CALGARY, Alberta, March 17, 2021 (GLOBE NEWSWIRE) -- STEP Energy Services Ltd. (the “Company” or “STEP”) is pleased to announce its financial and operating results for the three and twelve months ended December 31, 2020. The following press release should be read in conjunction with the management’s discussion and analysis (“MD&A”) and audited consolidated financial statements and notes thereto as at and for the year ended December 31, 2020 (the “Financial Statements”). Readers should also refer to the “Forward-looking information & statements” legal advisory and the section regarding “Non-IFRS Measures” at the end of this press release. All financial amounts and measures are expressed in Canadian dollars unless otherwise indicated. Additional information about STEP is available on the SEDAR website at www.sedar.com, including the Company’s Annual Information Form for the year ended December 31, 2020 dated March 17, 2021 (the “AIF”).
CONSOLIDATED HIGHLIGHTS
FINANCIAL
FINANCIAL HIGHLIGHTS – 2020 ANNUAL
FINANCIAL HIGHLIGHTS – FOURTH QUARTER 2020 COMPARED TO FOURTH QUARTER 2019
FINANCIAL HIGHLIGHTS – FOURTH QUARTER 2020 SEQUENTIAL
INDUSTRY CONDITIONS & OUTLOOK
Early signs of a global economic recovery are now evident with the roll out of COVID-19 vaccination programs, and various government stimulus programs. These measures are expected to support recovering energy demand which has been reflected in the recovering price for oil and natural gas. Industry watchers continue to monitor the Organization of the Petroleum Exporting Countries (“OPEC”) along with certain non-OPEC nations (“OPEC+”) production discipline as well as the discipline of U.S. shale producers to assess the supply response to the recovering global energy demand. With the improved outlook for demand for services, STEP has reactivated equipment to meet client awarded work programs for 2021.
Various industry forecasts are predicting improvements in activity for 2021 compared to 2020. From October 2, 2020, to March 5, 2021 rig count has recovered 52% in U.S. and 88% in Canada. Crude oil spot pricing has averaged $56 U.S./barrel for the first 60 days of 2021 with a high of $63 and there is continued strength in natural gas prices (March 5, 2021 AECO spot was $2.85 CAD/million British thermal units “mmbtu”). STEP has reactivated equipment in both Canada and the U.S. to support the 2021 tender awards and a higher expected level of activity.
Factors that are expected to increase demand for crude oil and support stable prices for crude oil include continued adherence to voluntary OPEC+ production cuts and ongoing capital discipline from U.S. shale producers in light of higher commodity prices. Natural gas prices have strengthened over the last year with the decline in associated gas production driven by the marked decrease in oil directed drilling and the continued demand growth for the commodity. Continued strength of oil and natural gas prices are expected to improve demand for STEP services. However, producers are expected to continue to operate within cashflows with an emphasis on paying down debt and/or returning capital to investors which could limit additional demand for STEP’s services.
A return to more stable demand and supply for crude oil will partially depend upon actions taken by health and government authorities and individual responses to these measures, as we deal with COVID‐19 (see below). Factors that could add to industry uncertainty include any erosion of OPEC+ cohesion and compliance with production cuts, a new U.S. administration that has already cancelled the Keystone XL pipeline and issued an executive order that halted new oil and gas leases on federal land and water, and the potential for the reversal of Iran sanctions and resulting production increases.
With the marked decline in activity during 2020, the North American pressure pumping industry sought to rebalance supply and demand by de-activating as much as 45% of the equipment that was operating in the first quarter of 2020. Some industry watchers have indicated that as much as 40% of this capacity may have been permanently retired which may accelerate the rebalancing of completion equipment capacity in Canada and the U.S. With less overall equipment capacity available to service any demand recovery, service providers may be in a position to capture price recovery earlier as activity levels begin to increase.
Q1 2021
STEP’s Canadian operations have enjoyed a strong level of activity thus far in the first quarter of 2021. Client programs, underpinned by a strengthening commodity outlook, are expected to expand relative to 2020. Our clients continue to value STEP’s strong execution and dual - fuel fleet capabilities that improve program efficiencies while supporting ESG programs. As in other years, weather has impacted first quarter activity. A severe cold snap mid quarter slowed operations for seven to ten days.
U.S. operations have recently been hampered by unprecedented cold weather that was experienced in the Company’s areas of operations. Activity is slowly recovering; however, the impact of this disruption will negatively impact our expected operating results for the first quarter. With the recovery in commodity prices, the industry has been actively engaged in price recovery discussions with customers and STEP is participating in these discussions. STEP is encouraged by the declarations made by a number of large industry participants who have indicated they will forgo additional equipment remobilization in an effort to support a rebalancing of the market and price recovery to sustainable levels for service providers.
CAPITAL
The Company’s amended 2020 capital program was $17.5 million, all of which was directed to maintenance capital. Spending on the 2020 capital program was on budget as the Company incurred $16.1 million of capital costs in the year and carried forward $1.4 million to 2021.
STEP’s Board of Directors has approved a 2021 capital program of $33.7 million based on expected work activity. The approved capital program is comprised of $28.8 million maintenance capital and $4.9 million of optimization capital. The program is roughly split evenly between Canada and the U.S.
STEP will continue to evaluate and manage its manned equipment fleet and capital program based on market demand for STEP’s services.
SUBSEQUENT EVENT
On August 13, 2020, STEP entered into the Credit Facilities, which includes a Canadian $215.0 million term facility, a Canadian $30 million revolving facility, a Canadian $10 million operating facility and a $15 million U.S. operating facility. Subsequent to December 31, 2020, STEP requested and was granted the following changes to the covenants on March 17, 2021:
COVID-19
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has significantly reduced economic activity in North America and the world causing a sudden and significant drop in demand for crude oil and natural gas, negatively impacting STEP’s clients’ cash flow and activity and STEP’s results.
Crude oil and natural gas prices have improved from the historic lows observed earlier in 2020. Price support from future demand has improved but remains uncertain as countries experience varying degrees of virus outbreak and newly emerging virus variants continue to hamper efforts to re-open local economies and international borders. The effect of low crude oil and natural gas prices have had, and should they continue, will likely continue to have a negative effect on STEP’s clients’ operational results and cashflow. This could impact level of capital investment by clients and potentially the demand for STEP services.
Currently, the duration and full impact of the COVID-19 pandemic is unknown. Vaccination programs are at various stages of deployment around the world but are generally in the early stages. The length of time it will take to complete the mass rollouts of vaccines is not known but is generally expected to take until the later part of 2021 with some programs extending into 2022. The effectiveness of the vaccines against new virus variants has not been finally determined and may affect the overall effectiveness of the vaccination campaigns.
CANADIAN OPERATIONS REVIEW
STEP has a fleet of 16 coiled tubing units in the WCSB. The Company’s coiled tubing units were designed to service the deepest wells in the WCSB. STEP’s fracturing business primarily focuses on the deeper, more technically challenging plays in Alberta and northeast British Columbia. STEP has 282,500 horsepower (“HP”), of which 15,000 HP will require capital for refurbishment. Approximately 132,500 HP of the available HP has dual - fuel capabilities. The Company deploys or idles coiled tubing units or fracturing horsepower as dictated by the market’s ability to support targeted utilization and economic returns.
FINANCIAL HIGHLIGHTS – FULL YEAR
For the year ended December 31, 2020, fracturing operating days were 704 compared to 1,357 operating days for the year ended December 31, 2019, a decline of 48%. STEP’s coiled tubing units had 1,373 operating days during 2020 compared to 2,140 operating days during 2019, a decline of 36%. During the first quarter of 2020, STEP deployed six fracturing spreads and 10 coiled tubing units. In response to deteriorating economic conditions and reducing client activity, STEP resized its available equipment to one fracturing spread and five coiled tubing units, during second quarter 2020. As activity picked up in third quarter, two additional fracturing spreads were activated. During fourth quarter, STEP continued to run three fracturing spreads and five coiled tubing units. This compares to 2019 where STEP ran six fracturing spreads and 9 coiled tubing units for the full year. Revenue for the year ended December 31, 2020, was $208.5 million as compared to $354.7 million in the same period of prior year. Adjusted EBITDA for the year ended December 31, 2020 was $44.6 million or 21% of revenue versus $65.2 million or 18% of revenue for the year ended December 31, 2019.
As discussed previously, STEP was able to access the federal government’s CEWS program and its Canadian operations received $10.7 million for the full year 2020. STEP also incurred $3.2 million in severance for the full year 2020. Revenue decreased by 41% and Adjusted EBITDA decreased by $20.6 million or 31% for the year ended December 31, 2020 compared to the year ended December 31, 2019. Adjusted EBITDA margin percentages were maintained in 2020 as a result of STEP’s aggressive reduction in manned equipment and staffing levels, the benefits received under the CEWS program and STEP’s sustained focus on cost controls.
The actions taken earlier in the year to manage the unprecedented negative economic and market conditions continued throughout the balance of 2020. Adjustments to cost saving measures were made when STEP had visibility to improving activity. During 2020, wages were reduced by up to 20% including a temporary one day per week furlough which was suspended at the end of the third quarter 2020. The remaining 10% reduction in wages was restored at the beginning of 2021. Field employees were recalled when the Company had visibility to sustained work. STEP also undertook to retain its most senior field staff to provide the ability to scale up operations. All discretionary expenses such as travel, bonuses and meals and entertainment were significantly reduced or eliminated.
During the month of December 2020, STEP incurred $1.8 million in additional costs to remobilize a fourth fracturing spread and two additional coil units to be utilized in 2021. The costs included maintenance on the equipment and additional wages as field employees were rehired and trained in anticipation of an active Q1 2021.
FINANCIAL HIGHLIGHTS – FOURTH QUARTER
Revenue for the three months ended December 31, 2020 was $41.0 million compared to $72.5 million for the fourth quarter of 2019. Adjusted EBITDA for fourth quarter 2020 was $5.5 million or 14% of revenue versus $9.4 million or 13% of revenue in the fourth quarter of 2019. Fracturing operating days decreased from 345 during fourth quarter 2019 to 138 during fourth quarter 2020. Coiled tubing operating days decreased from 563 during fourth quarter 2019 to 275 during fourth quarter 2020. The Company received the benefit of $3.8 million in CEWS and incurred severance of $0.1 million. The maintenance of margin percentages with a 44% decrease in revenue was achieved by maintaining higher utilization percentages with less equipment, the benefits received under the CEWS program and a sustained focus on cost savings.
FINANCIAL HIGHLIGHTS – SEQUENTIAL QUARTER
Revenue for the three months ended December 31, 2020 of $41.0 million decreased 9% from $44.8 million from the quarter ended September 30, 2020 due to an overall decrease in utilization with the completion of large customer programs that support high levels of utilization and efficiency. With the completion of these programs, STEP worked for a larger group of customers on shorter duration programs which hampered utilization and exposed the company to more aggressive market pricing as the overall level of service demand dropped at the end of the year. The reduction was partially offset by an increase in Company supplied proppant and chemical resulting in higher revenue generated per day. Despite the increase in Company supplied proppant, margins were impacted by lower total proppant pumped, competitive pressures, and increased Company supplied fuel in the quarter. Margins were further impacted by the preparation for Q1 remobilization as higher repairs and maintenance and payroll costs were incurred as parked units were brought back into service and new hires were trained. The Company also incurred additional payroll costs as the one-day furlough was discontinued in the fourth quarter to accommodate market conditions. Adjusted EBITDA for fourth quarter 2020 was $5.5 million or 14% of revenue versus $17.2 million or 38% of revenue during the quarter ended September 30, 2020. There was a decrease of 20 operating days for fracturing and a decrease of 44 operating days for coiled tubing for the three months ended September 30, 2020 and the three months ended December 31, 2020. The Company received the benefit of $3.8 million in fourth quarter 2020 and $4.1 million in third quarter 2020 from the CEWS program.
OPERATING HIGHLIGHTS
UNITED STATES OPERATIONS REVIEW
STEP’s U.S. business commenced operations in 2015 with coiled tubing services. STEP has a fleet of 13 coiled tubing units in the Permian and Eagle Ford basins in Texas and the Bakken shale in North Dakota. STEP entered the U.S. fracturing business in April 2018. The U.S. fracturing business has 207,500 HP, which primarily operates in the Permian and Eagle Ford basins in Texas. Management continues to adjust capacity and regional deployment to optimize utilization, efficiency and returns.
FINANCIAL HIGHLIGHTS – FULL YEAR
U.S. fracturing averaged two operating spreads throughout 2020 compared to an average of three spreads throughout 2019. U.S. fracturing was active for 425 operating days during 2020 compared to 643 operating days in 2019. U.S. coiled tubing operated five coiled tubing units on average during 2020 compared to an average of eight coiled tubing units in the same period of 2019. STEP’s U.S. coiled tubing units completed 1,210 operating days during 2020 compared to 2,032 operating days during 2019. Revenue for the year ended December 31, 2020 was $160.5 million compared to $313.6 million during the same period of 2019. Adjusted EBITDA loss was $0.6 million or negative 1% of revenue for the year ended December 31, 2020 versus Adjusted EBITDA of $28.6 million or 9% of revenue for the year ended December 31, 2019. Although utilization for both fracturing and coiled tubing services were approximately the same for 2020 and 2019, revenue per day declined by 23% for fracturing and 14% for coiled tubing. Both the fracturing and coiled tubing business continue to experience significant price pressure and increased competition as a result of the marked decrease in demand for services and the oversupply of available equipment. In response to the deterioration in market conditions, STEP undertook cost containment activities including headcount reductions, reduced wages, and elimination of discretionary expenditures.
During the fourth quarter of 2020, STEP incurred $0.7 million in remobilizing costs to activate a second fracturing spread.
FINANCIAL HIGHLIGHTS – FOURTH QUARTER
Revenue of $30.6 million for the three months ended December 31, 2020 decreased by $23.4 million from the same quarter in 2019. Fracturing services worked 22% fewer operating days in the fourth quarter of 2020 compared to the fourth quarter of 2019. A second fracturing spread was activated in December 2020 in anticipation of increased activity in 2021. Market pressure continues to depress pricing with fracturing revenue and coiled tubing revenue per day down 25% and 23% respectively for fourth quarter 2020 compared to the same period in 2019. Part of the fracturing revenue per day decline is attributable to clients providing their own sand. There was an Adjusted EBITDA loss of $1.4 million for the fourth quarter of 2020 compared to Adjusted EBITDA of $2.2 million for the same quarter in the prior year.
FINANCIAL HIGHLIGHTS – SEQUENTIAL QUARTER
In the U.S., seasonality is generally not a factor, impacting the Company. Revenue for the quarter increased from $17.5 million to $30.6 million an increase of 43% over the third quarter. Adjusted EBITDA loss for the quarter was $1.4 million or (5%) of revenue compared to a $4.8 million loss or (27%) of revenue in third quarter. Operating days increased by 215% and 35% for fracturing and coiled tubing, respectively, when compared to the third quarter of 2020 as the Company was able to remobilize a second fracturing fleet in response to increasing industry activity.
OPERATING HIGHLIGHTS
CORPORATE REVIEW
The Company’s corporate activities are separated from Canadian and U.S. operations. Corporate operating expenses include expenses related to asset reliability and optimization teams. Corporate Sales, General & Administrative costs include costs associated with the executive team, the Board of Directors, public company costs and other activities that benefit Canadian and U.S. operating segments collectively.
FINANCIAL HIGHLIGHTS – FULL YEAR
Expenses from corporate activities, excluding depreciation and share-based compensation related to corporate assets and employees, were $13.1 million for the year ended December 31, 2020 compared to $15.0 million for the year ended December 31, 2019 a decrease of 13%. Severance of $0.7 million was incurred for the year ended December 31, 2020. STEP also recorded $3.5 million of bad debt expense during 2020 (2019 - $0.8 million) due to the increased credit risk related to the extent of disruptions and uncertainty brought about COVID-19. STEP obtained $1.0 million of benefit from the CEWS program for corporate employees. Adjusting for bad debt expense, CEWS and severance would result in $9.9 million in expenses a 34% decrease year over year. The corporate expenses would be approximately 2.6% of revenue for 2020 and 2.0% of revenue for 2019.
With the onset of market volatility from COVID-19 and the decline of crude oil prices earlier in the year, STEP implemented several measures to minimize expenses. Headcount was reduced and 2020 management bonuses were eliminated. Other measures included reduced or eliminated discretionary expenses such as travel, meals and entertainment and vehicle allowances.
FINANCIAL HIGHLIGHTS – FOURTH QUARTER
Expenses from corporate activities, excluding depreciation and share-based compensation related to corporate assets and employees, for the fourth quarter of 2020 were $1.7 million compared to $2.4 million of expenses in the fourth quarter of 2019. Throughout the year, the Company initiated several cost saving programs that have reduced overhead and selling, general and administrative expenses. Discretionary expenses and management bonuses were eliminated. Headcount reductions were maintained throughout 2020. STEP obtained $0.3 million of benefit from the CEWS program for corporate employees.
FINANCIAL HIGHLIGHTS – SEQUENTIAL QUARTER
Expenses from corporate activities, excluding depreciation and share-based compensation related to corporate assets and employees, for the fourth quarter of 2020 were $1.7 million compared to $3.3 million of expenses in the third quarter of 2020. STEP incurred $0.3 million in severance and $1.0 million of bad debt expense during third quarter of 2020. The Company benefited from $0.3 million in CEWS during fourth quarter 2020 and $0.4 million during third quarter of 2020.
NON-IFRS MEASURES
Please see the discussion in the Non-IFRS Measures section of the MD&A for the reconciliation of non-IFRS items to IFRS measures.
FORWARD-LOOKING INFORMATION & STATEMENTS
Certain statements contained in this press release constitute “forward-looking statements” or “forward-looking information” within the meaning of applicable securities laws (collectively, “forward-looking statements”). These statements relate to the expectations of management about future events, results of operations and the Company’s future performance (both operational and financial) and business prospects. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “objective” and “capable” and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. While the Company believes the expectations reflected in the forward-looking statements included in this press release are reasonable, such statements are not guarantees of future performance or outcomes and may prove to be incorrect and should not be unduly relied upon.
In particular, but without limitation, this press release contains forward-looking statements pertaining to: COVID-19 and related public health measures and their impact on energy demand and the Company’s financial position and business plans; 2021 industry conditions and outlook, including potential increased activity and the impact thereof on the Company’s equipment reactivation plans, performance, revenue and cash flows; the potential for a global economic recovery; a strengthening commodity price outlook, the effect of weather on the Company’s potential Q1 2021 results; client demand for dual – fuel capabilities; supply and demand for oilfield services and industry activity levels, including industry capacity, equipment levels, and utilization levels; the Company’s ability to meet all financial commitments including interest payments over the next twelve months; market uncertainty, and its effect on commodity prices; relaxation of COVID-19 related restrictions, the potential for a second wave of COVID-19 infections, and the resulting impact on crude oil demand and the Company’s operations; the Company’s anticipated business strategies and expected success, including changes to cost structures and cash preservation measures; the Company’s ability to manage its capital structure; pricing received for the Company’s services; the Company’s capital program in 2021 and management’s continued evaluation thereof; planned utilization of government financial support and economic stimulus programs; expected profitability; expected income tax liabilities; adequacy of resources to funds operations, financial obligations and planned capital expenditures in 2021; planned deployment and staffing levels for the Company’s equipment; the Company’s ability to retain its senior field staff and existing clients; the monitoring of industry demand, client capital budgets and market conditions; client credit risk, including the Company’s ability to set credit limits, monitor client payment patterns, and to apply liens; and the Company’s expected compliance with covenants under its Credit Facilities, its ability to continue as a going concern, and its ability to satisfy its financial commitments and obtain relief from the lenders under its Credit Facilities; and the impact of litigation, including the Calfrac litigation, on the Company.
The forward-looking information and statements contained in this press release reflect several material factors and expectations and assumptions of the Company including, without limitation: the Company will continue to conduct its operations in a manner consistent with past operations; the Company will continue as a going concern; the Company’s ability to manage the effect of the COVID-19 pandemic and OPEC or OPEC+ related market uncertainty on the market for its operations; industry and regulatory uncertainty caused by the new U.S. Presidential administration; the general continuance of current or, where applicable, assumed industry conditions; pricing of the Company’s services; the Company’s ability to market successfully to current and new clients; the Company’s ability to utilize its equipment; the Company’s ability to collect on trade and other receivables; the Company’s ability to obtain and retain qualified staff and equipment in a timely and cost effective manner; levels of deployable equipment; future capital expenditures to be made by the Company; future funding sources for the Company’s capital program; the Company’s future debt levels; the availability of unused credit capacity on the Company’s credit lines; the impact of competition on the Company; the Company’s ability to obtain financing on acceptable terms; the Company’s continued compliance with financial covenants and the ability to obtain covenant relief; the amount of available equipment in the marketplace; and client activity levels. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove correct.
Actual results could differ materially from those anticipated in these forward-looking statements due to the risk factors set forth under the heading “Risk Factors” in the AIF and under the heading “Risk Factors and Risk Management” in the MD&A.
Any financial outlook or future orientated financial information contained in this press release regarding prospective financial performance, financial position or cash flows is based on the assumptions about future events, including economic conditions and proposed courses of action based on management’s assessment of the relevant information that is currently available. Projected operational information, including the Company’s capital program, contains forward looking information and is based on a number of material assumptions and factors, as are set out above. These projections may also be considered to contain future oriented financial information or a financial outlook. The actual results of the Company’s operations will likely vary from the amounts set forth in these projections and such variations may be material. Readers are cautioned that any such financial outlook and future oriented financial information contains herein should not be used for purposes other than those for which it is disclosed herein.
The forward-looking information and statements contained in this press release speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws. The reader is cautioned not to place undue reliance on forward-looking information.
About STEP
STEP is an oilfield service company that provides stand-alone and fully integrated fracturing, coiled tubing and wireline solutions. Our combination of modern equipment along with our commitment to safety and quality execution has differentiated STEP in plays where wells are deeper, have longer laterals and higher pressures.
Founded in 2011 as a specialized deep capacity coiled tubing company, STEP now provides an integrated solution for deep capacity coiled tubing and fracturing services to exploration and production (“E&P”) companies in Canada and the United States (“U.S.”). Our Canadian services are focused in the WCSB, while in the U.S., our services are focused in the Permian and Eagle Ford in Texas and the Bakken in North Dakota.
Our four core values; Safety, Trust, Execution and Possibilities inspire our team of professionals to provide differentiated levels of service, with a goal of flawless execution and an unwavering focus on safety.
For more information please contact: Regan Davis
President & Chief Executive OfficerMichael Kelly
Executive Vice President &
Chief Financial OfficerTelephone: 403-457-1772
Telephone: 403-457-1772 Email: investor_relations@step-es.comWeb: www.stepenergyservices.com
Head Office
Bow Valley Square II
1200, 205 - 5th Ave SW
Calgary, AB T2P 2V7
Main: 403-457-1772
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