Calfrac Announces Fourth Quarter Results

CALGARY, March 1, 2018 /CNW/ - Calfrac Well Services Ltd. ("Calfrac" or "the Company") (TSX-CFW) announces its financial and operating results for the three months and year ended December 31, 2017.

HIGHLIGHTS

 

CEO MESSAGE
Fernando Aguilar, Calfrac's President & Chief Executive Officer commented "The results delivered by Calfrac in the fourth quarter are the direct result of the hard work and dedication of our employees, and the improving fundamentals of our business in North America, although an expected slowdown in Canada did impact results for that division. I would like to once again thank all of our employees for their efforts and results achieved in 2017, and I look forward to further successes in 2018".

During the quarter, Calfrac:

• deployed one fleet into its San Antonio base, completing the restart of operations in that area;
• pumped over 700,000 tons of sand in North America, a second consecutive quarterly record for sand pumped;
• successfully recruited approximately 300 operations personnel across North America; and
• announced a 2018 capital budget of $132.0 million.

FOURTH QUARTER 2017 OVERVIEW
In the fourth quarter of 2017, the Company:

• generated revenue of $485.5 million, an increase of 152 percent from the fourth quarter in 2016, resulting primarily from higher activity and a larger scale of operations in North America;
  
  
• recorded $22.6 million in total compensation awards that were approved by the Board of Directors to recognize the Company's strong 2017 performance. This amount could not reliably be estimated until Calfrac's full-year financial results were finalized;
  
  
• recorded reactivation costs of $7.4 million compared to $1.5 million in the fourth quarter of 2016;
  
  
• would have generated adjusted EBITDA of $71.8 million, excluding the $22.6 million in total compensation awards noted above;
  
  
• reported adjusted EBITDA of $49.2 million, which included $14.4 million of annual bonus expenses and $8.2 million of stock-based compensation costs versus negative $13.7 million, which included $4.3 million of stock-based compensation costs and no bonus expense in the comparable period in 2016, mainly as a result of improved utilization and pricing in North America;
  
  
• recorded a reversal of the impairment loss with respect to property, plant and equipment of $76.3 million that was previously recorded in the United States in 2015;
  
  
• reported net income attributable to shareholders of Calfrac of $38.0 million or $0.26 per share diluted, which included the $76.3 million property, plant and equipment impairment reversal, compared to a net loss of $61.5 million or $0.51 per share diluted in 2016;
  
  
• reported period-end working capital of $327.0 million versus $271.6 million at December 31, 2016;
  
  
• incurred capital expenditures of $34.5 million primarily to support the Company's North American fracturing operations; and
  
  
• activated approximately 60,000 horsepower representing one fleet servicing South Texas.

CONSOLIDATED HIGHLIGHTS

 

Revenue in the fourth quarter of 2017 was $485.5 million, an increase of 152 percent from the same period in 2016. The Company's fracturing job count increased by 101 percent mainly due to a larger scale of operations and higher activity in Canada and the United States. The Company pumped approximately 60 percent and 190 percent more proppant in Canada and the United States, respectively, compared to the fourth quarter in 2016 as a result of greater activity and service intensity. Consolidated revenue per fracturing job increased by 42 percent primarily due to a combination of better pricing, larger job sizes and job mix.

Pricing in Canada and the United States increased while pricing in Russia was consistent with the fourth quarter of 2016. In Argentina, the transition to more unconventional activity does not allow for a meaningful pricing comparison to the fourth quarter in 2016 as the style of job is significantly different than conventional activity.

Adjusted EBITDA of $49.2 million for the fourth quarter of 2017 increased from negative $13.7 million in the comparable period in 2016 primarily due to significantly higher utilization in the United States and Canada offset partially by the incurrence of bonus expenses and reactivation costs in the fourth quarter of $14.4 million and $7.4 million, respectively, and higher stock-based compensation costs, which at $8.2 million were higher by $3.9 million versus the comparable quarter in 2016.

Net income attributable to shareholders of Calfrac was $38.0 million or $0.26 per share diluted compared to a net loss of $61.5 million or $0.51 per share diluted in the same period last year. Net income during the fourth quarter of 2017 included a property, plant and equipment impairment reversal related to the Company's U.S. division totalling $76.3 million and a primarily unrealized foreign exchange loss of $8.1 million.

 

Revenue in the fourth quarter of 2017 was $485.5 million, an increase of 8 percent from the third quarter of 2017, primarily due to higher activity in the United States offset partially by lower activity in Canada. Revenue per fracturing job increased by 27 percent due to job mix and customer mix in the United States. Pricing in all operating regions was largely consistent with the third quarter of 2017.

In Canada, fourth-quarter revenue decreased by 24 percent from the third quarter to $136.8 million as several of the Company's major customers completed the majority of their 2017 capital programs during the early part of the fourth quarter. Weather also negatively impacted activity in December, with early warm weather causing road bans to be enacted in some areas, while extreme cold at the end of the month delayed a number of operations into January. Operating income as a percentage of revenue was 11 percent versus 25 percent in the third quarter primarily due to lower equipment utilization, reactivation and hiring costs and the incurrence of $3.6 million of bonus expenses during the fourth quarter of 2017.

In the United States, revenue in the fourth quarter of 2017 increased by 38 percent from the third quarter to $267.7 million, mainly as a result of a full quarter of operations from the four additional fleets that were reactivated during the third quarter plus one additional fleet that was activated early in the fourth quarter. The United States division maintained its operating income margin from the third quarter at 19 percent of revenue, consistent with the third quarter of 2017. The U.S. division incurred $6.0 million in reactivation costs during the quarter compared to $8.0 million in the third quarter. Further, the U.S. division recorded bonus expenses of $4.1 million in the fourth quarter.

In Russia, revenue of $35.0 million in the fourth quarter of 2017 was 18 percent higher sequentially as the Company started supplying proppant to a significant customer late in the third quarter of 2017 combined with an increase in fracturing activity. Operating income as a percentage of revenue was 3 percent lower than the third quarter at approximately 13 percent after normalizing for the annual bonus provision that was recorded during the fourth quarter.

In Latin America, revenue increased sequentially by 6 percent to $46.0 million primarily due to an increase in activity in Argentina, including increased work volumes in the Vaca Muerta shale play. Although the Company improved its revenue during the quarter, profitability was negatively impacted by the continued transition to unconventional operations in Argentina.

BUSINESS UPDATE AND OUTLOOK
Calfrac's fourth-quarter results reflect the rapid improvement in business fundamentals across North America, offset somewhat by a slowdown in the Company's Canadian operations later in the quarter. With less than 300,000 horsepower remaining idle in the Company, the relative revenue impact of incremental reactivations is expected to be lower in 2018 than was seen in 2017, as the Company approaches full utilization of its asset base.

CANADA
In Canada, the fourth quarter was marked by a number of changes to work mix due to customer budget exhaustion, as well as both cold and warm weather that impacted operations. The 2017 work programs for a number of Calfrac's larger Canadian clients were completed in October due, in large part, to high levels of field productivity during the second and third quarters. Although some newer clients were added to the mix during the period, the repositioning of equipment and people did impact productivity during the latter part of the quarter. Weather impacts were meaningful in December, with early warm weather causing road bans to be enacted in some areas, while extreme cold during the holiday period delayed a number of operations into January.

Oil and liquids pricing improved sequentially in the fourth quarter, but low prices and short-term volatility were still present in Canadian natural gas markets, causing a number of downward budget revisions for 2018. While further spending reductions by gas-weighted clients are likely in 2018, the Company expects that incremental activity in liquids-driven areas should replace a meaningful segment of these reductions. Pricing in the Canadian market softened slightly during the fourth quarter as larger programs were completed, and the Company did observe that some spot market work was bid at a discount to market prices. However, there were no meaningful impacts to pricing for 2018 as a result of bidding activity in the fourth quarter.

Early in the first quarter of 2018, the Company deployed an incremental fracturing fleet in Canada focused on servicing the Montney and Deep Basin areas, where Calfrac has added a number of high quality clients. With eight fleets running, the Company is confident in its ability to service its client base across Western Canada throughout 2018. Due to strong demand, Calfrac is in the process of transferring 30,000 currently idle horsepower from its Canadian operations into the United States. The Company expects this transfer to be complete early in the second quarter and the equipment will support existing operations in the United States.

After the transfer, Calfrac's Canadian operation will retain approximately 70,000 horsepower of idle equipment, and will prudently analyze the commercial and strategic options across all of its active operations for opportunities to deploy this equipment. Regardless of where Calfrac's assets are deployed, the Company's mission of consistently delivering safe and productive service to a top-tier client base will remain unchanged.

Cost inflation was in line with expectations in Canada during the fourth quarter, and although cost mix evolved during the quarter, no major areas of inflation were noted. Moving into 2018, the Company will continue to work with its client base to manage the impact of any cost inflation.

Activity in the first quarter has commenced at a robust pace, with the Company fielding a number of requests for service over and above its committed work volumes. Calfrac expects its Canadian operations to remain fully booked into spring break-up, with very good prospects for project work in the second quarter. As always the impact of weather and road conditions will determine how much work can be serviced in the spring months.

Issues relating to sand logistics have not impacted Calfrac's Canadian operations to date in the first quarter. The Company's investments in supply chain expertise and partnerships have proved prescient, and at this point Calfrac expects no major disruptions to first-quarter work programs due to sand supply and logistics.

UNITED STATES
The United States showed sequential improvement in the fourth quarter as a result of fleet reactivations, aided by cost management and strong productivity in operating fleets. The Company reactivated one incremental spread during the quarter as it restarted operations in San Antonio, and exited 2017 with 13 active fleets.

Today, Calfrac's United States operations are nearly fully reactivated and the Company expects to have 16 fleets deployed by the end of the second quarter, representing approximately 800,000 horsepower.

Cost inflation in the United States is expected to continue in 2018, especially in the Permian basin as activity remains very high in that region. The emergence of regional sand supply in some markets may provide some cost relief, but it remains too early to definitively judge the financial impacts of that industry trend. Calfrac's expertise in logistics is anticipated to help mitigate the impact of supply chain issues throughout the year.

Sand supply and delivery issues have been more challenging in the United States during the first quarter, but the impact on Calfrac has been modest, and largely manageable. Calfrac does not expect these issues to be fully resolved until weather and related rail congestion issues abate, which is currently expected to occur in the second quarter.

In the year ahead, the focus for the Company's U.S. division will be to manage the remaining growth in operating scale and optimize all aspects of its business, including client mix, geographic footprint and cost structure. As the United States pressure pumping market appears to be undersupplied from a supply and demand perspective, pricing is expected to move higher in the quarters ahead. As always, Calfrac's mission will be the delivery of top tier service quality and HS&E performance to its strong portfolio of clients that are focused on maintaining the highest levels of operating efficiency.

RUSSIA
Calfrac's Russian operations generated meaningful year-on-year improvement in both operational and financial results in the fourth quarter of 2017 as utilization levels remained strong relative to the same period in 2016. The higher activity was due primarily to less adverse weather conditions, rather than higher client spending or pricing. Calfrac expects that its financial performance in Russia during 2018 will be relatively consistent with 2017, before the impact of any foreign currency changes.

LATIN AMERICA
Revenue increases in Argentina during the fourth quarter were due primarily to an acceleration of activity in the Vaca Muerta shale play. As the market continues to improve, the Company aims to realize better profitability in its operations in the region. As well, the transition to higher productivity operations is slowly occurring in the country which could further improve profitability.

In Mexico, due to reduced activity levels, the Company has ceased all operations in the country and has redeployed idle assets to its operations in the United States.

CORPORATE
With continued improvement in operating and financial results, Calfrac's focus at the corporate level will be the ongoing optimization of its entire portfolio of clients, assets and capital. The Company does not forecast significant administrative headcount growth in 2018, and expects that incremental working capital investments should subside through the year, with any resulting free cash flow being primarily used for the reduction of debt levels.

As announced in December 2017, Calfrac's Board of Directors have approved a 2018 capital budget of $132.0 million, consisting of sustaining and maintenance capital of $104.0 million, refurbishment capital of $22.0 million and corporate initiatives of $6.0 million.

FINANCIAL OVERVIEW – THREE MONTHS ENDED DECEMBER 31, 2017 VERSUS 2016

CANADA

 

REVENUE
Revenue from Calfrac's Canadian operations during the fourth quarter of 2017 was $136.8 million versus $72.3 million in the same period of 2016. Completions activity in Canada improved dramatically year-over-year, which allowed the Company to reactivate equipment throughout 2017. Since the end of the fourth quarter of 2016, the Company has reactivated 71,000 horsepower or two large fracturing crews and two deep coiled tubing units. Through a combination of this broader operating scale and significantly improved utilization and better pricing, the Company increased its revenue in the fourth quarter of 2017 by 89 percent from the comparative quarter in 2016. The number of fracturing jobs increased by 54 percent mainly due to a more active and efficient customer base versus the same period in 2016. The number of coiled tubing jobs increased by 31 percent from the fourth quarter in 2016, primarily due to higher activity, as well as a larger scale of operations in western Canada.

OPERATING INCOME
Operating income in Canada during the fourth quarter of 2017 was $14.7 million compared to $1.5 million in the same period of 2016. The increase was due to significantly improved utilization and better pricing compared to the fourth quarter of 2016. The Company incurred reactivation costs of $1.4 million during the fourth quarter of 2017 associated with the planned deployment of one incremental fracturing crew at the beginning of the first quarter of 2018. In addition, a $2.2 million bonus provision was recorded in operating expenses during the fourth quarter of 2017. The $1.9 million increase in SG&A expenses compared to the fourth quarter in 2016 was primarily due to a $1.4 million annual bonus expense that was recorded during the fourth quarter of 2017, combined with growth in business scale and increased activity.

UNITED STATES

 

REVENUE
Revenue from Calfrac's United States operations increased to $267.7 million during the fourth quarter of 2017 from $58.0 million in the comparable quarter of 2016. Completions activity in the United States has shown significant improvement year-over-year, which allowed the Company to reactivate equipment throughout 2017. The Company has successfully responded to the rebound in industry activity in the United States by activating nine fracturing crews since the start of 2017, including expansion into the Permian basin during the third quarter of 2017. The result was a 236 percent increase in the number of fracturing jobs completed period-over-period. Revenue per job increased 37 percent year-over-year due to job mix and improved pricing. The 5 percent depreciation in the U.S. dollar versus the Canadian dollar partially offset the revenue improvement.

OPERATING INCOME (LOSS)
The Company's United States operations generated operating income of $49.5 million during the fourth quarter of 2017 compared to an operating loss of $7.2 million in the same period in 2016. The turnaround to positive operating income was primarily the result of improved utilization and pricing in Colorado, North Dakota and Pennsylvania, as well as operations in Texas that were also accretive to operating income during the quarter. Operating income included $6.0 million of costs associated with the reactivation of one fleet during the fourth quarter of 2017 and one additional fracturing crew that commenced operations in the first quarter of 2018. SG&A expenses increased by 93 percent in the fourth quarter of 2017 due to a $1.3 million annual bonus expense that was recorded during the quarter, combined with growth in business scale and increased activity.

RUSSIA

 

REVENUE
Revenue from Calfrac's Russian operations increased by 43 percent during the fourth quarter of 2017 to $35.0 million from $24.4 million in the corresponding three-month period of 2016. The increase in revenue was largely attributable to a 31 percent increase in fracturing activity as the Company did not encounter as many weather-related delays during the fourth quarter of 2017 as compared to 2016. Revenue per fracturing job increased by 19 percent primarily due to the impact of providing sand to a significant customer during the fourth quarter of 2017 and not in the comparable quarter. Coiled tubing activity increased by 12 percent, however, the impact on revenue was partially offset by lower revenue per job as a result of a change in customer mix.

OPERATING INCOME
The Company's Russian operations generated operating income of $4.0 million during the fourth quarter of 2017 compared to $0.9 million in the corresponding period of 2016. This increase was primarily due to improved fracturing crew utilization resulting from fewer weather-related delays and the impact of converting one fleet in Khanty-Mansiysk to 24-hour operations. SG&A expenses were $0.6 million higher than the comparable quarter in 2016 primarily due to an annual bonus provision that was recorded during the fourth quarter of 2017.

LATIN AMERICA

 

REVENUE
Calfrac's Latin American operations generated total revenue of $46.0 million during the fourth quarter of 2017 versus $38.2 million in the comparable three-month period in 2016. Revenue in Latin America was 21 percent higher than the comparable quarter primarily due to higher activity in the Vaca Muerta shale play. The improvement was partially offset by lower cementing work volumes in Argentina resulting from a decrease in overall levels of drilling activity. Coiled tubing activity in Argentina increased year-over-year, but the impact was partially offset by the completion of smaller jobs.

OPERATING LOSS
The Company's operations in Latin America generated an operating loss of $3.1 million during the fourth quarter of 2017 compared to $2.9 million in the fourth quarter of 2016. Although the Company improved its revenue during the quarter, profitability was negatively impacted by the continued transition to unconventional operations in Argentina.

CORPORATE

 

OPERATING LOSS
Corporate expenses for the fourth quarter of 2017 were $20.3 million compared to $10.6 million in the fourth quarter of 2016. Operating expenses were $0.9 million higher as a result of a $1.2 million annual bonus provision recorded during the quarter offset partially by lower district personnel and occupancy costs. SG&A expenses increased by $8.9 million primarily due to a $4.4 million bonus provision, combined with a $3.9 million increase in stock-based compensation expense relating to vested restricted share units and performance share units that were recorded during the quarter. The remaining increase related to higher costs associated with operational growth.

DEPRECIATION
For the three months ended December 31, 2017, depreciation expense decreased by $16.8 million to $36.5 million in the corresponding quarter of 2016. The decrease in depreciation was primarily due to a one-time depreciation charge of $21.5 million that was recorded in the fourth quarter of 2016. Excluding this one-time charge, depreciation increased by 15 percent due to the 100,000 horsepower that was commissioned primarily in the second half of 2017, combined with capital expenditures related to the continued activation of fleets in North America during 2017.

FOREIGN EXCHANGE GAINS AND LOSSES
The Company recorded a foreign exchange loss of $8.1 million during the fourth quarter of 2017 versus a gain of $0.3 million in the comparative three-month period of 2016. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada and Latin America, and liabilities held in Canadian dollars in Russia. The Company's fourth-quarter 2017 foreign exchange loss was largely attributable to the translation of U.S. dollar-denominated liabilities held in Argentina as the value of the Argentinean peso depreciated against the U.S. dollar during the fourth quarter.

IMPAIRMENT
A substantial improvement in the commodity price environment occurred in the fourth quarter of 2017, and since December 2017 crude oil prices have averaged more than US$60 per barrel. The current and expected commodity price environment combined with the significant improvement in the operating and financial results of the Company's United States cash-generating unit (CGU) was an indicator that the impairment loss previously recorded in December 2015 may no longer exist. In addition, the Company reviewed each of its CGUs for potential impairment. A comparison of the recoverable amounts of each CGU with their respective carrying amounts resulted in no impairment against property, plant and equipment and supported the reversal of the impairment loss that was previously recorded in the United States CGU, after taking into account normal depreciation that would have been charged if no impairment had occurred. A reversal of impairment loss of $76.3 million was recorded in the fourth quarter of 2017 versus no impairment or reversal being recorded in the comparable quarter of 2016.

INTEREST
The Company's net interest expense of $21.0 million for the fourth quarter of 2017 was $1.1 million lower than in the comparable period of 2016. This decrease was primarily due to lower credit facility borrowings and the impact of a stronger Canadian dollar relative to the U.S. dollar, which resulted in lower reported interest on the Company's U.S. dollar-denominated unsecured notes.

INCOME TAXES
The Company recorded an income tax expense of $14.7 million during the fourth quarter of 2017 compared to a recovery of $32.2 million in the comparable period of 2016. The Company had an effective tax rate of 29 percent during the fourth quarter of 2017, however, there were a number of tax adjustments recorded during the quarter. These adjustments were primarily due to the tax rate changes in Argentina and the United States that were announced during December 2017. In the United States, a reduction in the Federal tax rate from 35 percent to 21 percent required a reduction to the deferred tax liability of $16.1 million, and in Argentina, a reduction in the tax rates required a reduction to the deferred tax asset of $7.3 million. The net adjustment for these items was recorded as a tax recovery of $8.8 million. After normalization for these adjustments, the effective tax rate was 44 percent during the fourth quarter of 2017, compared to a tax recovery rate of 34 percent in the comparable quarter in 2016. The effective tax rate in 2017 was higher due to significantly higher earnings in the United States as a result of the reversal of the impairment of $76.3 million that was recorded during the fourth quarter of 2017. This resulted in taxable income in the United States, offset partially by tax losses in Canada and Argentina which had lower statutory tax rates than the United States.

SUMMARY OF QUARTERLY RESULTS

 

SEASONALITY OF OPERATIONS
The Company's North American business is seasonal. The lowest activity is typically experienced during the second quarter of the year when road weight restrictions are in place due to spring break-up weather conditions and access to well sites in Canada and North Dakota is reduced.

FOREIGN EXCHANGE FLUCTUATIONS
The Company's consolidated financial statements are reported in Canadian dollars. Accordingly, the quarterly results are directly affected by fluctuations in the exchange rates for United States, Russian, Mexican and Argentinean currency.

FINANCIAL OVERVIEW – YEAR ENDED DECEMBER 31, 2017 VERSUS 2016

CANADA

 

REVENUE
Revenue from Calfrac's Canadian operations during 2017 was $540.1 million versus $250.0 million in 2016. Calfrac responded to the significant improvement in Canadian completions activity by reactivating two 24-hour fleets during 2017. Through a combination of a larger operating scale combined with significantly improved utilization and better pricing, the Company increased its revenue by 116 percent. The number of fracturing and coiled tubing jobs increased by 126 percent and 80 percent, respectively, due to a more active and efficient customer base as compared to 2016. Revenue per fracturing job decreased by 2 percent from the prior year due to job mix and changes in completion design which were offset partially by higher pricing.

OPERATING INCOME (LOSS)
The Company's Canadian division generated operating income of $84.7 million during 2017 compared to an operating loss of $5.0 million in 2016. The return to positive operating income was the result of significantly better utilization and improved pricing. The Company incurred reactivation costs of $3.4 million during 2017 primarily associated with the deployment of two fracturing crews during the year and one additional fracturing crew that commenced operations in the first quarter of 2018. The Canadian division's SG&A expenses increased by 38 percent year-over-year primarily due to a $1.4 million annual bonus provision that was recorded during the fourth quarter of 2017 combined with growth in business scale and overall activity.

UNITED STATES

 

REVENUE
Revenue from Calfrac's United States operations increased to $713.5 million during 2017 from $234.6 million in 2016 due to significantly higher fracturing activity and improved pricing. Completions activity in the United States has shown meaningful improvement year-over-year, which allowed the Company to reactivate equipment throughout 2017. The Company responded to this increase in industry activity by activating nine fracturing crews since the end of 2016, including two crews servicing the Permian basin in New Mexico and Texas. The number of fracturing jobs completed during 2017 increased by 135 percent from 2016 due to higher activity across all operating areas as well as the larger geographic footprint. Revenue per job increased by 29 percent year-over-year due to customer and job mix, while higher pricing in all operating regions also had a positive impact on revenue per job during the period.

OPERATING INCOME (LOSS)
The Company's United States division generated operating income of $121.8 million during 2017 after incurring an operating loss of $26.3 million during 2016. Strong utilization combined with a larger number of active fleets resulted in the significant year-over-year improvement in operating income. The operating results in 2017 also included reactivation costs of $20.4 million, and bonus expenses of $4.1 million of which $1.3 million was recorded in SG&A, while the operating loss in 2016 included restructuring costs and bad debt expenses of $3.1 million and $0.5 million, respectively.

RUSSIA

 

REVENUE
Revenue from Calfrac's Russian operations during 2017 increased by 29 percent to $124.0 million from $95.9 million in the comparable period in 2016. The increase in revenue, which is generated in roubles, was partially related to higher fracturing activity combined with the 13 percent appreciation of the Russian rouble in 2017 versus 2016. The improvement in fracturing revenue was partially offset by lower coiled tubing activity. Revenue per fracturing job increased by 13 percent due to the currency appreciation.

OPERATING INCOME
Operating income in Russia improved to $13.4 million during 2017 from $9.0 million in 2016 primarily due to higher fracturing crew utilization, combined with the 13 percent appreciation of the rouble. SG&A expenses increased by $1.2 million during the period compared to 2016 due to the appreciation of the rouble and a higher annual bonus provision.

LATIN AMERICA

 

REVENUE
Calfrac's Latin American operations generated total revenue of $150.2 million during 2017 versus $154.0 million in 2016. In Argentina, revenue was slightly higher than in 2016 as improved fracturing revenue offset the reduction in cementing revenue. The number of fracturing jobs completed in Argentina increased by 35 percent, primarily due to higher work volumes in the Vaca Muerta shale play. The improvement was partially offset by lower cementing activity resulting from a decrease in overall levels of drilling activity in Argentina. Coiled tubing revenue was consistent year-over-year as the impact of higher activity was offset by the completion of smaller jobs. In Mexico, revenue decreased by $6.3 million primarily due to lower fracturing activity with Calfrac's major customer during the first half of 2017, followed by the decision to shut down operations during the second half of 2017.

OPERATING LOSS
The Company's Latin America division had an operating loss of $3.1 million during 2017, compared to a loss of $2.5 million in 2016. The larger operating loss in 2017 was primarily due to lower pricing and higher labour costs. In addition, the Company's start-up of operations in the Vaca Muerta unconventional gas play, although a positive for activity, has not yet resulted in the operational efficiencies required to generate operating income. Restructuring costs of $0.7 million were also recognized during 2017. SG&A expenses in 2016 contained a bad debt provision of $4.6 million relating to work performed in Mexico.

CORPORATE

 

OPERATING LOSS
The Company's corporate expenses increased by 10 percent in 2017 compared to 2016 due to a higher annual bonus provision, offset partially by lower stock-based compensation expense. SG&A expenses were 12 percent higher primarily due to a $4.4 million annual bonus provision recorded during the fourth quarter of 2017, combined with higher costs associated with growth in the Company. Expenses related to stock options and deferred share units were $2.8 million higher due to additional options granted during the year and a higher share price at the end of 2017. However, these increases were more than offset by lower costs associated with restricted share units and performance share units, as the Company reversed $6.6 million of the liability associated with these units during the first half 2017. Operating expenses were 2 percent lower primarily as a result of a decrease in occupancy costs.

DEPRECIATION
Depreciation expense for the year ended December 31, 2017 decreased by 14 percent to $130.8 million from $152.8 million in 2016. The decrease in depreciation was primarily due to a one-time depreciation charge of $21.5 million that was recorded in the fourth quarter of 2016. Excluding this one-time charge, depreciation expense was consistent on a year-over-year basis.

FOREIGN EXCHANGE LOSSES
The Company recorded a foreign exchange loss of $34.3 million during 2017 versus a loss of $19.3 million in 2016. Foreign exchange gains and losses arise primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars in Canada and Latin America and liabilities held in Canadian dollars in Russia. The Company's foreign exchange loss during the year was largely attributable to the translation of U.S. dollar-denominated assets held in Canada as the U.S. dollar depreciated against the Canadian dollar during the year. In addition, the translation of U.S. dollar-denominated liabilities held in Argentina contributed to the foreign exchange loss as the value of the Argentinean peso depreciated against the U.S. dollar during 2017.

IMPAIRMENT
A substantial improvement in the commodity price environment occurred in the fourth quarter of 2017, and since December 2017, crude oil prices have averaged more than US$60 per barrel. The current and expected commodity price environment combined with the significant improvement in the operating and financial results of the Company's United States cash-generating unit (CGU) was an indicator that the impairment loss previously recorded in December 2015 may no longer exist. In addition, the Company reviewed each of its CGUs for potential impairment. A comparison of the recoverable amounts of each CGU with their respective carrying amounts resulted in no impairment against property, plant and equipment and supported the reversal of the impairment loss that was previously recorded in the United States CGU, after taking into account normal depreciation that would have been charged if no impairment had occurred. As a result, an impairment reversal of $76.3 million was recorded in 2017.

INTEREST
The Company's net interest expense was $85.5 million in 2017 versus $80.1 million in 2016 due to a full year of interest on the $200.0 million secured second lien term loan. This increase was offset partially by lower average credit facility borrowings during the year and the impact of a stronger Canadian dollar relative to the U.S. dollar, which resulted in lower reported interest on the Company's U.S. dollar-denominated unsecured notes.

INCOME TAXES
The Company recorded an income tax recovery of $7.7 million during 2017 compared to a recovery of $109.6 million in 2016. There were significant adjustments recorded during the fourth quarter in 2017 due to the impact of tax reform in the United States and Argentina. In the United States, a reduction in the federal tax rate from 35 percent to 21 percent required a reduction to the deferred tax liability of $16.1 million and, in Argentina, a reduction in the tax rates required a reduction to the deferred tax asset of $7.3 million. The net adjustment for these items was recorded as a tax recovery of $8.8 million. A normalized effective tax recovery rate for the year is 12 percent as pre-tax losses in Canada and Argentina were offset almost entirely by pre-tax income in the United States and Russia.

LIQUIDITY AND CAPITAL RESOURCES

 

OPERATING ACTIVITIES
The Company's cash used by operating activities for the year ended December 31, 2017 was $13.9 million versus $79.6 million in 2016. The decrease in cash used by operations was primarily due to significantly improved operating results in Canada and the United States offset by working capital requiring $117.2 million of cash in 2017 compared to working capital contributing $49.9 million of cash in 2016. At December 31, 2017, Calfrac's working capital was approximately $327.0 million compared to $271.6 million at December 31, 2016.

FINANCING ACTIVITIES
Net cash provided by financing activities for the year ended December 31, 2017 was $49.8 million compared to $125.1 million in 2016. During the year ended December 31, 2017, the Company received net funds from borrowings of $20.8 million and received net proceeds of $29.1 million related to shares issued during the year.

On September 27, 2017, Calfrac amended and extended its credit facilities to June 1, 2020. The amendment included a voluntary reduction in the total facilities from $300.0 million to $275.0 million. The facilities consist of an operating facility of $27.5 million and a syndicated facility of $247.5 million. The Company's credit facilities mature on June 1, 2020 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 2.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.50 percent above the respective base rates. The accordion feature of the syndicated facility remains at $200.0 million, and is available to the Company during the term of the agreement. The Company incurs interest at the high end of the ranges outlined above if its net Total Debt to Adjusted EBITDA ratio is above 5.00:1.00. Additionally, until such a time as the Company's net Total Debt to Adjusted EBITDA ratio is below 5.00:1.00, certain restrictions will apply including the following: (a) acquisitions will be subject to majority lender consent; (b) distributions will be restricted other than those relating to the Company's share unit plans, and no increase in the rate of dividends will be permitted; and (c) the Company will be prohibited from utilizing advances under the credit facilities to redeem or repay subordinated debt. As at December 31, 2017, the Company's net Total Debt to Adjusted EBITDA ratio, which excludes any benefit from the equity cure, was 4.97:1.00.

Advances under the credit facilities are limited by a borrowing base. The borrowing base is calculated based on the following:

 

As at December 31, 2017, the Company had used $2.7 million of its credit facilities for letters of credit and had $25.0 million of borrowings under its credit facilities, leaving $247.3 million in available liquidity under its credit facilities. As described above, the Company's credit facilities are subject to a monthly borrowing base calculation which could result in a lower liquidity amount.

The Company's credit facilities contain certain financial covenants as shown below.

 

Proceeds from equity offerings may be applied, as an equity cure, in the calculation of Adjusted EBITDA towards the Funded Debt to Adjusted EBITDA covenant for any of the quarters ending prior to and including June 30, 2020, subject to certain conditions including:

 

On December 6, 2016, Calfrac closed a bought deal private placement of 21,055,000 common shares for net proceeds of approximately $56.6 million. On December 22, 2015, Calfrac closed a bought deal private placement of 20,370,370 common shares for net proceeds of approximately $25.2 million. $50.0 million of the net proceeds from these offerings were held in a segregated account pending an election to use them as an equity cure. On April 3, 2017, the Company elected to use the first of its two fully-funded $25.0 million equity cures effective as of the quarter ending on June 30, 2017. The September 2017 amendments to the credit facilities provided that the Company can utilize two equity cures during the term of the credit facilities subject to the conditions described above, and confirmed that the previously funded $25.0 million equity cure may continue to be held in a segregated account to be used as an equity cure if required at a future date. To utilize an equity cure, the Company must provide notice of any such election to the lending syndicate at any time prior to the filing of its quarterly financial statements for the applicable quarter on SEDAR. Throughout the period ending on June 30, 2020, amounts used as an equity cure will increase Adjusted EBITDA over the relevant twelve-month rolling period and will also serve to reduce Funded Debt. The funds that were removed from the segregated account and utilized as an equity cure for the quarter ending on June 30, 2017, as described above, were used for general working capital and corporate purposes. When the remaining funds are removed from the segregated account, as an equity cure or otherwise, they are expected to be used to fund capital expenditures, to reduce outstanding indebtedness, and/or to be used for general working capital and corporate purposes.

As shown in the table below, at December 31, 2017, the Company was in compliance with the financial covenants associated with its credit facilities.

 

The Company's credit facilities also contain certain restrictions with respect to dispositions of property or assets in Canada and the United States. For such dispositions occurring on or prior to December 31, 2018, majority lender consent is required if the aggregate market value exceeds $40.0 million and for such dispositions occurring in a calendar year commencing January 1, 2019, majority lender consent is required if the aggregate market value exceeds $20.0 million. There are no restrictions pertaining to dispositions of property or assets outside of Canada and the United States, except that to the extent that advances under the credit facilities exceed $50.0 million at the time of any such dispositions, Calfrac must use the resulting proceeds to reduce the advances to less than $50.0 million before using the balance for other purposes.

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

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20.0 million. As at December 31, 2017 this basket was not utilized. The indenture also restricts the ability to incur additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $175.0 million or 30 percent of the Company's consolidated tangible assets. At December 31, 2017, the Company was able to incur additional indebtedness in excess of $400.0 million pursuant to the aforementioned exception.

As at December 31, 2017, the Company's Fixed Charge Coverage Ratio of 2.24:1 was higher than the required 2:1 ratio and the aforementioned prohibitions will not be applicable as long as the Company remains above this ratio.

On June 10, 2016, the Company closed a $200.0 million second lien senior secured term loan financing with Alberta Investment Management Corporation (AIMCo). The term loan matures on September 30, 2020 and bears interest at the rate of 9 percent annually and is payable quarterly. In addition, amortization payments equal to 1 percent of the original principal amount are payable annually in equal quarterly installments, with the balance due on the maturity date. In conjunction with the funding of the term loan, a total of 6,934,776 warrants to purchase common shares of the Company were issued to AIMCo, entitling it to acquire 6,934,776 common shares at a price of $4.14 per common share at any time prior to June 10, 2019. No amendments were made to the available commitment, term, covenants or interest rates payable under Calfrac's existing credit facilities as part of the required approvals for the term loan. On November 6, 2017, AIMCo. exercised all of its warrants resulting in cash proceeds of $28.7 million. The proceeds were used to reduce borrowings under the Company's credit facilities.

INVESTING ACTIVITIES
Calfrac's net cash used for investing activities was $76.0 million for the year ended December 31, 2017 versus $52.1 million in 2016. Cash outflows relating to capital expenditures were $86.4 million in 2017 compared to $56.1 million in 2016. Capital expenditures were primarily to support the Company's North American fracturing operations. The Company disposed of assets during the year for proceeds of $10.5 million compared to $3.9 million in 2016.

As announced in December 2017, Calfrac's Board of Directors have approved a 2018 capital budget of $132.0 million, consisting of sustaining and maintenance capital of $104.0 million, refurbishment capital of $22.0 million and corporate initiatives of $6.0 million.

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
The effect of changes in foreign exchange rates on the Company's cash and cash equivalents during year ended December 31, 2017 was a loss of $17.1 million versus a loss of $7.4 million in 2016. These losses relate to cash and cash equivalents held by the Company in a foreign currency.

With its working capital position, available credit facilities and anticipated funds provided by operations, the Company expects to have adequate resources to fund its financial obligations and planned capital expenditures for 2018 and beyond.

At December 31, 2017, the Company had cash and cash equivalents of $52.7 million of which $25.0 million was held in a segregated account at the Company's discretion, so that it may be utilized as an equity cure if required in the calculation of Adjusted EBITDA for purposes of the Company's bank covenants.

OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of common shares. Employees have been granted options to purchase common shares under the Company's shareholder-approved stock option plan. The number of shares reserved for issuance under the stock option plan and performance share unit plan is equal to 10 percent of the Company's issued and outstanding common shares. As at February 23, 2017, there were 143,923,491 common shares issued and outstanding and 10,749,775 options to purchase common shares.

ADVISORIES

FORWARD-LOOKING STATEMENTS
In order to provide Calfrac shareholders and potential investors with information regarding the Company and its subsidiaries, including management's assessment of Calfrac's plans and future operations, certain statements contained in this press release, including statements that contain words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "forecast" or similar words suggesting future outcomes, are forward-looking statements.

In particular, forward-looking statements in this press release include, but are not limited to, statements with respect to expected operating strategies and targets, capital expenditure programs, future financial resources, use of funds held in the Company's segregated bank account (as an equity cure or otherwise), anticipated equipment utilization levels, future oil and natural gas well activity in each of the Company's operating jurisdictions, results of acquisitions, the impact of environmental regulations and economic reforms and sanctions on the Company's business, future costs or potential liabilities, projections of market prices and costs, supply and demand for oilfield services, expectations regarding the Company's ability to maintain its competitive position, anticipated benefits of the Company's competitive position, expectations regarding the Company's financing activities and restrictions including with regard to its credit agreement and the indenture pursuant to which its senior notes were issued and its ability to raise capital, treatment under government regulatory regimes, commodity prices, anticipated outcomes of specific events (including exposure under existing legal proceedings), expectations regarding trends in, and the growth prospects of, the global oil and natural gas industry, the Company's growth strategy and prospects, and the impact of changes in accounting policies and standards on the Company and its financial statements. These statements are derived from certain assumptions and analyses made by the Company based on its experience and perception of historical trends, current conditions, expected future developments and other factors that it believes are appropriate in the circumstances, including, but not limited to, the economic and political environment in which the Company operates, the Company's expectations for its current and prospective customers' capital budgets and geographical areas of focus, the Company's existing contracts and the status of current negotiations with key customers and suppliers, the focus of the Company's customers on increasing the use of 24-hour operations in North America, the effectiveness of cost reduction measures instituted by the Company, the effect unconventional gas projects have had on supply and demand fundamentals for natural gas and the likelihood that the current tax and regulatory regime will remain substantially unchanged.

Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from the Company's expectations. Such risk factors include: excess oilfield equipment levels; regional competition; the availability of capital on satisfactory terms; restrictions resulting from compliance with debt covenants and risk of acceleration of indebtedness; direct and indirect exposure to volatile credit markets, including credit rating risk; currency exchange rate risk; risks associated with foreign operations; operating restrictions and compliance costs associated with legislative and regulatory initiatives relating to hydraulic fracturing and the protection of workers and the environment; changes in legislation and the regulatory environment; dependence on, and concentration of, major customers; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; uncertainties in weather and temperature affecting the duration of the service periods and the activities that can be completed; liabilities and risks associated with prior operations; failure to maintain the Company's safety standards and record; failure to realize anticipated benefits of acquisitions and dispositions; the ability to integrate technological advances and match advances from competitors; intellectual property risks; sourcing, pricing and availability of raw materials, component parts, equipment, suppliers, facilities and skilled personnel; and the effect of accounting pronouncements issued periodically. Further information about these and other risks and uncertainties may be found under "Business Risks" below.

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

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

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

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

 

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

 

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

FOURTH QUARTER CONFERENCE CALL
Calfrac will be conducting a conference call for interested analysts, brokers, investors and news media representatives to review its 2017 fourth quarter results at 10:00 a.m. (Mountain Time) on Thursday, March 1, 2018. The conference call dial-in number is 1-888-231-8191 or 647-427-7450. The seven-day replay numbers are 1-855-859-2056 or 416-849-0833 (once connected, enter 6981519). A webcast of the conference call may be accessed via the Company's website at www.calfrac.com.

CONSOLIDATED BALANCE SHEETS

 

CONSOLIDATED STATEMENTS OF OPERATIONS 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As at and for the years ended December 31, 2017 and 2016
(Amounts in text and tables are in thousands of Canadian dollars, except share data and certain other exceptions as indicated)

1.  CASH AND CASH EQUIVALENTS
On December 6, 2016, the Company received net proceeds of $56,636 from a private placement offering of common shares as described in further detail in note 5.

Prior to April 3, 2017, $50,000 of the net proceeds from the private placement was held in a segregated account. These funds are available for use at the Company's discretion and can be transferred to its operating bank account at any time. The Company can also elect to use the proceeds as an equity cure. When the proceeds are utilized as an equity cure, the funds are transferred to the Company's operating bank account and are available for use at the Company's discretion. In addition, the proceeds are applied as a reduction of Funded Debt and are included in the calculation of EBITDA for purposes of the Company's Funded Debt to EBITDA bank covenant.

On April 3, 2017, the Company elected to use the first of its two fully-funded $25,000 equity cures effective as of the quarter ending on June 30, 2017. As at December 31, 2017, $25,000 remains in a segregated account.

2.  INVENTORIES

 

For the year ended December 31, 2017, the cost of inventories recognized as an expense and included in cost of sales was approximately $560,000 (year ended December 31, 2016 – $274,000).

The Company reviews the carrying value of its inventory on an ongoing basis for obsolescence and to verify that the carrying value exceeds the net realizable amount. For the year ended December 31, 2017, the Company determined there was no impairment to write-off obsolete inventory and write-down inventory to its net realizable amount (year ended December 31, 2016 – $3,225).

 

3 .  PROPERTY, PLANT AND EQUIPMENT

 

 

Property, plant and equipment are tested for impairment in accordance with the Company's accounting policy. The Company reviews the carrying value of its property, plant and equipment at each reporting period for indicators of impairment. As well, the Company assesses at the end of each reporting period whether there is any indication that an impairment loss recognized in prior periods for an asset or cash-generating unit (CGU) other than goodwill may no longer exist or may have decreased. If any such indication exists, the Company estimates the recoverable amount of that CGU to determine if the reversal of impairment loss is supported.

The Company's CGUs are determined to be at the country level, consisting of Canada, the United States, Russia and Argentina.

The significant improvement in the operating and financial results of the Company's United States CGU was an indicator that the impairment loss previously recorded in December 2015 may no longer exist. As a result, the Company estimated the recoverable amount of its property, plant and equipment.

The recoverable amount of property, plant and equipment was determined using the value in use method, based on multi-year discounted cash flows to be generated from the continuing operations of each CGU. Cash flow assumptions were based on a combination of historical and expected future results, using the following main key assumptions:

• Commodity price forecasts
• Expected revenue growth
• Expected operating income growth
• Discount rate

The main commodity price assumptions over the forecast periods were:

• WTI Crude Oil (US$/bbl) increased from $57 in 2018 to $71 in 2022
• Henry Hub Gas (US$/mmBtu) increased from $3.00 in 2018 to $3.89 in 2022
• AECO Gas (C$/mcf) increased from $2.43 in 2018 to $3.67 in 2022

Revenue and operating income growth rates for each CGU were based on a combination of commodity price assumptions, historical results and forecasted activity levels, which incorporated pricing, utilization and cost improvements over the period. The revenue and operating income cumulative annual growth rates (CAGR) over the forecast period from 2018 to 2022, by CGU, are outlined below:

 

The cash flows were prepared on a five-year basis, using a discount rate ranging from 12.8 percent to 25.0 percent depending on the CGU. Discount rates are derived from the Company's weighted average cost of capital, adjusted for risk factors specific to each CGU. Cash flows beyond that five-year period have been extrapolated using a steady 2.0 percent growth rate.

 

A comparison of the recoverable amounts of each cash-generating unit with their respective carrying amounts resulted in no impairment against property, plant and equipment and supported the reversal of the impairment loss that was previously recorded in the United States CGU, after taking into account normal depreciation that would have been charged if no impairment had occurred. For the year ended December 31, 2017, a reversal of impairment loss of $76,296 was recognized (year ended December 31, 2016 – $nil).

A sensitivity analysis on the discount rate and expected future cash flows would have the following impact:

 

The Company also assessed fair value using market data to validate the impairment reversal and market data also supported the reversal of impairment.

Assumptions that are valid at the time of preparing the impairment test at December 31, 2017 may change significantly when new information becomes available. The Company will continue to monitor and update its assumptions and estimates with respect to property, plant and equipment impairment on an ongoing basis.

4.  LONG-TERM DEBT

 

The fair value of the senior unsecured notes, as measured based on the closing quoted market price at December 31, 2017, was $743,111 (December 31, 2016 – $702,903). The carrying values of the mortgage obligation, revolving term loan facilities and the second lien term loan approximate their fair values as the interest rates are not significantly different from current interest rates for similar loans.

On September 27, 2017, the Company amended and extended its credit facilities to June 1, 2020. The amendment included a voluntary reduction in the total facilities from $300,000 to $275,000. The facilities consist of an operating facility of $27,500 and a revolving term loan facility of $247,500. The Company's credit facilities mature on June 1, 2020 and can be extended by one or more years at the Company's request and lenders' acceptance. The Company also may prepay principal without penalty. The interest rates are based on the parameters of certain bank covenants. For prime-based loans and U.S. base-rate loans, the rate ranges from prime or U.S. base rate plus 0.50 percent to prime plus 2.50 percent. For LIBOR-based loans and bankers' acceptance-based loans, the margin thereon ranges from 1.50 percent to 3.50 percent above the respective base rates. The facility maintains its accordion feature at $200,000, which is available to the Company during the term of the agreement. The Company will incur interest at the high end of the ranges outlined above until its net Total Debt to Adjusted EBITDA ratio is below 5.00:1.00. Additionally, until such a time as the Company's net Total Debt to Adjusted EBITDA ratio is below 5.00:1.00, certain restrictions will apply including the following: (a) acquisitions will be subject to majority lender consent; (b) distributions will be restricted other than those relating to the Company's share unit plans, and no increase in the rate of dividends will be permitted; and (c) the Company will be prohibited from utilizing advances under the credit facilities to redeem or repay subordinated debt. As at December 31, 2017, the Company's net Total Debt to Adjusted EBITDA ratio, which excludes any benefit from the equity cure, was 4.97:1.00.

Debt issuance costs related to this facility are amortized over its term.

On June 10, 2016, the Company entered into a $200,000 second lien senior secured term loan facility. The term loan matures on September 30, 2020, and bears interest at 9 percent per annum, payable quarterly. Amortization payments equal to 1 percent of the original principal amount are payable annually, in equal quarterly installments, with the balance due on the final maturity date. The proceeds from the term loan were made available in a single draw, and amounts borrowed under the term loan that are repaid or prepaid are not available for re-borrowing. The term loan is secured by the Canadian and U.S. assets of the Company on a second priority basis, subordinate only to the revolving term loan facility.

Interest on long-term debt (including the amortization of debt issuance costs and debt discount) for the year ended December 31, 2017 was $85,520 (year ended December 31, 2016 – $78,069).

The following table sets out an analysis of long-term debt and the movements in long-term debt for the periods presented:

 

The aggregate scheduled principal repayments required in each of the next five years are as follows:

 

At December 31, 2017, the Company had utilized $2,664 of its loan facility for letters of credit and had $25,000 outstanding under its revolving term loan facility, leaving $247,336 in available credit, subject to a monthly borrowing base calculation, which could result in a lower amount of available credit.

See note 7 for further details on the covenants in respect of the Company's long-term debt.

5.  CAPITAL STOCK
Authorized capital stock consists of an unlimited number of common shares.

 

The weighted average number of common shares outstanding for the three months ended December 31, 2017 was 140,855,963 basic and 143,798,548 diluted (three months ended December 31, 2016 – 121,360,722 basic and 122,781,800 diluted). The weighted average number of common shares outstanding for the year ended December 31, 2017 was 137,663,943 basic and 139,461,872 diluted (year ended December 31, 2016 – 116,906,108 basic and 117,325,647 diluted). The difference between basic and diluted shares is attributable to the dilutive effect of stock options and warrants issued by the Company as disclosed in note 6.

On December 6, 2016, the Company closed a bought deal private placement of 21,055,000 common shares for total gross proceeds of $60,007. Share issuance costs for the transaction were $3,371, resulting in net proceeds of $56,636.

A dividend of $0.015625 per common share, totalling $1,806, was declared on December 4, 2015 and paid on January 15, 2016.

During 2016, eight common shares were returned to the Company for cancellation. For accounting purposes, the cancellation of these shares was recorded as a reduction of capital stock in the amount of twenty-eight dollars, along with a corresponding increase to contributed surplus.

6.  SHARE-BASED PAYMENTS
(a)  Stock Options

 

The weighted average share price at the date of exercise for stock options exercised during 2017 was $4.12 (2016 – not applicable as no options were exercised).

 

Stock options vest equally over four years and expire five years from the date of grant. When stock options are exercised, the proceeds together with the compensation expense previously recorded in contributed surplus, are added to capital stock.

The weighted average fair value of options granted during 2017, determined using the Black-Scholes valuation method, was $2.11 per option (year ended December 31, 2016 – $0.84 per option). The Company applied the following assumptions in determining the fair value of options on the date of grant:

 

Expected volatility is estimated by considering historical average share price volatility.

(b)  Share Units

 

 

Stock-based compensation expense is included in selling, general and administrative expenses.

The Company grants deferred share units to its outside directors. These units vest in November of the year of grant and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the deferred share units is recognized equally over the vesting period, based on the current market price of the Company's shares. At December 31, 2017, the liability pertaining to deferred share units was $867 (December 31, 2016 – $690).

The Company grants performance share units to a senior officer. The amount of the grants earned is linked to corporate performance and the grants vest on the approval of the Board of Directors at the meeting held to approve the consolidated financial statements for the year in respect of which performance is being evaluated. As with the deferred share units, performance share units are settled either in cash or Company shares purchased on the open market. At December 31, 2017, the liability pertaining to performance share units was $1,389 (December 31, 2016 – $1,560).

The Company grants restricted share units to its employees. These units vest over three years and are settled either in cash (equal to the market value of the underlying shares at the time of exercise) or in Company shares purchased on the open market. The fair value of the restricted share units is recognized over the vesting period, based on the current market price of the Company's shares. At December 31, 2017, the liability pertaining to restricted share units was $5,096 (December 31, 2016 – $4,995).

Changes in the Company's obligations under the deferred, performance and restricted share unit plans, which arise from fluctuations in the market value of the Company's shares underlying these compensation programs, are recorded as the share value changes.

(c)  Warrants

In conjunction with the second lien senior secured term loan facility as disclosed in note 4, 6,934,776 warrants to purchase common shares of the Company were issued during 2016, entitling the holder to acquire up to 6,934,776 common shares at a price of $4.14 per common share. The warrants expire on June 10, 2019 and can be exercised at any time prior to such date. The fair value of the warrants issued was estimated using a Black-Scholes pricing model, in the amount of $5,830 and accounted for as a deferred finance cost during 2016. On November 6, 2017, all the warrants which were issued in conjunction with the senior secured second lien term loan facility were exercised, for total proceeds of $28,709.

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

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

The Company monitors its capital structure and financing requirements using, amongst other parameters, the ratio of net debt to operating income. Operating income for this purpose is calculated on a 12-month trailing basis and is defined as follows:

 

Net debt for this purpose is calculated as follows:

 

The ratio of net debt to operating income does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

At December 31, 2017, the net debt to operating income ratio was 5.05:1 (December 31, 2016 – (15.07):1) calculated on a 12-month trailing basis as follows:

 

The Company is subject to certain financial covenants relating to working capital, leverage and the generation of cash flow in respect of its operating and revolving credit facilities. These covenants are monitored on a monthly basis. At December 31, 2017 and December 31, 2016, the Company was in compliance with its covenants with respect to its credit facilities.

 

Advances under the credit facilities are limited by a borrowing base. The borrowing base is calculated based on the following:

 

Distributions are restricted other than those relating to the Company's share unit plans and dividend distributions, provided that the rate of dividends must not exceed $0.015625 per share quarterly.

The indenture governing the senior unsecured notes contains restrictions on the Company's ability to pay dividends, purchase and redeem shares of the Company, and make certain restricted investments in circumstances where

 

These limitations on restricted payments are tempered by the existence of a number of exceptions to the general prohibition, including a basket allowing for restricted payments in an aggregate amount of up to US$20,000. As at December 31, 2017, this basket was not utilized.

The indenture also restricts the incurrence of additional indebtedness if the Fixed Charge Coverage Ratio determined on a pro forma basis for the most recently ended four fiscal quarter period for which internal financial statements are available is not at least 2:1. As is the case with restricted payments, there are a number of exceptions to this prohibition on the incurrence of additional indebtedness, including the incurrence of additional debt under credit facilities up to the greater of $175,000 or 30 percent of the Company's consolidated tangible assets. At December 31, 2017, the Company was able to incur additional indebtedness of approximately $400,000 pursuant to the aforementioned exception.

As at December 31, 2017, the Company's Fixed Charge Coverage Ratio of 2.24:1 was higher than the required 2:1 ratio and the aforementioned prohibitions will not be applicable as long as the Company remains above this ratio.

The Company has measures in place to ensure that it has sufficient liquidity to navigate the cyclical nature of the oilfield services sector and safeguard the Company's ability to continue as a going concern. The Company negotiated amendments to its credit facilities to provide increased financial flexibility. These amendments include an "Equity Cure" feature pursuant to which proceeds from equity offerings may be applied as both an adjustment in the calculation of Adjusted EBITDA and as a reduction of Funded Debt towards the Funded Debt to Adjusted EBITDA ratio covenant for any of the quarters ending prior to and including June 30, 2020, subject to certain conditions including:

 

In addition, to the extent that proceeds from an equity offering are used as part of the Equity Cure, such proceeds are included in the calculation of the Company's borrowing base.

On April 3, 2017, the Company elected to use the first of its two fully-funded $25,000 equity cures effective as of the quarter ending on June 30, 2017. As at December 31, 2017, $25,000 remains in a segregated account.

8.  CONTINGENCIES

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

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

In 1999, the largest group of plaintiffs received a ruling from the Athens Court of First Instance that their termination was invalid and that salaries in arrears amounting to approximately $10,305 (6,846 euros) plus interest were due to the former employees. This decision was appealed to the Athens Court of Appeal, which allowed the appeal in 2001 and annulled the above-mentioned decision of the Athens Court of First Instance. The said group of former employees filed an appeal with the Supreme Court of Greece, which was heard on May 29, 2007. The Supreme Court of Greece allowed the appeal and sent the matter back to the Athens Court of Appeal for the consideration of the quantum of awardable salaries in arrears. On June 3, 2008, the Athens Court of Appeal rejected NAPC's appeal and reinstated the award of the Athens Court of First Instance, which decision was further appealed to the Supreme Court of Greece. The matter was heard on April 20, 2010 and a decision rejecting such appeal was rendered in June 2010. As a result of Denison's participation in the consortium that was named in the lawsuit, the Company has been served with three separate payment orders, one on March 24, 2015 and two others on December 29, 2015. The Company was also served with an enforcement order on November 23, 2015.  Oppositions have been filed on behalf of the Company in respect of each of these orders which oppose the orders on the basis that they were improperly issued and are barred from a statute of limitations perspective. The salaries in arrears sought to be recovered through these orders are part of the $10,305 (6,846 euros) cited above and the interest being sought in respect of these orders is part of the $26,536 (17,629 euros) cited below. Provisional orders granting a temporary suspension of any enforcement proceedings have been granted in respect of all of the orders that have been served. The order served on March 24, 2015 was heard on November 24, 2015 and a decision was issued on November 25, 2016 accepting the Company's opposition on the basis that no lawful service of Judgment No 4528/2008 had taken place until the filing of the opponents' petition and/or the issuance of the payment order. The plaintiffs have filed an appeal against the above decision which has been scheduled to be heard on October 16, 2018. A hearing in respect of the order served on November 23, 2015 was adjourned until October 31, 2018. A hearing in respect of the orders served in December of 2015 scheduled for September 20, 2016 was adjourned until November 21, 2016 and two decisions were issued on January 9, 2017 accepting the Company's oppositions on a statute of limitations basis. The plaintiffs have filed appeals against the above decisions, which are scheduled to be heard on October 16, 2018.

NAPC is also the subject of a claim for approximately $4,308 (2,862 euros) plus associated penalties and interest from the Greek social security agency for social security obligations associated with the salaries in arrears that are the subject of the above-mentioned decision.

The maximum aggregate interest and penalties payable under the claims noted above, as well as three other immaterial claims against NAPC totaling $870 (578 euros), amounted to $26,536 (17,629 euros) as at December 31, 2017.

Management is of the view that it is improbable there will be a material financial impact to the Company as a result of these claims. Consequently, no provision has been recorded in these consolidated financial statements.

9.  SEGMENTED INFORMATION
The Company's activities are conducted in four geographical segments: Canada, the United States, Russia and Latin America (comprised of Argentina and Mexico). All activities are related to hydraulic fracturing, coiled tubing, cementing and other well completion services for the oil and natural gas industry.

The business segments presented reflect the Company's management structure and the way its management reviews business performance. The Company evaluates the performance of its operating segments primarily based on operating income, as defined below.

 

 

Operating income (loss) does not have a standardized meaning under IFRS and may not be comparable to similar measures used by other companies.

The following table sets forth consolidated revenue by service line:

 

The Company's customer base consists of approximately 130 oil and natural gas exploration and production companies, ranging from large multi-national publicly traded companies to small private companies. Notwithstanding the Company's broad customer base, Calfrac had five significant customers that collectively accounted for approximately 35 percent of the Company's revenue for the year ended December 31, 2017 (year ended December 31, 2016 – five significant customers for approximately 42 percent) and, of such customers, one customer accounted for approximately 10 percent of the Company's revenue for the year ended December 31, 2017 (year ended December 31, 2016 – 12 percent).

SOURCE Calfrac Well Services Ltd.

View original content: http://www.newswire.ca/en/releases/archive/March2018/01/c3146.html