Calfrac Announces Fourth Quarter Results

CALGARY, Feb. 26, 2014 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three months and year ended December 31, 2013.

HIGHLIGHTS              
  Three Months Ended December 31,       Years Ended December 31,
  2013 2012 Change 2013 2012 Change
(C$000s, except per share and unit data) ($) ($) (%) ($) ($) (%)
(unaudited)            
Financial            
Revenue 463,054 367,487 26 1,563,814 1,595,216 (2)
Operating income(1) 57,416 43,218 33 188,076 257,013 (27)
EBITDA(2) 57,667 46,866 23 185,933 264,471 (30)
       Per share - basic 1.25 1.05 19 4.07 5.97 (32)
       Per share - diluted 1.24 1.04 19 4.04 5.90 (32)
Net income attributable to            
       the shareholders of Calfrac            
       before foreign exchange            
       losses (gains)(3) 10,194 8,073 26 27,578 89,931 (69)
       Per share - basic 0.22 0.18 22 0.60 2.03 (70)
       Per share - diluted 0.22 0.18 22 0.60 2.01 (70)
Net income attributable to            
       the shareholders of Calfrac 11,764 11,243 5 27,914 97,146 (71)
       Per share - basic 0.25 0.25 - 0.61 2.19 (72)
       Per share - diluted 0.25 0.25 - 0.61 2.17 (72)
Working capital (end of period)       319,934 322,857 (1)
Total equity (end of period)       795,207 780,759 2
Weighted average common            
       shares outstanding (000s)            
      Basic 46,174 44,694 3 45,728 44,335 3
       Diluted 46,497 45,073 3 46,045 44,808 3
             
Operating (end of period)            
Pumping horsepower (000s)       1,194 977 22
Coiled tubing units (#)       38 29 31
Cementing units (#)       31 26 19

(1) Operating income is defined as net income (loss) before depreciation, interest, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, expenses and gain related to business combinations and income taxes. Management believes that operating income is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac's business segments prior to consideration of how these segments are financed or how they are taxed. Operating income is a measure that does not have any standardized meaning under International Financial Reporting Standards (IFRS) and, accordingly, may not be comparable to similar measures used by other companies.
(2)  EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. EBITDA is presented because it is frequently used by securities analysts and others for evaluating companies and their ability to service debt. EBITDA is a measure that does not have any standardized meaning prescribed under IFRS and, accordingly, may not be comparable to similar measures used by other companies.
(3)  Net income attributable to the shareholders of Calfrac before foreign exchange gains or losses is defined as net income (loss) attributable to the shareholders of Calfrac before foreign exchange gains or losses on an after-tax basis. Management believes that net income attributable to the shareholders of Calfrac before foreign exchange gains or losses is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac without the impact of foreign exchange fluctuations, which are not fully controllable by the Company. Net income attributable to the shareholders of Calfrac before foreign exchange gains or losses is a measure that does not have any standardized meaning prescribed under IFRS and, accordingly, may not be comparable to similar measures used by other companies.

CEO's MESSAGE

I am pleased to present Calfrac's operating and financial highlights for 2013 and to discuss our prospects for 2014. During the fourth quarter, our Company:

  • completed the acquisition of the operating assets of Mission Well Services, LLC ("Mission"), a privately-held hydraulic fracturing and coiled tubing services provider focused in the Eagle Ford shale play of Texas;
  • experienced strong equipment utilization in the unconventional natural gas resource plays of the United States;
  • began executing on its pressure pumping services contract with YPF S.A., the largest operator in Argentina; and
  • announced a 2014 capital program of $120.0 million, which focuses on maintenance and support capital, further investment in logistics equipment and international growth.

Financial Highlights


For the three months ended December 31, 2013, the Company recorded:

  • revenue of $463.0 million, an increase of 26 percent from the fourth quarter of 2012 driven primarily by the commencement of fracturing operations in the Eagle Ford shale play combined with increased activity in the Niobrara and Marcellus shale plays in the United States, higher fracturing activity in Russia due to an expanded customer base and increased demand for horizontal multi-stage fracturing operations, and the significant increase in fracturing activity in Argentina;
  • operating income of $57.4 million versus $43.2 million in the same quarter of 2012, mainly due to higher equipment utilization in the United States offset partially by the effects of the competitive pricing environment in Canada; and
  • net income attributable to shareholders of Calfrac of $11.8 million or $0.25 per share diluted, including a $1.5 million foreign exchange gain, compared to net income of $11.2 million or $0.25 per share diluted in the fourth quarter of 2012, which included a foreign exchange gain of $3.8 million.

For the year ended December 31, 2013, the Company:

  • generated revenue of $1.6 billion, a 2 percent decrease from 2012 driven primarily by competitive pricing pressure in western Canada and the United States and lower fracturing activity in Mexico, offset partially by higher multi-stage fracturing activity in Western Siberia, and the commencement of fracturing operations in Argentina and the Eagle Ford shale play in Texas during the second and fourth quarters of 2013, respectively;
  • reported operating income of $188.1 million versus $257.0 million in 2012, a decrease of 27 percent, mainly as a result of competitive pricing and a decline in activity in Canada and lower equipment utilization in Mexico; and
  • reported net income attributable to shareholders of Calfrac of $27.9 million or $0.61 per share diluted, including a foreign exchange loss of $1.2 million, compared to net income of $97.1 million or $2.17 per share diluted, which included a $8.3 million foreign exchange gain, in 2012.

Operational Highlights


Canada

Calfrac's financial and operating results in Canada for the fourth quarter met expectations as activity significantly increased as the quarter progressed with the onset of winter. Activity was particularly strong in the Montney play as several customers were focused on completing their 2013 programs during the quarter. However, bitterly cold temperatures throughout much of December did result in higher than expected fuel and subcontractor costs and impacted the Company's ability to cost effectively complete its scheduled programs. Financial performance in the fourth quarter was also weakened by further pricing competition on callout work during the early part of the quarter. Pricing stabilized as the quarter progressed and Calfrac expects this stable pricing environment to continue throughout the first quarter of 2014, as demand for its services remains at very high levels.

United States

In the United States, Calfrac's financial performance in the fourth quarter was consistent with expectations as equipment utilization remained high in the Marcellus and Fayetteville natural gas plays combined with improved utilization in the Bakken and Niobrara oil plays. The revenue base was further bolstered by the acquisition of the assets and business of Mission at the beginning of the fourth quarter as Calfrac made its entry into the Eagle Ford shale play in Texas. While utilization remained high, pricing continued to be a challenge in the fourth quarter as the oversupply of fracturing capacity remained prevalent in the latter part of the year. Financial results for the fourth quarter were also affected by holiday disruptions and inclement weather prevalent in several regions during the latter part of the quarter. The integration of Mission proceeded as planned although operating margins were impacted by the exposure to the weak callout market and the incurrence of certain costs related to integrating Mission into the Calfrac platform. Calfrac's United States operations remained focused on proactively managing the Company's cost structure. The Company's supply chain and logistic capabilities made further progress during the quarter to enhance operating efficiencies in the midst of challenging market conditions.

Russia

Equipment utilization for Calfrac's Russian operations continued to be positively impacted by the increase in horizontal multi-stage fracturing activity in Western Siberia. While this technology is still in the early stages of development, the Company remains optimistic that it will gain further acceptance and be a driver of future growth in operating and financial performance in Russia. While equipment utilization remained high in the fourth quarter, Calfrac's financial results were lower on a quarter-over-quarter basis due to the higher cost structure resulting from the onset of winter operating conditions. Late in the third quarter, a new district was opened in the Usinsk region and the Russian fleet was increased to six fracturing spreads. The Company successfully completed its first stimulation treatment in this region during the fourth quarter.

Latin America

Calfrac's Latin American operating results during the quarter improved substantially from the third quarter mainly due to an increase in fracturing activity in Argentina offset partially by a significant reduction in drilling and completion activity in the northern region of Mexico due to budget reductions implemented by the Company's main customer. The reduction in Mexican activity is not expected to change significantly in 2014, but Calfrac is optimistic that activity will improve in the future when the use of horizontal drilling with multi-stage completions becomes more prominent. In the meantime, the Company continues to rationalize its cost structure to be more closely aligned with its short term revenue outlook. Additional measures will be undertaken if the outlook does not improve as the year progresses.

In Argentina, the aforementioned increase in fracturing activity was related to the YPF S.A. tight gas contract that was announced in October 2013. This significant increase in activity was effectively managed by Calfrac's local team and has laid the groundwork for future growth opportunities. Based on the Company's assessment of the quality of the resource base in Argentina, it is expected that the greater adoption of horizontal well technology will provide further opportunities in this country.

Challenging market conditions in Colombia persisted in the fourth quarter of 2013, resulting in lower than expected equipment utilization and financial performance. Permitting and infrastructure issues remain barriers to greater oilfield activity. The Company expects these issues to be resolved, but continues to closely manage its operating costs while focusing on expanding its customer base. Calfrac currently operates four cementing units in Colombia and does not intend to deploy additional equipment until market conditions improve.

Outlook and Business Prospects


Natural gas prices in North America have improved during the first two months of 2014, with colder-than-normal weather providing improved fundamentals for a recovery in natural gas prices. Crude oil prices also remain at levels that provide solid economics to oil producers. Calfrac expects that this will encourage higher oilfield activity in 2014 in the unconventional resource plays of Canada and the United States. In addition, current trends in service intensity in the form of larger pad designs, longer horizontal legs and greater stimulation intensity should provide the basis for higher completions activity. The benefits of higher activity will however continue to be tempered by the competitive pricing environment in North America. Internationally, Calfrac's operations are experiencing continuing momentum in the application of multi-stage completion technology within horizontal wellbores, and the Company expects this increase to drive higher equipment utilization in those markets over the near and long term.

Fracturing and coiled tubing activity in western Canada is anticipated to remain strong in the Montney, Deep Basin, Cardium and Duvernay plays for the foreseeable future. Pricing recently stabilized and Calfrac expects it to remain firm throughout the first quarter. From a cost standpoint, the weakening of the Canadian dollar is negatively impacting certain input costs which are denominated in U.S. dollars and may continue into the first quarter. The development of liquids-rich gas plays, such as the Duvernay and various plays in the Deep Basin, likely represents the most meaningful short-term driver for increased activity, with the movement towards liquefied natural gas (LNG) export capability being the primary driver of higher demand for the Company's services over the longer-term.

Calfrac expects LNG export-related activity to increase with the influx of capital from foreign entities and large multi-national companies. The Company's leadership position in the development of the Montney, Duvernay and Horn River resource plays is expected to position it to participate significantly in the development of the natural gas reserves required to support these LNG initiatives. Calfrac believes that two or three LNG projects will move forward, but the timing for these projects remains unclear. Several of the Company's long-standing customers are at the forefront of this development, which is expected to be a catalyst for a significant increase in the demand for the Company's services over the longer term. Calfrac has seen the benefit of initial LNG activity in 2013, particularly in the Montney, and expects that this source of activity will grow materially in 2014. This should gain greater momentum in 2015 and beyond as further visibility unfolds regarding the scope and timing of the LNG projects.

Calfrac expects that oil-focused activity will remain stable for the rest of the year, with the introduction of higher-rate treatments in certain plays, such as the Cardium, driving higher equipment utilization. Viking activity is expected to increase in 2014 over 2013. Calfrac also expects to achieve further operational efficiencies in the Canadian market through the expanded use of 24-hour operations and multi-well pad development.

The organizational improvements initiated in the United States in late 2012 and 2013 resulted in improved financial performance during 2013 and provide the basis for achieving reasonable financial returns amidst challenging market conditions. Calfrac remains focused on prudently managing the Company's cost structure in the United States, creating further efficiencies through supply chain and logistical initiatives and expanding customer relationships in order to maximize profitability. In the short term, uncertainty remains due to the United States' over-supplied pressure pumping market. Calfrac's equipment utilization is expected to be quite strong given the Company's active customer base, contract coverage and positioning in some of the most economic plays such as the Marcellus, Niobrara and Eagle Ford. While the Company does not expect market conditions to change significantly in the first half of 2014, it remains cautiously optimistic that activity will increase in the last six months of 2014. This may lead to improved pricing dynamics, as further unconventional development occurs in oil-producing basins and completion activity in unconventional natural gas plays increases due to higher natural gas prices resulting from colder winter weather.

Calfrac's view is supported by its strong positioning in the U.S. market. The Company services three of the most active unconventional resource plays in the United States: the Bakken oil shale play in North Dakota, the Marcellus shale natural gas play in Pennsylvania and West Virginia and most recently, the Company's entry into the Eagle Ford shale play in Texas. Calfrac believes that the Marcellus will remain very active due to its low cost structure and proximity to consuming markets. In addition, Calfrac believes that activity in the Utica shale will see meaningful growth in 2014 as well results continue to improve. Calfrac's customer base, market presence and infrastructure have provided the opportunity to participate in this development. Activity in the Fayetteville shale play is anticipated to remain stable in 2014 due to the Company's strong customer relationships and operational performance in this region. Calfrac's long-standing presence in the Rocky Mountain region provides additional growth prospects in the Niobrara shale oil play, as many producers have begun using longer-reach horizontal wells and greater stimulation intensity with encouraging results. The Company has experienced a significant increase in activity in the Niobrara play and expects further growth in 2014.

Calfrac's Russian results in 2013 met its expectations and based on the results of the 2014 contract tender process, it expects improvement in both utilization and pricing in 2014. However, activity in the early portion of 2014 has been negatively impacted by harsh weather conditions. This outlook is primarily based on the expanded use of new technologies in Western Siberia, such as horizontal drilling and multi-stage completions. The pace of adoption of this new methodology has exceeded the Company's expectations. Approximately 35 percent of Calfrac's fracturing work was focused on horizontal wells in 2013. Consequently, Calfrac expects that this trend will continue to drive demand for its services over the short and long term as Russia's producing sector gains confidence in this approach.

In Mexico, the Company expects the use of multi-stage fracturing of horizontal wellbores to become more prominent over the longer term as capital budgets recover. Based on customer feedback, the majority of future onshore activity will be focused on horizontal wells, which should spur demand for Calfrac's services. However, as discussed above, short term visibility remains poor. Calfrac remains focused on prudently managing its Mexican cost structure to align with expected near-term activity. The Company continues to monitor this environment closely and will proactively manage this segment as more information becomes available. While the short-term outlook remains quite challenging, Calfrac is encouraged by the recent legislative and constitutional changes enacted in Mexico to open this market to foreign investment. The Company believes that implementation is likely to take some time as further clarity is required surrounding the rules governing foreign energy investment. This is likely to have a more material impact on oilfield service activity after 2014.

With Calfrac's successful entry into the Argentinean fracturing market in 2013, the Company believes that it is well-positioned to take advantage of additional opportunities related to the development of the country's unconventional resource plays. Calfrac expects that horizontal drilling combined with multi-stage fracturing will be key inputs to unlocking Argentina's tight sands and shale resources. With limited industry capacity in-country to service these emerging unconventional plays, the Company's strategy is to lever its long-standing reputation for service quality and technical expertise, which is expected to provide the foundation for long-term growth in Argentina. Calfrac's recently executed contract with YPF S.A. provides a strong foundation to grow its hydraulic fracturing, coiled tubing and cementing services in Argentina.

Overall, the Company believes that positive momentum in the pressure pumping business appears to be building in 2014. Calfrac remains focused on it core principles of service quality and technology and expects that further growth opportunities will develop as the year unfolds. The Company believes that it is well-positioned to take advantage of these opportunities.

On a personal note, Doug Ramsay recently retired from his role of Chief Executive Officer at Calfrac. As I assume the CEO role, I would like to acknowledge and thank Doug for the incredible leadership that he has provided to the Company over the last fifteen years since founding Calfrac and guiding it into one of the leading pressure pumping companies in the world. I look forward to continuing to work with Doug in his new role as Vice-Chairman.

Tim Swinton recently retired from his position as a director of Calfrac. Mr. Swinton has served as a director of Calfrac since its amalgamation with Denison Energy Inc. in March of 2004. The board and management of Calfrac would like to sincerely thank Tim for his many outstanding contributions to the growth and stewardship of Calfrac over the past decade, and wish him the very best in his retirement.

On behalf of the Board of Directors,

Fernando Aguilar
President & Chief Executive Officer
February 26, 2014

2013 Overview


For the three months ended December 31, 2013, the Company recorded:

  • revenue of $463.0 million, an increase of 26 percent from the fourth quarter of 2012 driven primarily by the commencement of fracturing operations in the Eagle Ford shale play combined with increased activity in the Niobrara and Marcellus shale plays, higher fracturing activity in Russia due to an expanded customer base and increased demand for horizontal multi-stage fracturing operations, and the commencement of fracturing operations in Argentina during the second quarter of 2013;
  • operating income of $57.4 million versus $43.2 million in the same quarter of 2012, mainly due to higher equipment utilization in the United States offset partially by the effects of the competitive pricing environment in Canada; and
  • net income attributable to shareholders of Calfrac of $11.8 million or $0.25 per share diluted, including a $1.5 million foreign exchange gain, compared to net income of $11.2 million or $0.25 per share diluted in the fourth quarter of 2012, which included a foreign exchange gain of $3.8 million.

In 2013, the Company:

  • generated revenue of $1.6 billion, a 2 percent decrease from 2012 resulting primarily from competitive pricing pressure in western Canada and the United States, lower coiled tubing activity in the unconventional plays in Canada, smaller fracturing job sizes in the United States, and lower fracturing activity in Mexico, offset partially by higher multi-stage fracturing activity in Western Siberia, and the commencement of fracturing operations in Argentina and the Eagle Ford shale play in Texas during the second and fourth quarters of 2013, respectively;
  • reported operating income of $188.1 million versus $257.0 million in 2012, a decrease of 27 percent, mainly as a result of competitive pricing and a decline in activity in Canada and lower equipment utilization in Mexico;
  • reported net income attributable to shareholders of Calfrac of $27.9 million or $0.61 per share diluted, including a foreign exchange loss of $1.2 million, compared to net income of $97.1 million or $2.17 per share diluted, which included a $8.3 million foreign exchange gain, in 2012;
  • incurred capital expenditures of $170.5 million primarily to bolster the Company's fracturing operations in Canada, the United States and Argentina;
  • completed the acquisition of the operating assets of Mission, a privately-held hydraulic fracturing and coiled tubing services provider focused on the Eagle Ford shale play of Texas;
  • entered the Argentinean fracturing market and announced the signing of a long-term pressure pumping services contract with YPF S.A., the largest operator in Argentina;
  • reported period-end working capital of $319.9 million versus $322.9 million at December 31, 2012; and
  • announced a capital budget for 2014 of $120.0 million, which focuses on maintenance and support capital, further investment in logistics equipment and international growth. Approximately $33.0 million is allocated to supporting Calfrac's growing international operations, including an investment in coiled tubing and fracturing equipment in Russia and Argentina. In addition, approximately $20.0 million remaining from Calfrac's 2013 capital program is expected to be expended in 2014.

Financial Overview - Three Months Ended December 31, 2013 Versus 2012


Canada      
Three Months Ended December 31, 2013 2012 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Revenue 197,112 201,573 (2)
Expenses      
       Operating 157,775 147,518 7
       Selling, general and administrative (SG&A) 4,334 5,033 (14)
  162,109 152,551 6
Operating income(1) 35,003 49,022 (29)
Operating income (%) 17.8% 24.3% (27)
Fracturing revenue per job ($) 188,660 192,600 (2)
Number of fracturing jobs 995 1,001 (1)
Pumping horsepower, end of period (000s) 389 375 4
Coiled tubing revenue per job ($) 26,617 22,689 17
Number of coiled tubing jobs 353 387 (9)
Coiled tubing units, end of period (#) 21 21 -

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
   

Revenue

Revenue from Calfrac's Canadian operations during the fourth quarter of 2013 was $197.1 million versus $201.6 million in the same period of 2012. The decrease in revenue was primarily due to increased pricing pressure, partially offset by the completion of larger jobs during the quarter.

Operating Income

Operating income in Canada decreased by 29 percent to $35.0 million during the fourth quarter of 2013 from $49.0 million in the same period of 2012. The decrease was primarily due to the competitive pricing environment experienced during the quarter. Additionally, extreme cold weather during the latter part of the quarter increased fuel and subcontractor costs. Selling, general and administrative expenses during the fourth quarter were $0.7 million less than in the comparable three-month period for 2012 primarily due to a lower annual bonus provision.

United States      
Three Months Ended December 31, 2013 2012 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 189,239 109,975 72
Expenses      
  Operating 154,001 99,048 55
  SG&A 5,642 5,439 4
  159,643 104,487 53
Operating income(1) 29,596 5,488 439
Operating income (%) 15.6% 5.0% 212
Fracturing revenue per job ($) 53,815 52,347 3
Number of fracturing jobs 3,348 1,943 72
Pumping horsepower, end of period (000s) 662 492 35
Cementing revenue per job ($) 37,285 30,678 22
Number of cementing jobs 213 180 18
Cementing units, end of period (#) 18 12 50
US$/C$ average exchange rate(2) 1.0498 0.9913 6

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
(2)  Source: Bank of Canada.
   

Revenue

Revenue from Calfrac's United States operations increased during the fourth quarter of 2013 to $189.2 million from $110.0 million in the comparable quarter of 2012. The increase was due primarily to the commencement of fracturing operations in the Eagle Ford shale play following the acquisition of the Mission assets early in the fourth quarter of 2013. In addition, higher activity in the Niobrara and Marcellus shale plays contributed to the revenue increase. The increase in revenue was partially offset by lower pricing in the United States resulting from high levels of competition.

Operating Income

Operating income in the United States was $29.6 million for the fourth quarter of 2013, an increase of $24.1 million from the comparative period in 2012. The increase was primarily due to higher utilization in the unconventional natural gas plays where Calfrac is active, as well as in the Niobrara shale oil play, and the commencement of operations in the Eagle Ford play.

Russia      
Three Months Ended December 31, 2013 2012 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 41,404 24,197 71
Expenses      
  Operating 36,946 22,707 63
  SG&A 1,794 1,744 3
  38,740 24,451 58
Operating income (loss)(1) 2,664 (254) -
Operating income (loss) (%) 6.4% -1.0% -
Fracturing revenue per job ($) 118,015 84,063 40
Number of fracturing jobs 284 199 43
Pumping horsepower, end of period (000s) 62 45 38
Coiled tubing revenue per job ($) 60,671 54,117 12
Number of coiled tubing jobs 130 138 (6)
Coiled tubing units, end of period (#) 7 7 -
Rouble/C$ average exchange rate(2) 0.0322 0.0319 1

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
(2)  Source: Bank of Canada.
   

Revenue

During the fourth quarter of 2013, the Company's revenue from Russian operations increased by 71 percent to $41.4 million from $24.2 million in the corresponding three-month period of 2012. The increase in revenue was mainly due to higher fracturing activity as a result of the Company expanding its customer base combined with increased demand for horizontal multi-stage fracturing operations in Western Siberia and larger fracturing job sizes. The Company began supplying proppant to two significant customers in 2013, which contributed to the revenue growth over the comparable quarter of 2012. The increase in revenue was partially offset by lower coiled tubing activity resulting from the increased use of multi-stage fracturing completions.

Operating Income (Loss)

Operating income in Russia was $2.7 million during the fourth quarter of 2013 compared to an operating loss of $0.3 million in the corresponding period of 2012. The turnaround in operating income was primarily a result of operational efficiencies resulting from higher fracturing equipment utilization and a higher overall revenue base. The increase in operating income was somewhat tempered by higher fuel and maintenance costs with the onset of winter operating conditions.

Latin America        
Three Months Ended December 31,   2013 2012 Change
(C$000s, except operational and exchange rate information)   ($) ($) (%)
(unaudited)        
Revenue   35,299 31,742 11
Expenses        
  Operating   28,943 26,489 9
  SG&A   2,520 2,152 17
    31,463 28,641 10
Operating income(1)   3,836 3,101 24
Operating income (%)   10.9% 9.8% 11
Pumping horsepower, end of period (000s)   81 65 25
Cementing units, end of period (#)   13 13 -
Coiled tubing units, end of period (#)   3 1 200
Mexican peso/C$ average exchange rate(2)   0.0806 0.0766 5
Argentinean peso/C$ average exchange rate(2)   0.1732 0.2066 (16)

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
(2)  Source: Bank of Canada.
   

Revenue

Calfrac's Latin America operations generated total revenue of $35.3 million during the fourth quarter of 2013 versus $31.7 million in the comparable three-month period in 2012. The increase in revenue was due to the significant increase in unconventional fracturing activity in Argentina during 2013 as a result of the pressure pumping services contract that was signed with YPF S.A. at the beginning of the fourth quarter of 2013 combined with higher cementing and coiled tubing activity in that country. This increase in revenue was offset by lower fracturing activity in Mexico resulting from budget constraints by Calfrac's major customer in that country. The Colombian market continued to present challenging conditions, due to permitting and infrastructure issues, resulting in lower-than-expected equipment utilization.

Operating Income

Operating income in Latin America for the three months ended December 31, 2013 was $3.8 million versus $3.1 million in the comparative quarter in 2012. The increase in operating income was due to the commencement of fracturing operations in Argentina combined with higher cementing and coiled tubing equipment utilization in that country. This increase was offset by a decrease in operating income in Mexico and Colombia resulting from significantly lower equipment utilization.

Corporate      
Three Months Ended December 31, 2013 2012 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Expenses      
  Operating 2,328 2,464 (6)
  SG&A 11,355 11,675 (3)
  13,683 14,139 (3)
Operating loss(1) (13,683) (14,139) (3)
       
% of Revenue 3.0% 3.8% (21)

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
   

Operating Loss

The 3 percent decrease in corporate expenses from the fourth quarter of 2012 was mainly due to lower annual bonus expenses. The decrease was offset partially by higher corporate personnel costs to support the Company's larger scale of operations.

Depreciation

For the three months ended December 31, 2013, depreciation expense increased by 33 percent to $31.4 million from $23.6 million in the corresponding quarter of 2012. The increase was mainly a result of the acquisition of assets from Mission at the beginning of the fourth quarter of 2013 combined with asset additions required to support the commencement of fracturing operations in Argentina.

Foreign Exchange Losses or Gains

The Company recorded a foreign exchange gain of $1.5 million during the fourth quarter of 2013 versus a foreign exchange gain of $3.8 million in the comparative three-month period of 2012. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in United States dollars in Canada, Russia and Latin America. The Company's fourth quarter 2013 foreign exchange gain was largely attributable to the translation of United States dollar-denominated assets held in Canada offset by a loss on United States dollar-denominated debt held in Argentina. The value of the United States dollar at December 31, 2013 had strengthened against the Canadian dollar and the Argentinean peso from the beginning of the quarter, resulting in a consolidated net foreign exchange gain.

Interest

The Company's net interest expense of $13.4 million for the fourth quarter of 2013 was $4.5 million higher than in the comparable period of 2012. The increase was related to the issuance of an additional US$150.0 million of Calfrac's 7.50 percent senior notes to finance the acquisition of assets from Mission combined with draws on its revolving credit facility during the fourth quarter. Additional short-term borrowing in Latin America to fund the operational expansion in Argentina also contributed to the increase in interest expense during the quarter.

Income Tax Expenses

The Company recorded income tax expense of $1.1 million during the fourth quarter of 2013 compared to $3.3 million in the comparable period of 2012. The effective income tax rate for the three months ended December 31, 2013 was 8 percent compared to 23 percent in the same quarter of 2012. The decrease in total income tax expense was primarily due to lower profitability in Canada and Mexico offset partially by higher taxable income in the United States. The lower effective tax rate was due to the mix of earnings between various tax jurisdictions combined with a lower-than-expected effective tax rate in the United States. The lower effective tax rate in the United States was partially due to the reclassification of $1.8 million of deferred tax expense related to the Mission acquisition to offset the gain on business combination as required under IFRS and as described in note 11.

Summary of Quarterly Results          
Quarters Ended       Mar. 31,       June 30,       Sept. 30,       Dec. 31,       Total
(C$000s, except per share and operating data) ($) ($) ($) ($) ($)
(unaudited)          

2013

         

Financial

         

Revenue

423,397 288,701 388,662 463,054 1,563,814

Operating income(1)

62,670 16,307 51,683 57,416 188,076
EBITDA(1) 65,169 16,235 46,862 57,667 185,933
  Per share - basic 1.44 0.36 1.02 1.25 4.07
  Per share - diluted 1.43 0.35 1.01 1.24 4.04
Net income (loss) attributable to the shareholders of Calfrac 24,645 (14,584) 6,089 11,764 27,914
  Per share - basic 0.55 (0.32) 0.13 0.25 0.61
  Per share - diluted 0.54 (0.32) 0.13 0.25 0.61
Capital expenditures 43,989 46,618 34,683 45,227 170,517
Working capital (end of period) 332,241 319,982 292,854 319,934 319,934
Total equity (end of period) 802,581 784,247 786,933 795,207 795,207
           
Operating (end of period)          
Pumping horsepower (000s) 1,013 1,025 1,025 1,194  
Coiled tubing units (#) 29 29 31 38  
Cementing units (#) 28 30 30 31  

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
                 
Quarters Ended             Mar. 31,       June 30,       Sept. 30,       Dec. 31,       Total
(C$000s, except per share and operating data)       ($) ($) ($) ($) ($)
(unaudited)                

2012

               

Financial

               

Revenue

      474,107 335,780 417,842 367,487 1,595,216

Operating income(1)

      113,381 29,810 70,604 43,218 257,013
EBITDA(1)       127,995 18,736 70,874 46,866 264,471
  Per share - basic       2.92 0.42 1.59 1.05 5.97
  Per share - diluted       2.87 0.42 1.58 1.04 5.90
Net income attributable to the shareholders of Calfrac       70,841 (11,855) 26,917 11,243 97,146
  Per share - basic       1.62 (0.27) 0.60 0.25 2.19
  Per share - diluted       1.59 (0.27) 0.60 0.25 2.17
Capital expenditures       84,075 75,286 63,962 55,694 279,017
Working capital (end of period)       431,053 357,128 353,182 322,857 322,857
Total equity (end of period)       779,426 747,591 783,091 780,759 780,759
                 
Operating (end of period)                
Pumping horsepower (000s)       782 830 845 977  
Coiled tubing units (#)       29 29 29 29  
Cementing units (#)       23 23 25 26  

(1) Refer to "Non-GAAP Measures" on page 20 for further information.


Financial Overview - Year Ended December 31, 2013 Versus 2012


Canada      
Years Ended December 31, 2013 2012 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Revenue 677,114 732,880 (8)
Expenses      
   Operating 538,730 526,400 2
  Selling, general and administrative (SG&A) 16,685 17,925 (7)
  555,415 544,325 2
Operating income(1) 121,699 188,555 (35)
Operating income (%) 18.0% 25.7% (30)
Fracturing revenue per job ($) 198,667 197,062 1
Number of fracturing jobs 3,239 3,441 (6)
Pumping horsepower, end of period (000s) 389 375 4
Coiled tubing revenue per job ($) 25,674 30,661 (16)
Number of coiled tubing jobs 1,310 1,787 (27)
Coiled tubing units, end of period (#) 21 21 -

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
   

Revenue

Revenue from Calfrac's Canadian operations was $677.1 million in 2013 versus $732.9 million in 2012. The decrease in revenue was primarily due to lower pricing experienced in Canada during 2013 due to competitive pressures, the effects of which were largely offset by an increase in average job size and associated revenue. The increase in average job size reflects the continued shift in activity into the unconventional oil and liquids-rich regions of western Canada. In addition, flood conditions experienced during the second and third quarters of 2013 resulted in lower fracturing and coiled tubing activity in central and southern Alberta. Lower coiled tubing activity in the Horn River area of northeast British Columbia in 2013 also contributed to the reduction in job sizes and overall revenue.

Operating Income

Operating income in Canada decreased by 35 percent to $121.7 million in 2013 from $188.6 million in 2012. The decline was primarily caused by a more competitive pricing environment combined with higher logistical costs associated with the completion of larger fracturing jobs. Selling, general and administrative expenses during 2013 were $1.2 million less than in 2012 primarily due to a lower provision for annual bonuses.

United States      
Years Ended December 31, 2013 2012 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 616,174 638,483 (3)
Expenses      
  Operating 492,699 512,482 (4)
  SG&A 19,350 20,872 (7)
  512,049 533,354 (4)
Operating income(1) 104,125 105,129 (1)
Operating income (%) 16.9% 16.5% 2
Fracturing revenue per job ($) 57,019 69,620 (18)
Number of fracturing jobs 10,256 8,766 17
Pumping horsepower, end of period (000s) 662 492 35
Cementing revenue per job ($) 35,432 30,912 15
Number of cementing jobs 854 661 29
Cementing units, end of period (#) 18 12 50
US$/C$ average exchange rate(2) 1.0299 0.9996 3

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
(2)  Source: Bank of Canada.
   

Revenue

Revenue from Calfrac's United States operations decreased by 3 percent to $616.2 million in 2013 from $638.5 million in 2012, primarily due to competitive pricing pressure and lower activity in the Bakken play of North Dakota. This was somewhat offset by higher fracturing activity in the Marcellus shale formation in Pennsylvania and West Virginia and the commencement of fracturing operations in the Eagle Ford shale play during the fourth quarter. Cementing revenue increased by $9.8 million to $30.3 million in 2013 primarily due to increased activity in the Fayetteville shale in Arkansas.

Operating Income

Operating income in the United States was $104.1 million for 2013, a decrease of 1 percent from 2012 and up slightly to 16.9 as a percentage of revenue. Higher equipment utilization in the Marcellus shale play and the Fayetteville shale basin combined with the start-up of operations in the Eagle Ford shale play in Texas were offset by competitive pricing pressure and lower utilization in North Dakota.

Russia      
Years Ended December 31, 2013 2012 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 158,782 112,765 41
Expenses      
  Operating 138,910 100,098 39
  SG&A 6,514 6,101 7
  145,424 106,199 37
Operating income(1) 13,358 6,566 103
Operating income (%) 8.4% 5.8% 45
Fracturing revenue per job ($) 108,599 92,791 17
Number of fracturing jobs 1,184 826 43
Pumping horsepower, end of period (000s) 62 45 38
Coiled tubing revenue per job ($) 58,304 57,884 1
Number of coiled tubing jobs 518 624 (17)
Coiled tubing units, end of period (#) 7 7 -
Rouble/C$ average exchange rate(2) 0.0323 0.0322 -

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
(2)  Source: Bank of Canada.
   

Revenue

The Company's revenue from Russian operations increased by 41 percent to $158.8 million in 2013 from $112.8 million in 2012. The increase in revenue was mainly due to the Company supplying proppant to two significant customers in Western Siberia during 2013. In addition, higher multi-stage fracturing activity in 2013 and an expanded customer base combined with larger conventional fracturing job sizes contributed to the overall increase in revenue. During 2013, approximately 34 percent of Calfrac's total Russian fracturing activity was related to multi-stage well completions compared to less than 5 percent in 2012. Coiled tubing activity declined as a result of the increased use of multi-stage fracturing operations, which reduced the requirements for coiled tubing services.

Operating Income

Operating income in Russia was $13.4 million in 2013 compared to $6.6 million in 2012. The increase in operating income was primarily due to operational efficiencies associated with multi-stage fracturing operations forming a larger proportion of total activity in 2013 and a higher revenue base.

Latin America      
Years Ended December 31, 2013 2012 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 111,744 111,088 1
Expenses      
  Operating 100,507 95,494 5
  SG&A 7,714 6,755 14
  108,221 102,249 6
Operating income(1) 3,523 8,839 (60)
Operating income (%) 3.2% 8.0% (60)
Pumping horsepower, end of period (000s) 81 65 25
Cementing units, end of period (#) 13 13 -
Coiled tubing units, end of period (#) 3 1 200
Mexican peso/C$ average exchange rate(2) 0.0807 0.0760 6
Argentinean peso/C$ average exchange rate(2) 0.1889 0.2201 (14)

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
(2)  Source: Bank of Canada.
   

Revenue

Calfrac's Latin American operations generated total revenue of $111.7 million during 2013 compared to $111.1 million in 2012. Revenue in Argentina increased significantly due to the start-up of conventional fracturing operations beginning in the second quarter of 2013 followed by the commencement of unconventional fracturing operations for YPF S.A. in Argentina's tight sands in October 2013. Higher cementing and coiled tubing activity in Argentina also contributed to higher overall revenue. The revenue improvement achieved in Argentina was almost entirely offset by significantly lower fracturing activity in Mexico resulting from customer budget reductions.

Operating Income

During 2013, Calfrac's Latin America division generated operating income of $3.5 million versus $8.8 million in 2012. The decrease in operating income was primarily due to lower equipment utilization in Mexico and Colombia combined with higher SG&A expenses as a result of the larger overall scale of the Company's Latin American operations with the commencement of fracturing operations in Argentina.

Corporate      
Years Ended December 31, 2013 2012 Change
(C$000s) ($) ($) (%)
(unaudited)      
Expenses      
  Operating 8,706 9,973 (13)
  SG&A 45,923 42,103 9
  54,629 52,076 5
Operating loss(1) (54,629) (52,076) 5
       
% of Revenue 3.5% 3.3% 6

(1)  Refer to "Non-GAAP Measures" on page 20 for further information.
   

Operating Loss

The 5 percent increase in corporate expenses in 2013 over 2012 was mainly due to a $4.2 million increase in stock-based compensation expenses resulting from additional restricted share units granted to employees and a higher stock price in 2013. Higher corporate personnel costs to support the Company's larger scale of operations also contributed to the increase in corporate expenses. The increase was offset partially by lower annual bonus expenses.

Depreciation

Depreciation expense increased by 22 percent to $110.0 million for 2013 from $90.4 million in 2012. The increase was mainly a result of the acquisition of assets from Mission at the beginning of the fourth quarter of 2013 combined with a larger fleet of equipment deployed in North America and Argentina throughout 2013 pursuant to Calfrac's 2013 capital plan.

Foreign Exchange Losses or Gains

The Company recorded a foreign exchange loss of $1.2 million during 2013 versus an $8.3 million gain in 2012. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in United States dollars in Canada, Russia and Latin America. The majority of the Company's foreign exchange loss recorded in 2013 was attributable to U.S. dollar-denominated debt in Russia and Argentina as the U.S. dollar appreciated against the Russian rouble and Argentinean peso during the period. The loss was partially offset by the impact of the net U.S. dollar-denominated asset position in Canada as the U.S. dollar appreciated against the Canadian dollar during this period.

Interest

The Company's interest expense increased by $5.6 million to $42.0 million in 2013 primarily due to the issuance of an additional US$150.0 million of Calfrac's 7.50 percent senior notes at the beginning of the fourth quarter of 2013 to finance the acquisition of assets from Mission. Additional short-term borrowing in Latin America, which was used to fund Calfrac's Argentinean expansion, combined with a draw on the Company's revolving credit facility during the fourth quarter also contributed to the increase in interest expense during the year.

Income Tax Expenses

The Company recorded income tax expense of $7.2 million during 2013 compared to $41.4 million in 2012. The effective income tax rate for 2013 was 21 percent compared to 30 percent in 2012. The decrease in total income tax expense was primarily due to lower profitability in Canada and Mexico. The lower effective tax rate was due to the mix of earnings between various tax jurisdictions combined with a lower-than-expected effective tax rate in the United States. The lower effective tax rate in the United States was partially due to the reclassification of $1.8 million of deferred tax expense related to the Mission acquisition to offset the gain on business combination as required under IFRS and as described below and in note 11.

Business Combination

On October 1, 2013, the Company acquired all of the operating assets of Mission. The purchase was recognized as a business combination and accounted for as such using the acquisition method of accounting under IFRS 3 Business Combinations. The gain of $4.5 million, before taxes, was recognized in the Statement of Operations on the acquisition date and represents the excess of the fair value of identifiable assets over the consideration paid. The Company has reassessed the fair value of the identifiable assets purchased and the fair value of the consideration transferred in determining the gain, as required under IFRS. The composition of the business combination expenses reported in the Statement of Operations is as follows:

         
Year Ended December 31,       2013
(C$000s) (unaudited)       ($)
Gain on business combination       (4,522)
Deferred taxes relating to business combination       1,775
        (2,747)
Acquisition costs       5,221
Business combination       2,474
         

Liquidity and Capital Resources


           
Years Ended December 31,       2013 2012
(C$000s) (unaudited)       ($) ($)
Cash provided by (used in):          
       Operating activities       132,011 196,251
       Financing activities       191,515 (28,762)
       Investing activities       (331,720) (259,184)
       Effect of exchange rate changes on cash and cash equivalents       7,908 1,121
Decrease in cash and cash equivalents       (286) (90,574)
             

Operating Activities

The Company's cash provided by operating activities for the year ended December 31, 2013 was $132.0 million versus $196.3 million in 2012. The decrease was primarily due to a decline in operating margins in Canada. At December 31, 2013, Calfrac's working capital was approximately $319.9 million, in line with its working capital at December 31, 2012 of $322.9 million. The Company had accounts receivable of US$40.8 million at December 31, 2013 with a customer operating in Mexico that has been outstanding for greater than 120 days, for which no provision has been made. The payment delay is consistent with the experience of many other oilfield service companies in this market. Collection is expected in its entirety; however, the timing is uncertain.

Financing Activities

Net cash provided by financing activities was $191.5 million in 2013 compared to cash used in financing activities of $28.8 million in 2012. During 2013, the Company increased its senior notes by $150.2 million (net of debt issuance costs and debt discount) to finance the purchase of assets from Mission, received bank loan proceeds of $27.6 million in Argentina, received a net $22.8 million through draws and repayments on its credit facility, issued $15.8 million of common shares, paid cash dividends of $23.7 million and repaid $1.2 million of finance lease obligations and long-term debt.

On August 8, 2013, the Company extended the term of its credit facilities by one year to September 27, 2017. The maturity may be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. The facilities consist of an operating facility of $20.0 million and a syndicated facility of $280.0 million. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 1.25 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 2.25 percent above the respective base rates. As at December 31, 2013, the Company had used $24.4 million of its credit facilities for letters of credit and had $24.5 million outstanding under its credit facility, leaving $251.1 million in available credit.

On October 8, 2013, the Company closed a private offering of US$150.0 million aggregate principal of its 7.50 percent senior notes yielding net proceeds of $150.2 million (US$145.4 million) after applicable discount and debt issuance costs. Fixed interest on the notes is payable semi-annually on June 1 and December 1 of each year. The notes will mature on December 1, 2020. The net proceeds from this offering were used to finance the Mission asset acquisition.

Calfrac pays quarterly dividends to shareholders at the discretion of the Board of Directors, which qualify as "eligible dividends" as defined by the Canada Revenue Agency. In February 2012, the Company increased its semi-annual cash dividend from $0.10 to $0.50 per share, beginning with the dividend paid on July 16, 2012, thereby increasing the annualized dividend to $1.00 per share beginning in 2012. In December 2012, the Company announced that it would pay dividends quarterly instead of semi-annually commencing with a $0.25 dividend that was declared in the first quarter of 2013.

Investing Activities

Calfrac's net cash used for investing activities was $331.7 million for the year ended December 31, 2013 versus $259.2 million for 2012. Cash outflows relating to capital expenditures were $170.5 million during 2013 compared to $279.0 million in 2012. Capital expenditures were primarily to support the Company's Canadian, United States, Russian and Argentinean fracturing operations.

On October 1, 2013, the Company completed the acquisition of the operating assets of Mission, a privately-held hydraulic fracturing and coiled tubing services provider based in San Antonio, Texas and operating in the Eagle Ford shale play of Texas. The acquisition provides the Company with modern fracturing and coiled tubing equipment and an entry into the Texas market. Under the terms of the purchase agreement, the total purchase price was approximately $150.5 million, excluding transaction costs, which included certain working capital associated with the ongoing operations of the business. The purchase price accounting for this transaction resulted in a business combination expense of $2.5 million recorded in 2013, the composition of which is described above and in note 11.

Calfrac's 2014 capital budget is projected to be approximately $120.0 million, of which $33.0 million is being directed towards growing its international operations, including an investment in coiled tubing and fracturing equipment in Russia and Argentina. In addition, approximately $20.0 million remaining from Calfrac's 2013 capital program is expected to be expended in 2014. As such, projected capital spending in 2014 is expected to be $160.0 million.

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 2013 was a gain of $7.9 million versus a gain of $1.1 million during 2012. These gains relate to cash and cash equivalents held by the Company in a foreign currency.

With its strong working capital position, available credit facilities and anticipated funds provided by operations, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for 2014 and beyond.

At December 31, 2013, the Company had cash and cash equivalents of $42.2 million.

Outstanding Share Data

The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan is equal to 10 percent of the Company's issued and outstanding common shares. As at February 21, 2014, there were 46,560,836 common shares issued and outstanding, and 2,945,725 options to purchase common shares.

The Company has a Dividend Reinvestment Plan that allows shareholders to direct cash dividends paid on all or a portion of their common shares to be reinvested in additional common shares that will be issued at 95 percent of the volume-weighted average price of the common shares traded on the Toronto Stock Exchange (TSX) during the last five trading days preceding the relevant dividend payment date.

Normal Course Issuer Bid

The Company filed a Notice of Intention (the "Renewal Notice") to renew its Normal Course Issuer Bid (the "Renewed NCIB") with the TSX on November 1, 2012. Under the Renewed NCIB, the Company could acquire up to 3,318,738 common shares, which was 10 percent of the public float outstanding as at October 31, 2012, during the period November 12, 2012 through November 11, 2013. The maximum number of common shares that could be acquired by the Company during a trading day was 44,254, with the exception that the Company was allowed to make one block purchase of common shares per calendar week that exceeded such limit. All purchases of common shares were to be made through the TSX, alternative trading systems or such other exchanges or marketplaces through which the common shares trade from time to time at the market price of the shares at the time of acquisition. Any shares acquired under the Renewed NCIB were to be cancelled. There were no shares purchased under the Renewed NCIB for the year ended December 31, 2013. The NCIB was not renewed for 2014. A copy of the Renewal Notice may be obtained by any shareholder, without charge, by contacting the Company's Corporate Secretary at 411 - 8th Avenue S.W., Calgary, Alberta, T2P 1E3, or by telephone at 403-266-6000.

Advisories


Forward-Looking Statements

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

In particular, forward-looking statements in this press release include, but are not limited to, statements with respect to expected operating strategies, 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 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 ability to raise capital, treatment under government regulatory regimes, commodity prices, anticipated outcomes of specific events, trends in, and the growth prospects of, the global oil and natural gas industry, the Company's growth prospects including, without limitation, its international growth strategy and prospects and the impact of changes in accounting policies and standards on the Company and its financial statements. These statements are derived from certain assumptions and analyses made by the Company based on its experience and 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 general stability of the economic and political environment in which the Company operates, the Company's expectations for its current and prospective customers' capital budgets and geographical areas of focus, the Company's existing contracts and the status of current negotiations with key customers and suppliers, the focus of the Company's customers on oil and liquids-rich plays in the current natural gas pricing environment in North America, the effect unconventional gas projects have had on supply and demand fundamentals for natural gas and the likelihood that the current tax and regulatory regime will remain substantially unchanged.

Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from the Company's expectations. Such risk factors include: general economic conditions in Canada, the United States, Russia, Mexico, Argentina and Colombia; the demand for fracturing and other stimulation services during drilling and completion of oil and natural gas wells; volatility in market prices for oil and natural gas and the effect of this volatility on the demand for oilfield services generally; regional competition; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; changes in legislation and the regulatory environment; sourcing, pricing and availability of raw materials, component parts, equipment, suppliers, facilities and skilled personnel; the ability to integrate technological advances and match advances of competition; the availability of capital on satisfactory terms; intellectual property risks; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; dependence on, and concentration of, major customers; the creditworthiness and performance by the Company's counterparties and customers; liabilities and risks associated with prior operations; the effect of accounting pronouncements issued periodically; failure to realize anticipated benefits of acquisitions and dispositions; and currency exchange rate risk. Further information about these and other risks and uncertainties may be found in the Company's most recently filed Annual Information Form.

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

Business Risks

The business of Calfrac is subject to certain risks and uncertainties. Prior to making any investment decision regarding Calfrac, investors should carefully consider, among other things, the risk factors set forth in the Company's most recently filed Annual Information Form, which are specifically incorporated by reference herein.

The Annual Information Form is available through the Internet on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR), which can be accessed at www.sedar.com. Copies of the Annual Information Form may also be obtained on request without charge from Calfrac at 411 - 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1E3, or at www.calfrac.com, or by facsimile at 403-266-7381.

Non-GAAP Measures

Certain supplementary measures in this press release do not have any standardized meaning as prescribed under IFRS and are therefore considered non-GAAP measures. These measures include operating income and EBITDA. These measures may not be comparable to similar measures presented by other entities. These measures have been described and presented in this press release in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and its ability to generate funds to finance its operations. Management's use of these measures has been disclosed further in this press release as these measures are discussed and presented.

Additional Information

Further information regarding Calfrac Well Services Ltd., including the most recently filed Annual Information Form, can be accessed on the Company's website at www.calfrac.com or under the Company's public filings found at www.sedar.com.

Fourth Quarter Conference Call

Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2013 fourth quarter results at 10:00 a.m. (Mountain Time) on Wednesday, February 26, 2014. 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 96180761). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS    
As at December 31, 2013 2012
(C$000s) (unaudited) ($) ($)
ASSETS    
Current assets    
  Cash and cash equivalents 42,195 42,481
  Accounts receivable 395,845 320,143
  Income taxes recoverable 1,146 292
  Inventories 134,140 118,713
  Prepaid expenses and deposits 17,189 10,697
  590,515 492,326
Non-current assets    
  Property, plant and equipment 1,245,009 1,005,101
  Goodwill 10,523 10,523
  Deferred income tax assets 23,884 16,871
Total assets 1,869,931 1,524,821
       
LIABILITIES AND EQUITY    
Current liabilities    
  Accounts payable and accrued liabilities 245,899 168,250
  Bank loan (note 3) 24,298 -
  Current portion of long-term debt (note 4) 384 479
  Current portion of finance lease obligations - 740
  270,581 169,469
Non-current liabilities    
  Long-term debt (note 4) 651,553 441,018
  Other long-term liabilities 198 435
  Deferred income tax liabilities 152,392 133,140
Total liabilities 1,074,724 744,062
Equity attributable to the shareholders of Calfrac    
Capital stock (note 5) 332,287 300,451
Contributed surplus (note 7) 27,658 27,546
Loan receivable for purchase of common shares (note 14) (2,500) (2,500)
Retained earnings 440,179 458,543
Accumulated other comprehensive loss (839) (2,403)
  796,785 781,637
Non-controlling interest (1,578) (878)
Total equity 795,207 780,759
Total liabilities and equity 1,869,931 1,524,821
See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF OPERATIONS        
  Three Months Ended Dec. 31, Years Ended Dec. 31,
  2013 2012 2013 2012
(C$000s, except per share data) (unaudited) ($) ($) ($) ($)
Revenue 463,054 367,487 1,563,814 1,595,216
Cost of sales (note 15) 411,404 321,860 1,389,558 1,334,828
Gross profit 51,650 45,627 174,256 260,388
Expenses        
       Selling, general and administrative 25,644 26,043 96,186 93,756
       Foreign exchange (gains) losses (1,517) (3,818) 1,183 (8,260)
       Business combination (note 11) 2,474 - 2,474 -
       (Gain) loss on disposal of property, plant and  equipment
(1,208) 170 (1,514) 802
       Interest 13,433 8,933 41,985 36,354
  38,826 31,328 140,314 122,652
Income before income tax 12,824 14,299 33,942 137,736
Income tax expense        
       Current 814 (344) 3,853 4,733
       Deferred 259 3,662 3,356 36,642
  1,073 3,318 7,209 41,375
Net income for the period 11,751 10,981 26,733 96,361
         
Net income (loss) attributable to:        
       Shareholders of Calfrac 11,764 11,243 27,914 97,146
       Non-controlling interest (13) (262) (1,181) (785)
  11,751 10,981 26,733 96,361
         
Earnings per share (note 5)        
       Basic 0.25 0.25 0.61 2.19
       Diluted 0.25 0.25 0.61 2.17
See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME        
  Three Months Ended Dec. 31, Years Ended Dec. 31,
  2013 2012 2013 2012
(C$000s) (unaudited) ($) ($) ($) ($)
Net income for the period 11,751 10,981 26,733 96,361
Other comprehensive income (loss)        
Items that may be subsequently reclassified  to profit or loss:        
       Change in foreign currency translation adjustment 2,337 460 1,602 (3,856)
Comprehensive income for the period 14,088 11,441 28,335 92,505
           
Comprehensive income (loss) attributable to:        
       Shareholders of Calfrac 14,056 11,707 29,478 93,409
       Non-controlling interest 32 (266) (1,143) (904)
  14,088 11,441 28,335 92,505
See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY  
                   
  Equity Attributable to the Shareholders of Calfrac    
  Share
Capital
Contributed
Surplus
Loan
Receivable for
Purchase of
Common
Shares
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total Non-
Controlling
Interest
Total
Equity
(C$000s) (unaudited) ($) ($) ($) ($) ($) ($) ($) ($)
Balance - January 1, 2013 300,451 27,546 (2,500) (2,403) 458,543 781,637 (878) 780,759
Net income for the year - - - - 27,914 27,914 (1,181) 26,733
Other comprehensive income:                
       Cumulative translation adjustment - - - 1,564 - 1,564 38 1,602
Comprehensive income for the year - - - 1,564 27,914 29,478 (1,143) 28,335
Stock options:                
       Stock-based compensation recognized - 5,454 - - - 5,454 - 5,454
       Proceeds from issuance of shares 21,132 (5,342) - - - 15,790 - 15,790
Dividend Reinvestment Plan shares                
       issued (note 21) 10,704 - - - - 10,704 - 10,704
Dividends - - - - (45,953) (45,953) - (45,953)
Non-controlling interest contribution - - - - - - 118 118
Dilution of non-controlling interest - - - - (325) (325) 325 -
Balance - December 31, 2013 332,287 27,658 (2,500) (839) 440,179 796,785 (1,578) 795,207
                 
Balance - January 1, 2012 271,817 24,170 (2,500) 1,334 405,954 700,775 (206) 700,569
Net income for the year - - - - 97,146 97,146 (785) 96,361
Other comprehensive income:                
       Cumulative translation adjustment - - - (3,737) - (3,737) (119) (3,856)
Comprehensive income for the year - - - (3,737) 97,146 93,409 (904) 92,505
Stock options:                
       Stock-based compensation recognized - 6,990 - - - 6,990 - 6,990
       Proceeds from issuance of shares 14,836 (3,614) - - - 11,222 - 11,222
Dividend Reinvestment Plan shares                
       issued (note 21) 13,798 - - - - 13,798 - 13,798
Dividends - - - - (44,557) (44,557) - (44,557)
Non-controlling interest contribution - - - - - - 232 232
Balance - December 31, 2012 300,451 27,546 (2,500) (2,403) 458,543 781,637 (878) 780,759
See accompanying notes to the consolidated financial statements.


CONSOLIDATED STATEMENTS OF CASH FLOWS  
  Three Months Ended Dec. 31, Years Ended Dec. 31,
  2013 2012 2013 2012
(C$000s) (unaudited) ($) ($) ($) ($)
CASH FLOWS PROVIDED BY (USED IN)        
OPERATING ACTIVITIES        
  Net income for the period 11,751 10,981 26,733 96,361
  Adjusted for the following:        
    Depreciation 31,410 23,634 110,006 90,381
    Stock-based compensation (note 8) 1,075 1,926 5,454 6,990
    Unrealized foreign exchange (gains) losses (320) (2,462) 1,350 (10,895)
    Gain on business combination, net of tax (note 11) (2,747) - (2,747) -
    (Gain) loss on disposal of property, plant and equipment
(1,208) 170 (1,514) 802
    Interest 13,433 8,933 41,985 36,354
    Deferred income taxes 259 3,662 3,356 36,642
  Interest paid (20,386) (16,883) (39,770) (34,596)
  Changes in items of working capital (note 10) (46,609) (10,739) (12,842) (25,788)
Cash flows provided by operating activities (13,342) 19,222 132,011 196,251
FINANCING ACTIVITIES        
  Bank loan proceeds 11,173 - 27,596 2,734
  Issuance of long-term debt, net of debt issuance costs 339,866 (511) 365,581 (440)
  Bank loan repayments - (4,948) - (4,948)
  Long-term debt repayments (166,714) (125) (193,037) (461)
  Finance lease obligation repayments - (135) (740) (1,734)
  Net proceeds on issuance of common shares 403 693 15,790 11,222
  Dividends paid, net of DRIP (note 21) (7,249) (16,431) (23,675) (35,135)
Cash flows provided by (used in) financing activities 177,479 (21,457) 191,515 (28,762)
INVESTING ACTIVITIES        
  Purchase of property, plant and equipment (note 10) (41,330) (55,338) (183,124) (261,321)
  Proceeds on disposal of property, plant and equipment 713 392 1,799 1,905
  Business combination (note 11) (150,513) - (150,513) -
  Other - 39 118 232
Cash flows used in investing activities (191,130) (54,907) (331,720) (259,184)
Effect of exchange rate changes on cash and cash equivalents 5,440 3,168 7,908 1,121
Increase (decrease) in cash and cash equivalents (21,553) (53,974) (286) (90,574)
Cash and cash equivalents, beginning of period 63,748 96,455 42,481 133,055
Cash and cash equivalents, end of period 42,195 42,481 42,195 42,481
See accompanying notes to the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


As at and for the years ended December 31, 2013 and 2012
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated) (unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Calfrac Well Services Ltd. was formed through the amalgamation of Calfrac Well Services Ltd. (predecessor company originally incorporated on June 28, 1999) and Denison Energy Inc. ("Denison") on March 24, 2004 under the Business Corporations Act (Alberta). The registered office is at 411 - 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1E3. The Company provides specialized oilfield services, including hydraulic fracturing, coiled tubing, cementing and other well completion services to the oil and natural gas industries in Canada, the United States, Russia, Mexico, Argentina and Colombia.

These consolidated financial statements were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) and interpretations by the International Financial Reporting Interpretations Committee (IFRIC).

The Company has consistently applied the same accounting policies throughout all periods presented, as if these policies had always been in effect.

These financial statements were approved by the Board of Directors for issuance on February 25, 2014.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim consolidated financial statements follow the same accounting policies and methods of application as the most recent annual financial statements.

For purposes of calculating income taxes during interim periods, the Company utilizes estimated annualized income tax rates. Current income tax expense is only recognized when taxable income is such that current income taxes become payable.

The adoption of accounting standards and amendments, effective January 1, 2013, is disclosed in the March 31, 2013 interim consolidated financial statements.

3. BANK LOAN

The Company's Argentinean subsidiary has two operating lines of credit, and a total of ARS148,975 ($24,298) was drawn at December 31, 2013 (December 31, 2012 - $nil). The interest rate ranges from 35.0 percent to 38.0 percent and both lines of credit are secured by letters of credit issued by the Company.

4. LONG-TERM DEBT

As at December 31,   2013 2012
(C$000s)   ($) ($)
US$600,000 senior unsecured notes (December 31, 2012 -      
       US$450,000) due December 1, 2020, bearing interest at      
       7.5% payable semi-annually   638,160 447,705
Less: unamortized debt issuance costs and debt discount   (11,161) (6,895)
    626,999 440,810
$280,000 extendible revolving term loan facility, secured      
       by Canadian and U.S. assets of the Company   24,463 -
Less: unamortized debt issuance costs   (1,291) (1,444)
    23,172 (1,444)
US$1,661 mortgage maturing May 2018 bearing interest      
  at U.S. prime less 1%, repayable at US$33 per month      
  principal and interest, secured by certain real property   1,766 2,003
Argentina term loan maturing December 31, 2013 bearing      
  interest at 18.25%, repayable at ARS61 per month      
  principal and interest, secured by a Company guarantee   - 128
    651,937 441,497
Less: current portion of long-term debt   (384) (479)
    651,553 441,018
       

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at December 31, 2013, was $652,921 (December 31, 2012 - $443,228). The carrying values of the mortgage obligations, term loans and revolving term loan facilities approximate their fair values as the interest rates are not significantly different from current interest rates for similar loans.

On October 8, 2013, the Company closed a private offering of US$150,000 of its 7.5 percent senior notes yielding net proceeds of $150,208 (US$145,396) after applicable debt discount and debt issuance costs. The notes bear the same terms and conditions as the pre-existing senior notes.

The interest rate on the $280,000 revolving term loan facility is based on the parameters of certain bank covenants. For prime-based loans, the rate ranges from prime plus 0.50 percent to prime plus 1.25 percent. For LIBOR-based loans and Bankers' Acceptance-based loans the margin thereon ranges from 1.50 percent to 2.25 percent above the respective base rates for such loans. The facility is repayable on or before its maturity of September 27, 2017, assuming it is not extended. The maturity may be extended by one or more years at the Company's request and lenders' acceptance. The Company may also prepay principal without penalty. Debt issuance costs related to this facility are amortized over its term.

Interest on long-term debt (including the amortization of debt issuance costs and debt discount) for the year ended December 31, 2013 was $40,629 (year ended December 31, 2012 - $36,085).

The Company also has an extendible operating loan facility, which includes overdraft protection in the amount of $20,000. The interest rate is based on the parameters of certain bank covenants in the same fashion as the revolving term facility. Drawdowns under this facility are repayable on September 27, 2017, assuming the facility is not extended. The term and commencement of principal repayments may be extended by one year on each anniversary at the Company's request and lenders' acceptance. The operating facility is secured by the Company's Canadian and U.S. assets.

At December 31, 2013, the Company had utilized $24,410 of its loan facility for letters of credit and had $24,463 outstanding under its credit facility, leaving $251,127 in available credit.

5. CAPITAL STOCK

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

Years Ended December 31, 2013 2012
Continuity of Common Shares Shares Amount Shares Amount
  (#) (C$000s) (#) (C$000s)
Balance, beginning of year 45,020,641 300,451 43,709,073 271,817
Issued upon exercise of stock options 896,837 21,132 686,488 14,836
Dividend Reinvestment Plan shares issued (note 21) 381,096 10,704 625,080 13,798
Balance, end of year 46,298,574 332,287 45,020,641 300,451
         

The weighted average number of common shares outstanding for the year ended December 31, 2013 was 45,727,828 basic and 46,045,471 diluted (year ended December 31, 2012 - 44,334,810 basic and 44,808,099 diluted). The difference between basic and diluted shares is attributable to the dilutive effect of stock options issued by the Company as disclosed in note 8.

6. NORMAL COURSE ISSUER BID

The Company received regulatory approval to purchase its own common shares in accordance with a Normal Course Issuer Bid (NCIB) for the one-year period November 7, 2011 through November 6, 2012 and for the one-year period November 12, 2012 through November 11, 2013. There were no shares purchased under the NCIB for the years ended December 31, 2013 or 2012. The NCIB was not renewed for 2014.

7. CONTRIBUTED SURPLUS

     
Continuity of Contributed Surplus
Years Ended December 31,
2013 2012
(C$000s) ($) ($)
Balance, beginning of year 27,546 24,170
  Stock options expensed 5,454 6,990
  Stock options exercised (5,342) (3,614)
Balance, end of year 27,658 27,546
       

8. STOCK-BASED COMPENSATION

(a) Stock Options

Continuity of Stock Options   2013 2012
      Average   Average
      Exercise   Exercise
    Options Price Options Price
    (#) (C$) (#) (C$)
Balance, January 1   2,920,412 25.67 3,198,475 23.31
  Granted during the year   707,700 24.64 704,200 27.71
  Exercised for common shares   (896,837) 17.61 (686,488) 16.35
  Forfeited   (228,025) 28.94 (295,775) 26.60
       Expired   (1,875) 13.06 - -
Balance, December 31   2,501,375 27.98 2,920,412 25.67
             

Stock options vest equally over four years and expire five years from the date of grant. When stock options are exercised, the proceeds, together with the amount of compensation expense previously recorded in contributed surplus, are added to capital stock.

(b) Stock Units

Continuity of Stock Units 2013 2012
  Deferred Performance Restricted Deferred Performance Restricted
  Stock Stock Stock Stock Stock Stock
  Units Units Units Units Units Units
  (#) (#) (#) (#) (#) (#)
Balance, January 1 35,000 45,000 247,230 35,000 40,000 -
       Granted during the year 35,000 45,000 399,125 35,000 45,000 270,135
       Exercised (35,000) (45,000) (82,410) (35,000) (40,000) -
       Forfeited - - (50,150) - - (22,905)
Balance, December 31 35,000 45,000 513,795 35,000 45,000 247,230
             

The Company grants deferred stock units to its outside directors. These units vest in November of the year of grant and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the deferred stock units is recognized equally over the vesting period, based on the current market price of the Company's shares. During the year ended December 31, 2013, $1,064 of compensation expense was recognized for deferred stock units (year ended December 31, 2012 - $885). This amount is included in selling, general and administrative expenses. At December 31, 2013, the liability pertaining to deferred stock units was $1,085 (December 31, 2012 - $877).

The Company grants performance stock units to its senior officers who do not participate in the stock option plan. The amount of the grants earned is linked to corporate performance and the grants vest on the approval of the Board of Directors at the meeting held to approve the consolidated financial statements for the year in respect of which performance is being evaluated. As with the deferred stock units, performance stock units are settled either in cash or Company shares purchased on the open market. During the year ended December 31, 2013, $1,467 of compensation expense was recognized for performance stock units (year ended December 31, 2012 - $1,296). This amount is included in selling, general and administrative expenses. At December 31, 2013, the liability pertaining to performance stock units was $1,395 (December 31, 2012 - $1,227).

The Company grants restricted share units to its employees. These units vest equally over three years and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the restricted share units is recognized over the vesting period, based on the current market price of the Company's shares. During the year ended December 31, 2013, $9,031 of compensation expense was recognized for restricted share units (year ended December 31, 2012 - $3,693). This amount is included in selling, general and administrative expense. At December 31, 2013, the liability pertaining to restricted share units was $10,696 (December 31, 2012 - $3,693).

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

9. FINANCIAL INSTRUMENTS

The Company's financial instruments included in the consolidated balance sheets are comprised of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, bank loan and long-term debt.

The fair values of financial instruments included in the consolidated balance sheets, except long-term debt, approximate their carrying amounts due to the short-term maturity of those instruments. The fair value of the senior unsecured notes based on the closing market price at December 31, 2013 was $652,921 before deduction of unamortized debt issuance costs (December 31, 2012 - $443,228). The carrying value of the senior unsecured notes at December 31, 2013 was $638,160 before deduction of unamortized debt issuance costs and debt discount (December 31, 2012 - $447,705). The fair values of the remaining long-term debt obligations approximate their carrying values, as described in note 4.

10. SUPPLEMENTAL CASH FLOW INFORMATION

Changes in non-cash operating assets and liabilities are as follows:

  Three Months Ended Dec 31, Years Ended Dec 31,
  2013 2012 2013 2012
(C$000s)        
Accounts receivable (97,816) (15,895) (75,702) (6,245)
Income taxes recoverable 1,393 (345) (854) 1,048
Inventory (12,852) 4,887 (8,748) (24,369)
Prepaid expenses and deposits 4,487 2,447 (5,230) (548)
Accounts payable and accrued liabilities 58,234 (1,782) 77,929 4,666
Other long-term liabilities (55) (51) (237) (340)
  (46,609) (10,739) (12,842) (25,788)
         

Purchase of property, plant and equipment (excluding the business acquisition disclosed in note 11) is comprised of:

  Three Months Ended Dec. 31, Years Ended Dec. 31,
  2013 2012 2013 2012
(C$000s) ($) ($)    
Property, plant and equipment additions (45,227) (55,694) (170,517) (279,017)
Change in liabilities related to purchase of        
       property, plant and equipment 3,897 356 (12,607) 17,696
  (41,330) (55,338) (183,124) (261,321)
           

11. BUSINESS COMBINATION

On October 1, 2013, the Company acquired all of the operating assets of Mission Well Services, LLC ("Mission"), a privately-held hydraulic fracturing and coiled tubing services provider based in San Antonio, Texas and operating in the Eagle Ford shale play. The total purchase price was cash consideration of $150,513. The purchase was recognized as a business combination and accounted for as such using the acquisition method of accounting under IFRS 3 Business Combinations.

The acquisition provides the Company with modern fracturing and coiled tubing equipment as well as an entry into the Texas pressure pumping market. The recognized amounts of identifiable assets acquired and liabilities assumed are as follows:

(C$000s)     ($)
Prepaid expenses and deposits     1,261
Inventory     6,680
Property, plant and equipment     147,094
Deferred income tax liability     (1,775)
Total identifiable net assets     153,260
Gain on business combination, net of tax     (2,747)
Total consideration     150,513
       

The composition of the business combination expenses reported in the Statement of Operations is as follows:

(C$000s)     ($)
Gain on business combination     (4,522)
Deferred taxes relating to business combination     1,775
      (2,747)
Acquisition costs     5,221
Business combination     2,474
       

The gain of $4,522, before taxes, was recognized in the Statement of Operations on the acquisition date and represents the excess of the fair value of identifiable assets over the consideration paid.

The Company has reassessed the fair value of the identifiable assets purchased and the fair value of the consideration transferred in determining the gain, as required under IFRS.

During the period October 1, 2013 to December 31, 2013, the acquisition contributed immaterial operating income to the Company. The effect on revenue and operating income, had the acquisition occurred on January 1, 2013, is not determinable.

12. CAPITAL STRUCTURE

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

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

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

Years Ended December 31, 2013 2012
(C$000s) ($) ($)
Net income for the year 26,733 96,361
Adjusted for the following:    
  Depreciation 110,006 90,381
  Amortization of debt issuance costs and debt discount 1,464 1,234
  Stock-based compensation 5,454 6,990
  Unrealized foreign exchange losses (gains) 1,350 (10,895)
  Gain on business combination, net of tax (2,747) -
  (Gain) loss on disposal of property, plant and equipment (1,514) 802
  Deferred income taxes 3,356 36,642
Cash flow 144,102 221,515
       

The ratio of long-term debt to cash flow does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

At December 31, 2013, the long-term debt to cash flow ratio was 4.52:1 (December 31, 2012 - 1.99:1) calculated on a 12-month trailing basis as follows:

As at December 31, 2013 2012
(C$000s, except ratio) ($) ($)
Long-term debt (net of unamortized debt issuance costs and    
  debt discount) (note 4) 651,937 441,497
Cash flow 144,102 221,515
Long-term debt to cash flow ratio 4.52:1 1.99:1
       

The ratio is higher at the current year-end than the prior year-end due to additional debt taken on to acquire the Mission assets. The ratio reflects the full amount of debt (at December 31, 2013) whereas cash flow only represents three months of activities related to the Mission assets.

The Company is subject to certain financial covenants relating to working capital, leverage and the generation of cash flow in respect of its operating and revolving credit facilities. These covenants are monitored on a monthly basis. The Company is in compliance with all such covenants.

The Company's capital management objectives, evaluation measures and targets remained unchanged over the periods presented.

13. PURCHASE OBLIGATIONS

The Company has obligations for the purchase of products, services and property, plant and equipment over the next five years that total approximately $114,814.

14. RELATED-PARTY TRANSACTIONS

In November 2010, the Company lent a senior officer $2,500 to purchase common shares of the Company on the Toronto Stock Exchange. The loan is on a non-recourse basis and is secured by the common shares acquired with the loan proceeds. It is for a term of five years and bears interest at 3.375 percent per annum, payable annually. The market value of the shares that secure the loan was approximately $2,623 as at December 31, 2013 (December 31, 2012 - $2,119). In accordance with applicable accounting standards regarding share purchase loans receivable, this loan is classified as a reduction of shareholders' equity due to its non-recourse nature. In addition, the shares purchased with the loan proceeds are considered to be, in substance, stock options.

The Company leases certain premises from an entity controlled by a director of the Company. The rent charged for these premises during 2013 was $552 (year ended December 31, 2012 - $356), as measured at the exchange amount.

During 2012, an entity controlled by a director of the Company provided ongoing real estate advisory services to the Company; the aggregate fees charged for such services were $29. This arrangement was discontinued in 2013.

15. PRESENTATION OF EXPENSES

The Company presents its expenses on the consolidated Statements of Operations using the function of expense method whereby expenses are classified according to their function within the Company. This method was selected as it is more closely aligned with the Company's business structure. The Company's functions under IFRS are as follows:

  • operations; and
  • selling, general and administrative.

Cost of sales includes direct operating costs (including product costs, direct labour and overhead costs) and depreciation on assets relating to operations.

Additional information on the nature of expenses is as follows:

Years Ended December 31, 2013 2012
(C$000s) ($) ($)
Product costs 477,384 490,222
Depreciation 110,006 90,381
Amortization of debt issuance costs and debt discount 1,464 1,234
Employee benefits expense (note 16) 379,117 356,844
     
   

16. EMPLOYEE BENEFITS EXPENSE

Employee benefits include all forms of consideration given by the Company in exchange for services rendered by employees.

Years Ended December 31, 2013 2012
(C$000s) ($) ($)
Salaries and short-term employee benefits 356,519 337,919
Post-employment benefits (group retirement savings plan) 3,595 3,587
Share-based payments 17,016 12,866
Termination benefits 1,987 2,472
  379,117 356,844
     

17. COMPENSATION OF KEY MANAGEMENT

Key management is defined as the Company's Board of Directors, Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer. Compensation awarded to key management comprised:

Years Ended December 31, 2013 2012
(C$000s) ($) ($)
Salaries, fees and short-term benefits 2,151 2,756
Post-employment benefits (group retirement savings plan) 39 34
Share-based payments 2,732 2,392
  4,922 5,182
     

In the event of termination, key management (excluding the Board of Directors) are entitled to one to two years of annual compensation. In the event of termination resulting from change of control, key management (excluding the Board of Directors) are entitled to two years of annual compensation.

18. 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 $10,033 (6,846 euros) plus interest were due to the former employees. This decision was appealed to the Athens Court of Appeal, which allowed the appeal in 2001 and annulled the above-mentioned decision of the Athens Court of First Instance. The said group of former employees filed an appeal with the Supreme Court of Greece, which was heard on May 29, 2007. The Supreme Court of Greece allowed the appeal and sent the matter back to the Athens Court of Appeal for the consideration of the quantum of awardable salaries in arrears. On June 3, 2008, the Athens Court of Appeal rejected NAPC's appeal and reinstated the award of the Athens Court of First Instance, which decision was further appealed to the Supreme Court of Greece. The matter was heard on April 20, 2010 and a decision rejecting such appeal was rendered in June 2010. NAPC and the Company are assessing available rights of appeal to any other levels of court in any jurisdiction where such an appeal is warranted. NAPC is also the subject of a claim for approximately $4,194 (2,862 euros) from the Greek Social Security Agency for social security obligations associated with the salaries in arrears that are the subject matter of the above-mentioned decision and interest of approximately $3,226 (2,201 euros) payable on such amounts as at December 31, 2013. 

Several other smaller groups of former employees have filed similar claims in various courts in Greece. One of these cases was heard by the Athens Court of First Instance on January 18, 2007. By judgment rendered November 23, 2007, the plaintiff's allegations were partially accepted, and the plaintiff was awarded compensation for additional work of approximately $51 (35 euros), plus interest. The appeal of this decision was heard on June 2, 2009, at which time an additional claim by the plaintiff was also heard. A decision in respect of the hearing has been rendered which accepted NAPC's appeal of the initial claim and partially accepted the additional claim of the plaintiff, resulting in an award of approximately $16 (11 euros), plus interest.

Another one of the lawsuits seeking salaries in arrears of $188 (128 euros) plus interest was heard by the Supreme Court of Greece on November 6, 2007, at which date the appeal of the plaintiffs was denied for technical reasons due to improper service. A rehearing of this appeal was heard on September 21, 2010 and the decision rendered declared once again the appeal inadmissible due to technical reasons. The remaining action, which is seeking salaries in arrears of approximately $643 (439 euros) plus interest, was scheduled to be heard before the Athens Court of First Instance on October 1, 2009, but has been postponed a total of four times, including the most recent postponement on February 22, 2013. No new date has been set yet for the postponed hearing.

The maximum aggregate interest payable under the claims noted above amounted to $17,988 (12,274 euros) as at December 31, 2013.

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.

U.S. Litigation

A class and collective action complaint was filed against the Company in September 2012 in the United States District Court for the Western District of Pennsylvania. The complaint alleges failure to pay U.S. employees the correct amount of overtime pay required by the Fair Labor Standards Act (FLSA) and under the Pennsylvania Minimum Wage Act. In May 2013, the plaintiffs amended their complaint to add a Colorado wage-hour claim. In June 2013, the parties filed a joint stipulation for conditional certification of the FLSA collective action with certain current and former employees as the defined class. The notice to opt-in to the class was mailed to 1,204 current and former employees in September 2013. The opt-in period expired on November 15, 2013 and 359 individuals opted in. A discovery plan was approved by the court that extends through June 23, 2014.

The Company has filed answers to each complaint in a timely manner and believes it has defenses to each claim. At this time no motion for final class certification as to the FLSA claim or motion for certification of the Pennsylvania or Colorado state law claims has been filed. Thus no FLSA, Pennsylvania or Colorado class has been certified. Plaintiffs have not alleged an amount of damages and at this time it is not possible to predict the amount of any potential recovery. Given the stage of the proceedings and the existence of available defenses, no provision has been recorded in the Company's financial statements regarding these claims, since the direction and financial consequences of the claims in the amended complaint cannot be determined at this time. The Company does not have insurance coverage for these claims.

19. SEGMENTED INFORMATION

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

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

    United   Latin    
  Canada States Russia America Corporate Consolidated
(C$000s) ($) ($) ($) ($) ($) ($)
Three Months Ended December 31, 2013          
Revenue 197,112 189,239 41,404 35,299 - 463,054
Operating income (loss)(1) 35,003 29,596 2,664 3,836 (13,583) 57,416
Segmented assets 706,405 828,527 149,946 185,053 - 1,869,931
Capital expenditures 13,602 22,683 4,918 4,024 - 45,227
Goodwill 7,236 2,308 979 - - 10,523
Three Months Ended December 31, 2012          
Revenue 201,573 109,975 24,197 31,742 - 367,487
Operating income (loss)(1) 49,022 5,488 (254) 3,101 (14,139) 43,218
Segmented assets 707,663 568,665 126,564 121,929 - 1,524,821
Capital expenditures 22,216 26,351 2,454 4,673 - 55,694
Goodwill 7,236 2,308 979 - - 10,523
Year Ended December 31, 2013          
Revenue 677,114 616,174 158,782 111,744 - 1,563,814
Operating income (loss)(1) 121,699 104,125 13,358 3,523 (54,629) 188,076
Segmented assets 706,405 828,527 149,946 185,053 - 1,869,931
Capital expenditures 75,875 62,297 13,368 18,977 - 170,517
Goodwill 7,236 2,308 979 - - 10,523
Year Ended December 31, 2012          
Revenue 732,880 638,483 112,765 111,088 - 1,595,216
Operating income (loss)(1) 188,555 105,129 6,566 8,839 (52,076) 257,013
Segmented assets 707,663 568,665 126,564 121,929 - 1,524,821
Capital expenditures 124,902 138,328 6,173 9,614 - 279,017
Goodwill 7,236 2,308 979 - - 10,523
             
(1)      Operating income (loss) is defined as net income (loss) before depreciation, interest, foreign exchange gains or losses, expenses and gain related to business combinations, gains or losses on disposal of property, plant and equipment, and income taxes.
         
   
  Three Months Ended Dec 31, Years Ended Dec 31,
  2013 2012 2013 2012
(C$000s)        
Net income (loss) 11,751 10,981 26,733 96,361
Add back (deduct):        
  Depreciation 31,410 23,634 110,006 90,381
  Interest 13,433 8,933 41,985 36,354
  Foreign exchange (gains) losses (1,517) (3,818) 1,183 (8,260)
  Business combination (note 11) 2,474 - 2,474 -
    (Gain) loss on disposal of property, plant andequipment (1,208) 170 (1,514) 802
  Income taxes 1,073 3,318 7,209 41,375
Operating income 57,416 43,218 188,076 257,013
           

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

The following table sets forth consolidated revenue by service line:

  Three Months Ended Dec 31, Years Ended Dec 31,
  2013 2012 2013 2012
(C$000s)        
Fracturing 422,306 331,590 1,422,872 1,436,279
Coiled tubing 22,477 19,661 73,053 100,239
Cementing 15,399 10,181 53,520 34,750
Other 2,872 6,055 14,369 23,948
  463,054 367,487 1,563,814 1,595,216
         

The Company's customer base consists of approximately 180 oil and natural gas exploration and production companies, ranging from large multinational publicly traded companies to small private companies. Notwithstanding the Company's broad customer base, Calfrac had five significant customers that collectively accounted for approximately 46 percent of the Company's revenue for the year ended December 31, 2013 (year ended December 31, 2012 - five significant customers for approximately 39 percent) and, of such customers, one customer accounted for approximately 12 percent of the Company's revenue for the year ended December 31, 2013 (year ended December 31, 2012 - 13 percent).

20. SEASONALITY OF OPERATIONS

The Company's Canadian business is seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place and access to wellsites in Canada is reduced.

21. DIVIDEND REINVESTMENT PLAN

The Company's Dividend Reinvestment Plan (DRIP) allows shareholders to direct cash dividends paid on all or a portion of their common shares to be reinvested in additional common shares that are issued at 95 percent of the volume-weighted average price of the common shares traded on the Toronto Stock Exchange during the last five trading days preceding the relevant dividend payment date.

A dividend of $0.25 per common share, totalling $11,575, was declared on December 5, 2013, to be paid on January 15, 2014. This amount has been accrued in the financial statements.

A dividend of $0.25 per common share was declared on September 17, 2013 and paid on October 15, 2013. Of the total dividend of $11,531, $4,282 was reinvested under the DRIP into 144,478 common shares of the Company.

A dividend of $0.25 per common share was declared on June 14, 2013 and paid on July 15, 2013. Of the total dividend of $11,472, $3,313 was reinvested under the DRIP into 111,594 common shares of the Company.

A dividend of $0.25 per common share was declared on February 26, 2013 and paid on April 15, 2013. Of the total dividend of $11,375, $3,108 was reinvested under the DRIP into 125,024 common shares of the Company.

SOURCE Calfrac Well Services Ltd.

For further information:

Fernando Aguilar
President & Chief Executive Officer
Telephone:  403-266-6000
Fax:  403-266-7381

Michael (Mick) J. McNulty
Chief Financial Officer
Telephone:  403-266-6000
Fax:  403-266-7381

Tom J. Medvedic
Senior Vice President,
Corporate Development
Telephone:  403-266-6000
Fax:  403-266-7381

Ian Gillies
Manager, Investor Relations
Telephone:  403-266-6000
Fax:  403-266-7381