CJ 2017 Annual Report

Energy Services, CalFrac Well Services, as well as a significant number of regional, predominantly private businesses. Our major competitors for our Well Support Services include Key Energy Services, Basic Energy Services, Superior Energy Services, Ranger Energy Services, Precision, Forbes and Pioneer Energy Services, as well as a significant number of predominantly private, regional businesses. Generally, we believe that the principal competitive factors in the markets that we serve are price, technical expertise, equipment capacity, work force capability, safety record, reputation and experience. Although we believe our customers consider all of these factors, price is often the primary factor in determining which service provider is awarded work, particularly during times of weak commodity prices such as those we experienced from late 2014 through the majority of 2016. Throughout this severe, prolonged downturn for our industry, our customer base demonstrated a more intense focus and placed a higher priority on receiving the lowest service cost pricing possible. Additionally, projects for certain of our core service lines are often awarded on a bid basis, which tends to further increase competition based primarily on price. During this downturn, our utilization and pricing levels were also negatively impacted by predatory pricing from certain large competitors, who elected to operate at negative margins for these services. During healthier market conditions, we believe many of our customers choose to work with us based on the safety, performance and quality of our crews, equipment and services, although even then, we must be competitive in our pricing. We seek to differentiate ourselves from our major competitors by our operating philosophy, which is focused on delivering the highest quality customer service and equipment, coupled with superior execution and operating efficiency. As part of this strategy, we target high volume, high efficiency customers with service intensive, 24-hour work, which is where we believe we can differentiate our services from our competitors. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Industry Trends and Outlook” for additional discussion of the market challenges within our industry. Current Market Conditions and Outlook The challenging market conditions experienced from late 2014 through the majority of 2016 began to abate towards the end of 2016 as commodity prices began to stabilize and customers began re-initiating their drilling and completion programs. As we entered 2017, we experienced increasing utilization levels in our Completion Services segment as our customers accelerated drilling and completion activity to take advantage of higher overall commodity prices. We were able to increase pricing across our core Completion Services businesses, largely due to a lack of available service capacity in select core operating basins and rapidly increasing demand. Stability in the North American land drilling rig count coupled with the continued shortage of available fracturing equipment over the second half of 2017 resulted in higher overall utilization and pricing across our entire Completion Services segment, especially in our cased-hole wireline and pumping, coiled tubing and cementing businesses. During the fourth quarter of 2017, we continued to experience strong demand for all of our core completion services, which resulted in improved financial performance primarily due to additional equipment deployment and increased pricing despite the seasonal slowdown in activity in select operating basins. We currently expect demand to remain strong for our core completion services through 2018. In our Well Support Services segment, we also experienced improvement in market conditions entering into 2017, as customers began to allocate more capital towards well maintenance and workover activities with the stabilization in commodity prices. However, even with the increased activity levels experienced early in 2017, the operating environment remained highly competitive as several of our major competitors did not increase service rates throughout the majority of the year. In the fourth quarter of 2017, we closed the Canadian Divestiture narrowing our focus exclusively on the lower forty- eight U.S. land market. Additionally, despite the expected seasonal slowdown in activity experienced in the fourth quarter, we began to see signs of modest improvement in select core basins, especially in our special services and fluids management businesses. Increases in plug and abandonment, rental and fishing activities in both California and West Texas resulted in a sequential increase in both revenue and profitability in our special services business as well. In our fluids management business, we experienced pockets of activity improvement, specifically in West Texas and the Mid-Continent, but struggled to capitalize on these opportunities primarily due to growing labor shortages. We believe that pricing will need to further improve in order to both attract and retain additional employees to meet growing demand for fluids management services as completion activity continues to increase. Based on market conditions and customer demand, we are optimistic about the level of completion activity in 2018. Assuming macroeconomic conditions and commodity prices remain stable or improve, we would expect improving levels of activity from the majority of our customer base in 2018, which should result in continued operational and financial improvement in both our Completion Services segment and Well Support Services segment. 45