Calfrac Announces Third Quarter Results and Update on 2017 Capital Program

CALGARY, Oct. 26, 2017 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three and nine months ended September 30, 2017.

HIGHLIGHTS


Three Months Ended September 30,

Nine Months Ended September 30,


2017

2016

Change

2017

2016

Change

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

($)

($)

(%)

($)

($)

(%)

(unaudited)







Revenue

448,090

174,925

156

1,042,249

541,668

92

Operating income (loss)(1)

78,196

(12,392)

NM

135,331

(39,913)

NM


Per share – basic                                                

0.57

(0.11)

NM

0.99

(0.35)

NM


Per share – diluted

0.57

(0.11)

NM

0.98

(0.35)

NM

Adjusted EBITDA(1)

81,113

(11,055)

NM

142,610

(31,033)

NM


Per share – basic

0.59

(0.10)

NM

1.04

(0.27)

NM


Per share – diluted

0.59

(0.10)

NM

1.03

(0.27)

NM

Net income (loss) attributable to the
shareholders of Calfrac before foreign
exchange gains or losses(2)

17,564

(41,572)

NM

(13,826)

(123,009)

(89)


Per share – basic

0.13

(0.36)

NM

(0.10)

(1.07)

(91)


Per share – diluted

0.13

(0.36)

NM

(0.10)

(1.07)

(91)

Net income (loss) attributable to the
shareholders of Calfrac

7,822

(40,862)

NM

(32,074)

(136,604)

(77)


Per share – basic

0.06

(0.35)

NM

(0.23)

(1.18)

(81)


Per share – diluted

0.06

(0.35)

NM

(0.23)

(1.18)

(81)

Working capital (end of period)




334,606

269,081

24

Total equity (end of period)




477,188

501,926

(5)

Weighted average common shares outstanding (000s)








Basic

136,606

115,410

18

136,588

115,410

18


Diluted

138,105

116,555

18

138,158

115,610

20

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

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

 

CEO MESSAGE
Fernando Aguilar, Calfrac's President and Chief Executive Officer commented "The strong results shown by Calfrac in the third quarter are the direct result of the hard work and dedication of our employees, and the strong partnerships we have cultivated with leading producers in all areas of North America. In particular, the safe and profitable start-up of operations in the Permian Basin underscores the commitment Calfrac has to safety and quality in field execution along with prudent cost management and capital allocation."

During the quarter, Calfrac:

  • added 183,000 HHP (including 78,000 HHP previously uncommissioned) to the Company's active operating fleet comprised of four incremental fleets in its U.S. operations including expansion to the Permian Basin and one in Canada;
  • pumped almost 700,000 tons of sand in North America, a new record for quarterly sand pumped; and
  • successfully recruited approximately 200 operations personnel across North America;
  • amended and extended its credit facilities to June 1, 2020; and
  • increased its capital budget from $65.0 million to $95.0 million.

THIRD QUARTER 2017 OVERVIEW

CONSOLIDATED HIGHLIGHTS

Three Months Ended September 30,

2017

2016

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

448,090

174,925

156

Expenses





Operating

353,982

173,579

104


Selling, general and administrative (SG&A)

15,912

13,738

16


369,894

187,317

97

Operating income (loss)(1)

78,196

(12,392)

NM

Operating income (loss) (%)

17.5

(7.1)

NM

Adjusted EBITDA(1)

81,113

(11,055)

NM

Adjusted EBITDA (%)

18.1

(6.3)

NM

Fracturing revenue per job ($)

29,412

30,906

(5)

Number of fracturing jobs

13,673

4,508

203

Active pumping horsepower, end of period (000s)

1,057

644

64

Idle pumping horsepower, end of period (000s)

338

578

(42)

Total pumping horsepower, end of period (000s)

1,395

1,222

14

Coiled tubing revenue per job ($)

26,526

36,482

(27)

Number of coiled tubing jobs

961

592

62

Active coiled tubing units, end of period (#)

21

20

5

Idle coiled tubing units, end of period (#)

11

12

(8)

Total coiled tubing units, end of period (#)

32

32

Cementing revenue per job ($)

45,454

34,515

32

Number of cementing jobs

126

238

(47)

Active cementing units, end of period (#)

12

14

(14)

Idle cementing units, end of period (#)

13

11

18

Total cementing units, end of period (#)

25

25

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

 

Revenue in the third quarter of 2017 was $448.1 million, an increase of 156 percent from the same period in 2016. The Company's fracturing job count increased by 203 percent mainly due to a larger scale of operations and higher activity in Canada and the United States. The Company pumped approximately 185 percent and 160 percent more proppant in Canada and the United States, respectively, compared to the third quarter in 2016 as a result of greater activity and service intensity. Consolidated revenue per fracturing job decreased by 5 percent primarily due to the impact of job mix in Canada and Argentina.

Pricing in Canada and the United States increased while pricing in Argentina and Russia was consistent with the third quarter of 2016.

Adjusted EBITDA of $81.1 million for the third quarter of 2017 increased from negative $11.1 million in the comparable period in 2016 primarily due to significantly higher utilization in the United States and Canada.

Net income attributable to shareholders of Calfrac was $7.8 million or $0.06 per share diluted compared to a net loss of $40.9 million or $0.35 per share diluted in the same period last year.  Net income included a primarily unrealized foreign exchange loss of $13.6 million during the third quarter compared to a gain of $0.1 million in the comparable period in 2016.

As a result of increased activity and demand for its equipment, the Company is announcing a further increase in its 2017 capital budget from $65.0 million to $95.0 million. The incremental capital expenditures will be largely focused on maintenance capital for a larger fleet of equipment operating in North America due to a higher number of fleet activations than were initially planned. At September 30, 2017, the Company had commissioned all of the horsepower that formed part of its 2014 capital build program.

Three Months Ended

September 30,

June 30,

Change


2017

2017


(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

448,090

325,344

38

Expenses





Operating                                                     

353,982

275,932

28


SG&A

15,912

12,672

26


369,894

288,604

28

Operating income (loss)(1)

78,196

36,740

113

Operating income (loss) (%)

17.5

11.3

55

Adjusted EBITDA(1)

81,113

39,913

103

Adjusted EBITDA (%)

18.1

12.3

47

Fracturing revenue per job ($)

29,412

35,858

(18)

Number of fracturing jobs

13,673

8,132

68

Active pumping horsepower, end of period (000s)

1,057

874

21

Idle pumping horsepower, end of period (000s)

338

443

(24)

Total pumping horsepower, end of period (000s)

1,395

1,317

6

Coiled tubing revenue per job ($)

26,526

28,805

(8)

Number of coiled tubing jobs

961

704

37

Active coiled tubing units, end of period (#)

21

21

Idle coiled tubing units, end of period (#)

11

11

Total coiled tubing units, end of period (#)

32

32

Cementing revenue per job ($)

45,454

43,158

5

Number of cementing jobs

126

114

11

Active cementing units, end of period (#)

12

12

Idle cementing units, end of period (#)

13

13

Total cementing units, end of period (#)

25

25

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

 

Revenue in the third quarter of 2017 was $448.1 million, an increase of 38 percent from the second quarter of 2017, primarily due to higher activity and a larger operating fleet across North America. Revenue per fracturing job decreased by 18 percent due to job mix in Canada as more annular fracturing work was completed during the quarter, which include more stages at smaller sizes per stage. Pricing in the United States and Canada improved modestly sequentially while pricing in Argentina and Russia was consistent with the second quarter of 2017.

In Canada, third-quarter revenue increased by 63 percent from the second quarter to $181.0 million due to higher fracturing activity post spring break-up plus the contribution from the additional fleet that was reactivated in July. Operating income as a percentage of revenue was 25 percent versus 12 percent in the second quarter primarily due to strong utilization and customer efficiencies throughout the quarter as well as better fixed cost absorption.

In the United States, revenue in the third quarter of 2017 increased by 26 percent from the second quarter to $193.8 million, mainly as a result of the four additional fleets that were reactivated during the quarter as well as strong productivity and pricing improvements. The United States division improved its operating income margin from the second quarter, moving from 16 percent of revenue to 19 percent in the third quarter of 2017. The U.S. division incurred $8.0 million in reactivation costs during the quarter compared to $4.7 million in the second quarter. The improvement in sequential results was primarily driven by operational efficiencies with key customers as well as improved pricing and better fixed cost absorption.

In Russia, revenue of $29.8 million in the third quarter of 2017 was 6 percent lower sequentially primarily due to a weaker Rouble during the quarter. Operating income as a percentage of revenue was consistent with the second quarter at approximately 16 percent.

In Latin America, revenue increased sequentially by 52 percent to $43.6 million primarily due to a significant increase in activity in Argentina, including increased work volumes in the Vaca Muerta shale play. Although the Company improved its revenue during the quarter, its operating fleet continued to be underutilized, which resulted in breakeven operating income for the quarter. Third-quarter results included approximately $0.6 million of non-recurring expenses related to the start-up of its unconventional fracturing fleet.

BUSINESS UPDATE AND OUTLOOK
Calfrac's third-quarter results reflect further improvement in its operating and financial performance driven by a continued focus on maintaining a highly productive and cost-conscious operation combined with the impact of incremental pricing gains in Canada and the United States. Throughout the remainder of 2017, the Company expects further reactivations to occur in North America although the pace of pricing gains is anticipated to slow.

CANADA
Calfrac's Canadian division posted strong revenue and profitability during the third quarter of 2017. Higher liquids-driven activity combined with continued increases in service intensity contributed to the significant improvement in the Company's business fundamentals. This improvement is a result of robust pressure pumping demand combined with the impact of operating efficiencies from Calfrac and its client base as well as further pricing adjustments.

Although liquids pricing improved during the quarter, Western Canadian spot gas pricing fell materially which has impacted the economics of some of the Company's client base. As a result, completions activity in Canada is expected to shift more towards oil and liquids-rich gas resource plays in 2018. The Company expects strong levels of activity through the majority of the fourth quarter although activity is expected to be slightly lower than the third quarter as 2017 capital programs are completed and the onset of winter weather and holiday schedules occur. As well, low gas prices may drive some shift in activity in the near term. Activity in the first quarter of 2018 is expected to be robust for Calfrac's Canadian operations but will be confirmed by the budget announcements of its customer base later in the fourth quarter.

Cost inflation was less severe in the third quarter than earlier in the year, although weather events impacted the availability and price of some chemical products during the quarter. The Company expects that cost inflation will remain modest over the short term unless there is a significant step change in activity.

The Company secured exclusive access to a fifth sand transload facility in Canada during the quarter. This new facility augments Calfrac's ability to deliver large quantities of sand to client locations in a reliable and cost-effective manner and further reduces execution risk for the Company and its clients.

The Company plans to deploy an incremental Montney-focused fracturing fleet in Canada early in the first quarter of 2018. Calfrac has added a number of high quality clients that are focused on the Montney and Deep Basin. After the activation of its eighth fracturing fleet, the Company expects to have approximately 300,000 of active horsepower in Canada. Additionally, Calfrac plans to redeploy two idle coiled tubing units from the United States and expects that the first of these units will commence operations in the first quarter of 2018.

Calfrac anticipates that reactivation expenses for its eighth fracturing fleet will total approximately $2.5 million, including $1.0 million recorded in the third quarter of 2017. Future reactivations will require older equipment to enter service which is expected to result in an increase in overall fleet reactivation costs. Any additional fracturing equipment reactivations will depend on the risk-return balance considering geographic, industry and labour factors.

UNITED STATES
The United States experienced further improvement in the third quarter as a result of high levels of equipment utilization, improved pricing and proactive cost management. However, a stronger Canadian dollar impacted reported results by 9 percent relative to the previous quarter. During the quarter, the Company reactivated four fleets, including two incremental fleets in North Dakota, one fleet in Pennsylvania and commenced operations with one fleet in the Permian Basin based in Artesia, New Mexico. The Company's San Antonio district was reopened and the Company plans to reactivate a fleet in that region in the near-term.

Late in the third quarter, Calfrac took advantage of a break in client work schedules in Colorado and temporarily transferred a second fleet into the Permian Basin. The Company expects that this fleet will be replaced by a newly reactivated fleet during the fourth quarter and, as a result, Calfrac will operate 13 fleets in the U.S. market totaling approximately 600,000 horsepower. Calfrac expects that the pace of U.S. fleet additions will slow but barring any deterioration in market conditions, it expects to fully reactivate all of its fracturing equipment during 2018.

Pricing has continued to improve in the Company's U.S. operations, although similar to Canada, utilization, efficiencies and cost control have been more important drivers to profitability growth than net pricing improvement. Looking forward, higher demand for safe, productive and reliable fracturing services provides Calfrac with opportunities to align with financially strong and execution-focused clients to drive further operating efficiencies and improved profitability.

RUSSIA
Calfrac's Russian operations generated consistent financial results in the third quarter of 2017 as utilization levels remained strong. The Company anticipates that its fourth-quarter financial performance in Russia will be similar to the prior year as Western Siberia transitions to winter operating conditions. The Company is in the process of finalizing its 2018 annual contracts and expects that activity will be relatively consistent with 2017.

LATIN AMERICA
The meaningful gain in revenue in the third quarter was due to the substantial increase in activity in Argentina, including increased work volumes in the Vaca Muerta shale play. During the quarter, the Company began working for a major international customer in the region. As activity accelerates, the Company expects profitability to increase although the pace of this improvement is anticipated to be slower than observed in North America.

In Mexico, the business environment remains challenging with very limited onshore pressure pumping activity. Calfrac will continue to evaluate this market while maintaining a small scale operating presence with a minimal cost structure.

CORPORATE
Although operating results continue to improve, Calfrac remains focused on increasing the profitability of its operations by delivering high quality and cost effective service to its clients while maintaining an excellent asset base and experienced workforce. Management remains acutely focused in the short term on the prudent allocation of capital assets and people in its operations. In the longer term, management continues to evaluate options for the Company's balance sheet that can provide appropriate liquidity as well as mitigate longer-term risks.

As a result of increased activity and demand for its equipment, the Company is announcing a further increase in its 2017 capital budget from $65.0 million to $95.0 million. The incremental capital expenditures will be largely focused on maintenance capital for a larger fleet of equipment operating in North America due to a higher number of fleet activations than were initially planned.

FINANCIAL OVERVIEW – THREE MONTHS ENDED SEPTEMBER 30, 2017 VERSUS 2016

CANADA

Three Months Ended September 30,

2017

2016

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

180,953

59,577

204

Expenses





Operating                                                      

133,990

59,666

125


SG&A

2,545

1,939

31


136,535

61,605

122

Operating income (loss)(1)

44,418

(2,028)

NM

Operating income (loss) (%)

24.5

(3.4)

NM

Fracturing revenue per job ($)

20,287

20,738

(2)

Number of fracturing jobs

8,153

2,492

227

Active pumping horsepower, end of period (000s)

277

194

43

Idle pumping horsepower, end of period (000s)

150

216

(31)

Total pumping horsepower, end of period (000s)

427

410

4

Coiled tubing revenue per job ($)

22,243

25,981

(14)

Number of coiled tubing jobs

591

304

94

Active coiled tubing units, end of period (#)

9

7

29

Idle coiled tubing units, end of period (#)

4

6

(33)

Total coiled tubing units, end of period (#)

13

13

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

 

REVENUE
Revenue from Calfrac's Canadian operations during the third quarter of 2017 was $181.0 million versus $59.6 million in the same period of 2016. Completions activity in Canada has improved dramatically year-over-year, which allowed the Company to reactivate equipment throughout 2017. Since the end of the third quarter of 2016, the Company has reactivated 83,000 horsepower or two large fracturing crews and two deep coiled tubing units that were operational during the third quarter. Through a combination of this larger operating scale and significantly improved utilization and pricing, the Company increased its revenue in the third quarter of 2017 by 204 percent from the comparative quarter in 2016. The number of fracturing jobs increased by 227 percent mainly due to a more active and efficient customer base versus the same period in 2016. The number of coiled tubing jobs increased by 94 percent from the third quarter in 2016 primarily due to higher activity as well as a larger scale of operations in western Canada.

OPERATING INCOME (LOSS)
Operating income in Canada during the third quarter of 2017 was $44.4 million compared to a loss of $2.0 million in the same period of 2016. The reversal from a loss position was due to significantly improved utilization and better pricing compared to the third quarter of 2016. The Company incurred reactivation costs of $1.0 million during the third quarter of 2017 associated with the planned deployment of one incremental fracturing crew at the beginning of the first quarter of 2018. The $0.6 million increase in SG&A expenses compared to the third quarter in 2016 was primarily due to growth in business scale and increased activity.

UNITED STATES

Three Months Ended September 30,

2017

2016

Change

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

($)

($)

(%)

(unaudited)




Revenue

193,817

52,640

268

Expenses





Operating                                                                    

153,783

55,595

177


SG&A

2,950

3,043

(3)


156,733

58,638

167

Operating income (loss)(1)

37,084

(5,998)

NM

Operating income (loss) (%)

19.1

(11.4)

NM

Fracturing revenue per job ($)

39,260

34,815

13

Number of fracturing jobs

4,858

1,512

221

Active pumping horsepower, end of period (000s)

588

249

136

Idle pumping horsepower, end of period (000s)

188

362

(48)

Total pumping horsepower, end of period (000s)(2)

776

611

27

Active coiled tubing units, end of period (#)

Idle coiled tubing units, end of period (#)

5

5

Total coiled tubing units, end of period (#)

5

5

Active cementing units, end of period (#)

Idle cementing units, end of period (#)

11

11

Total cementing units, end of period (#)

11

11

US$/C$ average exchange rate(3)

1.2528

1.3046

(4)

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

(2) The Company reactivated equipment that was previously identified as impaired based on the impairment provision at December 31, 2015.

(3) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's United States operations increased to $193.8 million during the third quarter of 2017 from $52.6 million in the comparable quarter of 2016. Completions activity in the United States has shown meaningful improvement year-over-year, which allowed the Company to reactivate equipment throughout 2017. The Company has successfully responded to the rebound in industry activity in the United States by activating eight fracturing crews since the end of the third quarter in 2016, representing  339,000 horsepower, including expansion into the Permian basin during the third quarter of 2017. The result was a 221 percent increase in the number of fracturing jobs completed period-over-period. Revenue per job increased 13 percent year-over-year due to improved pricing offset partially by the completion of smaller jobs in the Rockies region. In addition, one of Calfrac's customers in North Dakota provided its own sand during the quarter which contributed to the reduction in reported revenue per job. The 4 percent depreciation in the U.S. dollar versus the Canadian dollar partially offset the revenue improvement.

OPERATING INCOME (LOSS)
The Company's United States operations generated operating income of $37.1 million during the third quarter of 2017 compared to an operating loss of $6.0 million in the same period in 2016. The turnaround to positive operating income was primarily the result of improved utilization and pricing in Colorado, North Dakota and Pennsylvania. Operating income included $8.0 million of costs associated with the reactivation of four incremental fleets during the third quarter of 2017. SG&A expenses decreased by 3 percent in the third quarter of 2017 due to the depreciation in the U.S. dollar versus the Canadian dollar.

RUSSIA

Three Months Ended September 30,

2017

2016

Change

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

($)

($)

(%)

(unaudited)




Revenue

29,758

26,303

13

Expenses





Operating                                                                      

24,299

21,586

13


SG&A

754

466

62


25,053

22,052

14

Operating income(1)

4,705

4,251

11

Operating income (%)

15.8

16.2

(2)

Fracturing revenue per job ($)

73,027

66,955

9

Number of fracturing jobs

336

307

9

Pumping horsepower, end of period (000s)

70

70

Coiled tubing revenue per job ($)

40,789

44,211

(8)

Number of coiled tubing jobs

128

130

(2)

Active coiled tubing units, end of period (#)

6

6

Idle coiled tubing units, end of period (#)

1

1

Total coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0213

0.0202

5

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

(2) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's Russian operations increased by 13 percent during the third quarter of 2017 to $29.8 million from $26.3 million in the corresponding three-month period of 2016. The increase in revenue was largely attributable to a 9 percent increase in fracturing activity combined with the 5 percent appreciation of the Russian rouble during the quarter. Revenue per fracturing job increased by 9 percent primarily due to the appreciation of the Russian rouble and the completion of larger jobs.

OPERATING INCOME
The Company's Russian operations generated operating income of $4.7 million during the third quarter of 2017 compared to $4.3 million in the corresponding period of 2016. This increase was primarily due to improved fracturing crew utilization combined with the appreciation of the Russian rouble. SG&A expenses were $0.3 million higher than the comparable quarter in 2016 primarily due to higher personnel costs combined with the 5 percent appreciation of the Russian rouble.

LATIN AMERICA

Three Months Ended September 30,

2017

2016

Change

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

($)

($)

(%)

(unaudited)




Revenue

43,562

36,405

20

Expenses





Operating                                                                         

40,977

35,636

15


SG&A

2,593

2,883

(10)


43,570

38,519

13

Operating loss(1)

(8)

(2,114)

(100)

Operating loss (%)

(5.8)

(100)

Pumping horsepower, end of period (000s)

122

131

(7)

Active cementing units, end of period (#)

12

14

(14)

Idle cementing units, end of period (#)

2

NM

Total cementing units, end of period (#)

14

14

Active coiled tubing units, end of period (#)

6

7

(14)

Idle coiled tubing units, end of period (#)

1

NM

Total coiled tubing units, end of period (#)

7

7

Mexican peso/C$ average exchange rate(2)

0.0703

0.0696

1

Argentinean peso/C$ average exchange rate(2)

0.0726

0.0873

(17)

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

(2) Source: Bank of Canada and Bloomberg.

 

REVENUE
Calfrac's Latin American operations generated total revenue of $43.6 million during the third quarter of 2017 versus $36.4 million in the comparable three-month period in 2016. Revenue in Latin America was 20 percent higher than the comparable quarter primarily due to higher work volumes in the Vaca Muerta shale play. The improvement was partially offset by lower cementing activity in Argentina resulting from lower overall levels of drilling activity. Coiled tubing activity in Argentina increased year-over-year but the impact was offset by the completion of smaller jobs.

OPERATING LOSS
The Company's operations in Latin America operated at a breakeven level during the third quarter of 2017 compared to an operating loss of $2.1 million in the third quarter of 2016. Although the Company improved its revenue during the quarter, its operating fleet continued to be underutilized. The Company incurred $0.6 million of start-up costs related to operations in the Vaca Muerta unconventional gas play during the third quarter of 2017. SG&A expenses decreased by 10 percent in the third quarter of 2017 due to lower personnel costs, driven primarily by the deprecation of the Argentinean peso.

CORPORATE

Three Months Ended September 30,

2017

2016

Change

(C$000s)

($)

($)

(%)

(unaudited)




Expenses





Operating                                 

933

1,096

(15)


SG&A

7,070

5,407

31


8,003

6,503

23

Operating loss(1)

(8,003)

(6,503)

23

% of Revenue

1.8

3.7

(51)

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

 

OPERATING LOSS
Corporate expenses for the third quarter of 2017 increased by 23 percent compared to the third quarter of 2016. Operating expenses were 15 percent lower as a result of lower district personnel and occupancy costs. SG&A expenses increased by $1.7 million primarily due to a $1.0 million increase in stock-based compensation expense relating to a higher share price at the end of the quarter combined with a larger number of stock options outstanding. The remaining increase related to higher costs associated with operational growth.

DEPRECIATION
For the three months ended September 30, 2017, depreciation expense decreased by 7 percent to $30.6 million from $33.0 million in the corresponding quarter of 2016. The decrease in depreciation was primarily due to a larger portion of the Company's asset base being fully depreciated combined with the impact of a weaker U.S. dollar.

FOREIGN EXCHANGE GAINS AND LOSSES
The Company recorded a foreign exchange loss of $13.6 million during the third quarter of 2017 versus a gain of $0.1 million in the comparative three-month period of 2016. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada and Latin America and liabilities held in Canadian dollars in Russia. The Company's third-quarter 2017 foreign exchange loss was largely attributable to the translation of U.S. dollar-denominated assets held in Canada as the U.S. dollar depreciated against the Canadian dollar during the third quarter. In addition, the translation of U.S. dollar-denominated liabilities held in Argentina contributed to the foreign exchange loss as the value of the Argentinean peso depreciated against the U.S. dollar during the third quarter.

INTEREST
The Company's net interest expense of $21.1 million for the third quarter of 2017 was $0.3 million higher than in the comparable period of 2016. This increase was primarily due to higher credit facility borrowings offset partially by the impact of a stronger Canadian dollar relative to the U.S. dollar, which resulted in lower reported interest on the Company's U.S. dollar-denominated unsecured notes.

INCOME TAXES
The Company recorded an income tax expense of $0.8 million during the third quarter of 2017 compared to a recovery of $24.4 million in the comparable period of 2016. The effective tax rate of 11 percent during the third quarter of 2017 was the result of the mix of earnings generated in Canada, the United States and Russia combined with pre-tax losses in Argentina.

SUMMARY OF QUARTERLY RESULTS

Three Months Ended

Dec. 31,

Mar. 31,

Jun. 30,

Sep. 30,

Dec. 31,

Mar. 31,

Jun. 30,

Sep. 30,


2015

2016

2016

2016

2016

2017

2017

2017

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

($)

($)

($)

($)

($)

($)

($)

($)

(unaudited)









Financial









Revenue

286,194

216,138

150,605

174,925

192,846

268,815

325,344

448,090

Operating income (loss)(1)

5,787

(11,623)

(15,898)

(12,392)

(18,291)

20,395

36,740

78,196


Per share – basic                                                      

0.06

(0.10)

(0.14)

(0.11)

(0.15)

0.15

0.27

0.57


Per share – diluted

0.06

(0.10)

(0.14)

(0.11)

(0.15)

0.15

0.27

0.57

Adjusted EBITDA(1)

22,933

(5,883)

(14,095)

(11,055)

(13,717)

21,584

39,913

81,113


Per share – basic

0.24

(0.05)

(0.12)

(0.10)

(0.11)

0.16

0.29

0.59


Per share – diluted

0.24

(0.05)

(0.12)

(0.10)

(0.11)

0.16

0.29

0.59

Net income (loss) attributable to the shareholders of Calfrac

(141,498)

(54,071)

(41,671)

(40,862)

(61,493)

(19,547)

(20,349)

7,822


Per share – basic

(1.45)

(0.47)

(0.36)

(0.35)

(0.51)

(0.14)

(0.15)

0.06


Per share – diluted

(1.45)

(0.47)

(0.36)

(0.35)

(0.51)

(0.14)

(0.15)

0.06

Capital expenditures

29,964

7,723

8,370

6,907

15,708

12,965

22,358

22,093

Working capital (end of period)

305,952

261,072

306,346

269,081

271,581

278,818

293,411

334,606

Total equity (end of period)

623,719

576,465

543,530

501,926

497,458

485,452

463,180

477,188









Operating (end of period)








Active pumping horsepower (000s)

776

640

582

644

659

727

874

1,057

Idle pumping horsepower (000s)

524

586

640

578

563

493

443

338

Total pumping horsepower (000s)

1,300

1,226

1,222

1,222

1,222

1,220

1,317

1,395

Active coiled tubing units (#)

20

18

19

20

19

20

21

21

Idle coiled tubing units (#)

17

14

13

12

13

12

11

11

Total coiled tubing units (#)

37

32

32

32

32

32

32

32

Active cementing units (#)

23

14

14

14

14

12

12

12

Idle cementing units (#)

8

11

11

11

11

13

13

13

Total cementing units (#)

31

25

25

25

25

25

25

25

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

 

SEASONALITY OF OPERATIONS
The Company's North American business is seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break-up weather conditions and access to well sites in Canada and North Dakota is reduced (refer to "Business Risks – Seasonality" in the 2016 Annual Report).

FOREIGN EXCHANGE FLUCTUATIONS
The Company's consolidated financial statements are reported in Canadian dollars. Accordingly, the quarterly results are directly affected by fluctuations in the exchange rates for United States, Russian, Mexican and Argentinean currency (refer to "Business Risks – Fluctuations in Foreign Exchange Rates" in the 2016 Annual Report).

FINANCIAL OVERVIEW – NINE MONTHS ENDED SEPTEMBER 30, 2017 VERSUS 2016

CANADA

Nine Months Ended September 30,

2017

2016

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

403,284

177,686

127

Expenses





Operating                                                     

326,390

178,300

83


SG&A

6,843

5,844

17


333,233

184,144

81

Operating income (loss)(1)

70,051

(6,458)

NM

Operating income (loss) (%)

17.4

(3.6)

NM

Fracturing revenue per job ($)

20,119

23,340

(14)

Number of fracturing jobs

18,176

6,799

167

Active pumping horsepower, end of period (000s)

277

194

43

Idle pumping horsepower, end of period (000s)

150

216

(31)

Total pumping horsepower, end of period (000s)

427

410

4

Coiled tubing revenue per job ($)

21,829

24,142

(10)

Number of coiled tubing jobs

1,595

787

103

Active coiled tubing units, end of period (#)

9

7

29

Idle coiled tubing units, end of period (#)

4

6

(33)

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

13

13

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

 

REVENUE
Revenue from Calfrac's Canadian operations during the first nine months of 2017 was $403.3 million versus $177.7 million in the same period in 2016. As activity in Canada improved significantly from 2016, the Company reactivated two fleets during the first nine months of 2017. Through a combination of additional active equipment together with significantly improved utilization and pricing, the Company increased its revenue by 127 percent. The number of fracturing jobs increased by 167 percent due to a more active and efficient customer base than the same period in 2016. Revenue per fracturing job decreased by 14 percent from the same period in the prior year due to job mix and completion design.

OPERATING INCOME (LOSS)
The Company's Canadian division generated operating income of $70.1 million during the first nine months of 2017 compared to an operating loss of $6.5 million in the first nine months in 2016. The return to positive income was the result of significantly better utilization and higher pricing. The Company incurred reactivation costs of $2.0 million during the first three quarters of the year primarily associated with the deployment of two incremental fracturing crews during the period and one additional fracturing crew that is planned for the first quarter in 2018. The Canadian division's SG&A expenses increased by 17 percent year-over-year primarily due to additional recruiting costs related to its crew reactivations as well as a larger operating scale and higher activity.

UNITED STATES

Nine Months Ended September 30,

2017

2016

Change

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

($)

($)

(%)

(unaudited)




Revenue

445,807

176,677

152

Expenses





Operating                                                                        

364,931

183,831

99


SG&A

8,615

11,905

(28)


373,546

195,736

91

Operating income (loss)(1)

72,261

(19,059)

NM

Operating income (loss) (%)

16.2

(10.8)

NM

Fracturing revenue per job ($)

39,144

32,162

22

Number of fracturing jobs

11,181

5,442

105

Active pumping horsepower, end of period (000s)

588

249

136

Idle pumping horsepower, end of period (000s)

188

362

(48)

Total pumping horsepower, end of period (000s)(2)

776

611

27

Active coiled tubing units, end of period (#)

Idle coiled tubing units, end of period (#)

5

5

Total coiled tubing units, end of period (#)

5

5

Active cementing units, end of period (#)

Idle cementing units, end of period (#)

11

11

Total cementing units, end of period (#)

11

11

US$/C$ average exchange rate(3)

1.3072

1.3228

(1)

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

(2) The Company reactivated equipment that was previously identified as impaired based on the impairment provision at December 31, 2015.

(3) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's United States operations increased to $445.8 million during the first nine months of 2017 from $176.7 million in the same period in 2016 due to significantly higher fracturing activity and improved pricing. Completions activity in the United States has shown meaningful improvement year-over-year, which allowed the Company to reactivate equipment throughout 2017. The Company responded to this increase in industry activity by activating eight fracturing crews since the end of the third quarter in 2016, representing 339,000 horsepower, including one crew servicing the Permian basin in New Mexico and Texas. The number of fracturing jobs completed during the first nine months of 2017 increased by 105 percent from 2016 due to higher activity across all operating areas. Revenue per job increased by 22 percent year-over-year due to the completion of larger jobs in Pennsylvania and North Dakota while higher pricing in all operating regions also had a positive impact on revenue per job during the period.

OPERATING INCOME (LOSS)
The Company's United States division generated operating income of $72.3 million during the first nine months of 2017 after operating at a loss of $19.1 million during the same period of 2016. Strong utilization combined with a larger number of active fleets resulted in the significant year-over-year improvement in operating income. Since the end of the third quarter of 2016, the Company has reactivated eight fracturing fleets across its operating districts in Colorado, North Dakota, Pennsylvania and Texas. The operating results in 2017 also included reactivation costs of $14.4 million while the operating loss in 2016 included restructuring costs and bad debt expenses of $3.1 million and $0.3 million, respectively.

RUSSIA

Nine Months Ended September 30,

2017

2016

Change

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

($)

($)

(%)

(unaudited)




Revenue

88,977

71,459

25

Expenses





Operating                                                                     

77,177

61,612

25


SG&A

2,382

1,778

34


79,559

63,390

26

Operating income(1)

9,418

8,069

17

Operating income (%)

10.6

11.3

(6)

Fracturing revenue per job ($)

74,766

68,048

10

Number of fracturing jobs

999

831

20

Pumping horsepower, end of period (000s)

70

70

Coiled tubing revenue per job ($)

43,820

40,411

8

Number of coiled tubing jobs

326

369

(12)

Active coiled tubing units, end of period (#)

6

6

Idle coiled tubing units, end of period (#)

1

1

Total coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0224

0.0194

15

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

(2) Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's Russian operations during the first nine months of 2017 increased by 25 percent to $89.0 million from $71.5 million in the comparable period in 2016. The increase in revenue, which is generated in roubles, was partially related to higher fracturing activity combined with the 15 percent appreciation of the Russian rouble in 2017 versus 2016. The improvement in revenue was partially offset by lower coiled tubing activity. Revenue per fracturing job increased by 10 percent due to the currency appreciation offset partially by the impact of job mix.

OPERATING INCOME
Operating income in Russia improved to $9.4 million during the first nine months of 2017 from $8.1 million in the comparable period in 2016 primarily due to the 15 percent appreciation of the rouble combined with higher fracturing crew utilization. SG&A expenses increased by 34 percent during the period compared to the first nine months of 2016 due to the appreciation of the rouble combined with higher personnel costs.

LATIN AMERICA

Nine Months Ended September 30,

2017

2016

Change

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

($)

($)

(%)

(unaudited)




Revenue

104,181

115,846

(10)

Expenses





Operating                                                                    

96,424

102,015

(5)


SG&A

7,783

13,485

(42)


104,207

115,500

(10)

Operating (loss) income(1)

(26)

346

NM

Operating (loss) income (%)

 

0.3

(100)

Pumping horsepower, end of period (000s)

122

131

(7)

Active cementing units, end of period (#)

12

14

(14)

Idle cementing units, end of period (#)

2

NM

Total cementing units, end of period (#)

14

14

Active coiled tubing units, end of period (#)

6

7

(14)

Idle coiled tubing units, end of period (#)

1

NM

Total coiled tubing units, end of period (#)

7

7

Mexican peso/C$ average exchange rate(2)

0.0694

0.0723

(4)

Argentinean peso/C$ average exchange rate(2)

0.0808

0.0912

(11)

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

(2) Source: Bank of Canada and Bloomberg.

 

REVENUE
Calfrac's Latin American operations generated total revenue of $104.2 million during the first nine months of 2017 versus $115.8 million in the same period in 2016. In Argentina, revenue was lower than in 2016 due to lower pricing, a reduction in cementing activity and the completion of smaller fracturing jobs due to a shift in customer and basin mix combined with the depreciation in the Argentinean peso. In Mexico, revenue decreased by $5.0 million primarily due to lower fracturing activity with Calfrac's major customer.

OPERATING (LOSS) INCOME
Latin America operated at break-even levels during the first nine months of 2017 compared to generating operating income of $0.3 million in the comparable period in 2016. The decrease in operating income in 2017 was primarily due to lower equipment utilization and pricing combined with higher labour costs. In addition, the Company incurred $1.6 million of expenses relating to the start-up of operations in the Vaca Muerta unconventional gas play. Restructuring costs of $0.4 million were also recognized during the first nine months in 2017. SG&A expenses during the comparable nine-month period in 2016 contained a bad debt provision of $4.6 million relating to work performed in Mexico.

CORPORATE

Nine Months Ended September 30,

2017

2016

Change

(C$000s)

($)

($)

(%)

(unaudited)




Expenses





Operating                              

2,668

3,633

(27)


SG&A

13,705

19,178

(29)


16,373

22,811

(28)

Operating loss(1)

(16,373)

(22,811)

(28)

% of Revenue

1.6

4.2

(62)

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

 

OPERATING LOSS
The Company achieved a 28 percent decline in corporate expenses for the first nine months of 2017 compared to the same period in 2016. Operating expenses were 27 percent lower as a result of lower district personnel costs. SG&A expenses were $5.5 million lower primarily due to a $6.4 million decrease in stock-based compensation expense. The Company reversed the liability related to its restricted share units and performance share units during the first half of 2017 which resulted in a recovery of $6.6 million compared to an expense of $2.0 million in the first half of 2016. This decrease was partially offset by higher non-cash expenses related to stock options and deferred share units, which were $2.2 million higher due to additional options granted during the period and a higher share price.

DEPRECIATION
Depreciation expense for the nine months ended September 30, 2017 decreased by 5 percent to $94.3 million from $99.6 million in the same period in 2016. The decrease was primarily due to a larger portion of the Company's asset base being fully depreciated.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $26.2 million during the first nine months of 2017 versus a loss of $19.6 million in the same period in 2016. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada and Latin America and liabilities held in Canadian dollars in Russia. The Company's foreign exchange loss during the period was largely attributable to the translation of U.S. dollar-denominated assets held in Canada as the U.S. dollar depreciated against the Canadian dollar during the period. In addition, the translation of U.S. dollar-denominated liabilities held in Argentina contributed to the foreign exchange loss as the value of the Argentinean peso depreciated against the U.S. dollar during the nine month period ending September 30, 2017.

INTEREST
The Company's net interest expense was $64.5 million in the first nine months of 2017 versus $58.0 million in the same period in 2016 due to higher average credit facility borrowings during the first nine months of 2017 and a higher rate of interest on the $200.0 million secured second lien term loan that was initiated during the second quarter of 2016.

INCOME TAXES
The Company recorded an income tax recovery of $22.4 million during the first nine months of 2017 compared to $77.4 million in the comparable period in 2016. The recovery was the result of pre-tax losses incurred in Canada, the United States and Argentina. The effective tax recovery rate was 39 percent during the first nine months in 2017 compared to 36 percent in the comparable period in 2016.

LIQUIDITY AND CAPITAL RESOURCES


Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016

(C$000s)

($)

($)

($)

($)

(unaudited)





Cash provided by (used in):






Operating activities

9,255

(25,874)

(58,910)

(39,492)


Financing activities

8,509

(6,780)

51,053

69,156


Investing activities

(15,973)

(8,429)

(44,371)

(36,409)


Effect of exchange rate changes on cash and cash equivalents

(7,577)

1,416

(14,102)

(10,679)

Decrease in cash and cash equivalents

(5,786)

(39,667)

(66,330)

(17,424)

 

OPERATING ACTIVITIES
The Company's cash provided by operating activities for the three months ended September 30, 2017 was $9.3 million versus cash used of $25.9 million in the comparable period in 2016. The increase in cash provided by operations was primarily due to significantly improved operating results in Canada and the United States offset by working capital requiring $64.5 million of cash in the third quarter of 2017 compared to $9.0 million in the comparable period in 2016. At September 30, 2017, Calfrac's working capital was approximately $334.6 million compared to $271.6 million at December 31, 2016.

The Company has a performance based compensation program designed to reward officers and eligible employees with additional compensation based on the Company meeting and exceeding pre-determined operating and financial thresholds. At September 30, 2017, the financial thresholds had not been met. However, based on the material improvement in the Company's operating and financial results year to date, and the positive near term industry outlook, these thresholds may be achieved during the balance of the year, which would result in the payment of short term incentive compensation and the vesting of restricted share units. The magnitude of any such payments cannot be determined at this time. Notwithstanding the foregoing, the Board of Directors has discretion over awarding any such performance based payments in any circumstances and will consider not only the operating and financial results for fiscal 2017, but also the significant contributions made by Calfrac's employees in generating the operational and financial results achieved by the Company when making such determination.

FINANCING ACTIVITIES
Net cash provided by financing activities for the three months ended September 30, 2017 was $8.5 million compared to cash used of $6.8 million in the comparable period in 2016. During the three months ended September 30, 2017, the Company received net funds from borrowings under its credit facilities of $9.0 million and made principal payments under its term loan of $0.5 million.

On September 27, 2017, Calfrac amended and extended its credit facilities to June 1, 2020. The amendment included a voluntary reduction in the total facilities from $300.0 million to $275.0 million. The facilities consist of an operating facility of $27.5 million and a syndicated facility of $247.5 million. The Company's credit facilities mature on June 1, 2020 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 2.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.50 percent above the respective base rates. The accordion feature of the syndicated facility remains at $200.0 million, and is available to the Company during the term of the agreement. The Company will incur interest at the high end of the ranges outlined above until its net Total Debt to Adjusted EBITDA ratio is below 5.00:1.00. Additionally, until such a time as the Company's net Total Debt to Adjusted EBITDA ratio is below 5.00:1.00, certain restrictions will apply including the following: (a) acquisitions will be subject to majority lender consent; (b) distributions will be restricted other than those relating to the Company's share unit plans, and no increase in the rate of dividends will be permitted; and (c) the Company will be prohibited from utilizing advances under the credit facilities to redeem or repay subordinated debt. As at September 30, 2017, the Company's net Total Debt to Adjusted EBITDA ratio, which excludes any benefit from the equity cure, was 7.69:1.00.

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

i. 

Eligible North American accounts receivable, which is based on 75 percent of accounts receivable owing by companies rated BB+ or lower by Standard & Poor's (or a similar rating agency) and 85 percent of accounts receivable from companies rated BBB- or higher;



ii.

100 percent of unencumbered cash of the parent company and its U.S. operating subsidiary, excluding any cash held in a segregated account for the purposes of a potential equity cure; and



iii.

25 percent of the net book value of property, plant and equipment (PP&E) of the parent company and its U.S. operating subsidiary. The value of PP&E excludes assets under construction and is limited to $125.0 million.

 

As at September 30, 2017, the Company had used $2.6 million of its credit facilities for letters of credit and had $55.0 million of borrowings under its credit facilities, leaving $217.4 million in available liquidity under its credit facilities. As described above, the Company's credit facilities are subject to a monthly borrowing base calculation which could result in a lower liquidity amount.

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

Years ended December 31, except as indicated in notes below

2017

2016

Working capital ratio not to fall below

1.15x

1.15x

Funded Debt to Adjusted EBITDA not to exceed(1)(2)(3)

3.00x

5.00x

Funded Debt to Capitalization not to exceed(2)(4)

0.30x

0.30x

(1) Funded Debt to Adjusted EBITDA covenant is 3.00x for all quarters ended during the term of the agreement.

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

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

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

 

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

i.

the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;



ii.

the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;



iii.

the maximum proceeds of each common share issuance permitted to be attributed to Adjusted EBITDA cannot exceed the greater of 50 percent of Adjusted EBITDA on a trailing four-quarter basis and $25.0 million; and



iv. 

if proceeds are not used immediately as an equity cure they must be held in a segregated bank account pending an election to use them for such purpose, and if they are removed from such account but not used as an equity cure they will no longer be eligible for such use.

 

On December 6, 2016, Calfrac closed a bought deal private placement of 21,055,000 common shares for net proceeds of approximately $56.6 million. On December 22, 2015, Calfrac closed a bought deal private placement of 20,370,370 common shares for net proceeds of approximately $25.2 million. $50.0 million of the net proceeds from these offerings were held in a segregated account pending an election to use them as an equity cure. On April 3, 2017 the Company elected to use the first of its two fully-funded $25.0 million equity cures effective as of the quarter ending on June 30, 2017. The September 2017 amendments to the credit facilities provided that the Company can utilize two equity cures during the term of the credit facilities subject to the conditions described above, and confirmed that the previously funded $25.0 million equity cure may continue to be held in a segregated account to be used as an equity cure if required at a future date. To utilize an equity cure, the Company must provide notice of any such election to the lending syndicate at any time prior to the filing of its quarterly financial statements for the applicable quarter on SEDAR. Throughout the period ending on June 30, 2020, amounts used as an equity cure will increase Adjusted EBITDA over the relevant twelve-month rolling period and will also serve to reduce Funded Debt. The funds that were removed from the segregated account and utilized as an equity cure for the quarter ending on June 30, 2017, as described above, were used for general working capital and corporate purposes. When the remaining funds are removed from the segregated account, as an equity cure or otherwise, they are expected to be used to fund capital expenditures, to reduce outstanding indebtedness, and/or to be used for general working capital and corporate purposes.

As shown in the table below, at September 30, 2017, the Company was in compliance with the financial covenants associated with its credit facilities.


Covenant

Actual

As at September 30,

2017

2017

Working capital ratio not to fall below

1.15x

2.63x

Funded Debt to Adjusted EBITDA not to exceed

3.00x

0.29x

Funded Debt to Capitalization not to exceed

0.30x

0.03x

 

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

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

i. 

the Company is in default under the indenture or the making of such payment would result in a default;



ii.  

the Company is not meeting the Fixed Charge Coverage Ratio(1) under the indenture of at least 2:1 for the most recent four fiscal quarters, with the restricted payments regime commencing once internal financial statements are available which show that the ratio is not met on a pro forma basis for the most recently ended four fiscal quarter period; or



iii. 

there is insufficient room for such payment within a builder basket included in the indenture.


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

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20.0 million. As at September 30, 2017 this basket was not utilized. The indenture also restricts the ability to incur additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $175.0 million or 30 percent of the Company's consolidated tangible assets. At September 30, 2017, the Company was able to incur additional indebtedness of approximately $350.0 million pursuant to the aforementioned exception.

As at September 30, 2017, the Company's Fixed Charge Coverage Ratio of 1.51:1 was less than the required 2:1 ratio. Failing to meet the Fixed Charge Coverage Ratio is not an event of default under the indenture, and the baskets highlighted in the preceding paragraph provide sufficient flexibility for the Company to incur additional indebtedness and make anticipated restricted payments which may be required to conduct its operations during periods of weakened market conditions.

On June 10, 2016, the Company closed a $200.0 million second lien senior secured term loan financing with Alberta Investment Management Corporation (AIMCo). The term loan matures on September 30, 2020 and bears interest at the rate of 9 percent annually and is payable quarterly. In addition, amortization payments equal to 1 percent of the original principal amount are payable annually in equal quarterly installments, with the balance due on the maturity date. In conjunction with the funding of the term loan, a total of 6,934,776 warrants to purchase common shares of the Company were issued to AIMCo, entitling it to acquire 6,934,776 common shares at a price of $4.14 per common share at any time prior to June 10, 2019. No amendments were made to the available commitment, term, covenants or interest rates payable under Calfrac's existing credit facilities as part of the required approvals for the term loan.

INVESTING ACTIVITIES
Calfrac's net cash used for investing activities was $16.0 million for the three months ended September 30, 2017 versus $8.4 million in the comparable period in 2016. Cash outflows relating to capital expenditures were $18.2 million during the third quarter in 2017 compared to $9.0 million in 2016. Capital expenditures were primarily to support the Company's North American fracturing operations. The Company disposed of assets during the third quarter for proceeds of $2.2 million compared to $0.6 million in the comparable quarter in 2016.

As a result of increased activity and demand for its equipment, the Company is announcing a further increase in its 2017 capital budget from $65.0 million to $95.0 million. The incremental capital expenditures will be largely focused on maintenance capital for a larger fleet of equipment operating in North America due to a higher number of fleet activations than were initially planned.

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during the three months ended September 30, 2017 was a loss of $7.6 million versus a gain of $1.4 million during the comparable period in 2016. These gains and losses relate to cash and cash equivalents held by the Company in a foreign currency.

With its working capital position, available credit facilities and anticipated funds provided by operations, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for 2017 and beyond.

At September 30, 2017, the Company had cash and cash equivalents of $43.6 million of which $25.0 million was held in a segregated account at the Company's discretion, so that it may be utilized if required in the calculation of Adjusted EBITDA for purposes of the Company's bank covenants.

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 and performance share unit plan is equal to 10 percent of the Company's issued and outstanding common shares. As at October 20, 2017, there were 136,789,990 common shares issued and outstanding, 10,306,450 options to purchase common shares and 6,934,776 warrants to purchase common shares.

ADVISORIES
FORWARD-LOOKING STATEMENTS
In order to provide Calfrac shareholders and potential investors with information regarding the Company and its subsidiaries, including management's assessment of Calfrac's plans and future operations, certain statements contained in this press release, including statements that contain words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "forecast" or similar words suggesting future outcomes, are forward-looking statements.

In particular, forward-looking statements in this press release include, but are not limited to, statements with respect to expected operating strategies and targets, capital expenditure programs, future financial resources, use of funds held in the Company's segregated bank account (as an equity cure or otherwise), anticipated equipment utilization levels, future oil and natural gas well activity in each of the Company's operating jurisdictions, results of acquisitions, the impact of environmental regulations and economic reforms and sanctions on the Company's business, future costs or potential liabilities, projections of market prices and costs, supply and demand for oilfield services, expectations regarding the Company's ability to maintain its competitive position, anticipated benefits of the Company's competitive position, expectations regarding the Company's financing activities and restrictions including with regard to its credit agreement and the indenture pursuant to which its senior notes were issued and its ability to raise capital, treatment under government regulatory regimes, commodity prices, anticipated outcomes of specific events (including exposure under existing legal proceedings), expectations regarding trends in, and the growth prospects of, the global oil and natural gas industry, the Company's growth strategy and prospects, and the impact of changes in accounting policies and standards on the Company and its financial statements. These statements are derived from certain assumptions and analyses made by the Company based on its experience and perception of historical trends, current conditions, expected future developments and other factors that it believes are appropriate in the circumstances, including, but not limited to, the economic and political environment in which the Company operates, the Company's expectations for its current and prospective customers' capital budgets and geographical areas of focus, the Company's existing contracts and the status of current negotiations with key customers and suppliers, the focus of the Company's customers on increasing the use of 24-hour operations in North America, the effectiveness of cost reduction measures instituted by the Company, the effect unconventional gas projects have had on supply and demand fundamentals for natural gas and the likelihood that the current tax and regulatory regime will remain substantially unchanged.

Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from the Company's expectations. Such risk factors include: excess oilfield equipment levels; regional competition; the availability of capital on satisfactory terms; restrictions resulting from compliance with debt covenants and risk of acceleration of indebtedness; direct and indirect exposure to volatile credit markets, including credit rating risk; currency exchange rate risk; risks associated with foreign operations; operating restrictions and compliance costs associated with legislative and regulatory initiatives relating to hydraulic fracturing and the protection of workers and the environment; changes in legislation and the regulatory environment; dependence on, and concentration of, major customers; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; liabilities and risks associated with prior operations; failure to maintain the Company's safety standards and record; failure to realize anticipated benefits of acquisitions and dispositions; the ability to integrate technological advances and match advances from competitors; intellectual property risks; sourcing, pricing and availability of raw materials, component parts, equipment, suppliers, facilities and skilled personnel; and the effect of accounting pronouncements issued periodically. Further information about these and other risks and uncertainties may be found under "Business Risks" below.

Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements and there can be no assurance that actual results or developments anticipated by the Company will be realized, or that they will have the expected consequences or effects on the Company or its business or operations. These statements speak only as of the respective date of this press release or the document incorporated by reference herein. The Company assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise, except as required pursuant to applicable securities laws.

BUSINESS RISKS
The business of Calfrac is subject to certain risks and uncertainties. Prior to making any investment decision regarding Calfrac, investors should carefully consider, among other things, the risk factors set forth in the Company's most recently filed Annual Information Form, which are specifically incorporated by reference herein. The Annual Information Form is available through the Internet on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR), which can be accessed at www.sedar.com. Copies of the Annual Information Form may also be obtained on request without charge from Calfrac at 411 - 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1E3, or at www.calfrac.com, or by facsimile at 403-266-7381.

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

Operating income (loss) is defined as net income (loss) before depreciation, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, interest, and income taxes. Management believes that operating income is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac's business segments prior to consideration of how these segments are financed or taxed. Operating income (loss) for the period was calculated as follows:


Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016

(C$000s)

($)

($)

($)

($)

(unaudited)





Net income (loss)

6,678

(42,169)

(35,285)

(140,201)

Add back (deduct):






Depreciation

30,604

32,952

94,307

99,550


Foreign exchange losses (gains)

13,556

(127)

26,174

19,575


Loss on disposal of property, plant and equipment

5,405

583

8,073

520


Interest

21,134

20,802

64,488

58,026


Income taxes

819

(24,433)

(22,426)

(77,383)

Operating income (loss)

78,196

(12,392)

135,331

(39,913)

 

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


Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016

(C$000s)



($)

($)

(unaudited)





Net income (loss)

6,678

(42,169)

(35,285)

(140,201)

Add back (deduct):






Depreciation

30,604

32,952

94,307

99,550


Unrealized foreign exchange losses

13,814

20

26,208

22,327


Loss on disposal of property, plant and equipment

5,405

583

8,073

520


Provision for settlement of litigation

(139)


Restructuring charges

213

514

568

4,417


Stock-based compensation

1,302

674

3,605

1,697


Losses attributable to non-controlling interest(1)

1,144

2

3,211

14


Interest

21,134

20,802

64,488

58,026


Income taxes

819

(24,433)

(22,426)

(77,383)

Adjusted EBITDA(2)

81,113

(11,055)

142,610

(31,033)

(1) The definition of Adjusted EBITDA excluded non-controlling interest related to Argentina during 2016.

(2) Adjusted EBITDA for the purposes of the funded debt to Adjusted EBITDA covenant includes an additional $25.0 million for the nine months ended September 30, 2017 as the Company elected to use the first of its two fully funded equity cures effective the quarter ended June 30, 2017.

 

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.

THIRD QUARTER CONFERENCE CALL
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2017 third quarter results at 10:00 a.m. (Mountain Time) on Thursday, October 26, 2017. 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 99815310). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS


September 30,

December 31,

As at

2017

2016

(C$000s) (unaudited)

($)

($)

ASSETS



Current assets




Cash and cash equivalents (note 1)

43,587

109,917


Accounts receivable

353,907

158,709


Income taxes recoverable

1,996

3,715


Inventories

124,734

99,601


Prepaid expenses and deposits

19,753

16,992


543,977

388,934

Non-current assets




Property, plant and equipment

1,049,695

1,153,882


Deferred income tax assets

82,999

70,188

Total assets

1,676,671

1,613,004

LIABILITIES AND EQUITY



Current liabilities




Accounts payable and accrued liabilities

207,050

114,529


Current portion of long-term debt (note 2)

2,289

2,520


Current portion of finance lease obligations

32

304


209,371

117,353

Non-current liabilities




Long-term debt (note 2)

983,967

984,062


Finance lease obligations

137


Deferred income tax liabilities

6,008

14,131

Total liabilities

1,199,483

1,115,546

Equity attributable to the shareholders of Calfrac



Capital stock (note 3)

466,824

466,445

Contributed surplus

39,564

36,040

Loan receivable for purchase of common shares

(2,500)

(2,500)

(Deficit) retained earnings

(16,745)

15,329

Accumulated other comprehensive income (loss)

2,275

(8,736)


489,418

506,578

Non-controlling interest

(12,230)

(9,120)

Total equity

477,188

497,458

Total liabilities and equity

1,676,671

1,613,004

Contingencies (note 6)

See accompanying notes to the consolidated financial statements.


 

CONSOLIDATED STATEMENTS OF OPERATIONS 


Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016

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

($)

($)

($)

($)

Revenue

448,090

174,925

1,042,249

541,668

Cost of sales

384,587

206,530

961,897

628,940

Gross profit (loss)

63,503

(31,605)

80,352

(87,272)

Expenses






Selling, general and administrative

15,911

13,739

39,328

52,191


Foreign exchange losses (gains)

13,556

(127)

26,174

19,575


Loss on disposal of property, plant and equipment

5,405

583

8,073

520


Interest

21,134

20,802

64,488

58,026


56,006

34,997

138,063

130,312

Income (loss) before income tax

7,497

(66,602)

(57,711)

(217,584)

Income tax expense (recovery)






Current

663

494

2,207

1,946


Deferred

156

(24,927)

(24,633)

(79,329)


819

(24,433)

(22,426)

(77,383)

Net income (loss)

6,678

(42,169)

(35,285)

(140,201)






Net income (loss) attributable to:






Shareholders of Calfrac

7,822

(40,862)

(32,074)

(136,604)


Non-controlling interest

(1,144)

(1,307)

(3,211)

(3,597)


6,678

(42,169)

(35,285)

(140,201)






Earnings (loss) per share (note 3)






Basic

0.06

(0.35)

(0.23)

(1.18)


Diluted

0.06

(0.35)

(0.23)

(1.18)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016

(C$000s) (unaudited)

($)

($)

($)

($)

Net income (loss)

6,678

(42,169)

(35,285)

(140,201)

Other comprehensive income (loss)





Items that may be subsequently reclassified to profit or loss:






Change in foreign currency translation adjustment

6,005

(109)

11,112

10,881

Comprehensive income (loss)

12,683

(42,278)

(24,173)

(129,320)

Comprehensive income (loss) attributable to:






Shareholders of Calfrac

13,740

(40,833)

(21,063)

(125,885)


Non-controlling interest

(1,057)

(1,445)

(3,110)

(3,435)


12,683

(42,278)

(24,173)

(129,320)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


Equity Attributable to the Shareholders of Calfrac



Share
Capital

Contributed
Surplus

Loan
Receivable
for Purchase
of Common
Shares

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings
(Deficit)

Total

Non-
Controlling
Interest

Total Equity

(C$000s) (unaudited)

($)

($)

($)

($)

($)

($)

($)

($)

Balance – Jan. 1, 2017

466,445

36,040

(2,500)

(8,736)

15,329

506,578

(9,120)

497,458

Net loss

(32,074)

(32,074)

(3,211)

(35,285)

Other comprehensive income:










Cumulative translation adjustment

11,011

11,011

101

11,112

Comprehensive income (loss)

11,011

(32,074)

(21,063)

(3,110)

(24,173)

Stock options:










Stock-based compensation recognized (note 4)

3,605

3,605

3,605


Proceeds from issuance of shares

379

(81)

298

298

Balance – Sept. 30, 2017

466,824

39,564

(2,500)

2,275

(16,745)

489,418

(12,230)

477,188

Balance – Jan. 1, 2016

409,809

27,849

(2,500)

(21,054)

213,426

627,530

(3,811)

623,719

Net loss

(136,604)

(136,604)

(3,597)

(140,201)

Other comprehensive income:










Cumulative translation adjustment

10,719

10,719

162

10,881

Comprehensive income (loss)

10,719

(136,604)

(125,885)

(3,435)

(129,320)

Warrants:










Fair value of warrants issued (note 4)

5,830

5,830

5,830

Stock options:










Stock-based compensation recognized (note 4)

1,697

1,697

1,697

Balance – Sept. 30, 2016

409,809

35,376

(2,500)

(10,335)

76,822

509,172

(7,246)

501,926

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS


Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016

(C$000s) (unaudited)

($)

($)

($)

($)

CASH FLOWS PROVIDED BY (USED IN)





OPERATING ACTIVITIES






Net income (loss)

6,678

(42,169)

(35,285)

(140,201)


Adjusted for the following:







Depreciation

30,604

32,952

94,307

99,550



Stock-based compensation

1,302

674

3,605

1,697



Unrealized foreign exchange losses

13,814

20

26,208

22,327



Loss on disposal of property, plant and equipment

5,405

583

8,073

520



Interest

21,134

20,802

64,488

58,026



Deferred income taxes

156

(24,927)

(24,633)

(79,329)



Interest paid

(5,337)

(4,817)

(45,767)

(39,385)



Changes in items of working capital

(64,501)

(8,992)

(149,906)

37,303

Cash flows provided by (used in) operating activities

9,255

(25,874)

(58,910)

(39,492)

FINANCING ACTIVITIES






Bank loan proceeds

4,977


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

9,025

(3)

52,754

214,897


Issuance of finance lease obligation

178

178


Bank loan repayments

(6,054)

(17,712)


Long-term debt repayments

(621)

(624)

(1,877)

(130,919)


Finance lease obligation repayments

(96)

(99)

(300)

(281)


Net proceeds on issuance of common shares (note 3)

23

298


Dividends paid (note 3)

(1,806)

Cash flows provided by (used in) financing activities

8,509

(6,780)

51,053

69,156

INVESTING ACTIVITIES






Purchase of property, plant and equipment

(18,160)

(9,014)

(49,928)

(39,623)


Proceeds on disposal of property, plant and equipment

2,187

585

5,557

3,214

Cash flows used in investing activities

(15,973)

(8,429)

(44,371)

(36,409)

Effect of exchange rate changes on cash and cash equivalents

(7,577)

1,416

(14,102)

(10,679)

Decrease in cash and cash equivalents

(5,786)

(39,667)

(66,330)

(17,424)

Cash and cash equivalents, beginning of period

49,373

146,248

109,917

124,005

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

43,587

106,581

43,587

106,581

See accompanying notes to the consolidated financial statements.


 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the three and nine months ended September 30, 2017 and 2016
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated)

1.  CASH AND CASH EQUIVALENTS
On December 6, 2016, the Company received net proceeds of $56,636 from a private placement offering of common shares. Another $25,194 of net proceeds was received from a private placement offering of common shares on December 22, 2015. Both of these transactions are described in further detail in note 3.

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

On April 3, 2017, the Company elected to use the first of its two fully-funded $25,000 equity cures effective as of the quarter ending on June 30, 2017. As at September 30, 2017, $25,000 remains in a segregated account.

2.  LONG-TERM DEBT


September 30,

December 31,

As at

2017

2016

(C$000s)

($)

($)

US$600,000 senior unsecured notes due December 1, 2020, bearing interest at 7.50% payable semi-




annually

748,800

805,620

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




9% payable quarterly, secured by the Canadian and U.S. assets of the Company on a second priority basis

197,500

199,000

$247,500 extendible revolving term loan facility, secured by Canadian and U.S. assets of the




Company

55,000

Less: unamortized debt issuance costs

(15,333)

(18,736)


985,967

985,884

US$232 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

289

698


986,256

986,582

Less: current portion of long-term debt

(2,289)

(2,520)


983,967

984,062

 

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at September 30, 2017, was $721,379 (December 31, 2016 – $702,903). The carrying values of the mortgage obligation, revolving term loan facilities and the second lien term loan approximate their fair values as the interest rates are not significantly different from current interest rates for similar loans.

On September 27, 2017, the Company amended and extended its credit facilities to June 1, 2020. The amendment included a voluntary reduction in the total facilities from $300,000 to $275,000. The facilities consist of an operating facility of $27,500 and a revolving term loan facility of $247,500. The Company's credit facilities mature on June 1, 2020 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 2.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.50 percent above the respective base rates. The facility maintains its accordion feature at $200,000, which is available to the Company during the term of the agreement. The Company will incur interest at the high end of the ranges outlined above until its net Total Debt to Adjusted EBITDA ratio is below 5.00:1.00. Additionally, until such a time as the Company's net Total Debt to Adjusted EBITDA ratio is below 5.00:1.00, certain restrictions will apply including the following: (a) acquisitions will be subject to majority lender consent; (b) distributions will be restricted other than those relating to the Company's share unit plans, and no increase in the rate of dividends will be permitted; and (c) the Company will be prohibited from utilizing advances under the credit facilities to redeem or repay subordinated debt. As at September 30, 2017, the Company's net Total Debt to Adjusted EBITDA ratio, which excludes any benefit from the equity cure, was 7.69:1.00.

Debt issuance costs related to this facility are amortized over its term.

On June 10, 2016, the Company entered into a $200,000 second lien senior secured term loan facility. The term loan matures on September 30, 2020, and bears interest at 9 percent per annum, payable quarterly. Amortization payments equal to 1 percent of the original principal amount are payable annually, in equal quarterly installments, with the balance due on the final maturity date. The proceeds from the term loan were made available in a single draw, and amounts borrowed under the term loan that are repaid or prepaid are not available for re-borrowing. The term loan is secured by the Canadian and U.S. assets of the Company on a second priority basis, subordinate only to the revolving term loan facility.

Interest on long-term debt (including the amortization of debt issuance costs and debt discount) for the nine months ended September 30, 2017 was $64,588 (nine months ended September 30, 2016$55,825).

At September 30, 2017, the Company had utilized $2,650 of its loan facility for letters of credit and had $55,000 outstanding under its revolving term loan facility, leaving $217,350 in available credit, subject to a monthly borrowing base calculation, which could result in a lower amount of available credit.

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

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


Nine Months Ended

Year Ended


September 30, 2017

December 31, 2016

Continuity of Common Shares

Shares

Amount

Shares

Amount


(#)

($000s)

(#)

($000s)

Balance, beginning of period

136,634,590

466,445

115,579,598

409,809

Issued upon exercise of stock options

149,625

379

Shares from private placements

21,055,000

56,636

Shares cancelled

(8)

Balance, end of period

136,784,215

466,824

136,634,590

466,445

 

The weighted average number of common shares outstanding for the three months ended September 30, 2017 was 136,606,064 basic and 138,105,347 diluted (three months ended September 30, 2016 – 115,410,398 basic and 116,554,975 diluted). The weighted average number of common shares outstanding for the nine months ended September 30, 2017 was 136,588,244 basic and 138,158,349 diluted (nine months ended September 30, 2016 – 115,410,398 basic and 115,609,802 diluted). The difference between basic and diluted shares is attributable to the dilutive effect of stock options and warrants issued by the Company as disclosed in note 4.

On December 6, 2016, the Company closed a bought deal private placement of 21,055,000 common shares for total gross proceeds of $60,007. Share issuance costs for the transaction were $3,371, resulting in net proceeds of $56,636. On December 22, 2015, the Company closed a bought deal private placement of 20,370,370 common shares for total gross proceeds of $27,500. Share issuance costs for the transaction were $2,306, resulting in net proceeds of $25,194.

A dividend of $0.015625 per common share, totalling $1,806, was declared on December 4, 2015 and paid on January 15, 2016.

During 2016, eight common shares were returned to the Company for cancellation. For accounting purposes, the cancellation of these shares was recorded as a reduction of capital stock in the amount of twenty-eight dollars, along with a corresponding increase to contributed surplus.

4.  SHARE-BASED PAYMENTS
(a)     Stock Options

Nine Months Ended September 30,

2017

2016

Continuity of Stock Options

Options

Average
Exercise Price

Options

Average
Exercise Price


(#)

($)

(#)

($)

Balance, January 1

7,246,386

6.62

8,229,947

7.81


Granted during the period

4,151,000

4.75

267,500

1.45


Exercised for common shares

(149,625)

1.99


Forfeited

(803,536)

8.11

(773,649)

10.97


Expired

(132,000)

12.76

(62,000)

16.83

Balance, September 30

10,312,225

5.74

7,661,798

7.19

 

Stock options vest equally over four years and expire five years from the date of grant. The exercise price of outstanding options range from $1.34 to $20.81 with a weighted average remaining life of 3.17 years. When stock options are exercised, the proceeds together with the compensation expense previously recorded in contributed surplus, are added to capital stock.

The weighted average fair value of options granted during the nine months ended September 30, 2017, determined using the Black-Scholes valuation method, was $2.11 per option (nine months ended September 30, 2016 - $0.57 per option). The Company applied the following assumptions in determining the fair value of options on the date of grant:

Nine Months Ended September 30,

2017

2016

Expected life (years)

3.5

3.5

Expected volatility

64.39%

56.70%

Risk-free interest rate

1.01%

0.58%

Expected dividends

$0.00

$0.00

 

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

(b)     Share Units

Nine Months Ended September 30,

2017

2016

Continuity of Stock Units

Deferred Share
Units

Performance
Share Units

Restricted
Share Units

Deferred Share
Units

Performance
Share Units

Restricted
Share Units


(#)

(#)

(#)

(#)

(#)

(#)

Balance, January 1

145,000

639,330

2,757,850

72,500

238,995

812,828


Granted during the period

145,000

124,000

2,566,900

145,000

500,000

2,349,750


Exercised

(145,000)

(72,500)


Forfeited

(79,665)

(689,708)

(99,665)

(409,888)

Balance, September 30

145,000

683,665

4,635,042

145,000

639,330

2,752,690

 


Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016


($)

($)

($)

($)

Expense (recovery) from:






Stock options

1,302

674

3,605

1,697


Deferred share units

379

39

583

320


Performance share units

11

(1,560)

396


Restricted share units

(19)

(4,995)

1,610

Total stock-based compensation expense

1,681

705

(2,367)

4,023

 

Stock-based compensation expense is included in selling, general and administrative expenses.

The Company grants deferred share units to its outside directors. These units vest in November of the year of grant and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the deferred share units is recognized equally over the vesting period, based on the current market price of the Company's shares. At September 30, 2017, the liability pertaining to deferred share units was $551 (December 31, 2016 – $690).

The Company grants performance share units to a senior officer. The amount of the grants earned is linked to corporate performance and the grants vest on the approval of the Board of Directors at the meeting held to approve the consolidated financial statements for the year in respect of which performance is being evaluated. As with the deferred share units, performance share units are settled either in cash or Company shares purchased on the open market. At September 30, 2017, the liability pertaining to performance share units was $nil (December 31, 2016 – $1,560). The recovery of expense of $1,560 related to performance share units for the nine months ended September 30, 2017 reflects the fact that given the challenging market conditions, the Board of Directors has determined that these units will likely not vest.

The Company grants restricted share units to its employees. These units vest over three years and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the restricted share units is recognized over the vesting period, based on the current market price of the Company's shares. At September 30, 2017, the liability pertaining to restricted share units was $nil (December 31, 2016 – $4,995). The recovery of expense of $4,995 related to restricted share units for the nine months ended September 30, 2017 reflects the fact that the financial thresholds for vesting such units are not expected to be met.

Changes in the Company's obligations under the deferred, performance and restricted share unit plans, which arise from fluctuations in the market value of the Company's shares underlying these compensation programs, are recorded as the share value changes.

(c)     Warrants

In conjunction with the second lien senior secured term loan facility as disclosed in note 2, 6,934,776 warrants to purchase common shares of the Company were issued during 2016, entitling the holder to acquire up to 6,934,776 common shares at a price of $4.14 per common share. The warrants expire on June 10, 2019 and can be exercised at any time prior to such date. The fair value of the warrants issued was estimated using a Black-Scholes pricing model, in the amount of $5,830 and accounted for as a deferred finance cost during 2016. To date, no warrants have been exercised.

5.  CAPITAL STRUCTURE
The Company's capital structure is comprised of shareholders' equity and debt. The Company's objectives in managing capital are (i) to maintain flexibility so as to preserve its access to capital markets and its ability to meet its financial obligations, and (ii) to finance growth, including potential acquisitions.

The Company manages its capital structure and makes adjustments in light of changing market conditions and new opportunities, while remaining cognizant of the cyclical nature of the oilfield services sector. To maintain or adjust its capital structure, the Company may revise its capital spending, adjust dividends, if any, paid to shareholders, issue new shares or new debt or repay existing debt.

The Company monitors its capital structure and financing requirements using, amongst other parameters, the ratio of net debt to operating income. Operating income for this purpose is calculated on a 12-month trailing basis and is defined as follows:


September 30,

December 31,

For the Twelve Months Ended

2017

2016

(C$000s)

($)

($)

Net loss

(98,641)

(203,557)

Adjusted for the following:




Depreciation

147,579

152,822


Foreign exchange losses

25,918

19,319


Loss (gain) on disposal of property, plant and equipment

7,062

(491)


Impairment of inventory

3,225

3,225


Interest

86,572

80,110


Income taxes

(54,675)

(109,632)

Operating income (loss)

117,040

(58,204)

 

Net debt for this purpose is calculated as follows:


September 30,

December 31,

As at

2017

2016

(C$000s)

($)

($)

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

986,256

986,582

Finance lease obligations

169

304

Less: cash and cash equivalents

(43,587)

(109,917)

Net debt

942,838

876,969

 

The ratio of net debt to operating income does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

At September 30, 2017, the net debt to operating income ratio was 8.06:1 (December 31, 2016 – (15.07):1) calculated on a 12-month trailing basis as follows:


September 30,

December 31,

For the Twelve Months Ended

2017

2016

(C$000s, except ratio)

($)

($)

Net debt

942,838

876,969

Operating income (loss)

117,040

(58,204)

Net debt to operating income ratio

8.06:1

(15.07):1

 

The Company is subject to certain financial covenants relating to working capital, leverage and the generation of cash flow in respect of its operating and revolving credit facilities. These covenants are monitored on a monthly basis. At September 30, 2017 and December 31, 2016, the Company was in compliance with its covenants with respect to its credit facilities.

Years Ended December 31, except as indicated in notes below

2017

2016

Working capital ratio not to fall below

1.15x

1.15x

Funded Debt to Adjusted EBITDA not to exceed(1)(2)(3)

3.00x

5.00x

Funded Debt to Capitalization not to exceed(2)(4)

0.30x

0.30x

(1) Funded Debt to Adjusted EBITDA covenant is 3.00x for all quarters ended during the term of the agreement.

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

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

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

 

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

i. 

Eligible North American accounts receivable, which is based on 75 percent of accounts receivable owing by companies rated BB+ or lower by Standard & Poor's (or a similar rating agency) and 85 percent of accounts receivable from companies rated BBB- or higher;



ii.

100 percent of unencumbered cash of the parent company and its U.S. operating subsidiary, excluding any cash held in a segregated account for the purposes of a potential equity cure; and



iii.

25 percent of the net book value of property, plant and equipment (PP&E) of the parent company and its U.S. operating subsidiary. The value of PP&E excludes assets under construction and is limited to $125,000.

Distributions are restricted other than those relating to the Company's share unit plans and dividend distributions, provided that the rate of dividends must not exceed $0.015625 per share quarterly.

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

i. 

the Company is in default under the indenture or the making of such payment would result in a default;



ii.

the Company is not meeting the Fixed Charge Coverage Ratio(1) under the indenture of at least 2:1 for the most recent four fiscal quarters; or



iii.

there is insufficient room for such payment within a builder basket included in the indenture. 


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

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20,000. As at September 30, 2017, this basket was not utilized.

The indenture also restricts the incurrence of additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $175,000 or 30 percent of the Company's consolidated tangible assets. At September 30, 2017, the Company was able to incur additional indebtedness of approximately $350,000 pursuant to the aforementioned exception.

As at September 30, 2017, the Company's Fixed Charge Coverage Ratio of 1.51:1 was less than the required 2:1 ratio. Failing to meet the Fixed Charge Coverage Ratio is not an event of default under the indenture, and the baskets highlighted in the preceding paragraphs provide sufficient flexibility for the Company to make anticipated restricted payments, such as dividends, and incur additional indebtedness as required to conduct its operations and satisfy its obligations during periods of weakened market conditions.

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

i.

the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;



ii.

the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;



iii.

the maximum proceeds of each common share issuance permitted to be attributed to Adjusted EBITDA cannot exceed the greater of 50 percent of Adjusted EBITDA on a rolling four-quarter basis and $25,000; and



iv.

if proceeds are not used immediately as an equity cure they must be held in a segregated bank account pending an election to use them for such purpose, and if they are removed from such account but not used as an equity cure they will no longer be eligible for such use.

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

On April 3, 2017, the Company elected to use the first of its two fully-funded $25,000 equity cures effective as of the quarter ending on June 30, 2017. As at September 30, 2017, $25,000 remains in a segregated account.

6.  CONTINGENCIES

GREEK LITIGATION
As a result of the acquisition and amalgamation with Denison in 2004, the Company assumed certain legal obligations relating to Denison's Greek operations.

In 1998, North Aegean Petroleum Company E.P.E. ("NAPC"), a Greek subsidiary of a consortium in which Denison participated (and which is now a majority-owned subsidiary of the Company), terminated employees in Greece as a result of the cessation of its oil and natural gas operations in that country. Several groups of former employees filed claims against NAPC and the consortium alleging that their termination was invalid and that their severance pay was improperly determined.

In 1999, the largest group of plaintiffs received a ruling from the Athens Court of First Instance that their termination was invalid and that salaries in arrears amounting to approximately $10,092 (6,846 euros) plus interest were due to the former employees. This decision was appealed to the Athens Court of Appeal, which allowed the appeal in 2001 and annulled the above-mentioned decision of the Athens Court of First Instance. The said group of former employees filed an appeal with the Supreme Court of Greece, which was heard on May 29, 2007. The Supreme Court of Greece allowed the appeal and sent the matter back to the Athens Court of Appeal for the consideration of the quantum of awardable salaries in arrears. On June 3, 2008, the Athens Court of Appeal rejected NAPC's appeal and reinstated the award of the Athens Court of First Instance, which decision was further appealed to the Supreme Court of Greece. The matter was heard on April 20, 2010 and a decision rejecting such appeal was rendered in June 2010. As a result of Denison's participation in the consortium that was named in the lawsuit, the Company has been served with three separate payment orders, one on March 24, 2015 and two others on December 29, 2015. The Company was also served with an enforcement order on November 23, 2015.  Oppositions have been filed on behalf of the Company in respect of each of these orders which oppose the orders on the basis that they were improperly issued and are barred from a statute of limitations perspective. The salaries in arrears sought to be recovered through these orders are part of the $10,092 (6,846 euros) cited above and the interest being sought in respect of these orders is part of the $25,793 (17,496 euros) cited below. Provisional orders granting a temporary suspension of any enforcement proceedings have been granted in respect of all of the orders that have been served. The order served on March 24, 2015 was heard on November 24, 2015 and a decision was issued on November 25, 2016 accepting the Company's opposition on the basis that no lawful service of Judgment No 4528/2008 had taken place until the filing of the opponents' petition and/or the issuance of the payment order. The plaintiffs have filed an appeal against the above decision which has been scheduled to be heard on October 16, 2018. A hearing in respect of the order served on November 23, 2015 was adjourned until October 31, 2018. A hearing in respect of the orders served in December of 2015 scheduled for September 20, 2016 was adjourned until November 21, 2016 and two decisions were issued on January 9, 2017 accepting the Company's oppositions on a statute of limitations basis. The plaintiffs have filed appeals against the above decisions, which are scheduled to be heard on October 16, 2018.

NAPC is also the subject of a claim for approximately $4,219 (2,862 euros) plus associated penalties and interest from the Greek social security agency for social security obligations associated with the salaries in arrears that are the subject of the above-mentioned decision.

The maximum aggregate interest and penalties payable under the claims noted above, as well as three other immaterial claims against NAPC totaling $852 (578 euros), amounted to $25,793 (17,496 euros) as at September 30, 2017.

Management is of the view that it is improbable there will be a material financial impact to the Company as a result of these claims. Consequently, no provision has been recorded in these consolidated financial statements.

7.  SEGMENTED INFORMATION

The Company's activities are conducted in four geographical segments: Canada, the United States, Russia and Latin America (comprised of Argentina and Mexico). All activities are related to hydraulic fracturing, coiled tubing, cementing and other well completion services for the oil and natural gas industry.

The business segments presented reflect the Company's management structure and the way its management reviews business performance. The Company evaluates the performance of its operating segments primarily based on operating income, as defined below.


Canada

United States

Russia

Latin America

Corporate

Consolidated

(C$000s)

($)

($)

($)

($)

($)

($)

Three Months Ended September 30, 2017






Revenue(2)

180,953

193,817

29,758

43,562

448,090

Operating income (loss)(1)

44,418

37,084

4,705

(8)

(8,003)

78,196

Segmented assets(4)

676,957

740,662

109,019

150,033

1,676,671

Capital expenditures

186

20,655

972

280

22,093







Three Months Ended September 30, 2016






Revenue(2)

59,577

52,640

26,303

36,405

174,925

Operating income (loss)(1)

(2,028)

(5,998)

4,251

(2,114)

(6,503)

(12,392)

Segmented assets(4)

641,355

710,108

102,014

165,486

1,618,963

Capital expenditures

4,440

435

352

1,680

6,907









Canada

United States

Russia

Latin America

Corporate

Consolidated

(C$000s)

($)

($)

($)

($)

($)

($)

Nine Months Ended September 30, 2017






Revenue(3)

403,284

445,807

88,977

104,181

1,042,249

Operating income (loss)(1)

70,051

72,261

9,418

(26)

(16,373)

135,331

Segmented assets(4)

676,957

740,662

109,019

150,033

1,676,671

Capital expenditures

15,079

38,678

1,912

1,747

57,416






Nine Months Ended September 30, 2016





Revenue(3)

177,686

176,677

71,459

115,846

541,668

Operating income (loss)(1)

(6,458)

(19,059)

8,069

346

(22,811)

(39,913)

Segmented assets(4)

641,355

710,108

102,014

165,486

1,618,963

Capital expenditures

(138)

14,747

1,594

6,796

22,999

(1) 

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

(2) 

Argentina's revenue for the three months ended September 30, 2017 and 2016 was $43,539 or 10% of consolidated revenue and $35,163 or 20% of consolidated revenue, respectively.

(3) 

Argentina's revenue for the nine months ended September 30, 2017 and 2016 was $102,113 or 10% of consolidated revenue and $108,737 or 20% of consolidated revenue, respectively.

(4) 

Argentina's assets as at September 30, 2017 and 2016 were $143,745 or 9% of consolidated assets and $155,052 or 10% of consolidated assets, respectively.

 


Three Months Ended Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016

(C$000s)

($)

($)

($)

($)

Net income (loss)

6,678

(42,169)

(35,285)

(140,201)

Add back (deduct):






Depreciation

30,604

32,952

94,307

99,550


Foreign exchange losses (gains)

13,556

(127)

26,174

19,575


Loss on disposal of property, plant and equipment

5,405

583

8,073

520


Interest

21,134

20,802

64,488

58,026


Income taxes

819

(24,433)

(22,426)

(77,383)

Operating income (loss)

78,196

(12,392)

135,331

(39,913)

 

Operating income (loss) does not have a 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 Sept. 30,

Nine Months Ended Sept. 30,


2017

2016

2017

2016

(C$000s)

($)

($)

($)

($)

Fracturing

402,146

139,326

929,971

444,389

Coiled tubing

25,492

21,597

66,129

55,845

Cementing

5,727

8,215

19,201

26,602

Product sales

5,500

10,919

Other

9,225

5,787

16,029

14,832


448,090

174,925

1,042,249

541,668

 

SOURCE Calfrac Well Services Ltd.

For further information: Fernando Aguilar, President & Chief Executive Officer, Mike Olinek, Chief Financial Officer, Scott Treadwell, Vice-President, Capital Markets & Strategy, Telephone: 403-266-6000, Fax: 403-266-7381, www.calfrac.com