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Trican Builds Western Canadian OFS Reach in Friendly Merger with Canyon Services

Trican Well Service Ltd., already one of Western Canada's largest pressure pumpers, is combining in a friendly merger with Canyon Services Group Inc. to improve efficiencies and respond to an evolving oil and natural gas market.

The all-share combination, estimated to be worth C$637 million, including C$40 million in Canyon debt, would create a company 56% owned by Trican and 44% by Canyon.

"It's the right time for the combination as we're seeing an improvement in our business," Trican CEO Dale Dusterhoft said during a conference call Wednesday. "We're seeing a situation in our industry right now where horsepower per job is increasing rapidly, the sand per well is increasing rapidly, and a lot of these trends are putting strains on both of our respective companies. And this deal allows us to get to a scale that allows to service our customers better, drive efficiencies in our business, and really respond to this change in the market that we're seeing...

"Our customers live with $50/bbl oil and $3.00/Mcf gas...For them to make money and for us to make money, we have to run very efficient organizations and scale allows us to do that...And we see this is being very important for our companies going forward. We also have similar cultures, we're very service-oriented companies..."

Trican has been shrinking in the past year to focus on Canadian operations. Last year in separate transactions it sold its U.S. business to Keane Group and its global completions arm to National Oilwell Varco Inc.

For pressure pumping capacity, the combined Calgary companies would have about 680,000 hp for fracturing (fracking), putting it in position to serve the entire Western Canadian Sedimentary Basin (WCSB), Dusterhoft said. Trican's cementing business also continues to be solid, while Canyon's fluids management business would complement the pressure pumping arm.

"As the job sizes get bigger, fluids is a business that we see some growth in as well," Dusterhoft said.

One of the reasons for the friendly combination is that both companies "are seeing a real steep ramp up in activity levels levels to the point that all of our active equipment in the marketplace has been fully utilized through the first quarter," he said. "We still both have parked equipment on the sidelines that we're going to man going forward, but our active equipment is very busy.

"And we're continuing to see increased frack size job intensity through the first quarter, and we believe kind of throughout the full 2017 year. So that first quarter activity is, I would say, higher than what most people anticipated going into the year, and that's a real positive that we're seeing within the marketplace."

Second quarter books also are "very strong, definitely on a year-over-basis, but even historical over the last five years. I would say, our fracturing capacity has booked out fully. We will have weather issues where we don't get full utilization," not unusual in Canada.

"We will have bunkers that we're drilling 24 hours, and we can only do 12 hours through to some of the road ban situations. But booking of our frack equipment has all booked out, and Canyon is seeing much the same... Booking and customer inquiries are very high through the second quarter, and so that's very positive."

Into the second half of this year, both companies also see strong demand from their clients.

"There is a lot of available capacity in the industry that is unmanned," Dusterhoft said. "So we will see our competitors respond by adding capacity to the marketplace as well. And we are both planning on adding some capacity going forward. Trican can certainly have a couple of couple of crews and Canyon is looking at one to two crews, really it just depends on hiring people right now."

Exploration and production customers in the WCSB "are pretty confident in their programs," despite stagnant pricing. "I think a lot of our clients are driven by production increases right now and the commodity prices -- they're fine with that through the hedging programs or whatever they are doing."

Trican still has about half of its capacity parked for its coil, nitrogen, acidizing service lines. On the fracking side, it has about 250,000 hp parked while Canyon has about 25,000 hp parked and another 75,000 hp that needs to be manned.

"So there is about 350,000 hp that we are going to add to the marketplace that will have significant earnings potential going forward," said the Trican chief. "This company is going to continue to grow upwards as we're able to hire some crews and add this capacity back into the marketplace."

The "biggest issue is labor and how quick we can hire, and I do think that there labor picture does improve...We're talking about putting a lot of people back to work, and that means that the people come to work for us, they're going to have a lot of opportunities to move up as we continue to grow the company...We're recruiting as a combined entity, and I think that's certainly going to be attractive."

The combined company expects to achieve about C$20 million in annual pre-tax synergies in 2018. The pro forma company now has a market capitalization of about $1.4 billion, which would be one of the largest Canadian oilfield services providers by market capitalization. Each board has unanimously approved the transaction, which, with shareholder and regulatory approvals, should be completed in the second half of 2017.

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