Description

Energy. Services. Canada. I imagine those three words alone will cause most of you to stop reading. And while I’m by no means crazy enough to pitch the equity as a value idea, I think Calfrac’s 2026 debt provides compelling risk-reward. At $67.50, this 8.5% piece of paper is trading at a 16.6% YTM and with a 12.6% cash yield.

CFW is a pressure pumper with roughly 65% of it’s fleet in the US, 25% in Canada and 15% Internationally (Russia & Argentina). It ranks as the 10th largest pumper in the US. With 879k HP, it would rank between CH & ProFrac in the chart below (I’m not quite sure why Keane left CFW out when making this chart).

The troubles with OFS industry are well established. Energy is dead, E&Ps have no access to capital and capex budgets are coming down. While I’m not disputing that the macro outlook is terrible, we think the bonds are currently pricing in more than worse case scenarios.

CFW has a C$260m mcap and C$930m of ND against LTM sales of C$2.15bn and adj EBITDA of C$300m. The capital structure is relatively simple. They have C$100m drawn on a C$347m revolver and US$650m Sr. Unsecured Notes (the investment opportunity). The bank line is more than covered by working capital, leaving a lot of cushion for note holders. As of March 31, CFW had C$276m in w/c. Ignoring everything else other than cash, A/R & A/P, CFW would still have C$136m in w/c, which again more than covers the bank line that is Sr. to noteholders.

While macro sentiment is terrible, the reality is that WTI is still at $56/bbl and the rig count is back to 2017 activity levels. Barring a collapse in oil prices back to the 2016 lows, CFW should continue to generate positive FCF. Yes, the financial track record is not great and there isn’t a ton of FCF in the biz, but as noteholders that doesn’t really matter. At current levels you have 1) equity cushion, 2) working capital cushion, and 3) hard asset value protecting you in a work-out scenario.

 CFW last 3 years

I think the most probably scenario is we have to wait 7 years to get our par value back. But what are some of the catalysts that could come sooner? I wouldn’t rule out asset sales that could be used to pay back debt. The Wilks brothers (OFS billionaires, see here) own 19.9% of CFW shares and have been angling for change for awhile. Maybe they would buy the US assets off CFW? Chairman Ron Mathison also owns 19.9% and I would have to think he’s willing to right cheques in order to prevent a wipeout of his equity. Also, let’s say oil activity doesn’t go to zero, CFW will generate modest FCF that could be used to repurchase debt in the open market. Another extremely remoted possibility is that CFW calls the bonds in June/21 at 106.375, which would be a 36.6% YTC at current levels. Although for this to happen CFW would have to be able to refi at better than 8% coupon to make it worthwhile (8.5% on 106.375).

Bottom Line: Energy services is a terrible biz and has huge swings in the P/L. CFW has a lot of leverage and much like the rest of the industry, consensus numbers are probably way too high. But with the bonds trading at $67 a lot has to go wrong for bondholders not to get repaid in 2026

Catalyst

-oil doesn't go to zero

-CFW decides to sell some assets