Trican Well Service Ltd

TSX:TCW

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the Trican Well Service Fourth Quarter and Year-end 2018 Earnings Results Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Dale Dusterhoft, President and Chief Executive Officer of Trican Well Service Ltd. Please go ahead.

[Dale M. Dusterhoft, President, CEO & Director]

Thank you very much. Good morning, ladies and gentlemen. I'd like to thank you for attending the Trican Well Service Annual and Fourth Quarter 2018 Conference Call. Here is a brief outline of how we intend to conduct the call. First, Robert Skilnick, our CFO, will give an overview of the annual and quarterly results. I will then address issues pertaining to current operating conditions and near-term outlook. Mike Baldwin, our Senior Vice President of Corporate Development, is also attending and available to answer questions. We'll then open the call for questions. 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 2017 AIF dated March 2019 -- 2018, and the Business Risks section of our MD&A for the year ended December 31, 2018, for a more complete description of business risks and uncertainties facing Trican. Our annual and fourth quarter results were released yesterday and are available on SEDAR. As Canadian industry activity decreased in 2018, Trican remained focused on improving our business and cost structure. This required difficult decisions to be made regarding certain service lines that were now less profitable due to changing industry dynamics. The results of these activities, combined with ongoing cost improvements, is a reduced fixed and administrative cost structure that will reduce our overall 2019 cost relative to 2018 by more than $20 million on an annualized basis. When we compare where our run-rate cost structure was in Q1 2018, the annualized savings are closer to $30 million. In combination with the Canyon acquisition made in 2017 and a related $32 million of synergies, the company's overall business and cost structure has been reduced by more than $50 million, which makes Trican much more resilient to volatile industry conditions. During 2018, we also continued to work on finding ways to reduce our idle assets, and monetized approximately $17 million worth of idle assets that were no longer relevant or required in Canada. We also activated 2 previously idled coil units, which helped our coil division significantly improve returns in the second half of the year. We will continue to review opportunities to reduce idle equipment in 2019. I will now review our fourth quarter and year-end results. Our breakeven 2018 fourth quarter adjusted EBITDA declined significantly on a sequential basis. Q4 2018 adjusted EBITDA is net of severance cost of $5.1 million and $1.6 million for fluid end cost, which negatively affected fourth quarter adjusted EBITDA. We had previously anticipated severance cost of $3.5 million. However, challenging Canadian industry conditions and an uncertain 2019 outlook required us to take more aggressive cost control measures. We anticipate that the majority of these reductions are permanent reductions to our fixed cost structure. The main reason for the drop in adjusted EBITDA was a significant decline in Canadian industry activity as our customers reduced their capital expenditures in the fourth quarter in response to declining world oil prices combined with a high differential in Canada due to a lack of pipeline capacity. The end result was a very low Canadian oil price. This activity slowdown mostly impacted our hydraulic fracturing service line. As we described on our third quarter conference call, hydraulic fracturing activity was trending down significantly, and we pumped 205,000 tonnes of proppant, a sequential decline of 48% from the third quarter 2018 levels. Pricing for our hydraulic fracturing services averaged $870 per average active horsepower on the approximate 121,000 average working horsepower in the fourth quarter. This compares to approximately $616 per horsepower in the third quarter. The change is not a reflection of pricing increases but a change in job mix with jobs weighted to customers where Trican supplied the proppant as compared to third quarter, in which a number of clients supplied their own proppant. Spot market pricing was down significantly in the quarter because of the overall low industry activity levels. We did grant minor pricing concessions to our customers in the fourth quarter. However, given the low activity levels, pricing changes had a relatively insignificant impact on fourth quarter operations and financial results. Our other service lines experienced a more typical fourth quarter slowdown in operational activity. Cement operations maintained its typical share of the drilling rig count and completed 1,338 jobs, representing only a 7.5% sequential activity decline. Coil activity remained relatively strong, as operating days declined by only 2% sequentially. Although operating margins in each of -- cementing, coiled tubing and fluid management declined, these declines were more modest when compared to the declines realized in our fracturing service line. 2018 full year results saw modest activity declines but more pronounced margin declines. 2018 results include a full year of the Canyon business, whereas 2017 included only 7 months. The company's pressure pumping services market share increased in proportion to the added equipment from the Canyon acquisition, but a decline in industry activity, particularly during the second half of 2018 resulted in only a small increase in the company's activity levels. Operationally, adjusted EBITDA was $90 million, but this amount is net of $22 million for fluid end expenses and $8 million for severance costs. Normalizing for these items, adjusted EBITDA would have been $120 million in 2018. 2017 full year adjusted EBITDA was $183 million, which was net of $18.5 million of transaction costs related to Canyon acquisition. 2018 net income was significantly affected by 2 items. The first item is a period loss on our Keane investment of $76 million. Although we have to realize $134 million of proceeds and realize gains of $66 million since we commenced our ownership in Keane, the decline in the Keane share price from $19 per share at the end of 2017 to $10.60 at the time of our final sale resulted in this more significant period loss in 2018. Additionally, the company recognized impairment charges of $134 million during the year. The impairment charges primarily relate to an impairment of goodwill in the Pressure Pumping CGU. The significant uncertainty surrounding the Canadian oil and gas business was a primary contributor to the impairment in the period, specifically dramatic discounts for Canadian oil and natural gas and the impacts of curtailment of Alberta oil production on service activity industry were key factors in the uncertainty of our forward-looking cash flow forecast. For this reason, we have recognized a significant impairment charge during the quarter. Absent these 2 items, net loss for the year would have been much more modest at $24 million or $0.07 per share. However, including these items, net loss for the period was $232 million and $0.72 per share. We completed our 2018 capital expenditure program in line with our previous expectations of $70 million. In addition, we incurred approximately $9 million to replace equipment damaged in an insured fire event. We have received part of the insurance proceeds and expect to receive additional funds in 2019. The company made significant progress in improving its balance sheet while still maintaining an active share repurchase program in 2018. We view our strong balance sheet as a strength heading into the current downturn, and we remain in a very strong financial position. We were able to improve and simplify our capital structure by expanding and renewing our credit facility and early repayment of the senior notes. We now have improved interest rates and more flexible covenants. At the end of Q4, we ended it with roughly $38 million of debt less cash and a noncash working capital balance of $108 million. Our strong financial position, combined with the recent monetization of Keane, permitted the company to make additional share repurchases at prices below tangible book value. Overall, since the inception of our first NCIB program, the company has repurchased 14% of our outstanding shares, including 4.5 million share repurchases since January 1, 2019. We will continue to allocate funds to buying back shares going forward as we monitor cash flow from our operations. However, our approach to share repurchases will be measured given the uncertainty in the current operating conditions. I'll now turn the call over to Dale, who will be providing comments on operating conditions and strategic outlook.

[Dale M. Dusterhoft, President, CEO & Director]

Thanks, Rob. 2018 proved to be a more challenging year than we anticipated at this time last year. We saw a significant decline in activity from September onward, which required us to adjust our business and reduce our overall cost structure. However, the combined Trican and Canyon businesses has removed over $55 million in cost since the acquisition of Canyon in 2017, which has made our business better able to navigate the near-term volatility and activity. We will continue to look at all the attributes for optimizing our business while we maintain our focus on overall service quality. Despite the declining industry activity levels, we were able to make some positive gains in our coiled tubing service line. Modest investments at this service allowed us to increase our coiled tubing market share during the second half of 2018. We saw this business generate 70% more revenue in the second half of 2018 and generate positive net earnings. We will continue to look at ways to activate currently idle coil equipment, so that it can contribute to positive cash flows and increase ROIC for the company. Despite declines in 2018 activity, we were still able to generate over $100 million in cash flow from operating activities. This positive cash flow, combined with the disposition of noncore assets and disciplined capital spending, allowed us to return capital to our shareholders by continuing to invest in our NCIB program. As Rob indicated, we have made substantial investments to repurchase our shares since October 2017 by buying back over 14% of our stock. I am pleased that our strong balance sheet and anticipated modest positive operating cash flow this year will allow us to continue our modest share repurchase program in 2019. We remain committed to returning funds to shareholders and believe utilization of our NCIB program gives us the best method of providing returns while adapting this investment to changing industry conditions. And again, maintenance capital program has kept our equipment in good operating condition. And based on current and anticipated industry conditions, we will have no need to invest in additional equipment in our fractioning and [indiscernible] industry service lines. Furthermore, we will only require a small amount of capital to activate additional coil units, which will improve the overall ROIC for this service line. Therefore, our 2019 capital expenditure program will be primarily focused on maintenance capital expenditures. We saw competitive industry conditions in the second half of 2018. These dynamics resulted in some significant pricing declines for Q4 fraction work and on some 2019 programs. The pricing on our fracturing jobs must not only generate positive operating margins and adjusted EBITDA but also cover our anticipated maintenance capital expenditures, in particular on high-pressure work. Pricing decisions made in the fourth quarter, combined with the reduced industry activity level, resulted in us parking some of our fracturing horsepower. Our equipment has a limited life and requires annual maintenance capital, if it is in service. Although adding jobs to contribute to covering fixed cost may be appealing in the short term, longer term return [ suffers ] equipment components must eventually be replaced at cash cost to the company. Operation decisions contributed to our lower utilization levels in the fourth quarter as fracturing utilization dropped to 44%. We have been able to work with a number of our clients to negotiate competitive pricing that recognizes the ongoing challenges they face with lower commodity prices while still allowing us to pay for our maintenance capital and generate some positive free cash flow. We are very pleased we were able to add incremental customers and retain a number of loyal fracturing customers to replace lost lower-priced work. We thank our loyal customers who are partnering with us to find the balance between a healthy sustainable service industry and a healthy sustainable producing industry in this short-term challenging Canadian commodity environment. The production curtailments in Alberta were positive and they stabilized commodity prices and significantly improved cash flow from our clients. Although we have seen some slow increases to capital programs since the commodity prices have recovered, the rig count is still 30% below Q1 2018 levels. Our cementing service line very closely [indiscernible] calcs to rig count and activity would be down about 30% in this business. Pricing has been more stable in this service line and we have rightsized this business to correct the math. Our coiled tubing service line has remained relatively strong in the quarter and should have improved the year-over-year results. We added 2 coiled tubing units to our fleet in Q4 and utilization of this service line has been tracking our fracturing service line at around 75% in the quarter. Again, pricing in this service line has not been impacted as much as that of fracturing. We continue to have parked coiled tubing assets that could be activated with little capital and we will look for opportunities to generate acceptable returns from adding this equipment into the market. Given the lower activity levels, we have taken steps to align our fracturing fleet size to the changing industry demand. As we saw the market begin to soften in Q4, we reduced the amount of crude horsepower. We are fairly running 10 fracturing crews, which is only down by 1 crew relative to the second half of 2018. Our current work scope, however, is characterized by less, large pad work and smaller jobs. In addition, much like we saw in Q3 of 2018, we are seeing more moves and rig updates, which will lower utilization on the 10 crews to approximately 75% from the 90%, we would've seen in Q1 of last year. With our current complement of crews and anticipated jobs filled, we expect to average 225,000 active horsepower in the quarter, a sequential increase from the Q4 average of only 121,000 active horsepower but a year-over-year decrease from average of 322,000 active horsepower. While our bookings are at 95% on all 10 crews from mid-January to mid-March, the biggest factor that will impact our anticipated Q1 average active horsepower and fracturing results is how far into March our customers decide to work, which will be somewhat dependent on weather. Overall, the increased quality and price environment has improved utilization of our fracturing business in Q1 from what we anticipate that it would be at the start of the quarter. Presenting activity levels beyond Q1 remains challenging, and our current view is that 2019 will still be a tough year. Pressure surrounding pipeline constraints in Western Canada have resulted in our customers being very cautious and undisciplined with capital -- and disciplined with capital plans and, therefore, the industry environment is very dynamic. However, we do believe that current commodity prices would support increased activity levels in the basin and discussions with clients would lean to increase programs rather than decrease programs from the original plans. We will closely monitor our customers' plans to ensure that our overall business and cost structure is reflective of their changing plans. Fracturing pricing has stabilized at levels above Q4 spot market pricing, although it is down from exit Q3 at early Q4 contract pricing. It is difficult to predict how pricing may evolve beyond Q1 given the lack of clarity on second half of 2019 capital budget of our clients. However, we believe the down rig trend in overall industry fracturing equipment supply is a part of our pricing stability. We are not announcing our formalized 2019 capital program, but instead, we'll be [ improving ] our capital budget on a quarterly basis. Our capital expenditures will vary with activity and, therefore, we estimate our Q1 capital expenditures will approximate 5% of our revenues. Given the industry volatility, we will remain disciplined in our capital spending, which is expected to be limited to required maintenance capital and clinical infrastructure upgrades. Minor investments may be made into growth capital items, if it will provide an immediate payback to either reduce costs or increase utilization. Despite the ever-changing market, our primary goals for 2019 remain relatively unchanged. First, we will continue to focus on ways to improve returns on our equipment through increased utilization and efficiency that generates acceptable ROIC for the company. We have a lot of idled equipment that we need to get back into the market at acceptable returns. Second, as I've already mentioned, we must continue to reduce our cost through all our avenues, including our lean efficiency program. Part of us helping our customers is finding ways to reduce the cost of their wells, which includes the reduced -- which includes reducing the cost of our services without reducing our margins. We have a number of lean initiatives underway, which we believe will further reduce our cost and make us more efficient. We will continue to look for innovative ways to optimize our business while also exercising tight cost controls throughout all levels of the company. Last, we will look at ways to grow our revenue. In line with the modest investments we made in our coiled business, which has improved profitability, we may look at similar opportunities in this service line and our other smaller service lines, which will improve returns from these businesses. Our strong financial position affords us the flexibility to look at these opportunities, but any investments will require quick financial return and a long-term improved ROIC for the company. I want to thank all of our staff for continuing to be safe and proactive in their jobs. To our field people who work under difficult weather conditions, particularly in this quarter, know that we appreciate your dedication to quality and safe work. To all of our support staff, we appreciate the continued pursuit of improving the business, providing great service to our clients and reducing our cost by becoming more efficient. These are unique and challenging times in the Canadian energy industry and it is inspiring for us to see our people's dedication to both our business and the industry. Lastly, I want to thank Murray Cobbe for his 23 years of leadership at Trican. I have had the privilege of working with Murray over this whole time and he has been a tremendous leader for the company and a mentor to a number of us. He guided Trican from a small regional cementing company with 9 trucks to the largest pressure pumping company in Canada that is respected by our clients, suppliers, our people and the industry as a whole. We wish him all the best in his retirement from our board. 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, Holt.

[Taylor Zurcher, Director of Oil Service Research]

Dale, it's obviously been a tough environment over the past several months and pricing has clearly trended lower. My question is, it sounds like pricing has stabilized at least a bit here in Q1. Could you frame for us, at least in percentage terms relative to Q3 of last year, where we sit today in terms of average pricing across your contract book for Q1? And maybe if there's a delta high to low, how wide that pricing delta is for your book of work that you have for the first quarter?

[Robert Skilnick, Chief Financial Officer]

It's a pretty -- Taylor, it's Rob here. It's a pretty dynamic environment, so we wouldn't have an exact percentage for you, I think. And given how low activity was in Q4, it's really difficult to quantify in percentage terms there for that so -- relative to the fourth quarter. So it's down, we'll call it, modest declines, as we've noted. I think the one thing that we are seeing, Taylor, is stability in pricing now. So for the most part, most of the pricing gyrations happened in Q4 and on -- some in 2019 work. But as we got into 2019 first quarter, we see some stability now and haven't really seen anything too crazy through the start of '19.

[Taylor Zurcher, Director of Oil Service Research]

Okay, understood. And a quick follow-up there. I know some of the pricing changes sequentially, albeit from a revenue per horsepower base -- on a revenue per horsepower basis were due to the changes in sand mix. Looking forward, almost all your sand was sourced internally in Q4. Should that normalize back to kind of the 50% range at least in Q1?

[Robert Skilnick, Chief Financial Officer]

Most of this -- most of our work is going to involve Trican purchasing and reselling that sand. So it will be virtually 100% Trican supply sand, I think, going forward.

[Taylor Zurcher, Director of Oil Service Research]

Okay, got it. And I'll squeeze one more in. As we think about free cash flow for 2019, I know the crystal ball is really fuzzy beyond -- really beyond Q1. But -- and you're not providing a full year budget yet, but as we think about some of the moving pieces as it relates to cash flow in 2019 for CapEx, would 5% of revenues be a good run rate to use over the back half of the year? And then how should we think about the potential for working capital to be a source of cash next year -- or this year?

[Robert Skilnick, Chief Financial Officer]

We had a pretty good unwind of working capital, given the slowdown late in Q4. So I'm not sure we'll have a massive release this year. It probably is going to stay relatively flat, I would guess. From a CapEx perspective, I mean, 5% is a sort of a general way to look at it, and that's how we're viewing this indication here in the first quarter, as Dale mentioned in his conference call notes. So that's as good a place to start as any, but we'll be -- it'll be pretty dynamic, so we can tweak that down further if we need to or if we saw some kind of rebound that was more abrupt, and obviously, tweak it the other way.

[Operator]

Our next question comes from Sean Meakim with JPMorgan.

[Sean Christopher Meakim, Senior Equity Research Analyst]

So it sounds like maybe the spot market or the marginal job has -- the market for that work is [ sailing ] out a little bit. Is there anything you'd call out in terms of competitor bidding behavior that surprised you? And just curious how you're seeing your peers' approach to fleet stacking, how that contrasts with what you are doing and just thinking about the [ research ] to how you're viewing the market beyond the first quarter here.

[Dale M. Dusterhoft, President, CEO & Director]

Yes. I would say, in Q1, because, as I said earlier, the pricing stabilized, there's no real surprises on pricing now that we're into the quarter. Most of the surprises came early into Q4, when things were kind of falling off pretty hard. In terms of supply/demand within the base, and we're actually -- our belief is that once we got through kind of the start of January, for the most part, the industry is at a balance point for active capacity with all the service companies and on what they chosen to run. I can't comment on what other companies are running. We know what they have nameplate, but we don't always know what they have staffed. And so I would say that we are in a balanced state right now. I believe that what we're seeing kind of full year '19 will be service companies adjusting their active equipment to -- either by transferring it out of the basin and/or not staffing it to balance the market for the second half. That's kind of what we're seeing and what we will be doing as a company as well.

[Sean Christopher Meakim, Senior Equity Research Analyst]

I appreciate that. That makes sense. If you think about moving in the second quarter, leaving aside [ weather and all the unknowns around ] breakup, given the mix of work that you've seen in the last couple of years during the second quarter, where you now to keep good utilization, you contrast that with some of the challenges you're seeing in the first quarter. Could you help us -- should we expect to see improved job mix in the second quarter as a result? Or could you give us a little bit of the puts and takes from here or there, again leaving aside the obvious seasonal unknowns?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. So April and May, I would say, our bookings are about 3 of our 10 frackers committed right now but we're also working on some other things that could push that up a bit. And so we've been able to replace some of the second quarter work we have in the past with additional or new clients that will get utilization on our fracturing service line up a bit. The -- June will be hard to say. It's a bit of a weather quarter. But right now, I'd say we're kind of 7 of 10 crews committed and working to get that 10 of 10. That will be weather-dependent as to when that all kicks in. If you looked at it, year-over-year, the type of work we're doing is going to be a little bit less utilization than we would have seen last year in the second quarter, even on the active crews, and that's due to the type work we're doing is a little more moving and raking up again, which was being kind of consistent with what we're seeing in Q1 as well. Where last year, we had to be sitting on pads churning a little bit more with no moves and pumping 28 days out of a month. And so we'll be affected by that a little bit, which will lower us a little bit on our overall utilization of those crews. It's -- there are some clients that are going to do some Q2 programs and there's still probably a little bit of opportunity to add some more work back in there.

[Sean Christopher Meakim, Senior Equity Research Analyst]

That's exactly the type of context I'm looking for. If I could add just one more piece to that. As you look towards the back half, plenty of unknowns, especially in the commodity side that will dictate where activity goes. When would you say is that point in time where you think you'll get third quarter work really firmed up? Is it that traditional May time frame? Do you think your customers maybe more reticent to make those commitments in that time and look for more commodity price discovery? Just how do you think about that traditional cadence unfolding this year?

[Dale M. Dusterhoft, President, CEO & Director]

Yes, we would have -- some of our clients that are -- I think, we have a lot of confidence that they're committing to the full year work scope with us. So the 7 of 10, I'm giving you are clients, that we have quite a confidence that they can always change. They will change if commodity prices crashed or something. But I think we have confidence that they're going to deliver on their programs. And the others, yes, it's -- there's a lot of quarterly bunch of it going on. So it's in that May bunch, May board meeting time frame where boards will actually confirm program. So even the 7 of 10, I will say board still have to confirm programs even though we have confidence and that we still want to see confirmation of actual wells that we -- when we get the actual well on our schedule, that's when we say we're officially put on our crews.

[Operator]

Our next question comes from Josef Schachter with Schachter Energy Research.

[Josef I. Schachter, Author & President]

A couple. First, to comment. I was a shareholder in the early days of Trican with Murray. So please send my best in his retirement and thank him for all he did to build the company up to its heyday success. The 2 questions. First, Dale, if we see -- I mean, of course, sloppy conditions in Q2, Q3, and then the price of oil is almost a reverse of 2018, and we have better prices in the fourth quarter of 2019, how quickly with the manpower changes that you've had of lowering staff? How quickly will the training be? And could end on a $65, $70 WTI, and $2.50, $3 equal environment in Q4. How quickly could you mobilize your crews and get the staffing up, so that you would take advantage of hopefully, a positive swing?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. I can only -- if I use kind of coming out of 2016 time frame as model, which probably is, the first 2 -- say 2 crews, maybe 3 crews, you can staff relatively quickly because there's people available that are relatively well trained past that, you're looking at about 1 month of training because you start to bring new people back into the industry. That's a qualitative statement because you never know how many people leave your industry during a downturn. But traditionally, there's kind of a pool of people that you can bring on for, I'd say, a couple of crews relatively quickly.

[Josef I. Schachter, Author & President]

Okay. The second question for Robert. The write-down that you did in goodwill related to Canyon equipment, given that your own equipment has also had valuation impairment, given what's going on in the industry, why wouldn't you've taken the full goodwill and written it totally off? You have a very strong balance sheet. Removing that, of course, would mean lower depletion and amortization going forward. Why wouldn't you have gone and knocked off the full goodwill component?

[Robert Skilnick, Chief Financial Officer]

I think we're just looking at the forward-looking model and yes, they can be tweaked and adjusted. And certainly, when you look at our range of possibilities, you can get from a very low impairment to a very high impairment. We think we went with our best estimates at this point for our discounted cash flow calculations, given the uncertain time we're facing right now. So we'll continue on that process of making our best estimates and our next goodwill impairment assessment is due 1 year from now unless conditions change.

[Operator]

Our next question comes from Anthony Linton with National Bank.

[Anthony Linton, Associate]

So 2018 being the first full year of the new accounting policy for fluid, and I was just wondering if that $22 million that expensed on $900 million of revenue, so that's kind of representation of the activity level or how should we think about that going forward as a run rate?

[Robert Skilnick, Chief Financial Officer]

It should be pretty close. I will caveat it with one item. We did have a lot more high-pressure work in 2018 than we're currently anticipating for 2019, so it might come in a little bit. But it's -- but generally, the industry trend is to more high-pressure work, so it's probably a good estimate.

[Operator]

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

[Ian Brooks Gillies]

You provided some detail around maintenance CapEx, call it, 5% of revenue in the first quarter of 2019. But I mean, it's been quite some time since newbuild equipment came forward. And so I mean, how are you think about major equipment overhauls versus, I guess, prescriptive maintenance at this point in time just given some of the changes and I guess, frac demand in the basin? What's required of equipment?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. Basically, right now, our equipment as we probably messaged about a year ago, last year, we spent capital getting all of our equipment up into the active fleet. And so we were rotating it through, and so we don't have any backlog of maintenance capital or anything like that on our equipment. In terms of refurbishments and rebuilding on that, there's no need to do that based on current activity levels and probably don't see a need at all for 2019. We still have a lot of refurbished and newer-type equipment that we've build -- certainly meets the needs of the basin. If we got to a point of increased activity level in Canada and by increasing to the levels, it may be even up to 2017 levels, you're going to start seeing us getting into an annualized refurbishment program or we're -- obviously, the number has been $30 million to $50 million a year. I'm ensuring that we don't have a big -- on refurbishing equipment, so that we ensure we don't have a big wave of equipment coming through, and we'll just have an annualized program of always kind of upgrading the oldest equipment, so that -- as long as the market is in there, returning capital then it's justified.

[Ian Brooks Gillies]

Okay. That's helpful. I guess, somewhere along the same lines. I mean, if you look where active horsepower peaked out in what was either idle or unmanned through the past cycle and there seems to be some spare capacity in Western Canada. And so are you able to perhaps provide a bit of an update on how you're thinking about, perhaps, generating some returns on that idle equipment and whether any of your customers are perhaps looking to pull you down to the U.S. at this point in time, even if it's pretty close to the border?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. I would say that, at the moment, the issue with the U.S. market is it's been a falling knife on prices. Prices have been deteriorating there as well as you can read from reports down there. And so it's sometimes difficult to enter a market where pricing is dropping quite quickly, so things can stabilize. So nothing imminent. We continue to monitor it. We are focused on getting returns from our assets long term, and we'll look at opportunities. But I would say that U.S. fracturing market in particular is a bit of concern just until it stabilizes. There are some other areas of the U.S. where other service lines -- our pipeline industrial division has some opportunities in the U.S. We may have some opportunities in a few other service lines to do something there. But I'd say that was -- there's nothing imminent there either.

[Ian Brooks Gillies]

Okay. And then -- I mean, with the change in Chairman, I mean, Brad's obviously been on the board for some time here. But should we expect any philosophical changes in deployment of capital? How capital is used? Or changes in strategic direction just given what's occurred?

[Dale M. Dusterhoft, President, CEO & Director]

No, not at all. The board's been aligned on this for -- since Brad came on the board and -- yes. Even before that, but it basically -- yes, there's no changes at all on that direction. We've been aligned for some time on this.

[Ian Brooks Gillies]

Okay. And then -- sorry, I'll just sneak in one last quick one. I mean, obviously the go-forward estimates are volatile at the best of times. But in the context of the buyback, I mean, where do you continue to think maybe net debt to EBITDA or debt to cap metrics should be hanging out in an effort to try and maybe ascertain what's the comfortable amount of buybacks for 2019?

[Robert Skilnick, Chief Financial Officer]

It's really fluid, just depending on how we're -- how the industry environment's moving and we're -- so we -- if we look at net debt to total tangible capitalization, that was something that historically, once you got above 25% in a volatile environment is something you had to really monitor. We're obviously well under that today. That doesn't necessarily mean we're going to chase things up that direction, but it's that high either, but it's something to sort of think about in a general term. But it's -- that number can move really quickly, too, as the industry environment changes, so you've just got to stay on top of it.

[Operator]

Our next question comes from Jon Morrison with CIBC Capital Markets.

[Jon Morrison]

I realize on the pricing side, it's fluid and you don't want to say too much, but just broad strokes when you think about 2019 versus 2018, is there any kind of rate of change that we should be thinking of -- thinking about at a high level as we think about forecasting your business?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. Well, I think, if you looked at the rate of change in the second half of '18, it was substantially down. And it's much more stable now, so we're seeing kind of flattish bouncing around, around a certain level of pricing right now. It's really hard -- as we said in the script, it's really hard to forecast what our competitors are going to do in the second half of '19, but that will be very dependent on supply/demand in the basin and our customers' activity levels. So we can't really forecast that. I do get the feel, on a general basis, that all of us are on a level that we can't sustain a lot lower pricing and run seems -- we seem to be bouncing around at a level that we can't go much lower on. You never know for sure, but I do get that read from our competitors and we certainly feel that we're actually too old of a level and really to increases our prices at some point of time to run a sustainable business.

[Jon Morrison]

So is it fair to say then flat sequentially from here is the base case, which applies down decently year-over-year in the front half, but more flattish in the back half from a year-over-year perspective?

[Dale M. Dusterhoft, President, CEO & Director]

Yes, if we stay flat sequentially, that's exactly where it will start narrowing up and basically, I guess, in Q4, it could potentially even be a little bit better than of Q4 of last year because we had just a slight improvement. But so we'll see. It’s going to be fluid. I'll be honest with you. I actually think you're going to see -- the visibility on the set, Matthew is so fuzzy, you're going to see us change our view as we get budget based on what we're seeing, so it's a continuously dynamic environment.

[Jon Morrison]

I realized that it's tough to forecast at this point, because ultimately, you're kind of getting bimonthly budget reloads at this point. But when you have customer conversations and talk to them about what you're going to need to do from an equipment and staffing perspective, is there anything you're seeing at this point? Or they're just going it is what it is? There's not much guidance we can give you and gut check? What would you expect to happen in the back half of the year? Is it fair to assume that the 30-ish percent down that we're sitting at today feels like the right number to be down year-over-year in the back half, or that's too aggressive?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. I guess, 2 parts to that question. One is that, we have a lot of different clients and if you went through kind of the 7 clients -- 7 of 10, we've been slipping our fractioning business. So the 7 of 10 that we have commitments on, both clients are certainly understanding that of us having a sustainable business. And they're excellent clients. I thank them all the time because they get that there's got to be a service industry that's healthy, and so they don't beat us up right to bottom dollars. And so I think that's one thing that there is an understanding between the clients and Trican that we need to generate some positive, small but positive cash even in this environment or a positive free cash. And then the second part of it is, at the moment, that 30% down or 25% down is probably as good as anything we have. If you look PSAC forecast, which is the industry association we belong to, they're sitting 25%-ish down on wells year-over-year. So I would say that's a number that maybe kind resonates that we're kind of hanging our head on for budgeting purposes right now and fully anticipate to read and react to that though.

[Jon Morrison]

There's obviously been deflation in the cost structure as well, removing just the employee side that you guys talked about. When you think about the supply chain side, can you give any directional comments on what those inputs have come down recently, including sand, and other?

[Robert Skilnick, Chief Financial Officer]

Directionally, there has been downward pressure on some of the input prices. I would say that, from our perspective, that it's generally been a -- we've been able to pass those savings on to our customers to a certain extent. So I think that's generally what we're seeing. So any of those potential input savings probably don't affect our internal model too much at this point, Jon.

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

Jon, it's Mike. Just to add a little bit more color to that. When you start talking about chemicals and parts and that type of thing, you really have to view the market, not as a Canadian market, but as a North American market. So we have seen some cost savings and we push for that on that front because of that state of the market and our suppliers have been pretty good about that. But at the end of the day, they look at it and say, we're busy in the states and we're still in a lockdown there. So there's only so much cost improvements that we can get on that front. So even though it seems like the U.S. markets is softening a little bit, it's still pretty active. So we're going to continue to push to try to make sure that we've got as lean a cost structure we can on that front. We're not, at this point in time, expecting a real meaningful drop beyond the sand side of things.

[Jon Morrison]

Okay. That's helpful, Mike.. Seasonal discounts, are they effectively largely off the table for Q2 just given the starting point that we're at?

[Dale M. Dusterhoft, President, CEO & Director]

It depends on the clients and the volume of work but you may give a volume discount in Q2 if it's a significant customer.

[Jon Morrison]

Okay. Just in terms of the small investment opportunities on the equipment side that you guys had talked about possibly hitting your hurdle rates, what type of things would those be? Is that largely just the coiled stuff you've talked about in the past? Or is there other opportunities that you're looking at?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. It's primarily the 12 things that we're looking at. It depends on where pricing is on that service line. But right now, I'd say there may be some opportunities in '19 to add 2 more coiled units to the markets that will be in our plans as you take a little bit of modest incremental capital to get them off the shelf and up working.

[Jon Morrison]

Maybe just one last one for me. Dale, where's your head at for service line diversification at this stage? And does it make sense to look at creating more diversified platforms in Canada to handle some of the challenges that are in front of us? Or it's pretty hard to contemplate doing that, just given the dichotomy and price expectations at this point?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. Strategically, we said for sometime that we want to diversify our service lines and have less -- basically less reliance on cyclical service lines to just track the drill bit. So strategically, over the long term, say, over the next 3 years, with Trican that's the direction we do want to go. In this type of environment, when you're just watching every single dollar that comes in and out, you're more cautious on taking on anything, so I'd say at the moment, we're quite cautious about doing an acquisition or anything like that that's any size. We may do some small tuck-ins into one of our smaller service lines that give us a little more diversity. The service line that we've said that we have it in the company now that we said that we do want to grow, that is countercyclical to some extent is our pipeline industrial services, which is pipeline integrity testing and doing work with in heavy oil facilities and power facilities on that. And that business, we believe, is one that does give us that diversity, that eventually could be a meaningful size as well. And so we will commit to organically growing that business this year, and potentially spending a little bit of capital in it.

[Operator]

Our next question comes from Dan Healing with the Canadian Press.

[Dan Healing]

I just wanted to see if I could get some detail on the $5.1 million in severance that's being announced in the fourth quarter. How many employees does that represent? And what is your headcount as of year-end versus the end of the year in 2017?

[Dale M. Dusterhoft, President, CEO & Director]

That was about 160 people across the whole company that we would have had since kind of late Q3. And so it's something in that range. And then the headcount year-over-year, January, January, I don't have that exact number, Dan. If you just give me a call offline, I can probably get you that. I'll give you some kind of idea there.

[Dan Healing]

Okay. Sounds good. I think you said that you have 10 fracking crews that are operating now. How many do you have that are parked that could possibly be added if things change?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. Well, it's depending on the size of the crews. But if you looked at horsepower, we have a substantial amount of horsepower parked in the range of 400,000 horsepower. That's on an active basis. And so we have capability to double that amount if we ran small crews, but probably, 15, 16 kind of normalized size screws is very reasonable for the company.

[Dan Healing]

And that's how many are parked?

[Dale M. Dusterhoft, President, CEO & Director]

No, that's where we could be. So we'll have 5 or 6 parked.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Dale Dusterhoft for any closing remarks.

[Dale M. Dusterhoft, President, CEO & Director]

Yes. Thank you for interest in Trican, and we certainly look forward to talking to you again in our -- after our Q1 results are released. Thank you, and have a great day.

[Operator]

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