Trican Well Service Ltd

TSX:TCW

Earnings Call Analysis

Trican Reports Stable Q3 Results Amidst Inflation

Trican Well Service reported revenue of $252.5 million in Q3, down just about 2% year-over-year, in a slightly quieter quarter affected by inflation and a changed job mix. EBITDA flattened slightly to $65.7 million, comprising 26% of their revenue. Despite inflationary pressures, the company navigated well, with an emphasized control over costs. Their operating fracturing crews are at 60% capacity, standing by to scale up as demand recovers, poised to profit from infrastructural readiness. Cementing services retain strong performance, especially in the Montney region with a 50% market share. Share repurchases continued, reflecting a robust return on capital strategy. Capital expenditures were strategic, focusing on maintenance and ongoing equipment upgrades. The balance sheet stayed strong with positive working capital and cash reserves.

Staff and Market Expansion Strategy

The company is experiencing staffing limitations that affect its ability to capitalize on market share opportunities. However, they are actively working on recruiting and training new employees to expand their workforce. A focus area is the Montney and Deep Basin, where staff shortages have led to a temporary relinquishment of market share in other areas. The company aims to recapture this market share as staffing levels improve. Furthermore, significant progress has been made within their coil division, resulting in one of the best quarters, with the limitation being the staffing shortage rather than the demand for their services.

Financial Outlook and Activity Growth

The company expects the fourth quarter to resemble the previous year's, with a projected growth in activity of around 5% for the next year, despite facing 10% CapEx due to inflationary pressures. They anticipate the market to be slightly busier next year, with market activity predicted to increase by approximately 5%. Given that the pressure pumping market is already operating at high utilization, any additional growth will lead to increased demand for the company's services.

Focus on Canada and LNG Prospects

Canada remains the primary focus for the company's business growth, with the upcoming LNG projects being a key driver. The management holds a bullish stance on the Canadian market, citing more stable and predictable operations. They anticipate sustained growth in the Montney and Duvernay regions, which will drive the demand for pressure pumping. Moreover, customers continue to exhibit capital discipline by spending responsibly on drilling and completion, providing a buffer against commodity price volatility.

Supply Chain Challenges and Strategic Investments

The company is dealing with an overstressed supply chain, particularly with sand logistics, as demand increases from 6 million tons in 2021 to 8 million tons in 2023. Long hauling routes and potential delays necessitate strategic investments to improve logistics, especially in Northeast British Columbia. The company is considering investments into infrastructure with immediate returns that would also benefit their customers.

Sustainable Business Practices and ESG Commitments

Aiming to build a long-term sustainable business, the company places emphasis on differentiation, modernization, and maintaining a conservative balance sheet. Investments are targeted towards low-emission, efficient operations with attention also given to chemical blends that minimize freshwater use. The company is dedicated to continuing their environmental stewardship and improving the safety and efficiency of their operations.

Return on Investment and Shareholder Value

The management team expresses strong commitment to generating significant free cash flow and maintaining a clean balance sheet. They prioritize growth and upgrading opportunities and remain open to mergers and acquisitions. A diversified approach to shareholder value encompasses share buybacks and dividends. Recently, they have been actively buying back shares, having repurchased over 42% since 2017, and they maintain a modest but potentially growing dividend strategy.

Operational Footprint and Efficiency

The company discusses the advantage of their operation's smaller footprint, which is particularly important in regions like Northeast BC, and on First Nations land where environmental impact is a critical consideration. Despite not adopting simultaneous fracturing practices seen in the US, the company boasts efficient Canadian operations, almost exclusively running on 24-hour schedules, rendering the need for multiple fleets on location unnecessary for now.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the Trican Well Service Third Quarter 2023 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 Limited. Please go ahead, Mr. Fedora.

[Bradley P. Fedora, executive]

Thank you, everyone. Thank you for attending our third quarter conference call. A brief outline on how we intend to conduct the call. First, Scott Matson, our CFO, will give an overview of the quarterly results. I will then provide some comments with respect to the quarter and the current operating conditions and the outlook for the future. And then we'll open the call for questions. As usual, we have several members of our executive team here in the room with us, so we'll be able to answer any questions that may come up. I'll now turn the call over to Scott.

[Scott Matson, executive]

Thanks, Brad, and good morning, everyone. So before we begin, I'd like to remind everyone 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 that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our MD&A for Q3 2023. 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 2022 Annual Information Form and the Business Risks section of our Q3 2023 MD&A and our MD&A for the year ended December 31, 2022, for a more complete description of the business risks and uncertainties facing Trican. These documents are available both on our website and on SEDAR.

During this call, we will refer to several common industry terms and use certain non-GAAP measures, which are more fully described in our Q3 2023 MD&A. Our quarterly results were released after market closed last night and are available both on SEDAR and our website.

So with that, let's move on to our results for the quarter. Most of my comments will draw comparisons to the third quarter of last year, and I'll provide some commentary about our quarterly activity and our expectations going forward. Our results for the quarter were as anticipated, down slightly from last year due to lower activity and a persistent yet somewhat more moderate inflationary environment. Revenue for the quarter was $252.5 million, a decrease of about 2% compared to the same period of last year. Our activity level was down marginally compared to the same period of last year, mostly attributable to the specific well designs and customer programs that we executed during the period.

Adjusted EBITDA came in at $65.7 million or 26% of revenue, down from the $70.9 million or 27% of revenue we printed last year in the same quarter. This is mainly attributable to the job mix I noted earlier and persistent inflation in some of our key inputs.

But also note that our adjusted EBITDA figure includes expenditures related to fluid and replacements which totaled $1.5 million in the quarter and were expensed in the period. Adjusted EBITDAS for the quarter came in at $68.5 million or 27% of revenues again, slightly down from the $72.1 million or 28% of revenues we printed last year. To arrive at EBITDAS, we add back the effects of cash settled stock-based compensation recognized in the quarter to more clearly show the results of our actual operations. and remove some of the financial noise associated with the changes in our share price as we mark-to-market these items.

On a consolidated basis, we continue to generate positive earnings printing $36.4 million in the quarter, which translates to $0.17 per share, both on a basic and fully diluted basis. We generated free cash flow of $47.7 million during the quarter as compared to $64.9 million in Q3 of 2022. Again, our definition of free cash flow is essentially EBITDA less nondiscretionary cash expenditures, such as maintenance capital, interest, cash taxes and cash settled stock-based comp. I would note that we moved into a net taxable position in 2023, which is the primary driver of the year-over-year difference. You can see some more details on this in the non-GAAP measures section of our MD&A.

Capital expenditures for the quarter totaled $27.1 million, split between our maintenance capital program of about $6.5 million and our upgrade capital program of about $20.6 million. Our upgrade capital continue to be dedicated mainly to our ongoing Tier 4 capital refurbishment program and the electrification of certain ancillary frac equipment, which Brad will touch on later.

Balance sheet remains in excellent shape. We exited the quarter with positive working capital of approximately $144 million, including cash of $44.5 million. And finally, with respect to our return of capital strategy, we renewed our normal course issuer bid program on October 2 and have repurchased and canceled 1.1 million shares under the renewed program. On a year-to-date basis, we've repurchased and canceled approximately 21.2 million shares at an average price of about $3.40 per share.

And as noted in our press release yesterday, Board of Directors declared a dividend of $0.04 per share to be paid on December 29, 2023, for the shareholders of record as of the close of business on December 15, 2023, and I would note that those dividends are designated as eligible dividends for Canadian income tax purposes.

So with that, I'll turn things back over to Brad.

[Bradley P. Fedora, executive]

Okay. Thanks. So overall, the quarter was a little quieter than we had expected. We're still very happy with our results. It was still in the grand scheme of things a great quarter for us. There was lots of interruptions this summer with fires and believe it or not, actually flooding at the same time that we were having fires. There were a few less rigs than last year, just I think just due to lower natural gas prices. And as a result, we did experience some pricing pressure just as some of our competitors position themselves for the winter. And as a result, we lost some customers. As we've said before, we don't play in that game. What we offer our investors is stability and discipline, and we're very fortunate in that we have very long-term customer base that has been with us for years. And so we tend to just step aside when that is happening in the market.

On the inflation side of things, we're still seeing inflation, but it's really -- it has really slowed. We still expect sand price increases, third-party trucking can get tight very quickly and they're very quick to respond with rate increases, products with the U.S. Canadian dollar going against us here, we will experience product price, chemical price increases, things like that, even all of the parts that we source come generally out of the U.S. And so exchange rate is very relevant to us and very real near time. So we're getting inflation, but it's kind of like the rest of the economy, it's somewhat under control.

On the fracturing side, we're still operating with 7 frac crews. The basin activity hasn't grown enough for us to add any more equipment to our operating fleet. That means that we're operating at about 60% of our fleet with 40% on the fence and ready to go. Our competitors are operating at near, if not, 100% capacity. And so as demand grows in the basin, we'll be able to respond with bringing more equipment into the field. And even though we're leading the sector in profitability, we're actually not in the sweet spot of our operation from a profit perspective, where obviously -- our infrastructure is built for more than 7 frac crews and more than 22 cement crews. And so as we add equipment to the field, our profitability will grow as we currently have to depreciate all equipment, whether it's operating in the field or parked against the fence, just that's the way the accounting rules are in Canada.

So as we bring that equipment off the fence and into the field, it's a direct drive right down to earnings immediately as our fixed costs won't change at all. We're operating with 4 -- Tier 4 dynamic gas blending fleets today. We get our fifth fleet, and I'm going to talk about this a little bit later. We get our fifth high-pressure fleet in late December. So that will mean we'll take another -- we'll take an old diesel fleet or a Tier 2 fleet out of the field and replace it with another DGB fleet. So as of Jan 1, 5 of 7 fleets will be the low emissions natural gas engine frac fleets.

On the cementing side, we're very happy with this division. It continues to perform quarter after quarter after quarter and we couldn't be happier with our results there. Overall, we're sort of 30% to 40% market share in the overall basin. But really the focal point for that division has been the Montney. We hold about a 50% market share in the Montney in the Deep Basin just because when things get technical, we're the go-to provider for cement services, we have a fully operational lab and fairly extensive engineering group here in Calgary. So it's kind of a no-brainer for the larger, more technical wells that Trican will be doing that work.

Our market share gains there are really limited to our ability to add staff. And just as we get more qualified staff and we get them through training, we'll continue to add units to the field. And I'm going to talk a little bit about this later as well, but we're going to continue to focus on some of the markets that we've had to give up just with staff shortage, and we had to concentrate our staff into the Montney and the Deep Basin. And as we're able to add it, we'll take back some market share that we had lost in other areas.

Coil, we have talked before that we weren't happy with our coil division, but we've made great strides in the coil division. So really good progress there. Q3 was 1 of our best quarters ever in coil. We're operating 6 to 7 units. Again, we're held back by staff there. Our demand far exceeds our ability to supply coil, and it's just -- as soon as we can catch up on things like supervisors and other field staff, we'll add more units into the field. Again, there's no fixed cost increases as we add those units. So it's very profitable proposition for us to add more equipment.

The outlook for the -- for Q3 or Q4 and next year, is basically similar to what we've been saying for the last year or so. We expect Q4 to be very similar to last year. October was a very busy month for us. Some of the work from Q3 did push into Q4. And as a result, some of the October work has been pushed into November and December. So we'll have a good quarter, but it will slow down going into Christmas, and that's a good thing. As we've said before, I think Q2 is now busier than ever -- than it has been in the past. And then as a result, we have a wind down into the Christmas season, which is great for the field staff.

We expect next year to grow about 5% in activity. I think CapEx is more like 10%, but there is inflation. So I think it will result in about a 5% activity increase. And there's always commodity price volatility and things will always change and you may have busy quarters followed by slow. But overall, the market, we think, is going to be 5% higher next year, and the pressure pumping market is operating at very high utilization. So as activity grows next year over 2023, that's a great thing for our sector. We're already working sort of 23 out of 24 hours a day. And so we don't really have any more hours to give from an efficiency perspective. And so any more additional activity will result in additional demand for our services.

The focal point of the basin is still the Montney, of course. Everybody is getting ready for LNG. The Montney is a very profitable play, world-class. So that's still the focal point of activity. We are seeing are seeing more growth in the Duvernay. The Duvernay play has been around for years, but we really didn't -- wasn't very busy and just the plans for that play are to increase activity. It's a very frac-intensive play with very high treating pressures. And we believe that our frac technology is really well suited for this area and our fifth Tier 4 fleet is specifically designed as a high pressure, high durability fleet with 3,000 horsepower pumps.

So the leading frac fleet in Canada for sure, and is specifically designed for plays like the Montney and the Duvernay that have high treating pressures, and you need to be able to operate sort of 23.9 hours a day at very high pressure. So we specifically designed this equipment. And as a result, it will have very high reliability, low R&M, should be very attractive to the Duvernay players in the Kaybob area in particular.

The Clearwater gets lots of attention very profitable play, obviously. We generally haven't -- we haven't sort of active in that play just due to manpower shortages. So we are expanding our cementing services into the Clearwater, been successful there. We have a few rigs running, and just as we're able to add more people, we'll focus on plays like the Clearwater and taking back some market share that we've given up in heavy oil in the oil sands. And as always, it's -- people are the bottleneck there. Getting people hired and trained and making sure that they can operate safely in the field and provide good service to our customers is our first priority.

So it just -- it takes a lot, and that's okay. We want to make sure that we're building a long-term sustainable business, and we'll take the time to do it right. We're very fortunate. We have great people. They are very committed to this organization and the strategy that we've put in place, and we have an excellent safety record. And so we continue to enjoy the dedication of our people and we wouldn't be able to operate as efficiently without them.

So from our perspective, employee retention and getting good people is, of course, our top priority right now, making sure that we can grow profitably as the industry grows. The supply chain on the sand side, particularly is definitely stressed. We've got -- it's basically operating at or above its capacity. So we expect that we're going to see some sand shortages from time to time, especially when things get cold and rail loads have to go in half, but we expect this will be tight for the next few years. So I'm going to talk a little bit about this on the strategy side. We are very bullish on Canada. We think this is a great place to have our business. We're not looking outside Canada at this time. We think Canada is going to continue to play an important role in providing natural gas in particular to the rest of the world.

Obviously, LNG is coming on stream here in the next 18 months. So we view this as a very attractive basin in which to grow our business. And we believe it will be sustainable growth as well. We think the dramatic cycles of the past are being -- basically are more muted now. The highs are lower and the lows are higher. So we're really comfortable looking at Canada as a long term -- from a long-term investment strategy.

The Montney and the Duvernay will drive lots of pressure pumping demand. We have the newest fleet, and we think we'll be -- we'll benefit from all the activities that's happening here. Unfortunately, our customers remain very disciplined with respect to their capital budgets. They're still spending about half of their cash flow on drilling and completing wells, provides a great shock absorber to temporary volatility in the commodity market. We are hearing directly that they are doing LNG-based activity now. And if we -- if LNG comes onstream early 2025, those wells have to be drilled very soon. In fact, that's what we are seeing.

Frac intensity is still growing, and we're talking about the supply chain. On a per well basis, we're seeing higher sand volumes, more stages. And we've gone from a basin that pumped about 6 million tons of sand in 2021 to about 8 million tons of sand in 2023. So of course, that means the logistics and supply chain is being stressed. Some of these wells in Northeast BC require 50 to 100 rail cars of sand. So that requires probably an infrastructure build-out, and we'll look to make strategic investments into logistics, particularly in Northeast BC to make sure that, Northeast BC sorry, to make sure that we can provide stand for our customers and have more efficient operations in that part of the world. The issue there is in Northeast BC without sort of transloading facilities that are connected to rail, you can end up with very long trucking times, which on those types of highways in the winter, you can experience all sorts of delays. So we'll make strategic investments that have returns immediately and benefit our customers.

As usual, we're very focused on free cash flow and return on invested capital. I've said this before, EBITDA is not really a good indicator of success in this service line, like you really need to look at free cash flow and in particular, return on invested capital because the -- our depreciation is real. So earnings is something that should get more attention, frankly than -- free cash flow and earnings should get more attention than EBITDA. Our strategy is still the same.

We're -- it's differentiation and modernization while maintaining a conservative balance sheet. We focus on state-of-the-art equipment, improving our systems to be state-of-the-art, internally developing a good ESG strategy, working with indigenous partnerships to help facilitate work in Northeast BC, making sure that everybody benefits from what is happening. We have a guiding principle of clean air and clean water. So all of our investments generally are focused on providing low emissions, more efficient operations, lower costs and things that the public is happy to see.

And it's not just equipment, it's things like chemical blends, as I've talked about before, that allow us to use more produced water versus freshwater. So something that both the clients and the local communities want to see this industry do is use less freshwater, recycle and use -- produce water whenever possible. So we have a full suite of chemicals to provide our customers with respect to that.

We're extremely happy with the results of our Tier 4 dynamic gas blending equipment, as I was saying, our fifth high-pressure fleet will be ready in late December. And our -- since we brought this equipment to the basin, it's basically been operating at 100% utilization. It's generally -- we can't keep up with demand. And as a result, with running 5 fleets now, we have the newest, most efficient state-of-the-art fleet in Canada with low emissions, high performance, long pump times, lower R&M, we're less trucks on the road because we're sourcing the natural gas right on location. And because the utilization is high, it's been good for our shareholders from a profitability perspective.

We -- the customers are happy because there's significant fuel savings. We try to capture a good chunk of that, of course. But this -- as you've seen now, our competitors have responded by building the same technology because it makes sense in Canada. We're not ready for an electric fleet in Canada yet or a fully electric fleet in Canada yet just because of the requirements. But -- so we think this natural gas engine technology is going to be basically the standard for the Montney and the Deep Basin.

We're not stopping there. We continue to differentiate our service offering. And in the last year, we've built electric equipment in our frac spread for everything other than the frac pumps. And so we call it the backside. And that includes the blender, the chemical unit, sand belts, the data van, all of this runs off electricity, which means there's a natural gas generator on location. And this, of course, means more diesel displacement, less fuel cost, fewer people. This electric gear operates very nicely without manpower, being controlled from the data van that means none of our employees are in the dangerous parts of the frac spread, which we call the hot zone. And with this electric equipment, we are now getting up to 90% natural gas substitution on location. So industry-leading throughout North America.

Our Tier 4 technology, we were getting the best substitution rates in North America. And now with the addition of this electric gear, we've taken it to a whole new level now. So we're basically getting 90% natural gas substitution, which means it's almost the same as a fully electric frac spread. But operationally, it makes much more sense in Canada. And of course, our customers, this electric gear is very well received. We cannot get more of this fast enough and we announced a preliminary capital budget of $76 million for next year in 2024. And some of that will be to build out 2 new electric packages. We wish we could get more of it sooner, but there's still lots of constraints in the supply chain to get new equipment.

There's other things we're working on as well on the technology side. We're currently trialing the hydrogen cell aftermarket add-on technology on our sand hauling trucks and what this does is injects hydrogen in the engine instead of using pure 100% diesel, and preliminary data looks really encouraging with a 10% to 12% reduction in fuel consumption and a really significant reduction in emissions. So we'll continue to test this if it makes sense or if it continues to perform over the long haul, like it's performed so far. This is something that will go on our fleet of trucks. As we've talked about before, we have 500-plus trucks on the road on any given day, and we drive over 20 million kilometers a year. And so if we can get a 10% to 12% fuel reduction and reduce our emissions, obviously, that's an investment that likely will make sense.

On the -- what's the value for shareholders and a return of capital. As we talked about before, we're very fortunate we generate significant free cash flow, and we have a clean balance sheet. And so our priorities are to build a resilient, sustainable differentiated company that can provide good service to our customers. We invest in growth and upgrading opportunities like the Tier 4 engines or the electric gear. We'll continue to look at M&A opportunities as they arise. But I think the idea is that we want to provide good cash flow and earnings, a good consistent cash flow and earnings stream that's growing ideally with a consistent return of capital to our shareholders. We believe in a diversified strategy, which means we both buy back shares and pay dividends.

We've been very aggressive on our NCIB. We finished our 2002-2003 (sic) [ 2022-2023 ] NCIB early and we've just renewed our '23 and 2024 program a month ago and have basically been active in the market every day. In calendar 2023, we purchased more than 21 million shares, and we'll just continue to chip away as we think buying our own shares and these kinds of multiples is a great investment opportunity.

Actually, quite hard to beat when you put it in the grand scheme of building new equipment or doing M&A, buying our own shares back is still 1 of our best investment alternatives. And just as a reminder, since we started this program in 2017, we bought over 42% of our shares back. So we're definitely dedicated to this program.

As Scott was saying, we do have a modest dividend of $0.16 a year paid quarterly, $0.04 quarterly. We'll continue with that program. We hope it's permanent, and we hope that we can increase it as the share count goes down. So we'll continue to review that in the context of our other investment opportunities.

Okay. Operator, I think I'll stop there and turn the call over for questions.

[Operator]

[Operator Instructions] The first question comes from Aaron MacNeil of TD Cowen.

[Aaron MacNeil, analyst]

Brad, you mentioned the 7 active crews and swapping the legacy fleet in the new year with the Tier 4 instead of going to 8. I'm sure you obviously noticed 1 of your competitors bringing pressure pumping equipment from the U.S. to Canada. And obviously, that's probably based on a pretty good demand outlook into Q1. I guess, are you seeing the same strength in your calendar? And what would you need to see to bring on that eighth crew? And how long do you think it would take to hire people?

[Bradley P. Fedora, executive]

Yes, Q1 of next year looks busy. I know we're a little behind on adding an eighth crew. But part of our disciplined model. We're not going to do it to do it. We don't, at the end of the day, care about market share, we only care about returns. So for us to add an eighth crew, we would want that equipment working at a very high utilization for like the entire year. And I'm not sure we're quite there yet.

We're obviously, we'll -- we're always looking to make that move. But just given the positioning that happened this summer with pricing, we kind of removed ourselves from that battle. But that's okay. And if we decide to do it, the hiring side is not insignificant. It's going to be a few months for sure to get that number of people hired and trained and then mentored in the field, getting them to the point where they're good to operate on their own.

Of course, we spread the new people around the company. We don't put them all together on 1 frac spread or anything like that. But still, we're dealing with high pressures, very expensive equipment, lots of driving risk. So we don't take adding a new crew lightly, and it would take time for sure, and it's something that can't be rushed.

[Aaron MacNeil, analyst]

Makes sense. You mentioned the backside investments embedded in the capital program next year, but it doesn't seem like you've contemplated any further Tier 4 upgrades. So a similar question wondering what you need to see the green light and other upgrade? And what you think the probability of that is of happening? And how much do you think it would cost?

[Scott Matson, executive]

Yes. I think, Aaron, I think, we're constantly evaluating what that next suite of technology looks like as well. As we come through the end of this year, we'll have 5 of 7 crews running on Tier 4 technology. And we're evaluating kind of next generation as we speak, which would be full nat gas engines as we go. That's probably not a next year discussion. That's probably a year or 2 in the future. But same metrics would apply, right, in terms of how do we bring that stuff in from a high profitability and utilization perspective. So I don't think our thinking has changed on the technology suite, we'd love to get more gear in the field, but that next generation is probably a little ways away for now.

[Aaron MacNeil, analyst]

Okay. Maybe I'll sneak 1 more question. And it just seems like you guys are a bit reluctant to get excited about the near-term outlook. You mentioned the 5% activity increase in 2024. Obviously, mechanical completion of Coastal GasLink happened earlier this week or last week. And so are you sort of risking the time line for LNG-related growth? Or how should we think about your view towards that?

[Bradley P. Fedora, executive]

No, not at all. The great thing about this market now is like I was saying, like it's a much more stable, predictable market. So way better operating environment than we've ever had. The downside of that of all this financial and capital discipline is you don't have these 30% growth years. That's a good thing, right? We want to just do our thing, provide good service to our customers. We're not -- we don't care about big flashy sort of events -- that are share price catalysts, right? Like where we've taken the sort of long-term disciplined, grind-it-out approach.

And as a result, we pay the dividend, we buy the stock, and we're providing growth that way. But don't get me wrong. Like this kind of the market that we're in today is awesome, right? Like as we know, LNG is going to put a foundation of activity into this basin. There's tons of LNG going on in the U.S., lots of Canadian players selling into that market. I mean, it's nothing, but it looks great, and that's why we're so happy to be in Canada. But again, the downside of that is it's all very disciplined and thoughtful by our customers.

And so therefore, we need to be disciplined and thoughtful and not oversupply the market and we're fortunate. We just have the 1 operating environment and somebody has to be disciplined, right? And that's us. We're the leader in the market, and we'll take that responsibility on and show some discipline and our shareholders can count on that kind of financial and operating discipline going forward. But make no mistake, we think this market is great. It's very -- for the first time, we can think in terms of 5-plus years. So it's a great place to be.

[Operator]

The next question comes from Keith MacKey of RBC.

[Keith MacKey, analyst]

I just like to start on the $76 million capital preliminary budget for next year. Can you just maybe talk about what make -- what turns that from preliminary to final or actual results? Is there some factors that could make that change materially to bring that north of $100 million. It sounds like maybe not more Tier 4 equipment, but just trying to get a sense on where things could go given your outlook for next year, which is a very modest growth in industry activity. So is there anything particular that could make that capital budget change materially? Or should it be really a $74 million plus 5 or minus 5 kind of a thing?

[Scott Matson, executive]

Yes, it's probably pretty secure at the number that it's at. I mean the biggest component of that $75 million is maintenance capital or capitalized maintenance that usually runs around 3.5% to 4% of revenues on an average basis. So that's a big chunk of it, similar to what we spent this year. We did about 100-ish this year, which included $30 million, $35 million of Tier 4 upgrade, right? So you pull that upgrade out and you're kind of at that $75 or so million including a couple of the backside additions that Brad talked about earlier. So I don't see that number at this point materially changing. But as we get into Q1 and get a bit more better view of what the rest of the year looks like, we'll evaluate it accordingly. But for now, I think it's a pretty solid number.

[Keith MacKey, analyst]

Okay. Got it. And as you think about potential investments in logistics or rail transload sand hauling type investments. Like I know there's nothing, I think, you said last call, there's no immediate press release cutting or anything like that. But can you give us a sense of how you're thinking about that, like could this be something that's a substantial investment? Are there any investments that you'd actually put debt on the balance sheet for? Or is this much, much smaller in magnitude?

[Bradley P. Fedora, executive]

Yes, it would be more -- it would be definitely smaller, nothing that would require any permanent debt of any kind. And the timing is just -- getting approval is always proves harder than you would expect. And so -- but these investments wouldn't be huge because you're probably better off with a couple of small ones than you are with 1 big 1 or something like that. It's still early days, and we want to make sure that any money that gets spent that we're that we are generating the kind of returns that our investors require, right?

So we generally don't spend money unless we think we can get high teens, low 20% return on it. And so you got to be careful, right? You can't just go out and say, "Wow, we need this." It's not that simple. We're going to spend -- everything costs millions of dollars as we all know. So if you're going to spend that money, we owe it to our shareholders to make sure that we're going to get cost reductions or efficiency gains that are going to generate returns.

[Operator]

The next question comes from Waqar Syed of ATB Capital Markets.

[Waqar Syed, analyst]

Brad, could you talk about the total -- your percentage of fleets in Canada now that are Tier 4? And how do you see that trending over the next 12 months or so?

[Bradley P. Fedora, executive]

I think I heard you, Waqar. So total Tier 4 fleets in Canada at the end of this year would be 5 from us. And I think 2 of our competitors have one each. So it makes a total of 7 out of, say, 31 fleets.

[Waqar Syed, analyst]

Okay. And do you see a need for an e-fleet like we hear that these e-fleets have significantly less wear and tear going on. And so bringing down OpEx quite a bit because of that. And then obviously, the significant fuel savings as you go to 100% fuel replacement. Do you see there's a need for that in Canada?

[Bradley P. Fedora, executive]

I mean, yes, everybody, I think, knows the nice thing about electric equipment is that it operates with less wear and tear. It's probably easier to operate electronically versus manned, and we would love to go to 100% electric, but it just isn't practical here. If you had an electric frac spread, it would be 35 megawatts of electricity required. I mean that's a lot of electricity needing to be generated. So the pressure we're getting particularly Northeast BC is a smaller footprint, right? And that's a strategic advantage to have a smaller footprint.

So if you start rolling a bunch of natural gas generators on to location that makes for a bigger footprint, and so that's why we love this combination of electric backside gear and the Tier 4 gears because we were at 90% natural gas versus 100 that you would have with electric. But the investments and the footprint increases that we would see by going full electric, we don't think are warranted at this stage, and we want to make sure that we're good corporate citizens, right? We want a smaller footprint.

We want to make sure our people are safe when they're operating the equipment. They're not that experienced with that kind of electricity and let's not downplay that side of it. We've got an entire oil patch that has grown up with mechanical gear and all those high-voltage lines running around. That's lots of potential for significant problems. And so we're not transitioning into that for many, many reasons. And we're happy with the Tier 4 technology. Now that being said, of course, we are looking at new technologies all the time. And I'm not pooling electric gear just -- in Northern Canada is -- it's not that practical yet.

[Waqar Syed, analyst]

Yes. And on the U.S. side, we've gone from like Zipper to simul-frac and now there's some talk of like I don't even know what the right word is, [ Tri fracs ], three word being frac at the same time. In terms of the service intensity and like the size of the crews needed to complete these jobs, like where do we stand in Canada? And what do you think -- how do you think that would change in the coming 1 or 2 years in terms of the horsepower needed at the well site?

[Bradley P. Fedora, executive]

We've kind of gone away from the 2 frac fleets on location. So I'm not -- I know exactly what you're asking me. But it doesn't seem to have trended that way here. We're -- these pads have 20-plus wells on them, but we haven't gone to this -- we haven't gone back to this sort of zipper style frac, where you have a couple of frac fleets on location doing multiple wells at the same time. It's been more 1 fleet at a time, 1 well at a time with everything obviously plumbed in. So there's no downtime in between stages.

[Waqar Syed, analyst]

Okay. Is there a structural reason for that, that those -- the U.S. practices are not relevant here? Or is there -- it's just that the trend -- over time that the Canadian market will shift towards that side as well?

[Bradley P. Fedora, executive]

Yes, I mean the footprint issue is significant, particularly in BC. I'm not sure anybody -- everybody is trying to figure out how to build a smaller pad, not a bigger pad. And if you want to -- especially on -- when you're on First Nations land, they want to know, hey, we want less trucks, smaller disturbance. And that doesn't jive with I think what you're asking, and I understand what you're saying. But you got to remember that the Canadian frac operations are so efficient. If you look at them compared to the U.S., like we're almost exclusively 24-hour operations, the number of frac or the number of drilling rigs per frac fleet here is higher, meaning the frac operations are more efficient.

So maybe that's part of the reason why you're just not seeing it is because we're already there from an efficiency gains perspective. And we have to do our part to provide a smaller footprint on locations so that we're -- we have less disturbance.

[Operator]

[Operator Instructions] The next question comes from John Gibson of BMO Capital Markets.

[John Gibson, analyst]

Just regarding those sand numbers you were talking about in '22 and 2023. Where do you see this going in '24 and beyond just given a bit of an uptick in activity as well as increasing well intensity? Is there enough capacity in the system to have these levels either from a logistical or operational perspective?

[Bradley P. Fedora, executive]

Yes. I mean we don't think there is, not efficiently, right? Like -- so we're at, say, 8.1 million tonnes this year, let's say, we have activity growth, and you can't use the well or the well or the rig count anymore, right? Because the rigs get more efficient and they drill longer laterals. So you have to sort of look at the number of wells and the average length per well to sort of backfill sand demand number. But yes, they're growing there -- as we all know, there's a lot of sand around, but the logistics issue is not easily solved because of the rail. There's only 1 rail company north of Edmonton. And there's no real giant transload facilities in Northeast BC. So we do a lot of trucking out of sort of Grande Prairie area into Northeast BC and you end up with these 16-hour return routes, which you get a bit of a snowstorm or a traffic accident or a road construction and all that goes out the window and the trucking times grow. So the logistics side is definitely stressed and that's why we're having a careful look at it to see where we can add some value.

[John Gibson, analyst]

Got it. And last one for me. Cementing work appears to be making up a larger portion of your revenue. What's driving this? And are you seeing some inroads with customers on the pumping side through your cementing work?

[Bradley P. Fedora, executive]

Sorry, say that again.

[John Gibson, analyst]

I'm just saying your cementing work appears to be making up a larger portion of your revenue and wondering what's driving this? And if it's -- you be allowing some inroads to customers on the pumping side through work.

[Bradley P. Fedora, executive]

No. Like our cementing customer list is massive and really why we've had cementing growth is because we finally were able to sort of meet some staffing or the staffing demand. And the demand was always there for our cementing services. It's just we weren't able to staff the equipment as well as we would have liked. And so we've seen a number of units grow in the last year from sort of 17, 18 to 22, 23 units, which is significant, right? And still demand is there for more if we can find the people.

Thank you. Okay, operator, I think we'll end the call here. I don't see any more questions on the board. The Trican management team is available for any follow-up questions for the remainder of the day. Thank you, everyone.

[Operator]

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