Trican Well Service Ltd.

Thank you very much. Good morning, ladies and gentlemen.

I'd like to thank you for attending the Trican Well Service second quarter 2019 conference call. Here is a brief outline of how we intend to conduct the call.

First, Robert Skilnick, our CFO, would give an overview of the quarterly results. I will then address the issues pertaining to current operating conditions and near-term outlook.

We will then open the call for questions. Mike Baldwin, our Executive Vice President, is also available to answer questions.

I'd now like to turn the call over to Rob to provide an overview of the financial results.

Thanks, Dale. Before we begin, I'd like to point out that this conference call may contain forward-looking statements and other information based on current expectations or results for the company.

Certain material factors or assumptions were applied in drawing a conclusion or making a projection as reflected in the forward-looking information section of our second quarter MD&A. A number of business risks and uncertainties could cause the actual results to differ materially from those forward-looking statements and financial outlook.

Please refer to our 2018 AIF and the Business Risks section of our MD&A for the year ended December 31, 2018 for a more complete description of business risks and uncertainties facing Trican. This conference call also makes reference to a number of common industry terms and certain non-GAAP measures which are more fully described in our second quarter 2019 MD&A.

Our second quarter results were released this morning and are available on SEDAR. Canadian industry activity saw typical seasonal slowdowns in Q2 which were more pronounced than those observed in Q2 of the prior year, in large part due to industry activity being down approximately 25% when compared to Q2 2018.

Trican was further affected by a few customers of ours deferring planned April and May work into Q3 and Q4. About 25% of our June work was also pushed into Q3 and Q4 due to wet weather.

This had a significant effect on our results, and in particular, the results from our fracturing service line. We are, however, encouraged that we did not lose any planned work to competitors and the work has been deferred with only a small amount being canceled.

In years past, we have been able to secure some spot market work to offset any changes in our schedule but those opportunities did not present themselves at reasonable pricing levels. Our second quarter saw more asset dispositions.

During the first six months of 2018, we received proceeds of approximately $17 million from asset sales and realized $4 million in gains on disposals. Included in asset sales was the disposition of approximately 79,000 horsepower of legacy 2,250 horsepower pumps.

Given increasing fracturing intensity and the current excess supply of equipment in Western Canada, we were able to realize reasonable monetization prices for equipment that ranged in age of 12 to 19 years old. Also, we have reactivated two previously idle small diameter coil units into an underserved market.

Cost associated with the activation of these units affected our Q2 results. However, we expect these recently activated units to start positively contributing to the business during the third quarter.

Optimizing our businesses and deploying or reducing idle equipment that is not generating returns remains an area of focus in 2019. The company remains focused on reducing costs; additional cost reduction measures have been implemented to improve our long-term cost structure which will result in additional $2 million to $3 million in cost savings beyond the previously forecast $23 million of annualized savings.

In addition to this we have a number of lean initiatives that we are working on that will improve our efficiencies and reduce costs later in the year. We will continue to review all opportunities to reduce costs and improve business operations.

Furthermore, we continue to review expected activity levels to try and align our average crew count. As a result, we have adjusted our fracturing crew count down by one crew in the second quarter, and will continue to adjust our operational crew count to reflect changing industry activity levels.

I will now review our second quarter financial results. Q2 2019 negative adjusted EBITDA of $14.3 million was net of severance costs of $0.8 million and $2.5 million for fluid end cost.

Adjusted EBITDA did benefit by $0.7 million from the adoption of IFRS 16 leases. At the time of our first quarter conference call, we had expected Q2 fracturing operations to realize average active horsepower of 90,000 horsepower.

However, actual second quarter average active horsepower was 72,000 for the previously described customer adjustments. General industry activity declines and lower average fracturing activity, both contributed to revenue declining by 35% when compared to Q2 2018.

Second quarter gross profit and adjusted EBITDA declined more dramatically than revenue declines as a result of the fixed cost nature of certain operating expenditures of the company. Cement operations declined less than the industry activity declined with the year-over-year job count decreasing by 20%.

However, profitability of cement operations was affected by these activity declines which result in cement results being below Q2 last year. Coil activity continued to show reason resiliency relative to industry declines with revenue up approximately 30% year-over-year.

Second quarter net loss of $28.4 million was lower than the loss of $34 million for Q2 2018 as the company's financial results were no longer affected by gains and losses from it's investment and gain. Our second quarter 2019 capital program spend primarily reflected activity and necessary maintenance capital.

Our strong financial position will also allow us to make minor investments in the infrastructure and other equipment that will permanently reduce our cost structure and/or offer an immediate payback. As we've previously noted, we expect our 2019 capital program to primarily track activity levels for maintenance requirements.

The company's balance sheet remain flexible with the company's credit facility borrowings net of cash being in a surplus position of $12 million as we paid down $44 million of debt in the quarter which was funded by the normal second quarter release of working capital. Additionally, the company's positive non-cash working capital position was $48 million.

Liquidity remains strong with more than $200 million of unused capacity on our revolving credit facility. We maintain our belief in the importance of having a strong balance sheet during this current uncertain market.

In spite of the difficult industry environment, the company generated approximately $11 million of operating cash flow during the first six months of 2019 before considering changes in working capital. This combined with acid sales has allowed the company to repurchase 4% of the company's outstanding shares this year for approximately $17 million.

Since the commencement of our 2019 NCIB program, the company has purchased approximately 8% of the company's shares. The company continues to view an ability to sell old non-revenue generating equipment at prices approximating book value and repurchasing shares at below book value as a reasonable use of proceeds.

We will continue to allocate funds to buying back shares going forward as we monitor cash flow from operations and believe that this is a good use of cash in the current market. However, our approach to share repurchases will be measured given the uncertainty in the current operating conditions, and as always, we will weigh share repurchases against other investment opportunities.

I'll now turn the call over to Dale, who will be providing comments on operating conditions and strategic outlook.

Thanks, Rob. The second quarter saw typical seasonal slowdowns that were magnified by some of our customers deferring scheduled fracturing programs into Q3 and Q4.

These deferrals were partially caused by the drop in oil prices in April and May, which resulted in certain of our customers to be cautious on spending until they saw commodity prices recover in June. We also had a large fracturing project pushed into Q3 when the customer had some well issues that needed to be repaired prior to commencing fracturing operations.

Due to the short notice of some of these deferrals and cancellations, and the low pricing on some of the spot market work in the quarter; we were unable to replace majority of this work. We are seeing normal sequential Q3 activity increases which will be substantially above Q2 levels.

However, we do not see industry activity reaching Q1 levels in Q3 as we are forecasting an industry average rate cut of about 140 to 150 rigs as compared to the 175 we saw in Q1. We continued to see demand for our coiled tubing business x saw an increase in revenue on modestly lower activity levels relative to 2018.

Trican added one coil, clearly [ph] it was out adding one more in Q3; the company has strong interest for these incremental coal units. We will continue to look at ways to increase utilization of currently idle equipment that can provide a return for the company.

As Rob discussed, we decided to sell our oldest generation of fracturing equipment. We sold our legacy 2,250 horsepower pumps that were 12 to 19 years old into international markets as we did not see them returning to work in Canada in the near future.

Despite the challenging North American fracturing market, we were able to realize proceeds in excess of book value of the equipment and on average received $160 per hydraulic horsepower for this older equipment. The fracturing industry remains competitive, for this reason in addition to the previously mentioned asset sales; we reduced our active hydraulic fracturing crude count by one relative to actually Q1, 2019 crude levels.

Pricing, for the most part stabilized this year, however, remains at low levels, although the industry was modestly oversupplied in Q1 2018; we believe our approach to disciplined pricing and parking crash and cruise [ph] will maintain a more stable market and ultimately lead to better financial results as the industry right-sizes itself to the new well count. Just earlier in Q4, we have reduced our manned equipment levels by more than 120,000 horsepower, and we will continue to adjust our active crews to changing industry demand.

We have 236,000 horsepower that is unstaffed, hot-stacked and readily available to put into service. All of this equipment is kept in good working order and is not cannibalized.

We do not anticipate any fracturing equipment being activated in the near future. However, by staffing our equipment in good working order, we minimize future liabilities and expenses to the company from any possible future fleet requirements.

By cementing service line very closely tracks the rig count and we anticipate activity will be down about 25% to 30% year-over-year in this business during the second half as our market share is holding with a lower rig count. Pricing has been stable and we have right-sized this business to current demand.

Our coiled tubing service line has remained relatively strong in the quarter and we should continue to see improved year-over-year results. Again, pricing in this service line has been relatively stable.

We continue to have part coiled tubing assets that could be activated with little capital, and we will look for opportunities to generate acceptable returns from the addition of this equipment to the market. Third quarter activities similar to last year will be affected by more rig up and move days on smaller paths which will lower utilization below Q1 levels.

Currently, we are anticipating around 35,000 average active hydraulic -- acts of hydraulic horsepower in Q3. This represents an 85% sequential increase from Q2, and is in line with anticipated industry rig count recoveries but below Q1 2019 levels.

We estimate our customers cash flows are up about 20% to 25% this year, over let's say forecast at the start of the year. However, many of them have not increased capital programs to takeaway capacity issues, commodity prices and a focus on disciplined capital spending.

We had previously anticipated some customers to modestly increase their second half programs, but no longer have those expectations. Our fracturing business first quarter visibility is more clear, and we have soft commitments for two-thirds of our fraction, the price consistent with Q1 levels for the fourth quarter with typical seasonal.

slowdowns in the second half of December. If commodity prices and differentials remain at current levels we anticipate Q4 2019 to be stronger than Q4 2018, as very few of our clients this year appear to be exhausting their capital budgets early.

Despite the average market, our primary goals for 2019 remain relatively unchanged. We will continue to focus on finding ways to improve returns on our active equipment to increase utilization, not permanently lowering our costs which will improve the ROIC we get from our equipment.

So we'd continue to look for opportunities to generate revenue for parked equipment or sell idle assets that can no longer be used in Canada. We will continue to focus on maintaining a strong balance sheet and returning capital to our shareholders through our own NCIB while monitoring cash flow from operations.

Maintaining a healthy balance sheet is still our top priority. Lastly, our strong financial position allows -- for us be the flexibility to examine investing in our current and new service lines that yield a quick financial return and long-term improved return on invested capital for the company.

I want to thank all of our staff for continuing to provide exceptional safe service despite the volatile operating environment in the Canadian oil and gas market. This exceptional service is and has been apparent on a number of jobs in all service lines and continues to be evident in our PAT [ph] operations where our fracturing team is safely executing 20 hours plus of pumping time per day.

Similar examples can be seen in our cement, coil and other service lines, and our crews have done this while improving our safety record throughout the year. This type of performance in all of our service lines has allowed us to retain our customers this year.

I would like to thank all of our staff, including all the support staff, for going the extra mile to provide safe, efficient, outstanding customer service to our clients in challenging economic times. I thank you for your attention today and your interest in Trican.

And I'd like to turn the call over to the operator for any questions.

Hey, good morning. Dale, you talked about visibility for the two-thirds of your fleet that have soft commitments, at least in the Q4.

I'm curious is that a sort of ratio of typical for this part of -- this time of year? And if you had any comments as it relates to the discussions ongoing for the other third year fleet that isn't committed as of right now?

Yes, it would be a little ahead of last year where we saw probably some tenders outstanding that we're not committed to at that time. You know, we had three of our fracture crews kind of -- in tenders that were being retendered in the September timeframe; so we would be ahead of last year but probably typical with previous years other than last year where we would normally have kind of that two thirds commitment.

Are there remaining fleets, there are still some bids and tenders outstanding for some work for Q4, and it will really depend on how we do on them as to -- whether we can keep all the crews working.

Okay, that's helpful. And I realize 2020 is really a lifetime away at this point, but one of your peers this morning made a comment that they're participating in a large number of bids for 2020 work already.

And so a two part question; is that dynamic something you're seeing as well today? And then, is it too early to make a guess on where Q1 20 might shake out on a year-over-year basis, whether up or down or flattish?

Yes, we were participating in bids for 2012 as well, which is pretty normal for a few of the clients. I wouldn't say that we could get a read at all on activity from those bids as these are just normal bid that some clients will do every time in this -- in kind of August to September timeframe for their upcoming work for the next year.

Okay. And Rob, this might, might be for you.

The guidance for Q3 of 135,000 average active manned horsepower is obviously up significantly versus Q2 but down significantly versus Q1; so just curious if you could provide thoughts on free cash flow over the back half of the year? I knew in Q3 you'll probably build some working capital, but on a pre-working capital basis, is it reasonable to assume you'll be cash flow positive over the back half of the year?

I mean, certainly that's our expectation is to be cash flow positive based on the activity levels we've seen, and then the business structuring we've undertaken in the prior quarters.

Okay. And in that environment, do you -- and you said in prepared remarks that the share buybacks from here would be -- continue to be pretty measured.

I think you've got around 6 million shares you could do on the existing NCIB. Is it -- do you expect to fulfill the whole NCIB authorization come October 1st or 2nd?

Well, it's a really dynamic market and our approach to that is; we review it constantly in the context of the current operating conditions and it's not a big chunk of shares, that's to monitor week to week.

Okay, awesome. I appreciate the answers.

I turn it back.

Good morning. So, I appreciate the commentary here this morning on the market and everything else.

In the context of the soft commitments that you have for the fourth quarter, you know, what does a soft commitment generally mean Dale? And does it -- is it more typical than not that those soft commitments turn into actual hard activity levels?

Yes. So soft commitments for us means that the customer has spoken for the fracture crew and said here is our Q4 program; and can you book us a crew?

So what changes on that if there is a commodity price change that kind of freaks him out or there is some macro change within their company cash flow spending, will they make a decision that they're not going to spend as much cash flow or as much cash as they follow their capital budgets. So those are primarily what makes a difference, sometimes it's -- there is some movement of wells as well as they find that they want to move their capital to another field or they may counsel some wells depending on results from wells.

So there is still some geological aspect to this. So it's usually those things.

I would say that the customers that we have soft commitments with are customers we've worked with for many years that are strong Trican clients and we have really good relationships with, and lots of dialogue; and we do get some fluctuation but for the most part they are very honest with us and they don't soft commit to a crew and then pull it out for no reason as there is usually a good reason for it.

Okay, that's good. Great color, appreciate that.

So in the context of the expectation for the seasonal increase in revenue and activity in the third quarter; do you think it's possible that the actual fourth quarter '19 -- given some of these soft commitments, given stabilization of pricing, is it possible that fourth quarter revenues could be higher than third quarter or are you just going to stick to fourth quarter '19 going to being better than fourth quarter of '18?

Yes, I think it would be that. I'd be quite surprised that activity levels will hit Q3 levels of '19.

We still have December, and December -- and even with our soft commitments; our soft commitments are pretty strong through October-November but they start falling off in December because most clients on less commodity prices are at a really high level and they're ramping up programs. But most clients seem to still be slowing down their activity in the December timeframe.

So that all -- that has an impact on takes for sure. And then, we're -- at the moment we still have two-thirds committed and one-third not committed.

So unless we -- I wouldn't want to go out and say that we're going to be better until you have all of the crews committed that you have in Q3.

Okay. And then, I know there was some reference to 2020 and you know, who knows what on a full year basis but is there any read at all, even on first quarter dynamics?

Do have any soft commitments for first quarter '20?

I would say that the only read on Q1 is kind of similar to this year that I would -- I think customers really high level view without getting specific on any programs as they'll have their -- Q1 will be one of the stronger capital spending quarters which we've seen in the industry for a number of years. So I would anticipate once, again, there we'll see a ramp up in that Q1 timeframe.

Then maybe just lastly in the context of the Canadian frac business; when he -- if you've get some perspective kind of total net attrition on horsepower, what would you think that would be for the second half of '19? How much equipment you think is going away and not coming back?

That's a good question. So we've committed to parking one crew and that equivalent to coming back, we're just not staffed; we've already gone through that.

I don't know how much equipment is going to leave the basin for sure. It's actually the supply demand balance account that isn't that far off with active crews.

In that -- you know, if looked at all of this, all the service companies I'd say in July and a lot of August, most people are working with most of their crews. It's more of what happens in the queue for timeframe as to whether it's an over balancing of capacity at that point in time, and whether then at that point in time people start retracting some carriers either to the U.S.

market or permanently retiring them. So that will be the more question.

I don't really expect to see too much in July, August, maybe even September will be more Q4 that people are going to pulling back -- that crew is potentially. But I do not doubted our competitors, I think our plans are right now like we said, we're running one less and we'll continue to kind of monitor it and adjust to our activity levels are.

All right, thanks. I appreciate it.

[Operator Instructions] Our next question comes from Anthony Linton of National Bank. Please go ahead, sir.

Good morning, guys. A couple of comments there in the opening remarks, just about deferral of work and some activation costs for those coiled tubing units.

I was just wondering if you guys are able to quantify that at all?

The coil costs were a sort of that $0.5 million range. And then, and then that's quantification is that 25% our June number that we've put in there on the revenue for the frac services; that would be the best way to characterize it with typically your June revenue being two-thirds of the Q2 scenario.

Okay, great. Just a couple of good disposal there in the last couple of quarters, just kind of a wondering; one, in terms of what you're actually seeing in terms of the market for that used equipment, it looks like it's pretty active.

And then two, just wondering, are you looking -- or is it kind of a plan to dispose all of that legacy equipment or what are you guys thinking in terms of that?

Yes. So we've -- as we've stated, we've disposed our 20 horsepower to 50 horsepower pumps, which was our oldest equipment and really lightest sturdy equipment that isn't really suited to deeper, higher intensity plays; so for the most part that's been disposed of.

We continue to look at -- we've got some still film, some older 25,000 horsepower pumps. So we continue to look at some options there.

And if we think that we can sell it for reasonable prices and put that capital to use, it will generate better shareholder returns then we will. But as you know, we also have a view that the long-term future and that we know we're not going to decimate our ability to participate in any kind of additional crews that's forward.

So there is a balancing act there.

Yes, makes sense. And then, maybe just one last one for me.

I think back at Q1, you had talked a little bit about additional cost cutting measures you're looking to through the end of the year. I think you kind of quantified it around $4 million.

So I was just wondering, is that about the same or is that changed since we last talked?

Yes, the fixed cost side -- that's what we had sat along the way. And yes -- and as Rob mentioned in his commentary, we're kind off -- we've already realized about $3 million of that.

So there is some additional fixed costs that we get it, we're always working on it, just the way our business is now. But then we also have some lean initiatives which really probably at that night or sorry 2020 more than '19.

But we have a number of lean initiatives that have more significant savings that we're executing. One is, as in the second half of the year.

Okay. That's it from me.

Thanks.

Thanks.

Thank you for your interest at Trican today. We certainly look forward to talking to you in the fall after we release our third quarter results.

Have a great day.