Trican Well Service Ltd

TSX:TCW

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the Trican Well Service Fourth Quarter and Year-end 2017 Earnings Results Conference Call and Webcast.As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Dale Dusterhoft, President and Chief Executive Officer of Trican Well Service.Please go ahead, Mr. Dusterhoft.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Thank you. Good morning, ladies and gentlemen. I'd like to thank you for attending the Trican Well Service Conference Call for the Fourth Quarter and Year-end of 2017.Here is a brief outline of how we intend to conduct the call. First of all, Robert Skilnick, our CFO, will give an overview of the quarterly results. I will then address issues pertaining to current operating conditions and near-term outlook.We'll then open the call up for questions.Also participating in the call will be Michael Baldwin, Senior Vice President of Corporate Development. I'd now like to turn the call over to Rob to discuss the overview of the financial results.

[Robert Skilnick, Chief Financial Officer]

Thanks, Dale. Before we begin, I'd like to point out that this conference call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions were applied in drawing a conclusion or making a projection as reflected in the Forward-looking Information section of our MD&A. A number of business risks and uncertainties could cause the actual results to differ materially from these forward-looking statements and financial outlook.Please refer to our 2016 AIF dated March 29, 2017 and the Business Risks section of our MD&A, for the year ended December 31, 2017, for a more complete description of business risks and uncertainties facing Trican.Our fourth quarter results were released yesterday and are available on SEDAR. Please note that all comparatives to previous quarters are for our continuing operations and exclude the discontinued operations and disposed the portions of the business.Strong activity levels carried over from the third quarter into the start of the fourth quarter. However, activity slowed considerably in the second half of the fourth quarter. A number of our core customers completed their 2017 capital programs or met their production targets early, which resulted in a significant drop in utilization as they forced us to temporarily shut down crews.As this was happening throughout the industry, we saw some price erosion on spot market single-well programs. We elected not to chase spot market pricing for one-off wells as it would potentially affect our 2018 pricing. Therefore, we maintained pricing throughout the quarter.As a result of the late fourth quarter slow down, we pumped 397,000 tons of proppant, which was a 30% sequential decline from the third quarter.From a fracturing prescriptive, we averaged approximately 300,000 working hydraulic horsepower compared to approximately 400,000 active horsepower during the third quarter. Our decision to maintain fracturing pricing levels resulted in pricing being consistent with the third quarter at approximately $650 per horsepower.Other service lines, in particular cementing, coil tubing and fluid management, saw more typical, sequential, quarterly activity declines.During the fourth quarter, cement maintained a strong and steady market share of the rig count consistent with our historical market share in this service line.The impact of activity declines and stable pricing levels resulted in fourth quarter revenue of $280 million and adjusted OP income of $47 million. Included in our operating income is $5 million cost for prior period reassessments of PSP and expensing fluid ends.In the fourth quarter, we guaranteed our field personnel's day rates to match competitor wage rate practices and strengthen retention.Also in the fourth quarter, we utilized the activity slow down to reduce our maintenance backlog, which has better prepared us for Q1. These activities increased our fourth quarter operating cost.We reassessed the useful life of stainless steel fluid ends. As a result of increased well intensity, in particular the Montney and Duvernay, fluid ends are no longer lasting more than a year. The result of this change will be an estimated reduction to our first half EBITDA and capital -- and a corresponding decrease to our capital budget by approximately $12 million. Overall, we anticipate fluid end cost to be approximately $25 million to $30 million in 2018.We've started to see some operating cost inflation. As previously noted, variable field bonuses were increased, effective August 1, to align Trican and Canyon job bonuses with the market rates.Overall, between this and other wage rate market alignment, we estimate that our wage cost will increase by approximately $15 million annually compared to 2017.The integration of Canyon continues to proceed as expected. We have realized roughly $31 million in synergies to-date. As we continue to align the two companies and further integrate across all aspects of the business, we expect further efficiencies to be achieved.Since the inception of our NCIB program, we've purchased approximately 11.9 million shares at a weighted average price of $4.27 per share.We expect to continue on with our NCIB once we are out of block out and continue to view an investment in our shares as an attractive use of extra cash flow, rather than adding to our existing fleet.We exited the fourth quarter in a very strong financial position with roughly $94 million of net debt and a working capital balance of $149 million.In the near term, we expect to utilize our free cash flow to further improve our balance sheet and invest into our NCIB program.Longer term, we will continue to evaluate the best investment alternatives for our free cash flow that will maximize long-term shareholder value.I'll now turn the call over to Dale, who will be providing comments on operating conditions and strategic outlook.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Thanks, Rob. Fourth quarter started strong for Trican as we were able to sustain momentum from our very busy third quarter operations.We saw a short-term decrease in demand for our services in the last half of the fourth quarter.Overall, this has not had a dramatic impact on our services in the first quarter of 2018 as all of our customers restarted their work programs in January.Although we have faced typical, first quarter cold-weather challenges and have seen some sand supply challenges, we have been able to maintain strong activity levels just marginally behind third quarter 2017 levels.There were some rail issues causing a tightness in sand supply in early February, which we have managed through with minimal disruption to our job scheduling.We thank our loyal supplier base for all their assistance in ensuring that we were able to meet our customers' needs during this short-term issue. We are now seeing a return to more normal sand delivery.It is difficult to determine how far into March we will continue to operate but based on our customer plans, we expect to have strong activity until the end of the quarter and, if weather permits, into the start of Q2.Based on our activity to-date, we expect our proppant buyers for Q1 2018 to be between our record third quarter and fourth quarter 2017 levels.If weather holds in March, we anticipate these activity levels to result in a strong quarter. We continue to see favorable trends, with respect to frac intensity per well, as the demand for horsepower on location and sand continues to increase.Lateral lengths are still increasing, which is increasing the number of stages per well.Our areas of focus still remain the Montney, Deep Basin and Duvernay, as those areas make up roughly 80% to 85% of our revenues.Our second quarter job already is relatively strong. Although Q2 2018's spot market may not be as strong as last year, our key customers are planning to be active throughout the quarter as they will continue on with pad work that is less susceptible to weather-related road restrictions.Currently, we are operating approximately 60% to 65% of our available 680,000 horsepower on a daily basis, with 140,000 horsepower working through our maintenance cycle and the remaining 111,000 horsepower still parked on the fence.Over time, we expect to improve on the approximately 25% maintenance horsepower and normalize at approximately 20%. However, we think it is prudent to have additional horsepower available to ensure minimal disruptions for our customers and to give us flexibility to grow fleet sizes or add additional fleets going forward.General macros conditions or concerns surrounding the second half of 2018 persist. We recognize our customers will only complete as many wells as their cash flow will permit. Low natural gas prices will hurt activity, but the strength in liquids prices, combined with a favorable Canadian to U.S. dollar exchange rate, should improve cash flows for our liquid-driven clients. We expect to see more clarity on their second half 2018 programs in the second quarter.We continue to see an increased demand for our services in East Duvernay. Although, as an early stage play, it is not ready for full-scale pad work. We expect this and other oil-weighted plays to absorb additional fracturing capacity in the second half of 2018.We are also seeing strong demand in the horsepower-intensive North and West Duvernay, which is also creating additional demand for high-pressure, high-intensity equipment.Currently, demand for pressure pumping services exceed demand/supply in the market. We are continuing to evaluate if this is a temporary or permanent market imbalance before we add crews in 2018. As always, crew additions will be dependent on customer commitments and overall activity in the basin. Adding crews will be challenging as hiring worker -- qualified workers remains difficult.Although we have completed a market alignment for our wages, we are not willing to cause excessive wage inflation at these pricing levels, so we'll proceed with a controlled hiring process.Our second half customer job bar remains strong. Approximately half of our crews are committed to long-term customers with the remaining fleet having soft commitments.We continue to have a number of inbound inquiries for high-pressure work that would require additional fraction equipment to be activated. We will evaluate these activations based on our return on capital and the term of the contract.Our operational execution, as measured by pumping hours, combined with our large fleet of continuous duty pumps, is attracting inquiries for equipment in these high-pressure plays.Our other service lines have remained active. Our cement activity has been extremely busy this quarter as the rig count is much higher than that experienced in Q4. We have added 3 additional span crews, which has been key in our ability to service the additional Q1 demand.Coil tubing utilization has been good, with some choppiness due to cold weather-related issues and customer job delays.As far as pricing is concerned, we are anticipating it to be relatively flat in Q1 and Q2, with some minor tweaks to offset any direct input cost increases that may arise.It is early -- it is too early to be able to assess how second half 2018 pricing will look, but our current view is that it will likely remain stable.I want to thank all of our staff for their contributions in making 2017 a significant turnaround year for the company.Our adjusted operating income improved from negative $37.4 million to positive $183.3 million, which was only achieved through the exceptional work of our people. Our employees continue to work hard to integrate our company and continue to provide seamless and safe, efficient service to our customers.We are very pleased with the Canyon integration and the synergies achieved today and believe that we have positioned Trican to be successful and to continue to grow going forward.I thank you for your attention today and your interest in Trican. And I'd like to turn the call over to the operator for any questions.

[Operator]

[Operator Instructions] Our first question comes from Taylor Zurcher with Tudor, Pickering.

[Taylor Zurcher, Director of Oil Service Research]

Dale, you've talked in the past and talked again this morning about having firm commitments in place for half your equipment for the balance of 2018 and soft commitments for the other half. Could you talk a little bit more about what exactly that means? And if the commodity price outlook, I guess, surprises to the downside or even stays where it is, what options those customers on the firm side at least have to get out of those contracts?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, on the firm side of it, there is a -- there's a higher level of contractual commitment, I guess, to Trican in some cases. And then there's a lot of different mechanisms in here. It will be a financial commitment with minimum payments to Trican. So getting out of them is not that easy without some kind of financial penalty.On the soft commitments, those are commitments as well that may have contracts with them, but there's little more wiggle room in terms of adjusting programs, primarily based on commodity prices.The one thing I will say though, and there's a lot of concern in the industry about where [ ACO ] prices are and where natural gas prices are and what the gas customers are doing. Our gas customers have been very transparent with us all the way through the process. They've communicated very well to us late last year and through this quarter as to where their programs are going to go through the year. We may get surprised a little bit if [ ACO ] continues to remain low on a little bit less. But we're -- it's pretty immaterial, we believe, because you've got only 15% of our activity coming from dry gas.So -- and we backfilled all those already with liquids customers. So on the soft commitment side, I would say that we've already kind of backfilled any kind of gas activity slowdowns that we've heard from our clients already.

[Taylor Zurcher, Director of Oil Service Research]

Okay, that's very helpful. Only other question from me, I think you said in prepared remarks that Q2 this year -- bookings are strong but probably not as strong as last year. Is it reasonable to assume you could still be profitable at the operating income line in Q2 of this year, given what you see on the horizon so far?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, actually, our bookings are a little bit stronger than last year. So if you went through all of our committed clients right now that have -- that are quite hard committed to us, the bookings are stronger. Whether it's a little weaker, it's a little hard to tell because we don't know exactly how to play out. We believe the spot market will be weaker in Q2. Last year, the spot market was very active and that there are a lot of clients that carry programs over from Q1 into Q2, they want to get those programs done, whether it was favorable enough to be able to do it. And so that really helped April and May, in particular.And we're anticipating, rightly or wrongly, that if the spot part is a little weaker this year but that could still cut through higher than our -- what we're expecting. But commitment-wise, we're up year-over-year a little bit.

[Operator]

And our next question comes from Benjamin Owens with RBC.

[Benjamin Edgar Owens, Associate]

I know you mentioned that it's too early to tell what direction pricing will head in second half of the year. Just curious if you've had any discussions with customers coming to you looking for pricing relief in the back half of this year already?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Nope, none at all. Basically, we're still of the view that pricing will hold through the second half. But we're cautioning ourselves, because you don't where commodity prices will go. But no customers have come through asking for pricing decreases at all.

[Benjamin Edgar Owens, Associate]

Okay. And then you mentioned typical winter delays on sourcing sand via rail. And has that -- has the rail delays caused any of your customers to take a closer look at sourcing regionally-produced sand versus rail imports?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes.

[Benjamin Edgar Owens, Associate]

And do you guys have an opinion on what's more preferable for you guys?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Well, from our side, it depends a lot on the customers' requirements for sand. But basically, first part of the answer is yes. The rail delays allowed us to switch over a lot of clients to domestic sand. And part two is every client probably still has a view of what's best for their reservoir in terms of domestic versus white sand. And is that changing? I wouldn't say it's a massive change right now just based on this short-term thing. But it's -- it has been evolving to more domestic sand for the last couple of years.

[Benjamin Edgar Owens, Associate]

Okay. That's helpful. Last one for me. Is there any difference in the pricing dynamic you're seeing in the market for your cementing assets versus the fracturing assets?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

No. Cementing is just very -- it cuts the rig count. So if the rig count's high, which it is this quarter, it's in really strong, high utilization through the quarter. And much like fracturing.

[Michael A. Baldwin, Senior Vice President of Corporate Development]

No price change, yes?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

No price change at all.

[Operator]

And our next question comes from Shawn Meakim with JPMorgan.

[Sean Christopher Meakim, Senior Equity Research Analyst]

So you talk about -- you said pricing very flat through the first half of '18. Just thinking about the fourth quarter, can you maybe give us a little bit more to what extent you think that you were impacted by -- the top line was impacted by maybe pricing versus job or customer mix? And how that mix could shift here in the first quarter during the kind of peak of winter drilling?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, there is no impact in 4Q on pricing. We held pricing flat through 4Q, and we're holding pricing flat through Q1 as well. So we really -- kind of independent of customer mix. The same customers are coming back with the same pricing.

[Michael A. Baldwin, Senior Vice President of Corporate Development]

Just to add on on the activity front. We -- if you look at the average horsepower we had active in the quarter, it was 300,000. In December, it was sitting at about 155,000 horsepower. So kind of gives you a flavor for where that activity fell off as the customers shut their programs down.

[Sean Christopher Meakim, Senior Equity Research Analyst]

Okay, got it. And then maybe also if you could give us a little more detail in terms of breaking down maintenance versus growth CapEx in 2018. And maybe could you elaborate a little bit about the change in capitalizing fluid ends maybe towards an expense model. Just maybe give us a little bit sense of some of those moving pieces?

[Robert Skilnick, Chief Financial Officer]

Yes, I mean, essentially, we -- yes, we added $1 million growth CapEx in -- for the first half. And we took back -- we took off $12.5 million of maintenance capital from our December 11 capital announcement.

[Sean Christopher Meakim, Senior Equity Research Analyst]

Okay, got it. And I guess, is there anything else to tieback back to with respect to the move from, say, 25% maintenance horsepower getting down to that 20%. How do you think about, I guess, timing? And kind of some of the more concrete steps to get you from point A to B.

[Robert Skilnick, Chief Financial Officer]

Yes, that's just -- the timing isn't -- I wouldn't say we have a firm's idea of timing. But that's just going to be an evolution as we get our equipment through the backlog of repairs maintenance and as we kind of come through the year. So I would say it's just an ongoing process. And I would anticipate to be there in the second half of the year. But it's just every -- kind of ongoing every month.

[Michael A. Baldwin, Senior Vice President of Corporate Development]

And just to clarify, that's maintenance and unmanned horsepower. So part of it would be crew adds that would bring some of that -- out of that cycle.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, you are going to see us have a little bit more horsepower in our fleet that's active but unmanned and just waiting for hiring, basically.

[Sean Christopher Meakim, Senior Equity Research Analyst]

And our next question comes from Greg Colman with National Bank Finance (sic) [ National Bank Financial ].

[Greg R. Colman]

Just a couple of follow-ups here to one of the earlier questions about Q2 operating income profitability. Dale, with your bookings being a little bit stronger year-over-year, even with your anticipation for the weaker spot market. Do those bookings suggest that you will be positive Q2 operating income just on the bookings alone? Or do you need to be sort of positively surprised on your spot market expectations in order to clear that over-under on the 0 hurdle?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, we would anticipate being positive.

[Greg R. Colman]

Okay, great. And just a clarity from your prepared remarks earlier. Sorry I misheard, did you say that Q1 propane volumes are expected to split Q3 and Q4, so to come in somewhere in between those?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes.

[Greg R. Colman]

Okay, great. Then just moving on. If we take a look at just a couple of comments that you had there. Rob, I'm probably going to regret asking this question before I even ask it, but you've got $35 million in taxes on pretax income of $55 million, which is a 64% tax rate. I'm in Ontario, and that even seems high. So could you help us normalize that, understanding a red note '17? I put my best crypto analysis onto it, but what would be a normalized tax level?

[Robert Skilnick, Chief Financial Officer]

The issue is actually to do with January 2017 keen realized gain. So a portion of our keen proceeds were realized gain, which moved income from other comprehensive income into net income that also drew in income tax. Now to fully confuse you, the valuation allowance associated with our U.S. tax losses had already, in 2016, been relieved through the P&L. What I'll tell you is, starting Jan 1, 2018, all of the keen gains and losses, including tax, will flow through the P&L. So it should start to look a little more normal going forward.

[Greg R. Colman]

Okay. I definitely do regret that. But I look forward to reading the transcript 4 times. What -- so what would be a good normalized tax rate that we will be using in 2018?

[Robert Skilnick, Chief Financial Officer]

I mean, we're subject to the Canadian tax rate, essentially of 28% today, 27%, 28%. So that's the normalized rate, but you've got to back off your nondeductible equity stock comp.

[Greg R. Colman]

Okay, got it. And then this is related to that and actually where I was going. Can you give us an idea of what the actual cash savings are going to be from moving your fluid end cost from CapEx to OpEx? Because it would presumably be the tax.

[Robert Skilnick, Chief Financial Officer]

There's not much of a tax savings, the marginal tax. For tax, they were permitted to be expensed already.

[Greg R. Colman]

Okay, great. So then moving on to -- just stepping away from the detail and a little bit bigger picture here. Dale, maybe a question for you on the full year, you talk about a positive outlook. I know that the back half of the year is still a little foggy. But is it reasonable to assume that when you talk about a positive out book -- positive outlook, this implies a year-over-year increase in aggregate work for you? Even assuming a full year of Canyon, based on what you know now and your discussions with customers now, is that still what you are anticipating for 2018?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

I think that, yes, if you looked at Q3, Q3 was a -- kind of a peak utilization quarter last year. So we would have to have perfect weather in Q3, which we haven't had every year. But if we have perfect weather in Q3, it's there. But I don't know if I anticipate we absolutely hit those numbers in Q3. And in Q4, we had that significant slowdown, so I'd assume it to be a little bit better than -- depending on what our clients do, of course. But we have more contract protection this year from clients pulling the pin on short notice with us, which will help us in our Q4 timeframe. On an aggregate basis, is it going to be higher? Well, that's -- we haven't really said that because we want to get into our kind of firm negotiations with our clients on the uncommitted equipment here in Q2 and make sure that we get that all locked in on committed basis before we say it's going to be higher, lower or the same.

[Greg R. Colman]

Okay, that's fair. Wanted to push a bit, but understand that it's still in the negotiation periods.

[Operator]

And our next question comes from Jon Morrison with CIBC Capital Markets.

[Jon Morrison]

Can we dig into the $15 million wage rate figure that you mentioned in the press release? How much of that is field versus office and therefore be captured in embedded margins versus G&A?

[Robert Skilnick, Chief Financial Officer]

That'd be 90-plus percent.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Field.

[Robert Skilnick, Chief Financial Officer]

Field, sorry.

[Jon Morrison]

Okay. So basically, you're just highlighting it to emphasize that cost creep is real, and it's something that the market should be concerned about. But it's not astronomically different than any of the messaging in the past kind of 6 months?

[Robert Skilnick, Chief Financial Officer]

Yes, I think we're just probably clarifying and putting some numbers to it, Jon as well as just to provide some context. Although, independent, the $31 million of synergies that are out there as well. So just to give some context, we're seeing some gains. But there is cost inflation as well.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

I think, Jon -- we messaged in the past, Jon, that we did a salary adjustment for our field staff in August. This is just kind of rolling those together because we had a few more at the end of the year as we're just kind of making sure that we're market competitive. And so it's kind of summarizing all this together.

[Jon Morrison]

Okay. Where's the organization's head at on building cash and reducing net debt further than you already have versus buying back stock at this point? Is it fair to assume that any incremental 2018 free cash flow likely goes towards buying back stock?

[Robert Skilnick, Chief Financial Officer]

No, I think it's probably a combination. We've kind of been doing that here through the last few months. So I think it's a continued combination of both. Although, the net debt figure is already quite low.

[Jon Morrison]

Okay. On the solid bookings that you have in the back half of the year, is there any meaningful delta between cementing and fracturing at this point?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

In terms of the bookings for us -- for those service lines, you mean?

[Jon Morrison]

Yes, is cementing more booked than fracturing, or it's...

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

No.

[Jon Morrison]

Pretty even?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

It's pretty even. I would say, spendings a little bit different in that what our customers do as they allocate a percentage of rigs to us. So if they've got 10 rigs, they usually will say that, Trican, you're looking after 8 of them or something like that. And -- so it'll -- what our customers will do in Q2 now is they'll firm up how many rigs they're going to run for the second half. And they have a pretty good idea by April, May, that they're going to run 10 rigs, they're going to run 14 rigs, they're going to run 2 rigs. And then, they will just allocate those rigs to us. And so, it gets quite firmed up unless they pull their rig count back.

[Jon Morrison]

Okay. Given the unknowns in the market right now, why announce that you're deploying the incremental crew in Q2? I realize that you've probably already spent the cash to get it field deployed. But are you planning to staff it? And does it send a negative signal to the market and customers that there's going to be more capacity to be working in the back half of the year?

[Michael A. Baldwin, Senior Vice President of Corporate Development]

No, we -- kind of as we've said all along, we think we -- we're not deploying any crews if we're going to destroy pricing. So if we could add a crew without -- with a decent return on capital criteria, and the customer demand is there in terms of longevity of the bookings for that crew, then we're going to do it. And so that's why we're still looking at adding a crew because we have demand for it. And that meets those criteria. And the only -- the risk around it, Jon, is just -- is mainly staffing right now. As I've said in the past, staffing is an issue, and we continue to reiterate that. In terms of just getting a qualified staff, we're not going to change wages up to do this. So we have to keep our cost under control and add staff slowly. And then when we get enough staff, then we'll add that crew to the market.

[Jon Morrison]

Dale, is it fair to assume that you're still trying to add net employees at this point going forward then? Okay. Last one just for me, on the sand supply issues in Q1, what specifically allowed you to meet customer demand so far? Was it buying northern light volumes from storage in Western Canada? Or using more domestic sand? Or do you feel that your vendors just prioritize you versus other clients?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

It's a combination of all those things together. I think, we did -- we pulled a lot of levers as much as anything. I think our team did a phenomenal job, making sure they work with our clients. We had to move clients around a little bit. If there -- a particular client was using a type of sand that was maybe in short supply for a week or something. But between our people moving things and our suppliers really stepping up to that and supporting us, a combination of the two of those things was a big part of it.

[Operator]

[Operator Instructions] Our next question comes from Ian Gillies from GMP.

[Ian Brooks Gillies]

Can you maybe give us some detail around where your customers' well completion backlog looks like right now? I mean -- and relative to this point last year, because if I recall correctly, there is a fair number of ducks heading through the end of Q1, which really helps support Q3. And so is it better, worse, the same?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, Ian, I think the trend in our industry now going forward and this year, it was the same last year as a lot of customers drilled their wells in Q1 and then tried to complete them in Q3. So I anticipate that we're probably going to see a similar type of carryover. There was a little bit more capacity tightness in Q1 last year. So there were some customers that maybe didn't get to their program. So that may reduce it a little bit. But it's still -- there's still a lot of clients that like to complete their wells when it's warmer and the water doesn't freeze.

[Ian Brooks Gillies]

Okay. And just be clear, I mean, and that well backlog would be adjusted for the new Canyon equipment that's now in the Trican fleet as well?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes.

[Robert Skilnick, Chief Financial Officer]

Yes. So you're just saying specific to Trican, right? Like if you looked at pro forma Trican, Canyon last year?

[Ian Brooks Gillies]

Yes, does the backlog look similar on a year-over-year basis or better or worse? And it sounds like it's about the same, maybe a bit worse?

[Robert Skilnick, Chief Financial Officer]

Yes, I think it's probably where you're seeing is where we described the spot market in Q2. So some of those wells that just got pushed into April a little bit on the spot market are maybe not quite there. But as far as the planned Q3 backlog, I think, pretty similar, pretty similar.

[Ian Brooks Gillies]

Okay, that's helpful. And with respect to frac intensity, the data is so dated, down of all the databases, can you maybe give us a sense of what your customers are doing at the leading-edge in both the Montney and Duvernay, and whether that trend has started to peter out or whether it's still seeing increases?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Well, per stage basis, we're still seeing about a 10% increase year-over-year and anticipate that in '18 we'll see that as well. And our -- the leading-edge sand per well is still going up. But it depends on the play, of course. But if you go play-by-play, the Duvernay is still very high and the East Duvernay is certainly growing a lot as we go. And the Montney remains very high with a lot of clients, but I'd say some clients have stabilized in there. Leading-edge, right now, is 11,000 tons per well is what we've seen. And that's probably the highest we've seen in the Trican world. I wouldn't say all clients are there yet, but that is what some have tried.

[Robert Skilnick, Chief Financial Officer]

Yes, no, I think that's it. East Duvernay is early stages. But you're seeing 4,500 tons is probably going to be the metric there. So it's not an insignificant amount, but that play could impact demand.

[Ian Brooks Gillies]

Okay. And with respect to fluid ends and other sorts of parts, are you seeing any cost inflation there, given what seems to be the large amount of orders for new frac equipment in the U.S.?

[Robert Skilnick, Chief Financial Officer]

We haven't seen the inflation. We did have a period where oreing parts -- they were pretty long lead, but I think those long lead times are starting to shrink as the supplier has kind of backfilled their personnel. So we have not seen cost inflation on there yet.

[Ian Brooks Gillies]

Okay. And with the U.S. noncompete, I guess, ending in April, are you at a point yet where you're starting to look at that? Or is the focus over the next, call it, 18 to 24 months or however long you want to put on it, Canada only?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, 2018, we're focused on our Canadian business. I've said a number of times that we continue to evolve our strategic plan and what we look at in the future, we haven't taken the U.S. off the table but there's no immediate plans to jump into that market unless you had a customer come to you with a firm hard-committed program or something and then maybe we'd look at it.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

I wanted to circle back onto the labor cost side. Just to understand the $15 million you referenced in the documents, is that relative to what you incurred for expense in 2017 after making that field adjustment?

[Robert Skilnick, Chief Financial Officer]

Yes.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

And so would you have had in Q4 the revised effect of these labor cost changes in the operating cost side?

[Robert Skilnick, Chief Financial Officer]

Partial, partial. Yes.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

Is it possible to get any perspective of how meaningful or what magnitude of an impact they had in Q4?

[Robert Skilnick, Chief Financial Officer]

I think if you look, probably -- I don't have the number in front of me, Jeff, but it would be probably a couple of million dollars, like I'm thinking $2.5 million. Just thinking practically as to what it would've been.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

Okay. So when we look at your Q1, Q2 of '18 margins on a year-over-year basis, essentially taking half of or thereabouts of that, $15 million is a reasonable way of thinking about them?

[Robert Skilnick, Chief Financial Officer]

Sorry, maybe I'm confused, Jeff, but it's -- I think we're...

[Jeff Fetterly, Principal and Oilfield Services Analyst]

Sorry, sorry, let me clarify. So when I look at Q1 '18 and Q2 '18 on a year-over-year basis, should we be essentially adding $7.5 million to your operating cost structure to reflect the field changes?

[Robert Skilnick, Chief Financial Officer]

No. Sorry, I think we're thinking $15 million annualized. I mean, for lack of a better approach, it won't be quite divide by 4. It will be a little bit of activity-weighted since it's tied to job bonus. But that -- that's kind of gives you a flavor for how it will play out next year.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

Okay. On the pricing side, how wide is the band rate now of your price book?

[Robert Skilnick, Chief Financial Officer]

For us, it's very tight. We've basically tendered everything on a return-on-capital basis. And so you may see certainly different fluctuations in terms of the dollars per job. But for Trican's standpoint, the return on capital criteria is very tight for our clients. We don't want to have a big band there and of course, our core clients get a little bit better deal than clients that bounce around and so there'll be a little bit there, but the band's quite tight.

[Robert Skilnick, Chief Financial Officer]

Yes, the only other variation is if -- pricing is obviously higher in the high-pressure areas because your maintenance cost is higher. Whereas some of the areas with low pressures, the pricing is a little bit lighter there just from a pressure perspective.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

On a blended basis for Q1 '18, how much higher would your pricing be on a year-over-year basis?

[Robert Skilnick, Chief Financial Officer]

On an annualized basis year-over-year? I don't have that number in front of me, Jeff. I mean, if I'm thinking on a pro forma combined basis, I think it's reasonable to assume we are in that 10% to 15% annual number, it kind of plays along with where we were coming out of Q3 -- sorry, coming out of Q2 last year when we were providing that messaging last August.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

Okay. And, Dale, just to clarify your comments earlier. When you think about Q2 pricing, you mentioned that spot pricing could be lower on a year-over-year basis. Do you expect that your average blended price will be higher or lower year-over-year during Q2?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Probably, just to clarify, I don't believe that -- first of all, our committed prices are the same. So we basically have -- we haven't dropped prices in previous years. And in '17, in particular, we cut back our pricing in Q2 to push work into '17. We didn't do that this year and so I'd say our committed work is at the same price. Spot market is spot market. So if we see an opportunity that's going to be profitable and increase utilization, we may move pricing a little bit, but our intent is not really to go out there and chase work on low pricing, we'll just see how that plays out in Q2.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

Okay. And sorry, for the cumulative work, when you say it's the same, that would be consistent with Q1 '18 or Q2 '17?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Q1 '18.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

Okay. And on the crew reactivation side, when do you need to make a commitment for reactivations in the second half of the year?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Well, basically what you're going to see us do is likely get all the equipment active. So we're already bringing our equipment off the fence. And it's minimal capital to do that. We've said that in the past. So you're going to see us continue to pull pumpers, in particular, off the fence and get it into our more active fleet that may not be manned. When will we decide to man this, we're -- as I said earlier, we're continuing to hire -- to man one crew. When we start getting firm commitments in April, May time frame on potential additional work that meets our return-on-capital criteria and have some term to the contract, that's when we would ramp-up or start hiring for additional crews, whenever that may be.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

And right now, how long would you expect it would take to recruit and train a crew for the incremental capacity?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

3 months per crew.

[Jeff Fetterly, Principal and Oilfield Services Analyst]

Okay. So conceptually, the earliest that you could have additional equipment in the field would be the latter part of the summer?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes. Depending -- with the exception of that one crew that we're still hiring for right now.

[Andrew Bradford, Head of Energy Research]

Just a couple of follow-up questions. When you say -- Dale, you said your -- 15% of your business is oriented dry gas, do you see that changing through year and being more liquids-oriented in the second half? Did you mean 15% dry gas today or is that in the fourth quarter?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

15% today.

[Michael A. Baldwin, Senior Vice President of Corporate Development]

And the fourth quarter.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

And fourth quarter. So we've already shipped our customer mix over. And there's a possibility that maybe that drops back a bit as the year goes on, we'll see what the dry gas producers do.

[Andrew Bradford, Head of Energy Research]

Okay. Do you think that Trican was more exposed to customers that tended to or had a tendency to stop their programs, say, more than average? Do you think you were disadvantageously positioned customer-wise in the fourth quarter?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

It's a good question, Andrew. We don't know always where our competitors at. But I would say that there was softness and with all the frac companies in the fourth quarter because we could tell when a job came up on the spot market but there -- everyone was bidding on it. And there were some pricing discounting going on, so people were trying to fill their ports. So it wasn't just us that was underutilized. But I will say that our core clients pulled back pretty hard. So we may have been a little more impacted on the core client side because we had 3 of our major core clients that pulled their activity back pretty strong in that December time frame.

[Andrew Bradford, Head of Energy Research]

Okay. So if we look to the late third, early fourth quarter and your customer mix in concentration at that point, would that be reflective of the way it is right now? Working capital as the same customers?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, exactly, we basically kept our client list essentially the same. They pulled back and then they went back to work in late December or early January.

[Andrew Bradford, Head of Energy Research]

Okay. When you said that so far, the Q2 bookings are stronger year-over-year, did you mean they're stronger than they were Trican as a standalone or stronger than they were Trican plus Canyon last year?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Well, Canyon last year, for the most part, had mainly spot market bookings. And did very well with spot market bookings because spot were so active. And so kept their utilization very high filling the port on relatively short notice. Trican last year had a high-committed volume of work, but we did have one major client, and we messaged it a year ago -- almost a year ago that it didn't come through with our bookings last year, now the class -- so if you roll it all together, our bookings are quite a bit stronger at the Trican level. And at the Trican Canyon level, if -- not the buying company.

[Andrew Bradford, Head of Energy Research]

Okay. And just a follow-up from the question that the drilled-down completed inventory. You say there are more -- your understanding is that there are more drilled-down completed wells today than they were last year, did they get that right?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

No, we said the same.

[Andrew Bradford, Head of Energy Research]

[indiscernible] the same. Not sure the same.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes, the only thing that I did say, just to clarify that. We never really know for sure how many wells can't get down just because of capacity issues in March here. And so that will sweep the number up and down. But if you looked at kind of the committed side of it, it's going to be very similar.

[Andrew Bradford, Head of Energy Research]

Okay. And just last question from me then is are -- do any of your agreements with your customers, whether they're harder agreements or softer agreements, are these sort of last-man-standing- style agreements?

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Some of them are, yes.

[Jason Alexander Zhang, Analyst of Institutional Equity Research]

Just a quick one for me, as it relates to your NCIB, when do you guys come off blackout?

[Robert Skilnick, Chief Financial Officer]

Two days. Two trading days.

[Jason Alexander Zhang, Analyst of Institutional Equity Research]

Okay. And then when are you back on for Q1?

[Robert Skilnick, Chief Financial Officer]

So back on buying? We'll be making those decisions over the next two days. You're wondering about when...

[Jason Alexander Zhang, Analyst of Institutional Equity Research]

When does blackout start again for the Q1 period?

[Michael A. Baldwin, Senior Vice President of Corporate Development]

April 8 or something.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

April 8. Now just to clarify, there's some rules that permit to go under in automatic repurchase on your block. However, we didn't have one of those executed here for Q1.

[Dale M. Dusterhoft, Chief Executive Officer, President and Director]

Yes. Thank you very much for your interest in Trican today. We certainly wish you a good day and look forward to talking to you after our first quarter is complete. Thank you, and have a great day.