Operator
Good morning and welcome to the STEP Energy Services Q1 2022 Results Conference Call and Webcast. At this time all participants are in listen-only mode.
Following management's presentation there will be a question-and-answer session open to financial analysts only. Instructions will be provided at that time for you to queue up for questions.
[Operator Instructions]. I would like to remind everyone that this conference call is being recorded today May 12, 2022, at 09:00 Mountain Time.
On the call today are Regan Davis Chief Executive Officer, Klaas Deemter, Chief Financial Officer and Steve Glanville, President and Chief Operating Officer. Now I'll turn the conference over to Regan Davis.
Please go ahead.
Regan Davis
Good morning, everyone. Thank you for joining us for this call.
The format this morning will be Klaas will give an update on finances. Steve will give an update on operations.
And I'll provide some closing comments summarizing what you probably already will hear from them. So I'll turn it over to Klaas at this time.
Klaas Deemter
Good morning everyone. Thanks Reagan.
Before we begin, I'd like to remind everyone that this conference call may contain forward-looking statements other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking Information section over Q1 2022 MD&A.
Several business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to the risk factor and risk management section of our MD&A for the quarter ended March 31.
For more complete description of business risks and uncertainties facing this document is available on our website as well as on SEDAR. During this call, we're going to refer to several common industry terms and certain non-IFRS measures that are again more fully described in our MD&A which is again on the website or SEDAR.
So I'm going to give a brief overview view of our financial results and then I'll turn the mic over to Steve who's going to provide some operational detail. So the first quarter of 2022 delivered the confidence start to year that the company has signaled in its Q4 2021 release.
First quarter revenue was highest Q1 in our history, and highest quarters since Q3 2018. Revenue for the quarter was $218.5 million which is about 60% higher than the $136 million we generated in Q1 of 2021, up from $159 million in Q4 last year.
Biggest driver of course, is a familiar story of higher commodity prices, strong oil and gas prices enjoyed by our clients drove activity higher with rig count up significantly in Canada and U.S. Our revenue counting was tucked under $147 million compared to $109 million in Q1 of last year and $91 million in Q4 of 2021.
Utilization was higher across the board and the strong demand from our oil focus customers allowed us to feel the low pressure -- that specifically targeted this oil focused work [ph]. Steve, we'll get into the details of the crew.
But it was a nice talk in addition that we could activate with minimal capital spent. And in addition to this small crew, we offer just four larger fraction curves and eight codes to events in Canada.
Revenue in the U.S. was $72.7 million compared to $27.5 million in Q1 2021.
Just note we only operated two fracturing spreads in Q1 of last year, where it's operating three fracturing spreads this year. Our $72.7 million compares to the $67 million that we earned in Q4 of last year.
In addition to those three spreads, we also operated eight coiled tubing units in U.S. We were able to move up pricing in both Canada and the U.S.
during the quarter but we didn't get real movement until after we saw our January results which were hammered by inflation and somewhat slowly start to the month. Once we saw these results in early February, we gave our sales teams a mandate to increase prices and said that we were prepared to lose work if our clients didn't accept increases.
We were able to move prices up 10% to 15% in Canada, 20% to 25% in the U.S. However, we won't get full benefit of these increases until the coming quarters given the timing of how they rolled up to in Q1.
Keeping prices steady through Q2 in Canada and [Indiscernible] has engaged in the price discounting and typically happens during the spring break up period. Our U.S.
team is continuing to push pricing higher through the quarter following the lead of a much larger competitors in the basins that we operate in. We generated $36.9 million in adjusted EBITDA in Q1 2022 up from $16 million in Q1 of last year, which I'd like to point out, also included $3.5 billion in CEWS and we were also up from the $17 million that we earned in Q4 2021.
As noted in our MD&A, inflation limited the returns that we were able to achieve in this quarter. But I want to point out that this is the highest first quarter EBITDA since Q1 2018.
And we're extremely proud of the hard working professionals in our company that made this possible. A strong EBITDA performance translated into the first quarter of positive net income since Q3 of 2018.
The $9.2 million net income earned this quarter translated into an earnings per share of $13.5. Turning to our balance sheet, we saw a significant increase in our working capital compared to the fourth quarter.
The increase in our net debt was a result of the increased draw on our credit facilities to fund the higher working capital demands in the business. We maintain adequate liquidity through the quarter and expect that our lines will touch zero this week, as we harvest that working capital following a small lull in activity here in Canada due to the spring break.
We remain in compliance with all our covenants. And subsequent to the quarter end, we delivered notice of early termination of the Covenant relief provisions that were granted in Q3 of 2021.
These provisions were due to expire at the end of Q2, 2022 but the early termination reduced the ordering cost by about 200 basis points for the balance of the quarter. But just to put that into context, about $10,000 to date that we were able to return to the bottom line through that.
In response to the expected increase in activity, the board of directors has approved a lot of this increase to our 2022 capital budget of about $8 million, bringing our total budget to $56 million for the year. This capital will fund our ESG oriented investments into dual fuel and oil reduction kits, as well as increase our maintenance capital to response to the higher activity expectations for the year.
With that, I'll turn the call over to Steve will provide some more comments on our operating conditions and our outlook for Q2 and the balance of the year.
Steve Glanville
Thanks Klaas and good morning. Take a few minutes to talk about some of the operational highlights that we realized in the first quarter, as well provide brief commentary on how the second quarter is progressing for the business.
Utilization was very strong through most of Q1 despite the typical cold weather impacts early in the quarter, and the Omicron COVID-19 variant, which caused some operational disruptions. I'd like to take this opportunity and really thank our field professionals for battling through these tough conditions without the minimal operational challenges.
The high utilization for the quarter is a direct effect of the increase in drilling activity due to the surge in commodity prices. You remember WTI rose from the start of the quarter at $77 a barrel and averaged $95 a barrel through the quarter.
Also the exciting part about the current commodity cycle for our business and in particular our Canadian business is the increase in natural gas prices. Since most of our operations are focused on liquid rich natural gas completions.
The start of the year NYMEX gas prices were around $4. And today they're hovering around that $7 for an MMBtu.
The U.S. rig count averaged 636 rigs up 17% from the past quarter, and a 68% increase year-over-year.
In Canada, the rig count averaged around 193. And on a combined basis, we pumped over 600,000 tons of profit of which STEP supplied 64% of that and the remaining being plant supplied.
This was a 10% increase in the previous quarter on 615 operating days for our active fractures. I'll dive a bit deeper and discuss operational results from each of our geographic regions.
Starting with our U.S. frac business, we continue to operate three large frac crews, with each frac crew having between 50 and 60,000 horsepower available.
Majority of the work was where we were active in the Permian Basin. Profit and last mile delivery bottlenecks resulted in some minor delays which impacted optimum frac efficiencies.
The quick wrap up in the Basin activity put a strain on supply chain and third party infrastructure. However, we believe this will correct itself in the coming quarters as additional resources will be added.
One other highlight for the quarter is one of our tier two frac crews has a bolt on dual fuel system, which is quite a bit different than the current systems that are out there. Where it's a direct injection, which is very comparable to what's the tier four that is out there today.
And we average around 75% substitution so we're quite happy with the results of that fleet. In the U.S.
on our coiled tubing business had a slower start at the beginning of the quarter as activity typically follows the frac completions and since most operators took time off during the holiday season. This created about a two week lag to reach full utilization in January and due to wells not being handed over for milling operations.
At the end of the quarter, we stopped that additional unit in the Rockies region as high demand warranted the expansion. This additional overhead was captured in the quarter however, revenue was not.
And we'll be following in the subsequent quarters. So this will put us at nine deep active coiled tubing units currently in the U.S.
We are very pleased with the results that our U.S. business put up in Q1, and we look forward to improving our bottom line margins.
As we continue to work with our dedicated clients, they increase pricing. Over to our Canadian business, on the frac side, we operate five frac spreads with 215,000 horsepower during the quarter.
And as Klaas had mentioned, we did reactivate a fifth frac spread. And it was mainly focused on lower intensity work in the Viking and Cardium areas.
And we really were able to capitalize with our bundled services with our cultivating assets. Total operating days for the quarter surged 42% on quarter-over-quarter basis as the band for our frac services increased.
One other interesting note for quarter for the frac side is, as Klaas had mentioned, our idle reduction control kits were we have 10% of our fleet installed without our horsepower. And with the delays and constraints from a third party trucking perspective, we were able to remove some of our tractors off of our horse party units and use that as our internal hauling business.
So pretty excited about that technology. On the coiled tubing side of our Canadian business, we were also extremely active in the first quarter.
And we operated 80 deep capacity coiled tubing units, which was an increase from the previous quarter. As we look into the outlook recounts, of course in 2022, are expected to track approximately 25% higher in Canada relative to 2021.
And over 25% or more in the U.S. The increase in recount will drive demand for our services which will push the limits to the overall fleet capacities.
Our operations both in Canada and the U.S. have experienced very strong levels of activity thus far in the quarter.
Besides the typical slowdown in seasons that happens in Canada during the breakup period, which of course is due to road restrictions. We expected record breaking quarters for both our U.S.
and our Canadian business units as we've been able to increase pricing across every business unit versus in the past provided to discount in Canada for the slow Q2. Looking forward into the third quarter, we're seeing increased activity prior to Q3 of 2021 for both geographic regions.
Currently, our Canadian frac schedule is filling up, and we expect it to be fully utilized or sold out in the coming weeks. And in the U.S.
with the increase in drilling activity, we expect similar utilization metrics, as we are seeing in Q2. Our pricing discussions from our clients, they've responded positively with what almost everything across the board.
And we expect that to translate into higher margins for our business. I'll now turn it over to Reagan for some closing comments.
Regan Davis
Thanks, Steve. Again, I think most of my comments will sort of touch on stuff that Steve and Klaas have already spoken to so well.
I'll start with like I couldn't be happier than Q1 than how it turned out. It really was a great, momentous quarter for the company.
Utilization was strong, the cooperation with our clients to ultimately result in net margin improvements for our business, the incredible execution from our field professionals. And then in April, just outside of the first quarter, we were able to complete our first IOR job.
Now IOR is a technology that ultimately results in it's applied to existing walls to help improve recovery from those wells. And given our suite of global IP from [Indiscernible] we are in a really unique position to be able to develop that market with very little competition.
As I look at the outlook, I think it's worth noting that we've had quarter-over-quarter improvements since Q4 of 2020. And we've got a obviously a very constructive outlook.
As we look through the balance of this year and into 2023. And I think we've all had the benefit of reading some of the commentary from global energy producers from large industry leaders, all the best leaders in our space to support that outlook.
We have obviously had great success moving pricing up through Q1 and as Steve mentioned, that pricing is going to carry through into Q2 resulting in improved margins with virtually no discounts in recognition of how tight the suppliers are – of our business assets are. U.S.
pricing is literally improving by the month. And I would like to note that if you look at our Q1 results for the U.S.
division, I think they stand up very well, if not better than many of our larger U.S. competitors.
The Canadian rig count is the highest at this time of year since 2014. The U.S.
rig count is 57% higher year-over-year, we have a very strong visibility to strong utilization for -- assets for the back half of the year. And I would suggest as we think about moving into Q1 2023 assuming this environment maintains the momentum and salving, we would looked at additional capacity in the market in Q1 of 2023.
All this said, I think it's appropriate, given the profitability in the sector, that our business and our sector or sector, it gets comfortable with pursuing top of cycle margins, but it's only appropriate. Once again, thank you, thank all of our professionals for the fantastic execution during Q1.
And note that during a very busy time, we continue to have success that’s down to your digital and operational optimization strategies. I would highlight that our team is a very, very proud participant in the energy supply network, which is most recently beginning in gaining respect globally.
Final comment would be we're very pleased to share that we've released our first ESG report. This report clarifies the company's progress and on-going commitment to supporting our clients with emissions reductions.
It speaks to our track record of strong governance. And it establishes our commitment to our team through safety and our culture.
That brings my comments to a close, back to the operator.
Operator
Thank you. [Operator Instructions] First question today is from Cole Pereira with Stifel.
Your line is open.
Cole Pereira
Hi, good morning, everyone and congrats on the quarter. Just wanted to refer back to the commentary on Canada.
So talking about it being largely sold out. Pricing obviously improving on a net basis.
I mean, I'm just wondering, it's obviously fair to think that that Q3 EBITDA could be equal to if not materially higher than Q1 here.
Regan Davis
Hey Cole, great question. You know, just what I have mentioned, we're definitely we have minimal whitespace on our calendar for Q3.
And, and yes, we probably expect that quarter to be equal or higher than our Q1 EBITDA numbers.
Cole Pereira
Okay, perfect.
Regan Davis
Yes, I mean, that's the Canadian business. And then, of course, our U.S.
business definitely seeing higher traction from a pricing standpoint and utilization has been there already. So, the, the additional revenue, of course, will help from the bottom line perspective.
Cole Pereira
Okay, great. And yes, just coming back to your comments on it being a record quarter for the U.S.
business. I mean, I assume that's for a record Q2.
I mean, if I look back to 2019 2018, this business was generating call it $15 million $25 million of EBITDA a quarter. I mean, are you kind of looking at a different metric other than EBITDA with that comments?
Or is or is there some potential to get within that range?
Regan Davis
Sorry, to say is it just for the U.S. business Cole?
Cole Pereira
Yes. Sorry, just for the U.S.
business.
Regan Davis
Yes, I think it really take a look at our recent, the recent contexts are certainly going to be much stronger than we've been there before. There's potential for us to get back to those 2018 numbers, but I don't think that's right now, and let's see got some additional thoughts on that.
Steve Glanville
But yes, I don't think we'll quite hit that Cole. But, I do see this as Reagan had mentioned, like pricing is changing almost on a daily basis there.
I mean, there, there is no frac capacity available in the U.S. You're called [Indiscernible] crew today, I bet you'd be months to get a get accrued in place.
Cole Pereira
Okay, perfect. And yeah, go ahead.
Regan Davis
Well, it's probably worth noting that, as we look at our results, month-over-month, and kind of annualized the EBITDA per fleet, we're comfortably inside the mid-teens now and EBITDA per fleet. And, all indications are that it's going to continue if not improved.
Cole Pereira
Okay, got it. No, that.
That makes sense. And I'm just wondering, are you able to provide any goalposts around how we should be thinking about working capital changes in Q2, and then in the second half of the year, acknowledging there's obviously still some uncertainty?
Regan Davis
Yes. So we're going to see as I mentioned there in my commentary, we had a bit of a loan, we talked about that the MD&A as well, because of April and early May in our Canadian business, so we're seeing some harvest come back into our accounts, or actually, we'll touch zero in our accounts.
But we're going to build that right back up again, here as we ramp up here. So on I would say on that basis for Q2, we'll see, we'll see a harvest there.
And then we'll see a bit of a build on again in Q3. And then kind of depending on how Q4 goes with that, end of the December, kind of timeframe.
We're looking really deeply into the crystal ball here, but expect we'll see a bit of a recovery there. So on a net basis, I guess, over the year, I would say that Q1 is probably our high point, then we'll probably under that basis through the year, we'll come down a bit against that.
Cole Pereira
Okay, perfect. That's helpful.
Thanks. So that's all for me.
I'll turn it back.
Operator
The next question is from Keith Mackey with RBC. Your line is open.
Keith Mackey
Hi, thanks and good morning. Maybe just talk about, given the current and future price increases, certainly have talked about, about where you kind of expect margins to see but really where, going into Q2, Q3 and Q4, how should we be thinking about margins on a consolidated basis relative to Q1?
Regan Davis
I mean, our expectation is you're going to improve. I mean, do you want more detail than that?
I mean, I think the U.S. as we mentioned, is, is showing improving results month over month and, and our clients are very cooperative in Canada, as we seek to improve margins, as we move through the year.
Steve Glanville
I can't remember which one of our drillers said it, but they were talking about pricing increases to the point of I don't think was painful. And maybe it was uncomfortable, I can't remember the exact wording, but are the drillers who who typically lead with these things, they're pushing that pricing narrative extremely strongly down U.S.
and if you recall, from the U.S. buffers, the messages were falling, the prices are going up and up and up.
So we're happy to I mean, we're not a big presence in that market, the way we are in Canada, or we're happy to hit your wagon to that train. But other than the U.S.
side, or Canada side, strong pressing commentary coming out of our Canadian peers as well. So we expect continued sequential improvement.
Keith Mackey
Perfect, no, that's helpful. Maybe just secondly, on the balance sheet a little bit.
So certainly, operationally, the outlook for margins and EBITDA is quite strong with capital not expected to go up to too much. So it sounds like there should be some free cash flow through 2022 and, and likely 2023.
But how are you thinking now about, the term loan maturity into 2023. And with refinancing that and maybe just a little bit more about your, your approach there.
And if when, when we should expect to see something, something happen on refinancing of that.
Klaas Deemter
So our facility goes and it expires, I guess, at the end of July 2023. We've had preliminary conversations with our lenders, quite constructive around kind of our proposed structure.
Our goal internally, and this is certainly something we're communicating to the market as well as that. We've got a strong debt reduction focus.
The best way for us right now to add value to our shareholders is to pay down that debt. And they give us that flexibility when that inevitable downturn comes again.
So, anticipate that we'll have some news coming out towards the end of this quarter, maybe it's the beginning of Q3 around that. The free cash flow that we're starting to generate is, is meaningful.
And we should be able to knock that debt down to a much more manageable number, around two and a half times on a trailing 12 basis. I think, if I recall correctly, you're at the end of Q1.
And he kind of lined that out to where you expect to be, where we expect to be towards the end of this year, will be significantly better than that. So then with Q3 -- starting with 2023 the forecasts if those come to fruition, and we'll be in a much healthier position from a debt perspective.
Keith Mackey
Perfect, Thanks very much for the color.
Operator
Our next question is from Waqar Syed with ATB Capital Markets. Your line is open.
Waqar Syed
Hey, good morning and congrats on a great quarter. My question, first question relates to input inflation.
Are you seeing some any stability in the inflation that you're experiencing? And you talked about some of the price increases that you're getting?
Could you also talk about the net price increases that you're getting versus just the gross price increases?
Klaas Deemter
So Waqar I’ll start just by touching on that, the gross versus that. So when we raised prices in Q1, it was a bit reactive to kind of what we saw in in, in January.
And as they reacted, we were pushing the price narrative continually through Q4 and into January and thought we were staying out of it until we saw how hard inflation kind of hit in that month. So if we take a look at Canada, it was I think, this quarter around 10%, to 15%, in the MD&A, our net number, on a quarterly basis, there was probably around five.
And in the U.S., it was in that 20% to 25% range. But again, inflation limited that inflation, and I'm going to say timing, as well limit to that to around that 5%.
We'll see benefit coming on that. But Steve's going to talk to you in a second about where we're seeing all those pricing pressures.
It's not going away. And it's something that we're continually talking to our clients around.
And it gets, our sales guys are getting tired of the revolving door, go back to the to the to their clients, but it's like, we're seeing the same thing coming in through our front door. And we have to pass those price increases on.
Waqar Syed
Yes. Yes.
Go ahead.
Steve Glanville
Sorry, Waqar, I'll just add on to what Klaas was commenting on it. You know obviously, our main focus is making sure that we have a happy employee base.
And that was our first obviously we had to increase wages there, which was well needed. It's been a long time since our field professionals were receiving an increase.
So, of course, we implemented that into our business starting in the beginning of the year. And from that, of course, we saw increases from a supply chain standpoint.
So higher profit costs, higher fuel, of course, everybody's filling up their vehicles today, they know the price of that that's obviously impacting our business. And then, of course, the biggest thing was our profit.
And so our clients have all been accepting of these changes, and these price increases. And, obviously, Klaas had mentioned just from a net standpoint, we need to get margin back in the business so that we can continue to invest in as the capital intensity of our equipment.
So our clients are understanding that and have been really, really willing to work with us on almost price increases.
Klaas Deemter
I'll give you a couple of examples that we talked about yesterday. So Goodyear tires, just gave us 20% price increase.
Ford, where we buy a lot of electric trucks said we probably only get 85% of our order. That is hardly even willing to commit to any kind of pricing even if we give them appeal.
Kenworth, it will take 18 to 24 months to get a tractor if you ordered it today, but the list goes on. So there's a bit of a feeling that we may have caught up to inflation but there it feels like there may be another leg coming.
And if you think about the pressures that we're facing in labor and everything else, every other business is doing the same thing talking about raising wages, and this is where we get into that whole economic discussion around inflation and is the transitory is our feeling is it's part transitory and we're going to continue to see that pressure here for the coming year.
Waqar Syed
Yes. Okay.
Then it could you also talk about the coiled tubing market what are you seeing there in terms of pricing?
Steve Glanville
Yes, Waqar, it’s Steve here. I'll just start in the U.S.
market, in particularly the Permian. There's probably an oversupply still today, in the Permian market, when it comes to coiled tubing completions.
So been a little bit harder to move prices, we've been very successful, we've walked up two out of our three coiled tubing units on long term contracts with a large client in that area. And we've been able to see 25% to 30% price increases there for the remainder of the year.
So that's been helpful for our business. As we moved north into the Rockies and into the box, and we've had a few competitors disappear in that area.
And we've been able to increase prices, perhaps even a little bit higher than that. But later on in the quarters, we didn't really realize that until, till really kind of March timeframe.
So we expect to see that all we see coming into Q2. Into Canada, there's such a limited amount of, I guess, competitors in this space.
And we had high utilization, of course in the Canadian market. And we typically see that going obviously forward into Q2, and Q3 and have been leading, leading the price march on our coiled tubing business since we do – entering the market share for that.
Waqar Syed
And your U.S. equipment, you're already running at a very high utilization level, how much room do you have to increase equipment in Q3 and Q4?
Steve Glanville
Yes, I mean, we would look at increasing it to just one additional fleet. If we see the demand there.
We would be, we'd be wanting to secure a long term contract before we even look at that Waqar. One thing that we don't really we don't talk about and Regan mentioned in the in his closing comments about our IRR technology.
We are starting to see some traction there. And we expect to see some additional traction as we get better well results from our data from that well that we completed.
And that would definitely help from a top line and bottom line perspective in the U.S. going forward.
Waqar Syed
Could you maybe expand on that a little bit? I know you were doing some field tests of that technology?
Could you maybe provide some more color?
Steve Glanville
Yes, I mean, the job itself was extremely successful. We were able to see some diversion happen, which was exactly what we wanted.
While results initially, so far have been holding in there. And in fact, it's increased the field around it.
So pretty early on right now, Waqar but we're extremely ecstatic about the level of safety that was performed on the job and high level of execution. We had a number of clients or potential clients that were waiting for this first job to be done.
And now they're talking with us about some work that they want to put in this calendar. So I think a couple of other more technical aspects.
Part of this process is a chemical cocktail that is intended to change the wettability for the surface tension of the reservoir and liberate water, only water and of course, change the viscosity of the oil and [Indiscernible]. We've seen success with that part of the technology as well which is very encouraging and validates the modeling.
And the other the other piece that we expected but were very pleasantly surprised was how effective it was in cleaning up wax in the wellbore. The well was the tubing the wellbore itself was highly blunt with wax, therefore never well or damage -- are plugging during due to the wax.
And our fluid that we injected was very very effective at that essentially dissolving and upgrading [ph] that that wax problem So another really encouraging side benefit from the technology.
Waqar Syed
Do you think the customer would wait for another would wait for 90 days or so to get production data or more like 180 days or how long do you think the customer would feel comfortable with the data set to go ahead with the additional programs?
Regan Davis
We think at least 90 days is the timeframe we're thinking. But Steve referred to other clients that that we’re in vast discussions with working through just sort of administrative type hurdles at the moment.
So we have several wells in the queue that we expect to start getting results on in the coming weeks and months.
Waqar Syed
And just my last question, is in terms of working cash flow from working capital changes, what's your expectations for Q2, and for the second half of this year?
Regan Davis
We're going to get a harvest coming out of Q2, Waqar. And then as we go back into Q3, we'll probably build up that a little bit.
And then, in a Q4, we'll see probably a bit of a harvest to come through their guests for them. Operationally, if we're, if we see the ramp that we that we're optimistically seeing, we may actually see a bit more of a build in Q4.
As winter activity really begins to pick up. But for now, we're kind of on the conservative side saying, we'll model a bit of a recovery there for it.
Waqar Syed
Great. Thank you very much, appreciate the color.
Operator
[Operator Instructions] Our next question is from John Daniel with Daniel Energy Partners. Your line is open.
John Daniel
Hey, guys, just a question on the, Steve, I think you mentioned the bolt-on kits rebuild fuel. Can you remind us what percent of the fleet has that capability?
And what the plans are to expand that capability?
Steve Glanville
Good question, John. So we have basically 22 pumpers, in our U.S.
fleet of out of 80 that have this bolt-on kit. We, Klaas has mentioned some of our capital expansion plans that we're have got approved from our board yesterday, and, and that would be adding some additional tips for our U.S.
business. So to kind of look at it, we're around 60,000 horsepower, we'll get up to close to 80,000 horsepower by the end of Q3.
John Daniel
Got it. And then the just curious if you can see the kit to bolt-on is from the engine OEM or is that from a third party?
Klaas Deemter
It is from a third party. It was a it was a proven system actually used in a mining operation, same engine that we use on our frac pumps that we're using on haul trucks from a mining perspective.
So the technology is proven in that aspect. And we were the first one to bring it into the North American market.
And as I mentioned before, we saw a substitution percentages, averaged around 70% and upwards of 75% to 80%. Because it is a direct injection, versus a fumigatus system that a typical tier two OEM would have.
John Daniel
Thank you. And then the final one for me.
I think you mentioned the Kenworth lead times of 18 to 24 months to secure new tractors. Is that – did I hear those numbers correctly?
Klaas Deemter
Yes. That's feedback from our Ops guys.
They've -- that meetings just recently.
John Daniel
I'm curious…
Steve Glanville
Sorry, John. I’ll just add on to what Klaas’s comments were.
I mean, obviously, a lot of our tractors would be, special order, particularly hauling coal to me, and it's heavy load. So, large, large transfer cases, heavy haul units, and, and those custom tractors are, you're at least 18 months old for that.
John Daniel
Okay. I don't want you to have to speak for the industry.
I'm asking this question anyways. But are we looking at a situation where the trucking situation gets worse?
I mean, you guys put lots of miles on tractors today, right? Spare parts are harder to get, what's going to happen?
Let's review 9 to 12 months from now on just how you move putting the weather be it sand or whatever your thoughts on that?
Steve Glanville
That’s a good question. I mean, as you know, I mean, most of our I mean, all of our tractors on the frac site, typically sit on location for three weeks, four weeks at a time, not putting on any miles.
So we have a we have a fleet of tractors that are maybe age wise, old, but obviously able to, we don't have loss of life at home. So I talked about our idle reduction control system that we are we have 10% of our fleet in Canada, we're adding more capacity there.
So these kits are excellent from an ESD standpoint where the units aren't running. They're shutting off and allow that flexibility to pull that track drone and begin holding ourselves.
We saw that in Q1 in Canada. And we'll continue to invest in that technology going forward in North America.
John Daniel
All right, well, thank you guys for answering those questions your way.
Steve Glanville
Thanks John.
Operator
We have no further questions at this time. We'll turn it back to the presenters for any closing remarks.
Regan Davis
Thank you everyone for joining. We appreciate your interest.
I’ll get back.
Operator
Ladies and gentlemen this concludes todays conference call and webcast. Thank you for participating.
You may now disconnect.