Calfrac Announces Fourth Quarter Results, Dividend Increase and 2012 Capital Budget Reduction

CALGARY, Feb. 28, 2012 /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, 2012.

HIGHLIGHTS
  Three Months Ended December 31,       Years Ended December 31,
  2011 2010 Change 2011 2010 Change
(C$000s, except per share and unit data) ($) ($) (%) ($) ($) (%)
(unaudited)            
Financial            
Revenue 490,037 268,710 82 1,537,392 935,927 64
Operating income(1) 150,364 62,184 142 412,828 185,236 123
EBITDA(2) 149,146 62,464 139 398,682 185,839 115
      Per share - basic 3.40 1.44 136 9.13 4.31 112
      Per share - diluted 3.38 1.42 138 8.98 4.25 111
Net income attributable to            
      the shareholders of Calfrac            
      before foreign exchange            
      losses (gains)(3) 78,388 14,476 442 199,097 48,724 309
      Per share - basic 1.79 0.33 442 4.57 1.13 304
      Per share - diluted 1.78 0.33 439 4.48 1.11 304
Net income attributable to            
      the shareholders of Calfrac 78,921 16,126 389 187,451 49,502 279
      Per share - basic 1.80 0.37 386 4.29 1.15 273
      Per share - diluted 1.79 0.37 384 4.22 1.13 273
Working capital (end of period)       398,526 341,677 17
Total equity (end of period)       700,569 502,032 40
Weighted average common shares outstanding (000s)            
      Basic 43,805 43,247 1 43,689 43,090 1
      Diluted 44,091 44,113 - 44,393 43,726 2
             
Operating (end of period)            
Pumping horsepower (000s)       719 481 49
Coiled tubing units (#)       29 29 -
Cementing units (#)       23 21 10

(1)  Operating income is defined as net income (loss) before depreciation, interest, foreign exchange gains or losses, gains or losses on disposal of capital assets 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.

As of January 1, 2011, Calfrac began preparing its interim consolidated financial statements and comparative information based on IFRS. Previously, the Company's financial statements were prepared in accordance with Canadian generally accepted accounting principles (GAAP).

CEO's MESSAGE

I am pleased to present Calfrac's operating and financial highlights for 2011 and to discuss our prospects for 2012. During the fourth quarter, our Company:

  • achieved quarterly record revenue, EBITDA and net income resulting from high levels of pressure pumping activity in the unconventional oil and natural gas plays in western Canada and the United States; and
  • continued to remain active in the early-stage development of many emerging unconventional resource plays in North America..

Financial Highlights

For the three months ended December 31, 2011, the Company recorded:

  • record fourth-quarter revenue of $490.0 million versus $268.7 million in the comparable quarter of 2010, led by higher year-over-year activity in Canada, the United States, Russia and Latin America;
  • operating income of $150.4 million versus $62.2 million in the comparable period in 2010, resulting primarily from strong activity and improved pricing in Canada and the United States, combined with a continued focus on cost control; and
  • net income of $78.9 million or $1.79 per share diluted compared to net income of $16.1 million or $0.37 per share diluted in the fourth quarter of 2010.

For the year ended December 31, 2011, the Company generated:

  • record annual revenue of $1.5 billion versus $935.9 million in 2010, led by higher year-over-year activity in all of Calfrac's operating divisions;
  • operating income of $412.8 million versus $185.2 million in 2010, driven by strong financial performance in Canada and the United States; and
  • net income of $187.5 million or $4.22 per share diluted, which included a $14.2 million foreign exchange loss ($0.26 per share diluted) of which a majority is unrealized, compared to net income of $49.5 million or $1.13 per share diluted in 2010. After adjusting for this foreign exchange loss, net income in 2011 would have been $199.1 million or $4.48 per share diluted.

Operational Highlights

Canada

During the fourth quarter of 2011 Calfrac experienced very strong demand for its services as oilfield activity in western Canada continued to build from the third quarter and remained focused on the development of liquids-rich natural gas and oil formations. As a result, the Company's Canadian operations generated record revenue and operating income.

With capital programs of exploration and production companies incorporating larger multi-well pad designs, longer horizontal well legs and a greater average number of fractures per wellbore, the vast majority of the Company's activity was concentrated in these unconventional resource plays throughout western Canada. Using these approaches, our customers are continuing to focus on realizing further efficiencies as they steadily de-risk and mature these plays. Calfrac will continue to work closely with its customers and introduce new technologies to help improve the economics of the resource plays. The Company's leadership position in fluid technology has provided the basis for further expansion, particularly in oil regions, which have become more reliant on fluid technology improvements to develop these plays.

United States

Calfrac's United States operations delivered exceptional financial and operational performance in the fourth quarter. Record revenue and operating income were driven by an expanded presence in the Marcellus and Bakken resource plays, combined with a larger presence in the Niobrara oil shale play in the Rocky Mountain region. The Company's strong financial performance during the fourth quarter was partially due to the deployment of an additional fracturing crew into Pennsylvania midway through the third quarter, based on a long-term minimum commitment contractual agreement with a large customer. As a result, three fracturing fleets are currently operating in that region's Marcellus shale play and the Company expects high utilization for this equipment based on its contract position and customer base.

Early in the fourth quarter, the Company deployed a third fracturing fleet into the Bakken play of North Dakota. Two of the Company's three fracturing crews operating in North Dakota during the fourth quarter are under long-term minimum commitment contracts with one of the region's largest operators. Demand for Calfrac's services in this region remains extremely high. Near year-end the Company deployed an additional fracturing fleet into the emerging Niobrara oil shale play in northern Colorado and Wyoming. While the play is in the early stages of development, the Company has taken a leadership position through its longstanding presence and established customer base.

The Company continues to proactively manage its commodity and logistical requirements, as the larger volumes associated with the market shift towards unconventional resource development have made this function critical for job execution success. Calfrac has always devoted a great deal of resources to these requirements and, therefore, remains well-positioned to execute its growth plans. During the fourth quarter, the Company also expanded its cementing operations in Pennsylvania and commenced coiled tubing operations in the Bakken play. Calfrac is optimistic about the future expansion opportunities for these services lines in these regions.

Russia

Activity for Calfrac's Russian operations was consistent with the third quarter as the Company's customers focused on the completion of their 2011 capital plans. Calfrac is actively managing its operating cost structure to mitigate cost increases experienced in recent quarters and improve operating income, which was successful in the fourth quarter. The Russian well servicing market is concentrated on the development of crude oil formations, which is expected to drive improvement in the demand for the Company's services in Western Siberia.

Latin America

In Mexico, completions activity continued to improve during the fourth quarter of 2011 as a focus towards greater onshore development was realized throughout the past year, reviving activity from the lows experienced in late 2010. Calfrac's activities remain concentrated on oil-producing regions due to the current strong commodity price environment. Calfrac anticipates continuing to deploy innovative technologies into this market as it collaborates with its customers to enhance oil and natural gas production and financial returns.

Cementing and coiled tubing activity in Argentina remained consistent with the previous quarter. The Company continues to broaden its customer base and establish itself as a top-tier service provider in this market. Producers are dedicating significant resources towards the development of several emerging shale natural gas and oil plays. This expected future activity is anticipated to provide additional demand for Calfrac's service lines and the opportunity to commence fracturing operations by mid-year.

Calfrac commenced cementing operations in Colombia late in the year and continues to increase the size of its operations in this emerging international market through the deployment of additional capital and expansion of its customer base.

Outlook and Business Prospects


Given the recent weakness in natural gas prices, the Company expects that North American drilling and completion activity in 2012 will focus on the development of oil and liquids-rich natural gas resource plays. During 2011, the adoption of multi-well pads and 24-hour operations increased and the Company expects that this trend will become more prominent as its customers strive to improve drilling and completion efficiencies in these plays. Despite advancements made in recent years, Calfrac believes that completion strategies in oil and liquids-rich reservoirs remain in early stages of development. With the introduction of improving technologies, it is expected that the economics of these plays will continue to improve and result in further commodity diversification and provide greater sustainability of the Company's revenue base.

The largest growth driver in the Company's Canadian operations has been completion activity in unconventional light oil plays such as the Cardium, Viking and Bakken as well as emerging plays such as Beaverhill Lake, Alberta Bakken, Dunvegan and Slave Point. As these plays provide producers with very strong returns at current commodity prices, fracturing and coiled tubing activity is expected to increase and provide for further commodity-based diversification for Calfrac in western Canada.

Activity in the liquids-rich natural gas plays of northwest Alberta and northeast British Columbia is expected to remain high as producers focus on the types of plays and particular areas within plays offering the highest liquids content. In addition to the more developed regions, emerging areas such as the Duvernay shale could drive significant demand for Calfrac's services in 2012 and beyond. The Company is actively involved with its customers in the early-stage development of these unconventional resource plays and estimates that in excess of 70 percent of its activities will be focused on oil or liquids-rich natural gas development in 2012.

In the United States, Calfrac's expanded presence in the Bakken, Marcellus and Niobrara resource plays has created the foundation for significant growth. The Company expects demand for its services in the Bakken oil shale play of North Dakota to be robust in 2012. With the addition of its recently deployed third and fourth fracturing crews and the commencement of coiled tubing operations, Calfrac's activity in this market is expected to grow significantly. Service intensity through longer horizontal legs and a greater number of fractures per wellbore combined with the increased adoption of 24-hour operations provide the basis for strong growth anticipated in North Dakota.

The Marcellus shale play has evolved into one of the most economic natural gas producing regions in the United States. Calfrac deployed its third fracturing fleet into the Marcellus shale play in August 2011. Two of the three crews are contracted to large producers under long-term minimum commitment agreements, with the other crew committed to one of these customers under a long-term right-of-first-refusal arrangement. The Company is completing the construction of a new district facility in Smithfield, Pennsylvania to service this play, which will provide the capacity to service not only the Marcellus but also a large part of the emerging liquids-rich Utica shale play. Calfrac recently completed its first significant project in the Utica play, which has the potential to provide a significant future growth platform for the Company.

The third area of growth for Calfrac in the United States market is the emerging Niobrara oil shale play of northern Colorado and Wyoming. Calfrac deployed an additional fracturing spread into this region late in the fourth quarter of 2011. Similar to the Cardium play in Canada, this region was considered mature but has been revitalized using multi-stage fracturing techniques in horizontal wellbores. While still in the early stages of development, recent exploration successes by some of the Company's customers plus announcements of accelerated drilling by certain large area operators provide the basis for optimism.

Calfrac operates in Russia under a mix of annual and multi-year agreements. The Company operates five fracturing spreads and seven coiled tubing units in this oil-focused market. The Company recently concluded its 2012 tender process and expects that utilization of the Company's equipment will remain high, generating operating margins consistent with 2011. In the future, Calfrac expects that fracturing of Russian natural gas wells may become more prevalent given the country's status as one of the world's largest natural gas producers. In addition, the Company believes that the Russian market is poised to begin applying horizontal drilling and multi-stage completion technology to a greater extent, which could also create additional future demand for Calfrac's services.

The Company's Mexican operations and financial performance improved throughout 2011 from the low levels of oilfield activity experienced in the latter half of 2010, primarily due to the easing of Pemex budget constraints and a greater focus on completions activity. Calfrac is optimistic that this recovery will continue in 2012 with the strong price of crude oil stimulating onshore development in Mexico. The Company recognizes the region's long-term potential and will remain focused on providing new technology and improving its operating efficiencies. Calfrac will continue to assess available long-term opportunities and plan its strategy accordingly.

The Company remains encouraged by the development of a number of emerging unconventional oil and natural gas plays in Argentina which are expected to stimulate further oilfield activity over the longer term. Similar to North America, horizontal drilling combined with multi-stage fracturing is anticipated to be integral to unlocking the large development potential of these reservoirs. In response to these market opportunities, Calfrac deployed additional cementing and coiled tubing equipment in 2011 and expects to commence fracturing operations in Argentina during 2012.

Calfrac continues to execute its geographical diversification strategy of deploying its technology and brand into selected international markets. The Company has been evaluating various market opportunities in Latin America and commenced cementing operations in the oil-focused Colombian market late in 2011. The entry into Colombia is consistent with Calfrac's international expansion strategy of using cementing or coiled tubing operations, which require a smaller initial capital investment, to provide an opportunity to build a market presence prior to the potential deployment of fracturing equipment. The Company expects that the emerging Colombia market will provide significant opportunities for growth.

The Company has chosen to reduce its 2012 capital budget by $94 million to a total of $271 million. Calfrac wishes to strategically employ its capital budget to support existing customer commitments as its customers further develop their completion requirements in several North American unconventional resource plays through 2012. During the balance of 2012, the Company expects to make fewer new equipment additions relating to potential future demand that is not supported by existing or pending contracts. The reduced capital budget also recognizes the lower horsepower requirements of many of today's developing unconventional oil and liquids-rich reservoirs, which are the current focus of many customers, since many oil and natural gas companies are continuing to reduce capital expenditures in dry natural gas plays, due to the current lower natural gas price environment. In addition, the trend towards the greater adoption of 24-hour operations has resulted in improved equipment utilization, requiring fewer incremental crews to complete customer programs. Overall, Calfrac expects that the incremental horsepower contemplated by the revised capital budget will properly meet the anticipated future demand for its services.

The majority of the reduction in the capital budget will be focused on the Company's U.S. operations and will result in a revised capital budget of $104 million for the United States Division. The revised capital budget includes the addition of approximately 52,000 horsepower (HHP), which will bring the United States Division's total horsepower capacity to approximately 490,000 HHP by the end of 2012. Calfrac's Canadian capital budget remains largely unchanged at $136 million which will add approximately 79,000 HHP to the Canadian fleet and result in year end horsepower of approximately 400,000. The Company remains optimistic about the continuing development of these unconventional resource plays in North America as well as internationally, and is well-positioned with a strong balance sheet to execute on any opportunities that are presented.

As a reflection of the Company's positive long-term outlook and commitment to maximizing shareholder value, Calfrac is pleased to announce that its Board of Directors has approved an increase to its semi-annual dividend from $0.10 to $0.50 per common share, thereby increasing the annual dividend to $1.00 per common share. The increased dividend indicates Calfrac's positive view on the sustainability of its strong earnings in the future and the Company's ability to provide a meaningful yield on investment without impacting its ability to aggressively pursue long-term growth opportunities as they arise.

On behalf of the Board of Directors,



Douglas R. Ramsay
Chief Executive Officer

February 27, 2012

2011 Overview


In the fourth quarter of 2011, the Company:

  • achieved record fourth-quarter revenue of $490.0 million, an increase of 82 percent from the comparable quarter in 2010, driven primarily by strong growth in all of the Company's divisions;
  • reported operating income of $150.4 million versus $62.2 million in the same quarter of 2010, an increase of 142 percent, mainly as a result of high levels of fracturing activity in western Canada and the United States; and
  • reported net income attributable to the shareholders of Calfrac of $78.9 million or $1.79 per share, including an unrealized $1.0 million foreign exchange loss, compared to net income of $16.1 million or $0.37 per share in the fourth quarter of 2010, which included a foreign exchange gain of $0.2 million.

In 2011, the Company:

  • increased revenue by 64 percent to $1.5 billion from $935.9 million in 2010, driven by strong growth in most of the Company's divisions;
  • reported operating income of $412.8 million versus $185.2 million in 2010, an increase of 123 percent, mainly as a result of high levels of fracturing and coiled tubing activity in the unconventional natural gas and oil plays of western Canada, combined with strong United States fracturing activity in the Fayetteville and Marcellus shale natural gas plays and the Bakken oil play;
  • reported net income attributable to the shareholders of Calfrac of $187.5 million or $4.22 per share, which included a primarily non-cash foreign exchange loss of $14.2 million, compared to results in 2010 of $49.5 million or $1.13 per share, which included the pre-tax impact of $22.7 million of refinancing costs resulting from the retirement of the Company's senior notes originally due in 2015;
  • made capital expenditures of $324.0 million, primarily to bolster the Company's fracturing operations;
  • deployed a second and third large fracturing fleet into both the Marcellus shale gas play in Pennsylvania and the Bakken oil shale play in North Dakota;
  • increased its credit facilities from $175.0 million in 2010 to $250.0 million with a syndicate of financial institutions, and extended the term of these facilities to four years;
  • increased its period-end working capital by 17 percent over December 31, 2010 to $398.5 million at December 31, 2011;
  • increased its semi-annual dividend by 33 percent from $0.075 per share to $0.10 per share during December 2011 and declared dividends of $7.7 million or $0.175 per share in 2011 compared to $5.4 million or $0.125 per share in 2010; and
  • announced a capital budget for 2012 of $365.0 million. The capital program will focus on the Company's operations in Canada and the United States as well as facilities and infrastructure capital required to support Calfrac's rapidly expanding fracturing, coiled tubing and cementing operations in many of the most active North American unconventional oil and natural gas markets. A portion of this capital is also dedicated to expanding Calfrac's presence in the well servicing markets in Argentina and Colombia.

Financial Overview - Three Months Ended December 31, 2011 Versus 2010


Canada      
Three Months Ended December 31, 2011 2010 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Revenue 237,286 160,967 47
Expenses      
       Operating 134,681 102,440 31
       Selling, General and Administrative (SG&A) 4,384 4,024 9
  139,065 106,464 31
Operating income(1) 98,221 54,503 80
Operating income (%) 41.4% 33.9% 22
Fracturing revenue per job ($) 183,063 131,653 39
Number of fracturing jobs 1,181 1,104 7
Pumping horsepower, end of period (000s) 285 211 35
Coiled tubing revenue per job ($) 30,301 22,128 37
Number of coiled tubing jobs 696 706 (1)
Coiled tubing units, end of period (#) 21 22 (5)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

Revenue

Revenue from Calfrac's Canadian operations during the fourth quarter of 2011 was $237.3 million versus $161.0 million in the comparable three-month period of 2010. The 47 percent increase in revenue was primarily due to the completion of more and larger fracturing and coiled tubing jobs in the Deep Basin, Montney, Cardium, Bakken and Viking plays of western Canada, combined with higher pricing.

Operating Income

Operating income in Canada increased by 80 percent to $98.2 million during the fourth quarter of 2011 from $54.5 million in the same period of 2010. The increase in Canadian operating income was mainly due to higher overall fracturing activity levels, improved pricing, and the completion of larger fracturing and coiled tubing jobs in the unconventional oil and natural gas resource plays of western Canada.

United States      
Three Months Ended December 31, 2011 2010 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Revenue 202,511 84,190 141
Expenses      
  Operating 137,342 59,913 129
  SG&A 4,877 3,202 52
  142,219 63,115 125
Operating income(1) 60,292 21,075 186
Operating income (%) 29.8% 25.0% 19
Fracturing revenue per job ($) 88,471 66,751 33
Number of fracturing jobs 2,200 1,204 83
Pumping horsepower, end of period (000s) 364 203 79
Coiled tubing units, end of period (#) 1 - -
Cementing revenue per job ($) 30,360 22,221 37
Number of cementing jobs 182 172 6
Cementing units, end of period (#) 9 7 29
C$/US$ average exchange rate(2) 1.0231 1.0128 1

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

(2) Source: Bank of Canada.

Revenue

Revenue from Calfrac's United States operations increased during the fourth quarter of 2011 to $202.5 million from $84.2 million in the comparable quarter of 2010. The increase was due primarily to the commencement of fracturing operations in the Bakken play of North Dakota during the fourth quarter of 2010, combined with higher fracturing activity in the Marcellus shale formation in Pennsylvania and West Virginia and the Fayetteville shale play in Arkansas, as well as improved pricing. The Company also operated a larger number of fracturing fleets in North Dakota and Pennsylvania. The Company deployed two additional fracturing fleets into each of these markets from the second quarter to early in the fourth quarter of 2012. In addition, the Company commenced cementing operations in the Marcellus shale play late in the second quarter of 2011, which increased cementing activity and average job sizes. Revenue also increased from the commencement of coiled tubing operations in North Dakota during the fourth quarter of 2011.

Operating Income

Operating income in the United States was $60.3 million for the fourth quarter of 2011, an increase of 186 percent from the comparative period in 2010. The increase in operating income was primarily due to higher equipment utilization in the Bakken oil shale play in North Dakota and the Marcellus natural gas shale play of Pennsylvania and West Virginia, partially due to the expanded use of 24-hour operations. In addition, improved pricing combined with the completion of larger fracturing jobs augmented operating income in the United States during the fourth quarter of 2011. These factors were offset slightly by the use of higher cost ceramic proppant in the Bakken play of North Dakota.

Russia      
Three Months Ended December 31, 2011 2010 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Revenue 30,737 19,095 61
Expenses      
  Operating 25,534 16,232 57
  SG&A 1,385 1,410 (2)
  26,919 17,642 53
Operating income(1) 3,818 1,453 163
Operating income (%) 12.4% 7.6% 63
Fracturing revenue per job ($) 126,819 81,272 56
Number of fracturing jobs 190 153 24
Pumping horsepower, end of period (000s) 45 45 -
Coiled tubing revenue per job ($) 54,442 44,697 22
Number of coiled tubing jobs 122 149 (18)
Coiled tubing units, end of period (#) 6 6 -
C$/rouble average exchange rate(2) 0.0328 0.0330 (1)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

(2) Source: Bank of Canada.

Revenue

During the fourth quarter of 2011, the Company's revenue from Russian operations increased by 61 percent to $30.7 million from $19.1 million in the corresponding three-month period of 2010. The increase in revenue was mainly due to the completion of larger fracturing and coiled tubing jobs combined with higher fracturing activity as a result of a larger equipment fleet deployed to Russia. This increase was offset slightly by lower coiled tubing activity.

Operating Income

Operating income in Russia in the fourth quarter of 2011 was $3.8 million compared to $1.5 million in the corresponding period of 2010. The increase in operating income was primarily due to the higher revenue base and lower fuel prices. The increase was offset partially by the provision of proppant and additional services for a new customer in Western Siberia.

Latin America      
Three Months Ended December 31, 2011 2010 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Revenue 19,503 4,458 337
Expenses      
  Operating 16,911 7,535 124
  SG&A 1,187 909 31
  18,098 8,444 114
Operating income (loss)(1) 1,405 (3,986) 135
Operating income (loss) (%) 7.2% -89.4% 108
Pumping horsepower, end of period (000s) 25 23 9
Cementing units, end of period (#) 9 8 13
Coiled tubing units, end of period (#) 1 1 -
C$/Mexican peso average exchange rate(2) 0.0750 0.0817 (8)
C$/Argentine peso average exchange rate(2) 0.2211 0.2505 (12)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

(2) Source: Bank of Canada.

Revenue

Calfrac's Latin America operations generated total revenue of $19.5 million during the fourth quarter of 2011 versus $4.5 million in the comparable three-month period in 2010. The increase in revenue was primarily due to higher fracturing activity and job sizes in Mexico as well as higher cementing activity in Latin America combined with a $2.9 million non-recurring reduction in revenue that was recorded in the fourth quarter of 2010. This increase was offset partially by lower pricing and the depreciation of the Mexican and Argentine pesos versus the Canadian dollar.

Operating Income (Loss)

Operating income in Latin America for the three months ended December 31, 2011 reversed from the comparable period's loss and amounted to $1.4 million, a change of 135 percent. The improvement in operating performance was primarily due to improved fracturing margins in Latin America and a $2.0 million reduction in operating income that was recorded in the fourth quarter of 2010 related to the non-recurring revenue adjustment discussed above. This increase was offset slightly by the impact of the decline in the Mexican and Argentine pesos against the Canadian dollar.

Corporate      
Three Months Ended December 31, 2011 2010 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Expenses      
  Operating 1,757 1,371 28
  SG&A 11,615 9,490 22
  13,372 10,861 23
Operating loss(1) (13,372) (10,861) 23
       
% of Revenue 2.7% 4.0% (33)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

Operating Loss

The 23 percent increase in Corporate expenses from the fourth quarter of 2010 was mainly due to an increase in the number of personnel supporting the Company's significantly larger scale of operations and higher bonus provisions. This increase was offset slightly by lower stock-based compensation expenses, due mainly to a decrease in Calfrac's stock price.

Depreciation

For the three months ended December 31, 2011, depreciation expense increased by 15 percent to $23.0 million from $19.9 million in the corresponding quarter of 2010. The increase in depreciation expense was mainly a result of a larger fleet of equipment operating in North America and Russia, offset partially by the depreciation of the United States dollar.

Foreign Exchange Losses or Gains

The Company incurred a foreign exchange loss of $1.0 million during the fourth quarter of 2011 versus a foreign exchange gain of $0.2 million in the comparative three-month period of 2010. 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 the fourth quarter of 2011 was attributable to the translation of United States dollar-denominated debt held in Russia and Mexico offset partially by the translation of United States dollar-denominated net monetary liabilities held in Canada. The value of the United States dollar at December 31, 2011 strengthened significantly against the Russian rouble and Mexican peso and weakened significantly against the Canadian dollar from the beginning of the quarter, resulting in a consolidated net foreign exchange loss.

Interest

The Company's net interest expense of $9.0 million for the fourth quarter of 2011 represented a decrease of $21.2 million from $30.2 million in the comparable period of 2010. This decrease was primarily due to the Company incurring $22.7 million of refinancing charges in the fourth quarter of 2010 related to the early redemption of US$230.7 million of unsecured senior notes originally due in February 2015. This decrease was partially offset by the increase in the aggregate principal of Calfrac's unsecured senior notes to US$450.0 million in November 2010.

Income Tax Expenses

The Company recorded income tax expense of $38.2 million during the fourth quarter of 2011 compared to an income tax recovery of $3.8 million in the comparable period of 2010. The effective income tax rate for the three months ended December 31, 2011 was 33 percent compared to negative 31 percent in the same quarter of 2010. The increase in total income tax expense was primarily due to significantly higher profitability in Canada and the United States.

The mix of earnings in the various tax jurisdictions in which Calfrac operates resulted in an effective tax rate of 33 percent in the fourth quarter of 2011. The effective tax rate in the fourth quarter of 2010 was negative mainly due to the incurrence of $22.7 million of refinancing charges related to the redemption of US$230.7 million of unsecured notes in November 2010, which resulted in a net recovery of current income tax. The utilization of a capital loss carry-forward, the benefit of which was not previously recorded, also contributed to the decrease in the effective tax rate in the fourth quarter of 2010.

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

2011

         

Financial

         

Revenue

337,408 269,456 440,491 490,037 1,537,392

Operating income(1)

88,000 47,937 126,527 150,364 412,828
EBITDA(1) 96,897 50,597 102,042 149,146 398,682
  Per share - basic 2.23 1.16 2.33 3.40 9.13
  Per share - diluted 2.18 1.14 2.30 3.38 8.98
Net income attributable to the shareholders of Calfrac 49,078 12,071 47,381 78,921 187,451
  Per share - basic 1.13 0.28 1.08 1.80 4.29
  Per share - diluted 1.11 0.27 1.07 1.79 4.22
Capital expenditures 65,777 72,047 85,130 101,008 323,962
Working capital (end of period) 356,370 324,832 375,823 398,526 398,526
Total equity (end of period) 556,277 568,607 632,889 700,569 700,569
           
Operating (end of period)          
Pumping horsepower (000s) 530 584 656 719  
Coiled tubing units (#) 29 29 29 29  
Cementing units (#) 21 22 23 23
         
           
Quarters Ended       Mar. 31,       June 30,       Sept. 30,       Dec. 31,       Total
(C$000s, except per share and operating data) ($) ($) ($) ($) ($)
(unaudited)          

2010

         

Financial

         

Revenue

227,123 164,849 275,245 268,710 935,927

Operating income(1)

38,831 14,878 69,343 62,184 185,236
EBITDA(1) 40,974 11,637 70,764 62,464 185,839
  Per share - basic 0.95 0.27 1.64 1.44 4.31
  Per share - diluted 0.94 0.27 1.63 1.42 4.25
Net income (loss) attributable to the shareholders of Calfrac 11,701 (10,280) 31,955 16,126 49,502
  Per share - basic 0.27 (0.24) 0.74 0.37 1.15
  Per share - diluted 0.27 (0.24) 0.74 0.37 1.13
Capital expenditures 14,974 26,813 30,097 47,015 118,899
Working capital (end of period) 156,095 138,500 177,561 341,677 341,677
Total equity (end of period) 460,771 453,290 485,280 502,032 502,032
           
Operating (end of period)          
Pumping horsepower (000s) 465 472 481 481  
Coiled tubing units (#) 28 28 28 29  
Cementing units (#) 21 21 21 21  

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

Financial Overview - Year Ended December 31, 2011 Versus 2010

Canada      
Years Ended December 31, 2011 2010 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Revenue 755,333 507,247 49
Expenses      
  Operating 481,062 343,764 40
  SG&A 15,909 14,583 9
  496,971 358,347 39
Operating income(1) 258,362 148,900 74
Operating income (%) 34.2% 29.4% 16
Fracturing revenue per job ($) 165,666 124,580 33
Number of fracturing jobs 4,165 3,702 13
Pumping horsepower, end o f period (000s) 285 211 35
Coiled tubing revenue per job ($) 25,511 26,046 (2)
Number of coiled tubing jobs 2,561 1,768 45
Coiled tubing units, end of period (#) 21 22 (5)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

Revenue

Revenue from Calfrac's Canadian operations was $755.3 million in 2011 versus $507.2 million in 2010. The 49 percent increase was primarily due to more and larger fracturing jobs in the unconventional natural gas resource plays of northern Alberta and northeast British Columbia, increased pricing and an increase in oil-related fracturing in the resource plays of Saskatchewan and west central Alberta. Higher coiled tubing activity levels in western Canada also contributed to the revenue increase.

Operating Income

Operating income in Canada was $258.4 million in 2011 versus $148.9 million in 2010, mainly due to higher overall fracturing and coiled tubing activity levels, improved pricing, the completion of larger fracturing jobs in the unconventional oil and natural gas resource plays of western Canada, and a focus on controlling operating and SG&A expenses.

United States      
Years Ended December 31, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 607,731 301,512 102
Expenses      
  Operating 408,657 225,567 81
  SG&A 14,865 10,513 41
  423,522 236,080 79
Operating income(1) 184,209 65,432 182
Operating income (%) 30.3% 21.7% 40
Fracturing revenue per job ($) 82,527 64,726 28
Number of fracturing jobs 7,143 4,459 60
Pumping horsepower, end of period (000s) 364 203 79
Coiled tubing units, end of period (#) 1 - -
Cementing revenue per job ($) 26,016 22,015 18
Number of cementing jobs 611 586 4
Cementing units, end of period (#) 9 7 29
C$/US$ average exchange rate(2) 0.9891 1.0299 (4)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

(2) Source: Bank of Canada.

Revenue

Revenue from Calfrac's United States operations increased by 102 percent during 2011 to $607.7 million from $301.5 million in 2010, primarily due to the commencement of fracturing operations in the Bakken play of North Dakota during the fourth quarter of 2010, combined with a larger equipment fleet and higher fracturing activity in the Marcellus shale formation in Pennsylvania and West Virginia and the Fayetteville shale play in Arkansas. The revenue increase was also a result of improved pricing and the commencement of cementing operations in Pennsylvania late in the second quarter of 2011. It was partially offset by lower fracturing activity levels in the Rocky Mountain region of Colorado and a 4 percent decline in the United States dollar against the Canadian dollar.

Operating Income

Operating income in the United States was $184.2 million for 2011, an increase of 182 percent from 2010. The significant increase in operating income was primarily due to a larger equipment fleet and high equipment utilization in the Bakken oil shale play in North Dakota and the Marcellus natural gas shale play of Pennsylvania and West Virginia. This higher utilization of equipment was partially due to a greater proportion of 24-hour operations. In addition, improved pricing combined with the completion of larger fracturing and cementing jobs increased operating income. These factors were offset partially by the impact of the depreciation of the United States dollar.

Russia      
Years Ended December 31, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 116,105 76,595 52
Expenses      
  Operating 96,950 62,791 54
  SG&A 6,413 4,860 32
  103,363 67,651 53
Operating income(1) 12,742 8,944 42
Operating income (%) 11.0% 11.7% (6)
Fracturing revenue per job ($) 114,541 82,151 39
Number of fracturing jobs 751 603 25
Pumping horsepower, end of period (000s) 45 45 -
Coiled tubing revenue per job ($) 53,531 43,926 22
Number of coiled tubing jobs 562 616 (9)
Coiled tubing units, end of period (#) 6 6 -
C$/rouble average exchange rate(2) 0.0337 0.0339 (1)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

(2) Source: Bank of Canada.

Revenue

The Company's revenue from Russian operations increased by 52 percent to $116.1 million in 2011 from $76.6 million in 2010, primarily due to higher fracturing activity as a result of a larger equipment fleet deployed to Russia in mid-2010, combined with larger fracturing and coiled tubing job sizes. This was offset partially by lower coiled tubing activity.

Operating Income

Operating income in Russia was $12.7 million in 2011 compared to $8.9 million in 2010, primarily due to the higher revenue base. This increase was offset partially by lower operating margins related mainly to the provision of proppant, fracturing tubing and packers for new operations in Western Siberia.

Latin America

Years Ended December 31, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 58,223 50,573 15
Expenses      
  Operating 54,479 53,687 1
  SG&A 3,732 3,203 17
  58,211 56,890 2
Operating income (loss)(1) 12 (6,317) -
Operating income (loss) (%) 0.0% -12.5% -
Pumping horsepower, end of period (000s) 25 23 9
Cementing units, end of period (#) 9 8 13
Coiled tubing units, end of period (#) 1 1 -
C$/Mexican peso average exchange rate(2) 0.0798 0.0816 (2)
C$/Argentine peso average exchange rate(2) 0.2277 0.2593 (12)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

(2) Source: Bank of Canada.

Revenue

Calfrac's Latin American operations generated total revenue of $58.2 million during 2011 versus $50.6 million in 2010. Revenue generated through subcontractors decreased by $2.9 million from 2010 to $10.5 million in 2011.

In Mexico, revenue increased due to significantly higher fracturing activity. This increase was offset partially by lower year-over-year pricing in this market as a result of Pemex budget constraints as well as the completion of smaller fracturing and cementing job sizes.

The increase in Calfrac's Latin American revenue was also due to significantly higher Argentine cementing activity and the commencement of coiled tubing operations in this market during the fourth quarter of 2010. This increase was offset slightly by lower pricing and the completion of smaller cementing job sizes in Argentina as well as the depreciation of the Argentine peso versus the Canadian dollar.

Operating Income (Loss)

During 2011, the operating income of Calfrac's Latin America division increased by $6.3 million from 2010 to a breakeven position as well completion activity in Mexico continued to improve. This positive change was primarily due to higher fracturing activity in Mexico combined with the impact of cost-reduction measures as well as higher cementing and coiled tubing activity in Argentina. The increase was offset partially by smaller fracturing job sizes in Mexico and smaller cementing job sizes in Latin America, combined with the impact of the 12 percent decline in the Argentine peso.

Corporate      
Years Ended December 31, 2011 2010 Change
(C$000s) ($) ($) (%)
(unaudited)      
Expenses      
  Operating 6,260 5,072 23
  SG&A 36,237 26,651 36
  42,497 31,723 34
Operating loss(1) (42,497) (31,723) 34
       
% of Revenue 2.8% 3.4% (18)

(1) Refer to "Non-GAAP Measures" on page 19 for further information.

Operating Loss

The 34 percent increase in Corporate expenses from 2010 was mainly due to an increase in the number of personnel supporting the Company's significantly expanded operations and revenue base, combined with a higher annual bonus provision, increased professional fees and higher stock-based compensation expenses.

Depreciation

Depreciation expense increased by 13 percent to $87.5 million for 2011 from $77.4 million in 2010. The increase was mainly a result of a larger fleet of equipment operating in North America and Russia, offset partially by the depreciation of the United States dollar versus the Canadian dollar.

Foreign Exchange Losses or Gains

The Company incurred a foreign exchange loss of $14.2 million during 2011 versus $0.3 million in 2010. 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 2011 was attributable to the translation of United States dollar-denominated liabilities in Canada, Russia and Mexico. The value of the United States dollar appreciated significantly against the Canadian dollar, Russian rouble and Mexican peso during 2011 and was significantly higher at December 31, 2011, resulting in a foreign exchange loss related to these net monetary liabilities.

Interest

The Company's interest expense of $35.5 million for 2011 decreased by $13.3 million from $48.8 million in 2010. This decrease was primarily due to the Company incurring $22.7 million of refinancing costs in November 2010 related to the early redemption of US$230.7 million of unsecured senior notes originally due in February 2015. In addition, the depreciation of the United States dollar on the translation of interest expense related to the Company's United States dollar-denominated senior unsecured notes also contributed to the lower reported interest expense. This decrease was partially offset by the full-year impact of increasing the aggregate principal amount of Calfrac's senior unsecured notes in the fourth quarter of 2010 from US$235.0 million to US$450.0 million.

Income Tax Expenses

The Company recorded income tax expense of $88.6 million during 2011 versus $10.2 million during 2010. The effective income tax rate for 2011 was 32 percent compared to 17 percent in 2010. The increase in total income tax expense was primarily due to higher profitability in the United States and Canada. The effective tax rate for 2011 was higher than for 2010 primarily due to a higher percentage of taxable income in the United States, which has a higher average statutory tax rate. In the fourth quarter of 2010, the Company incurred refinancing costs of $22.7 million related to the redemption of US$230.7 million of unsecured notes due in 2015, which resulted in a net recovery of current income tax and also contributed to the decrease in the effective income tax rate for the year. In addition, Calfrac utilized a capital loss carry-forward in the fourth quarter of 2010, the benefit of which was not previously recorded, further contributing to the lower effective tax rate for 2010.

Liquidity and Capital Resources    
       
Years Ended December 31, 2011 2010
(C$000s) ($) ($)
(unaudited)    
Cash provided by (used in):    
  Operating activities 244,158 128,348
  Financing activities (10,163) 185,285
  Investing activities (320,162) (115,680)
  Effect of exchange rate changes on cash and cash equivalents 2,618 (6,419)
Increase (decrease) in cash and cash equivalents (83,549) 191,534

Operating Activities

The Company's cash provided by operating activities for the year ended December 31, 2011 was $244.2 million versus $128.3 million in 2010. This increase was primarily due to improved activity and operating margins in Canada and the United States. At December 31, 2011, Calfrac's working capital was approximately $398.5 million, an increase of 17 percent from December 31, 2010. The Company reviewed its accounts receivable in detail at December 31, 2011 and 2010 and determined that a provision for doubtful accounts receivable totalling $1.4 million and $1.5 million, respectively, was adequate. The majority of this provision related to a customer that filed for Chapter 11 restructuring under United States bankruptcy law in 2008.

Financing Activities

Net cash used in financing activities for 2011 was $10.2 million compared to net cash provided by financing activities of $185.3 million in 2010. During the first quarter of 2011, the Company repaid the remaining US$4.3 million of its 2015 senior notes as well as $3.2 million of mortgages related to certain properties acquired in the acquisition of Century Oilfield Services Inc. in September 2009. This was offset partially by the issuance of Calfrac common shares upon the exercise of stock options, the sale of common shares of Denison Mines Corporation and the proceeds from a bank loan in Colombia.

On November 18, 2010, Calfrac completed a private placement of senior unsecured notes for an aggregate principal amount of US$450.0 million due on December 1, 2020, which bear semi-annual interest of 7.50 percent per annum. The Company used the net proceeds of the offering to repay indebtedness, including to fund the tender offer for a majority of its 7.75 percent senior notes due in 2015, as well as for general corporate purposes and to pay related fees and expenses.

On September 27, 2011, the Company increased its credit facilities with a syndicate of Canadian chartered banks from $175.0 million to $250.0 million and extended the term to four years. The facilities consist of an operating facility of $20.0 million and a syndicated facility of $230.0 million. The interest rates for these facilities are 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 1.75 percent to 2.50 percent above the respective base rates for such loans. As at December 31, 2011, the Company had utilized $2.5 million of its facilities for letters of credit, leaving $247.5 million in available credit.

Calfrac pays semi-annual dividends to shareholders at the discretion of the Board of Directors, which qualify as "eligible dividends" as defined by the Canada Revenue Agency. In December 2011, the Company increased its semi-annual cash dividend from $0.075 to $0.10 per share, beginning with the dividend paid on January 31, 2012, thereby increasing the annualized dividend to $0.20 per share beginning in 2012. Dividend payments were $7.7 million for 2011 and $5.4 million for 2010.

At December 31, 2011, the Company had cash and cash equivalents of $133.1 million.

Investing Activities

Calfrac's net cash used for investing activities was $320.2 million for 2011 versus $115.7 million for 2010. Capital expenditures were $324.0 million in 2011 compared to $118.9 million in 2010. Capital expenditures were primarily related to supporting the Company's fracturing operations throughout North America.

The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during 2011 was a gain of $2.6 million versus a loss of $6.4 million during 2010. These gains and losses 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 2012 and beyond.

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 a maximum of 10 percent of the Company's issued and outstanding common shares. As at February 24, 2012, there were 43,846,437 common shares issued and outstanding, and 3,610,900 outstanding 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 during the last five trading days preceding the relevant dividend payment date.

Normal Course Issuer Bid

The Company filed a Notice of Intention (the "Notice") to make a Normal Course Issuer Bid with the Toronto Stock Exchange (TSX) on November 2, 2011. Under the Normal Course Issuer Bid, the Company may acquire up to 3,246,216 common shares, which is 10 percent of the public float outstanding as at October 31, 2011, during the period November 7, 2011 through November 6, 2012. The maximum number of common shares that may be acquired by the Company during a trading day is 42,392, with the exception that the Company is allowed to make one block purchase of common shares per calendar week that exceeds such limit. All purchases of common shares will be made through the facilities of the TSX at the market price of the shares at the time of acquisition. Any shares acquired under the bid will be cancelled. During the fourth quarter of 2011, the Company purchased 196,800 common shares under the terms of the Normal Course Issuer Bid for a total cost of approximately $4.9 million, all financed out of working capital. A copy of the 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 MD&A, including statements that contain words such as "anticipates", "can", "may", "could", "expect", "believe", "intend", "forecast", "will", or similar words suggesting future outcomes, are forward-looking statements. Forward-looking statements in this document include, but are not limited to, statements with respect to future capital expenditures, future financial resources, future oil and natural gas well activity, future costs or potential liabilities, outcome of specific events, trends in the oil and natural gas industry and the Company's growth prospects including, without limitation, its international growth strategy and prospects. These statements are derived from certain assumptions and analyses made by the Company based on its experience and interpretation of historical trends, current conditions, expected future developments and other factors that it believes are appropriate in the circumstances, including assumptions related to commodity pricing and North American drilling activity. 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. The most significant risk factors to Calfrac relate to prevailing economic conditions; commodity prices; the demand for fracturing and other stimulation services during drilling and completion of oil and natural gas wells; changes in legislation and the regulatory environment; liabilities and risks, including environmental liabilities and risks inherent in oil and natural gas operations; sourcing, pricing and availability of raw materials, components, parts, equipment, suppliers, facilities and skilled personnel; dependence on major customers; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; and regional competition. Readers are cautioned that the foregoing list of risks and uncertainties is not exhaustive. Further information about these risks and uncertainties may be found under "Business Risks" above.

Consequently, all of the forward-looking statements made in this MD&A 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. 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 2011 fourth quarter results at 10:00 a.m. (Mountain Time) on Tuesday, February 28, 2012. 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 52960178). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS      
         
  December 31, December 31, January 1,
As at 2011 2010 2010
(C$000s) (unaudited) ($) ($) ($)
ASSETS      
Current assets      
  Cash and cash equivalents 133,055 216,604 25,070
  Accounts receivable 313,898 177,652 135,775
  Income taxes recoverable 1,340 3,284 1,780
  Inventories 94,344 58,221 42,068
  Prepaid expenses and deposits 10,148 8,379 6,742
  552,785 464,140 211,435
Non-current assets      
  Property, plant and equipment 825,504 588,759 566,681
  Goodwill 10,523 10,523 10,523
  Deferred income tax assets 16,309 32,179 34,620
Total assets 1,405,121 1,095,601 823,259
       
LIABILITIES AND EQUITY      
Current liabilities      
  Accounts payable and accrued liabilities 149,740 116,315 82,212
  Bank loan (note 4) 2,309 - -
  Current portion of long-term debt (note 5) 476 4,854 1,996
  Current portion of finance lease obligations (note 6) 1,734 1,294 1,217
  154,259 122,463 85,425
Non-current liabilities      
  Long-term debt (note 5) 450,545 443,346 267,351
  Finance lease obligations (note 6) 740 2,515 3,808
  Other long-term liabilities 774 1,062 1,227
  Deferred income tax liabilities 98,234 24,183 15,453
Total liabilities 704,552 593,569 373,264
Equity attributable to the shareholders of Calfrac      
Capital stock (note 7) 271,817 263,490 251,282
Contributed surplus (note 9) 24,170 15,468 10,844
Loan receivable for purchase of common shares (note 15) (2,500) (2,500) -
Retained earnings (note 3) 405,954 229,865 187,801
Accumulated other comprehensive income (loss) 1,334 (4,252) -
  700,775 502,071 449,927
Non-controlling interest (206) (39) 68
Total equity 700,569 502,032 449,995
Total liabilities and equity 1,405,121 1,095,601 823,259

Contingencies (note 19)

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS  
  Three Months Ended December 31, Years Ended December 31,
Years Ended December 31, 2011 2010 2011 2010
(C$000s, except per share data) (unaudited) ($) ($) ($) ($)
Revenue 490,037 268,710 1,537,392 935,927
Cost of sales (note 16) 339,221 207,427 1,134,864 768,310
Gross profit 150,816 61,283 402,528 167,617
Expenses        
  Selling, general and administrative 23,448 19,035 77,157 59,809
  Foreign exchange losses 990 (222) 14,234 339
  Loss (gain) on disposal of property, plant and equipment 228 (57) (88) (941)
  Interest 9,053 30,224 35,489 48,785
  33,719 48,980 126,792 107,992
Income before income tax 117,097 12,303 275,736 59,625
Income tax expense (recovery)        
  Current 297 (3,555) 1,542 (1,901)
  Deferred 37,942 (209) 87,037 12,108
  38,239 (3,764) 88,579 10,207
Net income for the period 78,858 16,067 187,157 49,418
         
Net income (loss) attributable to:        
  Shareholders of Calfrac 78,921 16,126 187,451 49,502
  Non-controlling interest (63) (59) (294) (84)
  78,858 16,067 187,157 49,418
         
Earnings per share (note 7)        
  Basic 1.80 0.37 4.29 1.15
  Diluted 1.79 0.37 4.22 1.13

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
  Three Months Ended December 31, Years Ended December 31,
  2011 2010 2011 2010
(C$000s) (unaudited) ($) ($) ($) ($)
Net income for the period 78,858 16,067 187,157 49,418
Other comprehensive income (loss)        
  Change in foreign currency translation adjustment (4,627) (3,173) 5,713 (4,275)
Comprehensive income for the period 74,231 12,894 192,870 45,143
         
Comprehensive income (loss) attributable to:        
  Shareholders of Calfrac 74,179 12,960 193,037 45,250
  Non-controlling interest 52 (66) (167) (107)
  74,231 12,894 192,870 45,143

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, 2011 263,490 15,468 (2,500) (4,252) 229,865 502,071 (39) 502,032
Net income for the period - - - - 187,451 187,451 (294) 187,157
Other comprehensive income:                
  Cumulative translation adjustment - - - 5,586 - 5,586 127 5,713
Comprehensive income for the period - - - 5,586 187,451 193,037 (167) 192,870
Stock options:                
  Stock-based compensation recognized - 8,500 - - - 8,500 - 8,500
  Proceeds from issuance of shares 9,656 (2,109) - - - 7,547 - 7,547
  Shares cancelled (note 9) (105) 105 - - - - - -
Denison Plan of Arrangement (note 9) - 2,206 - - - 2,206 - 2,206
Shares purchased under Normal Course Issuer Bid (note 8) (1,224) - - - (3,702) (4,926) - (4,926)
Dividends - - - - (7,660) (7,660) - (7,660)
Balance - December 31, 2011 271,817 24,170 (2,500) 1,334 405,954 700,775 (206) 700,569
                 
Balance - January 1, 2010 251,282 10,844 - - 187,801 449,927 68 449,995
Net income for the period - - - - 49,502 49,502 (84) 49,418
Other comprehensive income:                
  Cumulative translation adjustment - - - (4,252) - (4,252) (23) (4,275)
Comprehensive income for the period - - - (4,252) 49,502 45,250 (107) 45,143
Stock options:                
  Stock-based compensation recognized - 7,096 - - - 7,096 - 7,096
  Proceeds from issuance of shares 12,130 (2,472) - - - 9,658 - 9,658
Shares issued for compensation 78 - - - - 78 - 78
Loan receivable for purchase of common shares (note 15) - - (2,500) -   (2,500)   (2,500)
Acquisitions (note 12) - - - - (2,024) (2,024) - (2,024)
Dividends - - - - (5,414) (5,414) - (5,414)
Balance - December 31, 2010 263,490 15,468 (2,500) (4,252) 229,865 502,071 (39) 502,032

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS  
  Three Months Ended December 31, Years Ended December 31,
  2011 2010 2011 2010
(C$000s) (unaudited) ($) ($) ($) ($)
CASH FLOWS PROVIDED BY (USED IN)        
OPERATING ACTIVITIES        
  Net income for the period 78,858 16,067 187,157 49,418
  Adjusted for the following:        
    Depreciation 22,996 19,937 87,457 77,429
    Stock-based compensation 2,342 2,791 8,500 7,174
    Unrealized foreign exchange (gains) losses (1,297) (2,392) 11,945 (1,897)
    Loss (gain) on disposal of property, plant and equipment 228 (57) (88) (941)
    Interest 9,053 30,224 35,489 48,785
    Deferred income taxes 37,942 (209) 87,037 12,108
  Interest paid (17,668) (18,605) (35,738) (39,933)
  Changes in items of working capital (note 13) (22,522) 2,461 (137,601) (23,795)
Cash flows provided by operating activities 109,932 50,217 244,158 128,348
FINANCING ACTIVITIES        
  Bank loan proceeds 1,051 - 2,309 -
  Issuance of long-term debt, net of debt issuance costs - 448,741 (422) 473,671
  Long-term debt repayments (115) (274,808) (7,882) (288,913)
  Finance lease obligation repayments (372) (311) (1,335) (1,217)
  Loan receivable for purchase of common shares (note 15) - (2,500) - (2,500)
  Denison Plan of Arrangement (note 9) - - 2,206 -
  Net proceeds on issuance of common shares 409 6,812 7,547 9,658
  Dividends (4,376) (3,261) (7,660) (5,414)
  Shares purchased under Normal Course Issuer Bid (note 8) (4,926) - (4,926) -
Cash flows provided by (used in) financing activities (8,329) 174,673 (10,163) 185,285
INVESTING ACTIVITIES        
  Purchase of property, plant and equipment (101,008) (47,015) (323,962) (118,899)
  Proceeds on disposal of property, plant and equipment 255 166 3,644 5,243
  Acquisition (note 12) - 17 - (2,024)
  Other 134 - 156 -
Cash flows used in investing activities (100,619) (46,832) (320,162) (115,680)
Effect of exchange rate changes on cash and cash equivalents (8,825) (5,391) 2,618 (6,419)
(Decrease) increase in cash and cash equivalents (7,841) 172,667 (83,549) 191,534
Cash and cash equivalents, beginning of period 140,896 43,937 216,604 25,070
Cash and cash equivalents, end of period 133,055 216,604 133,055 216,604

See accompanying notes to the consolidated financial statements.


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As at and for the years ended December 31, 2011 and 2010
(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, BASIS OF PRESENTATION AND ADOPTION OF IFRS

Calfrac Well Services Ltd. (the "Company") 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.

The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Canadian Institute of Chartered Accountants' (CICA) Handbook. In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (IFRS) and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, these are the Company's first annual consolidated financial statements prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB).

These consolidated financial statements have been prepared in accordance with IFRS. Except for certain transition elections and exceptions disclosed in note 3, the Company has consistently applied the same accounting policies in its opening IFRS balance sheet at January 1, 2010 (which is the date of transition) and throughout all periods presented, as if these policies had always been in effect. Note 3 discloses the impact of the transition to IFRS on the Company's reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Company's previous Canadian GAAP annual consolidated financial statements for the year ended December 31, 2010.

These financial statements were approved by the Board of Directors for issuance on February 27, 2012.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The policies set out below have been consistently applied to all periods presented as if these policies had been in effect since inception, except for certain transition elections disclosed in note 3.

(a) Basis of Measurement

The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value.

(b) Principles of Consolidation

These financial statements include the accounts of the Company and its wholly-owned subsidiaries in Canada, the United States, Russia, Cyprus and Mexico and its 80-percent-owned subsidiaries in Argentina and Colombia. All inter-company transactions, balances and unrealized gains and losses from inter-company transactions are eliminated upon consolidation.

Subsidiaries are those entities (including special-purpose entities) which the Company controls by having the power to govern their financial and operating policies. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date control is obtained by the Company and are deconsolidated from the date that control ceases.

(c) Critical Accounting Estimates and Judgments

The preparation of the consolidated financial statements requires that certain estimates and judgments be made concerning the reported amount of revenue and expenses and the carrying values of assets and liabilities. These estimates are based on historical experience and management's judgment. The estimation of anticipated future events involves uncertainty and, consequently, the estimates used by management in the preparation of the consolidated financial statements may change as future events unfold, additional experience is acquired or the environment in which the Company operates changes. The accounting policies and practices that involve the use of estimates that have a significant impact on the Company's financial results include the allowance for doubtful accounts, depreciation, the fair value of financial instruments, the carrying value of goodwill, income taxes, and stock-based compensation.

Judgment is also used in the determination of the functional currency of each subsidiary and in the determination of cash-generating units (CGUs).

i) Allowance for Doubtful Accounts

The Company performs ongoing credit evaluations of its customers and grants credit based upon a review of historical collection experience, current aging status, financial condition of the customer and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based upon specific situations and overall industry conditions.

ii) Depreciation

Depreciation of the Company's property and equipment incorporates estimates of useful lives and residual values. These estimates may change as more experience is obtained or as general market conditions change, thereby impacting the value of the Company's property and equipment.

iii) Fair Value of Financial Instruments

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

The fair values of financial instruments that are included in the consolidated balance sheet, 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 is based on the closing market price at the end-date of the reporting period, as described in note 5. The fair values of the remaining long-term debt and finance lease obligations approximate their carrying values.

iv) Carrying Value of Goodwill

Goodwill represents an excess of the purchase price over the fair value of net assets acquired and is not amortized. The Company assesses goodwill at least on an annual basis. Goodwill is allocated to each operating segment, which represents the lowest level within the Company at which the goodwill is monitored for internal management purposes. The fair value of each operating segment is compared to the carrying value of its net assets. The Company completed its annual assessment for goodwill impairment and determined there was no goodwill impairment as at January 1, 2010 nor for the years ended December 31, 2011 and 2010.

v) Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement amounts of existing assets and liabilities and their respective tax bases. Estimates of the Company's future taxable income have been considered in assessing the utilization of available tax losses. The Company's business is complex and the calculation of income taxes involves many complex factors as well as the Company's interpretation of relevant tax legislation and regulations.

vi) Stock-Based Compensation

The fair value of stock options is estimated at the grant date using the Black-Scholes option pricing model, which includes underlying assumptions related to the risk-free interest rate, average expected option life, estimated forfeitures, estimated volatility of the Company's shares and anticipated dividends.

The fair value of the deferred stock units and performance stock units is recognized based on the market value of the Company's shares underlying these compensation programs.

See note 10 for further information on stock-based compensation.

vii) Functional Currency

Management applies judgment in the determining the functional currency of its foreign subsidiaries. Judgment is made with regards to the currency that influences and determines sales prices, labour, material and other costs as well as financing and receipts from operating income.

viii) Cash-Generating Units

The determination of cash-generating units is based on management's judgment in regards to shared equipment, mobility of equipment, geographical proximity, and materiality.

(d) Foreign Currency Translation

i) Functional and Presentation Currency

Each of the Company's subsidiaries is measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The consolidated financial statements are presented in Canadian dollars, which is the Company's functional currency.

The financial statements of the subsidiaries that have a functional currency different from that of the Company are translated into Canadian dollars whereby assets and liabilities are translated at the rate of exchange at the balance sheet date, revenues and expenses are translated at average monthly exchange rates (as this is considered a reasonable approximation of actual rates), and gains and losses in translation are recognized in the shareholders' equity section as accumulated other comprehensive income.

When the Company disposes of its entire interest in a foreign operation, or loses control, joint control, or significant influence over a foreign operation, the foreign currency gains or losses accumulated in other comprehensive income related to the foreign operation are recognized in profit or loss. If the Company disposes of part of an interest in a foreign operation which remains a subsidiary, a proportionate amount of foreign currency gains or losses accumulated in other comprehensive income related to the subsidiary is reallocated between controlling and non-controlling interests.

ii) Transactions and Balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the transaction date. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in currencies other than an entity's functional currency are recognized in the statement of operations.

(e) Financial Instruments

Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires.

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

All financial instruments are measured at fair value on initial recognition of the instrument. Measurement in subsequent periods depends on the purpose for which the instruments were acquired and instruments are classified as "financial assets and liabilities at fair value through profit or loss", "available-for-sale investments", "loans and receivables", "financial liabilities at amortized cost", or "derivative financial instruments" as defined in International Accounting Standards (IAS) 39 Financial Instruments: Recognition and Measurement.

Cash and cash equivalents and accounts receivable are designated as "loans and receivables" and are measured at amortized cost. Accounts payable and accrued liabilities are designated as "financial liabilities at amortized cost" and are carried at amortized cost. Bank loans, long-term debt and finance lease obligations are designated as "financial liabilities at amortized cost" and carried at amortized cost using the effective interest rate method. The financing costs associated with the Company's US$450,000 private placement of senior unsecured notes on November 18, 2010 are included in the amortized cost of the debt. These costs are amortized to interest expense over the term of the debt.

At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired.

(f) Cash and Cash Equivalents

Cash and cash equivalents consist of cash on deposit and short-term investments with original maturities of three months or less.

(g) Inventory

Inventory consists of chemicals, sand and proppant, coiled tubing, cement, nitrogen and carbon dioxide used to stimulate oil and natural gas wells, as well as spare equipment parts. Inventory is stated at the lower of cost, determined on a first-in, first-out basis, and net realizable value. Net realizable value is the estimated selling price less applicable selling expenses. If carrying value exceeds net realizable amount, a write-down is recognized. The write-down may be reversed in a subsequent period if the circumstances which caused it no longer exist.

(h) Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the statement of operations during the period in which they are incurred.

Property, plant and equipment are depreciated over their estimated economic useful lives using the straight-line method over the following periods:

        Field equipment          5 - 30 years
        Buildings          20 years
        Shop, office and other equipment          5 years
        Computers and computer software          3 years
        Leasehold improvements          Term of the lease

Depreciation of an asset begins when it is available for use. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. Assets under construction are not depreciated until they are available for use.

The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant components and depreciates each component separately. Residual values, method of amortization and useful lives are reviewed annually and adjusted if appropriate.

Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the assets and are included in the statement of operations.

(i) Borrowing Costs

Borrowing costs attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. Qualifying assets are defined as assets which take a substantial period to construct, generally greater than one year. All other borrowing costs are recognized as interest expense in the statement of income in the period in which they are incurred. The Company does not currently have any qualifying assets.

(j) Non-Controlling Interests

Non-controlling interests represent equity interests in subsidiaries owned by outside parties. The share of net assets of subsidiaries attributable to non-controlling interests is presented as a component of equity. Their share of net income and comprehensive income is recognized directly in equity. Changes in the parent company's ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions.

(k) Impairment of Non-Financial Assets

Property, plant and equipment are tested for impairment when events or changes in circumstances indicate that the carrying amount exceeds its recoverable amount. Long-lived assets that are not amortized are subject to an annual impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows of other assets, called cash-generating units (CGUs). The recoverable amount is the higher of an asset's fair value less costs to sell and value in use (defined as the present value of the future cash flows to be derived from an asset). An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount.

Goodwill is reviewed for impairment annually or at any time if an indicator of impairment exists.

Goodwill acquired through a business combination is allocated to each operating segment that is expected to benefit from the related business combination. The operating segment level represents the lowest level within the Company at which goodwill is monitored for internal management purposes.

The Company evaluates impairment losses, other than goodwill impairment, for potential reversals when events or circumstances warrant such consideration.

(l)  Income Taxes

Income tax comprises current and deferred tax. Income tax is recognized in the statement of operations except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

In general, deferred tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates except, in the case of subsidiaries, where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Deferred income tax assets and liabilities are presented as non-current.

Tax on income for interim periods is accrued using the tax rate applicable to expected total annual earnings.

(m) Revenue Recognition

Revenue is recognized for services upon completion provided it is probable that the economic benefits will flow to the Company, the sales price is fixed or determinable, and collectability is reasonably assured. These criteria are generally met at the time the services are performed and the services have been accepted by the customer.

(n) Stock-Based Compensation Plans

The Company recognizes compensation cost for the fair value of stock options granted. Under this method, the Company records the fair value of stock option grants based on the number of options expected to vest over their vesting period as a charge to compensation expense and a credit to contributed surplus. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model.

The number of awards expected to vest is reviewed on an ongoing basis, with any impact being recognized immediately.

The Company recognizes compensation cost for the fair value of deferred stock units granted to its outside directors and performance stock units granted to the Company's most senior officers who are not included in the stock option plan. The fair value of the deferred stock units and performance stock units is recognized based on the market value of the Company's shares underlying these compensation programs.

(o) Change in Accounting Estimate

The Company has reviewed its estimates with respect to its property, plant and equipment components, respective useful lives and salvage values as a result of new information and more experience with the assets. The resulting revisions were adopted as a change in accounting estimate, effective January 1, 2011. It is impracticable to estimate the impact of the change in accounting estimate on future periods.

(p) Recently Issued Accounting Standards Not Yet Applied

Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company has not yet assessed their impact nor determined whether it will adopt them early.

(i)     IFRS 9 Financial Instruments was issued in November 2009 and addresses classification and measurement of financial assets. It replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed-measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent that they do not clearly represent a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely.

Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss are generally recorded in other comprehensive income.

This standard is effective for annual periods beginning on or after January 1, 2015 with earlier application permitted.

(ii)     IFRS 10 Consolidated Financial Statements requires an entity to consolidate an investee when it has power over the investee, is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces Standing Interpretations Committee (SIC) 12 Consolidation - Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements.

(iii)     IFRS 11 Joint Arrangements requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities - Non-monetary Contributions by Venturers.

(iv)     IFRS 12 Disclosure of Interests in Other Entities establishes disclosure requirements for interests in other entities such as subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The standard carries forward existing disclosure and also introduces significant additional disclosure that addresses the nature of, and risks associated with, an entity's interests in other entities.

(v)     IFRS 13 Fair Value Measurement is a comprehensive standard for fair value measurement and disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosure.

(vi)     There have been amendments to existing standards, including IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures. IAS 27 addresses accounting for subsidiaries, jointly controlled entities and associates in non-consolidated financial statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 through 13.

3. TRANSITION TO IFRS

As described in note 1, the Company adopted IFRS effective January 1, 2010 ("the transition date") and prepared its opening balance sheet as at that date. The Company's consolidated financial statements for the year ending December 31, 2011 are the first annual financial statements that comply with IFRS. The Company has prepared its opening balance sheet by applying IFRS having effective dates of December 31, 2011 or prior.

The effect of the Company's transition to IFRS is summarized as follows:

(i)     IFRS I transition elections

(ii)     Reconciliations of equity as previously reported under Canadian GAAP to IFRS

(iii)    Reconciliations of comprehensive income as previously reported under Canadian GAAP to IFRS

(iv)    Adjustments to the statement of cash flows

(v)     Explanatory notes on the transition to IFRS

(i)     IFRS 1 transition elections

IFRS 1 sets out a group of elective exemptions and a group of mandatory exceptions to its general principle that all IFRS are retrospectively applied on transition. The Company has applied the following transition exceptions and exemptions to full retrospective application of IFRS:

          As described in note 3(v)
Cumulative translation adjustment         a)
Business combinations         b)
Share-based payment transactions         c)

(ii)     Reconciliation of Equity as Previously Reported Under Canadian GAAP to IFRS

                 
As at         December 31, 2010     January 1, 2010
    Note
3(v)
    Canadian
GAAP
    Effect of
Transition
to IFRS
    IFRS     Canadian
GAAP
    Effect of
Transition
to IFRS
    IFRS
(C$000s)         ($)     ($)     ($)     ($)     ($)     ($)
ASSETS                                        
Current assets                                        
  Cash and cash equivalents         216,604     -     216,604     25,070     -     25,070
  Accounts receivable         177,652     -     177,652     135,775     -     135,775
  Income taxes recoverable         3,284     -     3,284     1,780     -     1,780
  Inventories   d     59,321     (1,100)     58,221     44,297     (2,229)     42,068
  Prepaid expenses and deposits   d     8,385     (6)     8,379     6,746     (4)     6,742
          465,246     (1,106)     464,140     213,668     (2,233)     211,435
Non-current assets                                        
  Property, plant and equipment   d     603,145     (14,386)     588,759     579,233     (12,552)     566,681
  Goodwill   b, e     12,547     (2,024)     10,523     10,523     -     10,523
  Deferred income tax assets   f     34,598     (2,419)     32,179     37,466     (2,846)     34,620
Total assets         1,115,536     (19,935)     1,095,601     840,890     (17,631)     823,259
                                         
LIABILITIES AND EQUITY                                        
Current liabilities                                        
  Accounts payable and accrued liabilities         116,315     -     116,315     82,212     -     82,212
  Current portion of long-term debt         4,854     -     4,854     1,996     -     1,996
  Current portion of finance lease obligations         1,294     -     1,294     1,217     -     1,217
          122,463     -     122,463     85,425     -     85,425
Non-current liabilities                                        
  Long-term debt         443,346     -     443,346     267,351     -     267,351
  Finance lease obligations         2,515     -     2,515     3,808     -     3,808
  Other long-term liabilities         1,062     -     1,062     1,227     -     1,227
  Deferred income tax liabilities   f     28,506     (4,323)     24,183     20,474     (5,021)     15,453
  Deferred credit   f     -     -     -     2,505     (2,505)     -
  Non-controlling interest   g     101     (101)     -     168     (168)     -
Total liabilities         597,993     (4,424)     593,569     380,958     (7,694)     373,264
Equity attributable to the shareholders of Calfrac                                        
  Share capital         263,490     -     263,490     251,282     -     251,282
  Contributed surplus   c, h     15,225     243     15,468     10,808     36     10,844
  Loan receivable for purchase of common shares         (2,500)     -     (2,500)     -     -     -
  Retained earnings   i     250,476     (20,611)     229,865     202,083     (14,282)     187,801
  Accumulated other comprehensive income (loss)   a, d     (9,148)     4,896     (4,252)     (4,241)     4,241     -
          517,543     (15,472)     502,071     459,932     (10,005)     449,927
Non-controlling interest   g     -     (39)     (39)     -     68     68
Total equity         517,543     (15,511)     502,032     459,932     (9,937)     449,995
Total liabilities and equity         1,115,536     (19,935)     1,095,601     840,890     (17,631)     823,259
                                         

(iii)     Reconciliation of Comprehensive Income as Previously Reported Under Canadian GAAP to IFRS

                 
          Three Months Ended December 31, 2010     Year Ended December 31, 2010
    Note
3(v)
    Canadian
GAAP
    Effect of
Transition
to IFRS
    IFRS     Canadian
GAAP
    Effect of
Transition
to IFRS
    IFRS
(C$000s, except per share data)         ($)     ($)     ($)     ($)     ($)     ($)
Revenue         268,710     -     268,710     935,927     -     935,927
Cost of sales   d     208,101     (674)     207,427     770,676     (2,366)     768,310
Gross profit         60,609     (674)     61,283     165,251     (2,366)     167,617
Expenses                                        
  Selling, general and administrative   c, h     18,958     77     19,035     59,603     206     59,809
  Foreign exchange (gains)  losses   d     (4,424)     4,202     (222)     (3,794)     4,133     339
  Loss (gain) on disposal of   property, plant and equipment         (56)     (1)     (57)     (930)     (11)     (941)
  Interest         30,224     -     30,224     48,785     -     48,785
          44,702     4,278     48,980     103,664     4,328     107,992
Income before income taxes         15,907     (3,604)     12,303     61,587     (1,962)     59,625
Income tax expense                                        
  Current         (3,555)     -     (3,555)     (1,901)     -     (1,901)
  Deferred   d, f     76     (285)     (209)     9,748     2,360     12,108
          (3,479)     (285)     (3,764)     7,847     2,360     10,207
Net income for the period         19,386     (3,319)     16,067     53,740     (4,322)     49,418
                                         
Net income (loss) attributable  to:                                        
  Shareholders of Calfrac         19,434     (3,308)     16,126     53,807     (4,305)     49,502
  Non-controlling interest   g     (48)     (11)     (59)     (67)     (17)     (84)
          19,386     (3,319)     16,067     53,740     (4,322)     49,418
                                         
Earnings per share                                        
  Basic         0.45     (0.08)     0.37     1.25     (0.10)     1.15
  Diluted         0.44     (0.07)     0.37     1.23     (0.10)     1.13
                                         
Other comprehensive income  (loss)                                        
  Change in foreign currency   translation adjustment         (3,566)     393     (3,173)     (4,907)     632     (4,275)
Comprehensive income for the  period         15,820     2,926     12,894     48,833     (3,690)     45,143
                                         
Comprehensive income (loss)  attributable to:                                        
  Shareholders of Calfrac         15,868     (2,908)     12,960     48,900     (3,650)     45,250
  Non-controlling interest         (48)     (18)     (66)     (67)     (40)     (107)
          15,820     (2,926)     12,894     48,833     (3,690)     45,143

(iv) Adjustments to the Statement of Cash Flows

The transition from previous Canadian GAAP to IFRS did not have a significant impact on cash flows generated by the Company.

Three Months Ended December 31, 2010   Note 3(v)     Canadian
GAAP
    Effect of
Transition
to IFRS
    IFRS
(C$000s)         ($)     ($)     ($)
CASH FLOWS PROVIDED BY (USED IN)                      
OPERATING ACTIVITIES                      
  Net income for the period         19,434     (3,367)     16,067
  Adjusted for the following:                      
    Depreciation   d     20,610     (673)     19,937
    Stock-based compensation   c, h     2,714     77     2,791
    Unrealized foreign exchange (gains) losses   d     (6,595)     4,203     (2,392)
    Loss on disposal of property, plant and equipment         (56)     (1)     (57)
    Interest         30,224     -     30,224
    Deferred income taxes   f     76     (285)     (209)
    Non-controlling interest   g     (48)     48     -
  Interest paid         (18,605)     -     (18,605)
  Changes in items of working capital         1,509     952     2,461
Cash flows provided by operating activities         49,263     954     50,217
FINANCING ACTIVITIES                      
  Issuance of long-term debt, net of debt issuance costs         448,741     -     448,741
  Long-term debt repayments         (274,808)     -     (274,808)
  Finance lease obligation repayments         (311)     -     (311)
  Loan receivable for purchase of common shares         (2,500)     -     (2,500)
  Net proceeds on issuance of common shares         6,812     -     6,812
  Dividends         (3,261)     -     (3,261)
Cash flows provided by financing activities         174,673     -     174,673
INVESTING ACTIVITIES                      
  Purchase of property, plant and equipment   d     (47,079)     64     (47,015)
  Proceeds on disposal of property, plant and equipment         166     -     166
  Acquisition         17     -     17
Cash flows used in investing activities   d     (46,896)     64     (46,832)
Effect of exchange rate changes on cash and cash equivalents   d     (4,373)     (1,018)     (5,391)
Increase in cash and cash equivalents         172,667     -     172,667
Cash and cash equivalents, beginning of period         43,937     -     43,937
Cash and cash equivalents, end of period         216,604     -     216,604
                       
                       
Year Ended December 31, 2010   Note 3(v)     Canadian
GAAP
    Effect of
Transition
to IFRS
    IFRS
(C$000s)         ($)     ($)     ($)
CASH FLOWS PROVIDED BY (USED IN)                      
OPERATING ACTIVITIES                      
  Net income for the period         53,807     (4,389)     49,418
  Adjusted for the following:                      
    Depreciation   d     79,794     (2,365)     77,429
    Stock-based compensation   c, h     6,967     207     7,174
    Unrealized foreign exchange (gains) losses   d     (6,030)     4,133     (1,897)
    Loss on disposal of property, plant and equipment         (930)     (11)     (941)
    Interest         48,785     -     48,785
    Deferred income taxes   f     9,748     2,360     12,108
    Non-controlling interest   g     (67)     67     -
  Interest paid         (39,933)     -     (39,933)
  Changes in items of working capital         (22,667)     (1,128)     (23,795)
Cash flows provided by operating activities         129,474     (1,126)     128,348
FINANCING ACTIVITIES                      
  Issuance of long-term debt, net of debt issuance costs         473,671     -     473,671
  Long-term debt repayments         (288,913)     -     (288,913)
  Finance lease obligation repayments         (1,217)     -     (1,217)
  Loan receivable for purchase of common shares         (2,500)     -     (2,500)
  Net proceeds on issuance of common shares         9,658     -     9,658
  Dividends         (5,414)     -     (5,414)
Cash flows provided by financing activities         185,285     -     185,285
INVESTING ACTIVITIES                      
  Purchase of property, plant and equipment   d     (118,941)     42     (118,899)
  Proceeds on disposal of property, plant and equipment         5,243     -     5,243
  Acquisition         (2,024)     -     (2,024)
Cash flows used in investing activities   d     (115,722)     42     (115,680)
Effect of exchange rate changes on cash and cash equivalents   d     (7,503)     1,084     (6,419)
Increase in cash and cash equivalents         191,534     -     191,534
Cash and cash equivalents, beginning of period         25,070     -     25,070
Cash and cash equivalents, end of period         216,604     -     216,604

(v) Explanatory Notes on the Transition to IFRS

a)     In accordance with IFRS transitional provisions, the Company elected to reset the cumulative translation adjustment, which includes gains and losses arising from the translation of foreign operations, to zero at the date of transition to IFRS. The cumulative translation adjustment reset was $18,886 with an offsetting decrease to opening retained earnings, as a result of the re-translation of the Company's foreign subsidiaries' non-monetary assets and liabilities using the rate of exchange at the balance sheet date versus the applicable historical rate.

b)     In accordance with IFRS transitional provisions, the Company has elected to apply IFRS relating to business combinations and goodwill prospectively from January 1, 2010. As such, previous Canadian GAAP balances relating to business combinations entered into before that date, including goodwill, have been carried forward without adjustment.

c)     In accordance with IFRS transitional provisions, the Company has elected not to apply IFRS relating to fully vested stock options at January 1, 2010. As such, previous Canadian GAAP balances relating to fully vested stock options at January 1, 2010 have been carried forward without adjustment. Full retrospective application of IFRS has been applied to non-fully-vested stock options at January 1, 2010.

d)     Under IFRS, the subsidiaries, with the exception of Cyprus, have a functional currency that is different from that of the Company. Their financial statements are translated into Canadian dollars whereby assets and liabilities are translated at the rate of exchange at the balance sheet date, revenues and expenses are translated at average monthly exchange rates, and gains and losses in translation are recognized in shareholders' equity as accumulated other comprehensive income.

This represents a change in the translation method from previous Canadian GAAP for some subsidiaries whereby monetary assets and liabilities were translated at the rate of exchange at the balance sheet date, and non-monetary items were translated at the historical rate applicable on the date of the transaction giving rise to the non-monetary balance. Revenues and expenses were translated at monthly average exchange rates and gains or losses in translation were recognized in income as they occurred.

The re-translation of the subsidiaries' financial statements to comply with IFRS resulted in translation differences due to the change in translation method.

e)     The Company entered into a transaction to acquire the non-controlling interest in one of its subsidiaries. The transaction was accounted for as a step-acquisition under previous Canadian GAAP. As such, purchase accounting was used to ascribe fair values to the assets and liabilities acquired with the remaining amount recorded as goodwill.

Under IFRS, the transaction is accounted for as a capital transaction as the Company had a change in ownership while retaining control over the subsidiary. Because the Company already controlled the subsidiary, any subsequent change in the ownership interest (while maintaining control) is recorded as a capital transaction. As such, any amounts previously recorded as goodwill are charged to retained earnings.

f)     Deferred income tax assets and liabilities have been adjusted to give effect to adjustments due to the tax impact of the inter-company sale of assets.

Under IFRS, the tax benefit or cost of inter-company sales is recognized. The Company had transactions with one of its subsidiaries in 2007 whereby the tax impact of the transactions was eliminated under previous Canadian GAAP. The tax effect of these transactions has been adjusted in the financial statements, resulting in a change to deferred taxes and tax expense.

Under IFRS, a deferred credit is not recorded for an acquisition when the tax attributes acquired are in excess of the proceeds paid. Under IFRS, the benefit related to these tax attributes is recorded through income at the time of the acquisition. Therefore, there was no deferred credit under IFRS. Under previous Canadian GAAP, the deferred credit was set up for the transaction and was drawn down during the first quarter of 2010 in the amount of $2,505.

g)     Under IFRS, the non-controlling interest's share of the net assets of subsidiaries is included in equity and its share of the comprehensive income of subsidiaries is allocated directly to equity. Under previous Canadian GAAP, non-controlling interest was presented as a separate item between liabilities and equity in the balance sheet, and the non-controlling interest's share of income and other comprehensive income was deducted in calculating the Company's net income and comprehensive income.

h)     Under IFRS, the application of an estimated forfeiture rate for stock option grants based on the number of options expected to vest over their vesting period is required. Under previous Canadian GAAP, an entity may elect either to estimate the expected forfeiture rate at the date of grant or to recognize compensation expense as though all options will vest and then recognize the impact of actual forfeitures as they occur.

The Company previously recognized forfeitures as they occurred and the adjustment included in contributed surplus and stock-based compensation expense is the result of the application of an estimated forfeiture rate for stock option grants based on the number of options expected to vest over their vesting period.

i)     The following is a summary of the transition adjustments to the Company's retained earnings from previous Canadian GAAP to IFRS:

As at     Note     December 31,
2010
    January 1,
2010
(C$000s)           ($)     ($)
Retained earnings as previously reported under Canadian GAAP           250,476     202,083
IFRS adjustments to the opening balance sheet                  
  Deferred income taxes due to inter-company sale of assets     f     2,135     2,135
  Deferred credit     f     2,505     2,505
  Estimated forfeitures for employee stock options     h     (36)     (36)
  Cumulative translation adjustment     a     (18,886)     (18,886)
IFRS adjustments for the year ended December 31, 2010                  
  Change in foreign currency translation     d     (1,313)     -
  Buy-out of non-controlling interest in subsidiary     e     (2,024)     -
  Deferred income taxes due to inter-company sale of assets     f     (298)     -
  Deferred credit     f     (2,505)     -
  Change in non-controlling interest due to foreign currency translation     g     17     -
  Estimated forfeitures for employee stock options     h     (206)     -
Retained earnings as reported under IFRS           229,865     187,801

4. BANK LOAN

The Company's Colombian subsidiary has an operating line of credit of which US$2,270 was drawn at December 31, 2011 (December 31, 2010 - $nil). It bears interest at the LIBOR rate plus 2.82 percent to 4.50 percent and is secured by a Company guarantee.

  1. LONG-TERM DEBT
As at   December 31,
2011
    December 31,
2010
    January 1,
2010
(C$000s)   ($)     ($)     ($)
US$450,000 senior unsecured notes due December 1, 2020, bearing interest at 7.5% payable semi-annually   457,650     447,570     -
US$4,320 senior unsecured notes (January 1, 2010 - US$235,000) due February 15, 2015, bearing interest at 7.75% payable semi-annually   -     4,297     246,985
Less: unamortized debt issuance costs and unamortized debt discount   (7,943)     (8,638)     (11,768)
    449,707     443,229     235,217
$230,000 extendible revolving term loan facility, secured by Canadian and U.S. assets of the Company   -     -     -
$160,000 extendible revolving term loan facility bearing interest at the Canadian prime rate plus 1%, secured by Canadian and U.S. assets of the Company   -     -     24,699
Less: unamortized debt issuance costs   (1,359)     (887)     (1,128)
    (1,359)     (887)     23,571
Mortgage obligations maturing between December 2012 and March 2014 bearing interest at rates ranging from 5.15% to 6.69%, repayable at $35 per month principal and interest, secured by certain real property   -     3,176     7,379
US$2,359 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   2,399     2,682     3,180
ARS1,277 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   274     -     -
    451,021     448,200     269,347
Less: current portion of long-term debt   (476)     (4,854)     (1,996)
    450,545     443,346     267,351

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at December 31, 2011, was $446,209 (December 31, 2010 - $457,682; January 1, 2010 - $239,575). 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.

The interest rate on the $230,000 revolving term loan facility is based on the parameters of certain bank covenants. For prime-based loans, the rate ranges from prime plus 0.5 percent to prime plus 1.25 percent. For LIBOR-based loans and Bankers' Acceptance-based loans the margin thereon ranges from 1.75 percent to 2.5 percent above the respective base rates for such loans. The facility is repayable on or before its maturity date of September 27, 2015, assuming the facility is not extended. The maturity date may be extended by one or more years at the Company's request and lenders' acceptance. The Company also has the ability to 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, 2011 was $36,312 (year ended December 31, 2010 - $48,758).

The US$4,320 senior unsecured notes at December 31, 2010 were repaid in full on February 15, 2011 (plus accrued interest and call premium of US$335) and the $3,176 of mortgage obligations at December 31, 2010 were repaid in full on February 22, 2011. The $160,000 revolving term loan facility is no longer in place.

The Company also has an extendible operating loan facility, which includes overdraft protection in the amount of $20,000. The interest rate is based upon the parameters of certain bank covenants in the same fashion as the revolving term facility. Drawdowns under this facility are repayable on September 27, 2015, 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 lender's acceptance. The operating facility is secured by the Canadian and U.S. assets of the Company.

At December 31, 2011, the Company had utilized $2,543 of its loan facility for letters of credit, leaving $247,457 in available credit.

6. FINANCE LEASE OBLIGATIONS

                 
    December 31,     December 31,     January 1,
As at   2011     2010     2010
(C$000s)   ($)     ($)     ($)
Finance lease contracts bearing interest at rates ranging from 5.68% to 6.58%, repayable at $124 per month, secured by certain equipment   2,579     4,110     5,599
Less: interest portion of contractual payments   (105)     (301)     (574)
    2,474     3,809     5,025
Less: current portion of finance lease obligations   (1,734)     (1,294)     (1,217)
    740     2,515     3,808

The carrying values of the finance lease obligations approximate their fair values as the interest rates are not significantly different from current rates for similar leases.

7. CAPITAL STOCK

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

             
      Year Ended     Year Ended
      December 31, 2011     December 31, 2010
Continuity of Common Shares     Shares     Amount     Shares     Amount
      (#)     (C$000s)     (#)     (C$000s)
Balance, beginning of period     43,488,099     263,490     42,898,880     251,282
Issued upon exercise of stock options     434,250     9,656     586,885     12,130
Issued for compensation     -     -     2,334     78
Shares cancelled (note 9)     (16,476)     (105)     -     -
Purchased under Normal Course Issuer Bid     (196,800)     (1,224)     -     -
Balance, end of period     43,709,073     271,817     43,488,099     263,490

The weighted average number of common shares outstanding for the year ended December 31, 2011 was 43,688,744 basic and 44,393,234 diluted (year ended December 31, 2010 - 43,089,918 basic and 43,725,829 diluted). The difference between basic and diluted shares for the year ended December 31, 2011 is attributable to the dilutive effect of stock options issued by the Company as disclosed in note 9.

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 during the last five trading days preceding the relevant dividend payment date.

8. NORMAL COURSE ISSUER BID

The Company received regulatory approval to purchase its own common shares in accordance with a Normal Course Issuer Bid for the one-year period November 7, 2011 through November 6, 2012. During the year ended December 31, 2011, 196,800 common shares were purchased at a cost of $4,926 and, of the amount paid, $1,224 was charged to capital stock and $3,702 to retained earnings. The common shares were cancelled prior to December 31, 2011.

9. CONTRIBUTED SURPLUS

             
Continuity of Contributed Surplus     Year Ended
December 31,
2011
    Year Ended
December 31,
2010
(C$000s)     ($)     ($)
Balance, beginning of period     15,468     10,844
  Stock options expensed     8,500     7,096
  Stock options exercised     (2,109)     (2,472)
  Shares cancelled     105     -
  Denison Plan of Arrangement     2,206     -
Balance, end of period     24,170     15,468

The Plan of Arrangement that governed the amalgamation with Denison in 2004 included a six-year "sunset clause" which provided that untendered share positions would be surrendered to the Company after six years. On January 19, 2011, 16,476 common shares of the Company previously held in trust for untendered shareholders were cancelled. In addition, the Company became entitled to approximately 517,000 shares of Denison Mines Corporation. These shares were sold on the Toronto Stock Exchange for net proceeds of approximately $2,189.

For accounting purposes, the cancellation of the 16,476 common shares was recorded as a reduction of capital stock and an increase in contributed surplus in the amount of $105, which represents the book value of the cancelled shares as of the date of amalgamation with Denison on March 24, 2004. The receipt and sale of the shares of Denison Mines Corporation is considered an equity contribution by the Company's owners. Consequently, the net proceeds from their sale, along with approximately $17 of cash received in respect of fractional share entitlements, have been added to contributed surplus in an amount totalling $2,206.

10. STOCK-BASED COMPENSATION

Continuity of Stock Options   2011     2010
          Average           Average
          Exercise           Exercise
    Options     Price     Options     Price
    (#)     (C$)     (#)     (C$)
Balance, January 1   2,583,825     17.50     2,508,143     16.70
  Granted during the period   1,179,800     34.09     1,113,200     20.95
  Exercised for common shares   (434,250)     17.38     (586,885)     16.46
  Forfeited   (130,900)     25.51     (93,341)     19.88
  Expired   -     -     (357,292)     23.71
Balance, December 31   3,198,475     23.31     2,583,825     17.50

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.

11. FINANCIAL INSTRUMENTS

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

The fair values of financial instruments included in the consolidated balance sheet, 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, 2011 was $446,209 before deduction of unamortized debt issuance costs (December 31, 2010 - $457,682). The carrying value of the senior unsecured notes at December 31, 2011 was $457,650 before deduction of unamortized debt issuance costs (December 31, 2010 - $451,867). The fair values of the remaining long-term debt and finance lease obligations approximate their carrying values, as described in notes 5 and 6.

12. ACQUISITIONS

In March 2010 the Company acquired the non-controlling interest in one of its subsidiaries for $2,024. The acquisition is considered a capital transaction and, accordingly, the amount was charged to retained earnings.

This transaction was an adjustment to the 2010 comparatives upon transition to IFRS and is discussed in note 3.

13. SUPPLEMENTAL CASH FLOW INFORMATION

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

      Three Months Ended December 31,     Years Ended December 31,
      2011     2010     2011     2010
(C$000s)     ($)     ($)     ($)     ($)
Accounts receivable     (10,768)     3,941     (136,246)     (41,877)
Income taxes recoverable     1,318     (1,824)     1,944     (1,504)
Inventory     (4,499)     (5,596)     (36,123)     (15,807)
Prepaid expenses and deposits     1,862     1,803     (1,769)     (1,638)
Accounts payable and accrued liabilities     (10,256)     4,144     34,881     37,195
Other long-term liabilities     (179)     (7)     (288)     (164)
      (22,522)     2,461     (137,601)     (23,795)

14. 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 the Company's 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 below.

               
      December 31,       December 31,
For the twelve months ended     2011       2010
(C$000s)     ($)       ($)
Net income for the period     187,157       49,418
Adjusted for the following:              
  Depreciation     87,457       77,429
  Amortization of debt issuance costs and debt discount     1,207       11,944
  Stock-based compensation     8,500       7,174
  Unrealized foreign exchange losses (gains)     11,945       (1,897)
  Gain on disposal of property, plant and equipment     (88)       (941)
  Deferred income taxes     87,037       12,108
Cash flow     383,215       155,235

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

At December 31, 2011, the long-term debt to cash flow ratio was 1.18:1 (December 31, 2010 - 2.89:1) calculated on a 12-month trailing basis as follows:

               
      December 31,       December 31,
As at     2011       2010
(C$000s, except ratio)     ($)       ($)
Long-term debt (net of unamortized debt issuance costs and debt discount) (note 5)     451,021       448,200
Cash flow     383,215       155,235
Long-term debt to cash flow ratio     1.18:1       2.89:1

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

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

15. RELATED-PARTY TRANSACTIONS

An entity controlled by a director of the Company provides ongoing real estate advisory services to the Company. The aggregate fees charged for such services during 2011 were $90 (2010 - $83), as measured at the exchange amount.

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 the rate of 3.375 percent per annum, payable annually. The market value of the shares that secure the loan was approximately $2,411 as at December 31, 2011 (December 31, 2010 - $2,900). 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 aggregative rent charged for these premises during 2011 was $312 (2010 - $15), as measured at the exchange amount.

16. PRESENTATION OF EXPENSES

The Company presents its expenses on the statement 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,     2011       2010
(C$000s)     ($)       ($)
Product costs     401,522       247,049
Depreciation     87,457       77,429
Amortization of debt issuance costs and debt discount     1,207       11,944
Employee benefits expense (note 17)     310,085       206,964

17. 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,     2011       2010
(C$000s)     ($)       ($)
Salaries and short-term employee benefits     295,525       194,102
Post-employment benefits (group retirement savings plan)     2,914       2,013
Share-based payments     10,836       10,332
Termination benefits     810       517
      310,085       206,964

18. 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 included:

Years Ended December 31,     2011       2010
($C000s)     ($)       ($)
Salaries, fees and short-term benefits     2,732       2,076
Post-employment benefits (group retirement savings plan)     32       38
Share-based payments     2,326       4,480
      5,090       6,594

19. CONTINGENCIES

Greek Operations

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 $9,613 (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. Counsel to NAPC has obtained a judicial order entitling NAPC to obtain certain employment information in respect of the plaintiffs which is required in order to assess the extent to which the plaintiffs have mitigated any damages which might otherwise be payable.

Several other smaller groups of former employees have filed similar cases 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 $49 (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 $15 (11 euros), plus interest.

Another one of the lawsuits seeking salaries in arrears of $180 (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 $616 (439 euros) plus interest, was scheduled to be heard before the Athens Court of First Instance on October 1, 2009, but was adjourned until November 18, 2011 as a result of the Greek elections. On November 18, 2011 the hearing of this claim was again postponed until May 24, 2012.

The maximum aggregate interest payable under the claims noted above amounted to $14,551 (11,029 euros) as at December 31, 2011.

The Company has signed an agreement with a Greek exploration and production company pursuant to which it has agreed to assign approximately 90 percent of its entitlement under an offshore licence agreement for consideration including a full indemnity in respect of the Greek legal claims described above. The completion of the transactions contemplated by such agreement is subject to certain conditions precedent, the fulfillment of which is not in the Company's control.

Management is of the view that it is improbable there will be an outflow of economic resources from the Company to settle these claims. Consequently, no provision has been recorded in these consolidated financial statements.

Potential Claim

The Company has a potential liability related to a contractual claim, the amount of which is estimated to be approximately $1,400 on an after-tax basis. Management considers it probable that the claim will be settled in favour of the Company.

20. SEGMENTED INFORMATION

The Company's activities are conducted in four geographic 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.

    Canada   United States   Russia   Latin America   Corporate   Consolidated
(C$000s)   ($)   ($)   ($)   ($)   ($)   ($)
Three Months Ended December 31, 2011                
Revenue   237,286   202,511   30,737   19,503   -   490,037
Operating income (loss)(1)   98,221   60,292   3,818   1,405   (13,372)   150,364
Segmented assets   710,143   534,294   118,197   42,487   -   1,405,121
Capital expenditures   35,415   61,006   3,140   1,447   -   101,008
Goodwill   7,236   2,308   979   -   -   10,523
Three Months Ended December 31, 2010                        
Revenue   160,967   84,190   19,095   4,458   -   268,710
Operating income (loss)(1)   54,503   21,075   1,453   (3,986)   (10,861)   62,184
Segmented assets   644,592   316,177   105,946   28,886   -   1,095,601
Capital expenditures   (7,000)   46,991   6,135   889   -   47,015
Goodwill   7,236   2,308   979   -   -   10,523
Year Ended December 31, 2011                        
Revenue   755,333   607,731   116,105   58,223   -   1,537,392
Operating income (loss)(1)   258,362   184,209   12,742   12   (42,497)   412,828
Segmented assets   710,143   534,294   118,197   42,487   -   1,405,121
Capital expenditures   139,459   170,956   10,601   2,946   -   323,962
Goodwill   7,236   2,308   979   -   -   10,523
Year Ended December 31, 2010                        
Revenue   507,247   301,512   76,595   50,573   -   935,927
Operating income (loss)(1)   148,900   65,432   8,944   (6,317)   (31,723)   185,236
Segmented assets   644,592   316,177   105,946   28,886   -   1,095,601
Capital expenditures   36,797   66,115   14,062   1,925   -   118,899
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, gains or losses on disposal of property, plant and equipment, and income taxes.
   

  Three Months Ended December 31,   Years Ended December 31,
  2011 2010   2011 2010
(C$000s)       ($) ($)
Net income 78,858 16,067   187,157 49,418
Add back (deduct):          
  Depreciation 22,996 19,937   87,457 77,428
  Interest 9,053 30,224   35,489 48,785
  Foreign exchange losses 990 (222)   14,234 339
  Loss (gain) on disposal of capital assets 228 (58)   (88) (941)
  Income taxes 38,239 (3,764)   88,579 10,207
Operating income 150,364 62,184   412,828 185,236

The following table sets forth consolidated revenue by service line:

    Three Months Ended December 31,   Years Ended December 31,
    2011 2010   2011 2010
(C$000s)         ($) ($)
Fracturing   449,137 241,576   1,406,444 828,892
Coiled tubing   30,496 22,330   98,639 73,156
Cementing   7,673 5,594   21,834 20,530
Other   2,731 (790)   10,475 13,349
    490,037 268,710   1,537,392 935,927

 

 

SOURCE Calfrac Well Services Ltd.

For further information:

Douglas R. Ramsay
Chief Executive Officer
Telephone:  403-266-6000
Fax:  403-266-7381

Laura A. Cillis
Senior Vice President, Finance 
and 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


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