CALGARY, May 30, 2018 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or the "Company") (TSX-CFW) announced earlier today the closing of an offering of US$650 million aggregate principal amount of 8.50% senior unsecured notes due 2026 (the "Financing").
With this important strategic Financing now successfully completed, Calfrac wishes to set the record straight concerning recent conduct by one of Calfrac's largest shareholders on the date of the initial launch of the Financing.
The Motivating Self-Interest of Wilks Brothers
Wilks Brothers, LLC ("Wilks Brothers") and certain related parties own approximately 19.9% of the common shares of Calfrac, which is less than the combined holdings of two of Calfrac's co-founders (22.1%).
Through a press release issued on May 9, 2018 (the "Press Release"), Wilks Brothers publicly aired criticisms of Calfrac and publicly offered several recommendations on the day the Financing was launched. In the Press Release, Wilks Brothers claimed that it spoke up "to help all shareholders maximize long-term value". While all shareholders are entitled to provide their own views, Wilks Brothers' protestations were tainted by self-interest.
In 2011, the founders of Wilks Brothers sold their large U.S.-based fracturing business, and exited the fracturing industry. In May 2016, Wilks Brothers re-entered the U.S. fracturing business by establishing Profrac Services, LLC ("Profrac"). Profrac is a competitor to Calfrac. Wilks Brothers has been aggressively seeking to grow Profrac's business.
As described below, the actions of Wilks Brothers in relation to Calfrac have been directed at advancing the interests of Wilks Brothers and Profrac, not the interests of Calfrac and its shareholders.
The Confidentiality Agreement
Starting in September 2017, public filings by Wilks Brothers disclosed that it might take an activist role in relation to Calfrac.
In response to these filings, Calfrac's management and board sought to constructively engage with Wilks Brothers. To facilitate such engagement, in February 2018, Calfrac entered into a Confidentiality Agreement with Wilks Brothers. The Confidentiality Agreement required Wilks Brothers to keep confidential certain information provided to Wilks Brothers, and prohibited Wilks Brothers from disclosing the fact that discussions or negotiations have taken place between Calfrac and Wilks Brothers concerning certain of the matters disclosed.
With the Confidentiality Agreement in place, Calfrac communicated important, confidential information to Wilks Brothers, including through a detailed written presentation. Through these disclosures, Wilks Brothers knew as of February 23, 2018 of Calfrac's intention to pursue the Financing, and the specifics of the Financing plan. One particular reason articulated for the Financing was to allow for the advantageous repayment of one class of the Company's indebtedness before June 10, 2018, after which the terms of such repayment would become more financially onerous to Calfrac.
The Annual Meeting
In the period after the Confidentiality Agreement was entered into, until the day prior to Calfrac's May 8, 2018 annual meeting of shareholders, Wilks Brothers expressed no dissatisfaction with Calfrac's directors nor with the Company's plans, including the specific plans to execute the Financing. It was not until May 7, 2018, in response to a specific inquiry from Calfrac, that Wilks Brothers articulated concerns similar to those expressed in its May 9, 2018 press release. This communication came only one day before the meeting, and over 75 days after Calfrac shared the detailed, confidential written presentation with Wilks Brothers.
The Press Release
Calfrac believes that Wilks Brothers breached the Confidentiality Agreement by issuing the Press Release, in which Wilks Brothers referred to prior discussions with Calfrac in relation to matters where Wilks Brothers received confidential information from Calfrac.
Moreover, the Press Release fails to mention that Wilks Brothers owns Profrac, which competes with Calfrac's U.S. fracturing business, and that Wilks Brothers has, both orally and in writing, requested a "strategic level conversation with the U.S. side of Calfrac if it becomes a standalone entity", and offered to "backstop capital initiatives" for such an entity.
Calfrac believes that the Press Release, which was issued immediately after Calfrac announced the Financing, was timed to negatively impact the Financing and increase pressure on Calfrac to dispose of its U.S. business to Wilks Brothers.
Wilks Brothers' purported activist altruism on behalf of Calfrac shareholders actually advances a commercial agenda that is very specific to Wilks Brothers. One shareholder's own agenda should not supersede the interests of all Calfrac shareholders, and that shareholder is not free to violate a legally binding agreement in a manner that negatively affects the counterparty to such agreement and its shareholders.
The Impact on Calfrac and its Shareholders
Whatever its motivations in issuing the Press Release, the Press Release negatively impacted the Financing, to the detriment of all Calfrac shareholders. Calfrac had thoughtfully timed the launch of the Financing based on market conditions, and the Press Release had a direct adverse effect on the cost of the Financing.
The Press Release both diminished interest in the Financing and increased Calfrac's interest cost. To recover these incremental costs for the benefit of all shareholders, Calfrac is today commencing an action against Wilks Brothers in the Court of Queen's Bench of Alberta.
Are There Subjects Where Calfrac Agrees with Wilks Brothers?
Notwithstanding concerns about the conduct of Wilks Brothers, Calfrac and Wilks Brothers appear to agree on certain issues.
Calfrac agrees that reducing financial leverage is an important objective. Calfrac had already built into its plans, long before being lectured to by Wilks Brothers, the clear objective of reducing debt in both absolute and relative terms. The Company's medium-term target is debt at 2.0x to 2.5x the Company's run rate of EBITDA.
At the same time, Calfrac recognizes that no company's indebtedness can be reduced on command. Essentially, indebtedness can be reduced through one or more of the following: free cash flow from operations; sales of assets or divisions; and/or sales of equity of either the parent company or its subsidiaries.
Research analysts at a number of investment banking firms have forecasted significant free cash flow for Calfrac in both 2018 and 2019, and Calfrac remains open to suitable strategic opportunities to sell assets, or parts of its business. Calfrac presently considers the sale of equity of either the parent company or its subsidiaries to be significantly less attractive, due to the valuation gap discussed further below.
Calfrac agrees that a valuation gap continues to exist and is actively addressing it. Both Calfrac and Wilks Brothers have made note of the gap that exists between the valuation of the shares of Calfrac and the shares of its U.S.-based peers. Calfrac is very focused on eliminating this gap by delivering superior operational and financial results. Calfrac is also considering a number of other potential alternative strategic steps to address the differential. Both Calfrac and Wilks Brothers wish to see further progress, as measured by the Calfrac share price performance relative to that of its peers. Nonetheless, it should be noted that, since Wilks Brothers first Early Warning Report in July 2017, which disclosed its then 11% interest in Calfrac, Calfrac's share price has increased by approximately 116%. This appreciation far exceeds the share price performance of Calfrac's peers and does indicate a narrowing of the valuation gap.
Where Does All of This Lead?
Calfrac understands that Wilks Brothers claims that there is only one alternative for the Company to pursue, the separation of Calfrac's U.S. business from the balance of Calfrac, and that Wilks Brothers is applying pressure to achieve that result.
Calfrac has a duty to all of its shareholders and believes Wilks Brothers' approach is only one of a number of alternatives that could unlock the underlying values that exist in Calfrac's businesses and address the valuation gap.
Importantly, most of the strategic alternatives available to Calfrac have multiple considerations and the steps involved would take significant time and expense to fully implement. The considerations involved in Calfrac's forward planning include tax, legal, securities, financial reporting, financing and other matters. These matters also need to be considered on a multi-country and cross-border basis. In addition, the benefits of geographic diversification, which has previously served the Company well, versus increased geographic focus, need to be weighed.
Very importantly, the vested interest that Wilks Brothers has, through the ownership of a competing oilfield services company, and as a self-disclosed interested party in Calfrac's U.S. business (if separated), should not be allowed to supersede the interests of all other Calfrac shareholders.
Calfrac's common shares are publicly traded on the Toronto Stock Exchange under the trading symbol "CFW". Calfrac provides specialized oilfield services to exploration and production companies designed to increase the production of hydrocarbons from wells drilled throughout western Canada, the United States, Russia and Argentina.
This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "may", "will", "project", "target", "should", "believe", "plans", "intends" and similar expressions are intended to identify forward-looking information or statements. More particularly and without limitation, this press release contains forward-looking statements and information relating to added interest costs related to the Financing; the filing of a statement of claim in the Court of Queen's Bench in Alberta; the repayment of certain indebtedness before June 10, 2018; the medium-term objective of reducing Calfac's financial leverage to 2.0x to 2.5x run rate EBITDA; analyst estimates for free cash flow in future periods; Calfrac's openness to evaluate opportunities to sell assets or parts of its business or sell equity of either the parent company or its subsidiaries; and the time and expense required to execute various strategic alternatives being considered.
These forward-looking statements and information are based on certain key expectations and assumptions made by Calfrac in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances, including, but not limited to, the following: the economic and political environment in which Calfrac operates; Calfrac's expectations for its customers' capital budgets and geographical areas of focus; the effect unconventional oil and gas projects have had on supply and demand fundamentals for oil and natural gas; Calfrac's existing contracts and the status of current negotiations with key customers and suppliers; the effectiveness of cost reduction measures instituted by Calfrac; and the likelihood that the current tax and regulatory regime will remain substantially unchanged.
Although Calfrac believes that the expectations and assumptions on which such forward looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information as Calfrac cannot give any assurance that they will prove to be correct. Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, risks associated with: global economic conditions; the level of exploration, development and production for oil and natural gas in Canada, the United States, Russia and Argentina; the demand for fracturing and other stimulation services during drilling and completion of oil and natural gas wells; volatility in market prices for oil and natural gas and the effect of this volatility on the demand for oilfield services generally; 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; sourcing, pricing and availability of raw materials, component parts, equipment, suppliers, facilities and skilled personnel; 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; liabilities relating to legal and/or administrative proceedings; failure to maintain Calfrac'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; third party credit risk; and the effect of accounting pronouncements issued periodically. The forward-looking statements and information contained in this press release are made as of the date hereof and Calfrac does not undertake any obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
SOURCE Calfrac Well Services Ltd.