Calfrac Announces Fourth Quarter Results

CALGARY, Feb. 24, 2016 /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, 2015.

HIGHLIGHTS



Three Months Ended December 31,

Years Ended December 31,


2015

2014

Change

2015

2014

Change

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

($)

($)

(%)

($)

($)

(%)

(unaudited)







Financial







Revenue

286,194

748,896

(62)

1,495,205

2,496,931

(40)

Operating income(1)

5,787

122,202

(95)

29,384

357,210

(92)


Per share - basic

0.06

1.29

(95)

0.31

3.80

(92)


Per share - diluted

0.06

1.28

(95)

0.31

3.77

(92)

Adjusted EBITDA(1)

22,933

121,731

(81)

52,057

357,295

(85)


Per share - basic

0.24

1.28

(81)

0.54

3.80

(86)


Per share - diluted

0.24

1.28

(81)

0.54

3.77

(86)

 

Net income (loss) attributable to the

shareholders of Calfrac before foreign







exchange gains or losses(2)

(119,113)

39,593

NM

(199,284)

89,550

NM


Per share - basic

(1.22)

0.42

NM

(2.08)

0.95

NM


Per share - diluted

(1.22)

0.42

NM

(2.07)

0.94

NM

Net income (loss) attributable to the

shareholders of Calfrac

(141,498)

26,470

NM

(221,594)

66,976

NM


Per share - basic

(1.45)

0.28

NM

(2.31)

0.71

NM


Per share - diluted

(1.45)

0.28

NM

(2.31)

0.71

NM

Working capital (end of period)

305,952

441,234

(31)

305,952

441,234

(31)

Total equity (end of period)

623,719

832,403

(25)

623,719

832,403

(25)

Weighted average common shares







outstanding (000s)








Basic

97,254

94,981

2

95,907

94,113

2


Diluted

97,423

95,188

2

96,076

94,781

1

 

Operating (end of period)







Active pumping horsepower (000s)

776

1,254

(38)

776

1,254

(38)

Idle pumping horsepower (000s)

524

524

Total pumping horsepower (000s)

1,300

1,254

4

1,300

1,254

4

Active coiled tubing units (#)

20

36

(44)

20

36

(44)

Idle coiled tubing units (#)

17

17

Total coiled tubing units (#)

37

36

3

37

36

3

Active cementing units (#)

23

31

(26)

23

31

(26)

Idle cementing units (#)

8

8

Total cementing units (#)

31

31

31

31

(1)

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

(2)

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



 


FOURTH QUARTER 2015 OVERVIEW

CONSOLIDATED HIGHLIGHTS

Three Months Ended December 31,

2015

2014

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

286,194

748,896

(62)

Expenses





Operating

259,633

591,137

(56)


Selling, general and administrative (SG&A)

20,774

35,557

(42)


280,407

626,694

(55)

Operating income(1)

5,787

122,202

(95)

Operating income (%)

2.0

16.3

(88)

Adjusted EBITDA(1)

22,933

121,731

(81)

Adjusted EBITDA (%)

8.0

16.3

(51)

Fracturing revenue per job ($)(2)

34,199

49,846

(31)

Number of fracturing jobs(2)

7,008

13,857

(49)

Active pumping horsepower, end of period (000s)

776

1,254

(38)

Idle pumping horsepower, end of period (000s)(3)

524

Total pumping horsepower, end of period (000s)(3)

1,300

1,254

4

Coiled tubing revenue per job ($)

40,264

35,688

13

Number of coiled tubing jobs

620

850

(27)

Active coiled tubing units, end of period (#)

20

36

(44)

Idle coiled tubing units, end of period (#)

17

Total coiled tubing units, end of period (#)

37

36

3

Cementing revenue per job ($)

55,430

44,230

25

Number of cementing jobs

336

528

(36)

Active cementing units, end of period (#)

23

31

(26)

Idle cementing units, end of period (#)

8

Total cementing units, end of period (#)

31

31

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

(2) Comparative amounts have been adjusted to reflect job count as fracturing stages completed.

(3) Excludes 60,000 pumping horsepower that has not been commissioned at December 31, 2015 (December 31, 2014 - nil).



Revenue in the fourth quarter of 2015 was $286.2 million, a decrease of 62 percent from the same period in 2014. The Company's fracturing job count decreased by 49 percent due to lower activity in Canada and the United States while consolidated revenue per fracturing job decreased by 31 percent primarily due to significantly lower pricing in Canada and the United States, lower activity in more service intensive operating areas, partially offset by the appreciation of the U.S. dollar. Cementing revenue per job increased by 25 percent primarily due to the completion of larger jobs in the Marcellus shale play in the United States.

Pricing in Canada declined on average by 30 percent in the fourth quarter of 2015 from the comparable quarter in 2014. In the United States, pricing was lower by an average of 40 percent compared to the fourth quarter of 2014. In Argentina, pricing was down by less than 10 percent following an agreed price reduction during the first quarter of 2015 in light of lower crude oil prices in that market. In Russia, pricing is determined by contract awards which resulted in the Company achieving a nominal pricing increase during the 2015 contract renewal process.

Adjusted EBITDA for the fourth quarter of 2015 was $22.9 million, a decline of 81 percent from the comparable period in 2014. Adjusted EBITDA excludes restructuring costs of $11.9 million that were recorded during the fourth quarter of 2015 (2014 - 7.9 million) primarily related to Calfrac's Canadian, United States and Corporate divisions. Adjusted EBITDA as a percentage of revenue declined from 16.3 percent to 8.0 percent compared to the same period last year due to significantly lower pricing in the United States and Canada, and to a lesser extent, Argentina, combined with lower utilization in North America.

Net loss attributable to shareholders of Calfrac was $141.5 million or $1.45 per share diluted, compared to net income of $26.5 million or $0.28 per share diluted in the same period last year, primarily due to significantly lower activity and pricing combined with pre-tax write offs of $114.5 million of property, plant and equipment and $14.3 million of inventory. In the fourth quarter of 2015, Calfrac declared a quarterly dividend of $0.015625 per share.

 

Three Months Ended

December 31, 2015

September 30, 2015

Change

(C$000s, except operational information)

(unaudited)

($)

($)

(%)

Revenue

286,194

289,075

(1)

Expenses





Operating

259,633

269,799

(4)


SG&A

20,774

16,501

26


280,407

286,300

(2)

Operating income(1)

5,787

2,775

NM

Operating income(%)

2.0

1.0

100

Adjusted EBITDA(1)

22,933

7,211

NM

Adjusted EBITDA (%)

8.0

2.5

NM

Fracturing revenue per job ($)

34,199

34,727

(2)

Number of fracturing jobs

7,008

7,070

(1)

Active pumping horsepower, end of period (000s)

776

754

3

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

524

533

(2)

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

1,300

1,287

1

Coiled tubing revenue per job ($)

40,264

37,011

9

Number of coiled tubing jobs

620

590

5

Active coiled tubing units, end of period (#)

20

20

Idle coiled tubing units, end of period (#)

17

17

Total coiled tubing units, end of period (#)

37

37

Cementing revenue per job ($)

55,430

46,274

20

Number of cementing jobs

336

433

(22)

Active cementing units, end of period (#)

23

28

(18)

Idle cementing units, end of period (#)

8

3

NM

Total cementing units, end of period (#)

31

31

(1)

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

(2)

xcludes 60,000 pumping horsepower that has not been commissioned at December 31, 2015 (September 30, 2015 - 40,000).



Revenue in the fourth quarter of 2015 was $286.2 million, a decrease of 1 percent from the third quarter of 2015. Revenue per fracturing job decreased by 2 percent due to lower pricing in the United States and Canada partially offset by the completion of larger jobs. The decrease in revenue per fracturing job was partially offset by the appreciation of the U.S. dollar. Adjusted EBITDA as a percentage of revenue increased by 550 basis points primarily due to the impact of cost reduction initiatives in both the United States and Canada.

Pricing in Canada was down approximately 10 percent from the third quarter of 2015. In the United States, pricing was down modestly from the third quarter of 2015. In Argentina and Russia, pricing was consistent with the previous quarter.

In Canada, revenue increased by 2 percent to $123.3 million in the fourth quarter of 2015 due to slightly higher activity and the completion of larger jobs. Operating income as a percentage of revenue increased to 11.5 percent, after adjusting for restructuring costs, from 8.8 percent primarily due to cost reduction initiatives implemented throughout the third quarter.

In the United States, revenue in the fourth quarter of 2015 declined by 13 percent from the third quarter of 2015 to $81.3 million, mainly as a result of lower activity and, to lesser extent, pricing. The decline in reported revenue was partially offset by the strengthening of the U.S. dollar. Operating income as a percentage of revenue, after adjusting for restructuring costs, increased from negative 7.4 percent in the third quarter to 1.5 percent in the fourth quarter of 2015. The sequential improvement was primarily attributable to the impact of cost reductions realized during the quarter.

In Russia, revenue decreased to $32.6 million in the fourth quarter of 2015 from $35.9 million in the third quarter of 2015. The decline in revenue was due to the completion of smaller fracturing jobs during the fourth quarter combined with a decline in the rouble of 3 percent. Operating income as a percentage of revenue increased slightly from 12.1 percent to 13.0 percent.

In Latin America, revenue increased 27 percent to $48.9 million. The increase was due to higher activity in Argentina and Mexico combined with the completion of larger jobs in Argentina. Operating income as a percentage of revenue increased from 2.0 percent in the third quarter to 8.2 percent in the fourth quarter primarily due to significant cost reductions in Mexico combined with higher equipment utilization in that country. In addition, operating income in the third quarter of 2015 was lower due to a one-time revenue reduction totaling $1.1 million in Mexico.

OUTLOOK AND BUSINESS PROSPECTS
The North American oilfield services industry is set to face another challenging year in 2016. The price of crude oil remainsvolatile, averaging around US$30 per barrel since the beginning of the year and hitting a 12-year low in February. As a result,the Company's customers have further scaled back capital spending plans for 2016, which marks the first time since thelate-1980s that global exploration and production spending has decreased for two consecutive years. As such, Calfrac anticipatesequipment utilization in North America will remain low for the majority of 2016, with the potential for a modest improvement towards the end of the year. Pricing continues to be a challenge with some competitors bidding at historically low levels inCanada and the United States. Calfrac's international operations are expected to continue to generate positive operating margins, which will mitigate the anticipated weakness across North America.

Given the current low commodity price environment and lack of visibility, Calfrac continues to focus on aggressively managing its cost structure. Calfrac is encouraged with what has been achieved to date, including fixed-cost reductions of roughly 50 percent and 60 percent from the fourth quarter of 2014 in Canada and the United States, respectively. As a result of the current market, the Company has reduced its headcount by approximately 40 percent in Canada and 60 percent in the United States since the end of 2014. Retaining key employees has always been a keen focus for Calfrac but unfortunately with the current downturn shaping up to be the worst in decades, the Company has had to make some difficult decisions in order to position itself to survive in this environment, and has been forced to let go of some of its longstanding employees.

In working with the Company's key suppliers, the logistics group has reduced costs for key products including having realized reductions of approximately 30 percent for proppant, 22 percent for third party subcontractors and 11 percent for chemical costs in Canada compared to the beginning of 2015. The strength in the U.S. dollar has and will continue to negatively impact product costs with the majority of the Company's sand and chemicals sourced from the United States. In the United States, proppant costs including third party hauling have been reduced on average by approximately 40 percent while chemical costs are down 25 percent from January, 2015 on a U.S. dollar basis. Calfrac continues to analyze all measures that it can employ to further lower its cost structure including process efficiencies and further cost mitigation strategies.

CANADA
Activity levels in the first quarter of 2016 started off slowly with limited activity throughout January as customers continuedto adjust their spending plans and delay planned work. Given the mild winter weather witnessed across the Western Canadian Sedimentary Basin, Calfrac anticipates an early break-up which combined with an overall lack of capital spending by customersis expected to result in very limited activity in March. Pricing has decreased a further 10 percent to 15 percent from the fourth quarter of 2015 with some competitors now bidding at below breakeven levels. Overall, the Company believes producer spending will be down substantially, with the year's actual spending remaining dependent on commodity prices. Approximately 45 percent of Calfrac's Canadian fracturing equipment fleet remains idle and the Company will continue to prudently manageits future operating scale and cost structure in order to navigate through this challenging market.

In Canada, gas-focused activity now represents a larger portion of Calfrac's work and the Company expects that trend to continue, offsetting some of the weakness in oil-focused activity with drilling and completion activity in the Viking and Cardium plays likely to remain limited until crude oil prices exceed US$40-$45 per barrel. That said, gas-directed drilling is currently facing its own challenges with AECO trading at sub $2.00/Mcf.

UNITED STATES
In the United States, the land-based rig count is already averaging a further 20 percent reduction from the fourth quarter of 2015 with no signs of a near-term reversal in the trend. A number of exploration and production companies have announced capital budgets that are lower by upwards of 50 percent year-over-year and Calfrac anticipates overall drilling and completion spending across the United States to be down meaningfully from 2015. Pricing remains at unsustainable levels but Calfrac believes it has largely found a bottom. Approximately 50 percent of the Company's horsepower in the United States is currently idle and Calfrac will continue to reduce its operating scale to match near-term activity levels.

RUSSIA
The Company expects activity in 2016 to be relatively consistent with 2015. However, the first quarter's financial results are expected to be lower sequentially as a result of the continued devaluation of the rouble and activity delays with select customers. Calfrac has been successful in the 2016 tender process thus far, although negotiations are ongoing and anticipated to be concluded by the end of the first quarter. The Company has experienced growing interest from new customers which has allowed Calfrac to further diversify its revenues across a larger number of companies.

LATIN AMERICA
Overall, the Company expects activity levels in 2016 to be consistent with the prior year as new contracts in southern Argentina are expected to offset the slowdown that Calfrac is currently experiencing in the Neuquen area. Although Argentina's internal price of oil will help maintain a certain level of activity, international oil companies have been cautious in dedicating new capital to the Vaca Muerta play pending an improvement in global oil prices. As a result, some shale oil projects have been delayed with activity transitioning to more gas-focused plays. On a positive note, Argentina's recently elected new government has already implemented changes to the country's previous policies that the Company believes are generating the basis for future foreign investment and will contribute to the continued development of Argentina's conventional and unconventional oil and gas resources.

In Mexico, Calfrac expects activity in the longer term to increase as the national reform of the energy industry continues to proceed. As a result of the current low levels of activity and cautious approach to spending by PEMEX in the short to medium term, the Company has scaled back its operations in order to match costs with anticipated revenue.

DIVIDEND POLICY
Calfrac's Board of Directors reviews the Company's dividend policy on a quarterly basis. Due to the challenging market conditions in the oilfield services industry, the Board of Directors have determined to suspend Calfrac's dividend effective immediately until further notice.

SUMMARY
Although Calfrac's long-term strategy has not changed, in the short-to-medium term the Company remains focused on one thing: surviving through what is shaping up to be the worst industry downturn in decades. Key focal points include managing the Company's cost structure, employing further process efficiencies, retaining as many of its best people as possible given expected activity levels, maintaining strong relationships with its existing customers as well as expanding its customer base, all while ensuring the Company has sufficient liquidity to navigate the cyclical downturn. The Company's international operations continue to generate strong cash contributions and provide an avenue for growth. Calfrac believes that the pressure pumping services industry will remain an integral component of unconventional resource development over the long term and that the Company will be well-positioned given its focus on top-tier safety, service quality, logistics management and technology.

FINANCIAL OVERVIEW - THREE MONTHS ENDED DECEMBER 31, 2015 VERSUS 2014

CANADA


Three Months Ended December 31,

2015

2014

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

123,341

296,983

(58)

Expenses





Operating

109,651

222,154

(51)


SG&A

3,529

7,265

(51)


113,180

229,419

(51)

Operating income(1)

10,161

67,564

(85)

Operating income (%)

8.2

22.8

(64)

Fracturing revenue per job ($)(2)

26,201

34,814

(25)

Number of fracturing jobs(2)

4,368

8,025

(46)

Active pumping horsepower, end of period (000s)

223

394

(43)

Idle pumping horsepower, end of period (000s)

202

Total pumping horsepower, end of period (000s)

425

394

8

Coiled tubing revenue per job ($)

25,344

30,400

(17)

Number of coiled tubing jobs

351

579

(39)

Active coiled tubing units, end of period (#)

6

17

(65)

Idle coiled tubing units, end of period (#)

12

Total coiled tubing units, end of period (#)

18

17

6

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




(2) Comparative amounts have been adjusted to reflect job count as fracturing stages completed.




REVENUE
Revenue from Calfrac's Canadian operations during the fourth quarter of 2015 was $123.3 million versus $297.0 million in the same period of 2014. The 58 percent decrease was primarily due to significantly lower activity and lower pricing for the Company's fracturing services. Revenue per fracturing job decreased by 25 percent from the same period in the prior year as a result of lower pricing offset partially by greater service intensity. Total proppant per reported fracturing job increased by 42 percent over the prior year. Coiled tubing jobs decreased by 39 percent from the prior year's fourth quarter due to lower activity in the shallow oil plays of Saskatchewan and in shallow gas areas of southern Alberta.

OPERATING INCOME
Operating income in Canada during the fourth quarter of 2015 was $10.2 million, which included restructuring costs totaling $4.0 million during the quarter (2014 - $2.8 million), compared to $67.6 million in the same period of 2014. The Company mitigated the impact of lower activity and pricing through the implementation of several cost reduction initiatives designed to maintain the Company's competitiveness in a lower-price environment. Operating costs were 51 percent lower than in the comparable quarter of 2014, which is attributable to the decline in activity combined with the impact of cost savings realized during the quarter. During the year, Calfrac realized reductions of approximately 30 percent for proppant, 22 percent for third party subcontractors and 11 percent for chemical costs. The significant reduction in product costs were partially offset by the impact of a weaker Canadian dollar on the cost of proppant and chemicals that are primarily sourced from the United States. During the quarter, the Company had approximately 202,000 horsepower temporarily idled in Canada rather than operating at margins that did not meet its required financial returns. SG&A expenses declined by 51 percent year-over-year, primarily due to workforce reductions, which have totaled approximately 40 percent since the end of 2014, as well as to a lower compensation structure combined with a reclassification of $1.1 million of employee costs from SG&A to operating costs during the quarter. Overall, the Canadian division reduced its fixed cost structure by roughly 48 percent since the end of 2014. The Company also recorded restructuring costs totaling $4.0 million during the quarter, of which $1.5 million was recorded in SG&A.

 


UNITED STATES

 

Three Months Ended December 31,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

81,263

355,688

(77)

Expenses





Operating

80,193

292,990

(73)


SG&A

4,953

9,878

(50)


85,146

302,868

(72)

Operating income (loss)(1)

(3,883)

52,820

NM

Operating income (loss) (%)

(4.8)

14.9

NM

Fracturing revenue per job ($)

34,664

65,397

(47)

Number of fracturing jobs

2,191

5,237

(58)

Active pumping horsepower, end of period (000s)

352

699

(50)

Idle pumping horsepower, end of period (000s)

322

Total pumping horsepower, end of period (000s)

674

699

(4)

Coiled tubing revenue per job ($)

45,043

(100)

Number of coiled tubing jobs

61

(100)

Active coiled tubing units, end of period (#)

5

(100)

Idle coiled tubing units, end of period (#)

5

Total coiled tubing units, end of period (#)

5

5

Cementing revenue per job ($)

54,786

36,177

51

Number of cementing jobs

97

289

(66)

Active cementing units, end of period (#)

10

18

(44)

Idle cementing units, end of period (#)

8

Total cementing units, end of period (#)

18

18

US$/C$ average exchange rate(2)

1.3354

1.1358

18

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




(2) Source: Bank of Canada.




 

REVENUE
Revenue from Calfrac's United States operations decreased to $81.3 million during the fourth quarter of 2015 from $355.7 million in the comparable quarter of 2014 due to significantly lower fracturing activity in Pennsylvania, south Texas, North Dakota and Arkansas resulting in 58 percent fewer fracturing jobs period-over-period. Activity in the Rockies remained resilient during the quarter due to an active customer base in this region. Revenue per job was 47 percent lower year-over-year due to significantly weaker pricing and, to a lesser extent, job mix. Proppant per fracturing job decreased by 26 percent from the same period in the prior year due to lower activity in more service intensive regions such as the Marcellus shale gas play.

OPERATING INCOME (LOSS)
The Company's United States operations had an operating loss of $3.9 million during the fourth quarter of 2015, which included restructuring costs totaling $5.1 million (2014 - $3.1 million), compared to operating income of $52.8 million in the same period in 2014. The decline was primarily due to significantly lower pricing and utilization. Operating income as a percentage of revenue declined materially from 15.7 percent in the fourth quarter of 2014 to 1.5 percent in 2015 after adjusting for restructuring charges in both periods. The deterioration in the operating income percentage was due to intense pricing competition from many of the Company's major competitors and lower equipment utilization in Pennsylvania, south Texas and North Dakota. Mitigating the overall trend were U.S. dollar pricing reductions for proppant averaging 38 percent, with chemical costs also down by approximately 25 percent from the beginning of the year. In addition, Calfrac had approximately 322,000 horsepower idled in the United States during the quarter. SG&A expenses decreased by 50 percent in the fourth quarter of 2015 from the same period in the prior year due to cost reductions that were initiated towards the end of the first quarter and continued throughout the remainder of 2015. Overall, the United States division has reduced its headcount and its U.S. dollar fixed cost structure by approximately 60 percent since the end of 2014. The Company also recorded restructuring costs totaling $5.1 million during the quarter of which  $1.1 million was recorded in SG&A.

 


RUSSIA

 

Three Months Ended December 31,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

32,641

37,685

(13)

Expenses





Operating

27,664

30,687

(10)


SG&A

745

2,175

(66)


28,409

32,862

(14)

Operating income(1)

4,232

4,823

(12)

Operating income (%)

13.0

12.8

2

Fracturing revenue per job ($)

90,035

93,156

(3)

Number of fracturing jobs

301

350

(14)

Pumping horsepower, end of period (000s)

70

70

Coiled tubing revenue per job ($)

39,578

46,610

(15)

Number of coiled tubing jobs

140

109

28

Coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0202

0.0241

(16)

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




(2) Source: Bank of Canada.




 

REVENUE
During the fourth quarter of 2015, revenue from Calfrac's Russian operations decreased by 13 percent to $32.6 million from $37.7 million in the corresponding three-month period of 2014. Russian revenue is generated in roubles and the decrease was primarily caused by the 16 percent devaluation of the Russian rouble in the fourth quarter of 2015 from the comparable quarter of 2014. The decline in the rouble was partially offset by higher fracturing and coiled tubing activity in Nefteugansk. Revenue per fracturing job declined by 3 percent due to the currency devaluation offset partially by the completion of larger jobs in Usinsk where weather permitted more activity in the area north of that city. Calfrac performs larger acid fracturing jobs in this region, which is only accessible by ice roads.

OPERATING INCOME
Operating income in Russia was $4.2 million during the fourth quarter of 2015 compared to $4.8 million in the corresponding period of 2014, the decline being primarily due to the 16 percent devaluation of the rouble. Operating income as a percentage of revenue was 13 percent, virtually unchanged. SG&A expenses declined by 66 percent in the fourth quarter of 2015 from the prior year's quarter due to the impact of the depreciation of the Russian rouble combined with cost reduction initiatives, including lower bonuses and personnel reductions.

 

LATIN AMERICA

 

Three Months Ended December 31,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

48,949

58,540

(16)

Expenses





Operating

40,254

41,125

(2)


SG&A

4,666

5,579

(16)


44,920

46,704

(4)

Operating income(1)

4,029

11,836

(66)

Operating income (%)

8.2

20.2

(59)

Pumping horsepower, end of period (000s)

131

91

44

Cementing units, end of period (#)

13

13

Coiled tubing units, end of period (#)

7

7

Mexican peso/C$ average exchange rate(2)

0.0797

0.0819

(3)

Argentinean peso/C$ average exchange rate(2)

0.1337

0.1334

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




(2) Source: Bank of Canada.








REVENUE
Calfrac's Latin American operations generated total revenue of $48.9 million during the fourth quarter of 2015 versus $58.5 million in the comparable three-month period in 2014. Revenue in Argentina increased by $2.2 million due to higher cementing activity offset partially by lower fracturing activity combined with a pricing decrease that was implemented during the first quarter of 2015. The increase in revenue in Argentina was more than offset by lower revenue in Mexico and Colombia during the quarter. Lower revenue in Mexico was the result of lower year-over-year activity and the depreciation of the Mexican peso. The Company completed its existing commitments in Colombia during the second quarter of 2015 and is in the process of closing operations.

OPERATING INCOME
Operating income in Latin America for the three months ended December 31, 2015 was $4.0 million compared to $11.8 million in the comparative quarter in 2014. Operating income in the fourth quarter of 2015 was lower due to decreased equipment utilization in Mexico, lower pricing in Argentina, and higher SG&A and district overhead costs in Argentina related to the Company's expanded unconventional fracturing operations. In addition, the Company recorded a positive revenue adjustment in Mexico during the fourth quarter of 2014 totaling US$6.4 million that did not recur in the fourth quarter of 2015.

 


CORPORATE

 

Three Months Ended December 31,

 

 

 

2015

 

 

 

2014

 

 

 

Change

(C$000s)
(unaudited)

($)

($)

(%)

Expenses





Operating

1,871

4,180

(55)


SG&A

6,881

10,661

(35)


8,752

14,841

(41)

Operating loss(1)

(8,752)

(14,841)

(41)

% of Revenue

3.1

2.0

55

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




 

OPERATING LOSS
The 41 percent decline in corporate expenses from the fourth quarter of 2014 resulted from the Company greatly reducing its costs  throughout  2015  to  better align  its  cost  structure with  anticipated  activity  levels.  These  initiatives  contributed approximately $12.0 million to the quarterly decrease in corporate expenses primarily by reducing corporate personnel costs and annual bonuses. The Company recorded restructuring costs totaling $2.3 million during the quarter (2014 - $0.9 million), of which $1.4 million was recorded in SG&A. Corporate SG&A included a recovery of stock-based compensation costs of $3.8 million during the fourth quarter of 2014 compared to a recovery of $0.1 million in the same period of 2015.

DEPRECIATION
For the three months ended December 31, 2015, depreciation expense increased by 12 percent to $40.3 million from $36.0 million in the corresponding quarter of 2014. The increase was mainly a result of a weaker Canadian dollar relative to the U.S. dollar.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $33.5 million during the fourth quarter of 2015 versus a loss of $16.6 million in the comparative three-month period of 2014. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada, Russia and Latin America. The Company's fourth-quarter 2015 foreign exchange loss was largely attributable to the translation of U.S. dollar-denominated liabilities held in Argentina as the value of the Argentinean peso depreciated 38 percent against the U.S. dollar during the fourth quarter. The foreign exchange loss was partially offset by U.S. dollar-denominated assets held in Canada as the U.S. dollar appreciated against the Canadian dollar during the fourth quarter.

IMPAIRMENT
A substantial downward shift in the commodity price environment occurred in the fourth quarter of 2015, and since December crude oil and natural gas prices have continued to weaken. This decline has resulted in an impairment to the carrying value of some of the Company's assets.

The Company carried out a comprehensive review of its property, plant and equipment at the end of 2015 and identified items that were permanently idle or obsolete and, therefore, no longer able to generate cash inflows, which primarily related to Canada. In addition, the Company reviewed each of its cash generating units (CGU) for potential impairment. As a result of this review, impairment charges were made in the United States and Mexico. Total impairment charges were $114.5 million for the quarter ended December 31, 2015 (2014 - $4.6 million). The impairment losses by CGU are as follows:

 

For the quarter ended December 31,

2015

2014

(C$000s)

($)

($)

Canada

10,091

2,941

United States

102,528

401

Mexico

1,860

Colombia

1,278


114,479

4,620

The Company also evaluated the net realizable value of its inventories at December 31, 2015 and recorded a $14.3 million write-down (2014 - $nil).

INTEREST
The Company's net interest expense of $18.3 million for the fourth quarter of 2015 was $2.8 million higher than in the comparable period of 2014. Interest expense on U.S. dollar-denominated debt was higher due to a weaker Canadian dollar relative to the U.S. dollar. The amount drawn on the Company's revolving credit facility was $57.2 million higher at the end of the fourth quarter than at the end of the comparable quarter in 2014.

INCOME TAXES
The Company recorded an income tax recovery of $72.0 million during the fourth quarter of 2015 compared to an expense of $17.5 million in the comparable period of 2014. The fourth quarter of 2015 results included an asset impairment of $114.5 million, an inventory write-down of $14.3 million and the write-off of deferred tax assets in Colombia of $2.1 million. Excluding these one-time items the income tax recovery would have been $26.7 million leading to an effective tax rate of 30 percent, which is consistent with the normalized effective tax rate of 29 percent during the comparable period in 2014.

SUMMARY OF QUARTERLY RESULTS

Three Months Ended

Mar. 31,
2014

Jun. 30,
2014

Sep. 30,
2014

Dec. 31,
2014

Mar. 31,
2015

Jun. 30,
2015

Sep. 30,
2015

Dec. 31,
2015

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

($)

($)

($)

($)

($)

($)

($)

($)

(unaudited)









Financial









Revenue

547,638

502,957

697,440

748,896

600,383

319,553

289,075

286,194

Operating income (loss)(1)

64,117

44,833

126,058

122,202

27,844

(7,022)

2,775

5,787

Per share - basic(2)

0.69

0.48

1.33

1.29

0.29

(0.07)

0.03

0.06

Per share - diluted(2)

0.68

0.47

1.32

1.28

0.29

(0.07)

0.03

0.06

Adjusted EBITDA(1)

67,932

44,008

123,624

121,731

25,609

(3,696)

7,211

22,933

Per share - basic(2)

0.73

0.47

1.31

1.28

0.27

(0.04)

0.08

0.24

Per share - diluted(2)

0.73

0.46

1.29

1.28

0.27

(0.04)

0.08

0.24


Net income (loss) attributable to










the shareholders of Calfrac

8,946

(12,905)

44,465

26,470

(12,628)

(43,277)

(24,191)

(141,498)


Per share - basic(2)

0.10

(0.14)

0.47

0.28

(0.13)

(0.45)

(0.25)

(1.45)


Per share - diluted(2)

0.10

(0.14)

0.46

0.28

(0.13)

(0.45)

(0.25)

(1.45)

Capital expenditures

27,331

35,312

62,909

52,033

52,669

50,356

24,945

29,964

Working capital (end of period)

338,916

334,320

393,653

441,234

413,950

340,639

296,816

305,952

Total equity (end of period)

803,904

794,615

828,537

832,403

818,825

775,646

742,972

623,719

 

Operating (end of period)









Active pumping horsepower (000s)

1,215

1,217

1,235

1,254

1,259

804

754

776

Idle pumping horsepower (000s)(3)

455

533

524

Total pumping horsepower (000s)(3)

1,215

1,217

1,235

1,254

1,259

1,259

1,287

1,300

Active coiled tubing units (#)

34

36

36

36

37

20

20

20

Idle coiled tubing units (#)

17

17

17

Total coiled tubing units (#)

34

36

36

36

37

37

37

37

Active cementing units (#)

31

31

31

31

31

26

28

23

Idle cementing units (#)

5

3

8

Total cementing units (#)

31

31

31

31

31

31

31

31

(1)

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

(2)

Comparative amounts were adjusted to reflect the Company's two-for-one common share split that occurred on June 2, 2014.

(3)

Excludes 60,000 pumping horsepower that had not been commissioned at December 31, 2015.



FINANCIAL OVERVIEW - YEAR ENDED DECEMBER 31, 2015 VERSUS 2014

CANADA

Years Ended December 31,

2015

2014

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

533,102

942,947

(43)

Expenses





Operating

487,634

744,135

(34)


SG&A

10,545

23,041

(54)


498,179

767,176

(35)

Operating income(1)

34,923

175,771

(80)

Operating income (%)

6.6

18.6

(65)

Fracturing revenue per job ($)(2)

31,809

35,811

(11)

Number of fracturing jobs(2)

15,755

24,857

(37)

Active pumping horsepower, end of period (000s)

223

394

(43)

Idle pumping horsepower, end of period (000s)

202

Total pumping horsepower, end of period (000s)

425

394

8

Coiled tubing revenue per job ($)

24,020

29,942

(20)

Number of coiled tubing jobs

1,330

1,763

(25)

Active coiled tubing units, end of period (#)

6

17

(65)

Idle coiled tubing units, end of period (#)

12

Total coiled tubing units, end of period (#)

18

17

6

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




(2) Comparative amounts have been adjusted to reflect job count as fracturing stages completed.




REVENUE
Revenue from Calfrac's Canadian operations during 2015 was $533.1 million versus $942.9 million in 2014. The decrease was primarily due to a mix of lower pricing and lower demand for the Company's fracturing services. Revenue per fracturing job decreased by 11 percent from the prior year primarily due to lower pricing and job mix offset partially by greater service intensity. Coiled tubing jobs decreased by 25 percent from the prior year due to lower activity in all operating regions.

OPERATING INCOME
Operating income in Canada during 2015 was $34.9 million compared to $175.8 million in 2014. The decrease in operating income was the result of significantly lower pricing and utilization partially offset by cost reductions for proppant, third-party subcontractors and chemical costs. The impact of a weaker Canadian dollar on the cost of proppant and chemicals that are primarily sourced from the United States partially offset the product cost reductions achieved through supply chain initiatives. SG&A expenses declined by 54 percent year-over-year, primarily due to workforce reductions and a lower compensation structure combined with a reclassification of $5.3 million of employee costs from SG&A to operating costs during 2015. The Company also recorded restructuring costs totaling $5.0 million during the year (2014 - $2.8 million), of which $1.5 million was recorded in SG&A.

UNITED STATES

 

Years Ended December 31,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

652,007

1,214,560

(46)

Expenses





Operating

629,842

981,685

(36)


SG&A

22,222

32,391

(31)


652,064

1,014,076

(36)

Operating income(1)

(57)

200,484

(100)

Operating income (%)

0.0

16.5

(100)

Fracturing revenue per job ($)

49,091

60,045

(18)

Number of fracturing jobs

12,639

19,360

(35)

Active pumping horsepower, end of period (000s)

352

699

(50)

Idle pumping horsepower, end of period (000s)

322

Total pumping horsepower, end of period (000s)

674

699

(4)

Coiled tubing revenue per job ($)

51,750

58,010

(11)

Number of coiled tubing jobs

55

203

(73)

Active coiled tubing units, end of period (#)

5

(100)

Idle coiled tubing units, end of period (#)

5

Total coiled tubing units, end of period (#)

5

5

Cementing revenue per job ($)

49,224

37,155

32

Number of cementing jobs

583

1,085

(46)

Active cementing units, end of period (#)

10

18

(44)

Idle cementing units, end of period (#)

8

Total cementing units, end of period (#)

18

18

US$/C$ average exchange rate(2)

1.2787

1.1045

16

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




(2) Source: Bank of Canada.




 

REVENUE
Revenue from Calfrac's United States operations decreased to $652.0 million in 2015 from $1.2 billion in 2014 due to significantly weaker pricing combined with lower fracturing activity. The number of fracturing jobs completed during 2015 decreased by 35 percent from 2014, primarily due to lower activity in Pennsylvania, North Dakota, south Texas and the closure of operations in the Fayetteville, partially offset by higher activity in the Rockies. Revenue per job declined by 18 percent year-over-year as a stronger U.S. dollar was more than offset by lower pricing. In addition, the volume of proppant per fracturing job decreased by 26 percent from the prior year despite the continued trend of greater service intensity per wellbore as the Company experienced lower activity in higher service intensive regions such as the Marcellus shale play in Pennsylvania.

OPERATING INCOME (LOSS)
The Company's United States division operated at a break-even level in 2015 after generating operating income of $200.5 million in 2014. The decline was primarily due to significantly lower pricing in all markets and decreased utilization in all of the resource plays where the Company operates with the exception of Colorado. The Company also recorded restructuring costs totaling $5.8 million during the year (2014 - $3.1 million), of which $1.1 million was recorded in SG&A. Mitigating the overall trend were pricing reductions for proppant and chemicals. SG&A expenses decreased by 31 percent in 2015 from the same period in the prior year due to cost reductions made towards the end of the first half of 2015, the benefit of which continued throughout the remainder of 2015.

 

RUSSIA

 

Years Ended December 31,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

137,876

171,703

(20)

Expenses





Operating

119,705

145,999

(18)


SG&A

3,428

6,970

(51)


123,133

152,969

(20)

Operating income(1)

14,743

18,734

(21)

Operating income (%)

10.7

10.9

(2)

Fracturing revenue per job ($)

88,913

109,680

(19)

Number of fracturing jobs

1,297

1,289

1

Pumping horsepower, end of period (000s)

70

70

Coiled tubing revenue per job ($)

42,238

54,543

(23)

Number of coiled tubing jobs

534

556

(4)

Coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0210

0.0292

(28)

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




(2) Source: Bank of Canada.




 

REVENUE
The Company's revenue from Russian operations decreased by 20 percent to $137.9 million from $171.7 million in 2014. The decrease in revenue, which is generated in roubles, was primarily related to the 28 percent devaluation of the rouble in 2015 versus 2014. The decline in the rouble was partially offset by higher fracturing activity in one of its operating districts, where Calfrac provides proppant to its largest customer. Revenue per fracturing job declined by 19 percent due to the currency devaluation but was partially offset by an increase in average job size and a modest rouble-based pricing increase.

OPERATING INCOME
Operating income in Russia declined to $14.7 million during 2015 from $18.7 million in 2014 primarily due to the 28 percent devaluation of the rouble, which was largely offset by improved operational leverage in one of its operating districts. The operating income percentage declined slightly due to Calfrac providing a large volume of proppant to a customer, which is priced at lower margins than completion service work, offset partially by slight pricing increases. SG&A expenses declined by 51 percent in 2015 from the prior year due to the devaluation of the rouble combined with cost reductions implemented during the year.

 

LATIN AMERICA

 

Years Ended December 31,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

172,220

167,721

3

Expenses





Operating

143,089

124,710

15


SG&A

15,836

16,153

(2)


158,925

140,863

13

Operating income(1)

13,295

26,858

(50)

Operating income (%)

7.7

16.0

(52)

Pumping horsepower, end of period (000s)

131

91

44

Cementing units, end of period (#)

13

13

Coiled tubing units, end of period (#)

7

7

Mexican peso/C$ average exchange rate(2)

0.0806

0.0830

(3)

Argentinean peso/C$ average exchange rate(2)

0.1388

0.1364

2

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




(2) Source: Bank of Canada.




 

REVENUE
Calfrac's Latin American operations generated total revenue of $172.2 million in 2015 versus $167.7 million in 2014. The increase resulted from the significant growth in fracturing and coiled tubing activity in Argentina, which included the start-up of a second unconventional crew in December 2014. The Company also experienced revenue growth in the Las Heras region, which is more focused on conventional activity. Revenue in Mexico was lower in 2015 than in the previous year due to significantly lower activity in that country.

OPERATING INCOME
Operating income in Latin America during 2015 was $13.3 million compared to $26.9 million in 2014. Operating income was lower due to reduced pricing in Argentina combined with lower equipment utilization and higher SG&A and district overhead in  Argentina related to  the Company's expanded  unconventional fracturing  operations. Calfrac  is  also  currently using subcontractors for services such as flowback and well testing more regularly than in 2014, which has had a negative impact on operating income as a percentage of revenue. In addition, the Company recorded US$6.4 million of foreign exchange and inflation adjustments in 2014 as a result of the settlement of fracturing contracts, which added to operating income that year. There were no such adjustments in 2015.

 

CORPORATE

 

Years Ended December 31,

 

 

 

2015

 

 

 

2014

 

 

 

Change

(C$000s) (unaudited)

($)

($)

(%)

Expenses





Operating

6,974

11,848

(41)


SG&A

26,546

52,789

(50)


33,520

64,637

(48)

Operating loss(1)

(33,520)

(64,637)

(48)

% of Revenue

2.2

2.6

(15)

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




 

OPERATING LOSS
The 48 percent decline in corporate expenses in 2015 from 2014 includes a reduction in stock-based compensation expense of $10.7 million resulting from a significant decline in the Company's stock price. In addition, the Company reduced costs during 2015 to align its cost structure with anticipated activity levels. These initiatives contributed approximately $23.6 million to the overall decrease in corporate expenses primarily by reducing corporate personnel costs and annual bonuses. The Company also recorded restructuring costs totaling $2.3 million during the year (2014 - $0.9 million), of which $1.4 million was recorded in SG&A.

DEPRECIATION
For the year ended December 31, 2015, depreciation expense increased by 12 percent to $156.6 million from $139.4 million in 2014. The increase was mainly a result of a weaker Canadian dollar relative to the U.S. dollar.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $37.0 million during 2015 versus a loss of $30.2 million in 2014. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada, Russia and Latin America. The Company's 2015 foreign exchange loss was largely attributable to the translation of U.S. dollar-denominated liabilities held in Argentina and Russia as the value of the Argentinean peso and Russian rouble depreciated against the U.S. dollar during the year. The foreign exchange loss was partially offset by U.S. dollar-denominated assets held in Canada as the U.S. dollar appreciated against the Canadian dollar during 2015.

IMPAIRMENT
A substantial downward shift in the commodity price environment occurred in the fourth quarter of 2015 and crude oil and natural gas prices have continued to weaken since December. The Company anticipates continued relatively low pricing in 2016. This decline in commodity prices and the negative impact on the Company's operations has resulted in an impairment to the carrying value of some of Calfrac's assets.

The Company carried out a comprehensive review of its property, plant and equipment at the end of 2015 and identified items that were permanently idle or obsolete and, therefore, no longer able to generate cash inflows, which primarily related to Canada. In addition, the Company reviewed each of its cash generating units (CGU) for potential impairment. As a result of this review, impairment charges were made in the United States and Mexico. Total impairment charges were $114.5 million for the year ended December 31, 2015 (2014 - $4.6 million). The impairment losses by CGU are as follows:

 


For the year ended December 31,

2015

2014

(C$000s)

($)

($)

Canada

10,091

2,941

United States

102,528

401

Mexico

1,860

Colombia

1,278


114,479

4,620

The Company also evaluated the net realizable value of its inventories at December 31, 2015 and recorded a $14.3 million write-down (2014 - $nil).

At September 30, 2015, the Company completed an assessment for goodwill impairment and determined that the recoverable amounts of its operating segments were less than their carrying amounts, and wrote-off all of the remaining goodwill of $9.5 million (2014 - $1.0 million).

INTEREST
The Company's net interest expense of $69.0 million for 2015 was $9.4 million higher than in 2014. Interest on U.S. dollar- denominated debt was higher due to a weaker Canadian dollar relative to the U.S. dollar. Loans on the Company's revolving credit facility were consistent with the comparable period in 2014.

INCOME TAXES
The Company recorded an income tax recovery of $114.1 million in 2015 compared to an expense of $48.7 million in 2014. The reversal to a recovery was the result of pre-tax losses incurred combined with an asset impairment of $114.5 million, the write-off of deferred tax assets in Mexico and Colombia totaling $15.7 million, an inventory write-down of $14.3 million and a goodwill write-down of $9.5 million. The effective tax recovery rate excluding these one-time items was 35 percent during 2015 compared to a normalized effective tax rate of 34 percent in 2014.

LIQUIDITY AND CAPITAL RESOURCES

Years Ended December 31,


2015

2014

(C$000s)

(unaudited)

($)

($)

Cash provided by (used in):




Operating activities

121,062

202,469


Financing activities

45,877

13,483


Investing activities

(155,050)

(160,053)


Effect of exchange rate changes on cash and cash equivalents

12,987

1,035

Increase in cash and cash equivalents

24,876

56,934

 

OPERATING ACTIVITIES
The Company's cash provided by operating activities for the year ended December 31, 2015 was $121.1 million versus $202.5 million in 2014. The decrease was primarily due to lower operating margins in Canada and the United States, offset by the reduction of working capital during the year. At December 31, 2015, Calfrac's working capital was approximately $306.0 million, a 31 percent decrease from December 31, 2014.

FINANCING ACTIVITIES
Net cash provided by financing activities for the year ended December 31, 2015 was $45.9 million compared to $13.5 million in 2014. During 2015, the Company issued $25.2 million of common shares through a private placement, increased the amount drawn on its credit facility by $46.1 million, increased its bank loan in Argentina by $3.4 million, paid cash dividends of $18.9 million and purchased $9.4 million under the normal course issuer bid.

On October 1, 2014, the Company extended the term of its credit facilities by one year to September 27, 2018. The maturity may be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty.

On December 11, 2015, Calfrac amended its credit facilities to provide increased financial flexibility. The amendment included a voluntary reduction in the total facility from $400.0 million to $300.0 million. The facilities consist of an operating facility of $30.0 million and a syndicated facility of $270.0 million. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 3.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 4.50 percent above the respective base rates. The facility was amended to increase the $100.0 million accordion feature to $200.0 million. The accordion feature is not available to the Company during the covenant relief period described below and ending on December 31, 2017. Additionally, for the quarter ended December 31, 2015 through the quarter ended December 31, 2017, advances under the credit facilities will be limited by a borrowing base. The borrowing base is calculated based on the following:

i.     

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



ii.   

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



iii.   

25 percent of the net book value of property, plant and equipment (PP&E) of the parent company and its U.S. operating subsidiary. The value of PP&E excludes assets under construction and is limited to a maximum of $90.0 million until June 30, 2016 and $150.0 million thereafter.



As at December 31, 2015, the Company had used $40.1 million of its credit facilities for letters of credit and had $110.0 million outstanding under its credit facility, leaving $149.9 million in available credit.

The Company's credit facilities contain certain financial covenants. Weakened market conditions attributable to the significant reduction in the price of oil and natural gas have required some oil and gas service companies to seek covenant relief from their lenders. Calfrac negotiated amendments including waivers and increases to certain of its financial covenant thresholds prior to the end of the fourth quarter, as shown below.

 



New Covenant


Years ended December 31, except as indicated in notes below

2015

2016

2017

Working capital ratio not to fall below

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

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

1.15x

4.50x

0.30x

1.15x

5.00x(1)

0.30x

1.15x

4.50x/4.00x(1)

0.30x

(1)

Funded Debt to Adjusted EBITDA covenant has been waived for the quarters ended March 31, 2016 and June 30, 2016 and increases to 5.00x for September 30, 2016 and December 31, 2016. The covenant declines to 4.50x for the quarters ended March 31, 2017 and June 30, 2017 and declines to 4.00x from the quarters ended September 30, 2017 and December 31, 2017 and is set at 3.00x for each quarter after December 31, 2017.


(2)

Funded Debt is defined as Total Debt excluding all outstanding senior unsecured notes. Total Debt includes bank loans and long-term debt (before unamortized debt issuance costs and debt discount) plus outstanding letters of credit (excluding a US$25,000 letter of credit supporting an Argentinean bank loan) less cash on hand with lenders.

(3)

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

(4)

Capitalization is Total Debt plus Equity attributable to the shareholders of Calfrac.



Proceeds from equity offerings may be applied, as an equity cure, in the calculation of Adjusted EBITDA towards the Funded Debt to Adjusted EBITDA covenant for any of the quarters ending prior to and including December 31, 2017 subject to certain conditions including:

i.     

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

ii.   

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

iii.   

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

iv.    

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



On  December 22, 2015, Calfrac closed a bought deal private placement of 20,370,370 common shares for net proceeds of approximately $25.2 million. The net proceeds of this offering are being held in a segregated account in accordance with the amended credit facilities pending an election to use them as an equity cure. Such an election may be made by Calfrac at any time prior to the completion of quarterly financial statements and the delivery of the covenant calculations for the relevant quarter to the lending syndicate. Throughout the period ending December 31, 2017, amounts used as an equity cure will increase Adjusted EBITDA over the relevant twelve month rolling period and, will also serve to reduce Funded Debt.  When the funds are removed from the segregated account, as an equity cure or otherwise, they are expected to be used to fund capital expenditures, to reduce outstanding indebtedness, and/or to be used for general working capital and corporate purposes.

As shown in the table below, at December 31, 2015, the Company was in compliance with the financial covenants associated with its credit facilities.

 


Covenant

Actual

As at December 31,

2015

2015

Working capital ratio not to fall below

Funded Debt to Adjusted EBITDA not to exceed

Funded Debt to Capitalization not to exceed

1.15x

4.50x

0.30x

2.63x

0.68x

0.02x

 

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

i.  

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

ii. 

the Company is not meeting the Fixed Charge Coverage Ratio(1 under the indenture of at least 2.0:1 for the most recent four fiscal quarters; or

iii.

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

 

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

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20.0 million. The indenture also restricts the ability to incur additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2.0:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $175.0 million or 30% of the Company's consolidated tangible assets.

As at December 31, 2015, the Company's Fixed Charge Coverage Ratio was 1.3:1, which was less than the required 2.0:1 ratio. Failing to meet the Fixed Charge Coverage Ratio is not an event of default under the indenture, and the baskets highlighted in the preceding paragraph provide sufficient flexibility for the Company to incur additional indebtedness and make anticipated restricted payments, which may be required to conduct its operations during this period of weakened market conditions.

INVESTING ACTIVITIES
Calfrac's net cash used for investing activities was $155.1 million in 2015 versus $160.1 million in 2014. Cash outflows relating to capital expenditures were $157.9 million during 2015 compared to $177.6 million in 2014. Capital expenditures were primarily to support the Company's Argentinean, United States and Canadian fracturing operations. In addition, Calfrac used $9.5 million to finance a business combination during the year.

In light of the current environment the Company reduced its 2016 capital budget by approximately $10.0 million, down to $15.0 million. Partially offsetting the reduction is the impact of the strengthening U.S. dollar which increased expected carryover capital to $35.0 million up from $30.0 million. In total, Calfrac now expects to spend $50.0 million throughout 2016.

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during 2015 was a gain of $13.0 million versus $1.0 million during 2014. These gains relate to cash and cash equivalents held by the Company in a foreign currency.

With its working capital position, available credit facilities and anticipated funds provided by operations, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for 2016 and beyond.

At December 31, 2015, the Company had cash and cash equivalents of $124.0 million of which $25.0 million is held in a segregated account at the Company's discretion, so that it may be utilized if required in the calculation of Adjusted EBITDA for purposes of the Company's bank covenants.

OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan is equal to 10 percent of the Company's issued and outstanding common shares. As at February 19, 2016, there were 115,579,598 common shares issued and outstanding, and 7,885,798 options to purchase common shares.

On September 24, 2015 the Company announced that the Dividend Reinvestment Plan (DRIP) would be suspended and all shareholders of record would receive cash on October 15, 2015. The DRIP allowed shareholders to direct cash dividends paid on all or a portion of their common shares to be reinvested in additional common shares that would be issued at 95 percent of the volume-weighted average price of the common shares traded on the Toronto Stock Exchange (TSX) during the last five trading days preceding the relevant dividend payment date.

NORMAL COURSE ISSUER BID
The Company filed a Notice of Intention (the "Notice") to make a Normal Course Issuer Bid (NCIB) with the TSX on December 12, 2014. Under the NCIB, the Company could acquire up to 7,177,721 common shares, which was 10 percent of the public float outstanding as at December 10, 2014, during the period commencing on December 17, 2014 and terminating on December 16, 2015. The maximum number of common shares that could be acquired by the Company during a trading day was 117,011, with the exception that the Company was allowed to make one block purchase of common shares per calendar week that exceeds such limit. All purchases of common shares were to be made through the TSX, alternative trading systems or such other exchanges or marketplaces through which the common shares trade from time to time at the market price of the shares at the time of acquisition. Any shares acquired under the NCIB were cancelled. During the year ended December 31, 2015, the Company purchased 1,517,700 common shares under the NCIB at a cost of $9.4 million. 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, Canada, 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 o Calfrac's plans and future operations, certain statements contained in this press release, including statements that contain words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "forecast" or similar words suggesting future outcomes, are forward-looking statements.

In particular, forward-looking statements in this press release include, but are not limited to, statements with respect to expected operating strategies and targets, capital expenditure programs, future financial resources, use of funds held in the Company's segregated bank account (as an equity cure or otherwise), anticipated equipment utilization levels, future oil and natural gas well activity in each of the Company's operating jurisdictions, results of acquisitions, the impact of environmental regulations and economic reforms and sanctions on the Company's business, future costs or potential liabilities, projections of market prices and costs, supply and demand for oilfield services, expectations regarding the Company's ability to maintain its competitive position, anticipated benefits of the Company's competitive position, expectations regarding the Company's ability to raise capital, treatment under government regulatory regimes, commodity prices, anticipated outcomes of specific events (including the Greek and U.S. litigation), trends in, and the growth prospects of, the global oil and natural gas industry, the Company's growth prospects including, without limitation, its international growth strategy and prospects, and the impact of changes in accounting policies and standards on the Company and its financial statements. These statements are derived from certain assumptions and analyses made by the Company based on its experience and perception of historical trends, current conditions, expected future developments and other factors that it believes are appropriate in the circumstances, including, but not limited to, the economic and political environment in which the Company operates, the Company's expectations for its current and prospective customers' capital budgets and geographical areas of focus, the Company's existing contracts and the status of current negotiations with key customers and suppliers, the focus of the Company's customers on increasing the use of 24-hour operations in North America, the effectiveness of cost reduction measures instituted by the Company, the effect unconventional gas projects have had on supply and demand fundamentals for natural gas and the likelihood that the current tax and regulatory regime will remain substantially unchanged.

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

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

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

 

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

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


 

         





Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

(unaudited)

($)

($)

($)

($)

Net (loss) income

(145,636)

26,280

(227,426)

67,502

Add back (deduct):






Depreciation

40,254

35,997

156,638

139,395


Foreign exchange losses

33,540

16,582

37,025

30,167


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

(643)

96

(2,257)

1,577


Business combination

(30,987)


Impairment of property, plant and equipment

114,479

4,620

114,479

4,620


Impairment of inventory

14,333

14,333


Impairment of goodwill

979

9,544

979


Provision for settlement of litigation

3,165

4,640

3,165

4,640


Interest

18,289

15,509

68,967

59,584


Income taxes

(71,994)

17,499

(114,097)

48,746

Operating income

5,787

122,202

29,384

357,210

 

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





Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

(unaudited)



($)

($)

Net (loss) income

(145,636)

26,280

(227,426)

67,502

Add back (deduct):






Depreciation

40,254

35,997

156,638

139,395


Unrealized foreign exchange losses

37,777

6,726

42,592

17,660


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

(643)

96

(2,257)

1,577


Business combination

(30,987)


Impairment of property, plant and equipment

114,479

4,620

114,479

4,620


Impairment of inventory

14,333

14,333


Impairment of goodwill

979

9,544

979


Provision for settlement of litigation

3,165

4,640

3,165

4,640


Restructuring charges

11,868

7,907

13,533

7,907


Stock-based compensation

785

1,144

3,082

4,138


Losses attributable to non-controlling interest

256

334

491

547


Interest

18,289

15,509

68,967

59,584


Income taxes

(71,994)

17,499

(114,097)

48,746

Adjusted EBITDA

22,933

121,731

52,057

357,295

                                                                                             

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 2015 fourth quarter results  at 10:00 a.m. (Mountain Time) on Wednesday, February  24, 2016. 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 39745162). A webcast ofthe conference call may be accessed via the Company's website at www.calfrac.com.





CONSOLIDATED BALANCE SHEETS

 

As at December 31,

 

 

 

2015

 

 

 

2014

(C$000s)

($)

($)

ASSETS



Current assets




Cash and cash equivalents (note 3)

124,005

99,129


Accounts receivable

221,995

521,137


Income taxes recoverable

3,540


Inventories (note 4)

127,622

182,161


Prepaid expenses and deposits

18,017

16,871


495,179

819,298

 

Non-current assets




Property, plant and equipment (note 5)

1,301,272

1,302,939


Goodwill (note 6)

9,544


Deferred income tax assets

19,372

25,586

Total assets

1,815,823

2,157,367

 

LIABILITIES AND EQUITY



Current liabilities




Accounts payable and accrued liabilities

172,633

356,933


Income taxes payable

3,856


Bank loans (note 7)

15,633

16,388


Current portion of long-term debt (note 8)

523

429


Current portion of finance lease obligations

438

458


189,227

378,064

 

Non-current liabilities




Long-term debt (note 8)

927,270

738,386


Finance lease obligations

382

1,048


Other long-term liabilities

4,060


Deferred income tax liabilities

75,225

203,406

Total liabilities

1,192,104

1,324,964

Equity attributable to the shareholders of Calfrac



Capital stock (note 9)

409,809

377,975

Contributed surplus (note 11)

27,849

24,767

Loan receivable for purchase of common shares (note 18)

(2,500)

(2,500)

Retained earnings

213,426

459,891

Accumulated other comprehensive loss

(21,054)

(26,757)


627,530

833,376

Non-controlling interest

(3,811)

(973)

Total equity

623,719

832,403

Total liabilities and equity

1,815,823

2,157,367

Contingencies (note 22)

See accompanying notes to the consolidated financial statements.

         

 



CONSOLIDATED STATEMENTS OF OPERATIONS





Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s, except per share data)

($)

($)

($)

($)

Revenue

286,194

748,896

1,495,205

2,496,931

Cost of sales (note 19)

299,887

627,134

1,543,882

2,147,772

Gross profit

(13,693)

121,762

(48,677)

349,159

Expenses






Selling, general and administrative

20,774

35,557

78,577

131,344


Foreign exchange losses

33,540

16,582

37,025

30,167


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

(643)

96

(2,257)

1,577


Business combination (note 16)

(30,987)


Impairment of property, plant and equipment (note 5)

114,479

4,620

114,479

4,620


Impairment of inventory (note 4)

14,333

14,333


Impairment of goodwill (note 6)

979

9,544

979


Provision for settlement of litigation (note 22)

3,165

4,640

3,165

4,640


Interest

18,289

15,509

68,967

59,584







203,937

77,983

292,846

232,911

Income (loss) before income tax

(217,630)

43,779

(341,523)

116,248

Income tax expense (recovery)






Current

(21)

7,250

1,872

15,733


Deferred

(71,973)

10,249

(115,969)

33,013


(71,994)

17,499

(114,097)

48,746

Net (loss) income

(145,636)

26,280

(227,426)

67,502






Net (loss) income attributable to:






Shareholders of Calfrac

(141,498)

26,470

(221,594)

66,976


Non-controlling interest

(4,138)

(190)

(5,832)

526


(145,636)

26,280

(227,426)

67,502

Earnings (loss) per share (note 9)






Basic

(1.45)

0.28

(2.31)

0.71


Diluted

(1.45)

0.28

(2.31)

0.71


See accompanying notes to the consolidated financial statements.

 

         



CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME





Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Net (loss) income

(145,636)

26,280

(227,426)

67,502

Other comprehensive (loss) income





Items that may be subsequently reclassified to profit or loss:






Change in foreign currency translation adjustment

1,690

(17,468)

6,690

(25,839)

Comprehensive (loss) income

(143,946)

8,812

(220,736)

41,663

Comprehensive (loss) income attributable to:






Shareholders of Calfrac

(140,877)

8,997

(215,891)

41,058


Non-controlling interest

(3,069)

(185)

(4,845)

605


(143,946)

8,812

(220,736)

41,663

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)

($)

($)

($)

($)

($)

($)

($)

($)

Balance – Jan. 1, 2015

377,975

24,767

(2,500)

(26,757)

459,891

833,376

(973)

832,403

Net loss

(221,594)

(221,594)

(5,832)

(227,426)

Other comprehensive income









(loss):










Cumulative translation adjustment

5,703

5,703

987

6,690

Comprehensive income (loss)

5,703

(221,594)

(215,891)

(4,845)

(220,736)

Stock options:










Stock-based compensation recognized

3,082

3,082

3,082

Net proceeds from issuance of shares (note 9)

25,194

25,194

25,194

Dividend Reinvestment Plan shares issued (note 25)

12,733

12,733

12,733

Dividends

(21,550)

(21,550)

(21,550)

Shares purchased under NCIB (note 10)

(6,093)

(3,321)

(9,414)

(9,414)

Non-controlling interest contribution






2,007

2,007

Balance – Dec. 31, 2015

409,809

27,849

(2,500)

(21,054)

213,426

627,530

(3,811)

623,719

Balance – Jan. 1, 2014

332,287

27,658

(2,500)

(839)

440,179

796,785

(1,578)

795,207

Net income

66,976

66,976

526

67,502

Other comprehensive income









(loss):










Cumulative translation adjustment

(25,918)

(25,918)

79

(25,839)

Comprehensive income (loss)

(25,918)

66,976

41,058

605

41,663

Stock options:










Stock-based compensation recognized

4,138

4,138

4,138


Proceeds from issuance of shares

27,722

(7,095)

20,627

20,627

Dividend Reinvestment Plan shares









issued (note 25)                                  

18,011

18,011

18,011

Dividends                                                     

(47,264)

(47,264)

(47,264)

Shares cancelled (note 11)                      

(45)

66

21

21

Balance – Dec. 31, 2014                       

377,975

24,767

(2,500)

(26,757)

459,891

833,376

(973)

832,403


See accompanying notes to the consolidated financial statements.

 

 



CONSOLIDATED STATEMENTS OF CASH FLOWS





Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES

($)

($)

($)

($)


Net (loss) income

(145,636)

26,280

(227,426)

67,502


Adjusted for the following:







Depreciation

40,254

35,997

156,638

139,395



Stock-based compensation

785

1,144

3,082

4,138



Unrealized foreign exchange losses

37,777

6,727

42,592

17,660



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

(643)

96

(2,257)

1,577



Gain on business combination (note 16)

(31,965)



Impairment of property, plant and equipment (note 5)

114,479

4,620

114,479

4,620



Impairment of inventory (note 4)

14,333

14,333



Impairment of goodwill (note 6)

979

9,544

979



Interest

18,289

15,509

68,967

59,584



Deferred income taxes

(71,973)

10,249

(115,969)

33,013



Interest paid

(31,999)

(27,300)

(65,647)

(56,754)



Changes in items of working capital (note 15)

53,522

(18,186)

154,691

(69,245)

Cash flows provided by operating activities

29,188

56,115

121,062

202,469






FINANCING ACTIVITIES






Bank loan proceeds

3,773

4,952

20,614

18,790


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

107,440

56,745

106,867

113,243


Issuance of finance lease obligation

1,648


Bank loan repayments

(7,044)

(8,098)

(17,208)

(22,379)


Long-term debt repayments

(60,405)

(45,994)

(60,792)

(89,337)


Finance lease obligation repayments

(119)

(99)

(466)

(189)


Shares purchased under NCIB (note 10)

(9,414)


Net proceeds on issuance of common shares (note 9)

25,194

902

25,194

20,627


Dividends paid, net of DRIP (note 25)

(1,488)

(6,957)

(18,918)

(28,920)

Cash flows provided by financing activities

67,351

1,451

45,877

13,483






INVESTING ACTIVITIES






Purchase of property, plant and equipment (note 15)

(21,370)

(45,289)

(160,773)

(162,549)


Proceeds on disposal of property, plant and equipment

1,692

1,532

13,214

2,475


Business combination (note 16)

(9,498)


Other

2,007

21

2,007

21

Cash flows used in investing activities

(17,671)

(43,736)

(155,050)

(160,053)

Effect of exchange rate changes on cash and cash equivalents

(9,714)

2,920

12,987

1,035

Increase in cash and cash equivalents

69,154

16,750

24,876

56,934

Cash and cash equivalents, beginning of period

54,851

82,379

99,129

42,195

Cash and cash equivalents, end of period (note 3)

124,005

99,129

124,005

99,129

See accompanying notes to the consolidated financial statements.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended December 31, 2015 and 2014
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated) (unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Calfrac Well Services Ltd. (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 and Argentina.

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

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

These financial statements were approved by the Board of Directors for issuance on February 23, 2016.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies set out below were consistently applied to the periods presented as if these policies had been in effect since the Company's inception.

(a)   Basis of Measurement

The consolidated financial statements were prepared under the historical cost convention, except for the revaluation of certain financial assets and 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, Mexico, and its 80-percent-owned subsidiary in Argentina. All inter-company transactions, balances and resulting unrealized gains and losses are eliminated upon consolidation.

Subsidiaries are those entities which the Company controls by having the power to govern their financial and operating policies. The existence and effect of voting rights that are exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated upon the Company obtaining control and are deconsolidated upon control ceasing.

(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 cash-generating units (CGUs), impairment of non-financial assets and the functional currency of each subsidiary.

i)     Allowance for Doubtful Accounts

The Company performs ongoing credit evaluations of its customers and grants credit based on a review of historical collection experience, current aging status, the customer's financial condition and anticipated industry conditions. Customer payments are regularly monitored and a provision for doubtful accounts is established based on 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 affecting 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 sheets 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 these financial instruments, except long-term debt, approximate their carrying amounts due to their short- term maturity. The fair value of the senior unsecured notes is based on the closing market price at the reporting period's end- date, as described in note 8. 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 annually. 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 results of the assessment for goodwill impairment are disclosed in note 6.

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 were 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 share units, performance share units and restricted share units is recognized based on the market value of the Company's shares underlying these compensation programs.

See note 12 for further information on stock-based compensation.

vii)  Functional Currency

Management applies judgment in determining the functional currency of its foreign subsidiaries. Judgment is made regarding 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 CGUs is based on management's judgment regarding shared equipment, mobility of equipment, geographical proximity, and materiality.

ix)   Impairment of Property, Plant and Equipment

Property, plant and equipment are tested for impairment when events or changes in circumstances indicate that the carrying amount exceeds its recoverable amount. The recoverable amount of cash-generating units are determined based on value in use calculations. These calculations requires the use of judgment applied by management regarding forecasted activity levels, expected future results, and discount rates. See note 5 for further information on impairment of property, plant and equipment.

(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 presentation currency.

The financial statements of the subsidiaries that have a different functional currency are translated into Canadian dollars whereby assets and liabilities are translated at the rate of exchange at the balance sheet date, revenue 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 shareholders' equity as accumulated other comprehensive income.

The following foreign entities have a functional currency other than the Canadian dollar:

 

                     

Entity

Functional Currency

United States          

U.S. dollar  

Russia

Russian rouble

Argentina

Argentinean peso

Mexico

Mexican peso

                                                     

 

In the event the Company disposed of its entire interest in a foreign operation, or lost control, joint control, or significant influence over a foreign operation, the related foreign currency gains or losses accumulated in other comprehensive income would be recognized in profit or loss. If the Company disposed of part of an interest in a foreign operation which remained a subsidiary, a proportionate amount of the related foreign currency gains or losses accumulated in other comprehensive income would be 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 consolidated statements 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 consolidated balance sheets 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 Standard (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 loan facility and US$600,000 private placement of senior unsecured notes 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 consolidated statements of operations during the period in which they are incurred.

Property, plant and equipment are depreciated over their estimated useful economic 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 consolidated statements 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 consolidated statements of operations 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 in CGUs, the lowest level with separately identifiable cash inflows that are largely independent of the cash inflows of other assets. The recoverable amount is the higher of an asset's fair value less costs of disposal 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 there is an indicator of impairment.

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 consolidated statements 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, when 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 when there is an intention to settle the balances on a net basis.

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

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

(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 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. The fair value of each tranche within an award is considered a separate award with its own vesting period and grant date. The fair value of each tranche within an award 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 share units granted to its outside directors and performance share units granted to its senior officers who do not participate in the stock option plan. The fair value of the deferred share units and performance share units is recognized based on the market value of the Company's shares underlying these compensation programs.

The Company recognizes compensation cost for the fair value of restricted share units granted to its employees. The fair value of the restricted share units is recognized based on the market value of the Company's shares underlying this compensation program.

(o)  Business Combinations

The Company applies the acquisition method to account for business combinations. The consideration transferred for the acquisition is the fair value of the assets transferred and the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Company recognizes any non- controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest's proportionate share of the recognized amounts of the acquiree's identifiable net assets.

Acquisition costs are expensed as incurred.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition- date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of operations as a gain on acquisition.

(p)  Changes in Accounting Policy and Disclosure

There were no new IFRS or IFRIC interpretations that became effective on or after January 1, 2015 that had a material impact on the Company.

(q)  Recently Issued Accounting Standards Not Yet Applied

In January 2016, the IASB issued IFRS 16 Leases, which requires lessees to recognize all leases on the balance sheet. IFRS 16 is effective for annual periods beginning on or after January 1, 2019 with earlier application permitted for companies that also apply IFRS 15 Revenue from Contracts with Customers. The Company is currently evaluating the impact of the standard on its financial statements.

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, which replaces IAS 18 Revenue, IAS 11 Construction Contracts, and related interpretations. The standard is required to be adopted either retrospectively or using a modified transition approach for fiscal years beginning on or after January 1, 2017, with earlier adoption permitted. IFRS 15 will come into effect for annual periods beginning on or after January 1, 2017. The Company is currently evaluating the impact of the standard on its financial statements.

In July 2014, the IASB completed the final elements of IFRS 9 Financial Instruments. The Standard supersedes earlier versions of IFRS 9 and completes the IASB's project to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9, as amended, includes a principle based approach for classification and measurement of financial assets, a single 'expected loss' impairment model and a substantially reformed approach to hedge accounting. IFRS 9 will come into effect for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company is currently evaluating the impact of the standard on its financial statements.

3. CASH AND CASH EQUIVALENTS
On December 22, 2015, the Company received net proceeds of $25,194 from a private placement offering of common shares, as described in note 9. $25,000 of the net proceeds are currently held in a segregated account and these funds are available for use at the Company's discretion, and this amount can be transferred, in whole or in part, to its operating bank account at any time. The Company can also elect to use the proceeds as a reduction of Funded Debt as well as include in the calculation of EBITDA for purposes of the Company's Funded Debt to EBITDA bank covenant.

4. INVENTORIES
The Company reviews the carrying value of its inventory on an ongoing basis for obsolescence and to verify that the carrying value exceeds the net realizable amount. As a result of lower levels of activity, the Company recorded an impairment charge of $14,333 to write-off obsolete inventory and write-down inventory to its net realizable amount.

Years Ended December 31,

2015

2014

(C$000s)

($)

($)

Canada

4,032

United States

10,301


14,333

 

5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are tested for impairment in accordance with the accounting policy stated in note 2. The Company reviews the carrying value of its property, plant and equipment at each reporting period for indicators of impairment. During the fourth quarter of 2015, the impact of the continued decline in oil and natural gas prices on the Company's current and future financial results and the oversupply of pressure pumping equipment in North America were indicators of impairment and the Company estimated the recoverable amount of its property, plant and equipment.

The recoverable amount of property, plant and equipment was determined using the value in use method, based on multi- year discounted cash flows to be generated from the continuing operations of each cash-generating unit (CGU). The Company's CGUs are determined to be at the country level, consisting of Canada, the United States, Russia, Mexico and Argentina. Cash flow assumptions were based on a combination of historical and expected future results, using the following main key assumptions:

  • Commodity price forecasts
  • Expected revenue growth
  • Expected operating income growth
  • Discount rate

 

The main commodity price assumptions over the forecast periods were:

  • WTI Crude Oil (US$/bbl) increased from a low of below $30 in 2016 to an average of $81 in 2020
  • Henry Hub Gas (US$/mmBtu) increased from $2.25 in 2016 to $4.25 in 2020
  • AECO Gas (C$/mcf) increased from $2.76 in 2016 to $3.96 in 2020

 

Revenue and operating income growth rates for each CGU were based on a combination of commodity price assumptions, historical results and forecasted activity levels, which incorporated pricing, utilization and cost improvements over the period. The revenue and operating income cumulative annual growth rates (CAGR) over the five-year forecast period, by CGU, are outlined below:



Canada

United States

Russia

Argentina

Mexico

Revenue CAGR

33%

52%

6%

31%

61%

Operating income CAGR

268%

233%

13%

42%

72%

 

The revenue and operating income assumptions for 2016 were significantly below 2015 actual results. Throughout the forecast periods, revenue and operating income assumptions remained below the Company's best years in its history. In the table above, the percentage increases in Canada and the United States reflect the fact that 2016 assumptions are significantly lower than historical results.

 

The cash flows were prepared on a five-year basis, using a discount rate ranging from 14.0 percent to 22.0 percent depending on the CGU. Discount rates are derived from the Company's weighted average cost of capital, adjusted for risk factors specific to each CGU. Cash flows beyond that five-year period have been extrapolated using a steady 2.0 percent growth rate.


Canada

United States

Russia

Argentina

Mexico

Discount rate

14.0%

14.0%

18.0%

22.0%

15.0%

A comparison of the recoverable amounts of each cash-generating unit with their respective carrying amounts resulted in an impairment charge against property, plant and equipment of $103,322 at December 31, 2015.

The recoverable amount for each CGU that was impaired is as follows:

 



Recoverable
Amount

Impairment
Recorded

(C$000s)

($)

($)

United States

623,826

101,462

Mexico

11,000

1,860

A sensitivity analysis on the discount rate and expected future cash flows would have the following impact:


Impairment


Canada

United States

Russia

Argentina

Mexico

(C$000s)

($)

($)

($)

($)

($)

10% increase in expected future cash flows

None

38,289

None

None

None

10% decrease in expected future cash flows

None

162,289

None

7,992

2,099

1% decrease in discount rate

None

31,300

None

None

None

1% increase in discount rate

None

159,289

None

4,000

2,099

 

Assumptions that are valid at the time of preparing the impairment test at December 31, 2015 may change significantly when new information becomes available. The Company will continue to monitor and update its assumptions and estimates with respect to property, plant and equipment impairment on an ongoing basis.

Furthermore, the Company carried out a comprehensive review of its property, plant and equipment and identified assets that were permanently idle or obsolete, and therefore, no longer able to generate cash inflows. These assets were written down to their recoverable amount resulting in an impairment charge of $11,157 for the year ended December 31, 2015 (year ended December 31, 2014 - $4,620).

The impairment losses by CGU are as follows:


Years Ended December 31,

2015

2014

(C$000s)

($)

($)

Canada

10,091

2,941

United States

102,528

401

Mexico

1,860

Colombia

1,278


114,479

4,620

 

6. GOODWILL
Goodwill is tested for impairment in accordance with the accounting policy stated in note 2. Goodwill acquired through a business combination is allocated to that operating segment (or segments) which represent the lowest level within the Company at which goodwill is monitored for internal management purposes.

During the third quarter of 2015, the impact of the decline in oil and natural gas prices on the Company's current and future financial results and the oversupply of pressure pumping equipment in North America were indicators of impairment and the Company estimated the recoverable amount of its goodwill.

The fair value of each operating segment was compared to the carrying value of its net assets. The fair value of each operating segment was derived using an accepted valuation method, which utilizes a discounted cash flow approach. Such approaches are typically utilized in valuing oilfield service companies.

The discount rate used in the discounted cash flow approach ranged from 14.0 percent to 24.0 percent depending on the operating segment.

The Company completed its assessment of goodwill impairment and determined that the recoverable amounts of the operating segments were less than their carrying amounts, resulting in an impairment charge of $9,544 for the year ended December 31, 2015 (year ended December 31, 2014 - $979).

The impairment losses by operating segment are as follows:

Years Ended December 31,

2015

2014

(C$000s)

($)

($)

Canada

7,236

United States

2,308

Russia

979


9,544

979

 

7. BANK LOANS
The Company's Argentinean subsidiary has two operating lines of credit, and a total of ARS147,290 ($15,633) was drawn at December 31, 2015 (December 31, 2014 - ARS120,792 ($16,388)). The interest rates ranges from 34.3 percent to 48.0 percent per annum and both lines of credit are secured by letters of credit issued by the Company.

8. LONG-TERM DEBT

As at December 31,

 

2015

2014

(C$000s)

($)

($)

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

annually

 

830,400

696,060

Less: unamortized debt issuance costs and debt discount

(10,306)

(10,404)


820,094

685,656

$270,000 extendible revolving term loan facility, secured by Canadian and U.S. assets of the

Company

 

110,000

 

52,785

Less: unamortized debt issuance costs

(3,588)

(1,133)


106,412

51,652

US$930 mortgage maturing May 2018 bearing interest at U.S. prime less

 1%, repayable at US$33 per month principal and interest, secured by certain real property

1,287

1,507


927,793

738,815

Less: current portion of long-term debt

(523)

(429)


927,270

738,386

 

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at December 31, 2015, was $336,312 (December 31, 2014 - $595,131). The carrying values of the mortgage obligation, bank 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 $270,000 revolving term loan facility is based on the parameters of certain bank covenants. For prime- based loans, the rate ranges from prime plus 0.50 percent to prime plus 3.50 percent. For LIBOR-based loans and bankers' acceptance-based loans the margin thereon ranges from 1.50 percent to 4.50 percent above the respective base rates for such loans. The facility is repayable on or before its maturity of September 27, 2018, assuming it is not extended. The maturity may be extended by one or more years at the Company's request and lenders' acceptance. The Company may also prepay principal without penalty. Debt issuance costs related to this facility are amortized over its term.

Interest on long-term debt (including the amortization of debt issuance costs and debt discount) for the year ended December 31, 2015 was $63,944 (year ended December 31, 2014 - $54,076).

The aggregate scheduled principal repayments required in each of the next five years are as follows:



As at December 31, 2015

Amount

(C$000s)

($)

2016

523

2017

535

2018

110,229

2019

2020

830,400

Thereafter


941,687

The Company also has an extendible operating loan facility, which includes overdraft protection in the amount of $30,000. The interest rate is based on the parameters of certain bank covenants in the same fashion as the revolving term facility. Drawdowns under this facility are repayable on September 27, 2018, assuming the facility is not extended. The term and commencement of principal repayments may be extended by one year on each anniversary at the Company's request and lenders' acceptance. The revolving term loan and operating facilities are secured by the Company's Canadian and U.S. assets.

At December 31, 2015, the Company had utilized $40,101 of its loan facility for letters of credit and had $110,000 outstanding under its revolving term loan facility, leaving $149,899 in available credit.

See note 17 for further details on the covenants in respect of the Company's long-term debt.

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

Years Ended December 31,


2015


2014

Continuity of Common Shares

Shares

Amount

Shares

Amount


(#)

(C$000s)

(#)

(C$000s)

Balance, beginning of period

95,252,559

377,975

92,597,148

332,287

Issued upon exercise of stock options

1,537,775

27,722

Dividend Reinvestment Plan shares issued (note 25)

1,474,379

12,733

1,123,296

18,011

Shares purchased under NCIB (note 10)

(1,517,700)

(6,093)

Shares from private placement

20,370,370

25,194

Shares cancelled (note 11)

(10)

(5,660)

(45)

Balance, end of period

115,579,598

409,809

95,252,559

377,975

 

The weighted average number of common shares outstanding for the three months ended December 31, 2015 was 97,254,201 basic and 97,423,401 diluted (three months ended December 31, 2014 - 94,981,436 basic and 95,187,590 diluted). The weighted average number of common shares outstanding for the year ended December 31, 2015 was 95,907,014 basic and 96,076,214 diluted (year ended December 31, 2014 - 94,112,758 basic and 94,781,241 diluted). The difference between basic and diluted shares is attributable to the dilutive effect of stock options issued by the Company as disclosed in note 12.

On December 22, 2015, the Company closed a bought deal private placement of 20,370,370 common shares for total gross proceeds of $27,500. Share issuance costs for the transaction were $2,306, resulting in net proceeds of $25,194.

10. NORMAL COURSE ISSUER BID
The Company received regulatory approval to purchase its own common shares in accordance with a Normal Course Issuer Bid (NCIB) for the one-year period December 17, 2014 through December 16, 2015. During the year ended December 31, 2015, 1,517,700 common shares were purchased at a cost of $9,414 and, of the amount paid, $6,093 was charged to capital stock and $3,321 to retained earnings. These common shares were cancelled prior to December 31, 2015 (year ended December 31, 2014 - $nil).

11. CONTRIBUTED SURPLUS

Years Ended December 31,

2015

2014

(C$000s)

($)

($)

Balance, beginning of period

24,767

27,658

Stock options expensed

3,082

4,138

Stock options exercised

(7,095)

Shares cancelled

66

Balance, end of period

27,849

24,767

 

During 2015, ten common shares were returned to the Company for cancellation. For accounting purposes, the cancellation of these shares was recorded as a reduction of capital stock in the amount of forty dollars, along with a corresponding increase to contributed surplus.

On November 10, 2009, the Company acquired all of the issued and outstanding shares of Century Oilfield Services Inc. ("Century"). The Plan of Arrangement that governed the acquisition included a five-year "sunset clause" which provided that untendered shares would be surrendered to the Company after five years. Effective November 10, 2014, 5,660 common shares of the Company previously held in trust for untendered shareholders were cancelled. In addition, residual proceeds of $21 previously held in trust for untendered shareholders were returned to the Company.

For accounting purposes, the cancellation of the 5,660 common shares was recorded as a reduction of capital stock in the amount of $45. Along with the residual cash received, a corresponding increase in contributed surplus was recorded in the amount of $66.

12. STOCK-BASED COMPENSATION
(a)   Stock Options



2015


2014

Continuity of Stock Options

Options

(#)

Average

Exercise Price

(C$)

Options

(#)

Average

Exercise Price
(C$)

Balance, January 1

4,269,050

14.76

5,002,750

13.99

Granted during the period

5,375,450

4.39

1,289,700

15.74

Exercised for common shares

(1,537,775)

13.41

Forfeited

(441,803)

13.59

(377,400)

14.65

Expired

(972,750)

16.82

(108,225)

10.37

Balance, December 31

8,229,947

7.81

4,269,050

14.76

 

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 compensation expense previously recorded in contributed surplus, are added to capital stock.

(b)  Share Units


2015

2014


Deferred Share

Performance

Restricted

Deferred Share

Performance

Restricted

Continuity of Stock Units

Units

Share Units

Share Units

Units

Share Units

Share Units


(#)

(#)

(#)

(#)

(#)

(#)

 

Balance, January 1

 

70,000

 

120,000

 

1,346,642

 

70,000

 

90,000

1,027,590


Granted during the period

72,500

178,995

995,007

70,000

120,000

806,900


Exercised

(70,000)

(60,000)

(614,464)

(70,000)

(90,000)

(391,014)


Forfeited

(914,357)

(96,834)

Balance, December 31

72,500

238,995

812,828

70,000

120,000

1,346,642

 



Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014


($)

($)

($)

($)

Expense (recovery) from:






Stock options

785

1,144

3,082

4,138


Deferred share units

(25)

(212)

111

704


Performance share units

(25)

(262)

32

1,094


Restricted share units

(836)

(4,510)

(3,049)

4,987

Total stock-based compensation expense

(101)

(3,840)

176

10,923

 

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

The Company grants deferred share units to its outside directors. These units vest in November of the year of grant and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the deferred share units is recognized equally over the vesting period, based on the current market price of the Company's shares. At December 31, 2015, the liability pertaining to deferred share units was $143 (December 31, 2014 - $701).

The Company grants performance share units to a senior officer. The amount of the grants earned is linked to corporate performance and the grants vest on the approval of the Board of Directors at the meeting held to approve the consolidated financial statements for the year in respect of which performance is being evaluated. As with the deferred share units, performance share units are settled either in cash or Company shares purchased on the open market. At December 31, 2015, the liability pertaining to performance share units was $373 (December 31, 2014 - $868).

The Company grants restricted share units to its employees. These units vest equally over three years and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the restricted share units is recognized over the vesting period, based on the current market price of the Company's shares. At December 31, 2015, the liability pertaining to restricted share units was $939 (December 31, 2014 - $9,602).

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

13. PURCHASE OBLIGATIONS
The Company has obligations for the purchase of products, services and property, plant and equipment over the next five years following December 31, 2015, as follows:

(C$000s)

($)

2016

122,184

2017

135,993

2018

87,417

2019

71,961

2020

4,266


421,821

 

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

The fair values of financial instruments included in the consolidated balance sheets, except long-term debt, approximate their carrying amounts due to the short-term maturity of those instruments. The fair value of the senior unsecured notes based on the closing market price at December 31, 2015 was $336,312 before deduction of unamortized debt issuance costs (December 31, 2014$595,131). The carrying value of the senior unsecured notes at December 31, 2015 was $830,400 before deduction of unamortized debt issuance costs and debt discount (December 31, 2014$696,060). The fair values of the remaining long- term debt approximate their carrying values, as described in note 8.

15. SUPPLEMENTAL CASH FLOW INFORMATION

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


Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Accounts receivable

19,004

(27,389)

299,141

(125,291)

Inventory

9,355

(11,330)

40,207

(48,021)

Prepaid expenses and deposits

7,541

2,834

(1,146)

317

Accounts payable and accrued liabilities

26,573

12,470

(172,055)

94,886

Income taxes payable

(4,281)

1,202

(7,396)

5,002

Other long-term liabilities

(4,670)

4,027

(4,060)

3,862


53,522

(18,186)

154,691

(69,245)

Income taxes paid



9,268

10,731

 

Purchase of property, plant and equipment is comprised of: 

 


Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Property, plant and equipment additions

(29,964)

(52,033)

(157,934)

(177,585)

Change in liabilities related to purchase of property, plant and equipment

8,594

6,744

(2,839)

15,036


(21,370)

(45,289)

(160,773)

(162,549)

 

16. BUSINESS COMBINATION

On July 6, 2015, the Company acquired all of the outstanding shares of GASFRAC Energy Services Inc. ("GASFRAC") , an oil and gas well fracturing company specializing in gas fracturing technologies, operating in western Canada, for a total purchase price of $9,498. The purchase was recognized as a business combination and accounted for as such using the acquisition method of accounting under IFRS 3 Business Combinations.

The recognized amounts of identifiable assets acquired are as follows:



(C$000s)

($)

Property, plant and equipment 

7,463

Deferred income tax asset

34,000

Total identifiable net assets

41,463

Gain on business combination

(31,965)

Total consideration

9,498

 The  composition  of  the  business  combination  expenses  reported  in  the  statement  of  operations  is  as  follows:

       



(C$000s)

($)

Gain on business combination    

(31,965)

Acquisition costs

978

Business combination

(30,987)

                                                                                                                                                  

The gain of $31,965 was recognized in the statement of operations on the acquisition date and represents the excess of the fair value of identifiable assets over the consideration paid.

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

During the period July 7, 2015 to December 31, 2015, the acquisition contributed immaterial operating income to the Company. The pro-forma estimated effects on revenue and operating income, had the acquisition occurred on January 1, 2015, would have been insignificant.

Deferred tax assets in the amount of $34,000 were recognized on the acquisition of GASFRAC during the period. The Company recognizes the financial statement impact of a tax filing position when it is probable based on technical merits that the position will be sustained upon audit. To the extent that any interpretation of tax law is successfully challenged by the tax authorities and future tax assets will not be realized, the effect of such an adjustment will be recognized into income as part of income tax expense and could materially affect the Company's estimate of current and deferred income taxes.

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

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

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

For the Twelve Months Ended December 31,

2015

2014

(C$000s)

($)

($)

Net income

(227,426)

67,502

Adjusted for the following:




Depreciation

156,638

139,395


Foreign exchange losses

37,025

30,167


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

(2,257)

1,577


Business combination (note 16)

(30,987)


Impairment of property, plant and equipment (note 5)

114,479

4,620


Impairment of inventory (note 4)

14,333


Impairment of goodwill (note 6)

9,544

979


Provision for settlement of litigation (note 22)

3,165

4,640


Interest

68,967

59,584


Income taxes

(114,097)

48,746

Operating income

29,384

357,210

 

Net debt for this purpose is calculated as follows:

 

As at December 31,

 

2015

 

2014

(C$000s)

($)

($)

Long-term debt, net of debt issuance costs and debt discount (note 8)

927,793

738,815

Bank loans (note 7)

15,633

16,388

Finance lease obligation

820

1,506

Less: cash and cash equivalents

(124,005)

(99,129)

Net debt

820,241

657,580

 

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

At December 31, 2015, the net debt to operating income ratio was 27.91:1 (December 31, 2014 - 1.84:1) calculated on a 12- month trailing basis as follows:

For The Twelve Months Ended December 31,

2015

2014

(C$000s, except ratio)

($)

($)

Net debt

820,241

657,580

Operating income

29,384

357,210

Net debt to operating income ratio

27.91:1

1.84:1

 

The Company's net debt to operating income ratio has increased during 2015 due to a cyclical low in activity and pricing in the North American pressure pumping market, combined with the foreign exchange impact of the senior unsecured notes, which are denominated in U.S. dollars. The notes are not due until December 1, 2020.

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. Prior to the end of the fourth quarter, the Company negotiated amendments including waivers and increases to certain of its financial covenant thresholds pertaining to its credit facilities, as shown below. At December 31, 2015 and 2014, the Company was in compliance with its covenants with respect to its credit facilities.

Quarters Ended

2015

2016

2017

Working capital ratio not to fall below

1.15x

1.15x

1.15x

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

4.50x

5.00x(1)

4.50x/4.00x(1)

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

0.30x

0.30x

0.30x

(1) Funded Debt to Adjusted EBITDA covenant has been waived for the quarters ended March 31, 2016 and June 30, 2016 and increases to 5.00x for September 30, 2016 and December 31, 2016. The covenant declines to 4.50x for the quarters ended March 31, 2017 and June 30, 2017 and declines to 4.00x from the quarters ended September 30, 2017 and December 31, 2017 and is set at 3.00x for each quarter after December 31, 2017.

(2) Funded Debt is defined as Total Debt excluding all outstanding senior unsecured notes. Total Debt includes bank loans and long-term debt (before unamortized debt issuance costs and debt discount) plus outstanding letters of credit (excluding a US$25,000 letter of credit supporting an Argentinean bank loan) less cash on hand with lenders.

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

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

 

For the quarter ended December 31, 2015 through the quarter ended December 31, 2017, advances under the credit facilities will be limited by a borrowing base. The borrowing base is calculated based on the following:

i. 

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

ii. 

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

iii. 

25 percent of the net book value of property, plant and equipment (PP&E) of the parent company and its U.S. operating subsidiary. The value of PP&E excludes assets under construction and is limited to a maximum of $90,000 until June 30, 2016 and $150,000 thereafter.

 

For the quarter ended December 31, 2015 through the quarter ended December 31, 2017, distributions are restricted other than those relating to the Company's share unit plans and dividend distributions, provided that the rate of dividends must not exceed $0.015625 per share quarterly.

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

i.  

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

ii. 

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

iii.

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

 

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

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20,000.

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

As at December 31, 2015, the Company's Fixed Charge Coverage Ratio was 1.3:1, which was less than the required 2:1 ratio. Failing to meet the Fixed Charge Coverage Ratio is not an event of default under the indenture, and the baskets highlighted in the preceding paragraphs provide sufficient flexibility for the Company to incur additional indebtedness and make anticipated restricted payments, which may be required to conduct its operations during this period of weakened market conditions.

The Company has measures in place to ensure that it has sufficient liquidity to navigate the cyclical nature of the oilfield services sector and safeguard the Company's ability to continue as a going concern. As discussed above, the Company negotiated amendments to its credit facilities to provide increased financial flexibility. These amendments include an "Equity Cure" feature pursuant to which proceeds from equity offerings may be applied as both an adjustment in the calculation of Adjusted EBITDA and as a reduction of Funded Debt towards the Funded Debt to Adjusted EBITDA ratio covenant for any of the quarters ending prior to and including December 31, 2017, subject to certain conditions including:

i.     

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

ii.   

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

iii.   

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

iv.  

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

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

18. RELATED-PARTY TRANSACTIONS
In November 2010, the Company lent a senior officer $2,500 to purchase common shares of the Company on the Toronto Stock Exchange. The loan is on a non-recourse basis and is secured by the common shares acquired with the loan proceeds. The loan was amended in February 2015 to extend the term by five years to November 8, 2020 and change the interest rate to the prescribed rate under the Income Tax Act (Canada), which rate was 1.0 percent per annum at the time of the amendment. The market value of the shares that secure the loan was approximately $387 as at December 31, 2015 (December 31, 2014 - $1,694). In accordance with applicable accounting standards regarding share purchase loans receivable, this loan is classified as a reduction of shareholders' equity due to its non-recourse nature. In addition, the shares purchased with the loan proceeds are considered to be, in substance, stock options.

The Company leases certain premises from an entity controlled by a director of the Company. The rent charged for these premises during the year ended December 31, 2015 was $1,083 (year ended December 31, 2014 - $822), as measured at the exchange amount.

As disclosed in note 9, the Company issued common shares under a private placement. Of the total gross proceeds of $27,500, $5,893 was purchased by directors or entities controlled by directors of the Company.

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

  • operations; and
  • selling, general and administrative.

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

Additional information on the nature of expenses is as follows:



Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Product costs

89,628

209,608

513,804

726,229

Depreciation

40,254

35,997

156,638

139,395

Amortization of debt issuance costs and debt discount

904

515

2,625

2,049

Employee benefits expense (note 20)

85,858

151,394

399,287

535,948

 

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


Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Salaries and short-term employee benefits

73,142

145,392

382,789

510,481

Post-employment benefits (group retirement savings plan)

1,451

2,185

5,051

Share-based payments

(101)

(3,840)

176

10,923

Termination benefits

12,817

8,391

14,137

9,493


85,858

151,394

399,287

535,948

 

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

Years Ended December 31,

2015

2014

(C$000s)

($)

($)

Salaries, fees and short-term benefits

1,740

3,331

Post-employment benefits (group retirement savings plan)

33

38

Share-based payments

474

2,106


2,247

5,475

 

In the event of termination, the three senior officers are entitled to one to two years of annual compensation, and to two years of annual compensation in the event of termination resulting from change of control.

22. CONTINGENCIES

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

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

In 1999, the largest group of plaintiffs received a ruling from the Athens Court of First Instance that their termination was invalid and that salaries in arrears amounting to approximately $10,289 (6,846 euros) plus interest were due to the former employees. This decision was appealed to the Athens Court of Appeal, which allowed the appeal in 2001 and annulled the above-mentioned decision of the Athens Court of First Instance. The said group of former employees filed an appeal with the Supreme Court of Greece, which was heard on May 29, 2007. The Supreme Court of Greece allowed the appeal and sent the matter back to the Athens Court of Appeal for the consideration of the quantum of awardable salaries in arrears. On June 3, 2008, the Athens Court of Appeal rejected NAPC's appeal and reinstated the award of the Athens Court of First Instance, which decision was further appealed to the Supreme Court of Greece. The matter was heard on April 20, 2010 and a decision rejecting such appeal was rendered in June 2010. As a result of Denison's participation in the consortium that was named in the lawsuit, the Company has been served with three separate payment orders, one on March 24, 2015 and two others on December 29, 2015. The Company was also served with an enforcement order on November 23, 2015. Oppositions have been filed on behalf of the Company in respect of each of these orders which oppose the orders on the basis that they were improperly issued and are barred from a statute of limitations perspective. The salaries in arrears sought to be recovered through these orders are part of the $10,289 (6,846 euros) cited above and the interest being sought in respect of these orders is part of the $24,876 (16,552 euros) cited below. Provisional orders granting a temporary suspension of any enforcement proceedings have been granted in respect of all of the orders that have been served. A hearing in respect of the order served on March 24, 2015 has been heard and a decision is pending. A hearing in respect of the orders served in December of 2015 is scheduled for September 20, 2016, and a hearing in respect of the order served on November 23, 2015 is scheduled for April 15, 2016.

NAPC is also the subject of a claim for approximately $4,301 (2,862 euros) plus associated penalties and interest from the Greek social security agency for social security obligations associated with the salaries in arrears that are the subject of the above- mentioned decision.

The maximum aggregate interest and penalties payable under the claims noted above, as well as three other immaterial claims against NAPC, amounted to $24,876 (16,552 euros) as at December 31, 2015.

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

U.S. LITIGATION
A collective and class action complaint was filed against the Company in September 2012 in the U.S. District Court for the Western District of Pennsylvania, alleging failure to pay U.S. employees the amount of overtime pay required by the Fair Labor Standards Act (FLSA) and the Pennsylvania Minimum Wage Act. In May 2013, the plaintiffs amended their complaint to add a Colorado wage-hour claim. In June 2013, the parties stipulated to conditional certification of a putative class in the FLSA collective action. After notice of the right to opt-in was mailed to approximately 1,200 current and former employees, 359 individuals opted in. Pursuant to a court-approved discovery plan, discovery occurred as to a mutually agreed-upon sample of the conditionally-certified opt-in class.

The Company and the plaintiffs have reached a tentative settlement of all claims, including certain potential, related claims. The court granted final approval of the settlement on December 17, 2015. As part of the settlement, plaintiffs filed a second amended complaint to add Arkansas and North Dakota wage-hour claims. For settlement purposes only, the court conditionally certified classes for the FLSA claim and each of the four state law claims. The proposed settlement contemplates use of a claims procedure, pursuant to which each plaintiff and potential plaintiff would be required to file a claim to be entitled to receive money pursuant to the settlement. During 2015, the Company recorded an additional US$1,500 provision to reflect its current best estimate of the projected net cost of the settlement, for a total overall provision of US$5,500, and also incurred legal fees of approximately US$810. The Company does not have insurance coverage for these claims.

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

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


Canada

United States

Russia

Latin America

Corporate

Consolidated

(C$000s)

($)

($)

($)

($)

($)

($)

Three Months Ended December 31, 2015







Revenue

123,341

81,263

32,641

48,949

286,194

Operating income (loss)(1)

10,161

(3,883)

4,232

4,029

(8,752)

5,787

Segmented assets

690,980

843,300

100,559

180,984

1,815,823

Capital expenditures

19,941

5,355

607

4,061

29,964

Goodwill


Three Months Ended December 31, 2014

Revenue

296,983

355,688

37,685

58,540

748,896

Operating income (loss)(1)

67,564

52,820

4,823

11,836

(14,841)

122,202

Segmented assets

822,699

1,022,145

111,576

200,947

2,157,367

Capital expenditures

26,676

11,270

2,359

11,728

52,033

Goodwill

7,236

2,308

9,544









Canada

United States

Russia

Latin America

Corporate

Consolidated

(C$000s)

($)

($)

($)

($)

($)

($)

Year Ended December 31, 2015







Revenue

533,102

652,007

137,876

172,220

1,495,205

Operating income (loss)(1)

34,923

(57)

14,743

13,295

(33,520)

29,384

Segmented assets

690,980

843,300

100,559

180,984

1,815,823

Capital expenditures

46,845

65,645

2,048

43,396

157,934

Goodwill








Year Ended December 31, 2014







Revenue

942,947

1,214,560

171,703

167,721

2,496,931

Operating income (loss)(1)

175,771

200,484

18,734

26,858

(64,637)

357,210

Segmented assets

822,699

1,022,145

111,576

200,947

2,157,367

Capital expenditures

57,604

81,566

10,372

28,043

177,585

Goodwill

7,236

2,308

9,544

(1) Operating income (loss) is defined as net income (loss) before depreciation, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, expenses and gain related to business combinations, impairment of property, plant and equipment, impairment of inventory, impairment of goodwill, provision for settlement of litigation, interest, and income taxes.

         


Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Net (loss) income

(145,636)

26,280

(227,426)

67,502

Add back (deduct):






Depreciation

40,254

35,997

156,638

139,395


Foreign exchange losses

33,540

16,582

37,025

30,167


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

(643)

96

(2,257)

1,577


Business combination

(30,987)


Impairment of property, plant and equipment

114,479

4,620

114,479

4,620


Impairment of inventory

14,333

14,333


Impairment of goodwill

979

9,544

979


Provision for settlement of litigation

3,165

4,640

3,165

4,640


Interest

18,289

15,509

68,967

59,584


Income taxes

(71,994)

17,499

(114,097)

48,746

Operating income

5,787

122,202

29,384

357,210

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

The following table sets forth consolidated revenue by service line:    


Three Months Ended December 31,

Years Ended December 31,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Fracturing

239,667

690,714

1,321,370

2,293,447

Coiled tubing

24,964

30,335

89,950

110,113

Cementing

18,624

23,353

72,872

80,633

Other

2,939

4,494

11,013

12,738


286,194

748,896

1,495,205

2,496,931

 

The Company's customer base consists of approximately 166 oil and natural gas exploration and production companies, ranging from large multi-national publicly traded companies to small private companies. Notwithstanding the Company's broad customer base, Calfrac had five significant customers that collectively accounted for approximately 41 percent of the Company's revenue for the year ended December 31, 2015 (year ended December 31, 2014 – six significant customers for approximately 47 percent) and, of such customers, one customer accounted for approximately 11 percent of the Company's revenue for the year ended December 31, 2015 (year ended December 31, 2014 – 11 percent).

24. SEASONALITY OF OPERATIONS
Certain of the Company's Canadian and United States businesses are seasonal in nature. The lowest activity levels in these areas are typically experienced during the second quarter of the year when road weight restrictions are in place and access to wellsites in Canada and North Dakota is reduced.

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

A dividend of $0.015625 per common share, totalling $1,806, was declared on December 4, 2015, to be paid on January 15, 2016. This amount has been accrued in the financial statements.

A dividend of $0.015625 per common share, totalling $1,488, was declared on September 24, 2015 and paid on October 5, 2015.

A dividend of $0.0625 per common share was declared on June 17, 2015 and paid on July 15, 2015. Of the total dividend of $6,066, $1,500 was reinvested under the DRIP into 219,549 common shares of the Company.

A dividend of $0.125 per common share was declared on March 18, 2015 and paid on April 15. 2015. Of the total dividend of $12,190, $5,645 was reinvested under the DRIP into 583,187 common shares of the Company.

A dividend of $0.125 per common share was declared on December 4, 2014 and paid on January 15, 2015. Of the total dividend of $11,907, $5,588 was reinvested under the DRIP into 671,643 common shares of the Company.

On September 24, 2015, the Company announced that the DRIP was suspended.

SOURCE Calfrac Well Services Ltd.

For further information: Fernando Aguilar, President & Chief Executive Officer; Michael (Mick) J. McNulty, Chief Financial Officer; Ashley Connolly, Manager, Capita I Markets,Telephone: 403-266-6000 Fax: 403-266-7381 www.calfrac.com


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