STEP Energy Services Ltd. (the “Company” or “STEP”) is providing a first quarter 2023 operational and financial update as well as reporting continued improvement in its balance sheet.
Operational Update
Canada
STEP’s Canadian operations had a robust first quarter 2023 in both fracturing and coiled tubing, leading to its best quarterly revenue performance. Favourable weather conditions and client alignment resulted in solid utilization in both service lines. STEP’s four large fracturing crews operated primarily in the gas and condensate rich areas of the Montney while its smaller low-pressure crew was active in the oil rich Cardium and Viking formations, driving record fracturing revenue for the quarter. The extended cold weather into late March provided a longer operating cycle for STEP’s nine coiled tubing units, with the service line recognizing its best top line performance since the third quarter of 2018. In line with the strong operating performance, Canada is expected to produce strong Adjusted EBITDA for the quarter.
Effective January 1, 2023, STEP started to record fracturing fluid ends as maintenance expense rather than sustaining capital. This change in accounting estimate was made after a detailed analysis of the useful life for these components. Canadian operations is expected to recognize between $2.5-3.0 million for fluid end expense in the first quarter, which includes an approximately $1.0 million expense to reflect the change in useful life.
United States
STEP’s U.S. operations saw mixed results in the first quarter. Coiled tubing continued its trend of sequential quarterly increases, leading to record top line performance, with strong demand from leading public E&Ps across all basins for STEP’s industry leading coiled tubing capabilities. As disclosed in STEP’s 2022 fourth quarter public release, STEP’s U.S. fracturing service line was negatively impacted by shifting client schedules related to drilling delays and commodity price pressures. With these changes coming at the start of the year, STEP was unable to secure sufficient spot work for the crews, resulting in lower revenues relative to the fourth quarter of 2022. Additional sustaining capital and maintenance expense was deployed to improve efficiencies and reliability of the equipment, but the fracturing service line downtime will negatively impact the U.S.’s Adjusted EBITDA margins.
Consolidated Results for the First Quarter
Aggregating the performance of STEP’s four service lines, first quarter 2023 revenue is expected to range between $260 million and $265 million and Adjusted EBITDA is expected to range between $43-$48 million, which includes an expense of approximately $2.5-$3.0 million for fluid end expenses. This compares to the approximately $37.0 million of Adjusted EBITDA reported in Q1 2022 and the $48.6 million in Q4 2022, neither of which recognized Canadian fluid ends in maintenance expense. Notwithstanding the sequential decline in Adjusted EBITDA, first quarter 2023 results are expected to rank as one of the Company’s strongest.
Outlook
Canada
STEP has aligned itself with a Canadian client base that recognizes the advantages of operating in the second quarter and expects to see good utilization for its fracturing service line through much of the quarter, particularly for the larger crews. STEP’s smaller fracturing crew is more susceptible to road bans due to the typical spring break up conditions in the areas in which it operates, which may limit activity for this crew in the second quarter of 2023. Coiled tubing is also more likely to be impacted by spring break up conditions, which could result in a moderating of utilization in that service line in the second quarter of 2023.
Visibility into the second half of the year is solid, with steady utilization anticipated across the Company’s core client group in both service lines.
United States
The U.S. is expected to see higher utilization for the fracturing service line in the second quarter. The recent strengthening of WTI oil prices above $80 will likely provide support to activity but the ongoing weakness in the natural gas price will remain a limiting factor in the U.S. and as a result STEP has deferred its plan to expand to four fracturing crews until market conditions can support additional capacity. Coiled tubing is expected to remain steady, with some impact from spring break up conditions expected in the northern districts.
Utilization on STEP’s fracturing and coiled tubing fleets is expected to remain steady into the second half of the year.
Balance Sheet and Capital Budget Update
Net debt1 at the close of Q1 2023 is expected to be between $130 and $135 million, continuing the deleveraging trend that has seen debt come down from $310 million in 2018. Debt reduction has been an important priority for the Company and a means to return value to shareholders.
STEP will continue to monitor the allocation of free cash flow to capital, ensuring that the spend is in line with expectations for 2023. The priority will be on continuing the Company’s Tier 4 dual fuel upgrade program, with completion of the first fleet expected before the end of the second quarter 2023. Eight of the sixteen pumps are already in the field, consistently providing diesel substitution rates of up to 85% for our client.
The change in accounting for fluid ends will remove approximately $4.2 million from the 2023 sustaining capital budget. These expenditures will now be accounted for in maintenance expense, so STEP expects no change to its free cash flow as a result of this change in accounting treatment.
CEO’s Comments
STEP’s President and CEO, Steve Glanville, commented “The first quarter of 2023 continued to show the strength of our story. We’ve had disciplined growth through M&A; sustained investment in our people and equipment; and strategic geographic diversification in the busiest North American operating areas, all of which produced among the best return on equity in our peer group in 2022.”
"Pressure pumping is a project-based business that is influenced by many different factors, which we saw in the U.S. in the first quarter. Client delays happen occasionally, but the market is typically dynamic enough that work can be backfilled. In this case, we saw a steep drop in frac activity in the Permian from January to February. This was seen in statistics from Rystad Energy, which showed a drop in fracturing jobs started between January to February of nearly 20%. Despite that, three of our four service lines had great results, which we’re very proud of. We’re seeing the U.S. market firm up and expect that our fracturing service line will contribute more meaningfully for the rest of the year.”
