Trican Well Service's (TOLWF) CEO Dale Dusterhoft on Q2 2017 Results – Earnings Call Transcript

Original Post Source

Trican Well Service Ltd. (OTCPK:TOLWF) Q2 2017 Earnings Conference Call August 11, 2017 12:00 PM ET

Executives

Dale Dusterhoft – President and CEO

Mike Baldwin – SVP, Finance and CFO

Robert Skilnick – VP of Finance

Analysts

Ben Owens – RBC Capital Markets

Connor Lynagh – Morgan Stanley

Sean Meakim – JPMorgan

Ian Gillies – GMP

Jon Morrison – CIBC Capital Markets

Jeff Fetterly – Peters & Co.

Brian Purdy – PI Financial

Tim Monachello – Raymond James

Operator

Good morning, ladies and gentlemen. Welcome to the Trican Well Service Second Quarter 2017 Earnings Results Conference Call and Webcast. As a reminder, this conference call is being recorded.

I would now like to turn the meeting over to Mr. Dale Dusterhoft, President and Chief Executive Officer of Trican Well Service Ltd. Please go ahead, Mr. Dusterhoft.

Dale Dusterhoft

Thank you very much. Good morning, ladies and gentlemen. I’d like to thank you for attending the Trican Well Service conference call for the second quarter of 2017. Here is a brief outline of how we intend to conduct the call. First of all, Mike Baldwin, our Senior Vice President of Finance and CFO, will give an overview of the quarterly results. I will then address issues pertaining to current operating conditions and near-term outlook. We’ll then open the call up for questions. Robert Skilnick, our VP of Finance, is also available for questions.

I’d now like to turn the call over to Mike to discuss the overview of the financial results.

Mike Baldwin

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 forecast or projection as reflected in the Forward-looking Information section of our MD&A. A number of business risks and uncertainties could cause the actual results to differ materially from these forward-looking statements and financial outlook. Please refer to our 2016 annual Information Form dated March 29, 2017 and the Business Risks section of our MD&A for the year ended December 31, 2016 for a more complete description of business risks and uncertainties facing Trican.

In addition, financial information is described in this conference call in relation to the effect of the Canyon acquisition as if it occurred at the start of 2017. The combined financial results may not be representative of the results had the acquisition occurred on January 1, 2017 and may differ from other pro forma calculations.

Our second quarter results were released yesterday and are available on SEDAR. Please note that all comparatives to previous quarters are for our continuing operations and exclude the discontinued and disposed portions of the business. Continuing operations include the results of Canyon effective June 2, 2017.

Second quarter activity levels remained relatively high compared to historical second quarters. And in particular, fracturing services experienced strong customer demand. The results of this high activity was second quarter revenue of $137 million and positive adjusted operating income of $12 million that significantly exceeded the comparative period. Had second quarter results reflected Canyon from April 1, 2017, revenue and adjusted operating income would have been $205 million and $21 million, respectively.

Notwithstanding the relatively strong second quarter results, a couple of items negatively affected our results. First, in Q4 2016, we agreed to typical seasonal spring breakup discounted pricing to help ensure minimum activity levels throughout the second quarter. These agreements resulted in average pricing dropping by approximately 8% from first quarter levels.

Secondly, we experienced some unplanned slowdowns during April and May as a few of our largest customers experienced delays in certain areas where access to locations was restricted. Both of these events combined to lower our April and May results below what they potentially could have been. The customer delays experienced in the start of the second quarter resulted in a strong June and have magnified the supply-demand imbalance heading into the second half of 2017 as this work was deferred into future months. This supply and demand imbalance has resulted in price increasing from Trican’s stand-alone first quarter 2017 pricing levels by approximately 20% to 25%. These price increases took effect on July 1 and should allow Trican to return to a more sustainable business model.

We do not anticipate that 100% of the price increases will translate into increased margins as cost escalation will partially offset these price increases. The acquisition of Canyon has provided Trican with more scale, which has already allowed us to work with our suppliers to minimize the impact of potential increases and, in some cases, reduce costs. We do, however, anticipate some increase in labor rates and certain product costs in the second half of 2017. The labor rate increase is in part a return of previously reduced wages combined with market adjustments.

Activity levels were extremely busy in June as we exited operating approximately 70% of our fracturing horsepower. We activated approximately 76,000 horsepower since the first quarter that has allowed us to increase the horsepower per crew to meet increases to job sizes and have additional horsepower available for maintenance and future crew additions. These activations did not meaningfully increase the number of active crews or our manned horsepower during the second quarter or during the first half of the third quarter. However, it demonstrates that we have had not to incur significant capital expenditures to activate parked equipment, and it means that the number of active crews and revenue-generating capability will increase as this equipment is manned.

At any given time, approximately 10% to 15% of our horsepower is being maintained. This maintenance factor is included in the 70% active fleet. We can activate the remaining 30% of our fracturing fleet with minimal incremental capital expenditures. Since the beginning of 2017, approximately 133,000 horsepower has activated, including Canyon activations. These activations have required less than $1 million of capital expenditures during 2017. The remainder of our parked fleet is in good condition and ready to go, and we do not anticipate any significant capital expenditures as we activate additional equipment.

While intensity and large job sizes continue to absorb equipment within the basin, a by-product of the increasing well intensity is dramatically higher proppant volumes. Our 2017 capital expenditure program increased to $25 million, which includes previously planned Canyon capital expenditures. A meaningful portion of the increased CapEx program will help improve our proppant handling capability as we’re adding additional on-site proppant storage facilities and trucks. Our ability to improve operational and logistics capabilities for proppant will directly translate to lower costs for our customers and ultimately higher margins for Trican.

Our balance sheet continues to be strong and can easily absorb this minor capital expenditure program. Given the stronger than previously anticipated ramp in activity, we expect to translate this high activity and price improvement to an even stronger balance sheet. The strength of our balance sheet will allow us to be nimble if our customers reduce programs or, alternatively, opportunities for accretive long-term investments become available. In addition to the anticipated strengthening cash flows, we can still benefit from incremental divestitures from our investments in Keane, although this is not a requirement and our strong balance sheet allows us to be patient as to the timing of any possible divestiture of Keane shares.

The integration of Canyon into Trican’s operations has progressed quicker than even we had previously anticipated. We were very pleased with the similarities in the operating cultures of both companies and the high level of customer service we have maintained through this transaction and the engagement of all employees. Estimated annual synergies are already almost $20 million, and we’ll focus on achieving additional synergies and continuing to provide a high level of service to our customers. We have retained all of Trican and Canyon’s preexisting customers that we have capacity for. And in the first month of the integration, the additional crews have allowed us more flexibility to service customers that each of Canyon and Trican individually would not have been able to service. We think our capabilities will only improve as we further integrate business and logistics processes.

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

Dale Dusterhoft

Thanks, Mike. In spite of lower – slower utilization in April and May, this was one of the busiest second quarters in recent memory. The market remained undersupplied of manned equipment. Significantly increasing activity, combined with the undersupply of equipment, combined with our customers’ willingness to pay for high-quality, safe, efficient fracturing crews that lower their overall well cost was the primary reason pricing levels have returned to more sustainable levels.

Our customers continue to call for incremental services, including preliminary discussions surrounding locking in crews for 2018 work. The number of these conversations is increasing. And at current pricing levels, we are exploring locking in a portion of our equipment into 2018 commitments. That being said, we are closely monitoring our customer plans, given the ongoing commodity price volatility, and we’ll quickly adjust our operating plans if our customers’ activity expectations meaningfully change in the future. We believe that customers will adjust budgets according to changes in their cash flow.

We also believe that our core customers have strong balance sheets and favorable economic returns at current commodity prices and will have continued programs next year if commodity prices stay in current ranges. Current activity levels, combined with the ongoing customer demand for more crews, continues to support our plan to activate two additional fracturing crews by the end of the third quarter. We will evaluate if a third crew will be activated in the fourth quarter, and we’ll continue to monitor market conditions prior to making a decision on this incremental crew. Hiring qualified personnel may delay the timing of crew additions. However, we anticipate that we will be able to add qualified personnel in all service lines.

In addition to the activation of two additional crews in the third quarter, which would bring our total activated fracturing fleet to 85% of our available 680,000 horsepower, we plan to increase the activity levels of our other equipment. Currently, we are operating approximately 60% of our non-fracturing equipment. However, we anticipate being able to activate 3 to 5 cement units in addition to coiled tubing, nitrogen and acid units in the second half of the year. This activated equipment provides Trican shareholders with incremental free cash flow with minimal investment as reactivation capital expenditures are expected to remain nominal.

While we continue to anticipate strong activity levels and equipment reactivations, our business structure has remained flexible. Our more flexible cost structure allows us to respond to both improving and declining market conditions that will help maximize our financial returns in a changing economic environment. More importantly, our organization is not dependent on higher oil prices to make money and is structured to generate economic returns in the current commodity price environment. We will remain innovative in our approach to operating our business, and we’ll continue to focus on improving our efficiencies for our customers and be relentlessly focused on cost efficiencies within our organization.

Overall, the service intensity in Western Canada remains strong. We pumped more proppant in the second quarter of 2017 than ever in the company history. We continue to see our customers pump more sand per well, and we saw another significant increase in monthly sand pumped in July. We anticipate continued growth in this area as the average sand per well in Canada is still behind that pumped in the U.S.

This increase in service intensity, combined with better rig efficiency, has rebalanced the Canadian pressure pumping market. We have previously stated that we anticipate the fracturing business in Canada to become balanced between 6,000 and 7,000 wells. With recent industry forecasts of 6,500 to 7,000 wells in Canada, combined with the continued dramatic increase of well intensity, we anticipate the fracture market will be undersupplied through the remainder of the year and into early 2018.

We remain encouraged by the economics of our clients in liquids-rich gas plays such as the Montney and Deep Basin and believe that these plays can cost-effectively compete with any plays in the world. These are core plays for Trican as our activity in these areas remain strong and generates about 70% to 75% of our revenue.

I want to thank all of our staff for their contributions to a strong second quarter. Activity remained very high, which did not give our people much time to catch up and have a break. Additionally, all of Trican’s employees, which now include Canyon employees, continued to work hard to integrate our company and to provide seamless, safe, efficient service to our customers. These efforts have set us up for a strong second half of 2017, and we thank our employees for their continued dedication and efforts.

I thank you for your attention today, and your interest in Trican. And I would like to turn the call over to the operator for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ben Owens with RBC Capital Markets.

Ben Owens

On the 20% to 25% average price increase you expect to see in the back half of the year, how much do you – I guess what percentage in percentage terms do you expect to be eaten up by supply chain cost increases?

Dale Dusterhoft

Yes. Well, I think it’s not just supply chain. As we mentioned, it’s labor and everything else. And I’ll qualify that we’re not going to take a stab at the supply chain side because we’re just currently tendering on our projects for the second half of the year. And with the Canyon acquisition, we revamped our supply chain side of the business. And so we really – we’re actually looking at limiting our increases on that side of the business. And so we do – I’m not going to be able to give any guidance on that because we’re going to be RFP-ing all of our major products and have kind of a renewed initiative in this area. On the labor side, it’s probably 200 or 300 basis points to our margins, in that kind of range, that will affect us in the second half of the year.

Ben Owens

Okay, that’s helpful. And then as a follow-up to that, what level of EBITDA margins does leading-edge pricing kind of imply for you guys in the back half of the year?

Dale Dusterhoft

Yes. We don’t give EBITDA guidance on our call, so I’ll stay off that one. But you can kind of factor in price increases. And as long as activity remains high, you can come up with something there.

Ben Owens

Okay. And then last one for me. Since bringing Canyon into the fold, has Trican changed its strategy in terms of sourcing proppant in terms of the number of suppliers you’re working with?

Dale Dusterhoft

I would say kind of what I said earlier that upon bringing Canyon into the fold, and we’re – this is something we were working on actually prior to Canyon, we’ve had an initiative all year to kind of revamp our supply chain focus in our supply chain group. And I would say that we’ve added all of Canyon’s suppliers on the proppant side as well as the ones that Trican had. But most of them are pretty similar anyhow, so there’s not a lot of additions there. So overall, we – I would say right at the moment, we’ve just combined the supply chain. And then going forward, as I mentioned, we’re going to be tendering out and RFP-ing in our major products, and we may see some shifting going forward. We’ll see how that plays out.

Operator

And our next question comes from Connor Lynagh with Morgan Stanley.

Connor Lynagh

Maybe just a higher level one for me. Yourselves and your peers have seen a second quarter like we haven’t seen in several years in Canada. And I’m wondering if you think that this level of profitability is attainable in the future. Is there something sort of one-off about this year? Or has there been more of a change in how your customers plan through the breakup season?

Dale Dusterhoft

Yes, our customers are definitely trying to structure themselves so that they can work through the second quarter with – easier, I guess. And they’re doing that through the type of locations they’re building, to their road access by trying to schedule their second quarter work to be close to main roads that are less affected by weather. So I would say that the intent of our clients, and of us of course, is that we do get a better second quarter going forward. And that it’s just a matter of economic conditions and weather as to whether that’s the case. And on the economic condition side, if it’s a relatively strong year and our customers have a big work program, they’re definitely going to try to work through Q2. But if it’s a weaker year when they’re trying to cut back programs, then they’ll probably not try to push things into Q2. But overall, I don’t think this is a flash in the pan. I think this is structurally where our clients want to be and certainly where we want to be.

Connor Lynagh

Right. Makes sense. Maybe shifting to the deployment schedule. So you highlighted that you expect to basically be fully deployed in the next 12 months or so. Do you need higher pricing to justify newbuild capacity? If so, how far are we from that? How do you think about the return calculation of cash flow in the business versus investing in new capacity?

Dale Dusterhoft

Yes. We’ll see how the utilization plays out. But if utilization stays high, I think we’re getting at a point on the pricing side that it justifies newbuild economics. Not going to do anything. We’ve got equipment to activate at very low capital cost, which is much more beneficial to our shareholders. So there’s nothing planned, but we’re at a point where pricing has drawn us back to running a sustainable business.

Operator

And our next question comes from Sean Meakim with JPMorgan.

Sean Meakim

So just I wanted to talk a little bit more about the potential for reactivations. And the ones that you’re planning, have you committed to customers? Any sense of the duration you can offer us on the types of arrangements you have for those? And I guess thinking beyond the next couple, we’ve discussed in the past that labor has been the gating item to reactivating fleets for the industry, any other hurdles needed for you to consider newbuilds in terms of what you want to see from customers to earn – excuse me not on newbuilds, but for further reactivations, I meant to say?

Dale Dusterhoft

Yes. I would say that at the present time, we don’t have any spot market capacity to speak of. We can cram in things if there’s a scheduling change or some consumer cancels for some reason or other, but not a lot of ability to do spot market. So definitely one of those crews we would like to place into the spot market to service a broader customer base and also probably realize a little bit better pricing. And one of those crews likely to go into a committed relationship – well, it can go into a committed relationship. And so it’s probably a 50-50 thing right now.

But what we have found recently that anytime that we have spot market crews, we get something put in front of us that’s pretty attractive, and we do lock those in with clients. And so we’ll play it by ear going forward, but the plan is to have a little bit of spot market capacity. But you never know, maybe we’ll lock it in, too. In terms of activating additional crews, I would say that current economics, and I think forward pricing definitely justifies activating crews. We are looking for some kind of commitments for the most part in terms of at least through the end of ’17 if we were to take on additional crews. And as I mentioned, we’re also talking about some ’18 commitments. Those are just discussion point at the present time.

Sean Meakim

In the U.S., it seems like there’s been a lot more adaptation to different contracting terms. Are you seeing similar types of changes in Canada with respect to perhaps creating more ratchets either in both directions or establishing a floor on pricing with some opportunity for it to move depending where the market goes, things like that?

Dale Dusterhoft

Yes, I think that’s exactly what the discussions have been. I think our clients want to get price assuredness in ’18 and we want to get price assuredness in ’18 within a band. And then there’s some mechanisms in there quite often that if oil went to $30 or something, there’s a floor. And if oil goes to $60, there’s a bit of a ceiling. So I think there’s a lot of different things you can do. None of them have been finalized yet. But on a high level, the customers and us are on the same page of getting better commitments if we’re going to lock in for ’18.

Sean Meakim

Got it. That’s helpful. And one last, if I could, just on the supply chain. We talked a little bit about the mix between Trican and Canyon’s respective supply chains. But if we think about the impact of FX, can you give us maybe an update on how much you’re sourcing from the U.S., given the recent move in the currency relative to the U.S. dollar? Just any significant differences between the two supply chains from that perspective and kind of where you stand on the FX exposure?

Mike Baldwin

Yes. Sean, it’s Mike. Really, the FX exposure that we had hasn’t really changed dramatically between what Canyon had and Trican had in place. So I don’t expect a meaningful change there. I haven’t run the numbers on our total operating expenditures recently on the FX side of things. But if I – talking off the top of my head, I think about 25% to 30% of our total OpEx is U.S. dollar-denominated and that really hasn’t changed, I don’t think.

Operator

And our next question comes from Ian Gillies with GMP.

Ian Gillies

If I were to think about what’s going on in Canada from the produce perspective, I would be asking for every – for Trican and every other frac company to be activating every frac crew they can in an effort to reduce some of the pricing tension. And so from that perspective, how are you mitigating that risk as you think about reactivating your frac crews?

Dale Dusterhoft

Yes. We’re locking in on committed programs through the end of ’17, and I’m very comfortable with the commitments. And I’m actually – part and parcel with that is I’m really comfortable with our customer base. We’re dealing with people that are not – how should I say, we worked with them a long time. They’re long-standing clients of ours. They don’t – we have long-standing cooperative relationships. They don’t play games with us, and we try not to play games with them. And so the customer base that the majority of our equipment is tied up with is – we have a good working relationship with and they’re not playing games with us. I would say on ’18 commitments, when you’re looking that far ahead, we’re looking for some kind of contract assuredness and if we’re going to lock in at current prices on a contract with a client, we’d like to have some kind of commitment from them that’s probably more than a handshake.

Ian Gillies

Yes. And so that’s helpful. So if I were to think about from a contract perspective, I mean pricing is always going to be challenging, I think. But I mean would minimum volume be the way to be thinking about it to get crews committed for 2018?

Dale Dusterhoft

Well, I think that you have to look at a few things – aspects of it. You want to basically lock the pricing in from the client’s side, and we want to have some level of assuredness there. But we want to have cost escalators if we have – some of our major products go wonky on us. And so there’s a cost escalation factor that has to be built in. And then on the utilization side, you’re basically looking for minimum utilization in a month and some dollar value associated with having that crew minimally utilized for that month, if that makes sense. It’s a well count. You’re either doing so many wells per month or so many days per month, something along that line.

Ian Gillies

No, that’s helpful. And I mean with respect to the synergies and cost savings, I mean in the release you noted $18 million on an annualized basis had already been realized. I mean, we’re only 2 months past closing. Are you willing to provide any additional detail of where you think you might be able to get to from a cost savings perspective? Or do you just wanted to continue to stick to that $20 million at this point in time?

Mike Baldwin

I think that there is the potential to get above that $20 million. It really comes down to what we’re able to do on the supply chain side of things. So as Dale mentioned previously, we’ve already gone through a pretty significant process of working with our vendors on our costs on that front. And we’re going to be moving into the RFP side of things. So depending on how those RFPs go, we’ll really dictate how much more from a synergy perspective we can push out of the system. At the end of the day, we’re seeing some pretty significant pricing pressures around transportation right now as well as a little bit on the proppant side of things. As so it’s as much about managing those costs and maintaining where we’re at today as well as reducing the costs where we can. So I think there’s still a pretty good opportunity. And maybe we can get – squeak out another $10 million beyond that if we’re really pushing it hard and getting good cooperation from our suppliers, but that remains to be seen.

Ian Gillies

Okay, that’s helpful. And with respect to – Canyon was built in the QEM 3000 pumps. I believe they should all have been delivered by now. Are you able to provide any, I guess, color around how those pumps may be performing? And how you think, I guess, that specific style of pump may fit within the broader Trican feet?

Dale Dusterhoft

Yes. We have them. As I’ve mentioned in the past, we are running the FMC 2700s, which is another continuous duty, high-horsepower pump. And we’re just evaluating the QEM 3000s against those pumps. The FMC pump’s quite a bit less capital cost to refit units with. There’s advantage there, and we’re just trying to see what maintenance is like on both of them and how the wear and tear is. And so we’re just in the evaluation process. We haven’t committed to go in another direction yet. But we’ve always, as a company, kind of moved to whatever we think is going to give us the best cost-effective performance. And we’ll continue to do that if we thought – if we think it’s the SPM pumps, then you’ll see us do more of it. Or if it’s – if the FMCs are holding up just as well, then you’ll probably see us lean that way.

Ian Gillies

Okay, perfect. And last one from me. I mean I looked at one of your largest competitors, and the large coiled business appears to be going quite well. I mean with the amount of free cash flow the business is generating and I mean there are some natural, I guess, synergies with the frac business there. I mean is that a business you guys are taking a closer look at, at this point, given the lack of competitors in that business in Canada?

Dale Dusterhoft

I think our coil business that we have right now has been highly utilized for the equipment we have running. But you’re right in that not all of our equipment is the absolute largest coil that could be used on every application. So if I went across all of our service lines, [indiscernible] in the past, I would say that all of our service lines now are in excellent shape in terms of capacity and quality of equipment. And with the exception of coil where we’d like to – we probably have an opportunity to get a little bit better there in terms of newer equipment styles. And so we’ll continue to look at that. I don’t anticipate anything in ’18, but – sorry, in ’17. But going into ’18, as part of our strategic plan, I suspect, if the market is still there, that you’ll see us trying to continue to improve in that area.

Operator

[Operator Instructions] Our next question comes from Jon Morrison with CIBC Capital Markets.

Jon Morrison

Does OEM parts availability make you question whether you’ll be able to meet all of your R&M needs in the next 6 months, just given how hard you’re running equipment?

Dale Dusterhoft

No, we’re fine with our supply chain on that front. I don’t think we have any issues at all upcoming.

Jon Morrison

Okay. Just as a point of clarification, Dale, you talked about employee costs going up. Have you actually implemented a wage increase as of today? Or is that all to come in the next few weeks?

Dale Dusterhoft

We did a wage increase in the second quarter for Trican staff. So this was prior to Canyon or right around the time of the Canyon acquisition. And so there’s part of it there. And then there’s some additional variable pay changes to our field staff that are taking place mid – well, say, in August.

Jon Morrison

Is 5% about the right number for that labor rate increase?

Dale Dusterhoft

5% was the right number, yes, back in the June increase.

Jon Morrison

Expectations on cementing pricing in the back half of the year. Do they go in line with the broad comments you made in regards to the fracturing market?

Dale Dusterhoft

Cementing pricing never dropped as much. And so – and has recovered a little bit better. So it was higher than fracturing pricing kind of coming into this quarter. So the percentage increase on – so won’t be as high. You won’t see 20%, 25%. But there will be some movement upwards there. We’re kind of looking through all of our cementing. And if we’ve got an outlier contract or some outlier pricing, we need to get that moved up to market rates.

Jon Morrison

Mike, how do you think about base CapEx needs pro forma in 2018 if you’re running 70%-plus of your capacity in the field?

Mike Baldwin

Yes. I mean given our history where we’ve been able to activate quite a bit of horsepower in the first half of the year even up – on a year-to-date basis and not have a lot of CapEx on that front. I’m not seeing a lot of CapEx coming out of the parked equipment, which is what we’ve been messaging from day 1 on that front. So not seeing a big need there. When you start getting into a maintenance CapEx type of a scenario, you probably – I mean we’ve got to do a lot more work on this to figure out, combined-wise, what that’s going to look like. But I still feel like going full run rate, getting up to 100% of our fleet running, you’re probably in the $30 million to $40 million maintenance CapEx range on an annual basis. But that remains to be seen. I think Rob and I need – still need to do a fair bit of work to make sure that we’re comfortable with that and reviewing what we have coming down the pipe.

Jon Morrison

Just going back to your comments about activating more crews. What rate of change would you need to see in 2018 producer budgets, broadly speaking, to keep activating your crews assuming that current economics of what you’re doing in the market holds? Do you need to see 10% up?

Dale Dusterhoft

Sorry, 10% up on activity or…

Jon Morrison

Yes.

Dale Dusterhoft

No, activity levels are at a point now that we could activate additional crews. And I would say that our view now is more around what it’s going to do in ’18. There’s no point activating a crew if ’18 comes off because [indiscernible] prices are down or if we see some kind of blip on customer budgets coming out of ’17. So it’s more getting a little bit of visibility on ’18 right now as to our comfort level around activating additional crews and the speed we want to do that.

Jon Morrison

Okay. And that just goes back to your comment on it needing to be contractual is the reconciling item, essentially?

Dale Dusterhoft

It’s contractual, plus, I said in the script that our customers’ budgets right now are very cash flow based. And if their cash flow drops, they’re going to scale back their budgets accordingly. You counter that with the service intensity increases we have. So we are taking a little bit more of the well kind of continuously. But saying that, it’s as much as anything tied to commodity prices. If commodity prices are up or down in ’18, it’s going to affect our plans.

Jon Morrison

I realize you don’t want to give any EBITDA guidance, but given the rates of change that we’ve seen in pricing and even netting out all of the offsets that you’re going to have in the back half of the year, is there any reason to believe that half 2 profitability doesn’t meaningfully eclipse half 1, even if you include the first 5 months of Canyon’s results that weren’t in there?

Mike Baldwin

I think that’s fairly reasonable.

Jon Morrison

Okay. Can you give any more color on the employee optimization comments that you just made in the release?

Mike Baldwin

I think just to touch on that is we’re just – when we talk about crew activations, and we’re seeing that we don’t need as much manpower to deliver the revenue, the earnings and everything else because the well intensity is getting higher. So that’s really what we’re talking about in combination with the fact, we’re able to – with more crews to play with on the job board. We’re just able to get to more jobs because you can move pieces a lot easier and there’s a broader client base to move those pieces. So that’s kind of some of the intangible employee optimization things that are going on here.

Dale Dusterhoft

Yes. And Jon, we’ve had an effort within Trican for the last – over a year now to reduce our footprint on locations or electronics and things. And so this is just a continuous movement that way. And also, I think, with absorbing Canyon now, it just allows us to even do that further.

Jon Morrison

Last one just for me. Are you needing to source labor outside of Western Canada at this point, as you think about those incremental crews being staffed?

Dale Dusterhoft

We don’t do fly-in, fly-out labor, but we’re always sourcing people from Eastern Canada who want to work in Western Canada or from British Columbia and that. So yes, we’ve always had a position that we’ll source labor from outside of Alberta. We don’t actively fly in, though. That’s probably the big difference in that we’re not hiring 30, 40 people and them flying them back and forth or anything like that, not of [indiscernible].

Jon Morrison

Okay. But recruitment efforts probably lean towards the East Coast at this point to try to get qualified people?

Dale Dusterhoft

We would be recruiting primarily in Western Canada. We don’t have active recruiting fairs on the East Coast. But we do – we certainly have people that have worked in the oil industry that reach out to us from the East Coast, is a better way to say it.

Operator

And our next question comes from Jeff Fetterly with Peters & Co.

Jeff Fetterly

On the SG&A side, Mike, what do you think the go-forward run rate looks like on a normalized basis?

Robert Skilnick

Jeff, this is Rob here. And I mean, if you look at the $6.8 million sort of adjusted number there, it’s going to be a little bit higher than that because we only had 1 month of Canyon. So whether that’s – 1/3 higher is too much, but in that neighborhood anyway.

Jeff Fetterly

Okay. And I guess a follow-on clarification to Ben and Jon’s question. So if you strip out a bunch of the onetime items in Q2, it looks to me like your incremental margins on a year-over-year basis were just under 30%. Is it fair to assume for the second half of the year that your year-over-year incremental margins should move higher than that number, given the pricing element plus the operational efficiencies and cost improvements?

Mike Baldwin

Yes, I think you’re right, definitely.

Jeff Fetterly

Okay. And Dale, your comments earlier about 2018, so if you’re looking at locking in a portion of equipment for ’18, would that be on a full year basis? And would that essentially be based on your, call it, July 1 pricing level with some adjustment mechanisms involved?

Dale Dusterhoft

That’s correct, yes. Customers like to get full year, the customers we’re talking to. Yes. And I’d say July 1 pricing with some kind of cost escalation built in there for major products.

Jeff Fetterly

And does that – is that a take-or-pay structure? Or is that more of a row-for structure that you would be looking at?

Dale Dusterhoft

I’d say there are negotiations right now, so everything’s on the table. But we’re looking for some kind of commitment back from our clients that’s more than a handshake. So it’s got to be some kind of financial commitment, and there’s various ways of doing that.

Jeff Fetterly

Okay. On the pricing side, the 20% to 25% improvement versus Q1, how wide would the range of your price book be starting July 1 or through the second half of the year?

Dale Dusterhoft

Well, we’ve tightened up the band pretty substantially between all of our clients. Of course, our best and largest clients would still get the best pricing based on volume, which is kind of how our business works. But that band has tightened up quite a bit because we had quite a few outliers in Q1, as I mentioned, and even through a lot of Q2 as we were renegotiating these. And so we’ve now got that tightened up to a very tight band.

Jeff Fetterly

And would the band be tighter in Q3, Q4 than what you saw in Q2?

Dale Dusterhoft

Yes.

Jeff Fetterly

Okay. Last question just on the CapEx side. So the $25 million guidance for the second half of the year, how much of that would be maintenance versus equipment reactivation versus some of the sand handling and other expansion things you mentioned?

Mike Baldwin

So just to be clear, that’s $25 million for the full year. That includes what we’ve spent on a year-to-date basis. Correct, Rob?

Robert Skilnick

No, that’s second half.

Mike Baldwin

Sorry, second half.

Robert Skilnick

Second half, but there’d be probably about half to a little bit more might be related to some of the additional equipment to manage the sand logistics, et cetera. And then the other half is sort of carryover maintenance CapEx, mainly from the Canyon side, and the reactivation is minimal.

Dale Dusterhoft

Yes. Trican reactivation was about $1 million for the first half of the year here. And then the rest would have been primarily Canyon, as Rob said.

Jeff Fetterly

Okay. So your sustaining capital expenditures, from a full year basis in ’17, are likely to be somewhere under $25 million?

Robert Skilnick

Yes, for 2017.

Jeff Fetterly

For 2017, okay.

Operator

And our next question comes from Brian Purdy with PI Financial.

Brian Purdy

I just wanted to ask about your customers and the conversations there. It certainly seems like you haven’t seen any lack of demand. There was a few budget cuts that we’ve seen as oil prices have come down. I’m just wondering if you saw any change in the tone from your customers with commodity prices weakening a bit there? Obviously price is going up. I’m just wondering if maybe you saw such a constriction of supply in the fracturing industry that maybe you’ve not seen the same factors as other service areas.

Dale Dusterhoft

Yes. It was pretty minimal, but there was the odd client, for sure, that when we were discussing with them, they were certainly aware of the commodity price changing and doing some minor tweaks to their capital budget. So every client’s different, and they’re all driven by different agendas within their own company. But yes, some clients would have, probably, have reduced their second half ’17 plans a little bit due to commodity prices that they saw earlier in kind of the May-June time frame.

Brian Purdy

Okay. And just in terms of some of the other services outside of fracturing, is the pricing power that you have there at the moment less than you have in the – than the fracturing side?

Dale Dusterhoft

No, I think we’re strong demand for all of our services, with maybe the exception of nitrogen, not quite as highly utilized. But coiled tubing, cementing, acidizing are all very strong demand.

Operator

And our next question comes from Tim Monachello from Raymond James.

Tim Monachello

Just trying to figure out, basically, could you give us an idea of how much fracturing revenue you would have had for the full quarter, including the full contribution from Canyon, if you had it for the 3 months?

Mike Baldwin

I guess we don’t have the Canyon figures in there, but Canyon was a lot more heavily weighted to fracturing. But if you took the information disclosed in the sales mix on Page 3 of the MD&A, it’s a pretty good proxy for the go forward, Tim.

Tim Monachello

Okay. I’m just trying to get an idea because when I look across the landscapes and your competitors, you’re seeing fracturing revenue be flat quarter-over-quarter or slightly down. It seemed like it was a little bit further down if you include what Canyon did in the first quarter. I mean it’s definitely not an exact science. But I’m just wondering have you seen any slippage maybe with customers that were using Canyon and Trican and have switched away, just for diversity of supply reasons?

Dale Dusterhoft

Not at all. No. We have lost no clients at all that – the only ones that we’ve lost are ones that basically we didn’t have the capacity to be able to service their work, or we couldn’t come to a pricing agreement that was kind of at market rates. And so – but every – all the other clients have stuck with us. I think what maybe influences your numbers, you can talk to us off-line if you’ve got something specific, but Trican didn’t have great fracturing quarters in April and May. And our numbers, independent of the Canyon numbers, were down on our fracturing services for April and May. We had a great June catching up. But as I mentioned, we were weathered out with quite a large portion of our client base in April and May. And so we would have been down a bit at that time frame and then caught up but not fully. It just deferred things into Q3. So it’s not lost work, but it definitely affected our results. We would have been much higher on the quarter if it wasn’t for those delays with a few of our major clients.

Operator

And I’m showing no further questions. I would now like to turn the call back to Mr. Dusterhoft for any further remarks.

Dale Dusterhoft

Yes. Thank you very much for your interest in Trican today. And we certainly look forward to talking to you in the fall after we release our Q3 numbers. So have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program, and you may disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Leave a Reply

Your email address will not be published. Required fields are marked *