Trican Well Service Ltd

TSX:TCW

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the Trican Well Service First Quarter 2022 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. Brad Fedora, President and Chief Executive Officer of Trican Well Service Ltd. Please go ahead, Mr. Fedora.

[Bradley P. Fedora, executive]

Thank you very much. Good morning, ladies and gentlemen. I'd like to thank you for attending the Trican conference call. A brief outline on how we intend to conduct the calls. First, Scott Matson, our Chief Financial Officer, will give an overview of the quarterly results, then I will address issues pertaining to current operating conditions and near-term outlook. Daniel Lopushinsky will talk about logistics and new technologies. And then we will open up the call for questions. Several members of our team are here with us today, and we will be available to answer any questions that may arise. I'll now turn the call over to Scott.

[Scott Matson, executive]

Thanks, Brad. So just before we begin, I'd like to remind everyone that this call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our first quarter 2022 MD&A. A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to our 2021 Annual Information Form and the Business Risks section of our MD&A for the year ended December 31, 2021, for a more complete description of business risks and uncertainties facing Trican. These documents are available on our website and on SEDAR.

During this call, we'll refer to several common industry terms and we'll use certain non-GAAP measures which are more fully described in our 2021 annual MD&A and then our first quarter 2022 MD&A. Our quarterly results were released after close of market last night and again, are available both on SEDAR and our website.

So with that, I'll move to our results for the quarter. Most of my comments will draw comparisons to the first quarter of last year, and I'll provide some commentary with respect to our results on a sequential basis compared to Q4 of 2021 as well.

The quarter started off a bit slower than we had expected due to some extremely cold weather experience coming out of the holiday break, but then ramped up fairly steadily after that. Activity levels across our service lines were pretty significantly improved versus last year, following continued strong commodity pricing and a generally more constructive industry environment to start the year. These factors led to an average Western Canadian rig count of just over 200 for the quarter, moving up meaningfully from Q4 2021 levels and quite a bit stronger than the Q1 levels of last year.

Revenue for the quarter was $219 million, an increase of 48% compared to our results from Q1 of 2021. And from an activity perspective, our overall job count year-over-year was up about 13% and total proppant pumped, which is a decent measure of well intensity and activity, was up 12% year-over-year. The other major factor influencing our revenue for the quarter was a generally stronger pricing environment compared to this time last year. However, as you can tell from our relatively flat margin percentages year-over-year, we gained very little on the profitability side as sharp and continuing inflationary pressures absorbed virtually all of the uplift.

Fracturing operations were busier sequentially from Q4 of 2021 and significantly busy as compared to the same period of last year. We were very pleased to deploy our first Tier 4 dynamic gas blending frac spread coming into the year. The feedback on its operating performance has been very positive and we're seeing increasing demand for the most advanced equipment in the basin. This brought our fracturing crew count to 7 for the quarter, with utilization of approximately 85%.

Our operations continue to be focused on pad-based programs, which help minimize both downtime and travel time between jobs and helps our overall efficiencies. Fracturing margins remained effectively stable year-over-year compared to last year as inflationary pressures experienced coming out of the year-end and through the first quarter served to offset most of the pricing improvements that we realized. Our cementing service line benefited from increased rig count, which provided steady utilizations through much of January and February before slowing in mid-March going into spring breakup.

Coiled tubing operating days increased 17% sequentially, driven by first call work with our core customers and our ongoing efforts to grow that portion of our business.

Adjusted EBITDA came in at $38.9 million, a significant improvement over the $27.3 million we generated in Q1 of 2021. And I would note that our adjusted EBITDA figure includes expenditures related to fluid end replacements, which totaled $1.6 million in the quarter and were expensed in the period. I would also note there was no contribution this quarter from the Canadian Emergency Wage and Rent Subsidy programs that were in place throughout 2021, which contributed $5.5 million to the first quarter of 2021.

It's also important to note that our adjusted EBITDA calculation does not add back the effects of cash settled stock-based compensation amounts. So to more effectively isolate these amounts and more clearly show the results of our operations, we've added the additional non-GAAP measure of adjusted EBITDAS to our ongoing disclosures.

We recognized $3.0 million in expense related to cash settled stock-based compensation expense in the quarter, which reflects the rapid rise in our share price since the year-end. Adjusting for these amounts, Trican generated $42.0 million in EBITDAS for the quarter compared to the $27.3 million generated in the same period of 2021.

On a consolidated basis, we generated positive earnings of $13.3 million in the quarter or $0.05 a share, and we are again very pleased to show positive earnings in the quarter. The second metric that we added to our ongoing disclosure is free cash flow, which we more fully outlined in our Q1 2022 MD&A. But effectively, our definition of free cash flow is EBITDAS less nondiscretionary cash-based expenditures such things like interest, cash taxes, cash-settled stock-based comp and maintenance capital expenditures. Trican generated free cash flow of $30.4 million during the quarter as compared to about $22 million in Q1 of 2021. Stronger operational performance, partially offset by budgeted higher maintenance capital expenditures in the quarter.

Capital expenditures for the quarter totaled $21.1 million, split between maintenance capital of $9.2 million and our upgrade capital of $11.9 million, dedicated mainly to our ongoing capital refurbishment program, upgrading a portion of our conventionally powered diesel pumper fleet with Tier 4 DGB engines.

Balance sheet remains in excellent shape as we exit the quarter, with positive noncash working capital of about $111 million and no long-term bank debt.

Finally, with respect to our NCIB program, we remained active during the quarter and repurchased and canceled approximately 2.8 million shares at an average price of $3.22 per share. We continue to view share repurchases as a good long-term investment opportunity for a portion of our capital in the context of returning capital to our shareholders.

So with that, I'll turn the call back to Brad, and we'll move from there.

[Bradley P. Fedora, executive]

Okay. Thanks, Scott. I'll try to keep my comments as brief as possible because most of the outlook and the commentary that we're to talk about today is quite consistent with our last conference call, which was just a few weeks or 2 months ago, I guess.

So really, nothing has changed. I think the -- our view on this year and next year continues to improve. Q1 activity significantly increased across all of our business lines when you compare it to Q4, and that's a result of commodity prices. We've got $100 oil, $7 gas for the first time since, I think, the late 2000s. Our customers' wells are paying out in a matter of months. So that's -- we're very pleased to see that they're making money and they're viewing their plays as great investments, especially in the context of what's happening around North America.

We had an average of over 200 rigs running for the quarter. So all things considered, generally, the oilfield activity is pretty good. I mean, we did have a slow start to the quarter just because everybody, I think, paused at Christmas. And then by the time wells get drilled and then we get on to the completion side where we fit in, that takes a few weeks and that's to be expected. And there's always -- and also we had some really bad cold weather that affects field activity and rail. But that's always to be expected. I can't remember a Q1 where we haven't had some type of weather event. And so we build that into our budgets and certainly nothing that should be surprising there.

And the other thing, I guess, that is different this time around is we did have ongoing COVID interruptions in the field, where we would have various field crews shut down for a day or 2, and we would have to scramble to get people to work days off, et cetera, but nothing that we didn't sort of manage our way through. But I think, thankfully, that seems to have almost disappeared. And I think we're getting back to normal, with respect to COVID in Western Canada.

We peaked at -- we averaged over -- just over 200 rigs. We peaked at 234 rigs. We actually didn't get the completions activity that you would expect with that type of rig count and a lot of that activity is spilled into Q2. And as a result, we should have a fairly decent Q2, but we didn't see the tightening in the system that would correspond to the rig count. And I think we'll talk about this in a second here, but I think we're going to see that for the second half of the year.

So far in Q2, we're sitting at 90 rigs, which is a lot better than the 60 we had last year, and we're almost halfway through breakup. And so we should start to see activity start to build momentum for the second half of Q2. And so things -- the snow was gone, it's starting to dry up, and our customers are pretty anxious to get back to work.

Majority of our business remains in BC, in the Alberta Montney and Deep Basin. Nothing is going to change there. As we have with $105 oil, we are seeing oil plays, Southeast Saskatchewan and throughout -- or the Southeast and Southwest Saskatchewan and Southeast Alberta, they are very active, and we expect that they will be active.

And now with these gas prices, we're starting to see plans unfold for CBM wells, which is shallow gas drilling. It's coil-based. They use nitrogen instead of water. It's something that we're all very familiar with, and we think Trican has an advantage in that play. So we were active throughout the winter, and we expect that might even get more active in the next few years.

We ran -- in the quarter, we ran sort of 6, 7 crews, depending on the week. 18 cement crews and 7 coil crews. So nothing's really changed there. We did have that seventh crew in Q1. Staffing is -- continues to be an issue. Our issue is getting people to stay in the industry, and that's a priority. Obviously, if we want to expand and we want to get -- we see our customers' activities expand, and we want to be able to keep up with them, obviously, we need to not only attract people but we need to be able to retain them. We're still losing people out of the oil and gas oil field and we're losing them to other industries as their wages increase and they look for better work-life balance. And so we're going to continue to try to get creative and address those issues going forward.

But certainly, the labor issue is both an issue that we need to work through, but also it's maybe not such a bad thing because it will keep the oilfield service companies from expanding too quickly. And so something that needs to be managed, but I think we're doing a good job of working our way through.

We had decent EBITDA for the quarter. And of course, we've talked about this previously. I think we need to start talking more about free cash flow than we do EBITDA. The nice thing about free cash flow is that it cleanses all the balance sheet inconsistencies between the companies and addresses the fact that some of this equipment needs significant repairs. And whether you choose to expense or capitalize them, it all gets caught up in free cash flow. And I think in general, the market wants to see companies that are generating good free cash flow on their assets. I think Scott talked about that already.

So we were successful in raising prices. If you look at this versus sort of a year ago, we're up anywhere from 15% to 25% in our various service lines, depending on the customer and depending on the situation. Unfortunately, all of our increases were generally offset by cost inflations. So our margins have been frustratingly stable for the last 12 months. I mean, we operate at a margin advantage compared to our competitors for the last sort of 15 months. But we would have thought by now, we would have started to see EBITDA margins in the mid-20s, which is really where we need to be if we want to have a double-digit return on invested capital.

But I think we'll get there. It will just -- it will take more discussions with our customers. And obviously, I think our customers want to see us have a sustainable business. And so we'll continue to work diligently about getting some margin capture for us and not just passing it on to our suppliers.

We did see the inflationary pressures early. And in Q4 and Q1, we were able to maintain our margins when many people were having margin erosion. But -- and not just -- we owe a lot to our supply chain group on making sure that we were ahead of that, and we're able to model that through the winter. We'll continue to stay diligent on that and the inflationary pressures aren't going away. And I think as everybody knows, when you have $100, $105 oil, there's a huge increase in diesel pricing and diesel impacts literally the entire supply chain. Nothing gets excluded. And it doesn't matter if it's sand, chemicals, trucking, everything, just even third-party services at the bases, I mean they have to run trucks. So diesel just ripples through the entire supply chain.

And what was unfortunate is that the frequency of those changes was unprecedented. We expected to see inflation, but we didn't see -- we didn't really -- we were hoping we wouldn't start to get price increases from our suppliers sort of on a weekly basis. And the customers find that very frustrating when you talk to them about price increases several times a month.

But generally, our customers were understanding. I mean, they're obviously working in the oil and gas business and they're taking advantages of high commodity prices, but naturally, that does ripple through all of their costs. So they did take cost increases to offset our cost increases and we're going to work with them again to capture some of that margin for Trican.

I think I'm going to pass this over to Daniel Lopushinsky now. He's going to talk about supply chain and some Tier 4 technology.

[Daniel Lopushinsky, executive]

Thanks, Brad. So from a supply chain perspective, if Q1 proved anything, it was the supply chain has become a major factor. Just with regards to how we manage our business from the context of higher activity levels but also the constant pricing pressures that Brad kind of noted previously. The entire supply chain was stretched pretty thin in Q1 if activity increases, which we think it will at the later part of the year. It will become that much more important from a managing perspective.

So we believe that we have really good logistics, and we welcome a tight market with respect to this and how we manage suppliers. As we've messaged, we did experience inflation across the entire supply chain at a significant rate and much higher rates than what we've ever seen before. Diesel, obviously, directly correlated with oil prices, surged through the early part of the year, exponentially from January, February and March.

And as an example, like if you look at sand, by the time sand reaches location, about 70% of the sand cost is transportation, so -- which diesel, the big impact on that stuff. And we do supply a fair bit of diesel to our customers. About 60% of our frac fleets are internally-supplied diesel.

From a third-party trucking and logistics perspective, trucking was really tight in Q1 with the increase in proppant volumes, larger pads, more work up in the Montney and Deep Basin. And the biggest contributing factor to that is there's just less trucks available in the basin. We talked about the workforce tightening up and those sorts of things. So just a generally smaller workforce than what we've had in the past, which you got to be nimble when you're managing this from a logistics perspective.

And then the other factor that makes it difficult is we're operating in even more remote areas of the basin. So we face significant logistical challenges from that standpoint.

With regards to the sand. Tier 1 sand suppliers are basically operating at capacity. There were some rail challenges early on in the year with respect to the cold weather. So the rail companies essentially shut down operations when the temperature meets certain temperatures. So we did see a little bit of tightness in the market from a proppant perspective early on in February, but we managed to work through those challenges.

The biggest increases that we've seen with regards to sand is diesel fuel surcharges, driven by the rail companies and those sorts of things. So in Q1, Trican's exposure to Tier 1 sand was about 60% of the sand we pumped was Tier 1 sand.

With regards to chemicals. We did experience some chemical disruptions, but nothing too meaningful to our operations. A lot of the base components of our chemistry are derivatives of oil. So those have similar manufacturing processes as diesel. So as diesel costs increase, so does the cost of our products. And those -- we continue to see those as we move throughout the year.

A lot of our chemicals come from China and the U.S. So we plan for expected delays and increased costs associated with transportation and those sorts of things. So we're always looking for substitutions and suppliers that get creative and are proactive with regards to how they're managing their supply chains as well.

As we've previously messaged, we are extremely excited that we rolled out our first Tier 4 DGB fleet here in Q1. We are extremely happy with how it's been operating. Field performance, particularly diesel displacement is in line or better than expected. So with these engines, we're burning lots of natural gas and displacing diesel at great rates.

We will be reactivating a second and third Tier 4 fleet in the summer and late Q4. And the value proposition for this equipment is significant with respect to fuel savings, the emissions reduction. I mean ultimately, we expect to get paid for it. And as the gap between -- as diesel prices increase and natural gas is more or less a consistent cost, it's even more of an excuse for us to get a premium for these fleets.

New Tier 4 engines. They burn more natural gas than diesel. So the net benefit for the environment is also on the cost side with natural gas, less expensive than diesel. And this technology will likely be the standard in the next few years as -- at least for Trican. We are really excited about this, and we're proud to be the first Canada -- company in Canada to roll this out.

I'll throw the call over to Brad to discuss Q2 and our second half outlook.

[Bradley P. Fedora, executive]

Yes. Just -- so the remainder of the year, we look -- we're very positive. We think budgets are just going to creep up as commodity prices hang in there. We will use that opportunity to put more equipment into the field, if we can do so at attractive pricing. We're very focused on return on invested capital and free cash flow. So we will continue to try to maximize that wherever we can.

But what we found is, breakup now is becoming less of a breakup as people try to level load their activity throughout the year and take advantage of the warmer weather with respect to things like water heating and just a less frenzied oil field. So we do expect to see Q2 be less punitive to our financials than it has been in the past.

The basin remains extremely gas focused, but we are seeing more oil activity as we have oil being sustained at over $100 a barrel. And again, we're going to use this activity to try to deploy more equipment at profitable rates.

Even coil which, in the past, has been one of our worst performing divisions, is now frankly, one of our best-performing divisions. We've seen that market tighten up. Cement activity will correlate directly with the rig count, and we continue to look to add staff in that department and maintain or grow our market share. We're very -- we're still very focused on the Deep Basin with respect to cement and coil. But as activity expands throughout the basin, we expect to expand our geographical market share in those 2 divisions as well.

There's about 30 frac crews running in Canada in aggregate between all the services companies. And that's basically balanced at about 200 drilling rigs, and we expect the rig count to exceed 200 for the second half of the year. And as a result, we expect frac pricing to go up as the year goes on.

And we know that debt repayment and return on capital is still the main focus for our customer base. But at these commodity prices, and we're only -- and they're really only reinvesting about 30% of their cash flow, we do expect that activity will increase as the year goes on, and we'll be there to take advantage of it.

Our big bottlenecks at this stage now are people. And I think we discussed this already, but we have to get very creative on attracting people to this industry. We're going to have to start expanding our search to all parts of Canada, like we have in the past.

And now that COVID seems to be petering out, we do expect that people will come back to work in the oil field that had previously worked here that now live in places throughout Eastern Canada and even the far west parts of B.C. And hopefully, we can attract them back to the industry. And we can provide our customers with crews and equipment as they increase their budgets.

On the technology side, there's not a lot new to report here. Technology has always been a big driver of efficiencies in the oil patch, and we will continue to stay well informed in all technological advances in our industry. We're not married to any technologies. We're very agnostic with respect to that, and we'll continue to review the advantages and the cost of it and deploy it where we think we can get a return on it.

I think there's too much talk about technology without talking about the payback of those investments. So I can assure you that we will not deploy technology for technology's sake. We will only do it if it improves our service offering and our returns.

I think the next big phase of technology is going to be the digitization of data and data collection, so that we can offer our customers with higher value service. And we expect to sort of take a deep dive on this over the next few years, things like artificial intelligence to reduce maintenance, get more predictive to ensure that we have less breakdowns, that's an area that we're going to be looking into. And things where you can maximize fuel consumptions, whether it's operating at certain RPMs versus certain pressures, all of that is the potential to reduce costs and provide a more reliable service.

We did release our first sustainability report last year, and we'll be releasing our second sustainability report late in Q2. So look for that. And again, I think we've talked about this, but our industry has done so much in the past with respect to ESG initiatives and frankly, we're thankful to have a forum in which to summarize those and report them.

We will continue to be very ESG focused. We have the balance sheet to provide us the flexibility to look at anything and everything. We've done a great job on reducing emissions, whether it's with Tier 4 natural gas engines or idle reduction technologies, getting better at picking certain RPM ranges in which to operate. All of that, I think, we've done lots of. And the next phase is to focus on the social and the governance. And we will put lots of efforts into those initiatives, and we'll be providing a report here in a few months.

So lastly, before I wrap up, I want to remind everybody, there's about 1.9 million horsepower operating in Canada or available in Canada and about 1.3 million of that is operating today. The equipment that is parked and is -- hopefully will come back into the basin one day, Trican does own about 40% of that.

We're operating 7 out of 12 frac crews. So we have substantial upside as activity continues to increase throughout the rest of this year and into next year. We're extremely well positioned. We have a clean balance sheet. And we're ready and able to make investments where we think we can get sustainable returns.

I'll now turn the call back to the operator, and we'll take questions.

[Operator]

[Operator Instructions] Our first question comes from Cole Pereira with Stifel.

[Cole Pereira, analyst]

So I acknowledge this question is an oversimplification, but as we think about Q3, are you able to provide any goalpost around how much net pricing has increased relative to Q1 across the whole fleet, maybe just on a percentage basis?

[Bradley P. Fedora, executive]

We would expect at the minimum, another 10% over Q1. We've had preliminary discuss -- yes, we've had preliminary discussions with our customers. And we would expect that would be the minimum.

[Cole Pereira, analyst]

Got it. And then just out of curiosity, how much would pricing be up on a gross basis versus Q3 of last year? Ballpark.

[Bradley P. Fedora, executive]

Versus Q3 of 2021?

[Cole Pereira, analyst]

Yes. So just year-over-year Q3 comparison.

[Bradley P. Fedora, executive]

20%.

[Cole Pereira, analyst]

Okay. Got you. And on the shareholder returns front. So obviously, the balance sheet is in great shape. You're continuing to buy back shares. How do you think about a dividend? I mean, I assume it's maybe more of a 2023 consideration, just given a lack of visibility beyond Q3?

[Bradley P. Fedora, executive]

Yes, it's a tough time of year to think about dividends. Just obviously, the budgets for the second half have not been finalized by all of our customers. And as the stock price goes up, its relative attractiveness goes down when you think about the other opportunities.

And so I do -- we're very open to dividends. It's obviously a cyclical business, and they may come and go, as they have in the past. But I do think there's a place for dividends in this industry where the money just cannot be deployed effectively at certain points. And I think as we've all learned, we don't want to overbuild and there's only so many people available. We don't have any debt to pay off. So eventually, there's too much cash on the balance sheet and needs to be given back to shareholders.

[Cole Pereira, analyst]

Got it. And then just out of curiosity, if you were to order a Tier 4 spread today, how long would it be until you could actually get in the field?

[Bradley P. Fedora, executive]

A year.

[Cole Pereira, analyst]

Okay. Scott, just quick...

[Bradley P. Fedora, executive]

Roughly $50 million, $60 million if you were to buy a brand new Tier 4 spread.

[Scott Matson, executive]

The new build, yes.

[Cole Pereira, analyst]

Got you. And then, Scott, just quickly on the working capital front. I mean, should we assume kind of a modest net investment for the rest of 2022?

[Scott Matson, executive]

I mean, we built pretty significantly in Q1. I would expect it to unwind a bunch in Q2, right? And then we'll slowly build up a little bit as we go to the end of the year. So we're probably at the peak coming out of Q1 as I think where we'd be for the year.

[Operator]

Our next question comes from the line of Waqar Syed with ATB Capital Markets.

[Waqar Syed, analyst]

Just a couple of questions here. First of all, the 2 Tier 4 upgrades, would those be incremental fleets based on what you know today? Or would those be replacement for something that's currently active?

[Bradley P. Fedora, executive]

Good question. We have demand in particular, for the Tier 4 technologies. We will only add them incrementally if the activity levels continue to increase. If activity levels stay flat, depending on customer conversations, we may -- they may be replacement for fleets that are operating today. But there are several factors that haven't been worked out yet. And that's -- the 2 main ones are industry activity and availability of labor.

[Waqar Syed, analyst]

And the 10% type price increase that you expect for Q3, would that justify an additional fleet or not?

[Bradley P. Fedora, executive]

An additional Tier 4 fleet?

[Waqar Syed, analyst]

Yes, that's right. Incremental fleet being added.

[Bradley P. Fedora, executive]

Well, the Tier 4 technology gets deployed at a premium, so it's sort of a separate pricing discussion. But it's always at a premium to conventional equipment. So it's -- yes, it's sort of a subsector of the market because certain -- it needs a certain customer that is concerned about not just fuel savings, but emissions and is willing to pay for that. And I just say we need to be able to staff it with good crews. So I'm not sure general price increase is the main driver of our desire to add Tier 4 technology.

[Waqar Syed, analyst]

Yes. And as you're making these investments, are -- is the return on that investment locked up? Because you may need, I don't know, what, a year or 2 years to recover that return. Is that locked up with a contract behind it?

[Bradley P. Fedora, executive]

Yes. We're still -- we don't want to talk about the particulars of contracts. But certainly, we have a direct line of sight on return.

[Waqar Syed, analyst]

Okay. And then in terms of cementing and coil. Cementing, your 18 active units. In coil, 7. How do you see that kind of growing in the second half?

[Bradley P. Fedora, executive]

Again, I mean, I hate to say it, but assuming we can -- so cementing, we would expect to just grow directly with the rig count, assuming we can get the labor. So 18 cement crews turns into 23 to 25 cement crews. And 7 coil crews probably turns into something like 10 because I think we have to be realistic about how much good labor we can add. Both those markets are very, very tight. And really what is constraining our service offering there is labor.

[Scott Matson, executive]

Being no additional equipment.

[Bradley P. Fedora, executive]

Yes, yes. We have equipment on the sidelines ready to go. It's in great shape. It just needs operators.

[Waqar Syed, analyst]

Right. Okay. In terms of the margins between the different businesses that you run, how would you rank order the current profitability of the 3 as a percentage of revenues? What's the highest, what's the lowest right now amongst your main big 3 business lines?

[Bradley P. Fedora, executive]

Coil would be the highest, and then cement and fracturing would be pretty very, very close to each other. They'd be tied for second.

[Operator]

[Operator Instructions] The next question is from the line of Andrew Bradford with Raymond James.

[Andrew Bradford, analyst]

So just looking back in the first quarter, you said on the call that you had between 6 and 7 crews working, depending upon the day or the week. Is there -- was it one crew that was sort of up and down through the quarter? Was it -- was that a function of the play it was in or the geography? Or was it kind of all spread all over your operating area?

[Bradley P. Fedora, executive]

Yes. I think unlike the U.S., what makes up a frac fleet on any given day is pretty fluid in Canada, just because the differences in the -- there's significant differences in equipment demands from one play to the next. And even within the same play, if you you've got a pump down crew or a plug and perf crew versus a coil crew, you can have different amounts of people and equipment on location.

So I wouldn't get too bogged down on was one crew working half the time, it doesn't really work that way. The people and the equipment gets spread around on any given week, and it may result in 7 crews, it may result in 6 or 5. And as we've discussed before, it's like LEGO this equipment, it all is intermixable and it goes where it's needed. There's no ring fence around any particular fleet.

[Andrew Bradford, analyst]

Okay. I appreciate that, so...

[Bradley P. Fedora, executive]

Sorry, Andrew, just to finish that up. The horsepower being deployed on any given day may not even change, but the rig count or the fleet count may. Or you could have 7 crews out 1 day and with less total horsepower than the following week with 5 fleets out. It's a little difficult.

[Andrew Bradford, analyst]

In that case then, is it maybe more helpful to talk about horsepower demand or horsepower utilization? And like how would you describe that through the quarter?

[Bradley P. Fedora, executive]

Well, it's pretty consistent with the exception of March, which basically took everything we had. There was a slow ramp-up in January and then a bit of a pause in February, when the really nasty weather was here. So it ebbed and flowed sort of as it does every year. And it's -- the last few years, I think March has been -- a lot of work is getting -- it's getting somewhat concerning as to how much work is getting pushed into March by operators because one of these years, you're going to get an early spring, and there's going to be some disappointments.

[Andrew Bradford, analyst]

Great. Scott, is it the fact that there was so much work late in March that kind of contributed to the higher than usual receivables on the balance sheet?

[Scott Matson, executive]

I think that's probably a fair statement, Andrew. Yes, like I mean, our activity ramped coming out of year-end, but really peaked in March, right? So that does drive a pretty significant uptick.

[Andrew Bradford, analyst]

Okay. Just want to jump around looking forward here into the second quarter. So some of your competitors have been talking about an absence or at least a lack of typical spring discounting. And I wonder, like could you -- is that -- was that your experience? And is that part of why you say that this -- that maybe the second quarter will also be less punitive than usual?

[Bradley P. Fedora, executive]

Yes. In fact, we've actually had prices go up Q2. There's been no discounting, and we've continued to pass on inflation. Sand prices, in particular, have taken another step up. So yes, if anything, pricing is higher today than it was 2 months ago.

[Andrew Bradford, analyst]

Okay. So that's useful. Does that kind of give you a more confident springboard into summer pricing? Or does that play into it at all?

[Bradley P. Fedora, executive]

Yes. For sure, it does. And one thing that -- the pricing discussion is never ending, as you can imagine. And certainly, everybody in the past has used spring breakup to pause pricing momentum and in fact, reverse it. I think the industry, just given the cost pressures this year, has done a good job of not allowing that to happen. And so I think more so than any breakup I can remember, I feel like we're in a better position to talk about price increases than we have in the past.

And I think our competitors are viewing it very similarly to us in that. There's just no -- there's always a bad operator out there. We all know that. But this inflation is not going away. Our margins have been very frustratingly stable now for 5 quarters in a row. Something has to change. And eventually, we have to capture margin.

[Andrew Bradford, analyst]

I was going to ask you about your -- the tenor of this call. In the past, you've been more confident or you sounded more confident about pricing. And today, it sort of seems like you're maybe a little bit less confident. You'd like it to come, you're having some early discussions. Is it -- like would you say that you're as confident as you've been at these prices, that the net pricing increases are coming?

[Bradley P. Fedora, executive]

Thanks for calling me out. No, like I'm very confident -- no less or no more confident than we've been in the past on pricing, but we underestimated the inflation. So we've had all these price increases. It just didn't result in anything. So I'm a little less assertive that, I guess, to highlight price increases because we haven't seen margin expansion, even though we had the price increases that we talked about.

So when we look back on a -- when we do the 1-year look back on price increase predictions versus realized price increases, they generally all came true. And higher -- we achieve more pricing gains than expected in certain situations. If you look at cementing, I mean, we had some fairly steep price changes there. But the inflation was just absolutely unrelenting on products. And so margins are flat. And I'm assuming that's all anybody really cares about at the end of the day is you can talk about price all you want. But until it results in a margin expansion, it's not really -- it's all just hot air.

[Andrew Bradford, analyst]

Well, it's good that you're, at a minimum, keeping up with inflation. On the second quarter, so it's interesting you said pricing is up in the second quarter. Is that net pricing? And I'm not saying you're going to get margin expansion in the second quarter because you have operating leverage issues or challenges. But that just sort of kept pace as well?

[Bradley P. Fedora, executive]

Pretty much. Pretty much. It certainly hasn't -- our net margins certainly have not gone down. They may be inched up slightly, but that more than gets offset with the built-up R&M that gets done.

[Andrew Bradford, analyst]

Okay. I just have one more question before I -- sorry.

[Bradley P. Fedora, executive]

Yes. No, and I just want to highlight. Our bias is to expense R&M, right? I think when you -- we got -- you got to sort of keep that in mind when you're looking at Trican's financials, and this is to all the analysts that are on the line. We expense -- when in doubt, it is expensed.

[Andrew Bradford, analyst]

Definitely appreciate it. Okay. So last question before I jump back in the queue is you've spoken about how the rig count in the second half should average over 200. And there's 1.3 million of the 1.9 million horsepower notionally active today. Do you care to take a stab at what that 1.3 million number turns into in the third quarter or fourth quarter this year?

[Bradley P. Fedora, executive]

At the most, 1.4 million. There just isn't the people.

[Operator]

The next question is from the line of Keith MacKey with RBC Capital Markets.

[Keith MacKey, analyst]

Maybe just wanted to go back to the pricing a little bit more. And certainly, that was something that I was interested in asking about as well is, has it been the case of just not being able to get enough pricing to grow margins? Or has the inflationary factors sort of caught up with the pricing you did expect to get? So it sounds like it's more the inflation versus the market.

So I guess, as we go into the second half and certainly now, E&P operators are starting to feel the inflation a little bit more themselves. How does your -- like does your strategy change at all as far as what price to ask for in order to get the margins you need to be able to make profitable reinvestments? Or how do you now try to make sure that you can actually get some expanded margin from these next round of price increases?

[Bradley P. Fedora, executive]

Well, I think what we learned is don't underestimate your own suppliers with respect to their intentions of price increases. And it's not surprising. The whole value chain, right from us to the sand mine in Wisconsin, has had 7 incredibly tough years. And pricing has -- we've let our prices get beaten down to just these ridiculously low levels and where possible, people are trying to recover that and it's -- this going to be a bit of a long answer, but it's -- we're still not actually back to 2018 pricing yet. But I would say there's -- some of our suppliers are just in a much better position to increase prices than we were. And some of our suppliers, like trucking, just did a better job of it than we did.

And so what we've learned is when you think prices are going to go up X percent, you may want to factor in 2x, because the whole value chain is trying to fight its way back to being a sustainable business. And from a customer's perspective, that's incredibly frustrating to them, right? Because they don't -- obviously, it's not their responsibility to understand how our businesses work. They're seeing major price increases and they get a price increase and then we're in their offices 3 weeks later talking about another one. And that's hard to make plans.

And so we've tried to sort of pass on price increases as we got them. And I think maybe what we need to do now, just for the benefit of everybody, is be a little bit more long-term predictive as to -- with respect as to where prices are going to end up. And that will allow our customers to make more accurate plans on AFEs and what well in September of this year is actually going to cost versus just incrementally bumping it up every 2 weeks for the next 3 months.

And it's maybe -- there's going to be some sticker shock and there's going to be some uncomfortable conversations, and there may be some fallout from that. But I think we owe it to our customers to say, hey, look, this is what we think a frac is going to cost 3 months from now based on our experience as to what's coming our way from a pricing increase perspective, from both our suppliers and from the labor, everything. Whether it's hotels, the diesel costs, chemical costs, sand, CN rail fuel surcharges, all of it has come fast and hard and has not stopped. And so I think we're going to get a little bit more predictive in where this is all going to end up.

[Keith MacKey, analyst]

Got it. Appreciate it. So maybe just to follow up. How is inflation -- you say it hasn't stopped. Is it actually continuing at the same rate of increase as you've seen? Or are things getting more expensive faster or more expensive less fast? Or how are you -- would you characterize that?

[Bradley P. Fedora, executive]

Yes. I think the rate of change has slowed, whereas the rate of change from November to March was shocking. We expected inflation. We just didn't -- the slope of that curve was steep. It's flattening out. It's not going to stop, but I think the rate of change and the size of the change from one event to the other is going to slow.

[Keith MacKey, analyst]

Got it. Okay. Can you maybe just talk a little bit about the market for Tier 4 DGB equipment? It sounds like you've got good confidence about increasing demand for that category of equipment. Are you seeing a greater number of customers looking at potentially contracting some of these new fleets as they become available? Or has it not really picked up like you might expect?

[Bradley P. Fedora, executive]

No, it's -- we needed a quarter for data collection and getting some actual fuel performance behind us. And so Q1 was pivotal in how we are relaying information and marketing this technology to our customer base. So now that we've got 3 months of operating data and some hard data, I would say the interest in the equipment is growing. The -- and of course, diesel prices are extremely high and seem very sticky. That is helping our value proposition.

So the market is, I would say, is getting better. And a lot of it is just we needed hard operating data. It's easy to say how this is going to operate in the field in theory, but we've been through a full quarter now and a tough quarter with respect to cold weather. So we've worked out a lot of the kinks, and we're really happy with things. And as a result, I would say our customer interest has grown.

[Keith MacKey, analyst]

Got it. And I know it's up to 85% substitution. Do you have the numbers for what you were actually able to do?

[Bradley P. Fedora, executive]

Yes. When you average the equipment out over ramping up and ramping down and depending on the length of stages, these numbers bounce all around. But something in the mid-70s is what you would expect over the life cycle of the frac.

[Operator]

Our next question is a follow-up from the line of Andrew Bradford with Raymond James.

[Andrew Bradford, analyst]

Just keying up in Keith's question there. How do most of your customers kind of look at the availability of the Tier 4 spread that has higher costs? And at this point, if they nominate now and they're going to get one -- some of your service in the fourth quarter versus Tier 2 dual fuel conversion, which they could probably get sooner and maybe at less pricing, how do they -- like how -- do they bring this up at all?

[Bradley P. Fedora, executive]

Yes. And remember, whether it's Tier 2 or Tier 4 technology, there's a fairly significant fuel savings and the incremental fuel savings from Tier 4 over Tier 2 is very significant. And the other issue is the methane emissions reductions. Like one of the problems with Tier 2 technology is there's a lot of what we call methane slip, which is natural gas is going into the engine, but it's not being burned and it's been being released into the environment.

And as everybody gets very focused on methane slip or methane emissions, that, of course, becomes less palatable to them. And frankly, we -- if you look back sort of 5, 10 years when Tier 2 technology was being deployed in the field, we frankly didn't focus on the methane slip element of the technology enough. And some of our customers are doing emission -- actual live emissions testing, particularly methane.

And the advantages of Tier 4 over Tier 2 don't stop at the fuel savings. There's a very, very concerted effort to almost completely reduce/eliminate the methane slip in this new Tier 4 technology. So if you're only after costs, you -- depending on your well design and the set up to provide natural gas at the well site, it would -- you may flip back and forth as to which is better for you.

If you're looking at this and you're saying, listen, we want great economics, but we also want to reduce our emissions, then there's -- Tier 4 is the only answer.

[Andrew Bradford, analyst]

Is that methane slip -- is that accounted for in greenhouse gas or CO2 equivalent emissions today?

[Bradley P. Fedora, executive]

Yes. It's -- but remember, it's about 13x worse than CO2. So when you convert it to sort of GHD, you multiply methane by -- it's 13x worse than CO2. I'm probably not saying that very eloquently, but it's much worse than CO2 alone.

[Andrew Bradford, analyst]

Yes, exactly. Okay. So -- and then just a quick -- you mentioned -- like is there a discussion at Trican about -- around opportunities to maybe even further vertically integrate your business to take control of some of these cost items? Like sand comes to mind as a sort of a cliched sort of avenue that you could pursue better -- or further pursue.

[Bradley P. Fedora, executive]

The general answer to that question would be, we look at that, but we have not seen an opportunity that we find attractive yet. The big issue is, do you have the scale to be a sole owner of one of your supply inputs. And in most cases, the answer to that is really, no. What -- there's other creative ways of working around us to give you preferential access to supplies. And that's why, frankly, we think from a competitive position, we're at our best when the industry is operating -- is incredibly -- activity is incredibly robust and things get very competitive and there's lots of planning required. And that's when we -- I think, that's when we're operating at our best.

Okay, everyone. Thank you very much for joining the call. We're approaching an hour, so we'll sign off now. The management team at Trican is available for questions throughout all day today and tomorrow if any more questions arise. And again, thank you for joining the call.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.