This morning, Calfrac provided an operational update and Q3/22 guidance that beat expectations. Since Q2 ended, CFW has experienced improved net pricing and increased utilization throughout all regions, contributing to a large beat on EBITDA consensus. The full quarter will be reported in the first week of November.

For Q3 (ending Sept 30), management is guiding for:

• Revenue of $400-430M vs. consensus of $403M, representing a 35-45% YoY increase

• Adjusted EBITDA of $75-85M vs. consensus of $62M, representing 111%-139% YoY growth

• Adjusted EBITDA margins of 19-20%

Regional Commentary

As for the U.S. segment, management guided for margin expansion and strong financial performance in Q3. The U.S. market is becoming increasingly tight, allowing CFW to increase prices beyond the inflationary input cost increases. Management highlighted that return on capital employed is beginning to approximate the value of the services provided. We think that this commentary along with the EBITDA guidance easily leads to $20M EBITDA/fleet in the U.S. (which management pointed to in its previous outlook). Similar to the U.S., the Canadian segment experienced improved pricing and utilization in Q3. As for Argentina, management is expecting significantly improved utilization in Vaca Muerta due to a renewed contract. In the past month, CFW set a divisional record in Argentina, pumping 19 hours in a day and is now consistently pumping 16 hours per day. Calfrac expects enhanced financial returns in the Argentina segment for quarters to come (in line with management’s commentary on the Q2 conference call). Corporate Updates CFW’s main capital return priority is to deleverage the balance sheet. Management highlighted that its TTM debt to EBITDA is expected to decrease from 2.75 to below 1.00 and that the Company has initiated discussions with its lenders to renew its credit facilities. The other two corporate priorities are to provide safe and efficient job execution and to reactivate idle fleets into profitable areas to generate additional FCF.

Valuation

Assuming CFW activates four more U.S. fleets by 2023, Calfrac trades at 2.7x 2023E EBITDA compared to its peers at 3.3x 2023E EBITDA. The discount does not make sense to us given that CFW has hit an inflection point where its operating metrics are in line (and in some cases exceed) peer levels. We think that the current consensus of $250M in EBITDA is too low given that management has been comparing the current environment to 2017/2018 when CFW posted $300M+ in EBITDA using the same assets (which it also posted in 2011 and 2014). While we think the entire oil services market is undervalued, CFW remains a key standout due to the upside to the current consensus and multiple. If CFW were to trade back to a mid-cycle multiple of 6x EBITDA, the stock would be worth over $15.00/share.