STEP Energy Services Ltd. (SNVVF) Q4 2022 Earnings Call Transcript

STEP Energy Services Ltd. (OTCPK:SNVVF) Q4 2022 Results Conference Call March 2, 2023 11:00 AM ET

Company Participants

Dana Brenner - Investor Relations

Steve Glanville - President and CEO

Klaas Deemter - CFO

Conference Call Participants

Cole Pereira - Stifel

John Daniel - Daniel Energy Partners

Waqar Syed - ATB Capital Markets

Andrew Bradford - Raymond James

Operator

Good morning, ladies and gentlemen. And welcome to the STEP Energy Services Fourth Quarter and Year End Conference Call and Webcast. At this time, all lines are in listen only mode. Following the presentation, we’ll conduct the question-and-answer session [Operator Instructions]. This call is being recorded on Thursday, March 2, 2023.

I would now like to turn the conference over to Mr. Brenner, Advisor, Investor Relations. Please go ahead.

Dana Brenner

Thanks, operator and good morning, everyone. Welcome to STEP's fourth quarter and year end 2022 conference call and webcast. The quarter capped off a terrific year for the company. I am pleased to introduce today's roster of speakers. Steve Glanville, our President and CEO, will give some opening remarks. Klaas Deemter, our CFO, will follow with an overview of the financial highlights before turning it back to Steve for some strategy and outlook focused commentary. We will host a Q&A session to follow. Before I turn it over to Steve, I would like to remind everyone that this conference call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our Q4 2022 MD&A. Several business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to the Risk Factor and Risk Management section of our MD&A for the quarter ended December 31, 2022 for a more complete description of business risks and uncertainties facing STEP. This document is available both on our Web site and on SEDAR. During this call, we will also refer to several common industry terms and certain non-IFRS measures that are fully described in our MD&A, which again is available on SEDAR and on our Web site.

With that, I will pass the call over to Steve.

Steve Glanville

Thanks, Dana, and good morning. Thank you for joining our year end 2022 conference call. As noted, my name is Steve Glanville, and I am the President and CEO of STEP Energy Services. We will be providing an operational update and commentary about our Q4 and full year results. By now, hopefully, you have had the opportunity to look at them. The year 2022 set new records for revenue and adjusted EBITDA and interestingly, each of the quarters showed a different stand of quality on what makes STEP successful in the pressure pumping and coiled tubing space. Our first quarter featured our return to profitability, which reflected years of balancing continued investment in our people and equipment with strong cost management along the way. The return to profitability happened more quickly at STEP than with many companies in the energy services space. Our second quarter showed the power of our field efficiencies when working with Western Canadian clients on large well planned pad based programs. It was one of the strongest results for a second quarter that I've seen in my 30 years in this business. This was during a period of extreme inflationary pressures, something that our sales and supply chain professionals did an excellent job at managing. Our third quarter showed further evidence of our strong operating efficiencies by achieving even higher consolidated adjusted EBITDA than Q2, and that occurred on a modest tick down in revenue. It is very unusual for pressure pumping company to achieve this given the fixed cost in the business.

We also made an important acquisition of four ultra deep capacity coiled tubing units in the premium and we also announced a novel funding arrangement for a tier four dual fuel frac fleet upgrade, one backed by a $10 million prepayment from one of our major clients. Finally, our fourth co quarter showed the power of the North American business model where our US well fracturing and coiled tubing business units both put up record quarters on a revenue and adjusted EBITDA basis. Thinking back to the full year, our achievements support the notion that pressure pumping is a project based business. It is rare for everything to go perfectly all at the same time. What you'll often see is that a sound company and business model will show different strengths at different times, which is good for all shareholders. I liken this year's performance to a hockey team that wins a championship or at least goes deep into the playoffs. A successful team needs everyone to contribute and needs scoring from all four lines. We scored from all four lines this year from both the US and Canada and in both fracturing and coiled tubing. We have entered 2023 with a different set of opportunities and challenges in front of us, but I genuinely feel that we are in great shape to face them. Before I address our outlook more specifically and take questions, I want to hand the call over to Klaas Deemter, our CFO, to go over our financial highlights of the quarter and full year.

Klaas Deemter

Thanks, Steve, and good morning everyone. Before we start, a quick reminder to listeners that all numbers are in Canadian dollars unless noted otherwise. So our consolidated revenue in the quarter was CAD251.4 million, the second highest quarter in our history. Our four quarter’s revenue was just slightly under $1 billion, a truly impressive achievement accomplished by everyone who works at STEP. Approximately 76% of this revenue was in facturing and the remaining 24% was in coiled tubing. Turning to consolidated adjusted EBITDA. STEP posted CAD48.6 million in Q4 as compared to the roughly CAD58 million in Q3 and CAD55 million in our exceptional Q2. For the full year, STEP earned CAD198.9 million in adjusted EBITDA, more than 3 times the CAD63 million that we earned in 2021. Our consolidated adjusted EBIDA margin was 20% for the year versus 12% last year. Great progress, although, we feel that the best days are still yet to come. Now turning to the geographic regions and provide more color on a solid quarter and a very exciting year overall. The full detail is in our MD&A, so I'm just going to hit the important highlights. And given here a record quarter that we had in the US, I'll start there. The US had a revenue of CAD136.6 million, which is up 31% versus Q3 2022, while adjusted EBITDA of CAD28.6 million is up 38% sequentially. Adjusted EBITDA margin was 21% in the US for Q4, up from 20% in Q3. The fourth quarter in the US was our best quarter ever for both of the business units, frac and coiled tubing. For context, the Baker Hughes land rig count was up 2% sequentially while the US fracturing activity was also up 2% sequentially, according to Rystad Energy Facility firm.

Full year results were similarly impressive with segment revenues of CAD421.2 million, up 136% year-over-year. Full year adjusted EBITDA in the US was CAD79.6 million, almost 8 times higher than the 2021 level of CAD10 million and demonstrating the earnings potential in our business model. US frac revenue in Q4 was CAD97.7 million, up 44% from Q3 levels and up 20% from our very strong Q2. Fracturing operating days increased to about 31% sequentially. Proppant pump was up 27%, while the number of stages was up 16% versus Q3. Stepping back a little, the largest factor in the growth of our fracturing service line is on the pricing side. Consider that full year US frac operating days are up around 20%, proppant pump was up 22% while US fracturing revenues overall were up about 170%. Another factor in the substantial year-over-year growth was the amount of tight supply of proppant. For 2022, this proportion was 49% of total volumes pumped while in 2021 was 36%. Strong US coiled tubing performance also contributed nicely in Q4 and the full year. As told earlier, US coiled tubing had its best top line fourth quarter with revenue of $38.9 million, up roughly 7% from Q3 2022. Operating days are roughly flat sequentially but pricing notched higher. On a full year basis, the acquisition of the four Permian based deep, ultra capacity coiled tubing units in September 2022 increased our scale and allowed operating days to rise almost 37% over to all of 2022 versus 2021. This acquisition enabled us to put 12 coiled tubing units in the field today and it's also important to note that this acquisition was from a US pressure pumping competitor that took STEP equity in the transaction, something we saw as a good endorsement of where we're headed as a company. Full year coiled tubing revenue was $412 million, up 80% versus 2021 and reflective of the better pricing in addition to higher operating days.

Turning to Canada. We had a bit of a mixed fourth quarter. Q4 can be a tough quarter as clients begin to wind down their capital programs. And without a strong commodity price prompt to pull capital forward, activity can start to slow in December, if not sooner, at times. We saw this in our business but also in industry stats. The Canadian rig count was down 7% versus Q3, while fracturing activity was down 17% sequentially. By contrast, a year ago against a more stable and actually rising commodity price backdrop, Q4 fracturing activity was in line with Q3 2021. So Q4 revenue in the Canadian segment was $114.8 million and down 19% from the previous quarter. Segment adjusted EBITDA was 23.6% versus 40.9% in the third quarter. Adjusted EBITDA margin was 21%, which is down from 29% in Q3 2022, which was the highest quarterly Canadian margin that we achieved this year. Our full year Canadian segment revenue was a record $567.8 million, which was up 59% year-over-year. Adjusted EBITDA in Canada was $136 million, which is also our best ever achievement at roughly double the 2021 level. Full year margins in this segment were 24%, up from 19% last year.

In Canada, fracturing made up 72% of revenue in Q4 and 80% of full year revenue, so we'll start there. Revenue on our five fracturing crews is CAD83.1 million in the quarter, down 25% from Q3. Frac operating days were 8% shy of what we had in Q3, while proppant pumped was 38% less than Q3, indicative of the lower intensity completions in our job mix. Beyond these two factors, a third factor in our fourth quarter, Canadian results was the addition of fracturing capacity, which put the market into an oversupplied position. Notwithstanding this lower Q4 -- full year results in the Canadian fracturing work, very commendable and posted a new high watermark of $453.6 million, up 64% year-over-year and up 24% from the previous high watermark in 2017. We ran eight coiled tubing units in 2022, up from seven in 2021. Our Canadian coiled tubing business unit, which also includes ancillary fluid and nitrogen pumping crews had its best quarter of the year in Q4 with revenue of $31.7 million, up 5% sequentially. And this top line was achieved despite the number of operating days declining from -- declining 7.5% from Q3. Full year performance was also commendable with revenue increasing to $114.2 million, up 42% year-over-year and the highest level since 2018.

Moving to the balance sheet and our free cash flow performance. Our year end net debt was CAD142.2 million, CAD45 million lower than a year ago. Measured against our full year 2022 adjusted EBITDA of CAD198.9 million, the net debt-to-adjusted-EBITDA ratio has improved to 0.7 times. One year ago, our net debt of CAD186.9 million was almost 3 times our 2021 adjusted EBITDA of CAD63 million. It's been a remarkable year of balance sheet improvement for STEP and more broadly, the company has paid down about CAD170 million since our peak in 2018 during some pretty challenging market conditions. Free cash flow was the other half of the story. In Q4, STEP generated over CAD22.4 million of free cash flow, while for the full year the number was CAD111.8 million. While the free cash generation and debt paydown has been very impressive, what many investors may not realize is the extent to which we have invested in our fleet along the way. It's important for companies to keep CapEx at a level where it matches longer term depreciation, something that we view as a sign of a properly maintained asset base. We have a slide in our IR deck, which compares our ratio on this against our North American peers, and you'll see that STEP compares very favorably against the group.

On the capital spending side, STEP's Board of Directors approved a budget for 2023 of $103.2 million with $55 million allocated towards sustaining capital and $48 million for optimization capital. The budget for sustaining capital is tied to activity levels and is generally geared towards replacement of major components required for daily operations. The optimization capital for projects that improve efficiency or reliability and also increase capital for our fleet refurbishments. We review this capital budget against current market conditions quarterly and we will adjust up or down as needed. The last couple of things I want to address is our earnings per share and book value per share, something we haven't had good news to report on for a while. As Steve noted, we returned to profitability this year, posting four quarters of positive net earnings and even during a seasonally challenged second quarter, Q4 EPS was CAD0.23 diluted versus CAD0.43 in Q3. Full year EPS was CAD1.31 diluted versus a loss of CAD0.41 in 2021. Consistent positive EPS will hopefully introduce a much larger focus on earnings and returns on invested capital, which is where we feel STEP excels. Finally, our book value per share has increased to CAD4.27 as of year end, up from CAD2.60 a year ago. That's measurable value creation for equity holders. With that, I'll turn it back to Steve for some key remarks on our strategy and outlook.

Steve Glanville

Yes. Thanks, Klaas. At the beginning of the call, I highlighted that STEP put up record results this year because we received a strong contribution from each of the business units. And that when we saw a bit of a slowdown in performance in one unit, another one was there to pick up the slack and power us forward. At STEP, we firmly believe that this -- that it makes the most sense to be a full North American player in the pressure pumping space because each of the major geographic regions offer different opportunities and often at different times. Today, LNG is clearly the biggest story in global energy going forward to at least 2030, particularly in the US and it reminds me of how the Permian became the biggest story in global energy five to six years ago. The best business model should strive to have exposure to these major energy growth areas and at STEP, we have that. We are largely Permian-focused today in our US operations, but are within operating range of the Haynesville natural gas play as it becomes a major source area of the natural gas that will flow through the growing list of US LNG export facilities. Although natural gas prices are weaker today, we see prices recovering as the year progresses and are excited to see how the industry develops as new LNG capacity comes online in 2024 and onwards. Interestingly, whereas the US exports roughly 10% to 12% of its natural gas production today, research suggests that, that level will move up to 20% and beyond in the coming years, which will start to decouple US natural gas prices from domestic factors. US natural gas prices should start to better reflect global supply demand forces and move to a tighter competitive spread with global oil prices.

Our diverse business model also puts us in a good position to benefit from the anticipated start-up of Canada's first LNG project and all the completion activity that will be needed to reach the over 2 Bcf a day of target export capacity by 2025 or early 2026. The recent agreement with the Blueberry River First Nations on regional development combined with what may be even a doubling of LNG Canada's [eventual] export capacity to over 4 Bcf per day, gives us great confidence in Canada as a growth market going forward. Our diverse business model also features STEP as one of North America's largest coiled tubing companies, one with the technical capability and expertise to serve the growing extended reach well market and what we see the same trends unfolding in this area as in the fracturing market. The size and scale are keys to success in coiled tubing and we continue to pursue that growth initiative by activating idle units or through acquisitions that we did last year. These are the pillars of STEP strategy going forward, and we have the people, the equipment, the technology and the balance sheet to make it happen. I'm very excited at our platform right now. Finally, I want to finish by offering up some comments on our outlook. Every year brings a different set of opportunities and challenges, and that is a good place to start with 2023. Canada has started strongly for us and the market has soaked up the extra capacity brought to it later in 2022 by competitors. Our Canadian fracturing crews are all very busy and although our Canadian coiled tubing operation had a typical start to January, today, we have nine coiled tubing units working in Canada, which is up from eight a year ago.

Overall, we have good visibility in the Canadian business to end the quarter in both fracturing and coiled tubing. Whatever work we can't complete in Canada in Q1 showed every indication of being pushed out into Q2, which suits us fine as it helps us level load our operations like last year. Having said that, we think we will be hard pressed to duplicate the outstanding Canadian second quarter of 2022 as everything came together perfectly, including a sizable number of large pads to work on, while spring conditions slowed everything else down. Also in Q2, we anticipate taking delivery of our first upgraded Tier 4 dual fuel frac fleet in Canada, the one I spoke of earlier that is partially funded by a client. It's an exciting development for us and it shows how energy service companies and E&P companies can partner and work to each other's benefit. Finally, activity should remain fairly robust in the back half of 2023 as a result of agreements signed with the Blueberry River First Nations. Large fracturing crews are required to perform the bulk of the stimulation operations in this region. So that should help to keep the fractured market as tight as possible. In the US, it's been a slower start to 2023 than we were expecting. First, there's the backdrop of the US Land Rig Count rolling over from lower natural gas prices, which has freed up some fracturing capacity caused a modest rollover in some pricing and led to some margin compression.

Second, more specific to STEP, we have seen lower US frac fleet utilization due to significant drilling delays on two of our clients' locations. These are large, multi-well pads that take 20 to 30 days to complete. So having these delays come at the start of the year when capital programs and schedules had just been reset that we couldn't find a replacement work for these crews. Once client activity was able to move forward on the same locations, they were affected by winter storms in early February. Utilization has since picked up, and we expect this level of solid US fracturing activity to continue into Q2. On the coiled tubing side, utilization has been strong so far this quarter, helped by the strong Q4 drilling and fracturing activity levels in the US. Other than some spring breakup effects with part of the fleet in the US Rockies and in North Dakota in late Q1 and early Q2, we expect continued strong utilization of our US fleet. We are now running 12 coiled tubing units in the US, which is up from 10 in our last quarter. Before I turn the call back to the operator, I want to close by saying how proud I am of what we accomplished together at STEP in 2022. It was a total team effort and it could not have happened without the efforts of our exceptional team and the deep collaborative relationships we have with our clients. We have much to look forward to in the coming quarters and years in this business.

Operator, we would be pleased to take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Cole Pereira from Stifel.

Cole Pereira

Just wanted to start on the Q2 activity outlook in Canada. I mean, Steve, you touched on it a little bit. And that last Q2 is really a perfect quarter, but are you seeing any factors other than that, like are you seeing E&Ps pulling back, have you seen a shift in work mix, maybe some customer changes or losses or anything like that?

Steve Glanville

Not really, we haven't seen any pullback at all in the Canadian market whatsoever. And it's going to be really hard to obviously duplicate, as I mentioned, our Q2 unfold of last year. It was pretty remarkable quarter. So to have that high bar set and to try to overcome that's going to be a bit difficult. But I can tell you, we're starting to see a lot of work kind of into kind of that June time frame for us and even April and May seem to be fairly steady. So although I don't think we're going to hit the top line revenue that we did last year, it's still going to be a great quarter for Canada. And I think where that comes from, Cole, is a lot of our clients are looking at level loading their programs on a yearly basis, and the cost to heat water in the wintertime, particularly in the northern regions. They've been able to access these pads close to highway, which helps from a breakup having the [indiscernible] situation alleviated. So I think, as I mentioned before, we should see more of that going forward as a more level loaded kind of Q2.

Klaas Deemter

The other factor considered, Cole, is that there's a couple of more frac fleets in the market, which will soak up some of that work in Q2.

Cole Pereira

So can you -- you talked about it a little bit. But can you touch on the visibility you have for the second half right now, how customer conversations are going and how we should think about the balance of lower natural gas prices with perhaps some incremental LNG and Blueberry development?

Steve Glanville

I mean, we're early signs right now, Cole, on that. We are obviously filling the back half of the year. I think some of the holdup on our activity could be based on the drilling rig supply. And what I'm hearing is there's some rigs moving from the US up into Canada to support some of the additional growth. And so we see that as perhaps a minor bottleneck and that will get sorted out in time. But we do expect the back half of the year as we mentioned in the call, just the LNG development, it needs to get going. And we're starting to hear signs of -- we're going to see some of that back in the back half of this year.

Cole Pereira

And obviously, the US business looked very strong this quarter. You have some weather issues early in the year, which it is what it is. But do you think that's kind of a peak for the business or do you think pricing and utilization can go higher, and maybe you can beat that in 2023?

Steve Glanville

If you look at Q4, I mean, gas prices were at $6. Today, we're at $2.75. And there's been a bit of a rollover, but I can always say that our business is positioned extremely well in the Permian. It's still a tight market on the fracturing side in the Permian. And I talked about in our Q1 delays, that's sort of a one-off situation that it was literally the two of our clients had drilling rig problems that just pushed up the schedule. We are seeing visibility past Q2 with a lot of our fleets to be highly utilized full.

Klaas Deemter

Cole, it's some important points. Just again, at the beginning of the year, all those scheduled like client schedules, pumper schedules, like all of the schedules basically get reset after Christmas, right? So everybody starts from zero. We're all at the starting line together. The drilling delays that we had with these particular clients because everybody else is basically ready to go.

You don't have that same kind of slipping and sliding of schedules where it's easier to backfill, have this happened in April, May, June, whatever pick a month, somewhere midyear, it's much easier to find kind of backup work. And in this case, it just happened to be where they just came right at the beginning of the year, which made it really challenging for us to find work right away. We were able to start some other work a little bit earlier, but going back to again, it's 20 to 30 days sometimes on these pads. So it's hard just to pick up another job and just move over. These are not two or three day jobs.

Cole Pereira

And just one more from me. Obviously, you bring in your Tier 4 into service here shortly. I mean any desire to increase that footprint in the near term or you're sort of happy with that one fleet for now?

Steve Glanville

No, I think -- but I can tell you, we've been talking to many clients that are really interested on how that deal came up part or came together. And so we've had lots of interest and we're very excited about moving forward. As our equipment gets to an end of life cycle on the major components, we will be looking at upgrading that with Tier 4. So that's our plan. Our team is working really hard. Our sales team is working hard on getting additional contracts in place. And we would only do that with additional kind of commitments from clients to want to expand into Tier 4.

Operator

Your next question comes from John Daniel from Daniel Energy Partners.

John Daniel

I want to dig a little bit more into just the Tier 4 upgrades that you've got. I know there's the one fleet, but really with respect to the customer interest. If they -- we keep hearing about the long lead times on capital equipment if they -- do you have to -- forgive me for being sort of forward, but should you not order some of the stuff ahead of time in anticipation of a contract that presumably could be forthcoming, how are you playing that angle?

Klaas Deemter

We've got some Tier 4 engines in reserve, and we also have builders that have major components that are ready to go. I acknowledge the question around lead times. We feel like we have that and if we have an opportunity that presents itself, we should be able to respond.

John Daniel

We always tend to talk about Tier 4 dual fuel, but you also have Tier 2 dual fuel. Do customers -- is there a willingness to use that, I would think that the lead times would be a bit shorter?

Steve Glanville

I mean we have two different types of engines in our fleet. One, of course, CAT is primarily in Canada that are Tier 2, and we're getting superior substitution with our CAT engines up to 55% on a Tier 2 fleet. And then in the US, we went ahead and we've spent some money in the last year and half developing a technology. And on our Tier 2 fleet, we're actually getting up to 70% substitution and it's almost a similar system to the Tier 4 with a direct injection versus a fogging system. So a lot different. We're really excited about that, John. And I guess it comes down to -- the natural gas prices being lower today, it's a huge advantage to our clients to go with, obviously, a natural gas fleet. And so we're pretty happy that 65% of our fleet today is on that or continue to invest, and that's a platform that you should expect us to continue to invest in.

Klaas Deemter

I would add to, John, on that Tier 4 theme. As you look at the development of engine technology, what's on the kind of the horizon there is that with the full gas powered is that's a really exciting development, something that we're quite interested in pursuing and something that we think has a lot of opportunity for the industry.

Operator

Your next question comes from Waqar Syed from ATB Capital Markets.

Waqar Syed

Steve, the Tier 4 fleet that's going to be coming on in Q2, would that become your sixth fleet or would you continue to have like take out the smaller fleet and just keep five crews running?

Steve Glanville

It's really replacing some assets, Waqar, that we have. We're refurbishing existing assets. So we'll continue to maintain four large fleets to Montney-Duvernay fleets in Canada. And then the fifth fleet is fairly specialized where we have an electric combination blender data and hydration unit, all in one unit. So it's really specific for our bundled services offering with coiled tubing. So more annular type of fracs that, that unit will be tied up with.

Waqar Syed

And then could you talk -- you mentioned pricing pressure in the US. Could you maybe elaborate to that and what the magnitude are we talking about here?

Steve Glanville

Sort of early days right now, Waqar. Seeing some minor competitive pressures, I guess, in the US and it's really kind of pad-by-pad basis. The US market is interesting when it's a tight market, you can really move prices when it's more of a balanced market, there's a bit more competitors that are kind of aggressively looking to fill gaps. So I can't really put a number on it, Waqar, because it is pad by pad that we're seeing it. On our coiled tubing business in the US, we've actually been able to increase price. We believe that's an undersupplied market for sure on our unique offering with our deep capacity units, we're seeing more 3-mile laterals being drilled, particularly in the Permian, and it suits our equipment complement extremely well.

Klaas Deemter

Waqar, I would also just add, it's interesting, we go to various industry events that we chat with our peers in the industry, not necessarily competitors. But one of the things that we've been hearing a lot is the incident -- the number of drilling delays through -- that happened because of cementing in wells or sidetracking or other kind of -- just kind of really weird one-off things that can really be tied more to kind of inexperienced crews. And we heard it even on our -- the last call at the Thrive conference, the efficiencies are starting to drop. So at the beginning of the year going back to what I said to Cole, we had -- there's a few delays. It wasn't just us that had some delays, there's a few others that I noticed and see there's a bunch of frac crews that gets sprung loose, and then there's a bit of a scramble for a little bit of spot work that's out there. So that's really when we talk about pricing pressure. I would say it's more localized so that we feel it was more of a January, early February thing and what we're seeing now from client inbound is that we're much more back to a balanced market here and pricing pressure is kind of relieved -- been relieved.

Waqar Syed

And then just -- I missed a little bit of your explanation of how many days of work was actually lost in January from these delays in drilling?

Steve Glanville

Yes, it's about three weeks of delays, Waqar, 20 to 30 days is what we have estimated.

Waqar Syed

On how many fleets, on all threefleets?

Steve Glanville

On basically two fleets. Yes. Well, we've been able to pick that up. Obviously, right now, we're at full utilization. And we see visibility really till the end of April, beginning of May for all three fleets.

Waqar Syed

And then could you talk about your input cost inflation, what are you seeing in Canada and the US in terms of prices for frac sand?

Steve Glanville

Yes, I would say those inflationary pressures that we saw last year, obviously, we're pretty stabilized right now compared to what we went through last year. We haven't seen much from an inflationary standpoint on any products. We're seeing some on -- some capital equipment. But as far as any type of products, it's quite stabilized right now.

Waqar Syed

And how about labor availability?

Steve Glanville

We've been extremely successful at -- we're very, very proud of our retention percentage within our company. We're back to, call it, 1,450 employees, which is back to a pre-COVID level. And I would say, it's been a bit of a challenge more -- well, I would say, in the US on our coiled tubing business, we've been all been successful at reactivating two additional fleets here this year, took some time, but we were able to get it done. And yes, I would say, it's always an ongoing problem with labor. We've had to obviously increase our labor rates, which is a well needed. Thanks for our professionals in the field and we did that back in November last year.

Operator

[Operator Instructions] Your next question comes from Andrew Bradford from Raymond James.

Andrew Bradford

So maybe just sticking with your US customer base. So having those delays, that's unfortunate. And if you're running three crews and obviously, that can have a -- having one crew down or two crew down for a couple of weeks then impacting the quarter. I just wondered maybe if you could describe your customer base a bit? How that's changed to the extent to which it hasn't changed and the extent to which your guidance is predicated on work with the existing customer base? And I guess, like couched in this is sort of the uncomfortable question is do you have the right customers in the Permian?

Steve Glanville

So we have obviously, a small footprint in the US. It's one thing that we're focusing on wanting to grow our business would be in US just to be able to handle a bit of these ups and downs. Our client base that we have today is Permian focused, primarily the larger private companies. And Klaas has mentioned in regards to drilling delays. We're not the only ones that have seen this. It's happened across the industry, having these kind of short notice delays and of course, trying to fill that has been difficult. But from our client base, we have basically one dedicated fleet that is with a large private and the other two fleets work between three or four other clients on the spot market, and we're obviously focusing on getting longer term commitments for those two fleets. And by the addition of our dual fuel assets to make it more competitive to the market that's down there, we expect to have that happen in the back half of the year.

Andrew Bradford

So some of these questions are going to seem like they are disjointed, but in a relatable way they’re tied together. Shift gears to technology a bit. So in the US, you described sort of this proprietary approach to increasing the gas mix in your Tier 2 dual fuels. I guess the first question I have about that is, do your customers see it as competitive with Tier 4 or is Tier 4 kind of like checking a Tier 4 box? Like it comes from as directive from the top, get us some -- we need more Tier 4 engines in our service mix. And I don't care how good your upgraded Tier 2 is, still meet Tier 4. Is that -- or is it sort of like, well, 70% is almost 85% substitution or whatever you can achieve with Tier 4, and that's the over most of away there, and that's at the margin a very similar technology?

Steve Glanville

I would say, in general, Andrew, most of the clients today that we are working for, Tier 4 has a higher substitution percentage, obviously, but it's not because they're ticking a box on ESG. It's really on the overall savings that they're achieving. And it makes a big difference, 10%, 15% or 30% and with gas prices being as low as it is right now, it actually -- it's not that big of a differentiator today. And so we have basically 80,000 horsepower of Tier 4 in the US that is not on dual fuel, and that is some of the capital that we are -- that we talked about on our optimization will be put towards that fleet to make it dual fuel.

Andrew Bradford

Do you deploy this technology in Canada?

Steve Glanville

It's a different asset quality in Canada. We're primarily CAT engines up here. And so our Tier 2 is the CAT technology. Of course, the Tier 4 upgrade that we announced is CAT as well.

Andrew Bradford

Then I'll just ask, when it comes to your strategy here, I think you've had a very sensible approach when it comes to bringing in these upgrades and where you need customer commitments on one hand and it was really nice to get customer involvement in the capital cost of the upgrade. My feeling is that in the current environment, that's going to be a bit more challenging and to get arrangements like that. And so as you may want to look at this, do you sort of -- is one of the concerns that you're addressing that if we wait around to get really good commercial terms like we did in that last upgrade that full system upgrade that we'll just sort of start slipping in terms of competitiveness, because we don't have the same amount of Tier 4 as maybe some of our competitors?

Steve Glanville

I talked a little bit about our life cycle of our engines, and it's about a $300,000 upgrade to go from Tier 2 to Tier 4 or even a little bit more. Since we've done a great job of getting our balance sheet in a pristine position, you should expect some of that as we move forward. And ideally, getting a client commitment is what we are striving for. But as the units end up, the engine starts getting to end of life, it will be our focus to convert them to Tier 4.

Klaas Deemter

And I guess I would add to that, Andrew, I said in my commentary, we adapt to what market conditions are, we review that quarterly and we'll respond accordingly.

Andrew Bradford

And then shift gears for just one second here to coil. Obviously killing it in the US with that acquisition doing really well there. And in your commentary, Steve, if I didn't mishear you, you said you're still looking to advance that business further. And I think you've even used the acquisition word or at least I wrote it down. And I'm wondering now, is that like as you sort of -- as you keep pushing the balance sheet towards effectively zero debt, how do you compare the value in doing that versus the value in continuing to advance that obviously profitable business in the US? And I'm kind of thinking about this in the context of valuation as well, not just yours but also what you could be buying because looking at my screen, the world seems to be on sale right now?

Steve Glanville

Yes, extremely happy with the acquisition that we made back in September, that's helped our US business get scale. Currently, today, we're really operating -- I'll just talk on North American basis. We're operating 21 coiled tubing units and we have 33 that could go to work. So we have a very, very large asset base that is relevant to today's market and wouldn't require a lot of capital. So the team has looked at that on ways to add to perhaps different basins with that asset base. But when you're talking acquisition, it would have to be a fireside kind of sale price that we would be looking at to want to kind of grow that business outside of our current assets that we have. And you got to think we have extremely like assets, some -- they're very similar made. We actually bought some assets through an auction back in November that was a competitor that ended up kind of selling some assets through an auction, and we were the beneficiaries of that on a low price. So we do have some additional capacity to add to the market.

Klaas Deemter

And just going to your M&A comment there, Andrew, it's been interesting the bid ask has really changed today versus what we saw kind of October, November, back when we're still riding the crest of that $6 gas price. Parties who are pretty confident in a very high valuation back in those days have come back to us with a much reduced valuation. But to Steve's point, with coil, we run some of the best equipment in the business. And if you take a look at our client list, these are all large blue-chip clients who are using us and very happy with the work, some of those surplus assets that we picked up from -- at the auction were from a competitor who didn't appreciate the value and couldn't run that equipment the same way we can. So to do an M&A transaction, it would have to be a very compelling from an equipment technology perspective. Otherwise, we feel like we're diluting the brand. And that's -- when we have good quality of equipment sitting on the fence, there's not a lot of interest in doing that.

Andrew Bradford

I'm not meaning to hog the part of your call, so I'll just ask one last question. Shifting gears to the second. When you talk about your visibility for the second half either in Canada or the US, I find that kind of -- it's a difficult thing to do because you never really know what your customers are going to be doing, but -- so maybe we could contextualize it. Your visibility for the second half here, sitting here at the beginning of March, how would -- if you can remember, how do you recall your visibility a year ago in March? And then like do you also remember like how your expectations a year ago actually played out, was -- did your visibility kind of match realizations from a year ago as well?

Steve Glanville

Yes, a year ago, it seemed like a long time ago in this business. But I do remember, we were seeing our back half of the year starting to fill up, really call it kind of right after breakup. And as you can remember, we were increasing prices, et cetera, trying to catch the inflationary pressure that we had in our business, passing them on the clients. Of course, we were able to be successful with the majority of our clients on moving pricing forward. Some didn't like it. Some went to market to look at, and we were very disciplined on keeping our prices to be able to get the margins that we need out of this business. And this year, I would say, well, I'll go back to Q4, there was too much frac capacity in Canada. There is absolutely -- I would call it probably two to three, too many crews that were added. There were obviously some of our competitors were staffing up to get ready for some work in Q1. But having that extra capacity ends up hurting the market, of course. And we saw a couple of clients of ours that decided to take a cheaper price, I guess, for the services. So as I look into this year, that capacity is going to get soaked up. I believe as we -- as I mentioned about LNG and getting that development kicked off, Blueberry River agreements in place, starting to see a lot of permits. When you look at the drilling rig count that is for our mix of services, Montney, Duvernay, we're up 40% from the beginning of December. 65 drilling rigs working in the Montney today. And of course, that is high intensity frac work, and the crews will be on location for a long time. So I do believe come the back half of the year, starting in July, August that the tightness of the frac supply will be there.

Klaas Deemter

And the US market, there's a bit of that shifting going on from gassier markets to oilier markets. And so clients aren't as concerned about locking up frac capacity. So some of that longer term discussions is there's not as much pressure on there. That being said, I guess, we're looking at some Q2, Q3 work that carries us kind of from the back half of Q2 into Q3. So there's still interest there. It's just not quite the same intensity as it was last year, Andrew, as kind of a shift to a bit more of a balanced market.

Andrew Bradford

I do have one more question. I apologize for that. But when you look at like your operating metrics in Canada, the operating statistics, whether it's fracturing operating days or proppant pump or stages completed, any of those numbers. How would you position how the first quarter is looking compared to the first quarter last year?

Steve Glanville

Yes, a lot higher.

Operator

There are no further questions at this time. Steve, please proceed with your closing remarks.

Steve Glanville

I just want to thank everyone for joining the call. As I mentioned, we're really excited about how the business unfolded for us in 2022 and look forward to the opportunities that we have in 2023. So thank you very much.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.