Calfrac Announces Second Quarter Results

CALGARY, July 28, 2016 /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, 2016.

HIGHLIGHTS



Three months ended June 30,


Six months ended June 30,


2016


2015


Change


2016


2015


Change

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

($)


($)


(%)


($)


($)


(%)

(unaudited)







Financial







Revenue

150,605


319,553


(53)


366,743


919,936


(60)

Operating income(1)

(15,898)


(7,022)


NM


(27,521)


20,822


NM


Per share – basic

(0.14)


(0.07)


100


(0.24)


0.22


NM


Per share – diluted

(0.14)


(0.07)


100


(0.24)


0.22


NM

Adjusted EBITDA(1)

(14,095)


(3,696)


NM


(19,978)


21,913


NM


Per share – basic

(0.12)


(0.04)


NM


(0.17)


0.23


NM


Per share – diluted

(0.12)


(0.04)


NM


(0.17)


0.23


NM

Net income (loss) attributable to the

shareholders of Calfrac before foreign

exchange gains or losses(2)

(40,926)


(43,040)


(5)


(81,437)


(56,488)


44


Per share – basic

(0.35)


(0.45)


(22)


(0.71)


(0.59)


20


Per share – diluted

(0.35)


(0.45)


(22)


(0.71)


(0.59)


20

Net income (loss) attributable to the

shareholders of Calfrac

(41,671)


(43,277)


(4)


(95,742)


(55,905)


71


Per share – basic

(0.36)


(0.45)


(20)


(0.83)


(0.59)


41


Per share – diluted

(0.36)


(0.45)


(20)


(0.83)


(0.59)


41

Working capital (end of period)

306,346


340,639


(10)


306,346


340,639


(10)

Total equity (end of period)

543,530


775,646


(30)


543,530


775,646


(30)

Weighted average common shares

outstanding (000s)








Basic

115,410


95,602


21


115,410


95,417


21


Diluted

115,621


95,771


21


115,580


95,587


21

Operating (end of period)







Active pumping horsepower (000s)

582


804


(28)


582


804


(28)

Idle pumping horsepower (000s)

640


455


41


640


455


41

Total pumping horsepower (000s)(3)

1,222


1,259


(3)


1,222


1,259


(3)

Active coiled tubing units (#)

19


20


(5)


19


20


(5)

Idle coiled tubing units (#)

13


17


(24)


13


17


(24)

Total coiled tubing units (#)

32


37


(14)


32


37


(14)

Active cementing units (#)

14


26


(46)


14


26


(46)

Idle cementing units (#)

11


5


NM


11


5


NM

Total cementing units (#)

25


31


(19)


25


31


(19)

(1) 

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

(2) 

Net income (loss) attributable to the shareholders of Calfrac before foreign exchange (FX) gains or losses is 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.

(3) 

Excludes 80,000 pumping horsepower that has not been commissioned at June 30, 2016 (June 30, 2015 - nil).



SECOND QUARTER 2016 OVERVIEW

CONSOLIDATED HIGHLIGHTS

Three months ended June 30,

2016


2015


Change

(C$000s, except operational information)

($)


($)


(%)

(unaudited)






Revenue

150,605


319,553


(53)

Expenses







Operating

144,716


307,880


(53)


Selling, general and administrative (SG&A)

21,787


18,695


17


166,503


326,575


(49)

Operating (loss) income(1)

(15,898)


(7,022)


NM

Operating (loss) income (%)

(10.6)


(2.2)


NM

Adjusted EBITDA(1)

(14,095)


(3,696)


NM

Adjusted EBITDA (%)

(9.4)


(1.2)


NM

Fracturing revenue per job ($)

34,088


48,949


(30)

Number of fracturing jobs

3,610


5,710


(37)

Active pumping horsepower, end of period (000s)

582


804


(28)

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

640


455


41

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

1,222


1,259


(3)

Coiled tubing revenue per job ($)

33,873


44,097


(23)

Number of coiled tubing jobs

454


468


(3)

Active coiled tubing units, end of period (#)

19


20


(5)

Idle coiled tubing units, end of period (#)

13


17


(24)

Total coiled tubing units, end of period (#)

32


37


(14)

Cementing revenue per job ($)

40,782


44,137


(8)

Number of cementing jobs

204


384


(47)

Active cementing units, end of period (#)

14


26


(46)

Idle cementing units, end of period (#)

11


5


NM

Total cementing units, end of period (#)

25


31


(19)

(1) 

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

(2) 

Excludes 80,000 pumping horsepower that has not been commissioned at June 30, 2016
(June 30, 2015 - nil).



Revenue in the second quarter of 2016 was $150.6 million, a decrease of 53 percent from the same period in 2015. The Company's fracturing job count decreased by 37 percent mainly due to lower activity in Canada and the United States. Consolidated revenue per fracturing job decreased by 30 percent primarily due to job mix and lower pricing in Canada and the United States, partially offset by the appreciation of the U.S. dollar. Coiled tubing revenue per job decreased by 23 percent primarily due to the impact of job mix, combined with revenue adjustments in Argentina related to foreign exchange and inflation. Cementing revenue per job decreased by 8 percent due to the closure of cementing operations in the United States, which included larger jobs in the comparative quarter in 2015.

Pricing in Canada decreased on average by 30 percent and in the United States it declined on average by 40 percent in the second quarter of 2016 from the second quarter of 2015. In Argentina and Russia, pricing was consistent with the second quarter of 2015 while pricing in Mexico was modestly lower than the comparable period in 2015.

Adjusted EBITDA for the second quarter of 2016 was negative $14.1 million compared to negative $3.7 million in the comparable period in 2015 due to significantly lower utilization and pricing in the United States and Canada combined with a $4.9 million provision for bad debt expense, and lower utilization in Argentina. The reduction in Adjusted EBITDA was partially offset by continued cost reduction initiatives since the end of the second quarter of 2015.

Net loss attributable to shareholders of Calfrac was $41.7 million or $0.36 per share diluted, compared to a net loss of $43.3 million or $0.45 per share diluted in the same period last year.

Three Months Ended

June 30,


March 31,


Change


2016


2016



(C$000s, except operational information)

($)


($)


(%)

(unaudited)






Revenue

150,605


216,138


(30)

Expenses







Operating

144,716


211,096


(31)


SG&A

21,787


16,665


31


166,503


227,761


(27)

Operating (loss) income(1)

(15,898)


(11,623)


37

Operating (loss) income (%)

(10.6)


(5.4)


96

Adjusted EBITDA(1)

(14,095)


(5,883)


NM

Adjusted EBITDA (%)

(9.4)


(2.7)


NM

Fracturing revenue per job ($)

34,088


32,876


4

Number of fracturing jobs

3,610


5,536


(35)

Active pumping horsepower, end of period (000s)

582


640


(9)

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

640


586


9

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

1,222


1,226


Coiled tubing revenue per job ($)

33,873


37,365


(9)

Number of coiled tubing jobs

454


505


(10)

Active coiled tubing units, end of period (#)

19


18


6

Idle coiled tubing units, end of period (#)

13


14


(7)

Total coiled tubing units, end of period (#)

32


32


Cementing revenue per job ($)

40,782


48,641


(16)

Number of cementing jobs

204


207


(1)

Active cementing units, end of period (#)

14


14


Idle cementing units, end of period (#)

11


11


Total cementing units, end of period (#)

25


25


(1) 

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

(2) 

Excludes 80,000 pumping horsepower that has not been commissioned at June 30, 2016
(March 31, 2016 - 60,000)



Revenue in the second quarter of 2016 was $150.6 million, a decrease of 30 percent from the first quarter of 2016 primarily due to significantly lower activity in Canada and the United States. Revenue per fracturing job increased by 4 percent due to a change in job mix in Canada and the United States offset partially by lower pricing in Canada and the appreciation of the U.S. dollar. Adjusted EBITDA as a percentage of revenue decreased by 670 basis points primarily due to a $4.9 million provision for bad debt expense recorded in SG&A during the second quarter, combined with lower activity and pricing in Canada due to spring break-up.

Pricing in Canada was approximately 10 percent lower compared to the first quarter of 2016 as spring break-up put further downward pressure on pricing. In the United States, pricing decreased by approximately 5 percent compared to the first quarter of 2016. Pricing in Argentina and Russia was consistent with the previous quarter.

In Canada, revenue decreased by 38 percent to $45.4 million in the second quarter of 2016 due to lower fracturing and coiled tubing activity, as well as lower pricing offset partially by the completion of larger jobs. The operating loss as a percentage of revenue was 10 percent, which was down from near break-even in the first quarter due to lower activity and pricing.

In the United States, revenue in the second quarter of 2016 declined by 37 percent from the first quarter of 2016 to $48.1 million, mainly as a result of lower fracturing activity and job mix. The decline in reported revenue was also due to the weakening of the U.S. dollar. The operating loss as a percentage of revenue decreased from 16 percent in the first quarter of 2016 to 2 percent in the second quarter. The prior quarter included $3.1 million of restructuring costs while the current quarter included a provision for bad debt expense of $0.3 million. The improvement in sequential results was driven by the decision to temporarily close its operations in south Texas, which were operating at unprofitable levels.

In Russia, revenue of $22.4 million in the second quarter of 2016 was was consistent with the first quarter of 2016. Operating income as a percentage of revenue improved by 980 basis points to 13 percent primarily due to higher utilization, lower operating expenses, including significantly lower fuel costs, and the strengthening of the rouble during the quarter.

In Latin America, revenue declined 22 percent to $34.7 million. The decrease was primarily due to lower fracturing and cementing activity in Argentina. Operating income as a percentage of revenue decreased from 15 percent in the first quarter to negative 13 percent in the second quarter of 2016 due to lower activity caused by union strikes in Argentina combined with adverse weather conditions in the Neuquén region. In addition, the Company recorded a bad debt provision of $4.6 million during the second quarter relating to work performed for a customer in Mexico.

OUTLOOK
Although the Company is encouraged that North American activity appears to be increasing slightly with the land-rig count in the United States up from the lows recorded in May and Canadian activity levels improving post spring break-up, Calfrac expects that the second half of 2016 will remain fairly weak. The Company believes that crude oil prices will have to show stability above US$50 per barrel in order to realize a modest increase in activity. The Company is optimistic that 2017 activity will improve year-over-year, but visibility remains uncertain at this time.

CANADA
Calfrac believes that completion activity in the third quarter will be significantly lower than the same period last year, but that utilization of its active fleets will be relatively strong throughout the quarter. However, pricing continues to be very low with current pricing down approximately 10 percent from the first quarter as a result of very strong competitive pricing pressures. Visibility remains limited past the end of the third quarter, but at this time, the Company does not expect activity to lead to the reactivation of any idled equipment for the remainder of 2016. As such, operating results for the second half of the year are not expected to improve meaningfully.

UNITED STATES
Although the United States land-based drilling rig count appears to have reached a historic low in the second quarter and is now trending higher, activity remains extremely low. In the second quarter, Calfrac temporarily suspended its fracturing operations in North Dakota and idled an additional fleet in Pennsylvania leaving only approximately 30 percent of its fleet currently active. Consequently, revenue in the third quarter is expected to decrease sequentially given the smaller active fleet and anticipated uneven activity levels throughout the quarter. Pricing has remained relatively stable since the first quarter of 2016 and while Calfrac expects it to be fairly consistent with current levels through the end of the year, further pricing pressure could arise should competitors attempt to add market share ahead of a recovery. Calfrac remains focused on cost control and mitigating losses as it does not anticipate activity to increase significantly in 2016.

RUSSIA
Overall activity in Russia has been fairly consistent with last year aside from some weather and customer-related challenges which caused some delays in the first half of 2016. In the remainder of the year, Calfrac expects operating results, both in terms of revenue and operating income, to improve from second-quarter levels.

LATIN AMERICA
While not as severely impacted as North America, Argentina has not been immune to the challenging commodity price environment with the rig count down over 30 percent from the end of last year. In addition, select large multinational competitors have recently increased pricing pressure in an attempt to recover market share. Despite the challenging market conditions, Calfrac's activity in Argentina for the remainder of the year is expected to be relatively consistent with 2015, as higher activity with new customers in southern Argentina is expected to partially offset the decline in oil-focused activity in the Neuquén region. However, there is potential that new union strikes in southern Argentina could arise and cause further delays in the Company's customers' work programs over the next few months.

In Mexico, activity across all regions remains low due to the delay in Pemex's budget process. While activity levels are expected to modestly increase over the coming months, Calfrac's focus is to continue to proactively manage its cost structure to generate breakeven margins in Mexico.

SUMMARY
Throughout the current downturn, Calfrac has reshaped its short-to-medium term strategy to focus primarily on managing its cost structure, employing further process efficiencies, retaining as many of its best people as possible given expected activity levels, maintaining strong relationships with its existing customers and suppliers as well as expanding its customer base, all while ensuring the Company has sufficient liquidity to navigate the cyclical downturn.

The second lien term loan financing that was recently announced in June leaves Calfrac well-positioned to navigate this period of market weakness and capitalize on the opportunities that are expected to arise as market conditions recover. This financing was completed with a reasonable cost of capital, limited dilution and no maintenance covenants associated with the new term loan. Although Calfrac's leverage remains high, the Company will continue to evaluate all of the available alternatives to reduce its overall indebtedness in the future which are in the best interests of its key stakeholders.

FINANCIAL OVERVIEW – THREE MONTHS ENDED JUNE 30, 2016 VERSUS 2015

CANADA

Three Months Ended June 30,

2016


2015


Change

(C$000s, except operational information)

($)


($)


(%)

(unaudited)




Revenue

45,388


66,894


(32)

Expenses





Operating

48,334


70,802


(32)


Selling, general and administrative (SG&A)

1,737


2,416


(28)


50,071


73,218


(32)

Operating loss(1)

(4,683)


(6,324)


(26)

Operating loss (%)

(10.3)


(9.5)


8

Fracturing revenue per job ($)

31,402


32,140


(2)

Number of fracturing jobs

1,285


1,935


(34)

Active pumping horsepower, end of period (000s)

194


225


(14)

Idle pumping horsepower, end of period (000s)

216


177


22

Total pumping horsepower, end of period (000s)

410


402


2

Coiled tubing revenue per job ($)

23,315


23,173


1

Number of coiled tubing jobs

216


203


6

Active coiled tubing units, end of period (#)

6


6


Idle coiled tubing units, end of period (#)(2)

7


12


(42)

Total coiled tubing units, end of period (#)(2)

13


18


(28)

(1) 

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

(2) 

Reduction was the result of equipment that was identified as permanently impaired based on
the impairment provision at December 31, 2015.

 

REVENUE
Revenue from Calfrac's Canadian operations during the second quarter of 2016 was $45.4 million versus $66.9 million in the same period of 2015. The 32 percent decrease was primarily due to significantly lower activity and lower pricing for the Company's fracturing services. The number of fracturing jobs decreased by 34 percent while revenue per fracturing job decreased by 2 percent from the same period in the prior year as a result of significantly lower pricing, offset by a change in the mix of completion treatments and greater service intensity. The number of coiled tubing jobs increased by 6 percent from the second quarter in 2015 due to increased activity in the Montney shale gas play in northern Alberta partially offset by lower activity in the shallow oil plays of Saskatchewan and the shallow gas areas of southern Alberta.

OPERATING LOSS
The operating loss in Canada during the second quarter of 2016 was $4.7 million compared to $6.3 million in the same period of 2015. The Company partially mitigated the impact of lower activity and pricing through the implementation of several cost reduction initiatives. Operating costs were 32 percent lower than the comparable quarter of 2015 primarily due to the decline in activity combined with the impact of cost savings realized during the quarter, including the closure of its Medicine Hat operating district at the beginning of March 2016. SG&A expenses decreased by 28 percent year-over-year primarily due to workforce reductions that have totaled 17 percent since the end of the second quarter of 2015, combined with a lower compensation structure.

UNITED STATES

Three Months Ended June 30,

2016


2015


Change

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

($)


($)


(%)

(unaudited)




Revenue

48,053


172,523


(72)

Expenses





Operating

45,281


168,364


(73)


SG&A

3,594


4,832


(26)


48,875


173,196


(72)

Operating loss(1)

(822)


(673)


22

Operating loss (%)

(1.7)


(0.4)


NM

Fracturing revenue per job ($)

25,669


50,829


(49)

Number of fracturing jobs

1,872


3,219


(42)

Active pumping horsepower, end of period (000s)

187


410


(54)

Idle pumping horsepower, end of period (000s)

424


279


52

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

611


689


(11)

Coiled tubing revenue per job ($)


66,196


(100)

Number of coiled tubing jobs


21


(100)

Active coiled tubing units, end of period (#)



Idle coiled tubing units, end of period (#)

5


5


Total coiled tubing units, end of period (#)

5


5


Cementing revenue per job ($)


46,104


(100)

Number of cementing jobs


163


(100)

Active cementing units, end of period (#)


13


(100)

Idle cementing units, end of period (#)

11


5


NM

Total cementing units, end of period (#)(2)

11


18


(39)

US$/C$ average exchange rate(3)

1.2886


1.2294


5

(1) 

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

(2) 

Reduction was the result of equipment that was identified as permanently impaired based on the
impairment provision at December 31, 2015.

(3) 

Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's United States operations decreased to $48.1 million during the second quarter of 2016 from $172.5 million in the comparable quarter of 2015 due to significantly lower fracturing activity across most of the Company's operating regions, with the exception of Pennsylvania, as 42 percent fewer fracturing jobs were completed period-over-period. The Company made the decision to temporarily close its North Dakota operations during the second quarter of 2016. The Company also closed its operations in the Fayetteville shale gas play during the second quarter of 2015, temporarily closed its south Texas operations and suspended all remaining cementing operations during the first quarter of 2016, all of which contributed to the year-over-year decline in revenue. Revenue per job was 49 percent lower year-over-year due to significantly weaker pricing in all remaining operating regions combined with the completion of smaller jobs in the Marcellus shale gas play in Pennsylvania.

OPERATING LOSS
The Company's United States operations had an operating loss of $0.8 million during the second quarter of 2016 compared to a loss of $0.7 million in the same period in 2015. The second quarter loss, although consistent with the comparative quarter in 2015, was primarily due to significantly lower equipment utilization and pricing in all of the Company's operating regions. The Company's decision to temporarily close its south Texas operations during the first quarter resulted in a significantly lower operating loss in this district. SG&A expenses decreased by 26 percent in the second quarter of 2016 from the prior year primarily due to workforce reductions that have totaled 48 percent since the end of the second quarter of 2015, offset partially by a provision for bad debt expenses of $0.3 million that was recorded during the quarter.

RUSSIA

Three Months Ended June 30,

2016


2015


Change

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

($)


($)


(%)

(unaudited)




Revenue

22,433


38,863


(42)

Expenses





Operating

18,674


33,389


(44)


SG&A

749


758


(1)


19,423


34,147


(43)

Operating income(1)

3,010


4,716


(36)

Operating income (%)

13.4


12.1


11

Fracturing revenue per job ($)

66,594


89,421


(26)

Number of fracturing jobs

271


354


(23)

Pumping horsepower, end of period (000s)

70


70


Coiled tubing revenue per job ($)

36,251


54,607


(34)

Number of coiled tubing jobs

121


132


(8)

Active coiled tubing units, end of period (#)

6


7


(14)

Idle coiled tubing units, end of period (#)

1



NM

Total coiled tubing units, end of period (#)

7


7


Rouble/C$ average exchange rate(2)

0.0196


0.0234


(16)

(1) 

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

(2) 

Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's Russian operations decreased by 42 percent during the second quarter of 2016 to $22.4 million from $38.9 million in the corresponding three-month period of 2015. The decline in revenue was largely attributable to the loss of an annual fracturing contract with a significant customer to which the Company also supplied proppant and the 16 percent devaluation of the Russian rouble in the second quarter of 2016 as compared to the same quarter of 2015. The decline in revenue was partially offset by call out activity and activity with new customers. Overall, the Company experienced lower activity due to a reduction in the number of stages performed as a result of geological conditions and delays in transporting equipment from Komi Republic to Western Siberia. Revenue per fracturing job declined by 26 percent primarily due to the currency devaluation combined with the impact of no longer providing proppant to one of its customers.

OPERATING INCOME
Operating income in Russia was $3.0 million during the second quarter of 2016 compared to $4.7 million in the corresponding period of 2015 primarily due to lower fracturing and coiled tubing utilization combined with the 16 percent devaluation of the rouble. Operating income as a percentage of revenue was 13 percent compared to 12 percent in 2015 primarily due to a greater proportion of activity in Usinsk, which generated higher operating margins.

LATIN AMERICA

Three Months Ended June 30,

2016


2015


Change

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

($)


($)


(%)

(unaudited)




Revenue

34,731


41,273


(16)

Expenses





Operating

31,384


33,762


(7)


SG&A

7,756


3,405


NM


39,140


37,167


5

Operating (loss) income(1)

(4,409)


4,106


NM

Operating (loss) income (%)

(12.7)


9.9


NM

Pumping horsepower, end of period (000s)

131


98


34

Cementing units, end of period (#)

14


13


8

Coiled tubing units, end of period (#)

7


7


Mexican peso/C$ average exchange rate(2)

0.0712


0.0802


(11)

Argentinean peso/C$ average exchange rate(2)

0.0907


0.1374


(34)

(1) 

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

(2) 

Source: Bank of Canada.

 

REVENUE
Calfrac's Latin American operations generated total revenue of $34.7 million during the second quarter of 2016 versus $41.3 million in the comparable three-month period in 2015. Revenue in Argentina was $5.3 million lower than the comparable quarter primarily due to lower activity resulting from union strikes that negatively impacted customer activity. In addition, adverse weather conditions in Neuquén also contributed to the decrease in revenue and customer activity. In Mexico, revenue decreased primarily due to lower fracturing activity which was offset partially by higher coiled tubing activity.

OPERATING (LOSS) INCOME
The Company's operations in Latin America incurred an operating loss of $4.4 million during the second quarter of 2016 compared to operating income of $4.1 million in the second quarter of 2015. This decrease was primarily due to lower equipment utilization in Argentina caused by union strikes which delayed the drilling schedules of Calfrac's customers combined with adverse weather conditions in the Neuquén region during the second quarter of 2016. In addition, the Company recorded a bad debt provision in SG&A of $4.6 million during the second quarter related to work performed in Mexico.

CORPORATE

Three Months Ended June 30,

2016


2015


Change

(C$000s)

($)


($)


(%)

(unaudited)




Expenses





Operating

1,043


1,564


(33)


SG&A

7,951


7,283


9


8,994


8,847


2

Operating loss(1)

(8,994)


(8,847)


2

% of Revenue

6.0


2.8


NM

(1) 

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

 

OPERATING LOSS
Corporate expenses for the second quarter of 2016 increased by 2 percent compared to the second quarter of 2015, which resulted from a $2.3 million increase in stock-based compensation expense resulting from a higher share price at the end of the quarter. Offsetting the increase in stock-based compensation were continued corporate cost reductions totaling $2.2 million, when compared to the comparable quarter in 2015, primarily driven by reductions in corporate personnel costs and discretionary spending.

DEPRECIATION
For the three months ended June 30, 2016, depreciation expense decreased by 22 percent to $31.0 million from $39.5 million in the corresponding quarter of 2015. The decrease was mainly a result of a $114.5 million impairment of property, plant and equipment in the United States and Canada that was recorded in the fourth quarter of 2015, offset partially by a weaker Canadian dollar relative to the U.S. dollar on a year-over-year basis.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $1.5 million during the second quarter of 2016 versus a loss of $0.9 million in the comparative three-month period of 2015. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada, Russia and Latin America. The Company's second-quarter 2016 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 offset partially by U.S. dollar-denominated liabilities held in Russia as the U.S. dollar depreciated against the Russian rouble during the second quarter of 2016.

INTEREST
The Company's net interest expense of $18.1 million for the second quarter of 2016 was $1.8 million higher than in the comparable period of 2015. Interest expense on the Company's U.S. dollar-denominated senior unsecured notes was higher due to the weaker Canadian dollar compared to the second quarter of 2015. In addition, interest expense related to the Company's revolving credit facility was higher due to an increase in the average outstanding amount and, to a lesser extent, higher interest rates than 2015. Interest on the $200.0 million secured second lien term loan also contributed to the higher interest expense recorded during the period as the interest rate on the loan was higher than the interest rate on the credit facility borrowings that were repaid.

INCOME TAXES
The Company recorded an income tax recovery of $24.1 million during the second quarter of 2016 compared to a recovery of $19.5 million in the comparable period of 2015. The recovery position was the result of pre-tax losses incurred during the quarter in Canada, the United States and Argentina. The effective tax recovery rate was 36 percent during the second quarter of 2016 compared to 31 percent in the comparable quarter in 2015. The effective tax recovery rate in 2015 was lower primarily due to the impact of recognizing the increase to Alberta's corporate income tax rate during the second quarter of 2015.

SUMMARY OF QUARTERLY RESULTS

Three Months Ended

Sep. 30,


Dec. 31,


Mar. 31,


Jun. 30,


Sep. 30,


Dec. 31,


Mar. 31,


Jun. 30,


2014


2014


2015


2015


2015


2015


2016


2016

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

($)


($)


($)


($)


($)


($)


($)


($)

(unaudited)









Financial









Revenue

697,440


748,896


600,383


319,553


289,075


286,194


216,138


150,605

Operating income (loss)(1)

126,058


122,202


27,844


(7,022)


2,775


5,787


(11,623)


(15,898)


Per share – basic

1.33


1.29


0.29


(0.07)


0.03


0.06


(0.10)


(0.14)


Per share – diluted

1.32


1.28


0.29


(0.07)


0.03


0.06


(0.10)


(0.14)

Adjusted EBITDA(1)

123,624


121,731


25,609


(3,696)


7,211


22,933


(5,883)


(14,095)


Per share – basic

1.31


1.28


0.27


(0.04)


0.08


0.24


(0.05)


(0.12)


Per share – diluted

1.29


1.28


0.27


(0.04)


0.08


0.24


(0.05)


(0.12)

Net income (loss) attributable to the shareholders of Calfrac

44,465


26,470


(12,628)


(43,277)


(24,191)


(141,498)


(54,071)


(41,671)


Per share – basic

0.47


0.28


(0.13)


(0.45)


(0.25)


(1.45)


(0.47)


(0.36)


Per share – diluted

0.46


0.28


(0.13)


(0.45)


(0.25)


(1.45)


(0.47)


(0.36)

Capital expenditures

62,909


52,033


52,669


50,356


24,945


29,964


7,723


8,370

Working capital (end of period)

393,653


441,234


413,950


340,639


296,816


305,952


261,072


306,346

Total equity (end of period)

828,537


832,403


818,825


775,646


742,972


623,719


576,465


543,530










Operating (end of period)









Active pumping horsepower (000s)

1,235


1,254


1,259


804


754


776


640


582

Idle pumping horsepower (000s)(2)




455


533


524


586


640

Total pumping horsepower (000s)(2)

1,235


1,254


1,259


1,259


1,287


1,300


1,226


1,222

Active coiled tubing units (#)

36


36


37


20


20


20


18


19

Idle coiled tubing units (#)




17


17


17


14


13

Total coiled tubing units (#)

36


36


37


37


37


37


32


32

Active cementing units (#)

31


31


31


26


28


23


14


14

Idle cementing units (#)




5


3


8


11


11

Total cementing units (#)

31


31


31


31


31


31


25


25

(1) 

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

(2) 

Excludes 80,000 pumping horsepower that had not been commissioned at June 30, 2016.

 

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 2015 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 2015 Annual Report).

FINANCIAL OVERVIEW – SIX MONTHS ENDED JUNE 30, 2016 VERSUS 2015

CANADA

Six Months Ended June 30,

2016


2015


Change

(C$000s, except operational information)

($)


($)


(%)

(unaudited)




Revenue

118,109


288,292


(59)

Expenses





Operating

118,634


269,698


(56)


SG&A

3,905


4,461


(12)


122,539


274,159


(55)

Operating (loss) income(1)

(4,430)


14,133


NM

Operating (loss) income (%)

(3.8)


4.9


NM

Fracturing revenue per job ($)

24,845


38,620


(36)

Number of fracturing jobs

4,307


7,067


(39)

Active pumping horsepower, end of period (000s)

194


225


(14)

Idle pumping horsepower, end of period (000s)

216


177


22

Total pumping horsepower, end of period (000s)

410


402


2

Coiled tubing revenue per job ($)

22,985


23,824


(4)

Number of coiled tubing jobs

483


645


(25)

Active coiled tubing units, end of period (#)

6


6


Idle coiled tubing units, end of period (#)(2)

7


12


(42)

Total coiled tubing units, end of period (#)(2)

13


18


(28)

(1) 

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

(2) 

Reduction was the result of equipment that was identified as permanently impaired based on
the impairment provision at December 31, 2015.

 

REVENUE
Revenue from Calfrac's Canadian operations during the first six months of 2016 was $118.1 million versus $288.3 million in the same period of 2015. The decrease was primarily due to lower pricing, job mix and lower demand for the Company's fracturing and coiled tubing services. Revenue per fracturing job decreased by 36 percent from the prior year primarily due to lower pricing and job mix offset partially by greater service intensity. Coiled tubing activity decreased by 25 percent from the prior year and also contributed to the decrease in revenue.

OPERATING (LOSS) INCOME
The Company's Canadian division incurred an operating loss of $4.4 million during the first six months of 2016 compared to operating income of $14.1 million in the comparable period in 2015. The reversal to a loss position was the result of significantly lower pricing and utilization partially offset by cost reductions for proppant, third-party subcontractors and chemicals. SG&A expenses during the first six months of 2015 included a recovery of $1.1 million related to 2014 annual bonus expenses. Excluding this recovery, SG&A expenses declined by 30 percent year-over-year, primarily due to workforce reductions and a lower compensation structure.

UNITED STATES

Six Months Ended June 30,

2016


2015


Change

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

($)


($)


(%)

(unaudited)




Revenue

124,037


477,602


(74)

Expenses





Operating

128,236


455,359


(72)


SG&A

8,862


11,565


(23)


137,098


466,924


(71)

Operating (loss) income(1)

(13,061)


10,678


NM

Operating (loss) income (%)

(10.5)


2.2


NM

Fracturing revenue per job ($)

31,141


55,885


(44)

Number of fracturing jobs

3,930


8,226


(52)

Active pumping horsepower, end of period (000s)

187


410


(54)

Idle pumping horsepower, end of period (000s)

424


279


52

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

611


689


(11)

Coiled tubing revenue per job ($)


51,750


(100)

Number of coiled tubing jobs


55


(100)

Active coiled tubing units, end of period (#)



Idle coiled tubing units, end of period (#)

5


5


Total coiled tubing units, end of period (#)

5


5


Cementing revenue per job ($)

150,293


45,039


NM

Number of cementing jobs

11


334


(97)

Active cementing units, end of period (#)


13


(100)

Idle cementing units, end of period (#)

11


5


NM

Total cementing units, end of period (#)(2)

11


18


(39)

US$/C$ average exchange rate(3)

1.3317


1.2353


8

(1) 

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

(2) 

Reduction was the result of equipment that was identified as permanently impaired based on the
impairment provision at December 31, 2015.

(3) 

Source: Bank of Canada.

 

REVENUE
Revenue from Calfrac's United States operations decreased to $124.0 million during the first six months of 2016 from $477.6 million in the same period of 2015 due to significantly lower fracturing activity combined with job mix and weaker pricing. The number of fracturing jobs completed during the period decreased by 52 percent from the comparable period in 2015, primarily due to lower activity in Pennsylvania, and the Rockies, combined with the impact of the temporary closure of operations in North Dakota, south Texas and closure of operations in Arkansas. Revenue per job declined by 44 percent year-over-year as a stronger U.S. dollar was more than offset by the completion of significantly smaller jobs sizes in the Marcellus shale play in Pennsylvania and the impact of lower pricing in all operating regions.

OPERATING (LOSS) INCOME
The Company's United States division operated at a loss of $13.1 million during the first six months of 2016 after generating operating income of $10.7 million in the same period in 2015. The loss included restructuring costs totaling $3.1 million (2015 - Nil) that related to organizational changes that were carried out across the United States division during 2016 and $0.3 million in bad debt charges. Excluding these one-time costs, the operating loss would have been $9.7 million, primarily due to decreased utilization in all of the resource plays where the Company operates combined with lower pricing. The temporary closure of operations in North Dakota, south Texas and closure of operations in Arkansas had a negative impact on operating income year-over-year due to a significantly lower revenue base during the period while these operating districts continued to incur fixed costs.

RUSSIA

Six Months Ended June 30,

2016


2015


Change

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

($)


($)


(%)

(unaudited)




Revenue

45,157


69,361


(35)

Expenses





Operating

40,027


61,097


(34)


SG&A

1,312


2,086


(37)


41,339


63,183


(35)

Operating income(1)

3,818


6,178


(38)

Operating income (%)

8.5


8.9


(4)

Fracturing revenue per job ($)

68,687


84,284


(19)

Number of fracturing jobs

524


683


(23)

Pumping horsepower, end of period (000s)

70


70


Coiled tubing revenue per job ($)

38,344


45,363


(15)

Number of coiled tubing jobs

239


260


(8)

Active coiled tubing units, end of period (#)

6


7


(14)

Idle coiled tubing units, end of period (#)

1



NM

Total coiled tubing units, end of period (#)

7


7


Rouble/C$ average exchange rate(2)

0.0190


0.0216


(12)

(1) 

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

(2) 

Source: Bank of Canada.

 

REVENUE
During the first six months of 2016, revenue from Calfrac's Russian operations decreased by 35 percent to $45.2 million from $69.4 million in the corresponding six month period of 2015. The decrease in revenue, which is generated in roubles, was partially related to lower fracturing and coiled tubing activity combined with the 12 percent devaluation of the rouble in 2016 versus 2015. The decline in revenue was also the result of the loss of a fracturing contract with a significant customer to which the Company also supplied proppant. Revenue per fracturing job declined by 19 percent due to the currency devaluation combined with the impact of no longer providing proppant to a significant customer.

OPERATING INCOME
Operating income in Russia declined to $3.8 million during the first six months of 2016 from $6.2 million in the same period in 2015 primarily due to the 12 percent devaluation of the rouble combined with lower fracturing and coiled tubing utilization. SG&A expenses declined by 37 percent during the first half of 2016 from the comparable period in 2015 due to the devaluation of the rouble combined with the impact of cost reduction initiatives.

LATIN AMERICA

Six Months Ended June 30,

2016


2015


Change

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

($)


($)


(%)

(unaudited)




Revenue

79,440


84,681


(6)

Expenses





Operating

66,377


68,788


(4)


SG&A

10,603


7,394


43


76,980


76,182


1

Operating income(1)

2,460


8,499


(71)

Operating income (%)

3.1


10.0


(69)

Pumping horsepower, end of period (000s)

131


98


34

Cementing units, end of period (#)

14


13


8

Coiled tubing units, end of period (#)

7


7


Mexican peso/C$ average exchange rate(2)

0.0737


0.0816


(10)

Argentinean peso/C$ average exchange rate(2)

0.0931


0.1401


(34)

(1) 

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

(2) 

Source: Bank of Canada.

 

REVENUE
Calfrac's Latin American operations generated total revenue of $79.4 million during the first six months in 2016 versus $84.7 million in the comparable period in 2015. Revenue in Argentina was lower than the comparable quarter primarily due the impact of union strikes in Neuquén and southern Argentina combined with adverse weather conditions in the Neuquén region which reduced customer activity during the second quarter of 2016. In Mexico, revenue increased slightly due to higher first quarter activity.

OPERATING INCOME
Operating income in Latin America during the first half of 2016 was $2.5 million compared to $8.5 million during same period in 2015. Operating income was lower primarily due to the Company recording a bad debt provision of $4.6 million during the second quarter relating to work performed for a customer in Mexico. Lower equipment utilization also contributed to the reduction in operating income year-over-year.

CORPORATE

Six Months Ended June 30,

2016


2015


Change

(C$000s)

($)


($)


(%)

(unaudited)




Expenses





Operating

2,537


2,869


(12)


SG&A

13,771


15,797


(13)


16,308


18,666


(13)

Operating loss(1)

(16,308)


(18,666)


(13)

% of Revenue

4.4


2.0


NM

(1) 

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

 

OPERATING LOSS
The Company achieved a 13 percent decline in corporate expenses for the first six months of 2016 compared to the same period in 2015. The Company continued to reduce costs to align its cost structure with anticipated activity levels. These initiatives contributed approximately $4.1 million to the overall decrease in corporate expenses primarily by reducing corporate personnel costs. An increase in stock-based compensation expense of $1.7 million, resulting from an increase in the Company's stock price, partially offset the cost reductions achieved during the period.

DEPRECIATION
For the six months ended June 30, 2016, depreciation expense decreased by 13 percent to $66.6 million from $76.9 million in the first half of 2015. The decrease was mainly a result of a $114.5 million impairment of property, plant and equipment in the United States and Canada that was recorded in the fourth quarter of 2015, offset partially by a weaker Canadian dollar relative to the U.S. dollar on a comparative period basis.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $19.7 million during the first six months in 2016 versus a loss of $1.7 million in the comparative six-month period of 2015. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada, Russia and Latin America. The Company's foreign exchange loss during the period was largely attributable to the translation of U.S. dollar-denominated liabilities held in Argentina as the value of the Argentinean peso depreciated 15 percent against the U.S. dollar during the first six months of 2016. The foreign exchange loss was also the result of U.S. dollar-denominated assets held in Canada as the U.S. dollar depreciated against the Canadian dollar during the first half of 2016.

INTEREST
The Company's net interest expense of $37.2 million for the first six months of 2016 was $4.4 million higher than in the first half of 2015. Interest on U.S. dollar-denominated debt was higher due to a weaker Canadian dollar relative to the U.S. dollar. In addition, interest expense related to the Company's revolving credit facility was higher due to an increase in the average outstanding amount and, to a lesser extent, higher interest rates than 2015. Interest on the $200.0 million secured second lien term loan also contributed to the higher interest expense recorded during the period as the interest rate on the loan was higher than the interest rate on the credit facility borrowings that were repaid.

INCOME TAXES
The Company recorded an income tax recovery of $53.0 million for the first six months of 2016 compared to $32.7 million in the comparable period in 2015. The recovery was the result of pre-tax losses incurred during the period in Canada, the United States and Argentina. The effective tax recovery rate was 35 percent during the first six months in 2016 compared to 37 percent in the comparable period in 2015.

LIQUIDITY AND CAPITAL RESOURCES


Three Months Ended June 30,


Six Months Ended June 30,


2016


2015


2016


2015

(C$000s)

($)


($)


($)


($)

(unaudited)





Cash provided by (used in):






Operating activities

(16,186)


67,081


(13,618)


57,315


Financing activities

76,023


(4,588)


75,936


(11,573)


Investing activities

(10,574)


(42,379)


(27,980)


(96,522)


Effect of exchange rate changes on cash and cash equivalents

64


(5,357)


(12,095)


17,507

Increase (decrease) in cash and cash equivalents

49,327


14,757


22,243


(33,273)

 

OPERATING ACTIVITIES
The Company's cash used by operating activities for the three months ended June 30, 2016 was $16.2 million versus cash provided by operating activities of $67.1 million in the comparable period in 2015. The decrease was primarily due to lower operating margins driven by lower utilization and pricing in Canada and the United States. At June 30, 2016, Calfrac's working capital was approximately $306.3 million, which was consistent with December 31, 2015.

FINANCING ACTIVITIES
Net cash provided by financing activities for the three months ended June 30, 2016 was $76.0 million compared to cash used of $4.6 million in the comparable period in 2015. During the three months ended June 30, 2016, the Company received net proceeds from its second lien senior secured term loan financing of $194.7 million, reduced its bank loan in Argentina by $8.7 million and paid down borrowings under its credit facilities by $110.0 million.

On June 10, 2016, the Company closed a $200.0 million second lien senior secured term loan financing with Alberta Investment Management Corporation (AIMCo). The term loan matures on September 30, 2020 and bears interest at the rate of 9 percent annually. In addition, amortization payments equal to 1 percent of the original principal amount are payable annually in equal quarterly installments, with the balance due on the maturity date. In conjunction with the funding of the term loan, a total of 6,934,776 warrants to purchase common shares of the Company were issued to AIMCo, entitling it to acquire 6,934,776 common shares at a price of $4.14 per common share at any time prior to June 10, 2019. No amendments were made to the available commitment, term, covenants or interest rates payable under Calfrac's existing credit facilities as part of the required approvals for the term loan.

The Company's credit facilities mature on September 27, 2018 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty.

On December 11, 2015, Calfrac amended its credit facilities to provide increased financial flexibility. The amendment included a voluntary reduction in the total facility from $400.0 million to $300.0 million. The facilities consist of an operating facility of $30.0 million and a syndicated facility of $270.0 million. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 3.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 4.50 percent above the respective base rates. The facility was amended to increase the $100.0 million accordion feature to $200.0 million. The accordion feature is not available to the Company during the covenant relief period described below and ending on December 31, 2017 and during this period the Company will incur interest at the high end of the ranges outlined above. Additionally, for the quarters ended June 30, 2016 through December 31, 2017, advances under the credit facilities will be limited by a borrowing base. The borrowing base is calculated based on the following:

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

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

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

As at June 30, 2016, the Company had used $35.1 million of its credit facilities for letters of credit and had no borrowings under its credit facilities, leaving $264.9 million in available liquidity under its credit facilities. Subsequent to June 30, 2016, the Company repaid the entire amount outstanding on its Argentina bank loan and cancelled the associated US$25.0 million letter of credit that supported the loan. Upon cancellation of the letter of credit, the Company had approximately $297.0 million in available liquidity under its credit facilities.

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 many oil and gas service companies to seek covenant relief from their lenders. Calfrac negotiated amendments including waivers and increases to certain of its financial covenant thresholds prior to the end of the fourth quarter in 2015, as shown below.

Years ended December 31, except as indicated in notes below

2016

2017

Working capital ratio not to fall below

1.15x

1.15x

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

5.00x

  4.50x/4.00x

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

0.30x

0.30x

(1)

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

(2)

Funded Debt is defined as Total Debt excluding all outstanding senior unsecured
notes and the second lien senior secured term loan facility. Total Debt includes
bank loans and long-term debt (before unamortized debt issuance costs and debt
discount) plus outstanding letters of credit (excluding a US$25.0 million letter of
credit supporting an Argentinean bank loan) less cash on hand with lenders
(excluding any cash held in a segregated account for the purposes of a potential
equity cure).

(3)

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

(4) 

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

 

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

i.  the Company is only permitted to use the proceeds of a common share issuance to increase Adjusted EBITDA a maximum of two times;
ii. the Company cannot use the proceeds of a common share issuance to increase Adjusted EBITDA in consecutive quarter ends;
iii. the maximum proceeds of a common share issuance permitted to be attributed to Adjusted EBITDA cannot exceed the greater of 50 percent of Adjusted EBITDA on a trailing four-quarter basis and $25.0 million; and
iv. if proceeds are not used immediately as an equity cure they must be held in a segregated trust account pending an election to use them for such purpose, and if they are removed from such account but not used as an equity cure they will no longer be eligible for such use.

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

As shown in the table below, at June 30, 2016, the Company was in compliance with the financial covenants associated with its credit facilities.


Covenant

Actual

As at June 30,

2016

2016

Working capital ratio not to fall below

1.15x

4.11x

Funded Debt to Adjusted EBITDA not to exceed

Waived

-11.94x

Funded Debt to Capitalization not to exceed

0.30x

-0.08x

 

The indenture governing the senior unsecured notes, which is available on SEDAR, contains restrictions on the Company's ability to pay dividends, purchase and redeem shares of the Company and make certain restricted investments, that are not defined as Permitted Investments under the indenture, in circumstances where:

i. the Company is in default under the indenture or the making of such payment would result in a default;
ii. the Company is not meeting the Fixed Charge Coverage Ratio(1) under the indenture of at least 2.0:1 for the most recent four fiscal quarters, with the restricted payments regime commencing once internal financial statements are available which show that the ratio is not met on a pro forma basis for the most recently ended four fiscal quarter period; or
iii. there is insufficient room for such payment within a builder basket included in the indenture.

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

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20.0 million. As at June 30, 2016 this basket was not utilized. The indenture also restricts the ability to incur additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2.0:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $175.0 million or 30 percent of the Company's consolidated tangible assets. At June 30, 2016, the Company was able to incur additional indebtedness in excess of $390 million pursuant to the aforementioned exception.

As at June 30, 2016, the Company's Fixed Charge Coverage Ratio of 0.23:1 was less than the required 2.0:1 ratio. Failing to meet the Fixed Charge Coverage Ratio is not an event of default under the indenture, and the baskets highlighted in the preceding paragraph provide sufficient flexibility for the Company to incur additional indebtedness and make anticipated restricted payments, which may be required to conduct its operations during this period of weakened market conditions.

INVESTING ACTIVITIES
Calfrac's net cash used for investing activities was $10.6 million for the quarter ended June 30, 2016 versus $42.4 million in 2015. Cash outflows relating to capital expenditures were $12.8 million during the second quarter of 2016 compared to $45.0 million in 2015. Capital expenditures were primarily to support the Company's Argentinean and United States fracturing operations.

Calfrac's 2016 capital budget is approximately $10.0 million. In addition, carryover capital expenditures are expected to be approximately $30.0 million, resulting in total spending of approximately $40.0 million throughout 2016.

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during the quarter ended June 30, 2016 was a gain of $0.1 million versus a loss of $5.4 million during 2015. These gains relate to cash and cash equivalents held by the Company in a foreign currency.

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

At June 30, 2016, the Company had cash and cash equivalents of $146.2 million of which $25.0 million is held in a segregated account at the Company's discretion, so that it may be utilized if required in the calculation of Adjusted EBITDA for purposes of the Company's bank covenants.

OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan is equal to 10 percent of the Company's issued and outstanding common shares. As at July 22, 2016, there were 115,579,598 common shares issued and outstanding, and 7,743,640 options to purchase common shares.

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

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

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

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

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

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


Three Months Ended June 30,


Six Months Ended June 30,


2016


2015


2016


2015

(C$000s)

($)


($)


($)


($)

(unaudited)





Net loss

(42,636)


(43,805)


(98,032)


(56,745)

Add back (deduct):






Depreciation

31,004


39,494


66,598


76,908


Foreign exchange losses

1,520


922


19,702


1,677


Loss (gain) on disposal of property, plant and equipment

164


(412)


(63)


(1,143)


Interest

18,109


16,323


37,224


32,806


Income taxes

(24,059)


(19,544)


(52,950)


(32,681)

Operating (loss) income

(15,898)


(7,022)


(27,521)


20,822

 

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


Three Months Ended June 30,


Six Months Ended June 30,


2016


2015


2016


2015

(C$000s)



($)


($)

(unaudited)





Net loss

(42,636)


(43,805)


(98,032)


(56,745)

Add back (deduct):






Depreciation

31,004


39,494


66,598


76,908


Unrealized foreign exchange losses

2,524


3,720


22,307


1,145


Loss (gain) on disposal of property, plant and equipment

164


(412)


(63)


(1,143)


Restructuring charges

170



3,903



Stock-based compensation

640


657


1,023


1,441


Losses attributable to non-controlling interest(1)

(11)


(129)


12


182


Interest

18,109


16,323


37,224


32,806


Income taxes

(24,059)


(19,544)


(52,950)


(32,681)

Adjusted EBITDA

(14,095)


(3,696)


(19,978)


21,913

(1)

The definition of Adjusted EBITDA was amended in June 2015 to include non-controlling interest related to Argentina and
has been applied prospectively.

 

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 2016 second quarter results at 10:00 a.m. (Mountain Time) on Thursday, July 28, 2016. The conference call dial-in number is 1-888-231-8191 or 647-427-7450. The seven-day replay numbers are 1-855-859-2056 or 416-849-0833 (once connected, enter 43234088). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS


June 30,


December 31,

As at

2016


2015

(C$000s) (unaudited)

($)


($)

ASSETS



Current assets




Cash and cash equivalents

146,248


124,005


Accounts receivable

127,523


221,995


Income taxes recoverable

4,788


3,540


Inventories

112,906


127,622


Prepaid expenses and deposits

17,339


18,017


408,804


495,179

Non-current assets




Property, plant and equipment

1,190,063


1,301,272


Deferred income tax assets

42,053


19,372

Total assets

1,640,920


1,815,823

LIABILITIES AND EQUITY



Current liabilities




Accounts payable and accrued liabilities

93,639


172,633


Bank loans (note 1)

5,932


15,633


Current portion of long-term debt (note 2)

2,494


523


Current portion of finance lease obligations

393


438


102,458


189,227

Non-current liabilities




Long-term debt (note 2)

952,283


927,270


Finance lease obligations

103


382


Deferred income tax liabilities

42,546


75,225

Total liabilities

1,097,390


1,192,104

Equity attributable to the shareholders of Calfrac



Capital stock (note 3)

409,809


409,809

Contributed surplus

34,702


27,849

Loan receivable for purchase of common shares

(2,500)


(2,500)

Retained earnings

117,684


213,426

Accumulated other comprehensive loss

(10,364)


(21,054)


549,331


627,530

Non-controlling interest

(5,801)


(3,811)

Total equity

543,530


623,719

Total liabilities and equity

1,640,920


1,815,823

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF OPERATIONS 


Three Months Ended June 30,


Six Months Ended June 30,


2016


2015


2016


2015

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

($)


($)


($)


($)

Revenue

150,605


319,553


366,743


919,936

Cost of sales

175,720


347,375


422,410


934,720

Gross loss

(25,115)


(27,822)


(55,667)


(14,784)

Expenses






Selling, general and administrative

21,787


18,694


38,452


41,302


Foreign exchange losses

1,520


922


19,702


1,677


Loss (gain) on disposal of property, plant and equipment

164


(412)


(63)


(1,143)


Interest

18,109


16,323


37,224


32,806


41,580


35,527


95,315


74,642

Loss before income tax

(66,695)


(63,349)


(150,982)


(89,426)

Income tax expense (recovery)






Current

643


514


1,452


1,886


Deferred

(24,702)


(20,058)


(54,402)


(34,567)


(24,059)


(19,544)


(52,950)


(32,681)

Net loss

(42,636)


(43,805)


(98,032)


(56,745)






Net loss attributable to:






Shareholders of Calfrac

(41,671)


(43,277)


(95,742)


(55,905)


Non-controlling interest

(965)


(528)


(2,290)


(840)


(42,636)


(43,805)


(98,032)


(56,745)






Loss per share (note 3)






Basic

(0.36)


(0.45)


(0.83)


(0.59)


Diluted

(0.36)


(0.45)


(0.83)


(0.59)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


Three Months Ended June 30,


Six Months Ended June 30,


2016


2015


2016


2015

(C$000s) (unaudited)

($)


($)


($)


($)

Net loss

(42,636)


(43,805)


(98,032)


(56,745)

Other comprehensive income (loss)





Items that may be subsequently reclassified to profit or loss:






Change in foreign currency translation adjustment

3,231


391


10,990


11,091

Comprehensive loss

(39,405)


(43,414)


(87,042)


(45,654)

Comprehensive loss attributable to:






Shareholders of Calfrac

(38,534)


(42,876)


(85,052)


(44,787)


Non-controlling interest

(871)


(538)


(1,990)


(867)


(39,405)


(43,414)


(87,042)


(45,654)

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


Equity Attributable to the Shareholders of Calfrac




Share
Capital


Contributed
Surplus


Loan
Receivable
for Purchase
of Common
Shares


Accumulated
Other
Comprehensive
Income (Loss)


Retained
Earnings


Total


Non-
Controlling
Interest


Total
Equity

(C$000s) (unaudited)

($)


($)


($)


($)


($)


($)


($)


($)

Balance – Jan. 1, 2016

409,809


27,849


(2,500)


(21,054)


213,426


627,530


(3,811)


623,719

Net loss





(95,742)


(95,742)


(2,290)


(98,032)

Other comprehensive income:










Cumulative translation adjustment




10,690



10,690


300


10,990

Comprehensive income (loss)




10,690


(95,742)


(85,052)


(1,990)


(87,042)

Warrants:










Fair value of warrants issued (note 2)


5,830





5,830



5,830

Stock options:










Stock-based compensation recognized


1,023





1,023



1,023

Balance – Jun. 30, 2016

409,809


34,702


(2,500)


(10,364)


117,684


549,331


(5,801)


543,530

Balance – Jan. 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

11,233






11,233



11,233

Dividends





(18,257)


(18,257)



(18,257)

Shares purchased under NCIB

(2,546)





(2,974)


(5,520)



(5,520)

Balance – Jun. 30, 2015

386,662


26,208


(2,500)


(15,639)


382,755


777,486


(1,840)


775,646

See accompanying notes to the consolidated financial statements.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS


Three Months Ended June 30,


Six Months Ended June 30,


2016


2015


2016


2015

(C$000s) (unaudited)

($)


($)


($)


($)

CASH FLOWS PROVIDED BY (USED IN)




OPERATING ACTIVITIES





Net loss

(42,636)


(43,805)


(98,032)


(56,745)


Adjusted for the following:







Depreciation

31,004


39,494


66,598


76,908



Stock-based compensation

640


657


1,023


1,441



Unrealized foreign exchange losses

2,524


3,720


22,307


1,145



Loss (gain) on disposal of property, plant and equipment

164


(412)


(63)


(1,143)



Interest

18,109


16,323


37,224


32,806



Deferred income taxes

(24,702)


(20,058)


(54,402)


(34,567)



Interest paid

(31,655)


(30,135)


(34,568)


(31,608)



Changes in items of working capital

30,366


101,297


46,295


69,078

Cash flows (used in) provided by operating activities

(16,186)


67,081


(13,618)


57,315

FINANCING ACTIVITIES





Bank loan proceeds


5,471


4,977


13,769


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

214,900


(554)


214,900


(533)


Bank loan repayments

(8,664)


(2,733)


(11,658)


(5,935)


Long-term debt repayments

(130,122)


(113)


(130,295)


(265)


Finance lease obligation repayments

(91)


(114)


(182)


(225)


Shares purchased under NCIB




(5,520)


Dividends paid, net of DRIP


(6,545)


(1,806)


(12,864)

Cash flows provided by (used in) financing activities

76,023


(4,588)


75,936


(11,573)

INVESTING ACTIVITIES





Purchase of property, plant and equipment

(12,839)


(44,994)


(30,609)


(106,652)


Proceeds on disposal of property, plant and equipment

2,265


2,615


2,629


10,130

Cash flows used in investing activities

(10,574)


(42,379)


(27,980)


(96,522)

Effect of exchange rate changes on cash and cash equivalents

64


(5,357)


(12,095)


17,507

Increase (decrease) in cash and cash equivalents

49,327


14,757


22,243


(33,273)

Cash and cash equivalents, beginning of period

96,921


51,099


124,005


99,129

Cash and cash equivalents, end of period

146,248


65,856


146,248


65,856

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, 2016 and 2015
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated) (unaudited)

1.  BANK LOANS

The Company's Argentinean subsidiary has an operating line of credit, of which ARS69,076 ($5,932) was drawn at June 30, 2016 (December 31, 2015 – ARS147,290 ($15,633)). The average interest rate is 39.83 percent per annum and the line of credit is secured by a letter of credit issued by the Company. Subsequent to June 30, 2016, the Company repaid the entire amount outstanding on its Argentina bank loan and cancelled the associated US$25,000 letter of credit that supported the loan.

2.  LONG-TERM DEBT


June 30,


December 31,

As at

2016


2015

(C$000s)

($)


($)

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

775,020


830,400

$200,000 second lien senior secured term loan facility due September 30, 2020, bearing
interest at 9% payable quarterly, secured by the Canadian and U.S. assets of the
Company on a second priority basis

200,000


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


110,000

Less: unamortized debt issuance costs

(21,161)


(13,894)


953,859


926,506

US$710 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

918


1,287


954,777


927,793