Calfrac Announces Second Quarter Results

CALGARY, July 29, 2015 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three and six months ended June 30, 2015.

HIGHLIGHTS


Three Months Ended June 30,  

Six Months Ended June 30,


2015

2014

Change

2015

2014

Change

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

($)

($)

(%)

($)

($)

(%)

(unaudited)







Financial







Revenue

319,553

502,957

(36)

919,936

1,050,595

(12)

Operating income (loss)(1)

(7,022)

44,833

(116)

20,822

108,950

(81)


Per share - basic

(0.07)

0.48

(115)

0.22

1.17

(81)


Per share - diluted

(0.07)

0.47

(115)

0.22

1.16

(81)

 

Net income (loss) attributable to the shareholders of

Calfrac before foreign exchange gains or losses(2)

(43,040)

(9,446)

356

(56,488)

1,346

NM


Per share - basic

(0.45)

(0.10)

350

(0.59)

0.01

NM


Per share - diluted

(0.45)

(0.10)

350

(0.59)

0.01

NM

Net loss attributable to the shareholders of Calfrac

(43,277)

(12,905)

235

(55,905)

(3,959)

NM


Per share - basic

(0.45)

(0.14)

221

(0.59)

(0.04)

NM


Per share - diluted

(0.45)

(0.14)

221

(0.59)

(0.04)

NM

Working capital (end of period)

340,639

334,320

2

340,639

334,320

2

Total equity (end of period)

775,646

794,615

(2)

775,646

794,615

(2)

Weighted  average  common  shares  outstanding

(000s)








Basic

95,602

93,946

2

95,417

93,440

2


Diluted

95,771

94,894

1

95,587

94,255

1

Operating (end of period)







Active pumping horsepower (000s)

804

1,217

(34)

804

1,217

(34)

Idle pumping horsepower (000s)

455

455

Total pumping horsepower (000s)

1,259

1,217

3

1,259

1,217

3

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 (#)

26

31

(16)

26

31

(16)

Idle cementing units (#)

5

5

Total cementing units (#)

31

31

31

31

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

 

SECOND QUARTER 2015 OVERVIEW

 

CONSOLIDATED HIGHLIGHTS


Three Months Ended June 30,

2015

2014

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

319,553

502,957

(36)

Expenses





Operating

307,880

427,752

(28)


Selling, general and administrative (SG&A)

18,695

30,372

(38)


326,575

458,124

(29)

Operating income (loss)(1)

(7,022)

44,833

(116)

Operating income (loss) (%)

(2.2)

8.9

(125)

Fracturing revenue per job ($)(2)

48,949

55,765

(12)

Number of fracturing jobs(2)

5,710

8,212

(30)

Active pumping horsepower, end of period (000s)

804

1,217

(34)

Idle pumping horsepower, end of period (000s)

455

Total pumping horsepower, end of period (000s)

1,259

1,217

3

Coiled tubing revenue per job ($)

44,097

40,934

8

Number of coiled tubing jobs

468

524

(11)

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 ($)

44,137

35,563

24

Number of cementing jobs

384

581

(34)

Active cementing units, end of period (#)

26

31

(16)

Idle cementing units, end of period (#)

5

Total cementing units, end of period (#)

31

31

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

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

 

Revenue in the second quarter of 2015 was $319.6 million, a decrease of 36 percent from the same period in 2014. The Company's fracturing job count decreased by 30 percent due to lower activity in Canada and the United States while consolidated revenue per fracturing job decreased by 12 percent primarily due to significantly lower pricing in Canada and the United States, partially offset by an increase in job size and the appreciation of the U.S. dollar.

Pricing in Canada declined by an average of approximately 20 percent in the second quarter of 2015 from the second quarter of 2014. In the United States, pricing was lower by an average of 30 percent compared to the second quarter of 2014. In Argentina, pricing was down by less than 10 percent as the Company agreed to a pricing 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 most recent contract renewal process.

Operating loss for the second quarter of 2015 was $7.0 million, a decline of 116 percent from the comparable period in 2014. Operating income as a percentage of revenue was lower by 1,110 basis points 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 the United States.

Net loss attributable to shareholders of Calfrac was $43.3 million or $0.45 per share diluted, compared to $12.9 million or $0.14 per share diluted in the same period last year, primarily due to lower pricing for the Company's fracturing services.

In the second quarter of 2015, Calfrac declared a quarterly dividend of $0.0625 per share.

 

Three Months Ended

June 30, 2015

March 31, 2015

Change

(C$000s, except operational information)

(unaudited)

($)

($)

(%)

Revenue

319,553

600,383

(47)

Expenses





Operating

307,880

549,931

(44)


SG&A

18,695

22,608

(17)


326,575

572,539

(43)

Operating income (loss)(1)

(7,022)

27,844

(125)

Operating income (loss) (%)

(2.2)

4.6

(148)

Fracturing revenue per job ($)

48,949

52,085

(6)

Number of fracturing jobs

5,710

10,688

(47)

Active pumping horsepower, end of period (000s)

804

1,259

(36)

Idle pumping horsepower, end of period (000s)

455

Total pumping horsepower, end of period (000s)

1,259

1,259

Coiled tubing revenue per job ($)

44,097

31,843

38

Number of coiled tubing jobs

468

707

(34)

Active coiled tubing units, end of period (#)

20

37

(46)

Idle coiled tubing units, end of period (#)

17

Total coiled tubing units, end of period (#)

37

37

Cementing revenue per job ($)

44,137

40,712

8

Number of cementing jobs

384

424

(9)

Active cementing units, end of period (#)

26

31

(16)

Idle cementing units, end of period (#)

5

Total cementing units, end of period (#)

31

31

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

 

Revenue in the second quarter of 2015 was $319.6 million, a decrease of 47 percent from the first quarter of 2015. Revenue per fracturing job decreased by 6 percent due to lower pricing in the United States and Canada. The decrease in revenue per fracturing job was partially offset by the completion of larger jobs in the United States, as well as the appreciation of the U.S. dollar. Operating income as a percentage of revenue declined 680 basis points due to lower pricing and activity in the United States and Canada.

Pricing in Canada declined by an average of approximately 10 percent in the second quarter of 2015 from the first quarter of 2015. In the United States, pricing was lower on average by 15 percent than in the first quarter of 2015. In Argentina, pricing was consistent with the previous quarter. In Russia, pricing is determined by contract awards which resulted in the Company achieving a nominal pricing increase during the most recent contract renewal process.

In Canada, revenue declined by 70 percent to $66.9 million in the second quarter of 2015 due to continued pricing pressure combined with the onset of spring break-up conditions. Operating income as a percentage of revenue decreased to negative 9 percent from positive 9 percent due to significantly lower activity related to spring break-up and weaker pricing, offset partially by cost optimization initiatives that were realized during the quarter.

In the United States, revenue in the second quarter of 2015 declined by 43 percent from the first quarter of 2015 to $172.5 million, mainly as a result of lower pricing and activity. The decline was partially offset by the strengthening of the U.S. dollar. Total proppant used declined by 20 percent sequentially while tons per fracturing job increased by 14 percent due to service intensity and changes in geographical job mix. Operating income as a percentage of revenue decreased to a break-even position in the second quarter of 2015 from 4 percent in the previous quarter due to lower pricing but was partially offset by cost reductions.

In Russia, revenue increased to $38.9 million in the second quarter of 2015 from $30.5 million in the first quarter of 2015. The increase resulted from the rouble appreciating 18 percent. Fracturing activity improved by 8 percent due to fewer weather-related disruptions. Operating income as a percentage of revenue increased by 730 basis points to 12 percent due to normal seasonal improvement and the appreciation of the rouble.

In Latin America, revenue declined 5 percent to $41.3 million. The decrease was primarily due to lower activity in Mexico. Operating income as a percentage of revenue was consistent at 10 percent.

OUTLOOK
Crude oil prices have weakened in recent months to a price range that is significantly lower than in 2014. As a result, it is anticipated that equipment utilization and pricing in the oilfield services industry will continue to be adversely affected for the remainder of the year and likely into 2016. Industry reports have indicated that North American oil and gas capital spending is down by 35 to 40 percent in 2015 from 2014. The first half of 2015 has demonstrated that customers are taking a very cautious approach in allocating capital and this is expected to continue to keep activity low in the second half of 2015.

Natural gas prices have declined modestly in recent months due to stronger-than-expected supply growth and storage levels returning to around the five-year average. Natural gas liquids pricing, which had been a key factor in natural gas development in Canada and the United States, has declined significantly. The anticipated impact of these developments is a reduction in activity in key natural gas plays in North America in 2015.

Calfrac is endeavoring to restructure its business in order to be profitable in a lower commodity price environment and continues to closely monitor its cost structure for additional savings. The Company is making every effort to protect its best people in order to quickly respond when market conditions improve and also to remain operationally strong over the long-term.

In addition, the Company believes that it is continuing to create a competitive advantage and deliver cost efficiencies through the ongoing implementation of various logistics initiatives despite a further weakening in the Canadian dollar which has increased U.S. dollar-denominated sand and proppant expenses. The logistics group has reduced costs for key products such as proppant and chemicals. Diesel fuel, a key input into operations, has fallen considerably in cost due to the decline in crude oil prices. Third-party trucking costs have also been lowered by attaining pricing concessions and more efficient use of the Company's internal fleet. The impact of cost saving initiatives implemented across the Company will increase as the year progresses and Calfrac continues to analyze additional measures that it can employ to further lower its cost structure.

CANADA
For the first half of 2015, horizontal well completion activity was significantly lower in 2015 than in the first half of 2014. In 2015, spring break-up arrived earlier than expected due to warm weather conditions through the winter. Activity in the second half of 2015 will depend on the extent of and pace at which oil and natural gas prices recover, however, the Company anticipates activity to be at the lowest levels experienced since 2009. In response, Calfrac has temporarily idled approximately 44 percent of its Canadian fracturing equipment.

Calfrac intends to retain its leadership position in western Canada's most important natural gas and natural gas liquids plays and expects to be a key participant in their long-term development. However, the weakening of natural gas and natural gas liquids prices is expected to lead to significantly lower activity in the second half of 2015 from the second half of 2014.

Calfrac expects oil-focused activity to be significantly lower for the remainder of 2015 than in 2014. A recovery in oil prices would, however, result in a relatively quick response in activity in the Viking and Cardium plays. The Company believes these plays will be an important component of its growth in the medium to long term.

UNITED STATES
In the United States, the Company anticipates that activity in the third and fourth quarters of 2015 will be lower than the second quarter of the year. Visibility for activity remains limited given the ongoing changes in capital spending plans by the Company's customers and competitive pricing dynamics. In response to these difficult market conditions and lower levels of activity, Calfrac suspended its fracturing operations in the Fayetteville and will continue to assess the viability of each district in which it currently operates.

Sporadic activity and weak pricing has lead to the Company temporarily idling 40 percent of its fracturing equipment in the United States during the second quarter of 2015 due to margins that are not anticipated to meet the Company's required financial returns. Calfrac has a plan in place to ensure that the equipment is kept up to its high standards and can be reactivated quickly when industry activity recovers.


RUSSIA
Calfrac expects its activity in Russia in 2015 to be similar to 2014, outside of normal weather-related variability. Calfrac's participation in unconventional development will be delayed until sanctions applied by Canada, the United States and certain other jurisdictions are removed. The significant devaluation of the Russian rouble will decrease reported 2015 financial results versus 2014. The long-term prospects in Russia, however, remain encouraging as unconventional development has become a pillar of that country's oil and natural gas growth plans.

LATIN AMERICA
Calfrac continues to believe in the long-term potential of Argentina's conventional and unconventional oil and gas development. The increasing customer demand for the Company's services is providing the opportunity to deploy additional equipment into the country, such as the equipment delivered in December 2014 and an additional 40,000 horsepower, which is on schedule to be deployed in the latter part of 2015. Calfrac believes that its service quality and technical expertise are contributing to its reputation as a service provider of choice in Argentina, thereby providing the foundation for long-term growth.

In Mexico, Calfrac remains optimistic regarding activity in the longer term as the national reform of the energy industry is proceeding. Calfrac believes this will eventually set the stage for increased capital spending by Pemex and create an avenue for new oil and gas companies to enter Mexico.

DIVIDEND POLICY
Calfrac's Board of Directors reviews the Company's dividend policy on a quarterly basis. During the second quarter,Calfrac reduced its quarterly dividend by 50 percent to $0.0625 per share. The Board of Directors will continue to monitor market conditions in order to determine whether further changes to Calfrac's dividend policy are required.

SUMMARY
The depressed prices for crude oil and natural gas and uncertainty as to the timing of a price recovery are likely to make the remainder of 2015 and early 2016 challenging for the entire industry, but Calfrac believes it has a well-defined strategy to manage the near-term challenges and remains optimistic about its future opportunities. The Company has an experienced Board of Directors and management team that have been through a number of industry downturns leaving Calfrac well positioned to navigate the current cycle. The Company has taken advantage of market opportunities in previous industry downturns to strengthen its operations and competitive position, which has had a positive effect on operational performance when industry activity has recovered. Over the long term, Calfrac believes that the pressure pumping services industry will remain an integral component of unconventional resource development and that the Company's top-tier safety, service quality, logistics management and technology will serve to generate cost efficiencies for its customers and profitability for Calfrac.


FINANCIAL OVERVIEW - THREE MONTHS ENDED JUNE 30, 2015 VERSUS 2014

CANADA

Three Months Ended June 30,

2015

2014

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

66,894

96,213

(30)

Expenses





Operating

70,802

101,738

(30)


SG&A

2,416

3,797

(36)


73,218

105,535

(31)

Operating loss(1)

(6,324)

(9,322)

(32)

Operating loss (%)

(9.5)

(9.7)

(2)

Fracturing revenue per job ($)(2)

32,140

35,412

(9)

Number of fracturing jobs(2)

1,935

2,545

(24)

Active pumping horsepower, end of period (000s)

225

384

(41)

Idle pumping horsepower, end of period (000s)

177

Total pumping horsepower, end of period (000s)

402

384

5

Coiled tubing revenue per job ($)

23,173

32,732

(29)

Number of coiled tubing jobs

203

186

9

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 page 19 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 second quarter of 2015 was $66.9 million versus $96.2 million in the same period of 2014. The 30 percent decrease was primarily due to a mix of lower activity and lower pricing for the Company's fracturing services. Revenue per fracturing job decreased by 9 percent from the same period in the prior year as a result of significant pricing reductions offset partially by the impact of greater service intensity. Total proppant per reported fracturing job increased by 21 percent over the prior year while total proppant used declined by 8 percent. Coiled tubing jobs increased by 9 percent from the prior year due to higher activity in Saskatchewan light oil plays.

OPERATING LOSS
The operating loss in Canada during the second quarter of 2015 was $6.3 million compared to $9.3 million in the same period of 2014. The Company was able to reduce the second quarter loss compared to the same period in 2014 through the implementation of several cost reduction initiatives designed to remain competitive in a lower-price environment. Operating costs were 30 percent lower than in the comparable quarter, which is attributable to the decline in activity combined with the impact of cost savings realized during the quarter. The impact of a weaker Canadian dollar on the cost of proppant and chemicals that are sourced from the United States partially offset the product cost reductions achieved through supply chain initiatives. During the quarter, the Company decided to temporarily idle approximately 177,000 horsepower in Canada rather than operate at margins that do not meet its required financial returns. SG&A expenses declined by 36 percent year-over-year, primarily due to workforce reductions and a lower compensation structure.


UNITED STATES

 

Three Months Ended June 30,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

172,523

315,971

(45)

Expenses





Operating

168,364

249,563

(33)


SG&A

4,832

7,694

(37)


173,196

257,257

(33)

 

Operating income (loss)(1)

 

(673)

 

58,714

 

(101)

Operating income (loss) (%)

(0.4)

18.6

(102)

Fracturing revenue per job ($)

50,829

59,473

(15)

Number of fracturing jobs

3,219

5,086

(37)

Active pumping horsepower, end of period (000s)

410

660

(38)

Idle pumping horsepower, end of period (000s)

279

Total pumping horsepower, end of period (000s)

689

660

4

Coiled tubing revenue per job ($)

66,196

45,469

46

Number of coiled tubing jobs

21

61

(66)

Active coiled tubing units, end of period (#)

8

(100)

Idle coiled tubing units, end of period (#)

5

Total coiled tubing units, end of period (#)

5

8

(38)

Cementing revenue per job ($)

46,104

40,454

14

Number of cementing jobs

163

265

(38)

Active cementing units, end of period (#)

13

18

(28)

Idle cementing units, end of period (#)

5

Total cementing units, end of period (#)

18

18

US$/C$ average exchange rate(2)

1.2294

1.0905

13

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

(2) Source: Bank of Canada.




 

REVENUE
Revenue from Calfrac's United States operations decreased to $172.5 million during the second quarter of 2015 from $316.0 million in the comparable quarter of 2014 due to significantly lower fracturing activity and pricing in south Texas, North Dakota, Arkansas and Pennsylvania. Increased activity in the Rockies partially offset the decline in fracturing activity, resulting in 37 percent fewer fracturing jobs period-over-period. Revenue per job was 15 percent lower year- over-year due to significantly weaker pricing, partially offset by the continued adoption of greater service intensity per job and a stronger U.S. dollar. Proppant per fracturing job increased by 30 percent over the same period in the prior year while total proppant used declined by 5 percent.

OPERATING INCOME (LOSS)
The Company's United States operations experienced an operating loss of $0.7 million for the second quarter of 2015 compared to operating income of $58.7 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 19 percent in the second quarter of 2014 to a break-even result in 2015. The decline in the operating income percentage was due to intense pricing competition from many of the Company's major competitors and lower equipment utilization in south Texas, North Dakota and Pennsylvania. Cost reduction initiatives mitigated the decline in operating income. In addition, Calfrac elected to temporarily idle approximately 279,000 horsepower in the United States during the quarter, including the decision to suspend its fracturing operations in the Fayetteville shale gas play in Arkansas. SG&A expenses decreased by 37 percent in the second quarter of 2015 from the same period in the prior year due to cost reduction initiatives that were implemented towards the end of the first quarter, which continued throughout the second quarter.


RUSSIA

 

Three Months Ended June 30,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

38,863

51,209

(24)

Expenses





Operating

33,389

42,524

(21)


SG&A

758

1,463

(48)


34,147

43,987

(22)

Operating income(1)

4,716

7,222

(35)

Operating income (%)

12.1

14.1

(14)

Fracturing revenue per job ($)

89,421

126,584

(29)

Number of fracturing jobs

354

327

8

Pumping horsepower, end of period (000s)

70

70

Coiled tubing revenue per job ($)

54,607

57,068

(4)

Number of coiled tubing jobs

132

172

(23)

Coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0234

0.0312

(25)

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

(2) Source: Bank of Canada.




 

REVENUE
During the second quarter of 2015, revenue from Calfrac's Russian operations decreased by 24 percent to $38.9 million from $51.2 million in the corresponding three-month period of 2014. The decrease in revenue, which is generated in roubles, was primarily related to the 25 percent devaluation of the Russian rouble in the second quarter of 2015 from the second quarter of 2014. The decline in the rouble was partially offset by slightly higher fracturing activity across all operating regions, with the exception of the Usinsk region, where warm weather resulted in the demobilization of equipment earlier than in 2014. Revenue per fracturing job declined by 29 percent due to the currency devaluation and lower acid fracturing activity in Usinsk, which typically has larger jobs. Lower coiled tubing activity in the Khanty-Mansiysk region also contributed to the decline in revenue.

OPERATING INCOME
Operating income in Russia was $4.7 million during the second quarter of 2015 compared to $7.2 million in the corresponding period of 2014, the decline being primarily due to the 25 percent devaluation of the rouble.  Operating income as a percentage of revenue declined from 14 percent to 12 percent due to weather-related interruptions in the Usinsk region. SG&A expenses declined by 48 percent in the second quarter of 2015 from the prior year's quarter due to the impact of the depreciation of the Russian rouble and cost reduction initiatives.

 

LATIN AMERICA

 

Three Months Ended June 30,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

41,273

39,564

4

Expenses





Operating

33,762

31,800

6


SG&A

3,405

4,000

(15)


37,167

35,800

4

Operating income(1)

4,106

3,764

9

Operating income (%)

9.9

9.5

4

Pumping horsepower, end of period (000s)

98

103

(5)

Cementing units, end of period (#)

13

13

Coiled tubing units, end of period (#)

7

4

75

Mexican peso/C$ average exchange rate(2)

0.0802

0.0839

(4)

Argentinean peso/C$ average exchange rate(2)

0.1374

0.1354

1

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

(2) Source: Bank of Canada.




 

REVENUE
Calfrac's Latin American operations generated total revenue of $41.3 million during the second quarter of 2015 versus $39.6 million in the comparable three-month period in 2014. The continued growth resulted from an increase in unconventional activity in Argentina, which is more service intensive than conventional work, and thereby drove higher revenue per job. Activity in Mexico was muted during the second quarter of 2015 and offset most of the increase in Argentina revenue. The Company completed its existing commitments in Colombia during the quarter and is in the process of closing operations.

OPERATING INCOME
Operating income in Latin America for the three months ended June 30, 2015 was $4.1 million compared to $3.8 million in the comparative quarter in 2014. Operating income in the second quarter of 2015 was higher due to an increase in unconventional activity in Argentina combined with the impact of cost reduction initiatives in Mexico.

CORPORATE

 

Three Months Ended June 30,

 

 

 

2015

 

 

 

2014

 

 

 

Change

(C$000s) (unaudited)

($)

($)

(%)

Expenses





Operating

1,564

2,127

(26)


SG&A

7,283

13,418

(46)


8,847

15,545

(43)

Operating loss(1)

(8,847)

(15,545)

(43)

% of Revenue

2.8

3.1

(10)

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




 

OPERATING LOSS
The 43 percent decline in corporate expenses from the second quarter of 2014 includes a reduction in stock-based compensation expense of $5.2 million resulting from a significant decline in the Company's stock price at the end of the quarter. In addition, the Company implemented several cost reduction initiatives during the first quarter of 2015 to better align its cost structure with anticipated activity levels. These initiatives contributed approximately $1.5 million to the overall decrease in corporate expenses primarily by reducing corporate personnel costs and annual bonuses.

DEPRECIATION
For the three months ended June 30, 2015, depreciation expense increased by 14.7 percent to $39.5 million from $34.4 million in the corresponding quarter of 2014. The increase was mainly a result of a larger fleet of equipment operating in the United States and, to a lesser extent Canada, combined with a weaker Canadian dollar relative to the United States dollar.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $0.9 million during the second quarter of 2015 versus a loss of $4.9 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 United States dollars in Canada, Russia and Latin America. The Company's second-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 against the U.S. dollar during the second quarter. The foreign exchange loss was partially offset by United States dollar-denominated liabilities held in Russia as the rouble appreciated against the U.S. dollar during the second quarter.

INTEREST
The Company's net interest expense of $16.3 million for the second quarter of 2015 was $1.9 million higher than in the comparable period of 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 quarter in 2014.

INCOME TAXES
The Company recorded an income tax recovery of $19.5 million during the second quarter of 2015 compared to an expense of $4.0 million in the comparable period of 2014. The reversal to a recovery was the result of pre-tax losses incurred during the quarter. The effective tax recovery rate was 31 percent during the second quarter of 2015. The 2015 tax recovery is net of $4.3 million of tax adjustments relating to the increased income tax rate in Alberta and income tax adjustments relating to prior periods for Canada, Argentina and Mexico that were recorded during the second quarter.

SUMMARY OF QUARTERLY RESULTS

Three Months Ended

Sep. 30, 

Dec. 31, 

Mar. 31,

Jun. 30, 

 Sep. 30,

Dec. 31,

Mar. 31, 

Jun. 30,


2013

2013

2014

2014

2014

2014

2015

2015

(unaudited) 

($)

($)

($)

($)

($)

($)

($)

($)

Financial









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









Revenue

388,662

463,054

547,638

502,957

697,440

748,896

600,383

319,553

Operating income (loss)(1)

51,683

57,416

64,117

44,833

126,058

122,202

27,844

(7,022)

Per share - basic(2)

0.56

0.62

0.69

0.48

1.33

1.29

0.29

(0.07)

Per share - diluted(2)

0.56

0.62

0.68

0.47

1.32

1.28

0.29

(0.07)

Net income (loss) attributable










to the shareholders of Calfrac

6,089

11,764

8,946

(12,905)

44,465

26,470

(12,628)

(43,277)


Per share - basic(2)

0.07

0.13

0.10

(0.14)

0.47

0.28

(0.13)

(0.45)


Per share - diluted(2)

0.07

0.13

0.10

(0.14)

0.46

0.28

(0.13)

(0.45)

Capital expenditures

34,683

45,227

27,331

35,312

62,909

52,033

52,669

50,356

Working capital (end of period)

292,854

319,934

338,916

334,320

393,653

441,234

413,950

340,639

Total equity (end of period)

786,933

795,207

803,904

794,615

828,537

832,403

818,825

775,646





Operating (end of period)


Pumping horsepower (000s)

1,025

1,194

1,215

1,217

1,235

1,254

1,259

1,259

Coiled tubing units (#)

31

38

34

36

36

36

37

37

Cementing units (#)

30

31

31

31

31

31

31

31

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

 

SEASONALITY OF OPERATIONS
The Company's North American business is seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break-up weather conditions and access to well sites in Canada and North Dakota is reduced (refer to "Business Risks – Seasonality" in the 2014 Annual Report).

FOREIGN EXCHANGE FLUCTUATIONS
The Company's consolidated financial statements are reported in Canadian dollars. Accordingly, the quarterly results are directly affected by fluctuations in the exchange rates for United States, Russian, Mexican and Argentinean currency (refer to "Business Risks – Fluctuations in Foreign Exchange Rates" in the 2014 Annual Report).

FINANCIAL OVERVIEW - SIX MONTHS ENDED JUNE 30, 2015 VERSUS 2014

CANADA

Six Months Ended June 30,

2015

2014

Change

(C$000s, except operational information)

($)

($)

(%)

(unaudited)




Revenue

288,292

363,887

(21)

Expenses





Operating

269,698

312,257

(14)


SG&A

4,461

8,473

(47)


274,159

320,730

(15)

Operating income(1)

14,133

43,157

(67)

Operating income (%)

4.9

11.9

(59)

Fracturing revenue per job ($)(2)

38,620

35,415

9

Number of fracturing jobs(2)

7,067

9,701

(27)

Active pumping horsepower, end of period (000s)

225

384

(41)

Idle pumping horsepower, end of period (000s)

177

Total pumping horsepower, end of period (000s)

402

384

5

Coiled tubing revenue per job ($)

23,824

28,788

(17)

Number of coiled tubing jobs

645

706

(9)

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 page 19 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 first six months of 2015 was $288.3 million versus $363.9 million in the same period of 2014. The decrease was primarily due to a mix of lower pricing and lower activity for its fracturing services. Revenue per fracturing job increased by 9 percent from the same period in the prior year due to the completion of larger jobs. Total proppant per reported fracturing job increased by 27 percent over the prior year while total proppant used declined by 7 percent. Coiled tubing jobs decreased by 9 percent from the prior year due to lower integrated activity and less cleanout and milling work prior to spring break-up in 2015.

OPERATING INCOME
Operating income in Canada during the first six months of 2015 was $14.1 million compared to $43.2 million in the same period of 2014. The decrease in operating income was the result of significantly lower pricing and utilization. The impact of a weaker Canadian dollar on the cost of proppant and chemicals that is sourced from the United States also contributed to the reduction in operating income. During the second quarter of 2015, the Company elected to temporarily idle approximately 177,000 horsepower in Canada rather than operate at margins that do not meet its required financial returns. SG&A expenses declined by 47 percent year-over-year, primarily due to workforce reductions and a lower compensation structure combined with a reclassification of $2.9 million of employee costs from SG&A to operating costs during the first six months of 2015.

UNITED STATES

 

Six Months Ended June 30,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

477,602

527,010

(9)

Expenses





Operating

455,359

433,469

5


SG&A

11,565

13,150

(12)


466,924

446,619

5

 

Operating income(1)

 

10,678

 

80,391

 

(87)

Operating income (%)

2.2

15.3

(86)

Fracturing revenue per job ($)

55,885

57,643

(3)

Number of fracturing jobs

8,226

8,746

(6)

Active pumping horsepower, end of period (000s)

410

660

(38)

Idle pumping horsepower, end of period (000s)

279

Total pumping horsepower, end of period (000s)

689

660

4

Coiled tubing revenue per job ($)

51,750

52,949

(2)

Number of coiled tubing jobs

55

84

(35)

Active coiled tubing units, end of period (#)

8

(100)

Idle coiled tubing units, end of period (#)

5

Total coiled tubing units, end of period (#)

5

8

(38)

Cementing revenue per job ($)

45,039

37,286

21

Number of cementing jobs

334

494

(32)

Active cementing units, end of period (#)

13

18

(28)

Idle cementing units, end of period (#)

5

Total cementing units, end of period (#)

18

18

US$/C$ average exchange rate(2)

1.2353

1.0965

13

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

(2) Source: Bank of Canada.




 

REVENUE
Revenue from Calfrac's United States operations decreased to $477.6 million during the first six months of 2015 from $527.0 million in the comparable six-month period of 2014 due to significantly weaker pricing combined with lower fracturing activity. The number of fracturing jobs completed during the first six months of 2015 decreased by 6 percent from the comparable period in 2014, primarily due to lower activity in Arkansas, south Texas and Pennsylvania, partially offset by higher activity in the Rockies and North Dakota. Revenue per job was slightly lower year-over-year as weaker pricing was offset by the continued customer adoption of greater service intensity per job and a stronger U.S. dollar. Proppant per fracturing job increased by 18 percent over the same period in the prior year while total proppant used increased by 21 percent.

OPERATING INCOME
Operating income in the United States was $10.7 million for the first six months of 2015, a decrease of 87 percent from the comparative period in 2014. The decline was primarily due to significantly lower pricing in all markets and decreased utilization in the Marcellus and Eagle Ford.  In addition, Calfrac elected to suspend its fracturing operations in the Fayetteville shale play in Arkansas during the second quarter. Operating income as a percentage of revenue declined materially from the comparative period of 2014 to 2 percent. The decline in the operating income percentage was due to the impact of lower pricing combined with lower equipment utilization in Pennsylvania, south Texas and Arkansas. Cost reduction initiatives mitigated the decline in operating income. As a result of these difficult market conditions, the Company decided to temporarily idle approximately 279,000 horsepower in the United States during the second quarter rather than operate at margins that do not meet its required financial returns. SG&A expenses decreased by 12 percent in the first six months of 2015 from the same period in the prior year due to cost reduction initiatives that were implemented towards the end of the first quarter, which continued throughout the second quarter.

RUSSIA

 

Six Months Ended June 30,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

69,361

90,123

(23)

Expenses





Operating

61,097

78,996

(23)


SG&A

2,086

3,088

(32)


63,183

82,084

(23)

 

Operating income(1)

 

6,178

 

8,039

 

(23)

Operating income (%)

8.9

8.9

Fracturing revenue per job ($)

84,284

118,014

(29)

Number of fracturing jobs

683

616

11

Pumping horsepower, end of period (000s)

70

70

Coiled tubing revenue per job ($)

45,363

57,703

(21)

Number of coiled tubing jobs

260

302

(14)

Coiled tubing units, end of period (#)

7

7

Rouble/C$ average exchange rate(2)

0.0216

0.0313

(31)

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

(2) Source: Bank of Canada.




 

REVENUE
During the first six months of 2015, revenue from Calfrac's Russian operations decreased by 23 percent to $69.4 million from $90.1 million in the corresponding six-month period of 2014. The decrease in revenue, which is generated in roubles, was primarily related to the 31 percent devaluation of the rouble in the first six months of 2015 when compared to the same period of 2014. The decline in the rouble was partially offset by higher fracturing activity in the Nefteugansk region. Revenue per fracturing job declined by 29 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 was $6.2 million during the first six months of 2015 compared to $8.0 million in the corresponding period of 2014 primarily due to the 31 percent devaluation of the rouble offset by fewer weather-related interruptions and improved operational leverage. Modest pricing increases also helped maintain the operating income percentage during the period. SG&A expenses declined by 32 percent in the first six months of 2015 from the prior year's first half due to the devaluation of the rouble.


LATIN AMERICA

 

Six Months Ended June 30,

 

 

 

2015

 

 

 

2014

 

 

 

Change

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

($)

($)

(%)

(unaudited)




Revenue

84,681

69,575

22

Expenses





Operating

68,788

53,007

30


SG&A

7,394

6,912

7


76,182

59,919

27

 

Operating income(1)

 

8,499

 

9,656

 

(12)

Operating income (%)

10.0

13.9

(28)

Pumping horsepower, end of period (000s)

98

103

(5)

Cementing units, end of period (#)

13

13

Coiled tubing units, end of period (#)

7

4

75

Mexican peso/C$ average exchange rate(2)

0.0816

0.0836

(2)

Argentinean peso/C$ average exchange rate(2)

0.1401

0.1405

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

(2) Source: Bank of Canada.




 

REVENUE
Calfrac's Latin American operations generated total revenue of $84.7 million during the first six months of 2015 versus $69.6 million in the comparable six-month period 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. Activity in Mexico was muted during the first six months of 2015.

OPERATING INCOME
Operating income in Latin America for the six months ended June 30, 2015 was $8.5 million compared to $9.7 million in the comparative period in 2014. Operating income was lower due to certain one-time costs and modestly lower pricing in Argentina combined with lower operating income in Mexico. Calfrac is also currently using subcontractors for services such as flowback and well testing more regularly than in the first six months of 2014, which had a negative impact on operating income as a percentage of revenue.


CORPORATE

 

Six Months Ended June 30,

 

 

 

2015

 

 

 

2014

 

 

 

Change

(C$000s)

(unaudited)

($)

($)

(%)

Expenses





Operating

2,869

4,420

(35)


SG&A

15,797

27,873

(43)


18,666

32,293

(42)

Operating loss(1)

(18,666)

(32,293)

(42)

% of Revenue

2.0

3.1

(35)

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




 

OPERATING LOSS
The 42 percent decline in corporate expenses for the first six months of 2015 compared to the same period in 2014 includes a reduction in stock-based compensation expense of $10.0 million resulting from a significant decline in the Company's stock price. In addition, the Company implemented several cost reduction initiatives during the first six months of 2015 to align its cost structure with anticipated activity levels. These initiatives contributed approximately $3.6 million to the overall decrease in corporate expenses primarily by reducing corporate personnel costs and annual bonuses.

DEPRECIATION
For the six months ended June 30, 2015, depreciation expense increased by 13 percent to $76.9 million from $67.9 million in the first half of 2014. The increase was mainly a result of a larger fleet of equipment operating in the United States and, to a lesser extent Canada, combined with a weaker Canadian dollar relative to the United States dollar.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $1.7 million during the first six months of 2015 versus a loss of $7.8 million in the comparative six-month period of 2014. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in United States dollars in Canada, Russia and Latin America. The Company's 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 against the U.S. dollar during 2015. The foreign exchange loss was partially offset by gains on U.S. dollar-denominated assets held in Canada and U.S. dollar- denominated liabilities held in Russia.

INTEREST
The Company's net interest expense of $32.8 million for the first six months of 2015 was $3.4 million higher than in the comparable period of 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 $32.7 million for the first six months of 2015 compared to an expense of $6.6 million in the comparable period of 2014. The reversal to a recovery was the result of pre-tax losses incurred during the period. The effective tax recovery rate was 37 percent during 2015, which is net of $2.8 million of tax adjustments relating to the increased income tax rate in the province of Alberta and income tax adjustments relating to prior periods for Canada, the United States, Argentina and Mexico that were recorded during the period.

LIQUIDITY AND CAPITAL RESOURCES


Three Months Ended June 30, 

 Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

($) (unaudited)





Cash provided by (used in):  






Operating activities  

67,081

27,322

57,315

47,101


Financing activities  

(4,588)

9,988

(11,573)

(1,871)


Investing activities 

(42,379)

(42,160)

(96,522)

(66,790)


Effect of exchange rate changes on cash and cash







equivalents        

(5,357)

(7,384)

17,507

(7,869)

Increase (decrease) in cash and cash equivalents

14,757

(12,234)

(33,273)

(29,429)

 

OPERATING ACTIVITIES
The Company's cash provided by operating activities for the three months ended June 30, 2015 was $67.1 million versus $27.3 million in the comparable quarter in 2014. The increase was primarily due to the reduction of working capital during the quarter offset by lower operating margins in the United States. At June 30, 2015, Calfrac's working capital was approximately $340.6 million, a 23 percent decrease from December 31, 2014.

FINANCING ACTIVITIES
Net cash used for financing activities for the three months ended June 30, 2015 was $4.6 million compared to $10.0 million provided by financing activities in 2014. During the three months ended June 30, 2015, the Company increased its bank loan in Argentina by $2.7 million, paid cash dividends of $6.5 million, and paid $0.8 million in financing charges.

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 January 29, 2015, Calfrac exercised the accordion feature of its syndicated credit facility, which increased the total facility from $300.0 million to $400.0 million. The terms and conditions of the facility remained unchanged. The facilities consist of an operating facility of $30.0 million and a syndicated facility of $370.0 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 2.25 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.25 percent above the respective base rates. As at June 30, 2015, the Company had used $37.5 million of its credit facilities for letters of credit and had $56.8 million outstanding under its credit facility, leaving $305.7 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. Although strictly not required, in light of the relief being granted to competitors, prior to the end of  the  second  quarter  Calfrac  negotiated  an  increase  to  certain  of  its  financial  covenants,  as  shown  below.

 


Old Covenant


New Covenant


Quarters Ended,


2015

2016

2017

Working capital ratio not to fall below

1.15x

1.15x

1.15x

1.15x

Funded debt to EBITDA not to exceed(1)

2.25x

3.00x

4.00x

3.50x(2)

Total debt to capitalization not to exceed

0.65x

0.70x

0.70x

0.70x

(1) Funded debt excludes Calfrac's senior unsecured notes.

(2) Funded debt to EBITDA covenant declines to 3.00x for each quarter after June 30, 2017.

 

As at June 30, 2015 the Company was in compliance with its previous and increased financial covenants.

On June 2, 2014, the Company's common shares were split on a two-for-one basis to shareholders of record as of May 23, 2014. Calfrac pays a quarterly dividend to shareholders at the discretion of the Board of Directors. On June 17, 2015, the Company reduced its quarterly dividend from $0.125 to $0.0625 per share, beginning with the dividend paid on July 15, 2015. For Canadian income tax purposes, all dividends paid by Calfrac on its common shares are designated as "eligible dividends" unless otherwise indicated.


INVESTING ACTIVITIES
Calfrac's net cash used for investing activities was $42.4 million for the quarter ended June 30, 2015 versus $42.2 million for the comparable period in 2014. Cash outflows relating to capital expenditures were $45.0 million during 2015 compared to $42.5 million in 2014. Capital expenditures were primarily to support the Company's Canadian, United States and Argentinean fracturing operations.

Calfrac's 2015 capital program of $227.0 million includes carryover from 2014 of approximately $175.0 million. The Company's 2015 capital budget of $52.0 million will be used for sustaining, infrastructure and maintenance initiatives.

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during the second quarter of 2015 was a loss of $5.4 million versus $7.4 million during 2014. These losses relate to cash and cash equivalents held by the Company in a foreign currency.

With its strong working capital position, available credit facilities and anticipated funds provided by operations, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for 2015 and beyond.

At June 30, 2015, the Company had cash and cash equivalents of $65.9 million.

OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan is equal to 10 percent of the Company's issued and outstanding common shares. As at July 24, 2015, there were 96,087,123 common shares issued and outstanding, and 5,543,874 options to purchase common shares.

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

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

In particular, forward-looking statements in this press release include, but are not limited to, statements with respect to expected operating strategies and targets, capital expenditure programs, future financial resources, anticipated equipment utilization levels, future oil and natural gas well activity in each of the Company's operating jurisdictions, results of acquisitions, the impact of environmental regulations and economic reforms and sanctions on the Company's business, future costs or potential liabilities, projections of market prices and costs, supply and demand for oilfield services, expectations regarding the Company's ability to maintain its competitive position, anticipated benefits of the Company's competitive position, expectations regarding the Company's 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 the cost reduction measures instituted by the Company in response to the significant decrease in commodity prices and expected oilfield activity in 2015, the effect unconventional gas projects have had on supply and demand fundamentals for natural gas and the likelihood that the current tax and regulatory regime will remain substantially unchanged.

Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from the Company's expectations. Such risk factors include: general economic conditions in Canada, the United States, Russia, Mexico, Argentina and Colombia; the demand for fracturing and other stimulation services during drilling and completion of oil and natural gas wells; volatility in market prices for oil and natural gas and the effect of this volatility on the demand for oilfield services generally; regional competition; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; changes in legislation and the regulatory environment; sourcing, pricing and availability of raw materials, 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
Operating Income in this press release does not have any standardized meaning as prescribed under IFRS and is therefore considered a non-GAAP measure. This measure may not be comparable to similar measures presented by other entities. This measure has been described and presented in this press release in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and its ability to generate funds to finance its operations. Management's use of Operating Income has been disclosed further in this press release as where it is discussed and presented.

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

SECOND QUARTER CONFERENCE CALL
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2015 second quarter results at 10:00 a.m. (Mountain Time) on Wednesday, July 29, 2015. 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 68635238). A webcast of the conference call may be accessed via the Company's website atwww.calfrac.com.

CONSOLIDATED BALANCE SHEETS


 June 30,

 December 31,

As at

2015

2014

(C$000s)

($)

($)

(unaudited)



 

ASSETS



Current assets




Cash and cash equivalents

65,856

99,129


Accounts receivable

268,129

521,137


Inventories

171,623

182,161


Prepaid expenses and deposits

18,803

16,871


524,411

819,298

Non-current assets




Property, plant and equipment

1,379,722

1,302,939


Goodwill

9,544

9,544


Deferred income tax assets

30,472

25,586

Total assets

1,944,149

2,157,367




LIABILITIES AND EQUITY



Current liabilities




Accounts payable and accrued liabilities

155,454

356,933


Income taxes payable

3,121

3,856


Bank loans (note 3)

24,216

16,388


Current portion of long-term debt (note 4)

468

429


Current portion of finance lease obligations (note 5)

513

458


183,772

378,064

Non-current liabilities




Long-term debt (note 4)

795,358

738,386


Finance lease obligations (note 5)

793

1,048


Other long-term liabilities

4,371

4,060


Deferred income tax liabilities

184,209

203,406

Total liabilities

1,168,503

1,324,964

Equity attributable to the shareholders of Calfrac



Capital stock (note 6)

386,662

377,975

Contributed surplus (note 8)

26,208

24,767

Loan receivable for purchase of common shares (note 13)

(2,500)

(2,500)

Retained earnings

382,755

459,891

Accumulated other comprehensive loss

(15,639)

(26,757)


777,486

833,376

Non-controlling interest

(1,840)

(973)

Total equity

775,646

832,403

Total liabilities and equity

1,944,149

2,157,367

See accompanying notes to the consolidated financial statements.


 

CONSOLIDATED STATEMENTS OF OPERATIONS


Three Months Ended June 30,

 Six Months Ended June 30,


2015

2014

2015

2014

(C$000s, except per share data)

($)

($)

($)

($)

(unaudited)





Revenue

319,553

502,957

919,936

1,050,595

Cost of sales (note 14)

347,375

462,174

934,720

950,091

Gross profit

(27,822)

40,783

(14,784)

100,504

Expenses






Selling, general and administrative

18,694

30,372

41,302

59,497


Foreign exchange losses

922

4,936

1,677

7,778


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

(412)

(117)

(1,143)

723


Interest 

16,323

14,470

32,806

29,384


35,527

49,661

74,642

97,382

Income (loss) before income tax

(63,349)

(8,878)

(89,426)

3,122

Income tax expense (recovery)






Current

514

2,751

1,886

3,406


Deferred

(20,058)

1,219

(34,567)

3,144


(19,544)

3,970

(32,681)

6,550

Net loss  

(43,805)

(12,848)

(56,745)

(3,428)






Net income (loss) attributable to:






Shareholders of Calfrac

(43,277)

(12,905)

(55,905)

(3,959)


Non-controlling interest

(528)

57

(840)

531



(43,805)

(12,848)

(56,745)

(3,428)

Earnings (loss) per share (note 6)






Basic

(0.45)

(0.14)

(0.59)

(0.04)


Diluted

(0.45)

(0.14)

(0.59)

(0.04)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


Three Months Ended June 30,  

Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)

(unaudited)

($)

($)

($)

($)

Net loss

Other comprehensive income (loss)

(43,805)

(12,848)

(56,745)

(3,428)

Items that may be subsequently reclassified to profit or loss:






Change in foreign currency translation adjustment

391

1,489

11,091

(1,606)

Comprehensive loss

(43,414)

(11,359)

(45,654)

(5,034)

 

Comprehensive income (loss) attributable to:






Shareholders of Calfrac

(42,876)

(11,416)

(44,787)

(5,641)


Non-controlling interest

(538)

57

(867)

607


(43,414)

(11,359)

(45,654)

(5,034)

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
Commo
n
Shares

Accumulated

 Other

 Comprehensive

 Income (Loss)

 

Retained

Earnings

 

 

Total

 

Non-

 Controlling

 Interest

 

Total

Equity

(C$000s)

($)

($)

($)

($)

($)

($)

($)

($)

(unaudited)









Balance – January 1, 2015

377,975

24,767

(2,500)

(26,757)

459,891

833,376

(973)

832,403

Net loss

(55,905)

(55,905)

(840)

(56,745)

Other comprehensive income

(loss):










Cumulative translation adjustment

11,118

11,118

(27)

11,091

Comprehensive income (loss)

11,118

(55,905)

(44,787)

(867)

(45,654)

Stock options:










Stock-based compensation recognized

1,441

1,441

1,441

Dividend Reinvestment Plan shares issued (note 19)

11,233

11,233

11,233

Dividends

(18,257)

(18,257)

(18,257)

Shares purchased under NCIB (note 7)

(2,546)

(2,974)

(5,520)

(5,520)

Balance – June 30, 2015

386,662

26,208

(2,500)

(15,639)

382,755

777,486

(1,840)

775,646

Balance – January 1, 2014

332,287

27,658

(2,500)

(839)

440,179

796,785

(1,578)

795,207

Net income (loss)

(3,959)

(3,959)

531

(3,428)

Other comprehensive income

(loss):










Cumulative translation adjustment

(1,682)

(1,682)

76

(1,606)

Comprehensive income (loss)

(1,682)

(3,959)

(5,641)

607

(5,034)

Stock options:










Stock-based compensation recognized

1,787

1,787

1,787


Proceeds from issuance of shares

23,940

(6,106)

17,834

17,834

Dividend Reinvestment Plan shares issued (note 19)

8,326

8,326

8,326

Dividends

(23,505)

(23,505)

(23,505)

Balance – June 30, 2014

364,553

23,339

(2,500)

(2,521)

412,715

795,586

(971)

794,615

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS


Three Months Ended June 30,

Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)

(unaudited)

($)

($)

($)

($)






CASH FLOWS PROVIDED BY (USED IN)










OPERATING ACTIVITIES






Net loss

(43,805)

(12,848)

(56,745)

(3,428)


Adjusted for the following:







Depreciation

39,494

34,422

76,908

67,943



Stock-based compensation

657

698

1,441

1,787



Unrealized foreign exchange losses

3,720

3,530

1,145

8,825



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

(412)

(117)

(1,143)

723



Interest

16,323

14,470

32,806

29,384



Deferred income taxes

(20,058)

1,219

(34,567)

3,144


Interest paid

(30,135)

(26,296)

(31,608)

(28,175)


Changes in items of working capital (note 11)

101,297

12,244

69,078

(33,102)

Cash flows provided by operating activities

67,081

27,322

57,315

47,101

FINANCING ACTIVITIES






Bank loan proceeds

5,471

3,795

13,769

8,013


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

(554)

24,456

(533)

24,456


Bank loan repayments

(2,733)

(3,630)

(5,935)

(9,951)


Long-term debt repayments

(113)

(16,111)

(265)

(27,275)


Finance lease obligation repayments

(114)

(225)


Shares purchased under NCIB (note 7)

(5,520)


Net proceeds on issuance of common shares

9,072

17,834


Dividends paid, net of DRIP (note 19)

(6,545)

(7,594)

(12,864)

(14,948)

Cash flows (used in) provided by financing activities

(4,588)

9,988

(11,573)

(1,871)






INVESTING ACTIVITIES






Purchase of property, plant and equipment (note 11)  

(44,994)

(42,471)

(106,652)

(67,396)


Proceeds on disposal of property, plant and equipment

2,615

311

10,130

606

Cash flows used in investing activities

(42,379)

(42,160)

(96,522)

(66,790)

Effect of exchange rate changes on cash and cash equivalents

(5,357)

(7,384)

17,507

(7,869)

Increase (decrease) in cash and cash equivalents

14,757

(12,234)

(33,273)

(29,429)

Cash and cash equivalents, beginning of period

51,099

25,000

99,129

42,195

Cash and cash equivalents, end of period

65,856

12,766

65,856

12,766

See accompanying notes to the consolidated financial statements.





 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

As at and for the three and six months ended June 30, 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, Argentina and Colombia.

These condensed consolidated interim financial statements were prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting using accounting policies consistent 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). They should be read in conjunction with the annual financial statements for the year ended December 31, 2014. The Company has consistently applied the same accounting policies throughout all periods presented, as if these policies were always in effect.

These financial statements were approved by the Audit Committee of the Board of Directors for issuance on July 28, 2015.

2.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

3.        BANK LOANS

The Company's Argentinean subsidiary has two operating lines of credit, and a total of ARS176,200 ($24,216) was drawn at June 30, 2015 (December 31, 2014 - ARS120,792 ($16,388)). The interest rate ranges from 24.0 percent to 48.0 percent per annum and both lines of credit are secured by letters of credit issued by the Company.

4.        LONG-TERM DEBT

As at

    June 30, 2015

   December 31, 2014

(C$000s)  

($)

($)




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

749,400

696,060

Less: unamortized debt issuance costs and debt discount

(10,259)

(10,404)


739,141

685,656

$370,000 extendible revolving term loan facility, secured by Canadian and U.S. assets of the Company

 

56,830

 

52,785

Less: unamortized debt issuance costs

(1,500)

(1,133)


55,330

51,652

US$1,085 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

 

 

1,355

 

 

1,507


795,826

738,815

Less: current portion of long-term debt

(468)

(429)


795,358

738,386

 

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at June 30, 2015, was $691,996 (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 $370,000 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 2.25 percent. For LIBOR-based loans and bankers' acceptance-based loans the margin thereon ranges from 1.50 percent to 3.25 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 six months ended June 30, 2015 was $30,771 (six months ended June 30, 2014 - $26,523).

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.

On January 29, 2015, the Company exercised an "accordion" feature contained in the terms of its loan facility and increased the facility from $300,000 to $400,000. The facility's terms and conditions remain unchanged.

At June 30, 2015, the Company had utilized $37,439 of its loan facility for letters of credit and had $56,830 outstanding under its revolving term loan facility, leaving $305,731 in available credit.

5.        FINANCE LEASE OBLIGATIONS

As at

June 30,
2015

December 31,
2014

(C$000s)

($)

($)

Finance lease contracts bearing interest at 20.5%, repayable at ARS445 per month, secured by equipment under the lease

1,637

1,978

Less: interest portion of contractual payments

(331)

(472)


1,306

1,506

Less: current portion of finance lease obligations

(513)

(458)


793

1,048

 

 

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

6.         CAPITAL STOCK

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


Six Months Ended
June 30, 2015

Year Ended
December 31, 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 19)

1,254,830

11,233

1,123,296

18,011

Shares purchased under NCIB (note 7)

(639,800)

(2,546)

Shares cancelled (note 8)

(6)

(5,660)

(45)

Balance, end of period

95,867,583

386,662

95,252,559

377,975

 

The weighted average number of common shares outstanding for the three months ended June 30, 2015 was 95,602,258 basic and 95,771,458 diluted (three months ended June 30, 2014 - 93,946,458 basic and 94,894,078 diluted). The weighted average number of common shares outstanding for the six months ended June 30, 2015 was 95,417,405 basic and 95,586,605 diluted (six months ended June 30, 2014 - 93,439,536 basic and 94,254,620 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 9.

On May 8, 2014, the Company's shareholders approved a split of its common shares on a two-for-one basis to all shareholders of record as of May 23, 2014. The weighted average numbers of shares, stock options and share-based plans (such as restricted share units, deferred share units and performance share units) for all periods presented have been adjusted for this two-for-one share split, without a corresponding change in dollar amounts. Earnings per share have been adjusted to reflect the impact of the two-for-one share split.

7.        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 six months ended June 30, 2015, 639,800 common shares were purchased at a cost of $5,520 and, of the amount paid, $2,546 was charged to capital stock and $2,974 to retained earnings. These common shares were cancelled prior to June 30, 2015 (six months ended June 30, 2014 - $nil).

8.        CONTRIBUTED SURPLUS

 

 

Continuity of Contributed Surplus

Six Months Ended

June 30, 2015

Year Ended

December 31, 2014

(C$000s)

($)

($)

Balance, beginning of period

24,767

27,658

Stock options expensed

1,441

4,138

Stock options exercised

(7,095)

Shares cancelled

66

Balance, end of period

26,208

24,767

 

On June 16, 2015, six 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 twenty-four 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.

9.        STOCK-BASED COMPENSATION

(a)  Stock Options

Six Months Ended June 30,

2015

2014

Continuity of Stock Options

Options

Average
Exercise
Price

Options

Average
Exercise
Price


(#)

(C$)

(#)

(C$)

 

Balance, January 1

 

4,269,050

 

14.76

 

5,002,750

 

13.99


Granted during the period

1,585,150

9.80

1,231,800

15.72


Exercised for common shares

(1,320,900)

13.50


Forfeited

(331,376)

13.70

(319,950)

14.52


Expired

(45,000)

10.85


Balance, June 30

5,477,824

13.42

4,593,700

14.56

 

Stock options vest equally over four years and expire five years from the date of grant. The exercise price of outstanding options ranges from $8.37 to $20.81 with a weighted average remaining life of 2.78 years. When stock options are exercised, the proceeds together with the compensation expense previously recorded in contributed surplus, are added to capital stock.

For the six months ended June 30, 2015, $1,441 of compensation expense was recognized for stock options (six months ended June 30, 2014 - $1,787) and was included in selling, general and administrative expenses.

(b)  Share Units

Six Months Ended June 30,

2015

2014

Continuity of Stock Units

Deferred
Share Units

Performance
Share Units

Restricted
Share Units

Deferred
Share Units

Performance
Share Units

Restricted
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

958,507

70,000

120,000

774,900


Exercised

(70,000)

(60,000)

(614,464)

(70,000)

(90,000)

(391,014)


Forfeited

(109,241)

(62,110)

Balance, June 30

72,500

238,995

1,581,444

70,000

120,000

1,349,366

 

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. During the six months ended June 30, 2015, $248 of compensation expense was recognized for deferred share units (six months ended June 30, 2014 - $702). This amount is included in selling, general and administrative expenses. At June 30, 2015, the liability pertaining to deferred share units was $279 (December 31, 2014 - $701).

The Company grants performance share units to a senior officer who does not participate in the stock option plan. The amount of the grants earned is linked to corporate performance and the grants vest on the approval of the Board of Directors at the meeting held to approve the consolidated financial statements for the year in respect of which performance is being evaluated. As with the deferred share units, performance share units are settled either in cash or Company shares purchased on the open market. During the six months ended June 30, 2015, $389 of compensation expense was recognized for performance share units (six months ended June 30, 2014 - $1,091). This amount is included in selling, general and administrative expenses. At June 30, 2015, the liability pertaining to performance share units was $730 (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. During the six months ended June 30, 2015, ($508) of compensation expense was recognized for restricted share units (six months ended June 30, 2014 - $8,009). This amount is included in selling, general and administrative expenses. At June 30, 2015, the liability pertaining to restricted share units was $3,202 (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.

10.      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 these financial instruments, 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 June 30, 2015 was $691,996 before deduction of unamortized debt issuance costs (December 31, 2014 - $595,131). The carrying value of the senior unsecured notes at June 30, 2015 was $749,400 before deduction of unamortized debt issuance costs and debt discount (December 31, 2014 - $696,060). The fair values of the remaining long-term debt and finance lease obligations approximate their carrying values, as described in notes 4 and 5.

11.      SUPPLEMENTAL CASH FLOW INFORMATION

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



Three Months Ended June 30,

Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Accounts receivable

171,437

47,538

253,008

1,310

Inventory

19,552

(11,738)

10,538

(13,780)

Prepaid expenses and deposits

1,521

(3,480)

(1,931)

(1,908)

Accounts payable and accrued liabilities

(88,155)

(21,787)

(192,113)

(20,018)

Income taxes payable

(2,996)

1,766

(735)

1,404

Other long-term liabilities

(62)

(55)

311

(110)


101,297

12,244

69,078

(33,102)






 

Purchase of property, plant and equipment is comprised of:






Three Months Ended June 30,

Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Property, plant and equipment additions

(50,356)

(35,585)

(103,025)

(62,916)

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

5,362

(6,886)

(3,627)

(4,480)


(44,994)

(42,471)

(106,652)

(67,396)

 

12.      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

June 30,

2015

December 31,

2014

(C$000s)

($)

($)

Net income

14,185

67,502

Adjusted for the following:




Depreciation

148,360

139,395


Foreign exchange losses

24,066

30,167


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

(289)

1,577


Interest

63,006

59,584


Provision for settlement of litigation (note 16)

4,640

4,640


Impairment of property, plant and equipment

4,620

4,620


Impairment of goodwill

979

979


Income taxes

9,515

48,746

Operating income

269,082

357,210




 

Net debt for this purpose is calculated as follows:




June 30,

2015

December 31,

2014

(C$000s)

($)

($)

Long-term debt, net of debt issuance costs and debt discount (note 4)

795,826

738,815

Bank loans (note 3)

24,216

16,388

Finance lease obligation (note 5)

1,306

1,506

Less: cash and cash equivalents

(65,856)

(99,129)

Net debt

755,492

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 June 30, 2015, the net debt to operating income ratio was 2.81:1 (December 31, 2014 - 1.84:1) calculated on a 12- month trailing basis as follows:

 

For The Twelve Months Ended

June 30,

2015

December 31,

2014

(C$000s, except ratio)

($)

($)

Net debt

755,492

657,580

Operating income

269,082

357,210

Net debt to operating income ratio

2.81:1

1.84:1

 

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

The Company's capital management objectives and targets remain unchanged from prior periods. However, the evaluation measure was changed from prior periods as the net debt to operating income ratio was adopted in the third quarter of 2014.

13.      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 $1,305 as at June 30, 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 six months ended June 30, 2015 was $449 (six months ended June 30, 2014 - $404), as measured at the exchange amount.

14.      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 June 30,

Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)



($)

($)

Product costs

118,534

147,723

327,533

315,203

Depreciation

39,494

34,422

76,908

67,943

Amortization of debt issuance costs and debt discount

556

510

1,098

1,020

Employee benefits expense (note 15)

89,521

126,876

234,699

246,797

 

15.       EMPLOYEE BENEFITS EXPENSE

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


Three Months Ended June 30,

Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)



($)

($)

Salaries and short-term employee benefits 

88,077

119,173

230,898

231,610

Post-employment benefits (group retirement savingsplan) 

869

1,326

2,185

2,430

Share-based payments

706

5,949

1,570

11,589

Termination benefits

(131)

428

46

1,168


89,521

126,876

234,699

246,797

 

16.      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 $9,534 (6,846 euros) plus interest were due to the former employees. This decision was appealed to the Athens Court of Appeal, which allowed the appeal in 2001 and annulled the above-mentioned decision of the Athens Court of First Instance. The said group of former employees filed an appeal with the Supreme Court of Greece, which was heard on May 29, 2007. The Supreme Court of Greece allowed the appeal and sent the matter back to the Athens Court of Appeal for the consideration of the quantum of awardable salaries in arrears. On June 3, 2008, the Athens Court of Appeal rejected NAPC's appeal and reinstated the award of the Athens Court of First Instance, which decision was further appealed to the Supreme Court of Greece. The matter was heard on April 20, 2010 and a decision rejecting such appeal was rendered in June 2010. As a result of Denison's participation in the consortium that was named in the lawsuit, the Company was served with a payment order on March 24, 2015 relating to approximately $6,833 (4,907 euros) of the salaries in arrears noted above, together with associated interest of approximately $12,067 (8,665 euros). An opposition brief was filed on behalf of the Company on April 16, 2015 which opposes the payment order on the basis that it was improperly issued and is barred from a statute of limitations perspective. A hearing in respect of the Company's application is scheduled for November 24, 2015.

NAPC is also the subject of a claim for approximately $3,986 (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 $22,956 (16,484 euros) as at June 30, 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.

No motion for final class certification as to the FLSA claim or motion for certification of the Pennsylvania or Colorado state law claims was filed, and thus no FLSA, Pennsylvania or Colorado class was certified. The Company and the plaintiffs have reached a tentative settlement of all claims, including certain potential, related claims, that is subject to court approval. 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. The US $4,000 provision recorded by the Company represents its current best estimate of the projected net cost of the settlement. The Company does not have insurance coverage for these claims.

17.      SEGMENTED INFORMATION

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

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



 

Canada

United

States

 

Russia

Latin

America

 

Corporate

 

Consolidated

(C$000s)

($)

($)

($)

($)

($)

($)

Three Months Ended

June 30, 2015







Revenue

66,894

172,523

38,863

41,273

319,553

Operating income (loss)(1)

(6,324)

(673)

4,716

4,106

(8,847)

(7,022)

Segmented assets

640,653

962,588

117,808

223,100

1,944,149

Capital expenditures

12,335

18,049

812

19,160

50,356

Goodwill

7,236

2,308

9,544

 

Three Months Ended

June 30, 2014







Revenue

96,213

315,971

51,209

39,564

502,957

Operating income (loss)(1)

(9,322)

58,714

7,222

3,764

(15,545)

44,833

Segmented assets

631,664

866,514

167,000

177,939

1,843,117

Capital expenditures

(3,528)

33,199

2,957

2,684

35,312

Goodwill

7,236

2,308

979

10,523

 

Six Months Ended







June 30, 2015







Revenue

288,292

477,602

69,361

84,681

919,936

Operating income (loss)(1)

14,133

10,678

6,178

8,499

(18,666)

20,822

Segmented assets

640,653

962,588

117,808

223,100

1,944,149

Capital expenditures

22,910

48,343

1,318

30,454

103,025

Goodwill

7,236

2,308

9,544

 

Six Months Ended







June 30, 2014







Revenue

363,887

527,010

90,123

69,575

1,050,595

Operating income (loss)(1)

43,157

80,391

8,039

9,656

(32,293)

108,950

Segmented assets

631,664

866,514

167,000

177,939

1,843,117

Capital expenditures

10,169

40,217

6,600

5,657

62,643

Goodwill

7,236

2,308

979

10,523

(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, interest, and income taxes.

 


Three Months Ended June 30,

Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Net loss

(43,805)

(12,848)

(56,745)

(3,428)

Add back (deduct):






Depreciation

39,494

34,422

76,908

67,943


Foreign exchange losses

922

4,936

1,677

7,778


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

(412)

(117)

(1,143)

723


Interest

16,323

14,470

32,806

29,384


Income taxes

(19,544)

3,970

(32,681)

6,550

Operating income (loss)

(7,022)

44,833

20,822

108,950

 

Operating income (loss) 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 June 30,

Six Months Ended June 30,


2015

2014

2015

2014

(C$000s)

($)

($)

($)

($)

Fracturing

279,498

457,942

836,184

961,760

Coiled tubing

20,637

21,449

43,151

47,922

Cementing

16,949

20,662

34,211

36,419

Other

2,469

2,904

6,390

4,494


319,553

502,957

919,936

1,050,595

 

18.      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.

19.      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 $0.0625 per common share, totaling $6,066, was declared on June 17, 2015, to be paid on July 15, 2015. This amount has been accrued in the financial statements.

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.

SOURCE Calfrac Well Services Ltd.

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

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