Calfrac Announces Third Quarter Results

CALGARY, Nov. 2, 2011 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX: CFW) announces its financial and operating results for the three and nine months ended September 30, 2011.

HIGHLIGHTS            
  Three Months Ended September 30,       Nine Months Ended September 30,
  2011 2010 Change 2011 2010 Change
(C$000s, except per share and unit data) ($) ($) (%) ($) ($) (%)
(unaudited)            
Financial            
Revenue 440,491 275,245 60 1,047,355 667,217 57
Operating income(1) 126,527 69,343 82 262,464 123,052 113
EBITDA(2) 102,042 70,764 44 249,536 123,375 102
      Per share - basic 2.33 1.64 42 5.72 2.87 99
      Per share - diluted 2.30 1.63 41 5.62 2.84 98
Net income attributable to            
      the shareholders of Calfrac            
      before foreign exchange            
      losses (gains) 69,017 31,258 121 120,708 34,248 252
      Per share - basic 1.58 0.72 119 2.77 0.80 246
      Per share - diluted 1.56 0.72 117 2.72 0.79 244
Net income attributable to            
      the shareholders of Calfrac 47,381 31,955 48 108,530 33,376 225
      Per share - basic 1.08 0.74 46 2.49 0.78 219
      Per share - diluted 1.07 0.74 45 2.44 0.77 217
Working capital (end of period)       375,823 177,561 112
Total equity (end of period)       632,889 485,280 30
Weighted average common            
      shares outstanding (000s)            
      Basic 43,767 43,076 2 43,649 43,037 1
      Diluted 44,337 43,431 2 44,436 43,455 2
             
Operating (end of period)            
Pumping horsepower (000s)       656 481 36
Coiled tubing units (#)       29 28 4
Cementing units (#)       23 21 10

(1)  Operating income is defined as net income (loss) before depreciation, interest, foreign exchange gains or losses, gains or losses on disposal of capital assets and income taxes. Management believes that operating income is a useful supplemental measure as it provides an indication of the financial results generated by Calfrac's business segments prior to consideration of how these segments are financed or how they are taxed. Operating income is a measure that does not have any standardized meaning under International Financial Reporting Standards (IFRS) and, accordingly, may not be comparable to similar measures used by other companies.
(2)  EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. EBITDA is presented because it is frequently used by securities analysts and others for evaluating companies and their ability to service debt. EBITDA is a measure that does not have any standardized meaning prescribed under IFRS and, accordingly, may not be comparable to similar measures used by other companies.

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

CEO's MESSAGE
I am pleased to present Calfrac's operating and financial highlights for the three and nine months ended September 30, 2011 and to discuss our prospects for the remainder of 2011 and beyond. During the third quarter, our Company:

  • achieved record third-quarter revenue, EBITDA and net income resulting from high levels of pressure pumping activity in the unconventional oil and natural gas plays in western Canada and the United States;
  • continued to remain active in the early-stage development of many emerging unconventional resource plays in North America;
  • completed two Horn River Basin projects which included both fracturing and coiled tubing operations;
  • announced a capital budget for 2012 of $271.0 million. It will further bolster Calfrac's fracturing, coiled tubing and cementing capacity and infrastructure and includes capital dedicated to funding the Company's ongoing proactive maintenance program for its equipment fleet and
  • increased its credit facilities with a syndicate of financial institutions from $175.0 million to $250.0 million and extended the term of these facilities to four years.

Financial Highlights


For the three months ended September 30, 2011, the Company recorded:

  • record third-quarter revenue of $440.5 million versus $275.2 million in the comparable quarter of 2010, led by higher year-over-year activity in Canada, the United States, Russia and Latin America;
  • operating income of $126.5 million versus $69.3 million in the comparable period in 2010, resulting primarily from strong activity and improved pricing in Canada and the United States, combined with a continued focus on cost control; and
  • net income of $47.4 million or $1.07 per share diluted, including a largely unrealized $23.7 million foreign exchange loss related primarily to the translation of United States dollar-denominated intercompany debt held in Canada, compared to net income of $32.0 million or $0.74 per share diluted in the third quarter of 2010. After adjusting for this foreign exchange loss, net income in the third quarter of 2011 would have been $69.0 million or $1.56 per share diluted.

For the nine months ended September 30, 2011, the Company generated:

  • record year-to-date revenue of $1.0 billion versus $667.2 million in the comparable period of 2010, led by higher year-over-year activity in all of Calfrac's operating divisions;
  • operating income of $262.5 million versus $123.1 million in the comparable period in 2010, driven by strong financial performance in Canada and the United States; and
  • net income of $108.5 million or $2.44 per share diluted, which included a $13.2 million foreign exchange loss ($0.28 per share diluted) of which a majority is unrealized, compared to net income of $33.4 million or $0.77 per share diluted in the first nine months of 2010.

Operational Highlights


Canada

During the third quarter of 2011, well completion activity in western Canada reached record levels with a significant focus on the development of liquids-rich natural gas and oil formations. As a result, the Company's Canadian operations generated exceptional results, including record revenue and operating income. Service intensity continues to increase as exploration and production companies incorporate larger multi-well pad designs, longer horizontal well legs and a greater number of fractures in each wellbore. These industry trends are anticipated to continue.

In addition, Calfrac was involved in the early-stage development of a number of emerging oil and natural gas resource plays, such as in the Horn River Basin as well as the Duvernay shale and Alberta Bakken plays. Late in the second quarter, the Company deployed a large fracturing crew into the Horn River Basin to commence fracturing and coiled tubing operations on two projects. These projects were completed by the end of the third quarter and executed in accordance with the highest operating and safety standards. Calfrac's 2011 activity in the Horn River Basin was higher than in 2010 and the Company believes this unconventional resource play will provide additional demand for its services. Calfrac will continue to work closely with its customers and introduce new technologies to assist in improving the economics of emerging resource plays.

United States

The Company's United States operations recorded strong financial and operational performance in the third quarter driven by an expanded presence in the Marcellus and Bakken resource plays and robust activity in Arkansas and the Rocky Mountain region of Colorado. During the third quarter, the Company deployed a large fracturing crew into Pennsylvania based on its long-term minimum commitment contractual agreement with a large customer. As a result, three fracturing fleets are currently operating in the Marcellus shale play and the Company expects high utilization for this equipment based on its contract position combined with the strong overall demand for pressure pumping services in this region. Calfrac's United States operations were also preparing for the deployment of a third fracturing fleet into the Bakken play, which took place early in the fourth quarter. As a result, third-quarter costs increased due to hiring and training personnel for these new crews in advance of the delivery of equipment. Cost increases on certain products used in the Company's fracturing operations also contributed to a decline in operating margins. A portion of these cost increases is expected to be recovered in the future as they are passed on to our customers. Two of the Company's three fracturing crews operating in North Dakota are contracted under long-term minimum commitment contracts with one of the largest operators in this region.

Calfrac experienced strong demand for its services in all of its operating areas during the third quarter of 2011. An increasing number of the Company's customers in the Marcellus, Bakken and Fayetteville plays are adopting 24-hour operations and Calfrac expects this trend to continue. The Company recently commenced cementing operations in Pennsylvania to service the Marcellus shale play and has received very positive customer feedback in this expanding market. In addition, the Company has recently commenced coiled tubing operations in the Bakken play of North Dakota. Calfrac is optimistic about the future expansion opportunities for this service line in North Dakota and other operating regions in the United States.

Russia

Activity in Calfrac's Russian operations in the third quarter was consistent with the second quarter and with the Company's expectations based on the 2011 tender process. Calfrac is actively managing its operating cost structure to mitigate cost increases experienced in recent quarters and improve operating income. The Russian well service market is concentrated on the development of crude oil formations and is expected to drive improvement in the demand for the Company's services in Western Siberia.

Latin America

In Mexico, completions activity in the third quarter of 2011 continued to improve over the lows experienced in the second half of 2010 and the Company recently redeployed certain equipment to more active operating regions in Mexico. Deployment of Calfrac's innovative fluid systems into this market remains a top priority as it collaborates with its customers to enhance oil and natural gas production.

Cementing and coiled tubing activity in Argentina was consistent with the second quarter but is expected to improve in the fourth quarter. Producers in this market are dedicating significant resources towards the development of tight natural gas and shale gas reserves as well as several emerging tight oil plays. This anticipated future activity is expected to provide additional demand for Calfrac's service lines and the opportunity to commence fracturing operations in early 2012.

Calfrac commenced cementing operations in Colombia late in the third quarter and expects this region to provide growth opportunities in the future.

Outlook and Business Prospects


Calfrac expects North American exploration and development activity to remain focused on unconventional natural gas and oil plays. The Company anticipates that the use of multi-well pads and 24-hour operations will become more prominent as producing companies strive to improve drilling and completion efficiencies in these plays. The recent shift towards multi-stage horizontal completions in oil and liquids-rich gas plays is expected to be a strong driver of future demand for the Company's services. Calfrac believes that completion strategies in oil and liquids-rich reservoirs, despite the advancements made in recent years, remain in the early stages of development and with improving technologies, the economics of these plays will continue to improve, resulting in increased activity levels well into the future.

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

Activity in the Montney and Deep Basin plays of northwest Alberta and northeast British Columbia is expected to remain high as these regions are amongst the most economic natural gas plays in North America. The Montney resource play has evolved into one of the preeminent natural gas reservoirs in North America with break-even economics at low commodity prices. The Company anticipates that activity in the Deep Basin will remain strong due to the high liquids content of certain zones and the recent development successes using multi-stage fracturing completions in horizontal wellbores. Emerging areas, such as the Duvernay shale and the Horn River Basin, could drive significant demand for Calfrac's services. Development activity in these basins is expected to increase substantially in 2012.

In the United States, Calfrac's expanded presence in the Marcellus and Bakken resource plays is expected to provide the foundation for significant future growth. The Company has experienced tremendous demand for its services in the Bakken oil shale play of North Dakota. Calfrac recently deployed its third fracturing crew and commenced coiled tubing operations in this region. Drilling and completion activity in this basin continues to increase using longer horizontal legs and a greater number of fractures per wellbore. Combined with the strength of crude oil prices, Calfrac anticipates this trend becoming a key growth area for the Company's United States operating division.

Calfrac recently deployed a third fracturing fleet into the Marcellus shale play. Two of the three crews are contracted to large producers under long-term minimum commitment agreements, with the other crew committed to one of these customers under a long-term right-of-first-call arrangement. The Marcellus play has evolved into one of the most prolific natural gas producing regions in the United States. Despite low natural gas prices, drilling and completion activity in this region is expected to remain strong and result in significant demand for the Company's fracturing services. Calfrac also recently introduced cementing operations into Pennsylvania providing another growth platform in the United States.

The Company has also expanded its presence in the emerging Niobrara oil shale play of northern Colorado and Wyoming. This region is being revitalized using multi-stage fracturing techniques in horizontal wellbores. Calfrac expects to deploy an additional fracturing spread into this region late in 2011.

Calfrac operates in Russia under a mix of annual and multi-year agreements and expects high utilization of its fracturing and coiled tubing fleets throughout the remainder of 2011. The Company operates five fracturing spreads and six coiled tubing units in this oil-focused market and plans to deploy a seventh coiled tubing unit later this year. Calfrac is optimistic that the stimulation of Russian natural gas wells will become more prominent. Given Russia's stature as one of the world's largest natural gas producers, Calfrac expects this trend to evolve as a long-term market opportunity. Calfrac also believes that the Russian market is poised to begin applying horizontal drilling and multi-stage completion technology to its various reservoirs, which would create additional future demand.

Activity in Mexico throughout the first nine months of 2011 continued to improve from the low levels experienced in the latter half of 2010, mainly due to the easing of Pemex budget constraints and a greater focus on completions activity. Calfrac is cautiously optimistic that activity will continue to improve with the strong price of crude oil acting as a stimulus for onshore development in Mexico. The Company recognizes the long-term potential of this region and will remain focused on providing new technology and improved efficiencies. However, Calfrac will continue to assess available long-term opportunities and plan its strategy accordingly.

The Company is encouraged by the development of a number of emerging tight sands and shale oil and gas opportunities in Argentina, which are expected to stimulate further oilfield activity. Horizontal drilling combined with multi-stage fracturing appears to have significant application in this emerging market. In response to this opportunity, Calfrac anticipates commencing fracturing operations in Argentina in the first half of 2012, supplementing its cementing and coiled tubing operations.

Consistent with the Company's geographical diversification strategy based on deploying its technology into selected international markets, Calfrac commenced cementing operations in the oil-focused Colombian market late in the third quarter of 2011. Exceptional service quality will be the foundation for future success in this market and this expansion will provide another platform for growth in Latin America.

Calfrac recently announced a capital budget for 2012 of $271.0 million. The capital program will focus on bolstering the Company's fracturing, coiled tubing and cementing capacity and infrastructure. In addition, certain capital will fund ongoing proactive maintenance as Calfrac expands its presence in the North American unconventional oil and natural gas markets. The 2012 capital budget for the Company's Canadian division is $88.0 million and includes the addition of approximately 79,000 hydraulic horsepower (HHP) to its fleet. An additional coiled tubing unit will also be constructed to expand Calfrac's presence in the growing Canadian deep coiled tubing market. Upon completion of the 2012 capital program, Calfrac's pumping capacity in Canada will be approximately 400,000 HHP, solidifying the Company's position as one of the largest fracturing service providers in this market. The United States division's 2012 capital budget is $183.0 million. This program includes the addition of approximately 132,000 HHP and support equipment, five cementing units and additional infrastructure to support the Company's expanded presence. Upon completion of the 2012 capital program, Calfrac's pumping capacity in the United States will be approximately 570,000 HHP.

In September 2011, Calfrac increased its credit facilities with a syndicate of financial institutions from $175.0 million to $250.0 million and extended the term to four years. The Company remains committed to prudently managing its business while maintaining a strong balance sheet and, as a result, is well-positioned to respond quickly to opportunities for accretive expansion of its business.

On behalf of the Board of Directors,

Douglas R. Ramsay
Chief Executive Officer

November 1, 2011

2011 Overview


In the third quarter of 2011, the Company:

  • achieved record third-quarter revenue of $440.5 million, an increase of 60 percent from the comparable quarter in 2010, driven primarily by strong growth in all of the Company's divisions;
  • reported operating income of $126.5 million versus $69.3 million in the same quarter of 2010, an increase of 82 percent, mainly as a result of high levels of fracturing activity in western Canada and the United States; and
  • reported net income attributable to the shareholders of Calfrac of $47.4 million or $1.07 per share, including a largely unrealized $23.7 million foreign exchange loss, compared to net income of $32.0 million or $0.74 per share in the third quarter of 2010, which included a foreign exchange gain of $1.5 million.

In the nine months ended September 30, 2011, the Company:

  • increased revenue by 57 percent to over $1.0 billion from $667.2 million in the first nine months of 2010, primarily as a result of strong growth in all of Calfrac's operating divisions;
  • reported operating income of $262.5 million versus $123.1 million in the same period of 2010, an increase of 113 percent, due to high levels of fracturing and coiled tubing activity in the unconventional natural gas and oil plays of western Canada, combined with strong United States fracturing activity in the Fayetteville and Marcellus shale natural gas plays and the Bakken oil play;
  • reported net income attributable to the shareholders of Calfrac of $108.5 million or $2.44 per share, which included a foreign exchange loss of $13.2 million of which a majority is unrealized, compared to net income of $33.4 million or $0.77 per share in the same period of 2010, including the impact of a $0.6 million foreign exchange loss;
  • incurred capital expenditures of $223.0 million, primarily to bolster the Company's fracturing operations;
  • deployed a second and third large fracturing fleet into the Marcellus shale gas play in Pennsylvania and a second fracturing spread into the Bakken oil shale play in North Dakota;
  • increased its credit facilities from $175.0 million to $250.0 million with a syndicate of financial institutions, and extended the term of these facilities to four years; and
  • increased its period-end working capital by 112 percent over September 30, 2010 to $375.8 million at September 30, 2011.

Financial Overview - Three Months Ended September 30, 2011 Versus 2010


Canada
Three Months Ended September 30, 2011 2010 Change
(C$000s, except operational information) ($) ($) (%)
(unaudited)      
Revenue 230,011 160,465 43
Expenses      
      Operating 138,364 103,102 34
      Selling, General and Administrative (SG&A) 4,444 3,890 14
  142,808 106,992 33
Operating income(1) 87,203 53,473 63
Operating income (%) 37.9% 33.3% 14
Fracturing revenue per job ($) 160,649 129,390 24
Number of fracturing jobs 1,317 1,122 17
Pumping horsepower, end of period (000s) 256 211 21
Coiled tubing revenue per job ($) 23,819 26,545 (10)
Number of coiled tubing jobs 774 576 34
Coiled tubing units, end of period (#) 22 22 -

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.

Revenue
Revenue from Calfrac's Canadian operations during the third quarter of 2011 was $230.0 million versus $160.5 million in the comparable three-month period of 2010. The 43 percent increase in revenue was primarily due to the completion of more and larger fracturing jobs in the Horn River, Montney, Cardium and Viking plays of western Canada combined with higher pricing. Higher coiled tubing activity in western Canada also contributed to the increase in revenue during the third quarter. The increase in revenue was offset partially by the completion of smaller coiled tubing jobs.

Operating Income
Operating income in Canada increased by 63 percent to $87.2 million during the third quarter of 2011 from $53.5 million in the same period of 2010. The increase in Canadian operating income was mainly due to higher overall fracturing and coiled tubing activity levels, improved pricing, and the completion of larger fracturing jobs in the unconventional oil and natural gas resource plays of western Canada.

United States      
Three Months Ended September 30, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 165,114 83,603 98
Expenses      
      Operating 115,094 59,331 94
      SG&A 3,729 2,871 30
  118,823 62,202 91
Operating income(1) 46,291 21,401 116
Operating income (%) 28.0% 25.6% 9
Fracturing revenue per job ($) 86,578 67,777 28
Number of fracturing jobs 1,851 1,181 57
Pumping horsepower, end of period (000s) 333 203 64
Cementing revenue per job ($) 29,985 24,885 20
Number of cementing jobs 162 143 13
Cementing units, end of period (#) 9 7 29
C$/US$ average exchange rate(2) 0.9800 1.0391 (6)

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.
(2)  Source: Bank of Canada.

Revenue
Revenue from Calfrac's United States operations increased during the third quarter of 2011 to $165.1 million from $83.6 million in the comparable quarter of 2010. The increase in United States revenue was due primarily to the commencement of fracturing operations in the Bakken play of North Dakota which began during the fourth quarter of 2010, combined with higher fracturing activity in the Marcellus shale formation in Pennsylvania and West Virginia and the Fayetteville shale play in Arkansas, as well as the impact of improved pricing. The Company also operated a larger fracturing fleet in North Dakota and Pennsylvania. In the second and third quarters of 2011, a second and a third large fracturing spread were deployed into each market, respectively. In addition, the Company commenced cementing operations in the Marcellus shale play late in the second quarter of 2011, which increased cementing activity and average job sizes. This increase was partially offset by lower fracturing activity in the Rocky Mountain region of Colorado and a 6 percent decline in the value of the United States dollar against the Canadian dollar.

Operating Income
Operating income in the United States was $46.3 million for the third quarter of 2011, an increase of $24.9 million from the comparative period in 2010. The significant increase in operating income was primarily due to higher equipment utilization in the Bakken oil shale play in North Dakota and the Marcellus natural gas shale play of Pennsylvania and West Virginia. In addition, improved pricing combined with the completion of larger fracturing jobs augmented operating income in the United States during the third quarter of 2011. These factors were offset partially by personnel expenses related to the deployment of an additional fracturing fleet in the Marcellus resource play during the third quarter and in North Dakota which occurred in early October, higher product costs in the Bakken play of North Dakota and the impact of the 6 percent depreciation of the United States dollar.

Russia      
Three Months Ended September 30, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 29,233 21,878 34
Expenses      
      Operating 24,439 15,320 60
      SG&A 1,449 1,374 5
  25,888 16,694 55
Operating income(1) 3,345 5,184 (35)
Operating income (%) 11.4% 23.7% (52)
Fracturing revenue per job ($) 114,816 77,702 48
Number of fracturing jobs 195 184 6
Pumping horsepower, end of period (000s) 45 45 -
Coiled tubing revenue per job ($) 53,884 42,354 27
Number of coiled tubing jobs 127 179 (29)
Coiled tubing units, end of period (#) 6 6 -
C$/rouble average exchange rate(2) 0.0336 0.0340 (1)

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.
(2)  Source: Bank of Canada.

Revenue
During the third quarter of 2011, revenue from Russian the Company's operations increased by 34 percent to $29.2 million from $21.9 million in the corresponding three-month period of 2010. The increase was mainly due to the completion of larger fracturing and coiled tubing jobs combined with higher fracturing activity as a result of a larger equipment fleet deployed to Russia. This increase was offset slightly by lower coiled tubing activity.

Operating Income
Operating income in Russia in the third quarter of 2011 was $3.3 million compared to $5.2 million in the corresponding period of 2010. The decrease in operating income was primarily due to higher product expenses related to the provision of proppant and fracturing tubing for new operations in Western Siberia combined with mobilization costs to transport equipment and product inventory to remote locations before the winter freezing period.

Latin America      
Three Months Ended September 30, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 16,133 9,299 74
Expenses      
      Operating 15,428 11,196 38
      SG&A 1,121 848 32
  16,549 12,044 37
Operating loss(1) (416) (2,745) 85
Operating loss (%) -2.6% -29.5% 91
Pumping horsepower, end of period (000s) 22 22 -
Cementing units, end of period (#) 9 8 13
Coiled tubing units, end of period (#) 1 - -
C$/Mexican peso average exchange rate(2) 0.0796 0.0812 (2)
C$/Argentine peso average exchange rate(2) 0.2246 0.2595 (13)
C$/Colombia peso average exchange rate(2) 0.0005 0.0006 (17)

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.
(2)  Source: Bank of Canada.

Revenue
Calfrac's Latin America operations generated total revenue of $16.1 million during the third quarter of 2011 versus $9.3 million in the comparable three-month period in 2010. For the three months ended September 30, 2011 and 2010, revenue generated through subcontractors was $3.2 million and $3.3 million, respectively. The increase in revenue was primarily due to higher fracturing activity in Mexico offset partially by the completion of smaller fracturing job sizes in Mexico, lower pricing and the depreciation of the Mexican and Argentine pesos versus the Canadian dollar.

Operating Loss
During the three months ended September 30, 2011 Calfrac's Latin America division incurred an operating loss of $0.4 million compared to a loss of $2.7 million in the comparative quarter in 2010. The improvement in operating performance was primarily due to improved fracturing margins in Latin America, offset slightly by the impact of the decline in the Mexican and Argentine pesos against the Canadian dollar.

Corporate      
Three Months Ended September 30, 2011 2010 Change
(C$000s) ($) ($) (%)
(unaudited)      
Expenses      
      Operating 1,635 1,401 17
      SG&A 8,261 6,569 26
  9,896 7,970 24
Operating loss(1) (9,896) (7,970) 24

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.

Operating Loss
The 24 percent increase in Corporate operating expenses from the third quarter of 2010 is mainly due to an increase in the number of personnel supporting the Company's significantly larger scale of operations, higher professional fees and a higher annual bonus provision. This increase was offset slightly by lower stock-based compensation expenses due mainly to a decrease in Calfrac's stock price.

Depreciation
For the three months ended September 30, 2011, depreciation expense increased by 10 percent to $21.9 million from $19.8 million in the corresponding quarter of 2010. The increase in depreciation expense is mainly a result of a larger fleet of equipment operating in North America and Russia offset partially by the depreciation of the United States dollar.

Foreign Exchange Losses or Gains
The Company recorded a foreign exchange loss of $23.7 million during the third quarter of 2011 versus a $1.5 million gain in the comparative three-month period of 2010. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in United States dollars in Canada, Russia and Latin America. The majority of the Company's foreign exchange loss recorded in the third quarter of 2011 was attributable to the translation of United States dollar-denominated intercompany debt held in Canada. The value of the United States dollar at September 30, 2011 strengthened significantly against the Canadian dollar from the beginning of the quarter resulting in an unrealized foreign exchange loss related to this net indebtedness.

Interest
The Company's interest expense during the third quarter of 2011 increased from the comparable period of 2010 by $2.5 million to $8.7 million. This increase was primarily due to higher overall debt offset partially by lower interest expense related to the Company's senior unsecured notes resulting from the depreciation of the United States dollar and a slight decrease in borrowing rates.

Income Tax Expenses
The Company recorded an income tax expense of $24.1 million during the third quarter of 2011 compared to income tax expense of $12.8 million in the comparable period of 2010. The effective income tax rate for the three-month period ended September 30, 2011 was 34 percent versus 29 percent in the comparable quarter of 2010. The increase in total income tax expense was primarily due to significantly higher profitability in the United States. The effective tax rate increased mainly due to non-taxable unrealized foreign exchange losses incurred in Canada during the quarter.

Summary of Quarterly Results


         
                 
Three Months Ended       Dec. 31,       Mar. 31,       June 30,       Sept. 30,       Dec. 31,       Mar. 31,       June 30,       Sept. 30,
  2009(1) 2010 2010 2010 2010 2011 2011 2011
(unaudited) ($) ($) ($) ($) ($) ($) ($) ($)

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

               
Revenue 173,124 227,123 164,849 275,245 268,710 337,408 269,456 440,491
Operating income(2) 23,157 38,831 14,878 69,343 62,185 88,000 47,937 126,527
EBITDA(2) 23,398 40,974 11,637 70,764 62,464 96,897 50,597 102,042
      Per share - basic 0.58 0.95 0.27 1.64 1.44 2.23 1.16 2.33
      Per share - diluted 0.57 0.94 0.27 1.63 1.42 2.18 1.14 2.30
Net income (loss) attributable to                
      the shareholders of Calfrac 864 11,701 (10,280) 31,955 16,126 49,078 12,071 47,381
      Per share - basic 0.02 0.27 (0.24) 0.74 0.37 1.13 0.28 1.08
      Per share - diluted 0.02 0.27 (0.24) 0.74 0.37 1.11 0.27 1.07
Capital expenditures 18,245 14,974 26,813 30,097 47,015 65,777 72,047 85,130
Working capital (end of period) 128,243 156,095 138,500 177,561 341,677 356,370 324,832 375,823
Total equity (end of period) 459,932 460,771 453,290 485,280 502,032 556,277 568,607 632,889
                 
Operating (end of period)                
Pumping horsepower (000s) 456 465 472 481 481 530 584 656
Coiled tubing units (#) 28 28 28 28 29 29 29 29
Cementing units (#) 21 21 21 21 21 21 22 23

(1)  As the Company's IFRS transition date was January 1, 2010, 2009 quarterly financial information has not been restated.
(2)  Refer to "Non-GAAP Measures" on page 17 for further information

Financial Overview - Nine Months Ended September 30, 2011 Versus 2010


Canada              
Nine Months Ended September 30, 2011     2010     Change
(C$000s, except operational information) ($)     ($)     (%)
(unaudited)              
Revenue 518,047     346,279     50
Expenses              
      Operating 346,381     241,323     44
      SG&A 11,525     10,558     9
  357,906     251,881     42
Operating income(1) 160,141     94,398     70
Operating income (%) 30.9%     27.3%     13
Fracturing revenue per job ($) 158,781     121,575     31
Number of fracturing jobs 2,984     2,598     15
Pumping horsepower, end of period (000s) 256     211     21
Coiled tubing revenue per job ($) 23,723     28,651     (17)
Number of coiled tubing jobs 1,865     1,062     76
Coiled tubing units, end of period (#) 22     22     -

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.

Revenue
Revenue from Calfrac's Canadian operations during the first nine months of 2011 was $518.0 million versus $346.3 million in the comparable nine-month period of 2010. The 50 percent increase in revenue was primarily due to more and larger fracturing jobs in the unconventional natural gas resource plays of northern Alberta and northeast British Columbia and increased pricing combined with an increase in oil-related fracturing in the resource plays of Saskatchewan and west central Alberta. In addition, higher coiled tubing activity levels in western Canada also contributed to the revenue increase. The increase was offset partially by the completion of generally smaller coiled tubing jobs.

Operating Income
Operating income in Canada increased by 70 percent to $160.1 million during the first nine months of 2011 from $94.4 million in the same period of 2010. The increase in Canadian operating income was mainly due to higher overall fracturing and coiled tubing activity levels, improved pricing, the completion of larger fracturing jobs in the unconventional oil and natural gas resource plays of western Canada and a focus on controlling operating and SG&A expenses.

United States      
Nine Months Ended September 30, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 405,220 217,322 86
Expenses      
      Operating 271,315 165,655 64
      SG&A 9,988 7,310 37
  281,303 172,965 63
Operating income(1) 123,917 44,357 179
Operating income (%) 30.6% 20.4% 50
Fracturing revenue per job ($) 79,881 63,976 25
Number of fracturing jobs 4,943 3,255 52
Pumping horsepower, end of period (000s) 333 203 64
Cementing revenue per job ($) 24,173 21,929 10
Number of cementing jobs 429 414 4
Cementing units, end of period (#) 9 7 29
C$/US$ average exchange rate(2) 0.9778 1.0358 (6)

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.
(2)  Source: Bank of Canada.

Revenue
Revenue from Calfrac's United States operations increased during the first nine months of 2011 to $405.2 million from $217.3 million in the comparable period of 2010. The increase in United States revenue was due primarily to the commencement of fracturing operations in the Bakken play of North Dakota during the fourth quarter of 2010 combined with a larger equipment fleet and higher fracturing activity in the Marcellus shale formation in Pennsylvania and West Virginia and the Fayetteville shale play in Arkansas. The revenue increase was also a result of improved pricing and the completion of larger cementing jobs in Arkansas. It was partially offset by lower fracturing activity levels in the Rocky Mountain region of Colorado and a 6 percent decline in the United States dollar against the Canadian dollar.

Operating Income
Operating income in the United States was $123.9 million for the first nine months of 2011, an increase of $79.6 million from the comparative period in 2010. The significant increase in operating income was primarily due to a larger equipment fleet and high equipment utilization in the Bakken oil shale play in North Dakota and the Marcellus natural gas shale play of Pennsylvania and West Virginia. In addition, improved pricing combined with the completion of larger fracturing and cementing jobs increased operating income. These factors were offset partially by the impact of the depreciation of the United States dollar.

Russia      
Nine Months Ended September 30, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 85,367 57,501 48
Expenses      
      Operating 71,416 46,559 53
      SG&A 5,027 3,451 46
  76,443 50,010 53
Operating income(1) 8,924 7,491 19
Operating income (%) 10.5% 13.0% (19)
Fracturing revenue per job ($) 110,382 82,450 34
Number of fracturing jobs 561 450 25
Pumping horsepower, end of period (000s) 45 45 -
Coiled tubing revenue per job ($) 53,279 43,680 22
Number of coiled tubing jobs 440 467 (6)
Coiled tubing units, end of period (#) 6 6 -
C$/rouble average exchange rate(2) 0.0340 0.0342 (1)

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.
(2)  Source: Bank of Canada.

Revenue
During the first nine months of 2011, the Company's revenue from its Russian operations increased by 48 percent to $85.4 million from $57.5 million in the corresponding nine-month period of 2010. The increase in revenue was mainly due to higher fracturing activity as a result of a larger equipment fleet deployed to Russia, combined with larger fracturing and coiled tubing job sizes. This was offset partially by lower coiled tubing activity.

Operating Income
Operating income in Russia in the first nine months of 2011 was $8.9 million compared to $7.5 million in the corresponding period of 2010. The increase in operating income was primarily due to the higher revenue base. This increase was offset partially by higher product expenses mainly due to the provision of proppant and fracturing tubing for new operations in Western Siberia.

Latin America      
Nine Months Ended September 30, 2011 2010 Change
(C$000s, except operational and exchange rate information) ($) ($) (%)
(unaudited)      
Revenue 38,721 46,115 (16)
Expenses      
      Operating 37,568 46,153 (19)
      SG&A 2,546 2,294 11
  40,114 48,447 (17)
Operating income (loss)(1) (1,393) (2,332) 40
Operating income (loss) (%) -3.6% -5.1% 29
Pumping horsepower, end of period (000s) 22 22 -
Cementing units, end of period (#) 9 8 13
Coiled tubing units, end of period (#) 1 - -
C$/Mexican peso average exchange rate(2) 0.0813 0.0815 -
C$/Argentine peso average exchange rate(2) 0.2298 0.2622 (12)
C$/Colombia peso average exchange rate(2) 0.0005 0.0005 -

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.
(2)  Source: Bank of Canada.

Revenue
Calfrac's Latin America operations generated total revenue of $38.7 million during the first nine months of 2011 versus $46.1 million in the comparable nine-month period in 2010. For the nine months ended September 30, 2011 and 2010, revenue generated through subcontractors was $7.7 million and $14.1 million, respectively.

In Mexico, overall oilfield activity in 2011 decreased significantly year-over-year due to Pemex budget constraints and resulted in lower pricing in this market. In addition, revenue in Mexico declined due to the completion of smaller fracturing and cementing job sizes combined with lower cementing activity.

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

Operating Loss
During the nine months ended September 30, 2011 Calfrac's Latin America division incurred an operating loss of $1.4 million compared to an operating loss of $2.3 million in the comparative period in 2010. This loss was primarily due to smaller fracturing job sizes in Mexico and smaller cementing job sizes in Latin America combined with the impact of the 12 percent decline in the Argentine peso. This decrease was offset partially by cost reduction measures implemented in Mexico as well as higher cementing and coiled tubing activity in Argentina.

Corporate      
Nine Months Ended September 30, 2011 2010 Change
(C$000s) ($) ($) (%)
(unaudited)      
Expenses      
      Operating 4,503 3,702 22
      SG&A 24,622 17,160 43
  29,125 20,862 40
Operating loss(1) (29,125) (20,862) 40

(1)  Refer to "Non-GAAP Measures" on page 17 for further information.

Operating Loss
The 40 percent increase in Corporate operating expenses from the first nine months of 2010 is mainly due to an increase in the number of personnel supporting the Company's significantly expanded operations and revenue base combined with higher stock-based compensation and annual bonus expenses.

Depreciation
For the nine months ended September 30, 2011, depreciation expense increased by 12 percent to $64.5 million from $57.5 million in the corresponding period of 2010. The increase in depreciation expense is mainly a result of a larger fleet of equipment operating in North America and Russia offset partially by the depreciation of the United States dollar.

Foreign Exchange Losses or Gains
The Company recorded a foreign exchange loss of $13.2 million during the first nine months of 2011 versus a $0.6 million loss in the comparative nine-month period of 2010. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in United States dollars in Canada, Russia and Latin America. The majority of the Company's foreign exchange loss recorded in the first nine months of 2011 was attributable to the translation of United States dollar-denominated intercompany debt held in Canada. The value of the United States dollar at September 30, 2011 appreciated significantly against the Canadian dollar from the beginning of the year, resulting in an unrealized foreign exchange loss related to this net indebtedness.

Interest
The Company's interest expense during the first nine months of 2011 increased from the comparable period of 2010 by $7.9 million to $26.4 million. This increase was primarily due to higher overall debt offset partially by the impact of the depreciation of the United States dollar on the translation of interest expense related to the Company's United States dollar-denominated senior unsecured notes.

Income Tax Expenses
The Company recorded an income tax expense of $50.3 million during the first nine months of 2011 compared to income tax expense of $14.0 million in the comparable period of 2010. The effective income tax rate for the nine months ended September 30, 2011 and 2010 was 32 percent and 30 percent, respectively. The increase in total income tax expense was primarily due to higher profitability in the United States, Canada and Russia but was offset partially by lower profitability in Latin America. The effective tax rate for the nine months ended September 30, 2011 was higher than in the comparable period in 2010 primarily due to the mix of earnings among tax jurisdictions in which Calfrac operates.

Liquidity and Capital Resources


 
 
Three Months Ended Sep. 30, Nine Months Ended Sep. 30,
  2011 2010 2011 2010
(C$000s) ($) ($) ($) ($)
(unaudited)        
Cash flows provided by (used in):        
      Operating activities (331) 55,383 120,984 77,636
      Financing activities 1,734 (3,247) (1,834) 10,612
      Investing activities (84,597) (29,938) (219,543) (68,848)
      Effect of exchange rate changes on
            cash and cash equivalents
38,334 (3,744) 24,685 (533)
Increase (decrease) in cash and cash equivalents (44,860) 18,454 (75,708) 18,867

Operating Activities
The Company's cash flow provided by operating activities for the nine months ended September 30, 2011 was $121.0 million versus $77.6 million in the comparable period of 2010. This change was primarily due to improved activity and operating margins in Canada and the United States. At September 30, 2011, Calfrac's working capital was approximately $375.8 million, an increase of 10 percent from December 31, 2010. The Company reviewed its accounts receivable in detail at September 30, 2011 and 2010 and determined that a provision for doubtful accounts receivable totalling $1.1 million and $1.5 million, respectively, was adequate. The majority of this provision related to a customer that filed for Chapter 11 restructuring under United States bankruptcy law.

Financing Activities
Cash flow used in financing activities during the first nine months of 2011 was $1.8 million compared to cash flow provided by financing activities of $10.6 million in the comparable 2010 period. During the first quarter of 2011, the Company repaid the remaining US$4.3 million of its 2015 senior notes as well as $3.2 million of mortgages related to certain properties acquired in the acquisition of Century Oilfield Services Inc. in September 2009. This was offset partially by the issuance of Calfrac common shares, the sale of common shares in Denison Mines Corporation and the proceeds from a bank loan in Colombia.

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

On September 27, 2011, the Company increased its credit facilities with a syndicate of Canadian chartered banks from $175.0 million to $250.0 million and extended the term to four years. The facilities consist of an operating facility of $20.0 million and a syndicated facility of $230.0 million. The interest rate on the syndicated facility is based on the parameters of certain bank covenants. For prime-based loans, the rate ranges from prime plus 0.50 percent to prime plus 1.25 percent. For LIBOR-based loans and Bankers' Acceptance-based loans, the margin thereon ranges from 1.75 percent to 2.50 percent above the respective base rates for such loans. As of September 30, 2011, the Company had utilized $1.4 million of its syndicated facility for letters of credit, leaving $248.6 million in available credit.

Calfrac pays semi-annual dividends to shareholders at the discretion of the Board of Directors. Dividend payments were $3.3 million ($0.075 per share) for the nine months ended September 30, 2011 and $2.2 million ($0.05 per share) for the same period in 2010.

At September 30, 2011, the Company had cash and cash equivalents of $140.9 million. A portion of these funds was invested in short-term investments, which consisted primarily of an overnight money market fund invested with a member of the banking syndicate.

Investing Activities
For the nine months ended September 30, 2011, Calfrac's cash flow used in investing activities was $219.5 million versus $68.8 million for 2010. Capital expenditures were $223.0 million in the first nine months of 2011 compared to $71.9 million in the same period of 2010. Capital expenditures were primarily related to supporting the Company's fracturing operations throughout North America.

In March 2010, the Company acquired a non-controlling interest in one of its subsidiaries for approximately $2.0 million. The acquisition was considered a capital transaction and, accordingly, the amount was charged to retained earnings.

The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during the first nine months of 2011 was an increase of $24.7 million versus a decrease of $0.5 million during the same period of 2010. These increases relate to cash and cash equivalents generated and held by the Company in a foreign currency.

With its strong working capital position, available credit facilities and anticipated funds provided by operating activities, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for the remainder of 2011 and beyond.

Outstanding Share Data
The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan is equal to a maximum of 10 percent of the Company's issued and outstanding common shares. As at October 31, 2011, there were 43,883,248 common shares issued and outstanding, and 3,200,350 options to purchase common shares.

Normal Course Issuer Bid
The Company has filed a Notice of Intention to make a Normal Course Issuer Bid with the Toronto Stock Exchange. Under the Normal Course Issuer Bid, the Company will be permitted to acquire up to approximately 3.2 million of its common shares during the period November 7, 2011 through November 6, 2012. Any shares acquired under the bid will be cancelled. A copy of the Notice of Intention to make a Normal Course Issuer Bid is available without charge on request to the Company's Corporate Secretary.

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 "anticipates", "can", "may", "could", "expect", "believe", "intend", "forecast", "will", or similar words suggesting future outcomes, are forward-looking statements. Forward-looking statements in this document include, but are not limited to, statements with respect to future capital expenditures, future financial resources, future oil and natural gas well activity, future costs or potential liabilities, outcome of specific events, trends in the oil and natural gas industry and the Company's growth prospects including, without limitation, its international growth strategy and prospects. These statements are derived from certain assumptions and analyses made by the Company based on its experience and interpretation of historical trends, current conditions, expected future developments and other factors that it believes are appropriate in the circumstances, including assumptions related to commodity pricing and drilling activity where the Company operates. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from the Company's expectations. The most significant risk factors to Calfrac relate to prevailing economic conditions; the demand for fracturing and other stimulation services during drilling and completion of oil and natural gas wells; commodity prices; 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; dependence on major customers; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; and regional competition. Readers are cautioned that the foregoing list of risks and uncertainties is not exhaustive.

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

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

Third Quarter Conference Call
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2011 third quarter results at 10:00 a.m. (Mountain Time) on Wednesday, November 2, 2011. 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 18880486). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS


 
     
  September 30, December 31,
As at 2011 2010
(C$000s) (unaudited) ($) ($)
ASSETS    
Current assets    
      Cash and cash equivalents 140,896 216,604
      Accounts receivable 303,130 177,652
      Income taxes recoverable 2,658 3,284
      Inventories 89,845 58,221
      Prepaid expenses and deposits 12,010 8,379
  548,539 464,140
Non-current assets    
Property, plant and equipment 757,678 588,759
Goodwill 10,523 10,523
Deferred income tax assets 16,686 32,179
Total assets 1,333,426 1,095,601
LIABILITIES AND EQUITY    
Current liabilities    
      Accounts payable and accrued liabilities 168,928 116,315
      Bank loan (note 4) 1,331 -
      Current portion of long-term debt (note 5) 486 4,854
      Current portion of finance lease obligations (note 6) 1,971 1,294
  172,716 122,463
Long-term debt (note 5) 464,215 443,346
Finance lease obligations (note 6) 875 2,515
Other long-term liabilities 953 1,062
Deferred income tax liabilities 61,778 24,183
Total liabilities 700,537 593,569
Equity attributable to the shareholders of Calfrac    
Capital stock (note 7) 272,511 263,490
Contributed surplus (note 8) 21,949 15,468
Loan receivable for purchase of common shares (note 15) (2,500) (2,500)
Retained earnings (note 3) 335,111 229,865
Accumulated other comprehensive income (loss) 6,076 (4,252)
  633,147 502,071
Non-controlling interest (258) (39)
Total equity 632,889 502,032
Total liabilities and equity 1,333,426 1,095,601

Contingencies (note 16)

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS


 
 
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
  2011 2010 2011 2010
(C$000s, except per share data) (unaudited) ($) ($) ($) ($)
Revenue 440,491 275,245 1,047,355 667,217
Cost of sales (note 14) 316,858 210,181 795,643 560,883
Gross profit 123,633 65,064 251,712 106,334
Expenses        
      Selling, general and administrative 19,003 15,552 53,709 40,774
      Foreign exchange losses (gains) 23,720 (1,523) 13,244 561
      Loss (gain) on disposal of property, plant and
            equipment
765 102 (316) (884)
      Interest 8,739 6,229 26,436 18,561
  52,227 20,360 93,073 59,012
Income before income tax 71,406 44,704 158,639 47,322
Income tax expense        
      Current (956) 620 1,245 1,654
      Deferred 25,077 12,154 49,095 12,317
  24,121 12,774 50,340 13,971
Net income for the period 47,285 31,930 108,299 33,351
         
Net income (loss) attributable to:        
      Shareholders of Calfrac 47,381 31,955 108,530 33,376
      Non-controlling interest (96) (25) (231) (25)
  47,285 31,930 108,299 33,351
         
Earnings per share (note 7)        
      Basic 1.08 0.74 2.49 0.78
      Diluted 1.07 0.74 2.44 0.77

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

 
  Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
  2011 2010 2011 2010
(C$000s) (unaudited) ($) ($) ($) ($)
Net income for the period 47,285 31,930 108,299 33,351
Other comprehensive income (loss)        
      Change in foreign currency translation adjustment 13,868 (2,239) 10,340 (1,102)
Comprehensive income for the period 61,153 29,691 118,639 32,249
Comprehensive income (loss) attributable to:        
      Shareholders of Calfrac 61,252 29,725 118,858 32,290
      Non-controlling interest (99) (34) (219) (41)
  61,153 29,691 118,639 32,249

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


 
       
  Equity Attributable to the Shareholders of Calfrac    
  Share
Capital
Contributed
Surplus
Loan
Receivable for
Purchase of
Common
Shares
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total Non-
Controlling
Interest
Total
Equity
(C$000s) (unaudited) ($) ($) ($) ($) ($) ($) ($) ($)
Balance - January 1, 2011 263,490 15,468 (2,500) (4,252) 229,865 502,071 (39) 502,032
Net income for the period - - - - 108,530 108,530 (231) 108,299
Other comprehensive income (net of tax):                
      Cumulative translation adjustment - - - 10,328 - 10,328 12 10,340
  263,490 15,468 (2,500) 6,076 338,395 620,929 (258) 620,671
Stock options:                
      Stock-based compensation recognized - 6,158 - - - 6,158 - 6,158
      Proceeds from issuance of shares 9,126 (1,988) - - - 7,138 - 7,138
      Shares cancelled (note 8) (105) 105 - - - - - -
Denison Plan of Arrangement (note 8) - 2,206 - - - 2,206 - 2,206
Dividends - - - - (3,284) (3,284) - (3,284)
Balance - September 30, 2011 272,511 21,949 (2,500) 6,076 335,111 633,147 (258) 632,889
                 
Balance - January 1, 2010 251,282 10,844 - - 187,801 449,927 68 449,995
Net income for the period - - - - 33,376 33,376 (25) 33,351
Other comprehensive income (net of tax):                
      Cumulative translation adjustment - - - (1,086) - (1,086) (16) (1,102)
  251,282 10,844 - (1,086) 221,177 482,217 27 482,244
Stock options:                
      Stock-based compensation recognized - 4,383 - - - 4,383 - 4,383
      Proceeds from issuance of shares 3,573 (726) - - - 2,847 - 2,847
Acquisitions (note 12) - - - - (2,041) (2,041) - (2,041)
Dividends - - - - (2,153) (2,153) - (2,153)
Balance - September 30, 2010 254,855 14,501 - (1,086) 216,983 485,253 27 485,280

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS


 
   
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
  2011 2010 2011 2010
(C$000s) (unaudited) ($) ($) ($) ($)
CASH FLOWS PROVIDED BY (USED IN)        
OPERATING ACTIVITIES        
      Net income for the period 47,285 31,930 108,299 33,351
      Adjusted for the following:        
            Depreciation 21,897 19,831 64,461 57,492
            Stock-based compensation 1,311 1,491 6,158 4,383
            Loss (gain) on disposal of property, plant and
                  equipment
765 102 (316) (884)
            Interest 8,739 6,229 26,436 18,561
            Deferred income taxes 25,077 12,154 49,095 12,317
      Interest paid 632 (10,558) (18,070) (21,328)
      Changes in items of working capital (note 13) (106,037) (5,796) (115,079) (26,256)
Cash flows provided by operating
      activities
(331) 55,383 120,984 77,636
FINANCING ACTIVITIES        
      Bank loan proceeds 1,162 - 1,258 -
      Issuance of long-term debt, net of unamortized
            debt issue costs
(811) 10,000 (422) 24,930
      Long-term debt repayments (109) (13,729) (7,767) (14,105)
      Finance lease obligation repayments (326) (307) (963) (906)
      Denison Plan of Arrangement (note 8) - - 2,206 -
      Net proceeds on issuance of common shares 1,818 789 7,138 2,846
      Dividends - - (3,284) (2,153)
Cash flows provided by (used in) financing
      activities
1,734 (3,247) (1,834) 10,612
INVESTING ACTIVITIES        
      Purchase of property, plant and equipment (85,130) (30,097) (222,954) (71,884)
      Proceeds on disposal of property, plant and
            equipment
533 141 3,389 5,077
      Acquisition (note 12) - 18 - (2,041)
      Other - - 22 -
Cash flows used in investing activities (84,597) (29,938) (219,543) (68,848)
Effect of exchange rate changes on cash and
      cash equivalents
38,334 (3,744) 24,685 (533)
Increase (decrease) in cash and cash equivalents (44,860) 18,454 (75,708) 18,867
Cash and cash equivalents, beginning of period 185,756 25,483 216,604 25,070
Cash and cash equivalents, end of period 140,896 43,937 140,896 43,937

See accompanying notes to the consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


For the Nine Months Ended September 30, 2011
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated) (unaudited)

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ADOPTION OF IFRS

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

The Company prepares its financial statements in accordance with Canadian generally accepted accounting principles as set out in the Canadian Institute of Chartered Accountants' (CICA) Handbook. In 2010, the CICA Handbook was revised to incorporate IFRS and require publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. The Company's interim financial statements for the three months and nine months ended September 30, 2011 were prepared on this basis.

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standards (IAS) 34 Interim Financial Reporting and IFRS 1 First-time Adoption of International Financial Reporting Standards using accounting policies consistent with IFRS as issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC). The accounting policies followed in these interim financial statements are the same as those applied in the Company's interim financial statements for the periods ended March 31, 2011 and June 30, 2011. Subject to certain transition elections disclosed in note 3, the Company has consistently applied the same accounting policies in its opening IFRS balance sheet at January 1, 2010 (which is the date of transition) and throughout all periods presented, as if these policies had always been in effect. Note 3 discloses the impact of the transition to IFRS on the Company's reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Company's previous Canadian GAAP annual consolidated financial statements for the year ended December 31, 2010.

The policies applied in these interim consolidated financial statements are based on IFRS issued and outstanding as of September 30, 2011. Any subsequent changes to IFRS that are given effect in the Company's annual consolidated financial statements for the year ending December 31, 2011 could result in restatement of these interim consolidated financial statements, including the transition adjustments recognized upon adoption of IFRS.

These interim financial statements do not include all of the information required for annual financial statements and should be read in conjunction with the Company's previous Canadian GAAP annual consolidated financial statements for the year ended December 31, 2010 and the Company's interim financial statements for the quarters ended March 31, 2011 and June 30, 2011, prepared in accordance with IFRS applicable to interim financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements follow the same accounting policies and methods of application as the March 31, 2011 and June 30, 2011 interim financial statements.

3. TRANSITION TO IFRS

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

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

(i)      IFRS I transition elections
(ii)      Reconciliations of equity as previously reported under Canadian GAAP to IFRS
(iii)      Reconciliations of comprehensive income as previously reported under Canadian GAAP to IFRS
(iv)      Adjustments to the statement of cash flows
(v)      Explanatory notes on the transition to IFRS

(i)     IFRS 1 transition elections

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

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

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

             
As at September 30, 2010 Note
3(v)
Canadian
GAAP
Effect of
Transition to
IFRS
    IFRS
(C$000s) (unaudited)   ($) ($)     ($)
ASSETS            
Current assets            
      Cash and cash equivalents   43,937 -     43,937
      Accounts receivable   181,593 -     181,593
      Income taxes recoverable   1,461 -     1,461
      Inventories d 52,760 (135)     52,625
      Prepaid expenses and deposits d 10,202 (20)     10,182
    289,953 (155)     289,798
Non-current assets            
      Property, plant and equipment d 583,134 (12,550)     570,584
      Goodwill b, e 12,564 (2,041)     10,523
      Deferred income tax assets f 32,286 (2,532)     29,754
Total assets   917,937 (17,278)     900,659
             
LIABILITIES AND EQUITY            
Current liabilities            
      Accounts payable and accrued
            liabilities
  110,399 -     110,399
      Current portion of long-term debt   564 -     564
      Current portion of finance lease
            obligations
  1,274 -     1,274
    112,237 -     112,237
Non-current liabilities            
      Long-term debt   276,705 -     276,705
      Finance lease obligations   2,846 -     2,846
      Other long-term liabilities   1,070 -     1,070
      Deferred income tax liabilities f 27,019 (4,498)     22,521
      Non-controlling interest g 149 (149)     -
Total liabilities   420,026 (4,647)     415,379
Equity attributable to the shareholders of Calfrac          
      Share capital   254,855 -     254,855
      Contributed surplus c, h 14,335 166     14,501
      Retained earnings i 234,303 (17,320)     216,983
      Accumulated other
            comprehensive income (loss)
a, d (5,582) 4,496     (1,086)
    497,911 (12,658)     485,253
Non-controlling interest g - 27     27
Total equity   497,911 (12,631)     485,280
Total liabilities and equity   917,937 (17,278)     900,659

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

               
    Three Months Ended Sept. 30, 2010 Nine Months Ended Sept. 30, 2010
  Note
3(v)
Canadian
GAAP
Effect of
Transition to
IFRS
IFRS Canadian
GAAP
Effect of
Transition to
IFRS
IFRS
(C$000s, except per share data) (unaudited)   ($) ($) ($) ($) ($) ($)
Revenue   275,245 - 275,245 667,217 - 667,217
Cost of sales d 210,766 (585) 210,181 562,575 (1,692) 560,883
Gross profit   64,479 (585) 65,064 104,642 (1,692) 106,334
Expenses              
      Selling, general and
            administrative
c, h 15,529 23 15,552 40,645 129 40,774
      Foreign exchange (gains)
         losses
d (1,325) (198) (1,523) 630 (69) 561
      Loss (gain) on disposal of
            property, plant and
            equipment
  109 (7) 102 (874) (10) (884)
      Interest   6,229 - 6,229 18,561 - 18,561
    20,542 (182) 20,360 58,962 50 59,012
Income before income taxes   43,937 767 44,704 45,680 1,642 47,322
Income tax expense              
      Current   620 - 620 1,654 - 1,654
      Deferred d, f 12,137 17 12,154 9,672 2,645 12,317
    12,757 17 12,774 11,326 2,645 13,971
Net income for the period   31,180 750 31,930 34,354 (1,003) 33,351
               
Net income (loss) attributable to:          
Shareholders of Calfrac   31,194 761 31,955 34,373 (997) 33,376
Non-controlling interest g (14) (11) (25) (19) (6) (25)
    31,180 750 31,930 34,354 (1,003) 33,351
               
Earnings per share              
      Basic   0.72 0.02 0.74 0.80 (0.02) 0.78
      Diluted   0.72 0.02 0.74 0.79 (0.02) 0.77
               
Other comprehensive income (loss)            
      Change in foreign currency
            translation adjustment
  (2,285) 46 (2,239) (1,341) 239 (1,102)
Comprehensive income for the period   28,895 796 29,691 33,013 764 32,249
               
Comprehensive income (loss) attributable to:            
      Shareholders of Calfrac   28,909 816 29,725 33,032 (742) 32,290
      Non-controlling interest   (14) (20) (34) (19) (22) (41)
    28,895 796 29,691 33,013 (764) 32,249

(iv)     Adjustments to the Statement of Cash Flows

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

Three Months Ended September 30, 2010 Note 3(v) Canadian
GAAP
Effect of
Transition to
IFRS
IFRS
(C$000s) (unaudited)   ($) ($) ($)
CASH FLOWS PROVIDED BY (USED IN)        
OPERATING ACTIVITIES        
      Net income for the period   31,194 736 31,930
      Adjusted for the following:        
            Depreciation d 20,416 (585) 19,831
            Stock-based compensation c, h 1,466 25 1,491
            Loss on disposal of property, plant and
                  equipment
  109 (7) 102
            Interest   6,229 - 6,229
            Deferred income taxes f 12,137 17 12,154
            Non-controlling interest g (14) 14 -
      Interest paid   (10,558) - (10,558)
      Changes in items of working capital (note 13)   (4,868) (928) (5,796)
Cash flows provided by operating activities   56,111 (728) 55,383
FINANCING ACTIVITIES        
      Issuance of long-term debt, net of unamortized debt
            issue costs
  10,000 - 10,000
      Long-term debt repayments   (13,729) - (13,729)
      Finance lease obligation repayments   (307) - (307)
      Net proceeds on issuance of common shares   789 - 789
Cash flows used in financing activities   (3,247) - (3,247)
INVESTING ACTIVITIES        
      Purchase of property, plant and equipment d (30,099) 2 (30,097)
      Proceeds on disposal of property, plant and equipment   141 - 141
      Acquisition (note 12)   18 - 18
Cash flows used in investing activities d (29,940) 2 (29,938)
Effect of exchange rate changes on cash and cash equivalents   (4,470) 726 (3,744)
Increase in cash and cash equivalents   18,454 - 18,454
Cash and cash equivalents, beginning of period   25,483 - 25,483
Cash and cash equivalents, end of period   43,937 - 43,937

Nine Months Ended September 30, 2010 Note 3(v) Canadian
GAAP
Effect of
Transition to
IFRS
IFRS
(C$000s) (unaudited)   ($) ($) ($)
CASH FLOWS PROVIDED BY (USED IN)        
OPERATING ACTIVITIES        
      Net income for the period   34,373 (1,022) 33,351
      Adjusted for the following:        
            Depreciation d 59,184 (1,692) 57,492
            Stock-based compensation c, h 4,253 130 4,383
            Gain on disposal of property, plant and
                  equipment
  (874) (10) (884)
            Interest   18,561 - 18,561
            Deferred income taxes f 9,672 2,645 12,317
            Non-controlling interest g (19) 19 -
      Interest paid   (21,328) - (21,328)
      Changes in items of working capital   (24,176) (2,080) (26,256)
Cash flows provided by operating activities   79,646 (2,010) 77,636
FINANCING ACTIVITIES        
      Issuance of long-term debt, net of unamortized debt
            issue costs
  24,930 - 24,930
      Long-term debt repayments   (14,105) - (14,105)
      Finance lease obligation repayments   (906) - (906)
      Loan receivable for purchase of common shares (note 15)   - - -
      Net proceeds on issuance of common shares   2,846 - 2,846
      Dividends   (2,153) - (2,153)
Cash flows provided by financing activities   10,612 - 10,612
INVESTING ACTIVITIES        
      Purchase of property, plant and equipment d (71,862) (22) (71,884)
      Proceeds on disposal of property, plant and equipment   5,077 - 5,077
      Acquisition (note 12)   (2,041) - (2,041)
Cash flows used in investing activities d (68,826) (22) (68,848)
Effect of exchange rate changes on cash and cash equivalents   (2,565) 2,032 (533)
Increase in cash and cash equivalents   18,867 - 18,867
Cash and cash equivalents, beginning of period   25,070 - 25,070
Cash and cash equivalents, end of period   43,937 - 43,937

(v)     Explanatory Notes on the Transition to IFRS

a)      In accordance with IFRS transitional provisions, the Company elected to reset the cumulative translation adjustment, which includes gains and losses arising from the translation of foreign operations, to zero at the date of transition to IFRS. The cumulative translation adjustment reset was $18,886 with an offsetting decrease to opening retained earnings, as a result of the re-translation of the Company's foreign subsidiaries' non-monetary assets and liabilities using the rate of exchange at the balance sheet date versus the applicable historical rate.
 
b)      In accordance with IFRS transitional provisions, the Company has elected to apply IFRS relating to business combinations and goodwill relating to foreign subsidiaries prospectively from January 1, 2010. As such, previous Canadian GAAP balances relating to business combinations entered into before that date, including goodwill, have been carried forward without adjustment.
 
c)      In accordance with IFRS transitional provisions, the Company has elected not to apply IFRS relating to fully vested stock options at January 1, 2010. As such, previous Canadian GAAP balances relating to fully vested stock options at January 1, 2010 have been carried forward without adjustment. Full retrospective application of IFRS has been applied to non-fully-vested stock options at January 1, 2010.
 
d)      Under IFRS, the subsidiaries, with the exception of Cyprus, have a functional currency that is different from that of the Company. Financial statements of the subsidiaries with a functional currency different from that of the Company are translated into Canadian dollars whereby assets and liabilities are translated at the rate of exchange at the balance sheet date, revenues and expenses are translated at average monthly exchange rates, and gains and losses in translation are recognized in the shareholders' equity section as accumulated other comprehensive income.
 
  This represents a change in the translation method from previous Canadian GAAP for some subsidiaries whereby monetary assets and liabilities were translated at the rate of exchange at the balance sheet date, and non-monetary items were translated at the historical rate applicable on the date of the transaction giving rise to the non-monetary balance. Revenues and expenses were translated at monthly average exchange rates and gains or losses in translation were recognized in income as they occurred.
 
  The re-translation of the subsidiaries' financial statements to comply with IFRS resulted in translation differences due to the change in translation method.
 
e)      The Company entered into a transaction to acquire the non-controlling interest in one of its subsidiaries. The transaction was accounted for as a step-acquisition under previous Canadian GAAP. As such, purchase accounting was used to ascribe fair values to the assets and liabilities acquired with the remaining amount recorded as goodwill.
 
  Under IFRS, the transaction is accounted for as a capital transaction as the Company had a change in ownership while retaining control over the subsidiary. Because the Company already controlled the subsidiary, any subsequent change in the ownership interest (while maintaining control) is recorded as a capital transaction. As such, any amounts previously recorded as goodwill are charged to retained earnings.
 
f)      Deferred income tax assets and liabilities have been adjusted to give effect to adjustments due to the tax impact of the inter-company sale of assets.
 
  Under IFRS, the tax benefit or cost of inter-company sales is recognized. The Company had transactions with one of its subsidiaries in 2007 whereby the tax impact of the transactions was eliminated under previous Canadian GAAP. The tax effect of these transactions has been adjusted in the financial statements, resulting in a change to deferred taxes and tax expense.
 
  Under IFRS, a deferred credit is not recorded for an acquisition when the tax attributes acquired are in excess of the proceeds paid. Under IFRS, the benefit related to these tax attributes is recorded through income at the time of the acquisition. Therefore, there was no deferred credit under IFRS. Under previous Canadian GAAP, the deferred credit was set up for the transaction and was drawn down during the first quarter of 2010 in the amount of $2,505.
 
g)      Under IFRS, the non-controlling interest's share of the net assets of subsidiaries is included in equity and its share of the comprehensive income of subsidiaries is allocated directly to equity. Under previous Canadian GAAP, non-controlling interest was presented as a separate item between liabilities and equity in the balance sheet, and the non-controlling interest's share of income and other comprehensive income was deducted in calculating net income and comprehensive income of the Company.
 
h)      Under IFRS, the application of an estimated forfeiture rate for stock option grants based on the number of options expected to vest over their vesting period is required. Under previous Canadian GAAP, an entity may elect either to estimate the expected forfeiture rate at the date of grant or to recognize compensation expense as though all options will vest and then recognize the impact of actual forfeitures as they occur.
 
  The Company previously recognized forfeitures as they occurred and the adjustment included in contributed surplus and stock-based compensation expense is the result of the application of an estimated forfeiture rate for stock option grants based on the number of options expected to vest over their vesting period.

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

As at Note Sept. 30, 2010
(C$000s) (unaudited)   ($)
Retained earnings as previously reported under Canadian GAAP   234,303
IFRS adjustments to the opening balance sheet    
      Deferred income taxes due to inter-company sale of assets f 2,135
      Deferred credit f 2,505
      Estimated forfeitures for employee stock options h (36)
      Cumulative translation adjustment a (18,886)
IFRS adjustments for the nine months ended September 30, 2010    
      Change in foreign currency translation d 1,854
      Buy-out of non-controlling interest in subsidiary e (2,041)
      Deferred income taxes due to inter-company sale of assets f (223)
      Deferred credit f (2,505)
      Change in non-controlling interest due to foreign currency translation g 6
      Estimated forfeitures for employee stock options h (129)
Retained earnings as reported under IFRS   216,983

4. BANK LOAN

The Company's Colombian subsidiary has an operating line of credit of which US$1,270 was drawn at September 30, 2011. It bears interest at the LIBOR rate plus 2.1 percent to 3.12 percent and is secured by a guarantee issued by the Company.

5. LONG-TERM DEBT

As at September 30,
2011
December 31,
2010
(C$000s)    
US$450,000 senior unsecured notes due December 1, 2020,    
      bearing interest at 7.5% payable semi-annually 471,690 447,570
US$4,320 senior unsecured notes due February 15, 2015,    
      bearing interest at 7.75% payable semi-annually - 4,297
Less: unamortized debt issue costs and unamortized debt discount (8,419) (8,638)
  463,271 443,229
$230,000 extendible revolving term loan facility, secured by    
      Canadian and U.S. property, plant and equipment - -
Less: unamortized debt issue costs (1,450) (887)
  (1,450) (887)
Mortgage obligations maturing between December 2012 and March    
2014 bearing interest at rates ranging from 5.15% to 6.69%,    
      repayable at $35 per month principal and interest, secured by    
      certain real property - 3,176
US$2,444 mortgage maturing May 2018 bearing interest at U.S.    
      prime less 1%, repayable at US$33 per month principal and    
      interest, secured by certain real property 2,562 2,682
ARS1,277 Argentina term loan maturing December 31, 2013    
       bearing interest at 18.25%, repayable at ARS61 per month    
      principal and interest, secured by guarantees by the Company 318 -
  464,701 448,200
Less: current portion of long-term debt (486) (4,854)
  464,215 443,346

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at September 30, 2011, was $445,747 (December 31, 2010 - $457,682). The carrying values of the mortgage obligations approximate their fair values as the interest rates are not significantly different from current mortgage rates for similar loans.

The interest rate on the term revolving facility is based on the parameters of certain bank covenants. For prime-based loans, the rate ranges from prime plus 0.5 percent to prime plus 1.25 percent. For LIBOR-based loans and Bankers' Acceptance-based loans the margin thereon ranges from 1.75 percent to 2.5 percent above the respective base rates for such loans. The facility is repayable on or before its maturity date of September 27, 2015, assuming the facility is not extended. The maturity date may be extended by one or more years at the request of the Company and acceptance by the lenders. The Company also has the ability to prepay principal without penalty. Debt issue costs related to this facility are amortized over the term of the facility.

Interest on long-term debt (including the amortization of debt issue costs and debt discount) for the nine months ended September 30, 2011 was $26,916 (year ended December 31, 2010 - $48,758).

The US$4,320 senior unsecured notes were repaid in full on February 15, 2011 (plus accrued interest and call premium of US$335) and the $3,176 of mortgage obligations at December 31, 2010 were repaid in full on February 22, 2011.

6. FINANCE LEASE OBLIGATIONS

     
  September 30, December 31,
As at 2011 2010
(C$000s)    
Finance lease contracts bearing interest at rates ranging from    
      5.68% to 6.58%, repayable at $124 per month, secured by    
      certain equipment 2,993 4,110
Less: interest portion of contractual payments (147) (301)
  2,846 3,809
Less: current portion of finance lease obligations (1,971) (1,294)
  875 2,515

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

7. CAPITAL STOCK

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

 
  Nine Months Ended Year Ended
  September 30, 2011 December 31, 2010
Continuity of Common Shares Shares   Amount   Shares   Amount
  (#)   (C$000s)   (#)   (C$000s)
Balance, beginning of period 43,488,099   263,490   42,898,880   251,282
Issued upon exercise of stock options 409,400   9,126   586,885   12,130
Issued for compensation -   -   2,334   78
Shares cancelled (note 8) (16,476)   (105)   -   -
Balance, end of period 43,881,023   272,511   43,488,099   263,490

The weighted average number of common shares outstanding for the nine months ended September 30, 2011 was 43,649,499 basic and 44,436,450 diluted (nine months ended September 30, 2010 - 43,037,030 basic and 43,454,502 diluted). The difference between basic and diluted shares for the nine months ended September 30, 2011 is attributable to the dilutive effect of stock options issued by the Company as disclosed in note 9.

8. CONTRIBUTED SURPLUS

     
Continuity of Contributed Surplus Nine Months
Ended Sept 30,
2011
Year Ended
December 31,
2010
(C$000s)    
Balance, beginning of period 15,468 10,844
      Stock options expensed 6,158 7,096
      Stock options exercised (1,988) (2,472)
      Shares cancelled 105 -
      Denison Plan of Arrangement 2,206 -
Balance, end of period 21,949 15,468

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

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

9. STOCK OPTIONS

Continuity of Stock Options (year to date) 2011 2010
    Average   Average
    Exercise   Exercise
  Options Price Options Price
  (#) (C$) (#) (C$)
Balance, January 1 2,583,825 17.50 2,508,143 16.70
      Granted during the period 1,127,800 34.30 1,091,200 20.84
      Exercised for common shares (409,400) 17.44 (203,335) 14.00
      Forfeited (98,275) 25.34 (70,466) 20.22
      Expired - - (357,292) 23.71
Balance, September 30 3,203,950 23.18 2,968,250 17.48

Stock options vest equally over three or four years and expire three-and-one-half or five years from the date of grant. The exercise price of outstanding options ranges from $8.35 to $37.18 with a weighted average remaining life of 3.10 years. When stock options are exercised the proceeds, together with the amount of compensation expense previously recorded in contributed surplus, are added to capital stock.

10. FINANCIAL INSTRUMENTS

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

The fair values of financial instruments included in the consolidated balance sheet, except long-term debt and finance lease obligations, 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 September 30, 2011 was $445,747 before deduction of unamortized debt issue costs of $8,419 (December 31, 2010 - $457,682 before deduction of unamortized debt issue costs of $8,638). The fair values of the remaining long-term debt and finance lease obligations approximate their carrying values, as described in notes 5 and 6.

11. CAPITAL STRUCTURE

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

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

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

     
  September 30, December 31,
For the twelve months ended 2011 2010
(C$000s)    
Net income for the period 124,366 49,418
Adjusted for the following:    
  Depreciation 84,398 77,429
  Amortization of debt issue costs and debt discount 10,736 11,944
  Stock-based compensation 8,950 7,174
  Gain on disposal of property, plant and equipment (373) (941)
  Deferred income taxes 48,886 12,108
Cash flow 276,963 157,132

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

At September 30, 2011, the long-term debt to cash flow ratio was 1.68:1 (December 31, 2010 - 2.85:1) calculated on a 12-month trailing basis as follows:

     
  September 30, December 31,
As at 2011 2010
(C$000s, except ratio)    
Long-term debt (net of unamortized debt issue costs and
debt discount) (note 5)
464,701 448,200
Cash flow 276,963 157,132
Long-term debt to cash flow ratio 1.68:1 2.85:1

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

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

12. ACQUISITION

In March 2010, the Company acquired the non-controlling interest in one of its subsidiaries for approximately $2,000. The acquisition is considered a capital transaction and, accordingly, the amount was charged to retained earnings.

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

13. SUPPLEMENTAL INFORMATION

Changes in non-cash working capital are as follows:

Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
  2011 2010 2011 2010
(C$000s)        
Accounts receivable (120,052) (37,634) (125,478) (45,818)
Income taxes recoverable (1,396) 227 626 320
Inventory (17,966) 3,631 (31,624) (10,211)
Prepaid expenses and deposits (2,590) 854 (3,631) (3,441)
Accounts payable and accrued liabilities 35,992 27,185 45,137 33,051
Other long-term liabilities (25) (59) (109) (157)
  (106,037) (5,796) (115,079) (26,256)

The preceding amounts exclude any changes in working capital resulting from acquisitions.

14. ADDITIONAL IFRS DISCLOSURE

The following IFRS disclosure relating to the nine months ended September 30, 2011 and 2010 is material to an understanding of these interim financial statements:

(i) Presentation of expenses

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

  • operations; and
  • selling, general and administrative.

Use of the function of expense method also requires that the following additional information on the nature of expenses be disclosed:

Nine Months Ended September 30, 2011       2010
(C$000s)    
Depreciation (included in cost of sales) 64,461       57,492
Amortization of debt issue costs and debt discount          889       2,097
Employee benefits expense (ii) 220,332       145,893

(ii) Employee benefits expense

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

Nine Months Ended September 30, 2011       2010
(C$000s)          
Salaries and short-term employee benefits 210,254       138,251
Post-employment benefits (group retirement savings plan) 2,072       1,292
Share-based payments 7,720       5,900
Termination benefits 286       450
  220,332       145,893

15. RELATED-PARTY TRANSACTIONS

An entity controlled by a director of the Company provides ongoing real estate advisory services to the Company. The aggregate fees charged to date for such services during 2011 were $81, as measured at the exchange amount.

In November 2010, the Company lent a senior officer $2,500 to purchase common shares of the Company on the Toronto Stock Exchange. The loan is on a non-recourse basis and is secured by the common shares acquired with the loan proceeds. It is for a term of five years and bears interest at the rate of 3.375 percent per annum, payable annually. The market value of the shares that secure the loan was approximately $2,072 as at September 30, 2011. 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.

16. CONTINGENCIES

Greek Operations

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

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

In 1999, the largest group of plaintiffs received a ruling from the Athens Court of First Instance that their termination was invalid and that salaries in arrears amounting to approximately $9,613 (6,846 euros) plus interest were due to the former employees. This decision was appealed to the Athens Court of Appeal, which allowed the appeal in 2001 and annulled the above-mentioned decision of the Athens Court of First Instance. The said group of former employees filed an appeal with the Supreme Court of Greece, which was heard on May 29, 2007. The Supreme Court of Greece allowed the appeal and sent the matter back to the Athens Court of Appeal for the consideration of the quantum of awardable salaries in arrears. On June 3, 2008, the Athens Court of Appeal rejected NAPC's appeal and reinstated the award of the Athens Court of First Instance, which decision was further appealed to the Supreme Court of Greece. The matter was heard on April 20, 2010 and a decision rejecting such appeal was rendered in June 2010. NAPC and the Company are assessing available rights of appeal to any other levels of court in any jurisdiction where such an appeal is warranted. Counsel to NAPC has obtained a judicial order entitling NAPC to obtain certain employment information in respect of the plaintiffs which is required in order to assess the extent to which the plaintiffs have mitigated any damages which might otherwise be payable.

Several other smaller groups of former employees have filed similar cases in various courts in Greece. One of these cases was heard by the Athens Court of First Instance on January 18, 2007. By judgment rendered November 23, 2007, the plaintiff's allegations were partially accepted, and the plaintiff was awarded compensation for additional work of approximately $49 (35 euros), plus interest. The appeal of this decision was heard on June 2, 2009, at which time an additional claim by the plaintiff was also heard. A decision in respect of the hearing has been rendered which accepted NAPC's appeal of the initial claim and partially accepted the additional claim of the plaintiff, resulting in an award of approximately $15 (11 euros), plus interest.

Another one of the lawsuits seeking salaries in arrears of $180 (128 euros), plus interest, was heard by the Supreme Court of Greece on November 6, 2007, at which date the appeal of the plaintiffs was denied for technical reasons due to improper service. A rehearing of this appeal was heard on September 21, 2010 and the decision rendered declared once again the appeal inadmissible due to technical reasons. The remaining action, which is seeking salaries in arrears of approximately $616 (439 euros) plus interest, was scheduled to be heard before the Athens Court of First Instance on October 1, 2009, but was adjourned until November 18, 2011 as a result of the Greek elections.

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

Management is of the view that the assignment and indemnity referred to in the preceding paragraph, together with the available defences to these proceedings, combine to make it improbable that the Company will incur any financial liability in connection with these claims.  It is management's view that an outflow of cash will not result from these judgments. Consequently, no provision has been recorded in these consolidated financial statements.

Potential Claim

The Company has a potential liability related to a contractual claim, the amount of which is estimated to be approximately $1,900 on an after-tax basis. Management considers it probable that the claim will be settled in favour of the Company.

17. SEGMENTED INFORMATION

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

The business segments presented reflect the management structure of the Company and the way in which the Company's 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 September 30, 2011        
Revenue 230,011 165,114 29,233 16,133 - 440,491
Operating income (loss)(1) 87,203 46,291 3,345 (416) (9,896) 126,527
Segmented assets 662,917 503,107 123,869 43,533 - 1,333,426
Capital expenditures 43,088 38,179 2,864 999 - 85,130
Goodwill 7,236 2,308 979 - - 10,523
Three Months Ended September 30, 2010          
Revenue 160,465 83,603 21,878 9,299 - 275,245
Operating income (loss)(1) 53,473 21,401 5,184 (2,745) (7,970) 69,343
Segmented assets 493,424 266,520 106,383 34,332 - 900,659
Capital expenditures 17,664 7,426 4,609 398 - 30,097
Goodwill 7,236 2,308 979 - - 10,523
Nine Months Ended September 30, 2011        
Revenue 518,047 405,220 85,367 38,721 - 1,047,355
Operating income (loss)(1) 160,141 123,917 8,924 (1,393) (29,125) 262,464
Segmented assets 662,917 503,107 123,869 43,533 - 1,333,426
Capital expenditures 104,045 109,949 7,461 1,499 - 222,954
Goodwill 7,236 2,308 979 - - 10,523
Nine Months Ended September 30, 2010          
Revenue 346,279 217,322 57,501 46,115 - 667,217
Operating income (loss)(1) 94,398 44,357 7,491 (2,332) (20,862) 123,052
Segmented assets 493,424 266,520 106,383 34,332 - 900,659
Capital expenditures 43,796 19,124 7,928 1,036 - 71,884
Goodwill 7,236 2,308 979 - - 10,523
(1)      Operating income (loss) is defined as net income (loss) before depreciation, interest, foreign exchange gains or losses, gains or losses on disposal of property, plant and equipment, and income taxes.
     
  Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
  2011 2010 2011 2010
(C$000s)        
Net income 47,285 31,930 108,299 33,351
Add back (deduct):        
      Depreciation 21,897 19,831 64,461 57,492
      Interest 8,739 6,229 26,436 18,561
      Foreign exchange losses (gains) 23,720 (1,523) 13,244 561
      Loss (gain) on disposal of capital assets 765 102 (316) (884)
      Income taxes 24,121 12,774 50,340 13,971
Operating income 126,527 69,343 262,464 123,052

The following table sets forth consolidated revenue by service line:

  Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
  2011 2010 2011 2010
(C$000s)        
Fracturing 405,747 244,207 957,307 587,316
Coiled tubing 25,548 22,871 68,143 50,826
Cementing 5,980 4,853 14,161 14,937
Other 3,216 3,314 7,744 14,138
  440,491 275,245 1,047,355 667,217

18. SEASONALITY OF OPERATIONS

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

19. SUBSEQUENT EVENT

The Company has filed a Notice of Intention to make a Normal Course Issuer Bid with the Toronto Stock Exchange. Under the Normal Course Issuer Bid, the Company will be permitted to acquire up to approximately 3.2 million of its common shares during the period November 7, 2011 through November 6, 2012. Any shares acquired under the bid will be cancelled. A copy of the Notice of Intention to make a Normal Course Issuer Bid is available without charge on request to the Company's Corporate Secretary.

 

 

SOURCE Calfrac Well Services Ltd.

For further information:

Douglas R. Ramsay    Laura A. Cillis     Tom J. Medvedic
Chief Executive Officer    Senior Vice President, Finance      Senior Vice President,
Telephone:  403-266-6000    and Chief Financial Officer   Corporate Development
Fax:  403-266-7381    Telephone:  403-266-6000   Telephone:  403-266-6000
  Fax:  403-266-7381   Fax:  403-266-7381

 


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