | |||
| (1) | Refer to "Non-GAAP Measures" on page 17 for further information. |
| (2) | Source: Bank of Canada. |
Revenue
During the second quarter of 2013, the Company's revenue from Russian operations increased by 28 percent to $37.3 million from $29.2 million in the corresponding quarter of 2012. The increase in revenue was mainly due to an increased demand for horizontal multi-stage fracturing operations in Western Siberia. During the second quarter, approximately 30 percent of Calfrac's total Russian fracturing activity was related to multi-stage well completions compared to no activity in the comparable period of 2012. The increase in revenue was partially offset by lower coiled tubing activity resulting from the increased use of multi-stage fracturing completions, which reduced the requirements for coiled tubing operations, combined with a decrease in coiled tubing job sizes.
Operating Income
Operating income in Russia in the second quarter of 2013 was $3.4 million compared to $1.8 million in the corresponding period of 2012. The increase in operating income was primarily due to operational efficiencies resulting from higher fracturing equipment utilization and higher overall revenue.
| Latin America | ||||||
| Three Months Ended June 30, | 2013 | 2012 | Change | |||
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |||
| (unaudited) | ||||||
| Revenue | 24,402 | 26,680 | (9) | |||
| Expenses | ||||||
| Operating | 23,898 | 24,001 | - | |||
| SG&A | 1,470 | 1,449 | 1 | |||
| 25,368 | 25,450 | - | ||||
| Operating (loss) income(1) | (966) | 1,230 | (179) | |||
| Operating (loss) income (%) | -4.0% | 4.6% | (187) | |||
| Pumping horsepower, end of period (000s) | 72 | 27 | 167 | |||
| Cementing units, end of period (#) | 13 | 11 | 18 | |||
| Coiled tubing units, end of period (#) | 1 | 1 | - | |||
| Mexican peso/C$ average exchange rate(2) | 0.0820 | 0.0747 | 10 | |||
| Argentinean peso/C$ average exchange rate(2) | 0.1953 | 0.2272 | (14) | |||
| (1) | Refer to "Non-GAAP Measures" on page 17 for further information. |
| (2) | Source: Bank of Canada. |
Revenue
Calfrac's operations in Latin America generated total revenue of $24.4 million during the second quarter of 2013 versus $26.7 million in the comparable three-month period in 2012. For the three months ended June 30, 2013 and 2012, revenue generated through subcontractors was $3.3 million and $6.5 million, respectively. The decrease in revenue was due to lower fracturing activity in the Chicontepec field in Mexico resulting from customer budget reductions, and was partially offset by the commencement of fracturing operations in Argentina combined with higher cementing and coiled tubing activity and the completion of larger cementing jobs in Argentina. Lower activity in Colombia also contributed to the year-over-year decrease in revenue.
Operating (Loss) Income
Calfrac's Latin America division incurred an operating loss of $1.0 million during the second quarter of 2013 compared to operating income of $1.2 million in the comparative quarter in 2012. The decrease in operating income was primarily due to lower equipment utilization in Mexico.
| Corporate | ||||||
| Three Months Ended June 30, | 2013 | 2012 | Change | |||
| (C$000s) | ($) | ($) | (%) | |||
| (unaudited) | ||||||
| Expenses | ||||||
| Operating | 2,567 | 2,482 | 3 | |||
| SG&A | 10,728 | 9,402 | 14 | |||
| 13,295 | 11,884 | 12 | ||||
| Operating loss(1) | (13,295) | (11,884) | 12 | |||
| % of Revenue | 4.6% | 3.5% | 31 | |||
| (1) | Refer to "Non-GAAP Measures" on page 17 for further information. |
Operating Loss
The 12 percent increase in corporate expenses in the second quarter of 2013 over the same period in 2012 was mainly due to higher stock-based compensation expenses of $1.0 million resulting from additional restricted share units granted and a higher stock price in 2013. The increase was offset partially by lower professional fees.
Depreciation
For the three months ended June 30, 2013, depreciation expense increased by 17 percent to $26.0 million from $22.3 million in the corresponding quarter of 2012. The increase in depreciation expense was mainly a result of a larger equipment fleet operating in North America and Argentina.
Foreign Exchange Gains or Losses
The Company recorded a foreign exchange loss of $0.1 million during the second quarter of 2013 versus a $9.8 million loss in the comparable period in 2012. 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 loss recorded in the quarter was largely attributable to the translation of United States dollar-denominated liabilities in Russia and Mexico offset partially by the translation of United States dollar-denominated assets in Canada. The value of the United States dollar appreciated against the Russian rouble and Mexican peso during the second quarter, which resulted in a foreign exchange loss related to these net monetary positions. The foreign exchange loss was offset by the foreign exchange gain related to the net monetary asset position in Canada as the United States dollar appreciated against the Canadian dollar during the quarter.
Interest
The Company's interest expense during the second quarter of 2013 was $9.3 million versus $9.0 million for the comparable period in 2012. The increase was related to additional short-term borrowing in Latin America and a draw on Calfrac's revolving credit facilities during the second quarter of 2013.
Income Tax Expenses
The Company recorded an income tax recovery of $4.1 million during the second quarter of 2013 versus a recovery of $0.5 million in the comparable period of 2012. The decrease in total income tax expense was primarily due to lower profitability in the United States. The effective income tax recovery rate for 2013 was 21 percent compared to 4 percent in 2012. The higher effective recovery rate for the second quarter of 2013 was primarily due to larger tax losses in Canada combined with a lower percentage of taxable income in the United States, which has a higher average statutory tax rate.
Summary of Quarterly Results
| Three Months Ended | Sept. 30, | Dec. 31, | Mar. 31, | June 30, | Sept. 30, | Dec. 31, | Mar. 31, | June 30, | |
| 2011 | 2011 | 2012 | 2012 | 2012 | 2012 | 2013 | 2013 | ||
| (unaudited) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |
| Financial (C$000s, except per share and operating data) |
|||||||||
| Revenue |
440,491 | 490,037 | 474,107 | 335,780 | 417,842 | 367,487 | 423,397 | 288,701 | |
| Operating income(1) |
126,527 | 150,364 | 113,381 | 29,810 | 70,604 | 43,218 | 62,670 | 16,307 | |
| EBITDA(1) | 102,042 | 149,146 | 127,995 | 18,736 | 70,874 | 46,866 | 65,169 | 16,235 | |
| Per share - basic | 2.33 | 3.40 | 2.92 | 0.42 | 1.59 | 1.05 | 1.44 | 0.36 | |
| Per share - diluted | 2.30 | 3.38 | 2.87 | 0.42 | 1.58 | 1.04 | 1.43 | 0.35 | |
| Net income (loss) attributable | |||||||||
| to shareholders of Calfrac | 47,381 | 78,921 | 70,841 | (11,855) | 26,917 | 11,243 | 24,645 | (14,584) | |
| Per share - basic | 1.08 | 1.80 | 1.62 | (0.27) | 0.60 | 0.25 | 0.55 | (0.32) | |
| Per share - diluted | 1.07 | 1.79 | 1.59 | (0.27) | 0.60 | 0.25 | 0.54 | (0.32) | |
| Capital expenditures | 85,130 | 101,008 | 84,075 | 75,286 | 63,962 | 55,694 | 43,989 | 46,618 | |
| Working capital (end of period) | 375,823 | 398,526 | 431,053 | 357,128 | 353,182 | 322,857 | 332,241 | 319,982 | |
| Total equity (end of period) | 632,889 | 700,569 | 779,426 | 747,591 | 783,091 | 780,759 | 802,581 | 784,247 | |
| Operating (end of period) | |||||||||
| Pumping horsepower (000s) | 656 | 719 | 782 | 830 | 845 | 977 | 1,013 | 1,025 | |
| Coiled tubing units (#) | 29 | 29 | 29 | 29 | 29 | 29 | 29 | 29 | |
| Cementing units (#) | 23 | 23 | 23 | 23 | 25 | 26 | 28 | 30 | |
| (1) | Refer to "Non-GAAP Measures" on page 17 for further information |
Seasonality of Operations
The Company's Canadian and United States businesses are seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break-up conditions and access to well sites in Canada and North Dakota is reduced (refer to "Business Risks - Seasonality" in the Company's 2012 Annual Report).
Foreign Exchange Fluctuations
The Company's consolidated financial statements are reported in Canadian dollars. Accordingly, the quarterly results are directly affected by fluctuations in the United States, Russian, Mexican, Argentinean and Colombian currency exchange rates (refer to "Business Risks - Fluctuations in Foreign Exchange Rates" in the Company's 2012 Annual Report).
Financial Overview - Six Months Ended June 30, 2013 Versus 2012
| Canada | ||||
| Six Months Ended June 30, | 2013 | 2012 | Change | |
| (C$000s, except operational information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 312,295 | 330,544 | (6) | |
| Expenses | ||||
| Operating | 246,546 | 239,356 | 3 | |
| SG&A | 7,802 | 8,027 | (3) | |
| 254,348 | 247,383 | 3 | ||
| Operating income(1) | 57,947 | 83,161 | (30) | |
| Operating income (%) | 18.6% | 25.2% | (26) | |
| Fracturing revenue per job ($) | 215,011 | 195,118 | 10 | |
| Number of fracturing jobs | 1,384 | 1,549 | (11) | |
| Pumping horsepower, end of period (000s) | 404 | 302 | 34 | |
| Coiled tubing revenue per job ($) | 24,371 | 32,276 | (24) | |
| Number of coiled tubing jobs | 604 | 877 | (31) | |
| Coiled tubing units, end of period (#) | 21 | 21 | - | |
| (1) Refer to "Non-GAAP Measures" on page 17 for further information. | ||||
Revenue
Revenue from Calfrac's Canadian operations during the first six months of 2013 was $312.3 million versus $330.5 million in the comparable period of 2012. The 6 percent decrease in revenue was primarily due to competitive pricing pressures as well as no fracturing and coiled tubing activity in the Horn River area of northeast British Columbia during the second quarter of 2013. In addition, extremely wet weather in western Canada during June delayed planned completion projects until the third quarter of 2013.
Operating Income
Operating income in Canada decreased by 30 percent to $57.9 million during the first six months of 2013 from $83.2 million in the same period of 2012. The decrease in Canadian operating income was primarily due to a more competitive pricing environment combined with higher logistical costs in the first quarter of 2013 associated with the completion of larger fracturing jobs and longer average travel distances to well sites in the unconventional oil and natural gas resource plays of western Canada. In addition, there was no activity in the Horn River region during the second quarter of 2013 whereas a significant project was completed during the comparable period of 2012.
| United States | ||||
| Six Months Ended June 30, | 2013 | 2012 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 273,285 | 370,035 | (26) | |
| Expenses | ||||
| Operating | 220,765 | 282,591 | (22) | |
| SG&A | 9,306 | 10,477 | (11) | |
| 230,071 | 293,068 | (21) | ||
| Operating income(1) | 43,214 | 76,967 | (44) | |
| Operating income (%) | 15.8% | 20.8% | (24) | |
| Fracturing revenue per job ($) | 58,418 | 79,237 | (26) | |
| Number of fracturing jobs | 4,438 | 4,488 | (1) | |
| Pumping horsepower, end of period (000s) | 501 | 456 | 10 | |
| Coiled tubing units, end of period (#) | - | 1 | (100) | |
| Cementing revenue per job ($) | 32,539 | 31,696 | 3 | |
| Number of cementing jobs | 431 | 328 | 31 | |
| Cementing units, end of period (#) | 17 | 11 | 55 | |
| US$/C$ average exchange rate(2) | 1.0156 | 1.0058 | 1 | |
| (1) Refer to "Non-GAAP Measures" on page 17 for further information. (2) Source: Bank of Canada. |
||||
Revenue
Revenue from Calfrac's United States operations during the first six months of 2013 decreased to $273.3 million from $370.0 million in the comparable period of 2012. The decrease was due primarily to competitive pricing pressures in the United States market combined with lower fracturing activity and the completion of smaller fracturing jobs in the Bakken shale play of North Dakota. The decrease was partially offset by higher activity in the Marcellus and Fayetteville shale natural gas plays.
Operating Income
Operating income in the United States was $43.2 million for the six months ended June 30, 2013 compared to $77.0 million in the first six months of 2012. The decrease in operating income was primarily due to competitive pricing pressures and lower fracturing equipment utilization in the unconventional natural gas plays of the United States during the first quarter of 2013. The decrease in operating income was mitigated by reductions in labour and maintenance expenses resulting from cost-saving initiatives implemented by the Company in late 2012 and early 2013, combined with supply chain and logistical improvements and declines in certain key materials such as guar.
| Russia | ||||
| Six Months Ended June 30, | 2013 | 2012 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 74,466 | 57,341 | 30 | |
| Expenses | ||||
| Operating | 65,836 | 51,210 | 29 | |
| SG&A | 3,283 | 2,805 | 17 | |
| 69,119 | 54,015 | 28 | ||
| Operating income(1) | 5,347 | 3,326 | 61 | |
| Operating income (%) | 7.2% | 5.8% | 24 | |
| Fracturing revenue per job ($) | 102,013 | 93,492 | 9 | |
| Number of fracturing jobs | 587 | 407 | 44 | |
| Pumping horsepower, end of period (000s) | 48 | 45 | 7 | |
| Coiled tubing revenue per job ($) | 56,746 | 58,454 | (3) | |
| Number of coiled tubing jobs | 257 | 330 | (22) | |
| Coiled tubing units, end of period (#) | 7 | 6 | 17 | |
| Rouble/C$ average exchange rate(2) | 0.0327 | 0.0325 | 1 | |
| (1) Refer to "Non-GAAP Measures" on page 17 for further information. (2) Source: Bank of Canada. |
||||
Revenue
During the first six months of 2013, the Company's revenue from Russian operations increased by 30 percent to $74.5 million from $57.3 million in the corresponding period of 2012. The increase in revenue was mainly due to higher fracturing activity as a result of the successful introduction of multi-stage fracturing programs in 2013 and larger conventional fracturing job sizes. Coiled tubing activity declined as a result of the increased use of multi-stage fracturing operations, which reduced the requirements for coiled tubing operations, combined with a decrease in coiled tubing job sizes.
Operating Income
Operating income in Russia in the first six months of 2013 was $5.3 million compared to $3.3 million in the corresponding period of 2012. The increase in operating income was primarily a result of operational efficiencies associated with multi-stage fracturing jobs forming a larger proportion of total activity in 2013.
| Latin America | ||||
| Six Months Ended June 30, | 2013 | 2012 | Change | |
| (C$000s, except operational and exchange rate information) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Revenue | 52,052 | 51,967 | - | |
| Expenses | ||||
| Operating | 49,064 | 45,355 | 8 | |
| SG&A | 2,802 | 2,864 | (2) | |
| 51,866 | 48,219 | 8 | ||
| Operating income(1) | 186 | 3,748 | (95) | |
| Operating income (%) | 0.4% | 7.2% | (94) | |
| Pumping horsepower, end of period (000s) | 72 | 27 | 167 | |
| Cementing units, end of period (#) | 13 | 11 | 18 | |
| Coiled tubing units, end of period (#) | 1 | 1 | - | |
| Mexican peso/C$ average exchange rate(2) | 0.0809 | 0.0759 | 7 | |
| Argentinean peso/C$ average exchange rate(2) | 0.1982 | 0.2290 | (13) | |
| (1) Refer to "Non-GAAP Measures" on page 17 for further information. (2) Source: Bank of Canada. |
||||
Revenue
Calfrac's Latin America operations generated total revenue of $52.1 million during the first six months of 2013, virtually unchanged from $52.0 million in the comparable period in 2012. For the six months ended June 30, 2013 and 2012, revenue generated through subcontractors was $9.1 million and $12.5 million, respectively.
Revenue for the six months ended June 30, 2013 increased due to the commencement of fracturing activity in Argentina combined with higher cementing and coiled tubing activity in that country. The increase was offset by lower fracturing activity in the Chicontepec field in Mexico resulting from customer budget constraints and lower activity in Colombia as a result of infrastructure and permitting issues.
Operating Income
For the six months ended June 30, 2013, Calfrac's Latin America division generated operating income of $0.2 million compared to $3.8 million in the comparative period in 2012. The decrease in operating income was primarily due to lower equipment utilization in Mexico and start-up costs associated with the commencement of fracturing activity in Argentina.
| Corporate | ||||
| Six Months Ended June 30, | 2013 | 2012 | Change | |
| (C$000s) | ($) | ($) | (%) | |
| (unaudited) | ||||
| Expenses | ||||
| Operating | 4,777 | 4,662 | 2 | |
| SG&A | 22,940 | 19,349 | 19 | |
| 27,717 | 24,011 | 15 | ||
| Operating loss(1) | (27,717) | (24,011) | 15 | |
| % of Revenue | 3.9% | 3.0% | 30 | |
| (1) Refer to "Non-GAAP Measures" on page 17 for further information. | ||||
Operating Loss
The 15 percent increase in corporate expenses for the six months ended June 30, 2013 over the comparative period in 2012 was mainly due to a $2.6 million increase in stock-based compensation expenses resulting from additional restricted share units granted and a higher stock price in 2013, as well as higher occupancy costs. The increase was offset partially by lower professional fees.
Depreciation
For the six months ended June 30, 2013, depreciation expense increased by 15 percent to $50.8 million from $44.3 million in the corresponding period of 2012. The increase is mainly a result of a larger fleet of equipment operating in North America and Argentina.
Foreign Exchange Gains or Losses
The Company recorded a foreign exchange gain of $2.3 million during the first six months of 2013 versus a $4.1 million gain in the comparative period of 2012. 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 the first six months of 2013 was attributable to the net U.S. dollar denominated asset position in Canada as the U.S. dollar appreciated by six percent against the Canadian dollar during this period. This gain was partially offset by the impact of the eight percent appreciation of the U.S. dollar versus the Russian rouble related to the Company's U.S. dollar debt in that country.
Interest
The Company's interest expense during the first six months of 2013 increased from the comparable period of 2012 by $0.6 million to $18.5 million. The increase was related to additional short-term borrowing in Latin America and a draw on Calfrac's revolving credit facility during the second quarter.
Income Tax Expenses
The Company recorded an income tax expense of $2.9 million during the first six months of 2013 compared to income tax expense of $25.7 million in the comparable period of 2012. The effective income tax rate for the six-month period ended June 30, 2013 was 24 percent compared to 30 percent in 2012. The lower effective tax rate for the first six months of 2013 was 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
| Three Months Ended June 30, | Six Months Ended June 30, | |||||
| 2013 | 2012 | 2013 | 2012 | |||
| (C$000s) | ($) | ($) | ($) | ($) | ||
| (unaudited) | ||||||
| Cash flows provided by (used in): | ||||||
| Operating activities | 3,400 | 90,363 | 44,902 | 174,439 | ||
| Financing activities | 24,587 | 1,101 | 41,472 | 8,159 | ||
| Investing activities | (44,720) | (74,732) | (104,374) | (149,475) | ||
| Effect of exchange rate changes on cash and cash equivalents | 465 | (1,400) | 6,462 | 465 | ||
| Increase (decrease) in cash and cash equivalents | (16,268) | 15,332 | (11,538) | 33,588 | ||
Operating Activities
The Company's cash provided by operating activities for the six months ended June 30, 2013 was $44.9 million versus $174.4 million in the comparable period of 2012. The decrease was primarily due to a decline in operating margins in Canada and the United States and slower accounts receivable collections in Mexico. At June 30, 2013, Calfrac's working capital was approximately $320.0 million, a decrease of 1 percent from December 31, 2012. The Company had a receivable of US$55.0 million at June 30, 2013 with a customer operating in Mexico that has been outstanding for greater than 120 days, for which no provision has been made. The payment delay is consistent with the situation of many other oilfield service companies in this market. Collection of the full amount is expected by the end of the year, although the timing is uncertain.
Financing Activities
Cash flow provided by financing activities during the first six months of 2013 was $41.5 million compared to $8.2 million in the comparable 2012 period. During the first six months of 2013, the Company made a $25.9 million draw on its credit facility, received bank loan proceeds of $12.5 million in Argentina, issued $12.2 million of Calfrac common shares, paid dividends of $8.3 million and repaid $0.7 million of finance lease obligations.
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 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 Canadian prime rate loans and U.S. base rate loans, the rate ranges from 0.50 percent to 1.25 percent above the respective base rates for such loans. 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 June 30, 2013, the Company had drawn $26.3 million on its operating facility and used $17.9 million of its credit facilities for letters of credit, leaving $255.8 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 instead of semi-annually commencing with a $0.25 dividend that was declared in the first quarter of 2013. In June 2013, Calfrac declared a $0.25 dividend that was paid on July 15.
Investing Activities
Calfrac's net cash used for investing activities was $104.4 million for the first six months of 2013 versus $149.5 million for the comparative period in 2012. Cash outflows relating to capital expenditures were $105.3 million during the period compared to $150.7 million in 2012. Capital expenditures were primarily to support the Company's Canadian, United States and Argentinean 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 carry-over 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 the first six months of 2013 was a gain of $6.5 million versus a gain of $0.5 million during 2012. 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 June 30, 2013, the Company had cash and cash equivalents of $30.9 million.
Outstanding Share Data
The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan is equal to a maximum of 10 percent of the Company's issued and outstanding common shares. As at July 26, 2013, there were 46,016,096 common shares issued and outstanding, and 2,747,375 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 (TSX) during the last five trading days preceding the relevant dividend payment date.
Normal Course Issuer Bid
On November 1, 2012, the Company filed a Notice of Intention (the "Renewal Notice") to renew its Normal Course Issuer Bid (the "Renewed NCIB") with the TSX. 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 Renewed NCIB will be cancelled. The Company did not purchase any shares under the Renewed NCIB during the first six months of 2013. 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 under "Business Risks" below.
Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements and there can be no assurance that actual results or developments anticipated by the Company will be realized, or that they will have the expected consequences or effects on the Company or its business or operations. 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, EBITDA and net income attributable to the shareholders of Calfrac before foreign exchange gains and losses. 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.
Second Quarter Conference Call
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2013 second quarter results at 10:00 a.m. (Mountain Time) on Wednesday, July 31, 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 17426327). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.
| CONSOLIDATED BALANCE SHEETS | |||
| June 30, | December 31, | ||
| As at | 2013 | 2012 | |
| (C$000s) (unaudited) | ($) | ($) | |
| ASSETS | |||
| Current assets | |||
| Cash and cash equivalents | 30,943 | 42,481 | |
| Accounts receivable | 312,516 | 320,143 | |
| Income taxes recoverable | 2,974 | 292 | |
| Inventories | 115,603 | 118,713 | |
| Prepaid expenses and deposits | 18,058 | 10,697 | |
| 480,094 | 492,326 | ||
| Non-current assets | |||
| Property, plant and equipment | 1,069,945 | 1,005,101 | |
| Goodwill | 10,523 | 10,523 | |
| Deferred income tax assets | 21,456 | 16,871 | |
| Total assets | 1,582,018 | 1,524,821 | |
| LIABILITIES AND EQUITY | |||
| Current liabilities | |||
| Accounts payable and accrued liabilities | 147,399 | 168,250 | |
| Bank loan (note 3) | 12,273 | - | |
| Current portion of long-term debt (note 4) | 440 | 479 | |
| Current portion of finance lease obligations | - | 740 | |
| 160,112 | 169,469 | ||
| Non-current liabilities | |||
| Long-term debt (note 4) | 493,083 | 441,018 | |
| Other long-term liabilities | 308 | 435 | |
| Deferred income tax liabilities | 144,268 | 133,140 | |
| Total liabilities | 797,771 | 744,062 | |
| Equity attributable to the shareholders of Calfrac | |||
| Capital stock (note 5) | 320,055 | 300,451 | |
| Contributed surplus (note 7) | 26,159 | 27,546 | |
| Loan receivable for purchase of common shares (note 12) | (2,500) | (2,500) | |
| Retained earnings | 445,432 | 458,543 | |
| Accumulated other comprehensive income (loss) | (3,606) | (2,403) | |
| 785,540 | 781,637 | ||
| Non-controlling interest | (1,293) | (878) | |
| Total equity | 784,247 | 780,759 | |
| Total liabilities and equity | 1,582,018 | 1,524,821 | |
| See accompanying notes to the consolidated financial statements. | |||
| CONSOLIDATED STATEMENTS OF OPERATIONS | |||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||
| 2013 | 2012 | 2013 | 2012 | ||
| (C$000s, except per share data) (unaudited) | ($) | ($) | ($) | ($) | |
| Revenue | 288,701 | 335,780 | 712,098 | 809,887 | |
| Cost of sales (note 13) | 276,363 | 306,704 | 637,772 | 667,514 | |
| Gross profit | 12,338 | 29,076 | 74,326 | 142,373 | |
| Expenses | |||||
| Selling, general and administrative | 22,002 | 21,538 | 46,134 | 43,523 | |
| Foreign exchange losses (gains) | 86 | 9,786 | (2,293) | (4,084) | |
| (Gain) loss on disposal of property, plant and equipment | (14) | 1,288 | (134) | 544 | |
| Interest | 9,285 | 8,982 | 18,488 | 17,917 | |
| 31,359 | 41,594 | 62,195 | 57,900 | ||
| Income (loss) before income tax | (19,021) | (12,518) | 12,131 | 84,473 | |
| Income tax expense (recovery) | |||||
| Current | (756) | (16) | 1,726 | 1,118 | |
| Deferred | (3,326) | (533) | 1,156 | 24,630 | |
| (4,082) | (549) | 2,882 | 25,748 | ||
| Net income (loss) for the period | (14,939) | (11,969) | 9,249 | 58,725 | |
| Net income (loss) attributable to: | |||||
| Shareholders of Calfrac | (14,584) | (11,855) | 10,061 | 58,986 | |
| Non-controlling interest | (355) | (114) | (812) | (261) | |
| (14,939) | (11,969) | 9,249 | 58,725 | ||
| Earnings (loss) per share (note 5) | |||||
| Basic | (0.32) | (0.27) | 0.22 | 1.34 | |
| Diluted | (0.32) | (0.27) | 0.22 | 1.32 | |
| See accompanying notes to the consolidated financial statements. | |||||
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||
| 2013 | 2012 | 2013 | 2012 | ||
| (C$000s) (unaudited) | ($) | ($) | ($) | ($) | |
| Net income (loss) for the period | (14,939) | (11,969) | 9,249 | 58,725 | |
| Other comprehensive income (loss) | |||||
| Items that may be subsequently reclassified to profit or loss: | |||||
| Change in foreign currency translation adjustment | (785) | (524) | (1,249) | (4,461) | |
| Comprehensive income (loss) for the period | (15,724) | (12,493) | 8,000 | 54,264 | |
| Comprehensive income (loss) attributable to: | |||||
| Shareholders of Calfrac | (15,326) | (12,280) | 8,858 | 54,628 | |
| Non-controlling interest | (398) | (213) | (858) | (364) | |
| (15,724) | (12,493) | 8,000 | 54,264 | ||
| 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$000s) (unaudited) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |
| Balance - January 1, 2013 | 300,451 | 27,546 | (2,500) | (2,403) | 458,543 | 781,637 | (878) | 780,759 | |
| Net income (loss) for the period | - | - | - | - | 10,061 | 10,061 | (812) | 9,249 | |
| Other comprehensive income (loss): | |||||||||
| Cumulative translation adjustment | - | - | - | (1,203) | - | (1,203) | (46) | (1,249) | |
| Comprehensive income (loss) for the period | - | - | - | (1,203) | 10,061 | 8,858 | (858) | 8,000 | |
| Stock options: | |||||||||
| Stock-based compensation recognized | - | 2,861 | - | - | - | 2,861 | - | 2,861 | |
| Proceeds from issuance of shares | 16,496 | (4,248) | - | - | - | 12,248 | - | 12,248 | |
| Dividend Reinvestment Plan shares | |||||||||
| issued (note 18) | 3,108 | - | - | - | - | 3,108 | - | 3,108 | |
| Dividends | - | - | - | - | (22,847) | (22,847) | - | (22,847) | |
| Non-controlling interest contribution | - | - | - | - | - | - | 118 | 118 | |
| Dilution of non-controlling interest | - | - | - | - | (325) | (325) | 325 | - | |
| Balance - June 30, 2013 | 320,055 | 26,159 | (2,500) | (3,606) | 445,432 | 785,540 | (1,293) | 784,247 | |
| Balance - January 1, 2012 | 271,817 | 24,170 | (2,500) | 1,334 | 405,954 | 700,775 | (206) | 700,569 | |
| Net income (loss) for the period | - | - | - | - | 58,986 | 58,986 | (261) | 58,725 | |
| Other comprehensive income (loss): | |||||||||
| Cumulative translation adjustment | - | - | - | (4,358) | - | (4,358) | (103) | (4,461) | |
| Comprehensive income (loss) for the period | - | - | - | (4,358) | 58,986 | 54,628 | (364) | 54,264 | |
| Stock options: | |||||||||
| Stock-based compensation recognized | - | 3,321 | - | - | - | 3,321 | - | 3,321 | |
| Proceeds from issuance of shares | 12,718 | (3,063) | - | - | - | 9,655 | - | 9,655 | |
| Dividend Reinvestment Plan shares | |||||||||
| issued (note 18) | 1,771 | - | - | - | - | 1,771 | - | 1,771 | |
| Dividends | - | - | - | - | (22,182) | (22,182) | - | (22,182) | |
| Non-controlling interest contribution | - | - | - | - | - | - | 193 | 193 | |
| Balance - June 30, 2012 | 286,306 | 24,428 | (2,500) | (3,024) | 442,758 | 747,968 | (377) | 747,591 | |
| See accompanying notes to the consolidated financial statements. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||
| 2013 | 2012 | 2013 | 2012 | |||
| (C$000s) (unaudited) | ($) | ($) | ($) | ($) | ||
| CASH FLOWS PROVIDED BY (USED IN) | ||||||
| OPERATING ACTIVITIES | ||||||
| Net income (loss) for the period | (14,939) | (11,969) | 9,249 | 58,725 | ||
| Adjusted for the following: | ||||||
| Depreciation | 25,971 | 22,272 | 50,785 | 44,341 | ||
| Stock-based compensation | 1,382 | 1,751 | 2,861 | 3,321 | ||
| Unrealized foreign exchange losses (gains) | 2,385 | 11,472 | (2,586) | (3,917) | ||
| (Gain) loss on disposal of property, plant and equipment |
(14) | 1,288 | (134) | 544 | ||
| Interest | 9,285 | 8,982 | 18,488 | 17,917 | ||
| Deferred income taxes | (3,326) | (533) | 1,156 | 24,630 | ||
| Interest paid | (17,708) | (17,040) | (17,961) | (17,301) | ||
| Changes in items of working capital (note 10) | 364 | 74,140 | (16,956) | 46,179 | ||
| Cash flows provided by operating activities | 3,400 | 90,363 | 44,902 | 174,439 | ||
| FINANCING ACTIVITIES | ||||||
| Bank loan proceeds | 3,403 | 1,386 | 12,549 | 2,734 | ||
| Issuance of long-term debt, net of debt issuance costs |
25,920 | 71 | 25,920 | 71 | ||
| Long-term debt repayments | (120) | (116) | (238) | (230) | ||
| Finance lease obligation repayments | (603) | (1,136) | (740) | (1,466) | ||
| Net proceeds on issuance of common shares | 4,254 | 896 | 12,248 | 9,655 | ||
| Dividends paid, net of DRIP (note 18) | (8,267) | - | (8,267) | (2,605) | ||
| Cash flows provided by financing activities | 24,587 | 1,101 | 41,472 | 8,159 | ||
| INVESTING ACTIVITIES | ||||||
| Purchase of property, plant and equipment (note 10) | (45,073) | (75,175) | (105,296) | (150,663) | ||
| Proceeds on disposal of property, plant and equipment |
235 | 250 | 804 | 995 | ||
| Other | 118 | 193 | 118 | 193 | ||
| Cash flows used in investing activities | (44,720) | (74,732) | (104,374) | (149,475) | ||
| Effect of exchange rate changes on cash and cash equivalents |
465 | (1,400) | 6,462 | 465 | ||
| Increase (decrease) in cash and cash equivalents | (16,268) | 15,332 | (11,538) | 33,588 | ||
| Cash and cash equivalents, beginning of period | 47,211 | 151,311 | 42,481 | 133,055 | ||
| Cash and cash equivalents, end of period | 30,943 | 166,643 | 30,943 | 166,643 | ||
| See accompanying notes to the consolidated financial statements. |
| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS |
| For the Three and Six Months Ended June 30, 2013 and 2012 (Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated) (unaudited) |
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ADOPTION OF IFRS
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 condensed consolidated interim financial statements were prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and interpretations by the International Financial Reporting Interpretations Committee (IFRIC). They should be read in conjunction with the annual financial statements for the year ended December 31, 2012. 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 Audit Committee of the Board of Directors for issuance on July 30, 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.
The adoption of accounting standards and amendments, effective January 1, 2013, is disclosed in the March 31, 2013 interim consolidated financial statements.
3. BANK LOAN
The Company's Argentinean subsidiary has two operating lines of credit of which a total of ARS62,872 ($12,273) was drawn at June 30, 2013. The interest rate ranges from 17.7 percent to 22.0 percent and both lines of credit are secured by letters of credit issued by the Company.
4. LONG-TERM DEBT
| June 30, | December 31, | ||
| As at | 2013 | 2012 | |
| (C$000s) | ($) | ($) | |
| US$450,000 senior unsecured notes due December 1, 2020, | |||
| bearing interest at 7.5% payable semi-annually | 473,310 | 447,705 | |
| Less: unamortized debt issuance costs | (6,831) | (6,895) | |
| 466,479 | 440,810 | ||
| Extendible revolving term loan facility, secured by Canadian | |||
| and U.S. assets of the Company | 26,295 | - | |
| Less: unamortized debt issuance costs | (1,249) | (1,444) | |
| 25,046 | (1,444) | ||
| US$1,838 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 | 1,933 | 2,003 | |
| ARS330 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 | 65 | 128 | |
| 493,523 | 441,497 | ||
| Less: current portion of long-term debt | (440) | (479) | |
| 493,083 | 441,018 | ||
The fair value of the senior unsecured notes, as measured based on the closing quoted market price at June 30, 2013, was $468,577 (December 31, 2012 - $443,228). 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 Canadian prime rate loans and U.S. base rate loans, the rate ranges from 0.50 percent to 1.25 percent above the respective base rates for such loans. 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. The facility is repayable on or before its maturity of September 27, 2016, assuming the facility is not extended. The maturity may be extended by one or more years at the Company's request and lenders' acceptance. The Company may also prepay principal without penalty. Debt issuance costs related to this facility are amortized over its term.
Interest on long-term debt (including the amortization of debt issuance costs) for the six months ended June 30, 2013 was $18,452 (six months ended June 30, 2012 - $18,241).
The Company also has an extendible operating loan facility, which includes overdraft protection in the amount of $20,000. The interest rate is based on the parameters of certain bank covenants in the same fashion as the revolving term facility. Drawdowns under this facility are repayable on September 27, 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 lenders' acceptance. The operating facility is secured by the Company's Canadian and U.S. assets.
At June 30, 2013, the Company had utilized $44,228 of its loan facility, including $17,933 for letters of credit, leaving $255,772 in available credit.
5. CAPITAL STOCK
Authorized capital stock consists of an unlimited number of common shares.
| Six Months Ended | Year Ended | ||||
| June 30, 2013 | December 31, 2012 | ||||
| Continuity of Common Shares | Shares | Amount | Shares | Amount | |
| (#) | (C$000s) | (#) | (C$000s) | ||
| Balance, beginning of period | 45,020,641 | 300,451 | 43,709,073 | 271,817 | |
| Issued upon exercise of stock options | 744,162 | 16,496 | 686,488 | 14,836 | |
| Dividend Reinvestment Plan shares | |||||
| issued (note 18) | 125,024 | 3,108 | 625,080 | 13,798 | |
| Balance, end of period | 45,889,827 | 320,055 | 45,020,641 | 300,451 | |
The weighted average number of common shares outstanding for the six months ended June 30, 2013 was 45,391,688 basic and 45,724,984 diluted (six months ended June 30, 2012 - 44,040,443 basic and 44,610,458 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 8.
6. 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 six months ended June 30, 2013 or for the year ended December 31, 2012.
7. CONTRIBUTED SURPLUS
| Six Months | Year Ended | ||
| Ended | December 31, | ||
| Continuity of Contributed Surplus | June 30, 2013 | 2012 | |
| (C$000s) | ($) | ($) | |
| Balance, beginning of period | 27,546 | 24,170 | |
| Stock options expensed | 2,861 | 6,990 | |
| Stock options exercised | (4,248) | (3,614) | |
| Balance, end of period | 26,159 | 27,546 | |
8. STOCK-BASED COMPENSATION
(a) Stock Options
| Six Months Ended June 30, | 2013 | 2012 | |||
| Average | Average | ||||
| Exercise | Exercise | ||||
| Continuity of Stock Options | Options | Price | Options | Price | |
| (#) | (C$) | (#) | (C$) | ||
| Balance, beginning of period | 2,920,412 | 25.67 | 3,198,475 | 23.31 | |
| Granted during the period | 697,200 | 24.53 | 634,700 | 28.14 | |
| Exercised for common shares | (744,162) | 16.46 | (584,013) | 16.53 | |
| Forfeited/expired | (103,425) | 28.09 | (203,575) | 26.81 | |
| Balance, end of period | 2,770,025 | 27.77 | 3,045,587 | 25.38 | |
Stock options vest equally over four years and expire five years from the date of grant. The exercise price of outstanding options ranges from $8.35 to $37.18 with a weighted average remaining life of 3.07 years. When stock options are exercised, the proceeds, together with the amount of compensation expense previously recorded in contributed surplus, are added to capital stock.
During the six months ended June 30, 2013, $2,861 of compensation expense was recognized for stock options (six months ended June 30, 2012 - $3,321). This amount is included in selling, general and administrative expenses.
(b) Stock Units
| Six Months Ended June 30, | 2013 | 2012 | |||||
| Continuity of Stock Units | Deferred | Performance | Restricted | Deferred | Performance | Restricted | |
| Stock | Stock | Stock | Stock | Stock | Stock | ||
| Units | Units | Units | Units | Units | Units | ||
| (#) | (#) | (#) | (#) | (#) | (#) | ||
| Balance, beginning of period | 35,000 | 45,000 | 247,230 | 35,000 | 40,000 | - | |
| Granted during the period | 35,000 | 45,000 | 389,375 | 35,000 | 45,000 | 252,085 | |
| Exercised | (35,000) | (45,000) | (82,410) | (35,000) | (40,000) | - | |
| Forfeited | - | - | (26,000) | - | - | (12,330) | |
| Balance, end of period | 35,000 | 45,000 | 528,195 | 35,000 | 45,000 | 239,755 | |
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 six months ended June 30, 2013, $509 of compensation expense was recognized for deferred stock units (six months ended June 30, 2012 - $407). This amount is included in selling, general and administrative expenses. At June 30, 2013, the liability pertaining to deferred stock units was $530 (December 31, 2012 - $877).
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 six months ended June 30, 2013, $754 of compensation expense was recognized for performance stock units (six months ended June 30, 2012 - $681). This amount is included in selling, general and administrative expenses. At June 30, 2013, the liability pertaining to performance stock units was $682 (December 31, 2012 - $1,127).
The Company grants restricted share units to its employees. These units vest equally over three years and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the restricted share units is recognized over the vesting period, based on the current market price of the Company's shares. During the six months ended June 30, 2013, $4,716 of compensation expense was recognized for restricted share units (six months ended June 30, 2012 - $1,670). This amount is included in selling, general and administrative expense. At June 30, 2013, the liability pertaining to restricted share units was $6,381 (December 31, 2012 - $3,693).
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.
9. 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 and long-term debt.
The fair values of financial instruments included in the consolidated balance sheets, except long-term debt, approximate their carrying amounts. The fair value of the senior unsecured notes based on the closing market price at June 30, 2013 was $468,577 before deduction of unamortized debt issuance costs (December 31, 2012 - $443,228). The carrying value of the senior unsecured notes at June 30, 2013 was $473,310 before deduction of unamortized debt issuance costs (December 31, 2012 - $447,705). The fair value of the remaining long-term debt approximates its carrying value, as described in note 4.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash operating assets and liabilities are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||
| 2013 | 2012 | 2013 | 2012 | |
| (C$000s) | ||||
| Accounts receivable | 89,675 | 117,811 | 7,627 | 102,853 |
| Income taxes recoverable | (3,247) | (1,651) | (2,681) | (1,352) |
| Inventory | 2,615 | (11,044) | 3,110 | (21,154) |
| Prepaid expenses and deposits | (9,424) | (4,874) | (7,361) | (5,584) |
| Accounts payable and accrued liabilities | (79,179) | (25,872) | (17,524) | (28,346) |
| Other long-term liabilities | (76) | (230) | (127) | (238) |
| 364 | 74,140 | (16,956) | 46,179 | |
Purchase of property, plant and equipment is comprised of:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||
| 2013 | 2012 | 2013 | 2012 | ||
| (C$000s) | |||||
| Property, plant and equipment additions | (46,618) | (75,286) | (90,607) | (159,361) | |
| Changes in liabilities related to the purchase | |||||
| of property, plant and equipment | 1,545 | 111 | (14,689) | 8,698 | |
| (45,073) | (75,175) | (105,296) | (150,663) | ||
11. 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.
| June 30, | December 31, | ||
| For the Twelve Months Ended | 2013 | 2012 | |
| (C$000s) | ($) | ($) | |
| Net income | 46,885 | 96,361 | |
| Adjusted for the following: | |||
| Depreciation | 96,825 | 90,381 | |
| Amortization of debt issuance costs and debt discount | 1,257 | 1,234 | |
| Stock-based compensation | 6,530 | 6,990 | |
| Unrealized foreign exchange gains | (9,564) | (10,895) | |
| Gain on disposal of property, plant and equipment | 124 | 802 | |
| Deferred income taxes | 13,168 | 36,642 | |
| Cash flow | 155,225 | 221,515 | |
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 June 30, 2013, the long-term debt to cash flow ratio was 3.18:1 (December 31, 2012 - 1.99:1) calculated on a 12-month trailing basis as follows:
| June 30, | December 31, | |
| As at | 2013 | 2012 |
| (C$000s, except ratio) | ($) | ($) |
| Long-term debt (net of unamortized debt issuance costs) (note 4) | 493,523 | 441,497 |
| Cash flow | 155,225 | 221,515 |
| Long-term debt to cash flow ratio | 3.18:1 | 1.99:1 |
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.
12. RELATED-PARTY TRANSACTIONS
In November 2010, the Company lent a senior officer $2,500 to purchase common shares of the Company on the Toronto Stock Exchange. The loan is on a non-recourse basis and is secured by the common shares acquired with the loan proceeds. 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 $2,564 as at June 30, 2013 (December 31, 2012 - $2,119). In accordance with applicable accounting standards regarding share purchase loans receivable, this loan is classified as a reduction of shareholders' equity due to its non-recourse nature. In addition, the shares purchased with the loan proceeds are considered to be, in substance, stock options.
The Company leases certain premises from an entity controlled by a director of the Company. The rent charged for these premises for the six months ended June 30, 2013 was $208 (six months ended June 30, 2012 - $178), as measured at the exchange amount.
13. 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:
| Six Months Ended June 30, | 2013 | 2012 |
| (C$000s) | ($) | ($) |
| Product costs | 218,299 | 240,436 |
| Depreciation | 50,785 | 44,341 |
| Amortization of debt issuance costs and debt discount | 639 | 616 |
| Employee benefits expense (note 14) | 179,472 | 176,552 |
14. EMPLOYEE BENEFITS EXPENSE
Employee benefits include all forms of consideration given by the Company in exchange for services rendered by employees.
| Six Months Ended June 30, | 2013 | 2012 |
| (C$000s) | ($) | ($) |
| Salaries and short-term employee benefits | 167,626 | 167,299 |
| Post-employment benefits (group retirement savings plan) | 2,089 | 1,698 |
| Share-based payments | 8,840 | 6,066 |
| Termination benefits | 917 | 1,489 |
| 179,472 | 176,552 |
15. 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 $9,373 (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 claims 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 $48 (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 $15 (11 euros), plus interest.
Another one of the lawsuits seeking salaries in arrears of $175 (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 $601 (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 yet for the postponed hearing.
The maximum aggregate interest payable under the claims noted above amounted to $16,398 (11,977 euros) as at June 30, 2013.
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 was recorded in the Company's financial statements.
16. 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.
| United | Latin | |||||
| Canada | States | Russia | America | Corporate | Consolidated | |
| (C$000s) | ($) | ($) | ($) | ($) | ($) | ($) |
| Three Months Ended June 30, 2013 | ||||||
| Revenue | 80,719 | 146,275 | 37,305 | 24,402 | - | 288,701 |
| Operating income (loss)(1) | 2,036 | 25,175 | 3,357 | (966) | (13,295) | 16,307 |
| Segmented assets | 655,600 | 627,853 | 136,132 | 162,433 | - | 1,582,018 |
| Capital expenditures | 28,116 | 11,349 | 4,533 | 2,620 | - | 46,618 |
| Goodwill | 7,236 | 2,308 | 979 | - | - | 10,523 |
| Three Months Ended June 30, 2012 | ||||||
| Revenue | 104,720 | 175,136 | 29,244 | 26,680 | - | 335,780 |
| Operating income (loss)(1) | 5,829 | 32,863 | 1,772 | 1,230 | (11,884) | 29,810 |
| Segmented assets | 717,001 | 571,539 | 120,507 | 69,610 | - | 1,478,657 |
| Capital expenditures | 43,308 | 27,183 | 1,249 | 3,546 | - | 75,286 |
| Goodwill | 7,236 | 2,308 | 979 | - | - | 10,523 |
| Six Months Ended June 30, 2013 | ||||||
| Revenue | 312,295 | 273,285 | 74,466 | 52,052 | - | 712,098 |
| Operating income (loss)(1) | 57,947 | 43,214 | 5,347 | 186 | (27,717) | 78,977 |
| Segmented assets | 655,600 | 627,853 | 136,132 | 162,433 | - | 1,582,018 |
| Capital expenditures | 45,407 | 32,158 | 6,964 | 6,078 | - | 90,607 |
| Goodwill | 7,236 | 2,308 | 979 | - | - | 10,523 |
| Six Months Ended June 30, 2012 | ||||||
| Revenue | 330,544 | 370,035 | 57,341 | 51,967 | - | 809,887 |
| Operating income (loss)(1) | 83,161 | 76,967 | 3,326 | 3,748 | (24,011) | 143,191 |
| Segmented assets | 717,001 | 571,539 | 120,507 | 69,610 | - | 1,478,657 |
| Capital expenditures | 80,502 | 72,722 | 2,108 | 4,029 | - | 159,361 |
| 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 June 30, | Six Months Ended June 30, | ||||
| 2013 | 2012 | 2013 | 2012 | ||
| (C$000s) | |||||
| Net income (loss) | (14,939) | (11,969) | 9,249 | 58,725 | |
| Add back (deduct): | |||||
| Depreciation | 25,971 | 22,272 | 50,785 | 44,341 | |
| Interest | 9,285 | 8,982 | 18,488 | 17,917 | |
| Foreign exchange losses (gains) | 86 | 9,786 | (2,293) | (4,084) | |
| (Gain) loss on disposal of property, plant and | |||||
| |
equipment | (14) | 1,288 | (134) | 544 |
| Income taxes | (4,082) | (549) | 2,882 | 25,748 | |
| Operating income | 16,307 | 29,810 | 78,977 | 143,191 | |
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 June 30, | Six Months Ended June 30, | |||
| 2013 | 2012 | 2013 | 2012 | |
| (C$000s) | ||||
| Fracturing | 263,496 | 299,281 | 647,641 | 728,660 |
| Coiled tubing | 9,505 | 21,214 | 31,106 | 51,998 |
| Cementing | 12,414 | 8,828 | 24,277 | 16,703 |
| Other | 3,286 | 6,457 | 9,074 | 12,526 |
| 288,701 | 335,780 | 712,098 | 809,887 | |
17. SEASONALITY OF OPERATIONS
The Company's Canadian and United States businesses are seasonal in nature. The lowest activity levels in these areas are typically experienced during the second quarter of the year when road-weight restrictions are in place and access to wellsites in Canada and North Dakota is reduced.
18. 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 $0.25 per common share was declared on February 26, 2013 and paid on April 15, 2013. Of the total dividend of $11,375, $3,108 was reinvested under the DRIP into 125,024 common shares of the Company.
A dividend of $0.10 per common share was declared on December 8, 2011 and paid on January 31, 2012. Of the total dividend of $4,376, $1,771 was reinvested under the DRIP into 71,189 common shares of the Company.
A dividend of $0.25 per common share ($11,472) was declared on June 14, 2013, to be paid on July 15, 2013.
SOURCE: Calfrac Well Services Ltd.
Douglas R. Ramsay
Chief Executive Officer
Telephone: 403-266-6000
Fax: 403-266-7381
Tom J. Medvedic
Senior Vice President, Corporate Development
& Interim Chief Financial Officer
Telephone: 403-266-6000
Fax: 403-266-7381
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