Calfrac Well Services Ltd. announces its financial and operating results for the three and nine months ended September 30, 2010.

CEO Message

I am pleased to present Calfrac's operating and financial highlights for the three and nine months ended September 30, 2010 and to discuss our prospects for the remainder of 2010 and 2011. During the third quarter, our Company:

  • achieved record third quarter revenue resulting from high levels of pressure pumping activity in the unconventional plays of western Canada and the United States;
  • achieved strong period-over-period growth in operating income and EBITDA despite inclement weather in western Canada during September;
  • performed a large-scale project in the Horn River play in northeast British Columbia, which resulted in the completion of 144 fracturing stages in 42 days; and
  • announced a $56 million increase to its 2010 capital program for a revised total of $236 million. This increase primarily related to the construction of a large fracturing spread for the Company's United States operations, supported by a recently executed long-term minimum commitment contract with a large customer focused on the Marcellus shale play in Pennsylvania.

Financial Highlights

For the three months ended September 30, 2010, the Company recorded:

  • all-time record quarterly revenue of $275.2 million versus $133.3 million in the comparable quarter of 2009, led by higher year-over-year activity in Canada and the United States;
  • operating income of $69.4 million versus $16.5 million in the comparable period in 2009, resulting from strong activity and improved pricing in Canada and the United States combined with a continued focus on cost control; and
  • net income of $31.2 million or $0.72 per share diluted, compared to net income of $2.8 million or $0.08 per share diluted in the third quarter of 2009.

For the nine months ended September 30, 2010, Calfrac generated:

  • revenue of $667.2 million, an increase of 59 percent from the same period of 2009;
  • operating income of $123.2 million versus $48.0 million in the comparable period in 2009, resulting from strong activity levels in Canada and the United States;
  • net income of $34.4 million or $0.79 per share diluted compared to a net loss of $6.4 million or $0.17 per share diluted in the comparable 2009 period;
  • proceeds of $4.8 million and a gain on disposal of $1.1 million on the sale of Canadian real estate assets made redundant by the acquisition of Century Oilfield Services Inc. ("Century"); and
  • end-of-period working capital of $177.7 million, an increase of 39 percent from December 31, 2009.

Operational Highlights

Canada

In the third quarter of 2010 Calfrac experienced very strong demand for its pressure pumping services despite poor weather in September. Activity was concentrated in the unconventional natural gas and oil resource plays of western Canada, including the Horn River, Montney, Deep Basin, Cardium and Bakken. Activity in unconventional natural gas reservoirs was very strong as the horizontal well count continued at historically high levels. Equipment utilization was positively impacted by the trend towards 24-hour completions operations by many of the Company's customers. Calfrac is very pleased to report the completion of one of the most successful Horn River projects to date during the third quarter. This program was distinguished by our completion of 144 fracturing stages in a 42-day period, which equates to an average of approximately 3.5 fracturing stages per day. The success of this project is the culmination of many months of planning between Calfrac and its customer.

In addition, the Company is encouraged by the momentum it experienced in oil well completions activity throughout the third quarter. High levels of activity in the Cardium, Bakken, and Viking formations continued to support strong demand for the Company's services. Oil-related completion activity in western Canada was at a pace that has not been experienced since the late 1990s, which provided greater commodity diversification to Calfrac's Canadian operations. The Company expects that the industry trend towards large, horizontal multi-stage completions in the unconventional natural gas and oil resource plays of the Western Canada Sedimentary Basin will continue to drive strong financial results in this market throughout the remainder of 2010 and into 2011.

United States

The Company's operations in the United States continued to deliver superior financial and operational performance during the third quarter. Strong overall demand for pressure pumping services resulted in improved pricing levels throughout all of Calfrac's operating regions. In Arkansas, fracturing and cementing activity levels remained strong, resulting in high levels of equipment utilization. Calfrac's customers in this region continue to transition towards 24-hour operations. As a result of this trend, several additional pumping units were deployed in early 2010 to service the Fayetteville shale play, increasing operating flexibility and lowering maintenance expenses in the midst of very high rates of equipment utilization. The Company also continued to experience strong demand for its services in the Marcellus shale play. Late in the third quarter, Calfrac entered into a long-term minimum commitment contract for the provision of a large fracturing crew in the Marcellus shale play. This is the Company's second major recent contract in this region and will represent a major growth platform for Calfrac in 2011. Activity levels in the Rocky Mountain region of Colorado continued at a steady pace during the third quarter. During the quarter, Calfrac completed several projects in the emerging Niobrara oil play in northern Colorado. While this play is still in its very early stages of development, the Company is encouraged by its potential and is well-positioned to participate in its future growth.

Outlook and Business Prospects

Exploration and development activity in Canada and the United States remains focused on horizontal wells incorporating multi-stage fracturing technology in unconventional resource plays. This industry trend is expected to provide robust utilization levels for the pressure pumping service industry during the remainder of 2010 and into 2011. The momentum experienced thus far in the liquids-rich natural gas and oil formations in North America has provided a tremendous amount of incremental oilfield activity, which resulted in strong demand for the Company's services in 2010 and is expected to provide the foundation for additional growth in 2011. Calfrac continues to proactively work with its customers to optimize efficiencies in our programs, which have become increasingly important in the face of lower natural gas prices.

The Company's outlook for the Canadian market remains very encouraging. Activity in the Montney and Deep Basin plays is strong with a greater proportion of wells being drilled horizontally. These regions are amongst the most economic plays in North America and the natural gas liquids (NGL) component of these plays has contributed significantly to their economic viability. Calfrac is also pleased to announce that it has secured a long-term minimum commitment contract with a major customer for the provision of two fracturing crews targeting the shallow gas region of southern Alberta. Activity in unconventional light oil plays, such as the Cardium, Viking and Bakken, is expected to be strong as the price of crude oil remains at attractive levels and has led to greater commodity-based diversification of the Company's Canadian operations. The focus on developing unconventional natural gas and oil plays is expected to result in high levels of equipment utilization in Canada into 2011, continuing to drive the financial performance of Calfrac's Canadian division.

The outlook for Calfrac's United States division is also positive, as overall demand in this market remains strong. The Company expects to deploy two large fracturing crews to the Marcellus shale play during the first half of 2011, based on long-term minimum commitment contracts. By mid-2011, Calfrac anticipates operating three large fracturing crews in this emerging basin. With a total of approximately 140,000 hydraulic horsepower, the Company's operations in Pennsylvania will become the largest of its operating districts in the United States. The Company has recently deployed a fracturing crew from Colorado to North Dakota to service the Bakken oil play. Calfrac has purchased facilities in this region and expects them to be operational by the end of the year. The entry into the Bakken was based on numerous customer requests and high levels of drilling activity in this oil-focused market. The Company is very encouraged about this play's prospects and the commodity diversification it will bring to Calfrac's United States operations. Fracturing and cementing activity in the Fayetteville shale play of Arkansas is expected to remain strong during 2011 due to high customer demand. Fracturing activity levels in the Rocky Mountain region of Colorado are expected to remain consistent in the foreseeable future, although the continued development of the Niobrara oil shale play in northern Colorado provides a significant growth opportunity for this market. The improved pricing levels recently seen in the United States market are anticipated to result in strong financial performance during the remainder of the year and into 2011.

In September Calfrac announced a $56.0 million increase to its 2010 capital program for a revised total of $236.0 million. This increase is mainly to construct a large fracturing spread for Calfrac's United States operations in the Marcellus shale play under the terms of a recently executed long-term minimum commitment contract with EXCO Resources (PA), LLC, a 50-50 joint venture between EXCO Resources, Inc. and BG Group, plc. This fracturing spread is expected to commence operations during the second quarter of 2011. As a result of this expansion, the Company's total pressure pumping capacity will increase by 55,000 horsepower to approximately 658,000 horsepower upon completion of the 2010 capital program. These capital expenditures will be funded from the Company's funds provided by operations and available credit facilities.

The overall outlook for the North American pressure pumping services industry is anticipated to remain strong over the long term, primarily due to the expected growth in completions activity in certain unconventional natural gas and oil plays, which remain profitable at relatively low commodity prices. However, natural gas drilling and completions activity in North America could decrease from current levels if the price for natural gas remains low. The Company is in a relatively strong position given its relationships and long-term commitments with some of the most active customers in resource play development. Calfrac expects to realize further commodity diversification in 2011 as it expands its presence in the emerging North American unconventional oil plays. The Company remains focused on maintaining a competitive cost structure and improving operating efficiencies. Calfrac will continue to capitalize on future growth opportunities in existing and new markets while using a conservative financial approach to maintain a strong balance sheet and overall financial flexibility.