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Article Excerpt
OPERATOR: Welcome to the Calfrac Well Services Limited Q4 2008 results conference call. (Operator Instructions) Following the presentation, we will conduct a question and answer session. I would like to remind everyone that this conference call is being recorded on Friday, March 6, 2009, at 12:00 p.m. Eastern Time. I will now turn the conference over to Doug Ramsay, President and Chief Executive Officer. Please go ahead, sir.
DOUG RAMSAY, PRESIDENT AND CEO, CALFRAC WELL SERVICES LTD: Thank you, Joanne. Good morning and welcome to our discussion of Calfrac Well Services fourth quarter results. Before we get started, I'd like to outline how this conference call will be conducted. Laura Cillis, our Senior Vice President of Finance and Chief Financial Officer will begin with an overview of our quarterly financial performance. I will then provide an operational review and discuss our prospects for 2009. After which, Laura Cillis, Tom Medvedic, Gordon Dibb and I will answer any questions you have. I will now turn the call over to Laura.
LAURA CILLIS, SVP FINANCE AND CFO, CALFRAC WELL SERVICES LTD: Thank you, Doug.And thank you, everyone, for joining us today. Before I begin my discussion this morning, I'd like to note that this conference call will contain certain statements and/or expressions that could be considered forward-looking statements under applicable securities legislation. Our assessment of future plans and operations is based on expectations that involve a number of business risks and uncertainties. These risks include but are not limited to; commodity prices for oil and natural gas; weather conditions; currency exchange rates; national and international economic conditions; political uncertainties; product and supply availabilities; labor shortages; and the ability of our customers to access credit and capital markets. These conditions could cause the Company's actual results to differ materially from our current expectations.
During the fourth quarter of 2008, Calfrac achieved the following financial results in comparison to the fourth quarter of 2007. Consolidated revenue increased by 51% from CAD114.5 million in 2007, to CAD172.4 million. With increased revenue in all regions, except Russia. Operating income, which is income generated after operating expenses and selling, general and administrative expenses, was CAD25.7 million, an increase of 29% from last year. Net income increased 115% from CAD3.7 million or CAD0.10 a share generated last year, to CAD7.9 million or CAD0.21 per share. And cash flow from operations before changes in noncash working capital was CAD24.8 million or CAD0.66 per share for the fourth quarter of 2008, which was an increase of 27% in cash flow.
In Canada, total revenue increased by 30% to CAD82.8 million in the fourth quarter of 2008, from CAD63.5 million for the same period of 2007. Fracturing revenue from Canadian operations was CAD69.3 million, compared to CAD53.8 million in 2007. Average revenue per job for fracturing increased 68%, primarily due to an increase in the number of larger jobs completed in the Montney play, located in northwest Alberta and northeast British Columbia; combined with fewer lower revenue fracturing jobs being completed in the shallow gas and coalbed methane markets of central and southern Alberta.
Canada's operation margin for the fourth quarter of 2008 was CAD11.8 million, a slight increase over last year, which was CAD11.6 million. As a percentage of revenue, margins dropped from 18.3% to 14.3%. Operating margins have been negatively impacted by an increase in equipment repair costs and personnel costs, in anticipation of higher activity levels throughout the first quarter of 2009, as well as the impact of the strengthened US dollar on input costs. Doug will comment further on this in his operational review.
For the United States and Latin America region, total revenue was CAD77.4 million, an increase of 134% over the same quarter last year. US revenue increased significantly during the fourth quarter of 2008 to CAD68.8 million from CAD31.5 million. The increase was primarily due to higher fracturing activity levels in Arkansas and Colorado, driven by higher average number of fracturing stages per well, combined with an increase in cementing activity in Arkansas. The appreciation in the US dollar also contributed to the revenue increase by approximately 23%.
Mexico operations generated revenue of CAD7.7 million in the fourth quarter of 2008 versus CAD1.7 million in the same quarter last year. This included about CAD2.4 million in revenue that was generated through subcontractors. Our new Argentinian operations contributed approximately CAD900,000 in revenue in the fourth quarter of 2008. Operating margins increased from CAD9.4 million, of 28.4% of revenue, to CAD18.4 million, which was 23.8%. Operating margins for this segment have also -- have been negatively impacted by competitive pricing pressures for work done in the US and will continue to be impacted as activity weakens in the Piceance and DJ Basins.
Selling, general and administrative expenses increased from CAD1.7 million in the fourth quarter of 2007 to CAD4.3 million in 2008. This increase was largely attributed to the investment in personnel required to support the new and growing operations. In addition, a CAD1 million provision for doubtful accounts was made that was primarily pertained to a customer that filed under Chapter Eleven.
Calfrac's revenue from Russian operations during the fourth quarter of 2008 decreased by 32% from CAD17.9 million in 2007 to CAD12.2 million. This decrease in revenue was a result of the closure of the Company's Purpe district in January, 2008, the completion of smaller fracturing jobs in Khanty-Mansiysk and the smaller pole tubing job sizes in Noyabrsk. This was partially offset by the appreciation of the ruble versus the Canadian dollar and higher coiled tubing activity levels in Khanty-Mansiysk. Operating margins in Russia were negatively impacted by lower than expected fracturing activity and job sizes in the quarter and a higher level of sales of low margin proppant.
The increase in corporate expenses for the fourth quarter of 2008 from the same quarter of 2007 was mainly due to the start up of inhouse laboratory services, resulting from the acquisition of ChemErgy in January 2008. And a larger corporate organization supporting the Company's increased scale of operations.
Turning to the balance sheet. The Company exited the quarter in strong financial condition, with working capital of CAD100.6 million and long-term debt of CAD160 million. The increase in long-term debt from last year of CAD129.5 million was due to the impact of the appreciation of the US dollar on long-term debt. In December 2008, Calfrac renewed its CAD90 million credit facilities, which are with a syndicate of Canadian chartered banks.
We will continue to monitor and preserve our cash position as we manage through these turbulent times. We're monitoring our balance sheet very closely, including the credit profile of all of our customers. Our focus remains on balance sheet strength, cost control and liquidity. I would now like to turn the call back to Doug for an overview of the Canadian operations.
DOUG RAMSAY: Thank you, Laura. I will now provide a brief overview of our operations during the past quarter and then discuss our outlook for 2009. I will begin with our operations in Canada. In the fourth quarter, the Company experienced strong levels of fracturing and coiled tubing activity in the deeper basins of northern Alberta and northeastern British Columbia. Natural gas drilling activity throughout the western Canadian Sedimentary Basin continues to be focused on developing unconventional resource plays, such as the Montney and Horn River. Calfrac continued it expansion in northern British Columbia to service emerging unconventional reservoirs in this region.
Additionally, the conventional and coalbed methane fracturing markets of southern and central Alberta were relatively active during the fourth quarter. We experienced operational challenges in the month in December due to the combination of extremely cold weather, as the demands of our fleet, of fracturing equipment and deep coiled tubing crews because of the new well profiles being very capital and thus, more intensive. The deployment of the 2008 capital program in late fourth quarter and in early 2009, the Company is in a much better position to service these new evolving plays. The Company also took this opportunity to complete additional preventive maintenance in advance of winter drilling season to ensure continued safe, efficient and reliable provision of service in the first quarter of 2009.
The Company also had higher personnel costs in preparation for what was expected to be a very busy first quarter. Additional rotational staff was added during the fourth quarter to assist in the manning, the additional equipment, which was deployed as part of the 2008 capital program. The changing well profile in western Canada has resulted in the requirement for significantly more equipment for people on location to service unconventional wells. (Sirens in the background) So, the background might be someone trying to recover from what's happening in our market. But anyways, I'll continue, the noise has gone by. Unfortunately, this cost is born of the vast deployment of equipment.
The Company also experienced higher production costs in Canada due to the strength in US dollar, from product and equipment being sourced from the US In the United States, the Company's fracturing and its main operations and unconventional Fayetteville Shale play, located in Arkansas, reached record levels of activity during the fourth quarter and built the financial performance of this geographic segment. Some costs were incurred as the Company prepared to deploy its third fracturing spread to this market. Most of these costs were in the context of additional staff, associated with the deployment of this crew.
The low natural gas price environment did, however, significantly reduce fracturing activity levels within the Piceance Basins and, to a lesser degree, the DJ Basin for the latter part of the fourth quarter. In November, the Company completed a highly successful fracturing program for one of the largest operators in the Bakken Shale play in North Dakota, utilizing a unique brands of chemistry. Calfrac is cautiously optimistic that this will lead to additional work for the customer in the area in the second quarter of 2009. In the fourth quarter, fracturing and coiled tubing activities in western Siberia were slower than expected due to the impact of reduced activity by a major Russian customer in one of our regions.
With the onset of winter, the Company experienced high fuel usage, although this was somewhat offset by the lower cost of fuel. Margins were also negatively impacted by our customer base requiring us to pump more of our proppant rather than customer supplied. In the Russian market, there's very little mark up on the provision of proppant.
The Company has been awarded work in three operating areas in Russia, with two of the country's largest oil and gas company's. We have commenced work in all three areas, based on written authorizations of these customers. And executed three annual contracts, in respect to the award. With two additional annual contracts, pending execution, upon the finalization of their term. We expect the Company's three fracturing spreads and five coiled tubing crews in this geographic market to remain highly utilized throughout 2009, with increased margins.
In Mexico, Calfrac's equipment fleet currently consists of two fracturing spreads, which service the Burgos field. The Company built some positive momentum in this market during the fourth quarter, as we performed a greater number of technically challenging deep [pot] jobs. And we expect, building on this momentum into 2009. Utilization of equipment during the fourth quarter was its highest level since inception of our operations in this geographic area.
The Company began operations in Argentina during the second quarter, under the terms of a negotiating arrangement with a local oil and natural gas company. Calfrac entered this new market with a measured approach and we intend to expand these international operations as the oil and natural gas market grows into the future. Having successfully executed the entire phase of its operation in Argentina, the Company anticipates that the financial results from its cementing operations will improve over the prior year.
Future prospects. The current business environment is very uncertain, amidst a growth economic recession, low commodity prices and restricted access to credit and capital markets. As a result, Calfrac remains focus on maintaining it's strong balance sheet, on maximizing equipment utilization, leaning on strong customer relationships and closely managing the Company's operating and capital costs. Pricing pressure...
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