Calfrac Well Services Ltd.

Fernando Aguilar - President and Chief Executive Officer Michael Olinek - Chief Financial Officer Scott Treadwell - Vice President of Capital Markets and Strategy

Sean Meakim - JP Morgan Chase & Co Ian Gillies - GMP Securities LP Benjamin Owens - RBC Capital Markets, LLC Brian Purdy - PI Financial Corp. John Watson - Simmons & Company International Jeff Fetterly - Peters & Company Westley Nixon - National Bank Financial, Inc.

Thank you, Leandra. Good morning, and welcome to our discussion of Calfrac Well Services third quarter results.

Joining me on the call today are Mike Olinek, Calfrac's Chief Financial Officer; and Scott Treadwell, our Vice President of Capital Markets and Strategy. This morning's conference call will be conducted as follows: I will provide an executive summary of the quarter.

After which, Mike will provide an overview of the financial performance of the Company. I will then close the presentation with an outlook for Calfrac's business.

After the presentation, we will open the call to questions from the phone. In a news release earlier today, Calfrac reported its third quarter 2017 results.

Please note that these financial figures are in Canadian dollars, unless otherwise indicated. Some of our comments today will refer to non-IFRS financial measures, such as adjusted EBITDA and operating income.

Please see our news release for additional disclosure on these financial measures. Our comments today will also include forward-looking statements regarding Calfrac's future results and prospects.

We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on forward-looking statements and these risk factors.

As shown in our results this morning, the third quarter of 2017 delivered further progress on a number of fronts, more active crews represent volume spent and the onset of a sustainable level of profitability. I would, first and foremost, like to thank all the employees at Calfrac that have contributed to this result.

Maintaining a high level of execution, safety and cost management in a period of rapid growth is only possible with a talented and committed team, and this is certainly the case at Calfrac. With some improvement in oil pricing through the quarter, macro-level volatility was reduced, also Canadian gas prices weakened materially as the quarter wrapped up.

Our client base was clearly focused on getting value for spend and this resulted in Calfrac activating four crews during the third quarter, including the establishment of an operation in the Permian Basin based in Artesia, New Mexico. In Canada, our operation was essentially fully booked for the quarter, delivering excellent productivity and benefiting from incremental pricing improvement.

As we move through the fourth quarter, we expect to see more volatility in activity levels, specially with the onset of winter weather in a number of operating areas and the prospect for a shift in work mix as the relative economic returns between liquids and gas driven plays in Canada widens. We have had some indications for a busy Q1 in both Canada and the U.S.

with potential for further reactivations through 2018. It is worth remembering that reduced budgeting processes are underway as always, and we would allocate resources prudently in a marketplace based on the capital spending plans of our customers.

Now I will pass the call over to Mike, who will begin with an overview of our quarterly financial performance. Mike?

Thank you, Fernando, and thank you, everyone, for joining us for today's call. Consolidated revenue in the third quarter increased by 156% year-over-year due to a 225% increase in fracturing activity in North America.

Adjusted EBITDA for the quarter was $81.1 million compared to negative $11.1 million a year ago. These improved results were driven primarily by a significantly higher and more consistent utilization in the United States and Canada, although results in Latin America and Russia also improved as compared to 2016.

Turning to Canada. Third quarter revenue was up 204% from the same quarter in 2016, primarily as a result of improved fracturing activity and higher pricing.

Although, it was partially offset by smaller average job sizes due to revenue mix. The number of fracturing jobs was higher due to an overall increase in completion activity in Western Canada as well as more active equipment and some change in job mix.

The number of coiled tubing jobs increased by 94% from the third quarter in 2016, primarily due to the nature of Calfrac's coiled tubing business, which supports its fracturing operations. Revenue for fracturing job decreased by 2% from the same period in the prior year as the Company's revenue included a higher proportion of smaller jobs due to completion design and geographic shifts.

Operating income margins increased by approximately 2,790 basis points year-over-year, which was mainly related to improved utilization and pricing as well as better fixed cost absorption. In the United States, the company has successfully responded to the rebound in industry activity by activating eight fracturing crews since the end of the third quarter in 2016.

This included three crews in North Dakota, two crews in Colorado, two crews in Pennsylvania and one crew, which began servicing the Permian Basin in New Mexico and Texas during the third quarter. The result was a 221% increase in the number of fracturing jobs completed period-over-period.

Revenue per job increased 13% year-over-year due to improved pricing, offset partially by the completion of smaller jobs in the Rockies region. In addition, one of Calfrac's customers in North Dakota provided its own sand during the quarter, which resulted in lower revenue per job in that region.

The 4% depreciation in the U.S. dollar versus the Canadian dollar partially offset the revenue improvement.

The Company's United States operations generated operating income of $37.1 million during the third quarter of 2017 compared to an operating loss of $6 million in the same period in 2016. The turnaround of positive operating income was primarily the result of improved utilization and pricing in Colorado, North Dakota and Pennsylvania, offset partially by $8 million in reactivation costs incurred during the quarter, including the start up of operations in Artesia.

SG&A expenses decreased by 3% in the third quarter of 2017 due to the depreciation in the U.S. dollar versus the Canadian dollar.

Revenue from Calfrac's Russian operations increased by 13% during the third quarter of 2017 to $29.8 million from $26.3 million in the corresponding three-month period of 2016. The increase in revenue was largely attributable to a 9% increase in fracturing activity combined with the 5% appreciation of the Russian ruble during the quarter.

Revenue per fracturing job increased by 9%, mainly due to the appreciation of the ruble and the completion of larger jobs. The Company's Russian operations generated operating income of $4.7 million during the third quarter of 2017 compared to $4.3 million in the corresponding period of 2016.

This increase was mainly due to improved fracturing crew utilization combined with the appreciation of the Russian ruble. SG&A expenses were $0.3 million higher than the comparable quarter in 2016, primarily due to higher personnel cost combined with the 5% appreciation of the Russian ruble.

Calfrac's Latin American operations generated total revenue of $43.6 million during the third quarter of 2017 versus $36.4 million in the comparable three-month period in 2016. Revenue in Latin America was 20% higher than the comparable quarter, primarily due to work volumes in the Vaca Muerta shale play.

The improvement was partially offset by lower cementing activity in Argentina, resulting from lower overall levels of drilling activity. Coiled tubing activity in Argentina increased year-over-year, but the impact was offset by the completion of smaller jobs.

The Company's operations in Latin America operated at a breakeven level during the third quarter compared to an operating loss of $2.1 million in the third quarter of 2016. Although the Company improved its revenue during the quarter, its operating fleet continued to be underutilized.

The Company also incurred $0.6 million of start up cost related to its operations in the Vaca Muerta unconventional play during the third quarter. SG&A expenses decreased by 10% in the third quarter, primarily due to changes in exchange rates.

Calfrac recorded a largely unrealized foreign exchange loss of $13.6 million during the quarter compared to a $0.1 million gain in 2016. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that are held in U.S.

dollars in Canada and Latin America as well as liabilities held in Canadian dollars in Russia. The Company's third quarter 2017 foreign exchange loss was largely due to the translation of U.S.

dollar-denominated assets held in Canada as the U.S. dollar depreciated against the Canadian dollar during the third quarter.

In addition, the translation of U.S. dollar denominated liabilities held in Argentina contributed to the foreign exchange loss as the value of the Argentinian peso depreciated against the U.S.

dollar during the third quarter. From a cash flow perspective, in spite of almost $65 million in additional working capital requirements during the quarter, Calfrac generated positive operating cash flow.

Our view remains that free cash flow, which we define as operating cash flow less capital investment, is needed for a sustainable business. As a result of the marked improvement in the Company's performance, free cash flow generation is becoming possible as incremental working capital requirements are reduced.

Turning to the balance sheet. The Company had approximately $43.6 million of cash, including one fully funded $25 million equity cure as well as working capital of approximately $335 million at the end of the third quarter.

In addition, Calfrac had used only $2.6 million of its credit facilities for letters of credit and had borrowings of $55 million on its credit facilities, leaving $217.4 million in available liquidity at the end of the third quarter. During the quarter, Calfrac amended and extended its credit facility agreement to June 1, 2020.

This amendment included a voluntary reduction in the available amount from $300 million to $275 million as well as a number of other adjustments that are detailed in the Liquidity section of our Q3 press release. As at September 30, 2017, the Company was in full compliance with its financial covenants.

Calfrac's 2017 capital budget was increased from $65 million to $95 million. This increase is mainly focused on sustaining capital projects that support the Company's existing pressure pumping operations in North America.

I would now like to turn the call back to Fernando to provide our outlook.

Thank you, Mike. Before I give a detailed summary, I would like to offer our thoughts on the macro trends at work in our industry.

The supply demand drivers in North American completions remain very robust. The rig count has moderated somewhat over the summer, the DUC, while inventory has continued to expand.

It was indicated that North America is short fracturing capacity and very short of quality fracturing crews. Sand volumes continue to grow, while Calfrac's Q3 was a record quarter in North America with almost 700,000 metric tons pumped.

And while the pace of intensity gains in North America may moderate, specially in the Lower 48, we believe that in the current commodity environment, the demand from completion services will remain high in the near term. As a result, the completions phase, the fracturing in particular, is becoming more and more critical to our clients' success in growing production at a reasonable cost and delivering returns to investors.

As Calfrac has focused on maintaining our license to operate through safe, productive and efficient execution, we have been able to gain market share towards North America, largely at the expense of service providers that cannot match our field performance. In fact, our entry into the Permian Basin was due in large part to the support from our clients in the area who have strongly expressed a desire to bring Calfrac into West Texas.

The outlook for the Company's operations in Canada remains positive. Although with the winter weather likely to hit Western Canada in the weeks ahead, we expect some typical seasonal disruptions to operational tempo as a result.

As well, we believe that some producers have exhausted their 2017 program budgets and will begin again in Q1 2018. This pattern is consistent with prior years and likely driven by having focus on present capital allocation rather than growth at any cost.

Finally, with the deterioration of Canadian gas pricing, some producers have adjusted activity levels accordingly, deferring some Q4 work into 2018. For the most part, as more producers and those behind on 2017 plans, have filled any available holes, but today we don’t expect fourth quarter activity in Canada to match third quarter levels.

Calfrac remains on track to reactivate on an eighth fleet in Canada during the latter part of the fourth quarter. However, we don't expect a material earning contribution until the first quarter of 2018.

As of today, our winter schedule is essentially fully booked. And we have prospects of a very strong workload during Q2 2018.

Pricing levels improved in the third quarter as almost all of our Canadian pricing we set during the latter stages of the second quarter. We will continue to evaluate pricing levels going forward on a case-by-case basis, but we don't expect material price improvement across our entire book of work in the short term.

Calfrac's U.S. operations reactivated four incremental fleets during the third quarter, including the establishment of a new base in Artesia, New Mexico, to survey the Permian Basin.

After a very busy summer and early full hiring and deployment of equipment, we expect the pace of reactivations to slow. We forecast the delivery of one fleet into Artesia in the fourth quarter and a fleet into San Antonio early 2018.

As is the case in Canada, pricing improvement have improved our results in recent months. As the pace of reactivation slows in 2018, we expect to see margin improvement.

However, reactivation cost ramp-ups and holiday activity levels are likely to impact margins in the fourth quarter. Now I would like to discuss Calfrac's international operations.

In Russia, the third quarter was in line with our expectations, largely due to a strong execution by our team in terms of consistent activity and cost management, but impacted by a slight weakening of the Russian ruble. Our outlook for 2018 is for operational and financial results to be relatively similar to 2017 in Russia, aside from currency exchange impacts.

Revenue in Argentina improved materially in the third quarter, driven by increased activity in the Vaca Muerta shale play in the country. As well, Calfrac commenced operations for a major international producer in the region.

As the ramp up phase subsides, we expect profitability to increase in the region, but pricing remains challenged and is not likely to pick up until higher levels of activity occur more consistently. As a result of increased activity and demand for equipment our previous forecast, the Company is announcing an increase in its 2017 capital budget from $65 million to $95 million.

The incremental spend will be focused on North American asset base. Thank you all very much for joining us today.

I will now turn the call back to the operator for questions.

Thanks. Good morning.

Good morning, Sean.

So Fernando, just to start, I guess, in Canada, obviously, great margin accretion, big move in the numbers. The labor bottleneck has been an ongoing challenge for the whole industry.

So I guess, I'm just trying to get a sense for how we should think about, on the one hand, market's pretty consolidated, you have this bottleneck as a result, market's very tight and so you're benefiting in terms of pricing power. But of course, there is limits to how much you can push given some of your commodity constraints for your customers.

Just trying to think about the puts and takes. That bottleneck also is restraining your ability to grow and reactivate further fleets.

How should we think about, as we go into 2018, the puts and takes of that labor bottleneck and its impact on both margins, but also top line growth potential?

Yes, Sean. We believe that the labor issues, as you presented them, can basically become bottlenecks and effect the potential growth for companies in the country.

Specially understanding what has been happening in the last two to three years when we lost so many employees in the industry, and in some cases, some of these employees are not really willing or interested to come back to the industry. We do have a very, very strong humans resources group working very close and embedded into our operations.

And the combination between the recruiters and all the people who are related to hiring, the production of ideas from the type of personnel that we need to attract and the different age profiles that we bring to the table, in conjunction with our training department and the operational side, is working very well. We do have today, as we speak, a couple of training sessions going with large numbers, they are fully booked.

And it continues to satisfy the demands from our operational area. Something that we are very proud of is our culture, and it has been something that is attracting people and bringing people onboard.

And also bringing people back from – the guys who were laid off during downturn has been proven very positive for us. So people are interested in coming back to the Company.

The ones that we had to release in the past, but also the new employees are joining. So is it a challenge?

Yes. Is it difficult to find qualified labor?

I also say, yes. But we have a name and we have a reputation in the industry and people are very proud to join the company and part of this operation.

So I'm not discounting that this is an easy exercise for the Company, but I can tell you that the different groups in the country are doing a good job. And we do not only attract people from the regional surrounding areas of our operations, but also from other parts of the country.

So just trying to summarize, is it challenging? Yes.

Are we managing to get the people that we need? Yes.

Because that's our job to man our fleets and our crews. But I can tell you that the people who are coming back are very happy to be part of this level of activity again.

So thank you for that Fernando. Let me just ask it a slightly different way.

I guess, what I'm asking is, is the governor of growth, labor? Is that the constraint?

Or is the constraint ultimately commodity prices and cash flow from your customers? I guess, in terms of those reactivations are going to grow.

Yes. So labor is not basically going to stop our potential for growth.

So it is – of course, a Company like Calfrac, which is a service-based Company, it is about how much money our customers are willing to spend and what type of activity they have in front of them. When Mike and I, we have included in our press release, we talk about some of the softness that can happen in the market.

I have to tell you two things: one is that some of these budgets that we managed to consume and finish in Q3, it was due to our efficiencies. I think in a couple of cases where our customers were basically expecting these programs to go until mid-December, the efficiency brought from our crews and the higher number of stages performed in a daily basis accelerated the pace of those operations, and we finished earlier than what we expected.

Which is very good news for our customers, because they can even regroup and think about the following year or they can continue investing and generate more work for us. So we were very efficient in Q3, as I was mentioning.

And as you see a little bit of softness in dry gas in the Canadian market. I think, we have to be cautious the way that we represent our view to the market as it has been introduced to you during the call.

So we believe that this is more a customer-driven situation than a human resources shortage as I'm discussing this with you today.

Okay. That's very helpful.

Thank you for that. And just one last piece.

I guess cash flow quite critical in terms of the pass-through and debt reduction. Could you maybe give us a little bit of a scenario now as to – or kind of how you think things could play out under a few different scenarios in 2018 from a cash flow perspective in terms of a more growth opportunities also can lead to higher CapEx as we've seen again this quarter.

Just how we think about the potential for free cash flow in a couple of other scenarios next year, which should be helpful towards the balance sheet?

Yes. So it is very interesting what we have in front of us.

And I think, we tried to spell it out in our introductory comments today. The place to be today in the oil and gas industry is North America.

You can see exactly where activity can pick up in a very fast and quick mode and it is going to take some time for the international business, let's say, to reach the momentum that is basically picked up in North America. The good news is that the industry has become very efficient.

And this efficiency is translating into more work for the pressure pumping companies. In those pressure pumping companies, you have different types of companies, and we're very proud to say that the way that we execute in the field, following as it was presented to you our license to operate, from the service quality and safety in the field and the supply chain network and technology from the corporate and divisional and district officers, it's working very well for us.

And the reason for this is that, the customers that we are working for today in both countries are very interested in the efficiencies. They really want to not only to keep the level where they are today.

If you remember, in 2014, the industry was running at four stages per day average, and today we're basically touching, as an industry average, between seven and eight. These increased intensities that requires more equipment added to the fact that we are pumping more volumes in terms of sand and the chemistries to support these designs is generating more business for us.

And what does it mean? More sales per day when you are basically covering your fixed cost, you're going to be able to start generating cash, you're going to start generating free cash as well and that cash flow generation is helping us to be in a better position today to do different things as you were positioning in your question.

So we are in a situation today where the industry will require, during 2018 and 2019, maybe 3 million to 4 million horsepower increase in the U.S. and maybe 10% what we have in Canada.

But the industry is not building, because the earnings per share as an average for the industry are not there yet for companies to invest in producing equipment or building equipment. So the translation for this is that, we believe that the industry is going to be short of pressure pumping equipment for the next couple of years.

And then it's going to take some time for the industry to bring the equipment to operation. Has the industry done it?

Yes, it has. In the past, 2011 was an example, when the equipment built and manufactured basically over flood the market.

I think the difference between those days and today is that a lot of companies are learning that in order for the industry to deploy this amount of capital, we have to be more disciplined, and we have to be careful. So we are very happy to see that in a market that hasn't really increased price a lot, because you can see that in the – some of the reports that our competitors are producing today, specially in the U.S., the pricing is not really moving very fast, but the balance between price increase, cost control and the efficiencies that are brought between customers and service companies is the formula that will generate that cash.

And Sean, I'll just add to that. So where Calfrac is, when we look at free cash flow has two main factors associated with it.

Obviously, as Fernando discussed, I mean, the underlying cash flow of the business is returning to what we consider more normalized levels, so that's obviously a very positive. But with the significant ramp-up in activity that's resulted in a very large working capital build.

As we get to a very more stable run rate on revenue, we're going to actually normalize our working capital, which will allow us with managing our CapEx, which, as you alluded to, has increased to $95 million. I think in 2018, we're certainly seeing the ability to generate pretty significant free cash flow for the enterprise.

With CapEx, I mean, the CapEx is almost directly associated with the amount of equipment we have operating in the field. And so that's the reason for the increase from $65 million to $95 million.

We foresee our ability to get all of our equipment up and operating at some point in 2018, hopefully by midyear. As a result, CapEx will increase slightly, but it certainly won't increase to the ramp that it's had throughout 2017 as far as what we've had to report.

Fair enough. Thank you for the details.

I appreciate it.

Thanks Sean.

Good morning, everyone.

Good morning, Ian.

Good morning.

Are you guys able to provide any additional detail around the capital cost associated with entering the Permian, i.e., base, et cetera? And maybe why you chose the location in New Mexico over a basin in the Midland area?

Yes, Ian, it's Scott. Well certainly on the cost side, really there is no capital associated with the base.

It's all expensed, it's leased. There would have been some funds put into it to get it up to what we want and that sort of thing, but really any capital we would spend is really focused on the assets.

Reactivating the fleet was something that was underway as we exited Q2 and got into Q3. And then in terms of location selection, part of it was really driven by our clients, the guys that brought us down there are a little more focused on the Delaware side than the Midland side, and so that gave us the opportunity to look outside of the Midland area where, obviously, there's a huge amount of activity, costs are a little bit higher, labor is a little bit harder to get.

And just through a confluence of factors, you ended up with an option to get a shop in Artesia that fit our purpose, at least in the short-term and it worked out quite well for us.

It is about the quality of the acreage and the quality of the customers in the area and the efficiencies at the end that these customers would really want to have with our operations.

Okay. That's helpful.

And I guess, along the same lines, are you able to use some of your existing partners on the supply chain side? Or have you had to go and find some new partners there to give you a hand, whether it be for chemicals or proppants and what have you?

In general terms, I have to tell you that the people we normally work with have been the – let's say, the bigger names in the industry for both the chemistries that we deploy and also the sand that we are pumping. You know that there is a trend in the U.S.

where the sand from the north, which is called Saragossa finer sand in Texas, and there is a trend in Texas to become more finer than in the past. So – and there is a new wave of, let's say, development of local and regional mines that is also happening.

So the combination of that, plus the supplier that we work with, are basically supporting our operations the way we need it. Is it working, let's say, 100% with our initials?

No. And you read that in all reports that the bottlenecks coming from sand and also chemicals and the level of activity from transport to sand to the different materials is challenging in West and South Texas, the answer is yes.

But we have a very professional group that is supporting these areas. And even with some hiccups that you can encounter, because you are operating in a new area.

You remember that in 2014, Calfrac had the idea of penetrating the Permian, but in long-term basically stopped us from doing it. Today, we can say that, that plan and that strategy to be active in the area is happening, and we are working for customers that are top in the region, and we are very proud and happy with our performance.

That's helpful color. Last one with respect to the Permian from me.

As you get ramped up there and you get two crews go in, I mean, do you feel the need that you're going the need to get to three crews? And by the time you get to two crews, do you think the margins from that specific region will be accretive or dilutive to, I guess, the segmented operating margin?

Ian, it's Mike. I think as you get and build out a fleet from one to two to three, you're going to be accretive to operating margins for sure.

Certainly, when one fleet isn't going to be accretive, but as you get to two, it's certainly I think, it's almost neutral and maybe slightly positive and anything past that is very accretive. So I think that's our goal.

The best indication, Ian, is the amount of work in the area and the ability or possibility to increase our presence in the Permian. And I think, this is going to be – I don't know if two or three is the number, four, five, six, it depends how things – and how much interest from the customer's point of view and the level of activity that the customers want to bring, and the efficiency that they want to have in the operation will materialize for us.

But I tell you, that this is just the beginning. And we're very proud to say that in our plants, we see a more active Permian than the one we have today.

Okay. And last one for me, just a bit of a housekeeping one.

Are you able to remind us now, given the reactivations, how many crews you're running in each of your various geographic areas?

Yes, I can do that for you. So today running seven in Canada, plan to get the eighth crew out as we said late this quarter, probably really January 1, 2018.

And then in the U.S., today, we're running three crews in the Marcellus. We're running four crews in North Dakota.

We're running four crews in Colorado, but one of those crews is temporally deployed to Artesia. And then we've got one incumbent crew, if you want to call that, in Artesia.

So we're actually operating two in Artesia and three in Colorado, but it's a Colorado domiciled equipment.

Perfect. Thanks very much guys.

So I’ll turn back over now.

Thank you, Ian.

Thank you, Ian.

Hey, good morning, guys. Congrats on a good quarter.

Thank you.

Thanks Ben.

You guys mentioned in the press release that reactivating the older fleets in Canada going forward would cost in excess of $2.5 million. Can you give us an estimate of what those reactivation costs are on a per square basis?

Yes. At this point, we know it's going to be more.

But to be honest, we haven't confirmed and taken decision internally to actually continue the reactivation. So at this point, it's still in the estimating process.

The big issues are going to be the pumps and the blenders. You're talking about older equipment, and you may need to replace fluid and some things like that before you put them into the field.

But again, we're in the estimation phase. So unfortunately, we don't have much.

But it's definitely going to be higher than that sort of $2 million to $3 million range we thought about. I don't think you'd look at $10 million, but that's really about the level of granularity I can give you.

But Ben, the good news about these reactivations up to now is that – and that we've been – if you take the number of fleets that we have reactivated is one every two months for Canada and one every month for the U.S. This is an outstanding performance from the amount of work that has to be dedicated to bring the equipment and the people to mine those crews.

And the numbers that we have provided to you, as Scott mentioned, $2 million for a smaller fleet and $3 million for a larger fleet, it has been happening all across the fleet, so the reason for that is the same thing that we have presented to you in all these calls, is that it was one of the main responsibilities of our district managers in the field was to protect the equipment, because that equipment had to go back to work soon. Cannibalizing the fleet and it was basically parking it without any sort of maintenance was something that we were not going to do.

So when you see the reactivation cost in line what we've been telling the market, it will increase, as Scott mentioned, for the last pieces of the fleet. But in general terms, we are very satisfied with the level of expense that we've been telling the market and also spending at the same time.

Okay. And as a follow-up, just hoping you may provide some color on the new sand transload that you added in the quarter, just maybe the location and kind of what the nature of the contractual arrangement is there?

Well, I won't go too much into the contract. But I'll tell you, it's in the Grand Prairie area.

So it supplements the facility we have in Taylor, and replaces a merchant third-party facility that we had access to previously. So this is a very similar arrangement to the other transloads where we don't own it, we haven't put capital into it, but we have exclusivity.

So it's Calfrac sand and Calfrac, either trucks or third parties contacted by Calfrac to move the sand. And as I said, I won't go into the details of the contract expect to say, it's relatively similar to the ones we've got operating today.

And we think it's a great step, but there is probably more to come, I think with sand intensity growing, activity growing, especially in that Grand Prairie corridor. You'd probably look to increase your density over time.

But again, it's going to depend on where the customer mix is, is it more BC? Or is it more Alberta?

Those are things that, I think, have to play out in the months ahead.

Okay, that's helpful. Actually one more follow-up for me, just wondering what you're seeing in terms of your E&P customers in Canada, sourcing their own sand, have you seen a shift in customer behavior there?

No. Not really.

I think other than the two that everybody knows is sourcing their own sand, I think largely – there may be a couple of others that are of sufficient scale to consider it. But I would say, Canada has got a lot more mid-cap and small-cap customers.

They've got really finite resources and though it may cost more on a per ton basis, the reliability of delivery and the ability to focus capital on getting Greece out of the ground, I think, is far more important for them. So I don't know that you see a massive change there given the customer demographics here, but yes, no changes in the short-term here.

It is same for the U.S. And we believe that is normally a 10% to 20% customers’ that decide to go that way, but it's not something that changes the way that service companies operate.

So it's – the same thing applies to the U.S.

Okay, great. Appreciate the color.

I’ll hand it back. Thanks guys.

Thank you.

Thanks Ben.

I wanted to ask just about the outlook. You mentioned a couple of factors in Canada that might make Q4 a little weaker.

I'm just wondering, if those apply to the U.S. to the same degree?

It didn't really – it wasn't entirely clear to me here. And obviously, you've got some more reactivations there.

I was just wondering if you give us a bit more outlook for Q4 on the U.S.

Yes. Well, Brian, we are always cautious the way that we see the market.

And you have to think that Q4 has Thanksgiving in the U.S. and then Christmas and New Year for the 2.

However, Christmas and New Year in the U.S. are not as – let's say, I'm not taking it as a big holiday as it happens in Canada.

So it's a compensation between the two. When you take the level of activity, most probably you'll be able to compensate the holiday periods in both countries.

With the reactivations so far, let's say, half fleet for Canada as we mentioned, that the full impact is going to be in Q1 for the eighth fleet, and then a couple of crews that are coming in the U.S. So we hope that this is basically going to compensate for that, but because of the price of gas and some uncertainty due to the holidays, we prefer to be in the cautious line.

I think you're right when you're saying that the reactivations will compensate for some, but we still have to see how that affects the quarter in general terms.

Okay. Fair enough.

And then just on the pricing side as well. It sounds like you're not expecting any big or fleet-wide increases.

I'm just wondering if you have some specific customers that are maybe still below your general pricing level that are catching up to the current pricing that might provide some positive impact in Q4 or beyond?

No. I would tell you, and we'd certainly like to recognize the efforts of our sales group in Canada and the U.S.

in really tightening up the portfolio on pricing. I think as you got through the first half of the year, there were definitely some legacy agreements signed late in 2016 and it's always been our way of doing business that will honor those agreements.

As those came due and came up for renegotiations through the second quarter largely, there were some more meaningful adjustments for some customers, but I would tell you now the band is pretty tight. I think better customers are going to get through better pricing.

We tend not to focus on the spot market. So I don't think we would characterize any of our pricing as really leading edge.

But I don't think there's anybody who we would look at as being meaningfully different on a profitability side. And again, just to sort of reiterate it, I know it sounds like a broken record that the biggest impact to our profitability is aligning with customers that allow us to frac more stages per day and more days per month.

Pricing helps, but if you've got no activity and great pricing, you're still not going to make any money.

Okay, great. And then just on the capital budget increase.

It looks like a pretty big ramp from what you've been doing. If you were going to make or spend all that $95 million within 2017, do you think some may spillover into 2018?

Yes. I would say that we're just building some history with some of the components as far as their natural lives.

So it's likely that we're going to have some spillover into 2018. But we'll see how things go, and we're just kind of prepared with our budget to worst-case scenario.

Okay, great. That’s all I had.

Thanks very much.

Thank you, Brian.

Thanks, Brains.

I think on the call, one of you mentioned being fully utilized at some point in 2018 as an aspiration. Given that, do you have any plans to order new equipment over the next couple of months?

Or will that decision be made down the road?

John, we still have equipment that has to be reactivated. And you remember that in the last – during the downturn and in the last couple of years, we finished the manufacturing or building 140,000 horsepower, 40,000 for Argentina and 100,000 for North America.

And we've been deploying that equipment in the react – sorry, in the activation of the fleets and reactivating equipment as well. So before we go back and order equipment, we will go through the process of reactivating everything that we have.

And it will all depend how the market continues developing. But you can see that this – that types of equipment that is going to be – is going to continue increasing as we speak today into 2018, it is going to be – it's going to put the market in a tighter situation, number one.

Number two, this is going to generate opportunities for improving our pricing levels. So we have to go through the reactivations and making sure that all the equipment that we have in our fleet is back to work before we start taking our, let's say, new capital plans in front of our board.

So the answer is, we would see how the market continues developing, but it is a combination of using what we have and we – and optimizing that fleet.

Right and that makes sense. And then regarding fleet size in U.S., a couple of your peers have increased average horsepower per fleet close to 50,000.

Has the average fleet in U.S. for Calfrac increased?

Or do you expect it to increase over the coming quarters?

Yes, it is correct what you're saying. These are the numbers that are basically happening.

And it was – it is very true that the number that you are using 45,000 to 50,000 is something that is an actual new data point.

Okay. And so the average fleet size for Calfrac is now 45,000?

Yes, 45,000 to 50,000. Yes.

You have as an example that you say is a good data point for you to check is that we were in the 20,000 to 25,000 horsepower in the back end and that has gone from 30,000 to 35,000 and as well the 40,000 in Pennsylvania going to 45,000 and sometimes to 50,000. So when you take the average fleet going from 20,000 and 35,000, where we are today is 45,000 to 50,000.

That is correct, John.

Okay, perfect. And then one more for me on San Antonio, previously, we've talked about the benefits of having basin scale.

And I guess, my question is, when do you expect to have two fleets operating in San Antonio to have some of that basin scale that you've mentioned in the past?

Soon, as I was saying before, we have been bringing 1 fleet per quarter in the U.S. And you have to realize, the effort that it takes just to bring the people, recertify them, train them again, make sure that they're ready for the operation, because customers really want you to not start walking, they want you to run as soon as you hit their basins.

So when you take the new fleets and you go straight we went – just to give you an anecdotal point, we went to one of the new operations in Texas, and we basically went and now that we're in the basil session in – season in Texas with the asperous, you have to realize that we just took it out of the stadium, knocked it out of the stadium. And the customer was expecting to have 800 barrels of oil production in Delaware, and we basically managed to get 1,600.

That gives you an idea that customers want you to run. So yes, we want Texas to be busier as we have managed to reactivate our operation in the state and in both places, having at least two, three crews in San Antonio and also in the Permian is something that we are aiming for the short-term.

Got it, congrats on a great quarter and I’ll turn it back.

Thanks a lot, John.

Good morning everyone. I have just a follow-up on the reactivation side.

So I know you talked about the cost of Canada going up as you bring – or potentially bring more crews back in. But on the U.S.

side, what trend do you expect as you move towards full reactivation?

You mean trend in terms of money or in terms of numbers?

Cost per crew for the incremental ones?

Yes. Well, it's not as what I said.

If we were thinking that we were spending between $2 million and $3 million for a smaller and larger fleet is what I was saying before, most probably we'll be in a 20% to 30% higher spends. As we approach the, let's say, the last 100,000 horsepower, most probably that number is going to increase a little bit more.

How much more? You know very well, Jeff, that when you are bringing equipment, you take the equipment that is basically ready to go back.

So I can think of the last 100,000 horsepower to be higher expense than what we've been reporting to you and this isn't – like Scott or Mike were mentioning earlier, I don't think that number is really very clear in front of us, but it's not going to be completely out of scope.

I guess, to add a little bit of color to that. As I said, it's blenders and pumps.

But a couple of the other things that we end up spending more on as we go through the fleet, you've been sort of taking frac iron, you need more frac iron per location, you need more blenders per location. And so you're kind of exhausting your equipment there faster than you are on the pump side.

And so that's where the cost starts to come in as that you're touching the bottom of the barrel on some other stuff before the pumps and that just adds cost. The guys in Beebe, Arkansas that do our refurbishments in the U.S., they've got the capacity to get through about a spread a quarter really on the refurbishment of equipment, pumps and blenders, but it's all the other bits and pieces that start to really add up for you.

And in order for us to keep that level of activity, when you take – when you want to bring and keep the quality and safety of the operation with the numbers that we're bringing, you have to remember, Jeff, that we had three crews a year ago, and now we are talking about 13 and 14 fleets. So it is a big, big change and the number of people that have to go through the system, train and be operational and making sure that you deliver, because you don't want to start an operation and be kicked out because the customer is not happy with you.

That basically tells you that the pace that we have decided to take in this ramp-up was the adequate one. And I think, we have – as we were saying before, we have good equipment.

But of course, that equipment that is basically living or being left at the – in front of the fence, at the end if they want, they're going to spend a little bit more money. And like I was saying before, we don't expect that to be more than 100,000 horsepower.

So the discipline that we have is basically paying off today.

Do you believe that the 776,000 horsepower in the U.S. and the 427,000 in Canada is all capable of working?

Yes. We believe that, yes and maybe more.

When you see what is happening with the trends in the industry. When you see what the customers really want to do and how they're ramping up in efficiencies, there is not enough equipment in the U.S.

for all the company's to take over the business. And that's why I was saying at the beginning of our meeting, the U.S.

is the – sorry, the North American market is the place to be, because that – those markets are the most efficient markets in the world and this is the place where – it is very true that the commodity price is not wherever it has to be. But as we continue balancing the market, that activity is going to increase.

I mean, the next two to three years in North America are going to be very interesting from the pressure pumping point of view.

On the CapEx side, the $95 million budget for 2017, what would the breakout be between reactivation costs and sustaining capital or re-infrastructure costs?

Yes. I would say that most of it is really just sustaining, not really related to reactivation.

So I would say, probably 15% somewhere in that realm is very related to reactivations.

And based on your goal to have the U.S. fleet fully reactivated by mid-2018 and potential reactivations on the Canadian side, is it safe to assume that, that level of spend for reactivations will just continue for 2018?

You mean at the same pace that we were in 2017, Jeff?

The dollars involved from a reactivation standpoint. Do you expect them to go down in 2018 versus what you've seen in 2017?

On a total basis, for sure they're going to go down. I think as we've discussed on a fleet basis likely go up from an expense side, and be very consistent on the capital side from what we've experienced, maybe a little bit higher on CapEx.

So even though your unit economics or unit expenses per crew being reactivated is going up and potentially materially up, even though it's going to be more than offset by the fact you have fewer crews to reactivate next year?

Yes, but yes, that's exactly what Mike said in his – he mentioned in his notes, Jeff. That we've been through, I don't know, 2015 or 2016 reactivations in 2017 coming from 30% of our equipment operational and 70% part.

That number, the absolute number has to go down. Yes, this is what we mentioned.

Okay. But to your comment earlier, Mike, from an overall capital spending standpoint, you expect that 2018 spending will be higher than 2017 and the reference point is the $95 million budget?

Yes. And it'll be slightly higher just as you get everything out and working.

And it shouldn't be materially higher, but it's going to be up a bit.

Okay. I know you mentioned earlier on the working capital side, you expect to draw us to start to abate.

Is there anything you can do to start to moderate your non-cash working capital currently sitting at $291 million?

Yes. I mean, we're highly focused on that internally here to do what we can to work on our working capital, whether it's better management of our inventory or getting better collections on our receivables.

But as we move forward, I think, at least, the run rate as the ramp on AR will abate and that will allow us to not to have draws and then we'll work on monetizing where we can, where it makes sense that we can do that. But we're solely focused on that in North America.

Okay. Last question, Fernando, on the Argentinian side, I know the outlook commentary is recently constructive about incremental customers, but what do you need to see or do to make money in that country?

I just came from Argentina, Jeff, and we have the opportunity of discussing this in more detail. But I have to tell you that the – what we need as an industry to make money in Argentina is for the activity to really happen.

The industry went from 140 weeks to 60, and now it's picking up again. And I think this is what is happening, as we speak.

I think there was a note yesterday about YPF investing more money in the next few years and all that, but the only way for a business to improve is exactly the same thing that is happening around the world. As rigs have activity in front of you and then company’s equipment back to work.

And that is not happening in 2017 up to now, but it's started to move. And some customers are really looking into that and understanding that problem.

Other customers still don't see that. So – and when you have five or six pressure pumping companies working for a very small market, it is very difficult for them to make money.

And I believe, what you're saying is 100% correct. I mean, just have the list in front of us, have the activity picking up and then the financials are going to be improved.

Thank you for the color. Appreciate it.

Yes, thanks.

Good morning, guys.

Good morning, Westley.

So I got two questions this morning. First one is, we've seen a few years now of rapid growth in average frac stages per well in North America.

And I'm curious if from your view has that started to plateau yet? Or is it realistic to expect that to continue to grow into 2018 in North America?

And if so, any difference in terms of those growth rates between Canada and the U.S.?

Yes. So that's a very interesting question, because we see that happening.

Canada is trailing and is trying to follow what the U.S. is doing, but not at the same pace.

But when you see what is happening in the U.S., there are some customers that are now moving – and you saw the numbers so far, sand, pumps and the wells and the number of stages, that increase is not plateauing yet, it will continue increasing in 2018. But what is basically very interesting really above that is that we see more super fracs happening now in the U.S.

that is basically generating higher efficiency and higher utilization and higher number of stages per day per fleet.

I think to think about it from the customer's point of view, they'll look at drainage on a stages per section or stages per acre metric rather than stages per well. So as wells continue to get longer and laterals get longer then, obviously, stage count's going to continue to increase.

But at some point that reaches a tipping point, which may limit the stages per well even though the stages per acre or stages per section continues to grow up, so you'd just see more wells. So I think there's a couple of moving parts there.

But I think, I'd agree that you'd see the trend continuing.

Okay.

Yes, Canada – as we said, Canada is following, and it's not at the level of the U.S., but is getting there.

Okay. And then so as we think about your mix of Canadian business as it stands today, I was wondering is there a way to ballpark it in terms of the split between your exposure to gas wells versus your exposure to oil and liquids-rich wells?

Yes, I mean I won't go into real granular detail, but I would tell you that dry gas is a very small piece of our business and then even lean liquids is not large. I think, we've done a really good job, Tom and his group in Canada have done a very great job of building the book of work and clients that are focused more on oil and liquids-rich gas plays and a little bit less on the dry gas and that wasn't because we saw anything coming.

I think that was just you saw where the returns in economics were and that seemed to be the place to go. And the clients have aligned with us quite nicely there.

We don't know what 2018 is going to look like. We'll certainly be watching customer budgets as intently as investors are, but we'll respond and reposition our customer base as we need to based on those budgets.

That’s great. Well, thanks a lot for your time.

Thank you, Westley.

Thanks, Westley. End of Q&A

Thank you, Leandra. Right on time, 11 o’clock, this finishes our Q3 conference call.

Thank you, everyone, who have participated in this call and we'll see you in our next conference call. Thank you and have a very good day.