STEP Energy Services Ltd. Reports First Quarter 2024 Results

CALGARY, Alberta–(BUSINESS WIRE)–STEP Energy Services Ltd. (the “Company” or “STEP”) is pleased to announce its financial and operating results for the three months ended March 31, 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 statements and notes thereto as at March 31, 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

($000s except percentages and per share amounts)	Three months ended
	March 31,				March 31,
		2024				2023
Consolidated revenue	$	320,146			$	263,368
Net income	$	41,357			$	19,656
Per share-basic	$	0.58			$	0.27
Per share-diluted	$	0.55			$	0.26
Adjusted EBITDA (1)	$	79,533			$	45,352
Adjusted EBITDA % (1)		25	%			17	%
Free Cash Flow (1)		53,483				17,070
Per share-basic	$	0.74			$	0.24
Per share-diluted	$	0.72			$	0.23
(1) Adjusted EBITDA and Free Cash Flow are non-IFRS financial measures, Adjusted EBITDA % is a non-IFRS financial ratio. These metrics are not defined and have no standardized meaning under IFRS. See Non-IFRS Measures and Ratios.

OPERATIONAL REVIEW

($000s except days, proppant, pumped, horsepower and units)	Three months ended
	March 31,				March 31,
		2024				2023
Fracturing services
Fracturing operating days (2)		566				473
Proppant pumped (tonnes)		830,000				510,000
Fracturing crews		8				8
Dual fuel horsepower (“HP”), ended		332,300				274,000
Total HP, ended		490,000				490,000
Coiled tubing services
Coiled tubing operating days (2)		1,352				1,263
Active coiled tubing units, ended		22				21
Total coiled tubing units, ended		35				35
(2) An operating day is defined as any coiled tubing or fracturing work that is performed in a 24-hour period, exclusive of support equipment.

($000s except shares)		March 31,			December 31,
		2024				2023
Cash and cash equivalents	$	7,427			$	1,785
Working Capital (including cash and cash equivalents) (1)	$	90,898			$	42,104
Total assets	$	763,439			$	606,519
Total long-term financial liabilities (1)	$	142,765			$	118,970
Net Debt (1)	$	107,925			$	87,844
Shares outstanding		71,724,258				72,233,064
(3) Working Capital, Total long-term financial liabilities and Net Debt are non-IFRS financial measures. They are not defined and have no standardized meaning under IFRS. See Non-IFRS Measures and Ratios.

FIRST QUARTER 2024 HIGHLIGHTS

• Consolidated revenue for the three months ended March 31, 2024 of $320.1 million, increased 22% from $263.4 million for the three months ended March 31, 2023 and increased 64% from $195.0 million for the three months ended December 31, 2023.
• Net income for the three months ended March 31, 2024 of $41.4 million ($0.55 per diluted share), compared to $19.7 million ($0.26 per diluted share) in the same period of 2023 and a loss of $5.2 million ($(0.07) per diluted share) for the three months ended December 31, 2023. Included in income for the three months ended March 31, 2023, was a share-based compensation recovery of $5.1 million, compared to an expense of $0.8 million during the three months ended March 31, 2024.
• For the three months ended March 31, 2024, Adjusted EBITDA was $79.5 million or 25% of revenue compared to $45.4 million or 17% of revenue in the comparative period of the prior year.
• Free Cash Flow for the three months ended March 31, 2024 was $53.5 million compared to $17.1 million in Q1 2023 and $(4.5) million in Q4 2023.
• STEP continued to advance its shareholder return strategy in 2024:
  • During the first quarter of 2024, the Company repurchased and cancelled 908,270 shares at an average price of $4.30 per share under its Normal Course Issuer Bid (“NCIB”). Additionally, the Company cancelled the 48,600 shares repurchased in Q4 2023. Under the NCIB, the Company can repurchase and cancel 3.6 million shares, representing 5% of Company’s issued and outstanding shares.
• Increased activity during the three months ended March 31, 2024 resulted in an increase in Working Capital to $90.9 million from $42.1 million at December 31, 2023.
• Net Debt increased to $107.9 million at March 31, 2024 compared to $87.8 million at December 31, 2023, resulting from a decrease in cash from operating activities.
• The Company invested $30.5 million into sustaining and optimization capital equipment during the three months ended March 31, 2024. The primary focus of the optimization capital was the continued upgrade of fracturing fleets in Canada and the U.S. with the latest Tier 4 dual fuel engine technology, which reduces cost and emissions by displacing up to 85% of diesel with natural gas. STEP completed the spend on its first U.S. Tier 4 dual fuel fleet in Q1 2024 and anticipates the completion of a second Canadian Tier 4 dual fuel fleet in Q2 2024.
• STEP’s fracturing service line set monthly pumping records in Canada and the U.S., achieving 629 hours in Canada and 547 hours in the U.S., a testament to the capabilities of the professionals that operate and manage these service lines as well as to the exceptional alignment with key clients that made this possible.
• STEP reactivated one coiled tubing spread during the quarter, bringing total active spreads in Canada and the U.S. to 22, among the largest fleets in North America. The fleet continues to set depth records in the U.S., reaching 8,356 meters (27,413 feet) during the first quarter.

FIRST QUARTER 2024 OVERVIEW

The first quarter of 2024 saw a growing divergence in pricing for the benchmark U.S. Henry Hub natural gas and West Texas Intermediate crude oil (“WTI”) prices. Natural gas prices continued to languish as a result of a mild winter in North America and Europe, tempering the expected demand and adding to storage levels that were already at the upper end of their five-year range. Natural gas drilling rigs in the U.S. have fallen to their lowest levels since early 2022 as natural gas producers, including large companies such as EQT, Chesapeake Energy and CNX Resources, began curtailing production or reducing their 2024 capital programs to moderate production volumes. After a Q1 2024 peak of approximately 106 billion cubic feet per day (“BCF/d”), production slowed to around 100 BCF/d in early April. There has not been as much of a supply response to low gas prices in Canada, with record monthly production holding relatively flat through the first quarter. Crude oil prices continued to rally through the first quarter, supported by ongoing production restraint from the Organization of the Petroleum Exporting Countries plus other oil-producing countries (“OPEC+”) and global inventory levels that sit meaningfully below the five-year ranges. WTI steadily increased from around $70 per barrel at the start of the quarter to approximately $84 per barrel at the close.

Oilfield service levels are primarily reflected in publicly reported drilling rig counts, with estimates made by analysts on fracturing activities. Oil directed drilling rigs in the U.S. did not materially respond to the strengthening oil prices, with the quarterly average only up from 500 in Q4 2023 to 502 in Q1 2024. Gas directed drilling rigs declined slightly from 118 at the start of the quarter to 112 at the close, averaging 117 in Q1 2024, in line with 118 in Q4 2023. Canadian rig counts averaged 208 during Q1 2024, peaking at 234 before closing the quarter at 151. Canadian rig counts typically see a seasonal decline at the end of Q1 with the onset of the spring break up period. Rystad Energy⁽¹⁾, an independent energy research and business intelligence company, reported that North American fracturing starts declined through the quarter, from 1,279 in January to 1,080 in March.

STEP earned consolidated first quarter revenue of $320.1 million and Adjusted EBITDA of $79.5 million, a record for the Company. The first quarter results demonstrated the powerful economic potential of steady utilization and is a template for what the Company is capable of.

STEP’s Canadian geographic region generated quarterly revenue of $241.1 million and Adjusted EBITDA of $72.1 million. Work scope deferred from prior year fourth quarter into the first quarter meant that STEP could resume operations in early January, largely avoiding the challenges associated with mobilizing crews during the extended cold snap later in the month. Strong client alignment enabled STEP to deploy a sixth fracturing fleet during the first quarter resulting in significantly higher operating days. Increased operating efficiency combined with higher-intensity well completions substantially improved fracturing revenue in Canada, resulting in STEP’s highest quarter for fracturing revenue. These operating improvements and shift in job mix are reflected in the increase in proppant pumped, which increased in Q1 2024 to 558,000 tonnes from 223,300 tonnes in Q4 2023 and from 296,000 tonnes in Q1 2023. STEP’s large logistics fleet handled a significant proportion of this proppant, providing additional value to clients as well as for the Company. Activity for STEP’s coiled tubing and ancillary pumping and fluid services was also strong throughout the first quarter, setting a revenue record for this combined service line. STEP’s reputation in the Canadian market as a technical leader and strong client alignment were key factors in this performance.

STEP’s U.S. geographic region generated quarterly revenue of $79.1 million and Adjusted EBITDA of $12.8 million, a significant improvement sequentially and year over year. U.S. fracturing operations saw a significant improvement in profitability despite only running two fleets, as a consistent client base with steady utilization created higher operating efficiencies. The improvement in efficiencies is evident in the proppant pumped which increased by 27% compared to the prior year despite a decrease in operating days by 28%. STEP continues to see strong results from the U.S. coiled tubing business as the focus on client alignment results in working for some of the largest operators in each basin.

The Company generated consolidated Adjusted EBITDA of $79.5 million (25% Adjusted EBITDA margin) during Q1 2024. This was higher than the $18.4 million (9% Adjusted EBITDA margin) posted in Q4 2023 and the $45.4 million (17% Adjusted EBITDA margin) achieved in Q1 2023. This performance depends on strong client relationships that recognize the need for flexibility in scheduling to accommodate the inevitable challenges that can occur as service companies balance multiple client schedules and deal with the uncertainties of weather and field operations. The increase in activity was a significant factor in the higher Adjusted EBITDA but margins were also positively impacted by strong cost management throughout the current quarter and by management’s proactive approach to complete key maintenance during the prior quarter to ensure the asset base was prepared for the highly utilized first quarter.

Net income was $41.4 million in Q1 2024 ($0.55 diluted earnings per share), sequentially higher than the $5.2 million loss in Q4 2023 ($0.07 diluted loss per share) and the $19.7 million in Q1 2023 ($0.26 diluted earnings per share). Net income included $2.9 million in finance costs (Q4 2023 ‐ $2.6 million, Q1 2023 ‐ $2.9 million) and share‐based compensation expense of $0.8 million (Q4 2023 ‐ $0.8 million expense, Q1 2023 ‐ $5.3 million recovery).

Free Cash Flow (“FCF”) was $53.5 million in Q1 2024 ($0.72 diluted FCF per share), sequentially higher than both the $(4.5) million in Q4 2023 ($(0.06) diluted FCF per share) and the $17.1 million in Q1 2023 ($0.23 diluted FCF per share). The positive Free Cash Flow enabled STEP to continue to improve its asset base while limiting increases to Net Debt. STEP invested $30.5 million into capital expenditures during Q1 2024 to further transition its asset base to next generation technology. Net Debt increased by $20.1 million during the first quarter to $107.9 million at the close of Q1 2024 from $87.8 million at the close of Q4 2023 due in large part to the increase in Working Capital that was created as a direct result of the increased activity levels experienced in Q1 2024. STEP has now reduced debt by nearly $210 million from peak levels in 2018. The reduction in debt and improvement in Adjusted EBITDA meant that the Company had a 12-month trailing Funded Debt to Adjusted Bank EBITDA of 0.63:1.00, well under the limit of 3.00:1 in the Company’s Credit Facilities (as defined in Capital Management – Debt below).

____________________

^{1 Rystad Energy: Frac Monitor, April 18, 2024}

MARKET OUTLOOK

The medium to longer term outlook for the North American energy sector is anticipated to continue strengthening as major energy infrastructure projects are completed in Canada and the U.S. In Canada, line fill has begun on the Trans Mountain Expansion Project (“TMX”), with the first shipment of oil expected to be loaded in the second quarter of 2024. This project increases the capacity of the original Trans Mountain Pipeline from 300,000 barrels of oil per day to 890,000 barrels of oil per day and will benefit the Canadian oil and gas sector by increasing production capacity and reducing the price differential for Canadian oil producers, while also increasing the oilsand’s demand for natural gas and condensate.

Key LNG projects in Canada and the U.S. are expected to reach completion in the next 12 months. LNG Canada is expected to begin taking feedgas in late 2024, marking a major milestone for the natural gas industry in Canada. The $5 billion Indigenous loan guarantee program included in the 2024 Canadian federal budget is viewed as potentially helpful for advancing the other LNG projects under consideration in Canada, which could push Canadian LNG production to approximately 6 BCF/d by 2030. In the U.S., LNG exports are set to resume growth in early 2025 as the Golden Pass and Plaque mines LNG facilities become operational. By the end of the decade U.S. LNG production is on schedule to double to around 26 BCF/d, increasing to approximately 32 BCF/d by 2032. Collectively these projects demonstrate that North America is becoming a cornerstone supplier of clean, reliable energy to the world, lifting millions of people out of energy poverty and delivering energy security to allies across the world, while providing constructive economic conditions for North American producers and service providers.

In the near term, natural gas will likely continue to struggle during the seasonal lull ahead of the summer power demand cycle. Production curtailment and capital reductions in the U.S. will put pressure on the oilfield service sector activity levels through the second quarter and into the third quarter, with some risk of the same in Canada. Oil prices are expected to remain stable as OPEC+ manages supply to keep global prices stable.

Canada

Canadian activity levels have been strong to date, as cool temperatures in April delayed the onset of typical spring break up conditions. Some seasonal softness in utilization is expected in the second quarter, but all service lines are seeing relatively strong utilization levels as an increasing number of clients are seeing value in continuing their work programs through the second quarter.

The fracturing service line continues to have a solid book of work through the next several quarters, although not at the same intensity experienced in the first quarter. STEP has secured long term contracts with clients that have large multi-well pads in the Montney and Duvernay plays which provides consistent utilization throughout much of the year. The longer-term contracts are complemented by shorter term contracts that tend to be for small to medium size work programs. Visibility into the fourth quarter is limited, with the trend to slower activity in this quarter expected to continue until LNG offtake adds more stability to the natural gas market. The pricing environment has been competitive, with the trend towards higher proppant intensity narrowing margins, particularly on large volume programs.

Activity for STEP’s coiled tubing and ancillary services of fluid pumping and nitrogen is also benefitting from the focus on client alignment. 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 Company’s focus on technology, such as STEP IQ real-time data services, brings industry leading solutions to client locations, allowing STEP to secure additional contracts for services for the balance of the year.

The worsening drought conditions have prompted extensive discussions with clients around the availability of water. This will remain a risk in 2024 but STEP’s comprehensive suite of water treatment solutions allow for greater use of recycled and non potable water than ever before. If drought conditions become more extreme, STEP’s proprietary LPG fracturing technology allows for the complete elimination of water.

United States

The U.S. fracturing market remains oversupplied, which continues to impact utilization and pricing as fracturing fleets focused on the gassier plays migrate to the Permian Basin and bid margins lower. STEP’s two dual fuel fleets provide high diesel substitution and have demonstrated high levels of operational efficiency, but the ongoing oversupply and pricing pressures will likely result in intermittent utilization and reduced margins, resulting in minimal profitability for this service line in the second quarter. Conditions are expected to improve into the second half of the year, but visibility remains limited at this juncture. Management continues to explore opportunities that leverage STEP’s geographic footprint to transfer assets where economic returns are most favourable.

Activity on STEP’s coiled tubing spreads has increased in the second quarter. The Company’s position as one of the leading service providers combined with strong client alignment in each operating basin continues to provide STEP with a solid base of consistent work. The weak natural gas market will increase competitive pressures, but STEP’s position as a technological leader in the market will provide some buffer to this. Utilization for the balance of the year is anticipated to remain steady and STEP can deploy additional spreads if market conditions improve and additional clients are secured. The continued E&P consolidation is expected to benefit STEP’s ultra deep coiled tubing capacity, as the contiguous land holdings of the consolidated entities create more opportunities for the three- and four-mile laterals to be drilled.

Consolidated

STEP’s steady reduction in leverage, particularly in the last three years, has resulted in a healthy balance sheet that provides stability despite the volatility in commodity prices. This stability enables STEP to continue focus on generation of Free Cash Flow that supports the Company’s commitment to investing into next generation technology and expanding its shareholder return framework.

STEP has made significant progress on upgrading the existing asset base to Tier 4 dual fuel capability and is committed to having 90% of its fracturing fleet capable of utilizing natural gas by the end of 2025. STEP continues to evaluate next generation technologies in both the fracturing and coiled tubing space to provide more efficient and cleaner solutions for our clients.

STEP’s shareholder return framework was expanded in late 2023 to include an NCIB. STEP believes that its current share price does not reflect the value inherent in its business and it intends to acquire the full amount permitted, provided market conditions remain favourable. STEP will continue to reduce overall leverage but will accept some short-term increases to invest in the future of the business.

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.

($000’s except per day, days, units, proppant pumped and HP)	Three months ended
	March 31,				March 31,
		2024				2023
Revenue:
Fracturing	$	198,371			$	139,576
Coiled tubing		42,698				34,859
		241,069				174,435
Expenses		179,168				138,609
Results from operating activities	$	61,901			$	35,826
Adjusted EBITDA (1)	$	72,127			$	44,776
Adjusted EBITDA % (1)		30	%			26	%
Sales mix (% of segment revenue)
Fracturing		82	%			80	%
Coiled tubing		18	%			20	%
Fracturing services
Number of fracturing operating days (2)		450				312
Proppant pumped (tonnes)		559,000				296,000
Fracturing crews		6				5
Coiled tubing services
Number of coiled tubing operating days (2)		615				572
Active coiled tubing units, end of period		10				9
Total coiled tubing units, end of period		16				16
(1) Adjusted EBITDA is a non-IFRS financial measure and Adjusted EBITDA % are non-IFRS financial ratios. They are not defined and have no standardized meaning under IFRS. See Non-IFRS Measures and Ratios. (2) An operating day is defined as any coiled tubing or fracturing work that is performed in a 24-hour period, exclusive of support equipment.

FIRST QUARTER 2024 COMPARED TO FIRST QUARTER 2023

Revenue for the three months ended March 31, 2024 was $241.1 million compared to $174.4 million for the same period of the prior year. The Company had strong utilization in both service lines, with the cold weather having only limited impact on operations. The deferral of work from Q4 2023 into Q1 2024 allowed fracturing services to start operations at the beginning of January so the crews were able to continue pumping through the cold snap later in the month, avoiding the personnel and equipment challenges that come with mobilizing during extreme cold. Fracturing services set Company operating records for the quarter both in operating days and volume of proppant pumped. One of STEP’s fracturing fleets achieved a monthly pumping record of 629 hours during the quarter, a testament to the capabilities of this team. Fracturing operating days for the first quarter were 44% higher than the same period of the prior year while proppant pumped was 88% higher, reflecting the continued increase in fracturing intensity. Coiled tubing similarly set a revenue record, with operating days increasing to 615 for Q1 2024 from 572 during the comparable period of 2023.

The high utilization across both service lines resulted in a significant increase in the profitability of our Canadian operations. Adjusted EBITDA for the first quarter of 2024 was $72.1 million (30% of revenue) versus $44.8 million (26% of revenue) in the first quarter of 2023. The year over year improvement in results is a reflection of the client alignment which provided STEP the opportunity to increase utilization for its services.

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.

Contacts

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

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