STEP Energy Services Ltd. provides a second quarter operational and financial update.
SECOND QUARTER OPERATIONS UPDATE
STEP is pleased to provide an update on the second quarter operations in the Canadian and U.S. geographic regions.
Throughout the past 12 months, STEP has focused on partnering with clients with active and stable work programs, allowing STEP to drive robust utilization and high efficiencies in our operation. This focus creates an Exceptional Client Experience and generates improved profitability, which is expected to be reflected in the strengthening financial results.
Both the Canadian and U.S. geographic regions are continuing to experience strong demand for services and STEP’s management expects second quarter 2022 results to show sequential improvement in revenue and Adjusted EBITDA performance.
STEP was deliberate in its alignment with clients that were expected to have active work programs through the first half of the year, particularly during the second quarter of 2022. The work scope for the second quarter of 2022 was concentrated on larger multi-well pads, which minimized the impact of spring break-up conditions. This focus provided steady utilization for the Company’s five fracturing crews, outside of a slower period during mid-April to mid-May.
The larger pads and improved pricing are expected to result in a higher revenue per day relative to the first quarter of 2022. These large, high-intensity pads are well-suited for STEP’s equipment and logistics capabilities, which can pump in excess 20 hours per day and handle large volumes of proppant. Large pads also optimize STEP’s dual fuel fleets, reducing costs to our clients and lowering emissions. The partial recapture of deep pricing concessions for the Company’s services made through the last downturn provided additional tailwinds to the Company’s second quarter results. Pricing to date in the second quarter of 2022 has held steady or has been raised for much of the work, in contrast to the typical price discounting that occurs during the spring break-up period.
The market for pressure pumping services has tightened significantly in the U.S., particularly in the Permian Basin where STEP operates three fracturing crews. Supply chain constraints and industry discipline are keeping the fracturing crew count flat, despite an increase in the drilling rig count.
Consistent with the messaging seen from our larger U.S. competitors, STEP has seen profitability improve. Pricing for the Company’s services in the U.S. has increased from the start of the second quarter of 2022, which is creating opportunity for margin expansion for STEP.
CONSOLIDATED RESULTS – RAISING GUIDANCE
The second quarter of 2022 is not yet complete, but as of today’s date STEP management estimates second quarter revenue to range between $250.0 million and $265.0 million and Adjusted EBITDA to range between $42.0-$50.0 million. These figures are dependent on some factors that are outside STEP’s control, including weather conditions. Adjusted EBITDA is a non-IFRS financial measure, which is not defined and does not have a standardized meaning under IFRS. See “Non-IFRS Measures” below.
This compares to $219.5 million in revenue and $37.0 million of Adjusted EBITDA ($9.2 million net income) reported in Q1 2022 and $107.5 million in revenue and $11.7 million of Adjusted EBITDA ($10.6 million net loss) generated one year ago in Q2 2021. For context, estimated top line revenue in the current quarter may be on track to be the highest in the Company’s history.
THIRD AND FOURTH QUARTER OUTLOOK
The third quarter of 2022 is expected to experience higher activity levels in Canada and steady activity in the U.S., with continued improvement in expected profitability on a sequential basis.
Inflation remains a pressing concern for the Company, pointing to the continued need for pricing adjustments. Proppant supply remains under pressure, although to date STEP has been able to leverage its North American presence to secure supply from its major sand suppliers. The supply of equipment is expected to remain tight, as the availability of trained personnel remains limited and much of the idled equipment requires significant investment to reactivate. STEP is satisfied that the market is in balance and does not anticipate activating additional fleet capacity through the balance of 2022.
Notwithstanding its expected strong second quarter performance, margins for the Company remain below the levels achieved in previous cycles. Returns on invested capital for the oilfield service sector must increase if the global energy complex is to address the extreme tightness in markets for both oil and natural gas. STEP expects to continue to move pricing higher, providing returns needed to reinvest into the Company’s employees and equipment and provide returns to our shareholders.
BALANCE SHEET UPDATE
In line with the expected improvement in profitability, the Company expects its leverage to decrease on an absolute and relative basis. Debt retirement remains a key priority for the Company and a means to return value to STEP shareholders as balance sheet fundamentals improve. The Company has initiated discussions on the renewal of its credit facilities with its syndicate of lenders and expects to have the extension completed in due course.
STEP’s President and Chief Operating Officer, Steve Glanville, commented “I am extremely proud of the performance of our professionals who go above and beyond every day to create the Exceptional Client Experience that STEP is known for. These results are impossible without their dedication and hard work.”
STEP’s focus on value creation for its employees, clients and shareholders is built on a foundation that prioritizes the following:
• A culture that fosters possibility thinking which delivers high performance results
• A disciplined focus on debt repayment, with a Debt to Adjusted EBITDA goal of less than 1:1
• Continued investment in state-of-the-art equipment that is ESG focused and delivers unparalleled performance
• A client base that is aligned with our core values