Calfrac Announces First Quarter Results

CALGARY, AB, April 29, 2021 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX: CFW) announces its financial and operating results for the three months ended March 31, 2021.

HIGHLIGHTS

Three Months Ended March 31,

2021

2020

Change

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

($)

($)

(%)

(unaudited)




Financial




Revenue

241,575

305,515

(21)

Operating income(1)

12,940

5,698

127

Per share – basic(2)

0.35

1.97

(82)

Per share – diluted(2)

0.15

1.96

(92)

Adjusted EBITDA(1)

11,936

6,812

75

Per share – basic(2)

0.31

2.35

(87)

Per share – diluted(2)

0.14

2.34

(94)

Net loss

(22,418)

(122,857)

(82)

Per share – basic(2)

(0.60)

(42.38)

(99)

Per share – diluted(2)

(0.60)

(42.38)

(99)

Working capital (end of period)

170,088

233,125

(27)

Total equity (end of period)

384,561

239,099

61

Weighted average common shares outstanding (000s)




Basic

37,422

2,899

NM

Diluted

83,814

2,911

NM

(1) 

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

(2) 

Comparative amounts were adjusted to reflect the Company's fifty-to-one common share consolidation that occurred on December 18, 2020.

PRESIDENT'S MESSAGE

Calfrac's President and Chief Operating Officer, Lindsay Link commented: "Calfrac's performance during the first quarter demonstrated the breadth of our operating footprint and the resilience of our business. Despite weather impacts in three of our operating areas, the Company's operations continued to build momentum during the quarter, positioning us well for the remainder of 2021. I would like to offer my thanks to our employees and their families for their hard work and commitment to excellence." During the quarter, Calfrac:

  • completed the ramp-up in its North American operating footprint to 11 fracturing crews;
  • achieved modest improvement in service pricing; and
  • delivered 34 percent in revenue growth over the prior quarter along with adjusted EBITDA of $11.9 million or 4.9 percent of revenue.

CONSOLIDATED HIGHLIGHTS

Three Months Ended March 31,

2021

2020

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

241,575

305,515

(21)

Expenses




Operating

217,447

282,747

(23)

Selling, general and administrative (SG&A)

11,188

17,070

(34)


228,635

299,817

(24)

Operating income(1)

12,940

5,698

127

Operating income (%)

5.4

1.9

184

Adjusted EBITDA(1)

11,936

6,812

75

Adjusted EBITDA (%)

4.9

2.2

123

Fracturing revenue per job ($)

24,549

23,323

5

Number of fracturing jobs

8,852

11,969

(26)

Active pumping horsepower, end of period (000s)

934

1,242

(25)

Idle pumping horsepower, end of period (000s)

411

174

136

Total pumping horsepower, end of period (000s)

1,345

1,416

(5)

Coiled tubing revenue per job ($)

23,471

34,804

(33)

Number of coiled tubing jobs

644

542

19

Active coiled tubing units, end of period (#)

16

20

(20)

Idle coiled tubing units, end of period (#)

11

7

57

Total coiled tubing units, end of period (#)

27

27

Cementing revenue per job ($)

50,665

61,979

(18)

Number of cementing jobs

93

121

(23)

Active cementing units, end of period (#)

10

13

(23)

Idle cementing units, end of period (#)

6

3

100

Total cementing units, end of period (#)

16

16

(1) 

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

Revenue in the first quarter of 2021 was $241.6 million, a decrease of 21 percent from the same period in 2020. The lower revenue was mainly due to the fracturing job count decreasing by 26 percent, resulting primarily from lower activity in North America. Cementing activity in Argentina was also lower by 23 percent, while consolidated coiled tubing activity increased by 19 percent as a result of job mix. Fracturing revenue per job increased by 5 percent due to changes in job mix in Canada.

Adjusted EBITDA of $11.9 million for the first quarter of 2021 increased from $6.8 million in the comparable period in 2020, primarily as a result of better utilization for its operating fleets in Canada, Russia and Argentina, combined with cost reduction measures implemented across the Company during 2020.

Net loss was $22.4 million or $0.60 per share diluted compared to a net loss of $122.9 million or $42.38 per share diluted in the same period last year, which included a gain on debt exchange of $130.4 million, a $115.6 million deferred tax expense related to the derecognition of the Company's deferred tax asset, and an impairment of PP&E and other assets of $54.0 million.

Three Months Ended

March 31,

December 31,

Change


2021

2020


(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

241,575

180,722

34

Expenses




Operating

217,447

154,582

41

SG&A

11,188

10,543

6


228,635

165,125

38

Operating income(1)

12,940

15,597

(17)

Operating income (%)

5.4

8.6

(37)

Adjusted EBITDA(1)

11,936

13,715

(13)

Adjusted EBITDA (%)

4.9

7.6

(36)

Fracturing revenue per job ($)

24,549

33,022

(26)

Number of fracturing jobs

8,852

4,887

81

Active pumping horsepower, end of period (000s)

934

901

4

Idle pumping horsepower, end of period (000s)

411

444

(7)

Total pumping horsepower, end of period (000s)

1,345

1,345

Coiled tubing revenue per job ($)

23,471

33,754

(30)

Number of coiled tubing jobs

644

354

82

Active coiled tubing units, end of period (#)

16

17

(6)

Idle coiled tubing units, end of period (#)

11

10

10

Total coiled tubing units, end of period (#)

27

27

Cementing revenue per job ($)

50,665

43,697

16

Number of cementing jobs

93

85

9

Active cementing units, end of period (#)

10

12

(17)

Idle cementing units, end of period (#)

6

4

50

Total cementing units, end of period (#)

16

16

(1) 

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

First-quarter revenue in 2021 of $241.6 million represented an increase of 34 percent from the fourth quarter of 2020, primarily due to improved fracturing activity in all of the areas where Calfrac operates. Revenue per fracturing job was 26 percent lower compared with the fourth quarter of 2020 due to the impact of job mix in Canada and a lower rouble in Russia.

In Canada, revenue increased by 60 percent from the fourth quarter to $85.6 million in the first quarter due to a rebound in customer activity resulting from improved oil and natural gas prices and refreshed capital budgets. Calfrac's Canadian division adjusted its operating footprint in advance of the first quarter and was able to deploy four fracturing fleets and four coiled tubing units in order to meet the needs of the Company's core clients. Operating income as a percentage of revenue was 18 percent, compared to 17 percent in the fourth quarter.

In the United States, revenue in the first quarter of 2021 was $92.9 million or 38 percent higher than the fourth quarter of 2020. The improvement was primarily activity driven as the Company had a full quarter of activity from the three fleets that were reactivated late in the fourth quarter. Operating losses were $3.0 million in the first quarter compared to operating income of $1.0 million in the fourth quarter of 2020. Cold weather and winter storms directly impacted activity levels in February and also caused a significant increase in fuel and other input costs. In total, this weather negatively impacted operating income by more than $2.0 million during the quarter.

In Russia, revenue of $27.6 million in the first quarter of 2021 was 2 percent higher than the fourth quarter due to a 5 percent increase in fracturing activity, offset partially by a weaker Russian rouble. Operating income decreased by $3.0 million due primarily to higher operating costs associated with winter operations in Western Siberia.

In Argentina, revenue in the first quarter of 2021 increased to $35.5 million from $33.1 million in the fourth quarter. The ongoing improvement in operating conditions resulted in a sequential improvement in overall activity. However, Calfrac's large fracturing spread shifted between customers, to a new major operator, during the early part of the quarter which impacted profitability. Consequently, operating income decreased from $5.5 million in the fourth quarter of 2020 to $3.9 million in the first quarter.

Adjusted EBITDA of $11.9 million for the first quarter of 2021 decreased from $13.7 in the fourth quarter of 2020, primarily due to the impact of winter storms in the United States, which caused temporary shut-downs and higher costs in February.

BUSINESS UPDATE AND OUTLOOK

During the first quarter, demand for Calfrac's services increased in all operating areas although disruptions due to winter weather conditions impacted activity and financial results in Russia, Canada and the United States.

CANADA

In Canada, the first quarter began with high levels of utilization for all four marketed spreads, and continued for much of the quarter with the exception of approximately 15 days that were lost due to severe cold weather for one crew that was operating in Saskatchewan. Warming weather conditions in March had very little impact on Calfrac's ability to service work as crews shifted further north and managed to remain fully utilized through the month.

Calfrac's Canadian division adjusted its operating footprint in advance of the first quarter and was able to deploy four fracturing fleets and four coiled tubing units in order to meet the needs of the Company's core clients. The high level of demand from these clients in Canada left very little spare capacity to service spot market work during the quarter. The Company plans to maintain a similar level of utilization through the remainder of 2021, and will not consider incremental equipment additions until service pricing increases are realized.

Second-quarter activity will decrease from first-quarter levels, however, a reduced footprint and cost management is expected to result in positive operating income during the upcoming quarter. Visibility on work projects for the second half of the year continues to improve and is expected to drive consistently high utilization for at least three fracturing fleets through the third and fourth quarters. While pricing in the Canadian market has improved marginally from the lows seen in 2020, it is still apparent that a number of active fleets did not experience full utilization in the first quarter, which prevented further pricing gains. If this utilization gap remains into the second half of the year, it will likely impair the industry's ability to significantly improve its financial results in the near term.

UNITED STATES

During the first quarter, Calfrac's operations in the United States improved quicker than expectations as work programs picked up in rapid succession, and some incremental work was secured outside of planned programs. Activity levels improved steadily through the quarter, but were severely disrupted in mid-February by the cold weather and winter storms that impacted much of the continental United States. These weather events directly impacted activity and resulted in a significant increase in fuel and other input costs. In total, the inclement weather was responsible for over $2.0 million of operating losses during the quarter. The Company acted quickly to identify and mitigate these impacts, and financial performance improved significantly in March.

Producers in the United States continue to focus on maintaining capital spending as planned, especially larger public companies. However, there has been an increase in bidding activity driven primarily by private companies in Texas, Colorado and North Dakota. Activity levels are expected to increase modestly in the second quarter, as the expected absence of weather impacts will improve results. Pricing has improved modestly from 2020 levels, which is expected to further improve profitability in the second quarter and beyond.

Activity levels are expected to remain strong through the summer and into the latter part of the year, and if pricing continues to strengthen, there may be opportunities to increase Calfrac's operating footprint later in the year. 

RUSSIA

Calfrac's financial performance in Russia during the first quarter met expectations as winter weather impacted activity levels but costs remained in line with the previous year. Approximately 15 operating days were lost during the quarter when temperatures were too low to permit operations to safely continue. As is also typical, March represented the strongest month of the quarter due to improved utilization. The transition to summer operating conditions is well underway and current expectations are for activity to remain high over the months ahead. There are a number of opportunities to activate additional fracturing and coiled tubing equipment in Russia and the Company will continue to engage with clients in this regard.

ARGENTINA

In Argentina, ongoing improvement in operating conditions resulted in a sequential improvement in activity, however, a significant change in cementing job mix was also observed during the quarter. In addition, Calfrac's large fracturing spread in Neuquén shifted between customers during the early part of the quarter which resulted in lower utilization for a short period and modestly impacted profitability from its unconventional fracturing operations. Demand for services remains strong, underpinned by federal government programs designed to improve the domestic supply of natural gas in the years ahead. Work volumes are expected to remain strong throughout the remainder of the year, and Calfrac remains very well-positioned in both the conventional and shale fracturing markets in Argentina.

CORPORATE

At the corporate level, Calfrac's focus remains on managing its costs and capital in a prudent manner while continuing to look for opportunities to improve its business. In particular, Calfrac has been evaluating ways to continue to advance the improvements it has made, together with its customers, on the environmental impact of our operations in a manner that recognizes ESG imperatives while respecting our shareholders' investments. Additionally, the potential for the collection and rapid analysis of data to deliver further insights into our operations and clients' resources is increasing, and Calfrac continues to develop technologies and partnerships to unlock that potential.

CANADA

Three Months Ended March 31,

2021

2020

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

85,583

104,619

(18)

Expenses




Operating

68,743

89,693

(23)

SG&A

1,661

2,951

(44)


70,404

92,644

(24)

Operating income(1)

15,179

11,975

27

Operating income (%)

17.7

11.4

55

Fracturing revenue per job ($)

16,939

15,290

11

Number of fracturing jobs

4,569

6,186

(26)

Active pumping horsepower, end of period (000s)

202

237

(15)

Idle pumping horsepower, end of period (000s)

73

36

103

Total pumping horsepower, end of period (000s)

275

273

1

Coiled tubing revenue per job ($)

23,062

25,031

(8)

Number of coiled tubing jobs

355

401

(11)

Active coiled tubing units, end of period (#)

7

11

(36)

Idle coiled tubing units, end of period (#)

6

2

200

Total coiled tubing units, end of period (#)

13

13

(1) 

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

REVENUE

Revenue from Calfrac's Canadian operations during the first quarter of 2021 was $85.6 million compared to $104.6 million in the same period of 2020, primarily due to lower activity. The number of fracturing jobs decreased by 26 percent from the comparable period in 2020 due to a smaller operating footprint as the Company responded to unfavorable market conditions and operated only four fleets compared to five fleets in the first quarter of 2020. Revenue per job increased by 11 percent mainly due to job mix as the majority of activity completed in the quarter was focused on larger pad style jobs. The number of coiled tubing jobs decreased by 11 percent from the first quarter in 2020 as the number of coiled tubing crews was reduced, while revenue per job decreased by 8 percent due to job mix.

OPERATING INCOME

Operating income in Canada during the first quarter of 2021 was $15.2 million compared to $12.0 million in the same period of 2020. Despite an 18 percent decrease in revenue, the Company's operating income as a percentage of revenue was 18 percent compared to 11 percent in the comparable quarter. This increase in operating income was mainly due to a right-sized operating footprint in response to unfavorable market conditions, cost saving initiatives implemented in the second quarter of 2020, which included salary and headcount reductions, combined with lower discretionary spending. The first quarter of 2021 included $1.4 million of Canadian Emergency Wage Subsidy compared to the first quarter of 2020 which included $1.6 million in restructuring costs.

UNITED STATES

Three Months Ended March 31,

2021

2020

Change

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

($)

($)

(%)

(unaudited)




Revenue

92,913

154,112

(40)

Expenses




Operating

93,154

144,729

(36)

SG&A

2,771

4,196

(34)


95,925

148,925

(36)

Operating (loss) income(1)

(3,012)

5,187

NM

Operating (loss) income (%)

(3.2)

3.4

NM

Fracturing revenue per job ($)

26,239

28,366

(7)

Number of fracturing jobs

3,541

5,433

(35)

Active pumping horsepower, end of period (000s)

532

802

(34)

Idle pumping horsepower, end of period (000s)

338

126

168

Total pumping horsepower, end of period (000s)

870

928

(6)

Active coiled tubing units, end of period (#)

Idle coiled tubing units, end of period (#)

1

1

Total coiled tubing units, end of period (#)

1

1

Active cementing units, end of period (#)

Idle cementing units, end of period (#)

3

2

50

Total cementing units, end of period (#)

3

2

50

US$/C$ average exchange rate(2)

1.2660

1.3449

(6)

(1) 

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

(2) 

Source: Bank of Canada.

REVENUE

Revenue from Calfrac's United States operations decreased to $92.9 million during the first quarter of 2021 from $154.1 million in the comparable quarter of 2020. The significant decrease in revenue can be attributed to a combination of a 35 percent reduction in the number of fracturing jobs completed and a 7 percent decrease in revenue per job period-over-period, primarily due to the decline in the U.S. dollar exchange rate. Activity levels for the quarter started off relatively strong but were severely impacted in mid-February by extreme cold weather which temporarily shutdown operations. The Company reduced it operating footprint from a peak of 14 fleets in the first quarter of 2020 down to seven fleets in the first quarter of 2021.

OPERATING (LOSS) INCOME

The Company's United States operations generated an operating loss of $3.0 million during the first quarter of 2021 compared to operating income of $5.2 million in the same period in 2020. The decrease in operating income was due to the significant reduction in revenue compared to the first quarter of 2020 as extreme weather in February resulted in lower utilization in North Dakota and Colorado and the temporary shutdown of operations in Pennsylvania and New Mexico. In addition, higher fuel costs and other expenses related to the winter storm were experienced in North Dakota. SG&A expenses decreased by 34 percent primarily due to headcount and compensation reductions that were enacted in the second quarter in 2020.

RUSSIA

Three Months Ended March 31,

2021

2020

Change

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

($)

($)

(%)

(unaudited)




Revenue

27,621

20,991

32

Expenses




Operating

25,465

22,250

14

SG&A

680

1,039

(35)


26,145

23,289

12

Operating income (loss)(1)

1,476

(2,298)

NM

Operating income (loss) (%)

5.3

(10.9)

NM

Fracturing revenue per job ($)

74,113

102,408

(28)

Number of fracturing jobs

339

179

89

Active pumping horsepower, end of period (000s)

77

65

18

Idle pumping horsepower, end of period (000s)

12

(100)

Total pumping horsepower, end of period (000s)

77

77

Coiled tubing revenue per job ($)

47,101

46,667

1

Number of coiled tubing jobs

53

57

(7)

Active coiled tubing units, end of period (#)

4

3

33

Idle coiled tubing units, end of period (#)

3

4

(25)

Total coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0170

0.0202

(16)

(1) 

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

(2) 

Source: Bank of Canada.

REVENUE

Revenue from Calfrac's Russian operations increased by 32 percent during the first quarter of 2021 to $27.6 million from $21.0 million in the corresponding period of 2020. The increase in revenue was attributable to a 89 percent increase in fracturing activity due to better utilization as the comparable quarter in 2020 had weather related access issues. Revenue per fracturing job decreased by 28 percent primarily due to a 16 percent decline in the Russian rouble, combined with a larger percentage of multi-stage wells completed, which lowered average fracturing job sizes for the quarter. Coiled tubing activity decreased by 7 percent due to changes in job mix as the Company operated primarily in the Erginskoye field, which had larger average job sizes as compared to the same period in 2020. Despite the decline in the Russian rouble, coiled tubing revenue per job was 1 percent higher than the comparable quarter due to changes in job mix.

OPERATING INCOME (LOSS)

The Company's Russian division generated operating income of $1.5 million during the first quarter of 2021 versus an operating loss of $2.3 million in the comparable quarter in 2020. The improved operating performance was primarily due to better utilization of its operating fleets combined with cost saving initiatives implemented in 2020.

ARGENTINA

Three Months Ended March 31,

2021

2020

Change

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

($)

($)

(%)

(unaudited)




Revenue

35,458

25,793

37

Expenses




Operating

29,730

24,949

19

SG&A

1,814

2,476

(27)


31,544

27,425

15

Operating income (loss)(1)

3,914

(1,632)

NM

Operating income (loss) (%)

11.0

(6.3)

NM

Fracturing revenue per job ($)

54,288

70,916

(23)

Number of fracturing jobs

403

171

136

Active pumping horsepower, end of period (000s)

123

138

(11)

Idle pumping horsepower, end of period (000s)

Total pumping horsepower, end of period (000s)

123

138

(11)

Coiled tubing revenue per job ($)

18,781

73,411

(74)

Number of coiled tubing jobs

236

84

181

Active coiled tubing units, end of period (#)

5

6

(17)

Idle coiled tubing units, end of period (#)

1

NM

Total coiled tubing units, end of period (#)

6

6

Cementing revenue per job ($)

50,665

61,979

(18)

Number of cementing jobs

93

121

(23)

Active cementing units, end of period (#)

10

13

(23)

Idle cementing units, end of period (#)

3

1

200

Total cementing units, end of period (#)

13

14

(7)

US$/C$ average exchange rate(2)

1.2660

1.3449

(6)

(1) 

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

(2) 

Source: Bank of Canada.

REVENUE

Calfrac's Argentinean operations generated revenue of $35.5 million during the first quarter of 2021 compared to $25.8 million in the comparable quarter in 2020, primarily due to the 136 percent increase in the number of completed fracturing jobs. Revenue per fracturing job decreased by 23 percent due to changes in customer and job mix. Despite the 181 percent increase in coiled tubing activity, coiled tubing revenue was lower quarter-over-quarter as revenue per job decreased by 74 due to changes in job mix. Cementing activity decreased by 23 percent from the comparable quarter in 2020 due to a reduction in active units. In addition, the first quarter included subcontractor revenue that was not experienced in the first quarter of 2020 due to changes in contracted service mix in Neuquén.

OPERATING INCOME (LOSS)

The Company's operations in Argentina generated an operating income of $3.9 million during the first quarter of 2021 compared to an operating loss of $1.6 million in the comparable quarter of 2020. Overall utilization in January and February experienced some operating delays by the Company's main customer, which lowered operating income for the first half of the quarter. Utilization improved significantly in March compared to the same period in 2020 as the prior year included a government-mandated shutdown of oilfield activity in response to the COVID-19 pandemic.

CORPORATE

Three Months Ended March 31,

2021

2020

Change

(C$000s)

($)

($)

(%)

(unaudited)




Expenses




Operating

355

1,126

(68)

SG&A

4,262

6,408

(33)


4,617

7,534

(39)

Operating loss(1)

(4,617)

(7,534)

(39)

% of Revenue

1.9

2.5

(24)

(1)

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

OPERATING LOSS

Corporate expenses for the first quarter of 2021 were $4.6 million compared to $7.5 million in the first quarter of 2020. The decrease was primarily due to lower personnel costs resulting from headcount and compensation reductions, combined with $0.2 million in government subsidies received during the first quarter of 2021. The Company's stock-based compensation expense was $0.5 million lower than the first quarter in 2020 as the Company cancelled all outstanding stock options and performance share units in conjunction with the Recapitalization Transaction that closed in December 2020 and has not yet issued any equity-based awards under its omnibus incentive plan.

DEPRECIATION

For the three months ended March 31, 2021, depreciation expense decreased by $31.7 million to $31.6 million from $63.3 million in the corresponding quarter in 2020. In 2020, the Company recorded PP&E impairment charges totaling $227.2 million which resulted in the reduction of depreciation expense during the first quarter in 2021. The year-over-year decrease in capital expenditures relating to major component purchases, which have a shorter useful life and a corresponding higher rate of depreciation, also contributed to the decrease in first-quarter depreciation expense.

FOREIGN EXCHANGE GAINS AND LOSSES

The Company recorded a foreign exchange loss of $3.3 million during the first quarter of 2021 versus a gain of $0.1 million in the comparative three-month period of 2020. 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, net monetary assets or liabilities that were held in pesos in Argentina, and liabilities held in Canadian dollars in Russia. The foreign exchange loss during the first quarter was mainly due to the revaluation of net monetary assets that were held in U.S. dollars as the Canadian dollar strengthened relative to the U.S. dollar.

INTEREST

The Company's net interest expense of $9.1 million for the first quarter of 2021 was $16.9 million lower than the comparable period in 2020. The decrease in interest expense was primarily due to the significant reduction in long-term debt resulting from the Recapitalization Transaction that closed on December 18, 2020, combined with the debt exchange that was completed during the first quarter in 2020. These transactions combined to eliminate US$650.0 million of the Company's 8.50 percent senior unsecured notes and replaced it with US$120.0 million of Second Lien Notes bearing interest at 10.875 percent and $59.0 million of 1.5 Lien Notes at an annual interest rate of 10.0 percent. Interest expense during the first quarter in 2020 also included the write-off of $4.4 million of deferred finance costs related to the portion of senior unsecured notes that were exchanged during that quarter.

INCOME TAXES

The Company recorded an income tax recovery of $8.3 million during the first quarter of 2021 compared to an expense of $114.1 million in the comparable period of 2020. A deferred tax recovery of $8.4 million was recorded primarily due to losses incurred in the United States and a current income tax expense of $0.1 million resulted from current tax obligations in Russia and certain state taxes in the United States. The expense position in the first quarter in 2020 was the result of the derecognition of the Company's deferred tax asset, which resulted in a deferred tax expense of $115.6 million.

IMPAIRMENT

Since the impairment test that was conducted as at December 31, 2020, the Company did not identify any changes in the indicators of impairment or any new indicators of impairment. Therefore, no further assessment on impairment was performed as there have been no changes in circumstances that indicate that the carrying amount of property, plant and equipment does not exceed its recoverable amount as at March 31, 2021. The impairment charge by CGU is shown in the table below.

Three Months Ended March 31,

2021

2020

(C$000s)

($)

($)

Canada

38,144

United States

15,380


53,524

LIQUIDITY AND CAPITAL RESOURCES


Three Months Ended Mar. 31,


2021

2020

(C$000s)

($)

($)

(unaudited)



Cash provided by (used in):



Operating activities

(19,862)

(46,339)

Financing activities

15,981

19,332

Investing activities

(10,506)

(25,856)

Effect of exchange rate changes on cash and cash equivalents

(1,478)

7,304

Decrease in cash and cash equivalents

(15,865)

(45,559)

OPERATING ACTIVITIES

The Company's cash used in operating activities for the three months ended March 31, 2021 was $19.9 million versus $46.3 million during the same period in 2020. The decrease in cash used in operations was primarily due to a lower outflow of cash from working capital during the period. Working capital used $20.8 million of cash in the first three months in 2021 compared to $44.0 million in the same period in 2020. At March 31, 2021, Calfrac's working capital was $170.1 million compared to $161.4 million at December 31, 2020.

FINANCING ACTIVITIES

Net cash provided by financing activities for the three months ended March 31, 2021 was $16.0 million compared to net cash provided of $19.3 million in the comparable three-month period in 2020. During the three months ended March 31, 2021, the Company borrowed $17.7 million on a net basis under its credit facilities, paid lease principal payments of $1.8 million and received proceeds of $0.1 million from the exercise of a portion of the Company's outstanding warrants.

On December 18, 2020, Calfrac completed the Recapitalization Transaction and the new financing of $60.0 million 1.5 Lien Notes. The completion of the Recapitalization Transaction significantly reduced the Company's total debt, will reduce annual interest expense and provide additional liquidity to fund ongoing operations. The Company also opted to pay its first interest payment on the 1.5 Lien Notes in cash during the first quarter rather than utilizing the payment-in-kind option.

During the first quarter of 2021, the Company recorded the rescission of $1.0 million of its 1.5 Lien Notes. For accounting purposes, the $1.0 million principal amount was recorded on a proportional basis as a reduction of the liability and equity portion of the 1.5 Lien Notes.

In conjunction with the completion of the Recapitalization Transaction, the Company amended its revolving credit facility agreement to reduce its total facility capacity from $375.0 million to $290.0 million and, as part of the amended agreement, the Company's Funded Debt to Adjusted EBITDA covenant is waived for the quarters ended March 31, 2021 through June 30, 2021 and is 4.50x for the quarter ended September 30, 2021, 3.50x for the quarter ended December 31, 2021 ("Covenant Relief Period") and 3.00x for each quarter end thereafter. The Covenant Relief Period terminates on the earlier of December 31, 2021 and any prior quarter end for which Calfrac has requested early termination and has provided a compliance certificate to its lenders certifying compliance with all financial covenants and where the Funded Debt to Adjusted EBITDA ratio is less than 3.00x at such quarter end. The facilities consist of an operating facility of $30.9 million and a syndicated facility of $259.1 million. The Company's credit facilities mature on June 1, 2022, and can be extended by one or more years at the Company's request and lenders' acceptance. The Company may also 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 1.00 percent to prime plus 3.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 2.00 percent to 4.50 percent above the respective base rates. The Company incurs interest at the high end of the ranges outlined above during the Covenant Relief Period or if its net Total Debt to Adjusted EBITDA ratio is above 4.00:1.00. Additionally, in the event that the Company's net Total Debt to Adjusted EBITDA ratio is above 5.00:1.00, certain restrictions apply including the following: (a) acquisitions are subject to majority lender consent; (b) distributions are restricted other than those relating to the Company's equity compensation plans; and (c) no increase in the rate of dividends are permitted. As at March 31, 2021, the Company's net Total Debt to Adjusted EBITDA ratio exceeded the 5.00:1.00 threshold.

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

      1. 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;
      2. 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
      3. 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 $150.0 million.

At March 31, 2021, the Company had used $0.8 million of its credit facilities for letters of credit and had $150.0 million of borrowings under its credit facilities, leaving $139.2 million in available capacity under its credit facilities. As described above, the Company's credit facilities are subject to a monthly borrowing base as determined using the previous month's results which at March 31, 2021 resulted in liquidity of $64.2 million. Under the terms of the Company's amended credit facility agreement, Calfrac must maintain a minimum liquidity amount of $15.0 million during the Covenant Relief Period.

The Company's credit facilities contain certain financial covenants. As per the amended credit facility agreement, the Company's Funded Debt to Adjusted EBITDA covenant is waived for the quarters ended March 31, 2021 through June 30, 2021 and is 4.50x for the quarter ended September 30, 2021, 3.50x for the quarter ended December 31, 2021 and 3.00x for each quarter end thereafter. As shown in the table below, the Company was in full compliance with its financial covenants associated with its credit facilities as at March 31, 2021.


Covenant

Actual

March 31,

2021

2021

Working capital ratio not to fall below

1.15x

2.44x

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

N/A

8.61x

Funded Debt to Capitalization not to exceed(1)(3)

0.30x

0.20x

(1) Funded Debt is defined as Total Debt excluding all outstanding Second Lien Notes, 1.5 Lien Notes, and lease obligations. 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).

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

(3) Capitalization is Total Debt plus equity.

On February 24, 2020, Calfrac executed an exchange offer of US$120.0 million of new 10.875 percent Second Lien Notes due March 15, 2026 to holders of its existing 8.50 percent senior unsecured notes ("Unsecured Notes") due June 15, 2026. The Second Lien Notes are secured by a second lien on the same assets that secure obligations under the Company's existing senior secured credit facility and 1.5 Lien Notes. The exchange was completed at an exchange price of US$550 for each US$1,000 of Unsecured Notes, resulting in US$218.2 million being exchanged for US$120.0 million of Second Lien Notes. The exchange resulted in reduced debt of approximately $130.0 million and a reduction in annual debt service costs of approximately $7.3 million.

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, 2022, subject to certain conditions including:

      1. the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;
      2. the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;
      3. 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
      4. 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.

The Company can utilize two equity cures during the term of the credit facilities subject to the conditions described above. 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. Amounts used as an equity cure prior to June 30, 2022 will increase Adjusted EBITDA over the relevant twelve-month rolling period and will also serve to reduce Funded Debt.

The Company's credit facilities also require majority lender consent for dispositions of property or assets in Canada and the United States if the aggregate market value exceeds $20.0 million ($10.0 million during the Covenant Relief Period). 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 indentures governing the Second Lien Notes and the 1.5 Lien Notes contain 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 indentures, in circumstances where:

      1. the Company is in default under either of the indentures or the making of such payment would result in a default;
      2. the Company would not meet the Fixed Charge Coverage Ratio(1) under either of the indentures of at least 2:1 for the most recent four fiscal quarters, after giving pro forma effect to such restricted payment as if it had been made at the beginning of the applicable four fiscal quarter period; or
      3. there is insufficient room for such payment within a builder basket included in the indentures; and in the case of the 1.5 Lien Notes indenture, at least one year has passed since their issue date.

(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 indentures as net income (loss) before depreciation, extraordinary gains or losses, unrealized foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment or reversal of impairment of assets, restructuring charges, stock-based compensation, interest, and income taxes. Interest expense is adjusted to exclude any non-recurring charges associated with redeeming or retiring any indebtedness prior to its maturity.

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 in each of these indentures. As at March 31, 2021, these baskets were not utilized. The indentures also restrict 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. The indenture governing the 1.5 Lien Notes includes restrictions on certain investments including certain investments in subsidiary entities, however the indenture includes several exceptions to this prohibition, including a general basket of US$10.0 million and baskets related to prepayment and build commitments which aggregate over US$12.0 million. This indenture also contains a restriction that any indebtedness incurred in excess of $290.0 million under the credit facilities basket shall be junior in priority to the 1.5 Lien Notes.

As at March 31, 2021, the Company's Fixed Charge Coverage Ratio of 0.43:1 was below the required 2:1 ratio. Failing to meet the Fixed Charge Coverage Ratio is not an event of default under the indentures, 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.

INVESTING ACTIVITIES

Calfrac's net cash used for investing activities was $10.5 million for the three months ended March 31, 2021 versus $25.9 million in the comparable period in 2020. Cash outflows relating to capital expenditures were $10.9 million for the three months ended March 31, 2021 compared to $26.8 million in the same period in 2020. Calfrac's Board of Directors have approved a 2021 capital budget of approximately $55.0 million, which is comprised primarily of maintenance capital.

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 March 31, 2021 was a loss of $1.5 million versus a gain of $7.3 million in the same period in 2020. These gains and losses relate to movements of cash and cash equivalents held by the Company in a foreign currency during the period.

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 2021 and beyond.

At March 31, 2021, the Company had cash on hand of $14.0 million.

OUTSTANDING SHARE DATA

The Company is authorized to issue an unlimited number of common shares. In connection with the approval of the Recapitalization Transaction, shareholders approved an omnibus incentive plan which permits the granting of various types of equity awards, including stock options, share appreciation rights, restricted shares, restricted share units, deferred share units and other share-based awards as determined by the Board of Directors. The number of shares reserved under the omnibus incentive plan is equal to 10 percent of the Company's issued and outstanding common shares. As at April 28, 2021, the Company had not issued any equity-based awards under its omnibus incentive plan.

SUMMARY OF QUARTERLY RESULTS

Three Months Ended

Jun. 30,

Sep. 30,

Dec. 31,

Mar. 31,

Jun. 30,

Sep. 30,

Dec. 31,

Mar. 31,


2019

2019

2019

2020

2020

2020

2020

2021

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

($)

($)

($)

($)

($)

($)

($)

($)

(unaudited)









Financial









Revenue

429,638

399,220

317,085

305,515

91,423

127,776

180,722

241,575

Operating income (loss)(1)

41,103

47,021

20,997

5,698

(7,307)

8,009

15,597

12,940

Per share – basic(2)

14.23

16.25

7.25

1.97

(2.52)

2.76

1.91

0.35

Per share – diluted(2)

14.07

16.18

7.22

1.96

(2.52)

2.75

0.27

0.15

Adjusted EBITDA(1)

45,123

43,028

26,882

6,812

(5,185)

8,467

13,715

11,936

Per share – basic(2)

15.62

14.87

9.29

2.35

(1.79)

2.91

1.68

0.31

Per share – diluted(2)

15.45

14.80

9.25

2.34

(1.79)

2.91

0.24

0.14

Net income (loss)

(41,045)

(29,424)

(49,400)

(122,857)

(277,275)

(50,000)

125,897

(22,418)

Per share – basic(2)

(14.21)

(10.17)

(17.07)

(42.38)

(95.61)

(17.20)

15.43

(0.60)

Per share – diluted(2)

(14.21)

(10.17)

(17.07)

(42.38)

(95.61)

(17.20)

2.19

(0.60)

Capital expenditures

37,784

38,885

34,418

29,283

6,068

2,792

6,487

11,586

Working capital (end of period)

291,056

257,189

248,772

233,125

157,165

127,989

161,448

170,088

Total equity (end of period)

443,361

414,195

368,623

239,099

(34,195)

(81,033)

410,234

384,561










Operating (end of period)









Active pumping horsepower (000s)

1,346

1,337

1,269

1,242

780

840

901

934

Idle pumping horsepower (000s)

59

72

141

174

572

505

444

411

Total pumping horsepower (000s)

1,405

1,409

1,410

1,416

1,352

1,345

1,345

1,345

Active coiled tubing units (#)

21

21

20

20

16

15

17

16

Idle coiled tubing units (#)

8

8

8

7

11

12

10

11

Total coiled tubing units (#)

29

29

28

27

27

27

27

27

Active cementing units (#)

14

14

13

13

13

12

12

10

Idle cementing units (#)

9

9

6

3

3

4

4

6

Total cementing units (#)

23

23

19

16

16

16

16

16

(1) 

Refer to "Non-GAAP Measures" on pages 17 and 18 for further information.

(2) 

Comparative amounts were adjusted to reflect the Company's fifty-to-one common share consolidation that occurred on December 18, 2020.

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 2020 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 and Argentinean currency (refer to "Business Risks - Fluctuations in Foreign Exchange Rates" in the 2020 Annual Report).

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 the Recapitalization Transaction, including its expected benefits to the Company and impacts on its debt, liquidity and financial position, the appeals by Wilks Brothers, LLC, a regulatory application with respect to the rescission of a subscription for 1.5 Lien Notes by an institutional Shareholder, and the Company's expectations and intentions with respect to the foregoing and other matters relating to the Recapitalization Transaction, expected operating strategies and targets, capital expenditure programs, future financial resources, 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 indentures pursuant to which its 1.5 Lien Notes and Second Lien Notes were issued, and its ability to raise capital, treatment under government regulatory regimes, commodity prices, anticipated outcomes of specific events (including exposure and positioning under existing legal and regulatory 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 effectiveness of cost reduction measures instituted by the Company 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: the Company's ability to continue to manage the effect of the COVID-19 pandemic on its operations; actions taken by Wilks Brothers, LLC; decisions by securities regulators and/or the courts; restrictions resulting from compliance with or breach of debt covenants and risk of acceleration of indebtedness, including under the Company's credit facilities, 1.5 Lien Notes indenture and/or Second Lien Notes indenture; failure to reach any additional agreements with the Company's lenders; the impact of events of defaults in respect of other material contracts of the Company, including but not limited to, cross-defaults resulting in acceleration of amounts payable thereunder or the termination of such agreements; failure to receive any applicable regulatory, court, third party and other stakeholder approvals or decisions in respect of the Recapitalization Transaction and the court orders granting enforcement thereof; global economic conditions, the level of exploration, development and production for oil and natural gas in Canada, the United States, Argentina and Russia; the demand for fracturing and other stimulation services for the 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; the availability of capital on satisfactory terms; direct and indirect exposure to volatile credit markets, including credit rating risk; dilution risks associated with the conversion of outstanding convertible securities and additional equity or debt financings; sourcing, pricing and availability of raw materials, component parts, equipment, suppliers, facilities and skilled personnel; excess oilfield equipment levels; regional competition; currency exchange rate risk; risks associated with foreign operations; 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 relating to legal and/or administrative proceedings; 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; failure to maintain the Company's safety standards and record; activist shareholder risks; social media risks; risk relating to the Plan of Arrangement; liabilities and risks associated with prior operations; the ability to integrate technological advances and match advances from competitors; intellectual property risk; third party credit risk; cybersecurity risks; greenhouse gas regulation risks; failure to realize anticipated benefits of acquisitions and dispositions. 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 is 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 Suite 500, 407 - 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1E5, 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, gains or losses on exchange or settlement of debt, impairment of property, plant and equipment, impairment of other assets, 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. In addition, management believes this measure allows investors to more accurately compare the Company's performance with its peers by providing an indication of its financial results prior to consideration of the age or size of its asset base, or the investment and accounting policies associated with its assets. Operating income (loss) for the period was calculated as follows:

Three Months Ended March 31,

2021

2020

(C$000s)

($)

($)

(unaudited)



Net loss

(22,418)

(122,857)

Add back (deduct):



Depreciation

31,624

63,263

Foreign exchange losses (gains)

3,345

(90)

(Gain) loss on disposal of property, plant and equipment

(387)

1,669

Impairment of property, plant and equipment

53,524

Impairment of other assets

507

Gain on exchange of debt

(130,444)

Interest

9,101

26,043

Income taxes

(8,325)

114,083

Operating income

12,940

5,698

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, unrealized foreign exchange losses (gains), non-cash stock-based compensation, 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 March 31,

2021

2020

(C$000s)



(unaudited)



Net loss

(22,418)

(122,857)

Add back (deduct):



Depreciation

31,624

63,263

Unrealized foreign exchange losses (gains)

2,086

(2,280)

(Gain) loss on disposal of property, plant and equipment

(387)

1,669

Impairment of property, plant and equipment

53,524

Impairment of other assets

507

Gain on exchange of debt

(130,444)

Restructuring charges

255

2,621

Stock-based compensation

683

Interest

9,101

26,043

Income taxes

(8,325)

114,083

Adjusted EBITDA

11,936

6,812

(1) For bank covenant purposes, EBITDA includes the deduction of an additional $2.1 million (three months ended March 31, 2020 - $5.5 million) of lease payments that would have been recorded as operating expenses prior to the adoption of IFRS 16.

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.

FIRST QUARTER CONFERENCE CALL

Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2021 first-quarter results at 10:00 a.m. (Mountain Time) on Thursday, April 29, 2021. 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 3159708). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS


March 31,

December 31,


2021

2020

(C$000s) (unaudited)

($)

($)

ASSETS



Current assets



Cash and cash equivalents

13,965

29,830

Accounts receivable

184,671

139,486

Income taxes recoverable

1,711

1,530

Inventories

87,233

83,294

Prepaid expenses and deposits

13,915

17,050


301,495

271,190

Non-current assets



Property, plant and equipment

593,903

618,488

Right-of-use assets

21,326

22,785

Total assets

916,724

912,463

LIABILITIES AND EQUITY



Current liabilities



Accounts payable and accrued liabilities

123,601

101,784

Current portion of lease obligations

7,806

7,958


131,407

109,742

Non-current liabilities



Long-term debt (note 1)

343,312

324,633

Lease obligations

12,611

14,013

Deferred income tax liabilities

44,833

53,841

Total liabilities

532,163

502,229

Capital stock (note 3)

800,444

800,184

Conversion rights on convertible notes (note 1)

4,788

4,873

Contributed surplus

65,986

65,986

Warrants (notes 2 and 4)

40,605

40,797

Loan receivable for purchase of common shares

(2,500)

(2,500)

Accumulated deficit

(531,827)

(509,409)

Accumulated other comprehensive income

7,065

10,303

Total equity

384,561

410,234

Total liabilities and equity

916,724

912,463

Contingencies (note 6)

See accompanying notes to the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS 

Three Months Ended March 31,

2021

2020

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

($)

($)

Revenue

241,575

305,515

Cost of sales

249,071

346,010

Gross loss

(7,496)

(40,495)

Expenses



Selling, general and administrative

11,188

17,070

Foreign exchange losses (gains)

3,345

(90)

(Gain) loss on disposal of property, plant and equipment

(387)

1,669

Impairment of property, plant and equipment

53,524

Impairment of other assets

507

Gain on exchange of debt (note 1)

(130,444)

Interest

9,101

26,043


23,247

(31,721)

Loss before income tax

(30,743)

(8,774)

Income tax expense (recovery)



Current

85

57

Deferred

(8,410)

114,026


(8,325)

114,083

Net loss

(22,418)

(122,857)




Loss per share (note 3)



Basic

(0.60)

(42.38)

Diluted

(0.60)

(42.38)

See accompanying notes to the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

Three Months Ended March 31,

2021

2020

(C$000s) (unaudited)

($)

($)

Net loss

(22,418)

(122,857)

Other comprehensive income (loss)



Items that may be subsequently reclassified to profit or loss:



Change in foreign currency translation adjustment

(3,238)

(7,350)

Comprehensive loss

(25,656)

(130,207)

See accompanying notes to the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


Share
Capital

Conversion Rights
on Convertible
Notes

Contributed
Surplus

Warrants

Loan Receivable
for Purchase of
Common Shares

Accumulated
Other
Comprehensive
Income (Loss)

Accumulated
Deficit

Total Equity

(C$000s) (unaudited)

($)


($)

($)

($)

($)

($)

($)

Balance – January 1, 2021

800,184

4,873

65,986

40,797

(2,500)

10,303

(509,409)

410,234

Net loss


(22,418)

(22,418)

Other comprehensive income (loss):









Cumulative translation adjustment

(3,238)

(3,238)

Comprehensive loss

(3,238)

(22,418)

(25,656)

Rescission of equity portion of 1.5 Lien Notes

(85)

(85)

Warrants:









Proceeds from issuance of shares (note 4)

260

(192)

68

Balance – March 31, 2021

800,444

4,788

65,986

40,605

(2,500)

7,065

(531,827)

384,561

Balance – January 1, 2020

509,235

44,316

(2,500)

2,746

(185,174)

368,623

Net loss

(122,857)

(122,857)

Other comprehensive income (loss):









Cumulative translation adjustment

(7,350)

(7,350)

Comprehensive loss

(7,350)

(122,857)

(130,207)

Stock options:









Stock-based compensation recognized

499

499

Performance share units:









Stock-based compensation recognized

184

184

Shares issued (note 3)

1,275

(1,275)

Balance – March 31, 2020

510,510

43,724

(2,500)

(4,604)

(308,031)

239,099

See accompanying notes to the interim condensed consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,

2021

2020

(C$000s) (unaudited)

($)

($)

CASH FLOWS PROVIDED BY (USED IN)



OPERATING ACTIVITIES



Net loss

(22,418)

(122,857)

Adjusted for the following:



Depreciation

31,624

63,263

Stock-based compensation

683

Unrealized foreign exchange losses (gains)

2,086

(2,280)

(Gain) loss on disposal of property, plant and equipment

(387)

1,669

Impairment of property, plant and equipment

53,524

Impairment of other assets

507

Non-cash gain on exchange of debt (note 1)

(130,444)

Interest

9,101

26,043

Interest paid

(10,636)

(6,468)

Deferred income taxes

(8,410)

114,026

Changes in items of working capital

(20,822)

(44,005)

Cash flows used in operating activities

(19,862)

(46,339)

FINANCING ACTIVITIES



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

18,770

24,258

Long-term debt repayments

(1,050)

Lease obligation principal repayments

(1,807)

(4,926)

Proceeds on issuance of common shares from the exercising of warrants

68

Cash flows provided by financing activities

15,981

19,332

INVESTING ACTIVITIES



Purchase of property, plant and equipment

(10,874)

(26,813)

Proceeds on disposal of property, plant and equipment

187

649

Proceeds on disposal of right-of-use assets

181

308

Cash flows used in investing activities

(10,506)

(25,856)

Effect of exchange rate changes on cash and cash equivalents

(1,478)

7,304

Decrease in cash and cash equivalents

(15,865)

(45,559)

Cash and cash equivalents, beginning of period

29,830

42,562

Cash and cash equivalents (bank overdraft), end of period

13,965

(2,997)

See accompanying notes to the interim condensed consolidated financial statements.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As at and for the three months ended March 31, 2021 and 2020

(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated)

1.  LONG-TERM DEBT


March 31,

December 31,


2021

2020

(C$000s)

($)

($)

$290,000 extendible revolving term loan facility, secured by the Canadian and U.S. assets of the Company on a first priority basis

150,000


130,000


$58,950 1.5 Lien Notes due December 18, 2023, bearing interest at 10.00% payable semi-annually, secured by the Canadian and U.S. assets of the Company on a second priority basis ahead of the Second Lien Notes

54,553


55,171


US$120,000 Second Lien Notes due March 15, 2026, bearing interest at 10.875% payable semi-annually, secured by the Canadian and U.S. assets of the Company on a second priority basis

150,900


152,784


Less: unamortized debt issuance costs

(12,141)


(13,322)



343,312


324,633


The fair value of the Second Lien Notes (as defined below), as measured based on the closing market price at March 31, 2021 was $111,287 (December 31, 2020 – $106,706). The carrying values of the revolving term loan facility and 1.5 Lien Notes approximate their fair value as the interest rate is not significantly different from current interest rates for similar loans.

a) 1.5 Lien Notes

On December 18, 2020, the Company issued $60,000 of 1.5 Lien Notes due December 18, 2023 on a private placement basis. The terms of the 1.5 Lien Notes enable the holders to convert each $1,000 principal amount into approximately 750 common shares at their discretion. Interest is payable in cash semi-annually on March 15 and September 15 of each year. On each interest payment date, the Company may elect to defer and pay in-kind any interest accrued as of such interest payment date by increasing the unpaid principal amount of the 1.5 Lien Notes as at such date (each, a "PIK Interest Payment"). Following each such increase in the principal amount of the 1.5 Lien Notes as a result of any PIK Interest Payment, the 1.5 Lien Notes will bear interest on such increased principal amount from and after the date of each such PIK Interest Payment. Upon repayment of the 1.5 Lien Notes, any interest which has accrued thereon but has not been capitalized as set forth above shall be paid in cash.

The liability portion of the 1.5 Lien Notes was recorded at an initial fair value of $55,127 using a discount rate of 13.4 percent, representing the discount rate of a comparable debt instrument without a conversion feature. The remaining $4,873 is the difference between the initial principal amount and the fair value of the liability component and was recorded as the equity portion of the conversion feature in shareholders' equity. The Company incurred transaction costs of $7,596 associated with the issuance of the 1.5 Lien Notes which was allocated to debt issuance costs and share issuance costs on a proportional basis to the initial fair value of the liability and equity components.

During the first quarter of 2021, the Company recorded the rescission of $1,050 of its 1.5 Lien Notes. For accounting purposes, the $1,050 principal amount was recorded on a proportional basis as a reduction of the liability and equity portion of the 1.5 Lien Notes for $965 and $85, respectively.

The Company also opted to pay its first interest payment on the 1.5 Lien Notes in cash during the first quarter of 2021 rather than utilizing the payment-in-kind option.

b) Second Lien Notes

On February 24, 2020, the Company completed an exchange offer of US$120,000 of new 10.875% second lien secured notes ("Second Lien Notes") due March 15, 2026 to holders of its existing Unsecured Notes. The exchange was completed at an average exchange price of US$550 per each US$1,000 of Unsecured Notes resulting in US$218,182 being exchanged for US$120,000 of Second Lien Notes, resulting in a non-cash gain on exchange of debt of $130,444. The early settlement of the Unsecured Notes resulted in the write-off of $4,449 of unamortized deferred finance costs.

c) Revolving Credit Facility

On December 18, 2020, the Company amended its credit facilities to reduce its total facility capacity from $375,000 to $290,000. The facilities consist of an operating facility of $30,933 and a syndicated facility of $259,067. As part of the amended agreement, the Company's Funded Debt to Adjusted EBITDA covenant is waived for the quarters ended December 31, 2020 through June 30, 2021 and is 4.50x for the quarter ended September 30, 2021, 3.50x for the quarter ended December 31, 2021 ("Covenant Relief Period") and 3.00x for each quarter end thereafter. The Covenant Relief Period terminates on the earlier of December 31, 2021 and any prior quarter end for which Calfrac has requested early termination and has provided a compliance certificate to its lenders certifying compliance with all financial covenants and where the Funded Debt to Adjusted EBITDA ratio is less than 3.00x at such quarter end.

The Company's credit facilities mature on June 1, 2022, and can be extended by one or more years at the Company's request and lenders' acceptance. The Company may also 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 1.00 percent to prime plus 3.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 2.00 percent to 4.50 percent above the respective base rates. The Company incurs interest at the high end of the ranges outlined above during the Covenant Relief Period or if its net Total Debt to Adjusted EBITDA ratio is above 4.00:1.00. Additionally, in the event that the Company's net Total Debt to Adjusted EBITDA ratio is above 5.00:1.00, certain restrictions apply including the following: (a) acquisitions are subject to majority lender consent; (b) distributions are restricted other than those relating to the Company's equity compensation plans; and (c) no increase in the rate of dividends are permitted. As at March 31, 2021, the Company's net Total Debt to Adjusted EBITDA ratio exceeded the 5.00:1.00 threshold.

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

Interest on long-term debt (including the amortization of debt issuance costs and debt discount) for the three months ended March 31, 2021 was $9,212 (three months ended March 31, 2020$25,448).

The following table sets out an analysis of long-term debt and the movements in long-term debt:


2021

(C$000s)

($)

Balance, January 1

324,633


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

18,770


Long-term debt repayments

(965)


Amortization of compound financial instrument discount

347


Amortization of debt issuance costs and debt discount

2,363


Foreign exchange adjustments

(1,836)


Balance, March 31

343,312


At March 31, 2021, the Company had utilized $817 of its loan facility for letters of credit, had $150,000 outstanding under its revolving term loan facility, leaving $139,183 in available credit, subject to a monthly borrowing base, as determined using the previous month's results, which at March 31, 2021, resulted in liquidity of $64,221. Under the terms of the amended credit facility agreement, the Company must maintain a minimum liquidity amount of $15,000 during the Covenant Relief Period.

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

2.  RECAPITALIZATION TRANSACTION

On December 18, 2020, the Company completed its Recapitalization Transaction, which was implemented pursuant to a Plan of Arrangement under the Canada Business Corporations Act. The Recapitalization Transaction involved the surrender and cancellation of the Company's US$431,818 Unsecured Notes, including all accrued and unpaid interest, in exchange for common shares of the Company. In addition, the Company issued new $60,000 1.5 lien senior secured 10% payment-in-kind convertible notes ("1.5 Lien Notes") due December 18, 2023 on a private placement basis. The proceeds from the issuance of the 1.5 Lien Notes were used to reduce the amounts owing under its revolving credit facility. All common share figures and share prices below are disclosed on a post-share consolidation basis of 50:1.

The composition of the gain on settlement of debt as reported in the statement of operations during the fourth quarter of 2020 was as follows:


Unsecured
Notes

Warrants

1.5 Lien Notes

Total

(C$000s)




($)

Settlement of Unsecured Notes against shares issued to noteholders (note 2a)

(250,867)




(250,867)


Forgiveness of accrued interest on Unsecured Notes (note 2a)

(47,272)




(47,272)


Issuance of warrants (note 2b)


40,797



40,797


Transaction and associated costs(1) (notes 2h and 4)

20,815




20,815


Issuance of shares in respect of the commitment fee related to the 1.5 Lien Notes (note 2g)



10,131


10,131


Withholding taxes on shares issued in respect of commitment fee on 1.5 Lien Notes (note 2g)



77


77


Total (gain) loss on settlement of debt(2)

(277,324)


40,797


10,208


(226,319)


(1) 

Includes $1,266 of other associated costs related to the Plan of Arrangement, of which $1,092 were non-cash expenses.

(2) 

$198,847 of the total gain on settlement of debt was non-cash in nature.

(a)     Unsecured Notes Settlement

The Company's US$431,818 8.50% unsecured notes due June 15, 2026 ("Unsecured Notes"), plus all accrued and unpaid interest, were surrendered and cancelled in exchange for 33,491,870 common shares. The common shares were valued for accounting purposes at a price of $9.00 per share, which represents the share price on December 21, 2020, the first trading day immediately following the announcement of the closing of this transaction, and resulted in an accounting gain on the settlement of debt of $277,324. The settlement of the Unsecured Notes also resulted in the write-off of the remaining unamortized deferred finance costs that pertained to these notes which totaled $7,387.

(b)     Warrants

Under the Recapitalization Transaction, shareholders were entitled to receive two warrants for each common share held. Pursuant to the Plan of Arrangement, the Company issued 5,824,433 warrants to shareholders of record (i.e. registered shareholders) as of market close on December 17, 2020. Each warrant is exercisable for a period of three years into one common share at a price of $2.50 per common shares subject to customary adjustments and restrictions. The fair value of the warrants of $40,797 was estimated using a Black-Scholes pricing model, and was accounted for as a reduction of the gain on settlement of debt. See note 4 for further information on the warrants.

(c)      Shareholder Cash Election

Under the Recapitalization Transaction, shareholders were provided the opportunity to elect for the Company to purchase all or any portion of their common shares for $7.50 per share up to an aggregate maximum of $10,000 in consideration available for shareholder cash elections. On December 18, 2020, 121,231 common shares were purchased for an aggregate cash election amount of $926 including transaction costs. See note 3 for further information on the shareholder cash election.

(d)     Common Share Consolidation

Immediately prior to the Unsecured Notes settlement, and after the issuance of warrants and settlement of shareholder cash elections noted above, the Company initiated a 50:1 share consolidation. See note 3 for further information on the share consolidation.

(e)     Share-Based Compensation

Pursuant to the Plan of Arrangement, all of the Company's outstanding stock options and cash-based performance share units were terminated and cancelled for no consideration. All of the Company's outstanding equity-based performance shares units vested immediately prior to the effective time of the Plan of Arrangement and aggregate consideration of $174 was paid to the holders thereof on a pro rata basis.

The cancellation of the stock options was accounted for as an acceleration of vesting and the remaining fair value of the options of $780 was recorded as a reduction of the gain on settlement of debt during the fourth quarter of 2020.

The immediate vesting of the equity-based performance share units was accounted for as an acceleration of vesting and the remaining fair value of the share units of $312 along with the cash consideration of $174 was recognized during the fourth quarter of 2020 as a reduction of the gain on settlement of debt.

In connection with the approval of the Recapitalization Transaction, shareholders approved an omnibus incentive plan which permits the granting of various types of equity awards, including stock options, share appreciation rights, restricted shares, restricted share units, deferred share units and other share-based awards as determined by the Board of Directors. The number of shares reserved under the omnibus incentive plan is equal to 10 percent of the Company's issued and outstanding common shares.

(f)      1.5 Lien Notes

In conjunction with the Recapitalization Transaction, the Company issued $60,000 of 1.5 lien senior convertible notes due December 18, 2023 ("1.5 Lien Notes") on a private placement basis. The gross proceeds of the 1.5 Lien Notes were used to reduce the Company's revolving credit facility, providing additional liquidity. During the first quarter of 2021, the Company recorded the rescission of $1,050 of its 1.5 Lien Notes. See note 1 for further information.

(g)     Commitment Fee on the 1.5 Lien Notes

In connection with the 1.5 Lien Notes offering, the Company issued 1,125,703 common shares to certain investors that backstopped the issuance of the 1.5 Lien Notes. These common shares were valued for accounting purposes at a price of $9.00 per share which represents the share price on December 21, 2020, the first trading day immediately following the announcement of the closing of this transaction, and were accounted for as an increase to share capital of $10,131 with a corresponding reduction of the gain on the settlement of debt.

(h)     Transaction Costs

The Company incurred transaction costs totaling $27,145 in connection with the Recapitalization Transaction. Of that amount, $19,549 was related to the settlement of the Unsecured Notes and was recorded as a reduction of the gain of settlement of debt. The remaining $7,596 was allocated to the issuance of the 1.5 Lien Notes as debt issuance costs or share issue costs, see note 1 for further information.

(i)      Court Appeals and Regulatory Application

Appeal of Chapter 15 Enforcement Order

On December 11, 2020, Wilks Brothers, LLC and its affiliated funds (collectively "Wilks Brothers") filed a notice of appeal (the "Chapter 15 Appeal") to the United States District Court for the Southern District of Texas ("U.S. District Court") appealing an order by the United States Bankruptcy Court for the Southern District of Texas under Chapter 15 of the United States Bankruptcy Code entered effective December 1, 2020 ("Chapter 15 Enforcement Order"), recognizing and granting enforcement of the October 30, 2020 order of the Court of Queen's Bench of Alberta approving the Plan of Arrangement pursuant to the Canada Business Corporations Act (the "CBCA Final Order"). At a hearing held on April 23, 2021, the U.S. District Court affirmed the Chapter 15 Enforcement Order and effectively denied the Chapter 15 Appeal (the "District Court Decision"). Wilks Brothers may appeal the District Court Decision as a matter of right to the United States Court of Appeals for the Fifth Circuit by filing a notice of appeal within thirty days of the entry of an order or judgment by the U.S. District Court. In such event, the Company believes it is well-positioned to prevail on the merits of the appeal.

Appeal of CBCA Final Order

On January 29, 2021, Wilks Brothers filed an application to the Supreme Court of Canada seeking leave to appeal the December 1, 2020 decision of the Court of Appeal of Alberta upholding the CBCA Final Order. Calfrac filed its response on April 9, 2021, and Wilks Brothers filed its reply to Calfrac's response on April 19, 2021. The materials will be considered by the Supreme Court and it will issue a written decision as to whether or not it is granting leave upon the completion of its review. The Company believes it is well-positioned to succeed in having the leave to appeal application dismissed.

Ontario Securities Commission Application

On April 22, 2021, the Company received notice that Wilks Brothers has filed an application to the Ontario Securities Commission (the "OSC"), requesting a hearing and review by the OSC of the decision of the Toronto Stock Exchange (the "TSX") granting exemptive relief in respect of the rescission of the purchase of 1.5 Lien Notes acquired by an institutional shareholder, as is further discussed under note 1. The Company believes that the TSX acted appropriately within its jurisdiction in granting exemptive relief, and that it is well-positioned to succeed in opposing the application.

3.  CAPITAL STOCK

Authorized capital stock consists of an unlimited number of common shares.


Three Months Ended

Year Ended


March 31, 2021

December 31, 2020

Continuity of Common Shares

Shares

Amount

Shares

Amount


(#)

($000s)

(#)

($000s)

Balance, beginning of period

37,408,490


800,184


2,897,778


506,735


Issued upon exercise of warrants

27,372


260




Issued upon vesting of performance share units



5,646


1,275


Issued on acquisition



8,913


2,500


Issued upon settlement of Unsecured Notes (note 2)



33,491,870


301,427


Issued for commitment fee on 1.5 Lien Notes (note 2)



1,125,703


10,131


Shares repurchased by shareholder cash election (note 2)



(121,231)


(21,268)


Cancellation of fractional shares upon 50:1 share consolidation

(114)



(189)



Share issue costs on 1.5 Lien Notes




(616)


Balance, end of period

37,435,748


800,444


37,408,490


800,184


On December 18, 2020, the Company consolidated its common shares on a basis of 50:1. All common share figures in the financial statements and comparatives have been adjusted to reflect the 50:1 effect, without a corresponding change in dollar amounts. Earnings per share have been adjusted to reflect the impact of the share consolidation.

Three Months Ended March 31,

2021

2020


(#)

(#)

Weighted average number of common shares outstanding



Basic

37,421,792


2,898,824


Diluted

83,813,876


2,911,125


The difference between basic and diluted shares is attributable to: warrants issued as part of the Recapitalization Transaction as disclosed in note 2, the dilutive effect of the conversion of the 1.5 Lien Notes as disclosed in note 1, and the dilutive effect of stock options issued by the Company as disclosed in note 4.

As disclosed in note 2, in conjunction with the Recapitalization Transaction, the Company purchased 121,231 common shares at a cost of $926 and, of the amount paid, $21,268 was charged to capital stock and $20,342 to contributed surplus. These common shares were cancelled prior to December 31, 2020.

4.  SHARE-BASED PAYMENTS

(a)     Stock Options

Three Months Ended March 31,

2021

2020

Continuity of Stock Options

Options

Average
Exercise Price

Options

Average Exercise
Price


(#)

($)

(#)

($)

Balance, January 1



244,060


158.00


Granted



498


52.50


Forfeited



(3,962)


145.50


Expired



(1,142)


418.50


Balance, March 31



239,454


157.00


As disclosed in note 2, the Company cancelled all outstanding stock options and performance share units in conjunction with the Recapitalization Transaction and has not yet issued any equity-based awards under its omnibus incentive plan.

(b)     Share Units

Three Months Ended March 31,

2021

2020

Continuity of Stock Units

Deferred
Share Units

Performance
Share Units

Deferred Share
Units

Performance
Share Units


(#)

(#)

(#)

(#)

Balance, January 1

2,400



2,900


25,891


Granted



2,100


19,723


Exercised




(5,646)


Forfeited




(3,170)


Balance, March 31

2,400



5,000


36,798


 

Three Months Ended March 31,

2021

2020


($)

($)

Expense (recovery) from:



Stock options


499


Deferred share units

19


(127)


Performance share units


184


Total stock-based compensation expense

19


556


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

The Company grants deferred share units to its outside directors. These units vest on the first anniversary of the date 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 March 31, 2021, the liability pertaining to deferred share units was $9 (December 31, 2020 – $9).

Changes in the Company's obligations under the deferred 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 Recapitalization Transaction, the Company issued 5,824,433 warrants to shareholders of record (i.e. registered shareholders) as of market close on December 17, 2020. Each warrant is exercisable for a period of three years into one common share at a price of $2.50 per common shares, subject to customary adjustments and restrictions. The fair value of the warrants at issuance was estimated using a Black-Scholes pricing model, in the amount of $40,797, and accounted for as a reduction of the gain on settlement of debt during the fourth quarter of 2020. The Company applied the following Black-Scholes model inputs:

Expected life (years)

3.00

Share price at grant date

$9.00

Exercise price

$2.50

Expected volatility

73.90%

Risk-free interest rate

1.27%

Expected dividends

$0.00

At March 31, 2021, 27,372 warrants were exercised for total proceeds of $68.

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, issue new shares or new debt or repay existing debt. The Company recently completed its Recapitalization Transaction aimed at addressing its capital structure, see note 2 for further information.

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:


March 31,

December 31,

For the Twelve Months Ended

2021

2020

(C$000s)

($)

($)

Net loss

(223,796)


(324,235)


Adjusted for the following:



Depreciation

140,382


172,021


Foreign exchange losses

18,912


15,477


(Gain) loss on disposal of property, plant and equipment

(2,032)


24


Impairment of property, plant and equipment

173,684


227,208


Impairment of inventory

27,868


27,868


Impairment of other assets


507


Gain on settlement of debt

(226,319)


(226,319)


Gain on exchange of debt


(130,444)


Interest

74,325


91,267


Income taxes

46,215


168,623


Operating income

29,239


21,997


Net debt for this purpose is calculated as follows:


March 31,

December 31,


2021

2020

(C$000s)

($)

($)

Long-term debt, net of debt issuance costs and debt discount

343,312


324,633


Lease obligations

20,417


21,971


Less: cash and cash equivalents

(13,965)


(29,830)


Net debt

349,764


316,774


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 March 31, 2021, the net debt to operating income ratio was 11.96:1 (December 31, 2020 – 14.40:1) calculated on a 12-month trailing basis as follows:


March 31,

December 31,

For the Twelve Months Ended

2021

2020

(C$000s, except ratio)

($)

($)

Net debt

349,764


316,774


Operating income

29,239


21,997


Net debt to operating income ratio

11.96:1

14.40:1

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. As per the amended credit facility agreement as disclosed in note 1, the Company's Funded Debt to Adjusted EBITDA covenant is waived for the quarters ended March 31, 2021 to June 30, 2021, and is 4.50x for the quarter ended September 30, 2021, 3.50x for the quarter ended December 31, 2021, and 3.00x for each quarter end thereafter. As shown in the table below, the Company was in full compliance with its financial covenants associated with its credit facilities as at December 31, 2020.


Covenant

Actual

As at March 31,

2021

2021

Working capital ratio not to fall below

1.15x

2.44x

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

N/A

8.61x

Funded Debt to Capitalization not to exceed(1)(3)

0.30x

0.20x

(1) Funded Debt is defined as Total Debt excluding all outstanding Second Lien Notes, 1.5 Lien Notes, and lease obligations. 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).

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

(3) Capitalization is Total Debt plus equity.

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, unrealized foreign exchange losses (gains), non-cash stock-based compensation, 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 March 31,

2021

2020

(C$000s)

($)

($)

Net loss

(22,418)


(122,857)


Add back (deduct):



Depreciation

31,624


63,263


Unrealized foreign exchange losses (gains)

2,086


(2,280)


(Gain) loss on disposal of property, plant and equipment

(387)


1,669


Impairment of property, plant and equipment


53,524


Impairment of other assets


507


Gain on exchange of debt


(130,444)


Restructuring charges

255


2,621


Stock-based compensation


683


Interest

9,101


26,043


Income taxes

(8,325)


114,083


Adjusted EBITDA(1)

11,936


6,812


(1) For bank covenant purposes, EBITDA includes the deduction of an additional $2,095 of lease payments for the three months ended March 31, 2021 (three months ended March 31, 2020 – $5,466) that would have been recorded as operating expenses prior to the adoption of IFRS 16.

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

      1. 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;
      2. 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
      3. 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 $150,000.

The indentures governing the Second Lien Notes and 1.5 Lien Notes contain 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 indentures, in circumstances where:

      1. the Company is in default under either of the indentures or the making of such payment would result in a default;
      2. the Company is not meeting the Fixed Charge Coverage Ratio(1) under either of the indentures of at least 2:1 for the most recent four fiscal quarters, after giving pro forma effect to such restricted payment as if it had been made at the beginning of the applicable four fiscal quarter period; or
      3. there is insufficient room for such payment within a builder basket included in the indentures; and in the case of the 1.5 Lien Note indenture, at least one year has passed since their issue date.

(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 indentures as net income (loss) before depreciation, extraordinary gains or losses, unrealized foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, impairment or reversal of impairment of assets, restructuring charges, stock-based compensation, interest, and income taxes. Interest expense is adjusted to exclude any non-recurring charges associated with redeeming or retiring any indebtedness prior to its maturity.  

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 in each of the indentures. As at March 31, 2021, these baskets were not utilized.

The indentures also restrict 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. The indenture governing the 1.5 Lien Notes includes restrictions on certain investments including certain investments in subsidiary entities, however the indenture includes several exceptions to this prohibition, including a general basket of US$10,000 and baskets related to prepayment and build commitments which aggregate over US$12,000. This indenture also contains a restriction that any indebtedness incurred in excess of $290,000 under the credit facilities basket shall be junior in priority to the 1.5 Lien Notes.

As at March 31, 2021, the Company's Fixed Charge Coverage Ratio of 0.43:1 was below the required 2:1 ratio. Failing to meet the Fixed Charge Coverage Ratio is not an event of default under the indentures, and the baskets highlighted in the preceding paragraphs provide sufficient flexibility for the Company to incur additional indebtedness and make anticipated restricted payments which may be required to conduct its operations.

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, 2022, subject to certain conditions including:

      1. the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;
      2. the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;
      3. 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
      4. 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.

The Company can utilize two equity cures during the term of the credit facilities subject to the conditions described above. 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. Amounts used as an equity cure prior to June 30, 2022 will increase Adjusted EBITDA over the relevant twelve-month rolling period and will also serve to reduce Funded Debt.

The Company's credit facilities also require majority lender consent for dispositions of property or assets in Canada and the United States if the aggregate market value exceeds $20,000 ($10,000 during the Covenant Relief Period). 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 $50,000 at the time of any such dispositions, the Company must use the resulting proceeds to reduce the advances to less than $50,000 before using the balance for other purposes.

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 $10,104 (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 was 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. 

Provisional orders granting a temporary suspension of any enforcement proceedings have been granted in respect of all of these orders. Hearings in respect of each of the orders have been held, and in each case, decisions were rendered accepting the Company's position. All of these decisions were appealed, but the favorable judgments have all been confirmed in the Company's favor. The plaintiffs have filed petitions for cassation against three of the appeal judgments, and will have 30 days to file a petition for cassation following the service of the remaining judgment once it has been certified. No hearings have been scheduled for the three pending cassation petitions.

NAPC is also the subject of a claim for approximately $4,224 (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 $853 (578 euros), amounted to $28,598 (19,377 euros) as at March 31, 2021.

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 Argentina. 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

Argentina

Corporate

Consolidated

(C$000s)



($)

($)

($)

($)

($)

($)

Three Months Ended March 31, 2021








Revenue



85,583


92,913


27,621


35,458



241,575


Operating income (loss)(1)



15,179


(3,012)


1,476


3,914


(4,617)


12,940


Segmented assets



239,469


533,225


61,478


82,552



916,724


Capital expenditures



1,093


8,043


1,083


1,367



11,586










Three Months Ended March 31, 2020








Revenue



104,619


154,112


20,991


25,793



305,515


Operating income (loss)(1)



11,975


5,187


(2,298)


(1,632)


(7,534)


5,698


Segmented assets



389,654


741,929


65,163


158,178



1,354,924


Capital expenditures



4,234


24,031


587


431



29,283


(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, gains or losses on exchange or settlement of debt, impairment of property, plant and equipment, impairment of other assets, interest, and income taxes.

Three Months Ended March 31,

2021

2020

(C$000s)

($)

($)

Net loss

(22,418)


(122,857)


Add back (deduct):



Depreciation

31,624


63,263


Foreign exchange losses (gains)

3,345


(90)


(Gain) loss on disposal of property, plant and equipment

(387)


1,669


Impairment of property, plant and equipment


53,524


Impairment of other assets


507


Gain on exchange of debt


(130,444)


Interest

9,101


26,043


Income taxes

(8,325)


114,083


Operating income

12,940


5,698


Operating income does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

SOURCE Calfrac Well Services Ltd.

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