News Releases

CALGARY, Alberta--(BUSINESS WIRE)--STEP Energy Services Ltd. (the “Company” or “STEP”) is pleased to announce its financial and operating results for the three and six months ended June 30, 2024. The following press release should be read in conjunction with the management’s discussion and analysis (“MD&A”) and the unaudited condensed consolidated financial interim statements and notes thereto as at June 30, 2024 (the “Financial Statements”). Readers should also refer to the “Forward-looking information & statements” legal advisory and the section regarding “Non-IFRS Measures and Ratios” 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.sedarplus.ca, including the Company’s Annual Information Form for the year ended December 31, 2023 dated March 11, 2024 (the “AIF”).

CONSOLIDATED HIGHLIGHTS

FINANCIAL REVIEW

OPERATIONAL REVIEW

SECOND QUARTER 2024 HIGHLIGHTS

• Consolidated revenue for the three months ended June 30, 2024 of $231.4 million, was effectively in line with revenue of $232.1 million for the three months ended June 30, 2023 and decreased 28% from $320.1 million for the three months ended March 31, 2024.
• Net income for the three months ended June 30, 2024 of $10.5 million ($0.14 per diluted share) compared to $15.3 million ($0.21 per diluted share) in the same period of 2023 and $41.4 million ($0.55 per diluted share) for the three months ended March 31, 2024. Included in net income for three months ended June 30, 2024 was share based compensation expense of $2.1 million, compared to $1.4 million during the three months ended June 30, 2023. STEP has generated positive net income for nine of the last ten quarters.
• For the three months ended June 30, 2024, Adjusted EBITDA was $41.7 million (18% of revenue) compared to $47.4 million (20% of revenue) in Q2 2023 and $79.5 million (25% of revenue) in Q1 2024.
• Free Cash Flow for the three months ended June 30, 2024 was $20.5 million compared to $34.8 million in Q2 2023 and $53.5 million in Q1 2024.
• STEP continued to advance its shareholder return strategy in 2024:
  • During the second quarter of 2024, the Company repurchased and cancelled 882,008 shares at an average price of $4.08 per share under its Normal Course Issuer Bid (“NCIB”). Under the NCIB, the Company can repurchase and cancel 3.6 million shares, representing 5% of Company’s issued and outstanding shares.
• STEP also made significant progress on debt reduction during the quarter while continuing to invest into the long-term sustainability of the business:
  • The Company had Net Debt of $75.8 million at June 30, 2024, compared to $87.8 million at December 31, 2023 and $107.9 million at March 31, 2024. STEP has reduced Net Debt by $235 million from peak levels in 2018.
  • The Company invested $26.4 million into sustaining and optimization capital budget expenditures. Optimization capital continues to be focused on the upgrade of fracturing fleets with the latest Tier 4 dual fuel engine technology, which displaces up to 85% of diesel with natural gas. At June 30, 2024, 74% of the Tier 2 and Tier 4 engines in STEP’s fracturing fleet have been transitioned to dual fuel technology.
• Working Capital as at June 30, 2024 of $64.6 million was $22.5 million higher than the $42.1 million at December 31, 2023 and lower by $26.3 million compared to the $90.9 million as at March 31, 2024. Working capital fluctuations are typical and are influenced by activity levels and timing of client receipts.

SECOND QUARTER 2024 OVERVIEW

The second quarter of 2024 saw continued volatility in natural gas prices, although the benchmark Henry Hub natural gas price exited the quarter on a more constructive trajectory, closing at $2.42/mmBtu, up from $1.64/mmBtu at the start of the quarter. U.S. natural gas production levels were down in April and May as a result of lower gas drilling and production curtailments, with some recovery seen in June as prices strengthened in expectation of the summer power demand cycle. AECO, the benchmark Canadian gas price, was weak through much of the quarter, although the impact of this is muted for many Canadian gas producers as they rely more heavily on the associated natural gas liquids production which is tied more closely to the price of oil. Oil prices stayed relatively steady, with the benchmark West Texas Intermediate (“WTI”) crude price hovering close to $80 per barrel for most of the quarter.

Oilfield service levels are primarily reflected in publicly reported drilling rig counts and estimates made by analysts on fracturing activities. Drilling rigs in the U.S. retreated to an average of 583 rigs in the second quarter, down from 602 in the first quarter. Canadian rig counts averaged 134 during the second quarter, down from 208 in the first quarter but in line with the seasonal slowdown that is typical in this quarter. It is notable that Canadian rig counts are at the higher end of the five-year average, whereas U.S. rig counts are trending below the five-year average. Rystad Energy, an independent energy research and business intelligence company, reported that North American fracturing starts declined through the quarter, from 1,118 in April to 1,087 in June, with the second quarter total down approximately 11% (Frac Monitor: June closes out weak first half of the year, 2024).

Spring break up typically affects STEP’s northern U.S. and Canadian operating regions. The impact of break up is diminishing as more clients recognize the value of level loading their programs by planning around the road restrictions and soft ground conditions on leases, but there is still a slow down that affects the operational cadence in the quarter. Revenue of $231.4 million was in line with performance from the same period last year, while a shift in job mix resulted in Adjusted EBITDA of $41.7 million, down from $47.4 million in the same period last year.

STEP’s Canadian geographic region generated quarterly revenue of $161.0 million and Adjusted EBITDA of $36.7 million. STEP’s reputation in the Canadian market as a technical leader and focus on strong client alignment continue to drive the success of these operations. The client commitments that STEP secured have created stability for both fracturing and coiled tubing operations, which is particularly important during the second quarter where spring break up has historically caused results to soften. Favourable weather conditions combined with a milder wildfire season also provided a lift to activity during Q2 2024. Revenue during the second quarter for the fracturing operations increased compared to the prior year as activity levels and operating efficiencies continue to improve. The utilization and efficiency improvements are reflected in the increase in proppant pumped, which increased in Q2 2024 to 501,000 tonnes from 310,000 tonnes in Q2 2023. Revenue for STEP’s coiled tubing and ancillary pumping and fluid services also increased compared to the prior year. STEP’s focus on working with clients with larger scale programs is one of the main reasons this service line has improved significantly on a year over year basis.

STEP’s U.S. geographic region generated quarterly revenue of $70.4 million and Adjusted EBITDA of $9.4 million, a decline sequentially and year over year. U.S. fracturing operations continued to be impacted by challenging market conditions resulting in significantly fewer operating days in the period compared to the prior year. The U.S. coiled tubing business continues to demonstrate its resiliency and was able to increase activity both sequentially and year over year. These operations have experienced some pricing pressure during recent periods, however, alignment with some of the largest operators in each basin continues to be a positive factor for this operating line. STEP reactivated one additional coiled tubing unit during the second quarter and continues to look for opportunities to reactivate additional units when market conditions will support further expansion.

The Company generated consolidated Adjusted EBITDA of $41.7 million (18% Adjusted EBITDA margin) during Q2 2024 which was slightly lower than the $47.4 million (20% Adjusted EBITDA margin) achieved in the comparable period of 2023. The change in revenue mix from both a geographic and service line perspective, higher sand volumes, the ongoing pricing pressures related to the lower natural gas price and the higher cost profile of the business following several years of inflation were all contributing factors in the modest margin compression compared to the prior year. Increased activity was a significant factor in STEP’s ability to maintain relatively consistent Adjusted EBITDA margins despite these factors.

Net income was $10.5 million in Q2 2024 ($0.14 diluted earnings per share), sequentially lower than the $41.4 million in Q1 2024 ($0.55 diluted earnings per share) and the $15.3 million in Q2 2023 ($0.21 diluted earnings per share). Net income included $2.8 million in finance costs (Q1 2024 ‐ $2.9 million, Q2 2023 ‐ $2.8 million) and $2.1 million in share‐based compensation expense (Q1 2024 ‐ $0.8 million, Q2 2023 ‐ $1.4 million expense).

Free Cash Flow was $20.5 million in Q2 2024 ($0.28 diluted Free Cash Flow per share), sequentially lower than the $53.5 million in Q1 2024 and lower than the $34.8 million in Q2 2023. STEP continues to generate positive Free Cash Flow enabling the Company to continue to upgrade its asset base as well as deliver on its shareholder return framework. STEP invested $26.4 million into capital expenditures during Q2 2024 to further transition its asset base to next generation technology and meet client demands for solutions that reduce both costs and emissions. Phase one of STEP’s shareholder return framework is the focus on deleveraging the balance sheet. Net Debt decreased to $75.8 million at the close of Q2 2024 from $107.9 million at close of Q1 2024. Debt is now $235 million lower than peak levels in 2018. The reduction in debt and improvement in Adjusted EBITDA resulted in a 12-month trailing Funded Debt to Adjusted Bank EBITDA of 0.48:1.00, well under the limit of 3.00:1 in the Company’s Credit Facilities (as defined in Capital Management – Debt below). Phase two of STEP’s shareholder return framework was the initiation of a NCIB in late 2023. As at June 30, 2024, 1,921,734 shares had been repurchased to date under the NCIB program at a weighted average price of $4.16 per share. STEP’s book value per share at June 30, 2024 was $5.70, representing exceptional value for investors.

MARKET OUTLOOK

STEP anticipates that the commodity market will continue to experience some price volatility through the second half of the year, but sees a constructive backdrop forming for 2025. U.S. producers have shown restraint in production growth, which has been supportive of OPEC’s goal to see price stability. The forward strip for natural gas prices is showing a recovery in the key Henry Hub benchmark, with prices above the crucial $3/mmBtu level for most of 2025. Completion of the Trans Mountain Expansion (“TMX”) project and LNG Canada will spur additional activity in Canada, where STEP earns the large majority of its revenue.

The long-term outlook for oilfield services is very constructive. The structural under-investment in hydrocarbon production capacity through the last seven years has been exacerbated by geopolitical tensions, forcing governments and policy makers to confront the reality that oil and gas will be a key part of the energy mix for many years.

Canada

The third quarter is expected to deliver robust activity levels across STEP’s Canadian division. Above average precipitation levels through the second quarter have lessened concerns over drought, although there remain areas where water availability may be difficult and could slow operations. Hot and dry conditions at the start of the quarter have also raised the risk of wildfire disruptions.

Fracturing has a full schedule of work through the third quarter and early into the fourth quarter. Most of STEP’s work is focused on large multi-well pads that require significant amounts of proppant. STEP expects to exceed 2023’s total Canadian proppant volume of 1.1 million tonnes early in the third quarter, with total 2024 volumes expected to reach record levels. Pricing on proppant for these large volume programs is competitive, with per ton margins compressed relative to smaller programs.

STEP’s coiled tubing and ancillary services of fluid and nitrogen pumping are expected to continue seeing strong utilization levels throughout the third quarter and early into the fourth quarter. The Company is one of the leading service providers in the WCSB and STEP’s coiled tubing crews are valued for their technical expertise and experience in the most technically challenging wells.

The fourth quarter is increasingly being marked by a slowdown in activity as E&P companies remain disciplined in their capital spending, resulting in work programs that begin winding down mid quarter. Pressure on natural gas prices has led some E&P companies to reduce their 2024 work programs, with a more pronounced slowdown expected in Q4 as a result. STEP will use the downtime in the fourth quarter to prepare for first quarter in 2025 that is expected to be highly utilized.

United States

STEP’s coiled tubing is expected to see steady utilization throughout the third quarter, with the northern regions continuing to run ahead of the southern regions. The growing trend towards three-mile laterals, and in some cases beyond, are constructive for STEP’s extended reach equipment and engineering expertise. Activity is expected to slow through the fourth quarter as larger clients complete their programs and spot work decreases.

The U.S. fracturing market continues to remain unsettled, with an oversupply of fracturing equipment impacting rates and utilization. STEP does not expect this service line to contribute meaningfully through the balance of 2024 and has reduced its utilization expectation and costs accordingly. Management continues to evaluate all options that leverage STEP’s geographic footprint and its ability to transfer assets where economic returns are most favourable.

Consolidated

STEP’s focus for the balance of 2024 and into 2025 is on generation of Free Cash Flow while continuing to invest in upgrading the Company’s asset base. The Company remains committed to having 90% of its fracturing horsepower capable of operating on natural gas by the end of 2025, displacing diesel and the associated emissions. Further investments into the development of next generation coiled tubing technologies are also anticipated.

The strong results posted year to date support the Company’s goals to reduce its balance sheet leverage and allowed STEP to expand its shareholder return framework to include a NCIB. Management believes that the current share price does not reflect the value inherent in the Company and sees the NCIB as an effective means to provide value to shareholders.

CANADIAN FINANCIAL AND OPERATIONS REVIEW

STEP has a fleet of 16 coiled tubing units in the WCSB, all of which are designed to service the deepest wells in the basin. STEP’s fracturing business primarily focuses on the deeper, more technically challenging plays in Alberta and northeast British Columbia. STEP deploys or idles coiled tubing units and fracturing horsepower as dictated by the market’s ability to support targeted utilization and economic returns.

SECOND QUARTER 2024 COMPARED TO SECOND QUARTER 2023

Revenue for the three months ended June 30, 2024 was $161.0 million compared to $135.9 million for the same period of the prior year. STEP’s fracturing operations continue to benefit from its alignment with clients that have large multi-well pads that provide consistent utilization throughout much of the year. These dedicated programs are complemented by smaller work programs creating a diverse client mix and improving overall utilization for the fracturing service line. The improved utilization combined with the addition of another fracturing fleet resulted in a 46% increase in operating days in the second quarter compared to the same period of the prior year. Fracturing results were further bolstered by the continued increase in fracturing intensity as proppant pumped was 62% higher in Q2 2024 compared to Q2 2023. The Canadian coiled tubing operations also continue to show significant improvement compared to the prior year with operating days increasing by 51% to 527 operating days in the period from 348 operating days in the same period in 2023. These operations have benefited from the focus on client alignment, securing long-term contracts with key clients in the highly utilized Montney basin.

Adjusted EBITDA for the second quarter of 2024 was $36.7 million (23% of revenue) versus $33.4 million (25% of revenue) in the second quarter of 2023. The increase in Adjusted EBITDA is a reflection of the overall increase in activity during the period however there has been some erosion in margins due to increased sand volumes and competitive pressures that limited the ability to increase rates while inflationary pressures continued to impact the cost profile.

SIX MONTHS ENDED JUNE 30, 2024 COMPARED TO SIX MONTHS ENDED JUNE 30, 2023

Revenue for the six months ended June 30, 2024 was $402.1 million compared to $310.4 million for the six months ended June 30, 2023. The Company had strong utilization in both service lines as alignment with key clients and minimal weather impacts allowed for consistent activity throughout first half of the year. These factors contributed to the increase in coiled tubing activity as operating days increased to 1,142 for the first six months of 2024 from 920 during the comparable period of 2023. These factors, combined with STEP’s focus on modernizing its fracturing fleet, resulted in increased operating days for the fracturing service line to 755 for the first six months of 2024 from 521 during the same period of 2023. Increased utilization and higher fracturing intensity have been a significant benefit to the fracturing service line as STEP pumped 93% of the prior year’s annual volume during the first six months of 2024.

The increased utilization across the entire Canadian operations has resulted in a significant boost to profitability of this segment. Canadian operations generated Adjusted EBITDA of $108.8 million (27% of revenue) for the first six months of 2024 compared to $78.2 million (25% of revenue) in the same period of 2023. Adjusted EBITDA increased 39% on a revenue increase of 30% which is a reflection of the impact of increased utilization on the financial performance of the business.

UNITED STATES FINANCIAL AND OPERATIONS REVIEW

STEP has a fleet of 19 coiled tubing units in the Permian and Eagle Ford basins in Texas, the Bakken shale in North Dakota, and the Uinta-Piceance and Niobrara-DJ basins in Colorado while the U.S. fracturing business primarily operates in the Permian and Eagle Ford basins in Texas. The Company deploys or idles coiled tubing units and fracturing horsepower as dictated by the market’s ability to support targeted utilization and economic returns.

For more information please contact:
Steve Glanville
President and Chief Executive Officer
Telephone: 403-457-1772

Klaas Deemter
Chief Financial Officer
Telephone: 403-457-1772

Email: investor_relations@step-es.com
Web: www.stepenergyservices.com