Step Energy Services Ltd. Reports Third Quarter 2024 Results
CALGARY, Alberta–(BUSINESS WIRE)–STEP Energy Services Ltd. (the “Company” or “STEP”) (TSX: STEP) is pleased to announce its financial and operating results for the three and nine months ended September 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 September 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
|
($000s except percentages and per share amounts) |
Three months ended |
Nine months ended |
||||||||||
|
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||
|
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
|
Consolidated revenue |
$ |
255,991 |
|
$ |
255,235 |
|
$ |
807,512 |
|
$ |
750,676 |
|
|
Net income (loss) |
$ |
(5,460 |
) |
$ |
20,734 |
|
$ |
46,366 |
|
$ |
55,663 |
|
|
Per share-basic |
$ |
(0.08 |
) |
$ |
0.29 |
|
$ |
0.65 |
|
$ |
0.77 |
|
|
Per share-diluted |
$ |
(0.08 |
) |
$ |
0.28 |
|
$ |
0.62 |
|
$ |
0.74 |
|
|
Adjusted EBITDA (1) |
$ |
43,800 |
|
$ |
52,286 |
|
$ |
164,999 |
|
$ |
145,142 |
|
|
Adjusted EBITDA % (1) |
|
17% |
|
21% |
|
20% |
|
19% |
||||
|
Free Cash Flow (1) |
$ |
28,404 |
|
$ |
37,121 |
|
$ |
102,347 |
|
$ |
87,269 |
|
|
Per share-basic |
$ |
0.40 |
|
$ |
0.51 |
|
$ |
1.43 |
|
$ |
1.21 |
|
|
Per share-diluted |
$ |
0.40 |
|
$ |
0.49 |
|
$ |
1.38 |
|
$ |
1.17 |
|
|
(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. |
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OPERATIONAL REVIEW
|
($000s except days, proppant pumped, crews, horsepower and units) |
Three months ended |
Nine months ended |
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|
September 30, |
September 30, |
September 30, |
September 30, |
|||||||||
|
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
|
Fracturing services |
|
|
|
|
|
|
|
|
||||
|
Fracturing operating days (2) |
|
360 |
|
407 |
|
1,304 |
|
1,273 |
||||
|
Proppant pumped (tonnes) |
|
594,000 |
|
589,000 |
|
2,064,000 |
|
1,693,000 |
||||
|
Fracturing crews |
|
7 |
|
8 |
|
7 |
|
8 |
||||
|
Dual fuel horsepower (“HP”), ended |
|
367,050 |
|
205,250 |
|
367,050 |
|
205,250 |
||||
|
Total HP, ended |
|
490,000 |
|
478,750 |
|
490,000 |
|
478,750 |
||||
|
Coiled tubing services |
|
|
|
|
|
|
|
|
||||
|
Coiled tubing operating days (2) |
|
1,340 |
|
1,311 |
|
4,060 |
|
3,713 |
||||
|
Active coiled tubing units, ended |
|
22 |
|
21 |
|
22 |
|
21 |
||||
|
Total coiled tubing units, ended |
|
35 |
|
35 |
|
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. |
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|
($000s except shares) |
|
September 30, |
December 31, |
|||
|
|
|
2024 |
|
2023 |
||
|
Cash and cash equivalents |
$ |
1,482 |
$ |
1,785 |
||
|
Working Capital (including cash and cash equivalents) (1) |
$ |
60,643 |
$ |
42,104 |
||
|
Total assets |
$ |
665,361 |
$ |
606,519 |
||
|
Total long-term financial liabilities (1) |
$ |
89,536 |
$ |
118,970 |
||
|
Net Debt (1) |
$ |
60,725 |
$ |
87,844 |
||
|
Shares outstanding |
|
71,728,384 |
|
72,233,064 |
||
|
(1) 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. |
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THIRD QUARTER 2024 HIGHLIGHTS
- Consolidated revenue for the three months ended September 30, 2024 of $256.0 million, in line with revenue of $255.2 million for the three months ended September 30, 2023 and an increase of 11% from $231.4 million for the three months ended June 30, 2024.
-
Net loss for the three months ended September 30, 2024 of $5.5 million ($0.08 loss per diluted share) compared to net income of $20.7 million ($0.28 per diluted share) in the same period of 2023 and $10.5 million ($0.14 per diluted share) for the three months ended June 30, 2024. Included in net income for three months ended September 30, 2024 was:
- share based compensation expense of $1.0 million, compared to $4.0 million in the same period of the prior year, and;
- impairment expense of $12.7 million compared to nil in the same period of the prior year. The impairment was taken on real estate and legacy Tier 1 and Tier 2 diesel engine powered fracturing pumps and associated ancillary fracturing equipment held in the U.S. fracturing cash generating unit.
- For the three months ended September 30, 2024, Adjusted EBITDA was $43.8 million (17% of revenue) compared to $52.3 million (21% of revenue) in Q3 2023 and $41.7 million (18% of revenue) in Q2 2024.
- Free Cash Flow for the three months ended September 30, 2024 was $28.4 million compared to $37.1 million in Q3 2023 and $20.5 million in Q2 2024.
-
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 $60.7 million at September 30, 2024, compared to $87.8 million at December 31, 2023 and $75.8 million at June 30, 2024. STEP has reduced Net Debt by $245 million from peak levels in 2018.
- The Company invested $17.7 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 September 30, 2024, 75% of the Tier 2 and Tier 4 engines in STEP’s fracturing fleet have been transitioned to dual fuel technology.
- Working Capital as at September 30, 2024 of $60.6 million was $18.5 million higher than the $42.1 million at December 31, 2023 and lower by $4.0 million compared to the $64.6 million as at June 30, 2024. Working capital fluctuations are typical and are influenced by activity levels and timing of client receipts.
- Subsequent to September 30, 2024, the Company entered into a definitive agreement with its major shareholder (ARC Energy Fund 8) and 2659160 Alberta Ltd. pursuant to which 2659160 Alberta Ltd. would acquire, via plan of arrangement, all the issued and outstanding common shares of STEP not already owned, directly or indirectly, by ARC Energy Fund 6 and ARC Energy Fund 8, and after which it is expected that the Company’s shares will be delisted from trading on the TSX and STEP would cease to be a reporting issuer. Refer to the subsequent event note below for more details.
THIRD QUARTER 2024 OVERVIEW
Benchmark natural gas prices in the third quarter showed continued weakness, with the average benchmark U.S. Henry Hub and Canadian AECO natural gas prices declining from the second quarter. Henry Hub averaged $2.23/MMBtu in Q3, down from $2.31/MMBtu in Q2 (USD), while AECO averaged $0.70/Mcf in Q3, down from $1.20/Mcf in Q2 (CAD). The AECO price was the lowest quarterly average price in 20 years, and while 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, the pricing weakness prompted some operators to shut in production, primarily in the dry gas regions, and to defer completion activities into Q4 or into 2025. Oil prices declined as well, with the benchmark West Texas Intermediate (“WTI”) crude price retreating to $75.27/barrel, down from $80.64/barrel (USD) in Q2.
Oilfield service levels are primarily reflected in publicly reported drilling rig counts and estimates made by analysts on fracturing crews. Land based drilling rigs in the U.S. continued to slide, retreating to an average of 565 rigs in the third quarter, down from 583 in the second quarter. Canadian rig counts averaged 207 during the third quarter, up from 120 in the second quarter but in line with the seasonal recovery that is typical in this quarter. Primary Vision, an independent energy research and business intelligence company, reported that U.S. fracturing fleets declined in the third quarter to an average of 233, down from 253 in the second quarter.
STEP’s Canadian geographic region generated quarterly revenue of $210.7 million and Adjusted EBITDA of $49.4 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. Activity during the third quarter benefited from longer term client commitments that STEP has secured. Revenue during the third quarter for the fracturing operations increased compared to the prior year as activity levels and operating efficiencies continue to improve, driving an increase in both operating days and proppant volumes. STEP continues to increase its proppant throughput with 570 thousand tonnes pumped during the quarter and 1,630 thousand tonnes pumped for the year to date, compared to 310 thousand tonnes and 910 thousand tonnes, respectively, in the comparable periods of the prior year. STEP’s focus on working with clients with larger scale programs has been a key contribution to the improvements within STEP’s coiled tubing operations, with operating days increasing against comparable periods of the prior year as well.
STEP’s U.S. geographic region generated quarterly revenue of $45.3 million and an Adjusted EBITDA loss of $1.4 million, a decline sequentially and year over year. The U.S. coiled tubing business remains resilient but was also impacted by an increasingly competitive spot market resulting in a slight decline in activity sequentially, although year over year activity remains higher. Pricing pressures have continued within the coiled tubing operations, however, alignment with some of the largest operators in each basin continues to be a positive factor for this service line. The tight market conditions resulted in STEP scaling back to 12 active coiled tubing units in the third quarter, but STEP will continue to look for opportunities to reactivate units when market conditions warrant. Challenging market conditions and client consolidation continued to impact STEP’s U.S. fracturing operations resulting in significantly fewer operating days in the period compared to the prior year. One fleet was active in the quarter, with work at the beginning and end of the quarter. The work was completed to STEP’s high standard and exceeded client expectations, but continual pricing pressure from competitors meant that the contracts were not extended. STEP carried additional costs in the fracturing service line during the quarter to maintain optionality and preserve value as it evaluated different scenarios for the future of the service line.
STEP’s consolidated revenue in the third quarter was $256.0 million, in line with the same period last year, but Adjusted EBITDA of $43.8 million (17% Adjusted EBITDA margin) was down from $52.3 million (21% Adjusted EBITDA margin) in the same period last year. The margin compression is the result of the ongoing pricing pressures in the U.S. and Canada stemming from the low natural gas prices and the cumulative effect of several years of high inflation increasing the Company’s cost profile.
Net loss was $5.5 million in Q3 2024 ($0.08 diluted loss per share), sequentially lower than the $20.7 million in Q2 2024 ($0.28 diluted earnings per share) and the $15.3 million in Q2 2023 ($0.21 diluted earnings per share). Net loss included $1.0 million in share‐based compensation expense (Q2 2024 ‐ $2.1 million, Q3 2023 ‐ $4.0 million expense), $4.3 million in finance costs (Q2 2024 ‐ $2.8 million, Q3 2023 ‐ $2.9 million) and $12.7 million in impairment expense (Q2 2024 – $nil, Q3 2023 – $nil). The impairment was taken on real estate and legacy Tier 1 and Tier 2 diesel engine powered fracturing pumps and associated ancillary fracturing equipment held in the U.S. fracturing cash generating unit.
Free Cash Flow was $28.4 million in Q3 2024 ($0.40 diluted Free Cash Flow per share), sequentially higher than the $20.5 million in Q2 2024 and lower than the $37.1 million in Q3 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 $21.3 million into capital expenditures during Q3 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 $60.7 million at the close of Q3 2024 from $75.8 million at close of Q2 2024. Net Debt is now $245 million lower than peak levels in 2018. The reduction in Net Debt and improvement in Adjusted EBITDA resulted in a 12-month trailing Funded Debt to Adjusted Bank EBITDA of 0.43:1.00, 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 normal course issuer bid (“NCIB”) in late 2023. As at September 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.
SUBSEQUENT EVENT
On November 3, 2024, STEP and 2659160 Alberta Ltd. (the “Purchaser”), and ARC Energy Fund 8 (as defined in the Accounting Policies and Estimates, Related Parties, section below) entered into a definitive arrangement agreement (the “Agreement”) pursuant to which the Purchaser will acquire all of the issued and outstanding common shares of STEP (each, a “Share”) not already owned, controlled or directed, directly or indirectly, by ARC Energy Fund 6 (as defined in the Accounting Policies and Estimates, Related Parties, section below), the Purchaser, ARC Energy Fund 8, or any other person controlled or managed, directly or indirectly by ARC Financial Corp. (such persons, together with ARC Energy Fund 6 and ARC Energy Fund 8, the “ARC Funds”). Under the terms of the Agreement, the Purchaser will acquire all the Shares that the ARC Funds do not currently own, control or direct, directly or indirectly (the “Minority Shares”) for cash consideration of $5.00 per Share. The transaction will be effected by way of an arrangement under the Business Corporations Act (Alberta) (the “Arrangement”).
The Arrangement, which has been unanimously approved by STEP’s board of directors entitled to vote thereon, will be subject to the approval of the holders of Shares (the “Shareholders”) including the approval of holders of the Minority Shares, court approval and customary closing conditions. Following completion of the Arrangement, it is expected that the Shares will be delisted from trading on the TSX and an application will be made for STEP to cease to be a reporting issuer.
Further details regarding the Arrangement will be contained in a management information circular (the “Circular”) to be sent to Shareholders in connection the special meeting of Shareholders to be called and held to approve the Arrangement (the “STEP Meeting”). The Circular is expected to be mailed on or about November 27, 2024, and the STEP Meeting is expected to be held on December 19, 2024.
Closing of the Arrangement is expected to occur on or about December 23, 2024, following the STEP Meeting and upon satisfaction of all conditions precedent, including receipt of the final order of the Court of King’s Bench of Alberta.
MARKET OUTLOOK
Continued pressure on commodity prices is expected to result in sequential and year over year decrease in fourth quarter activity, which will exacerbate the typical slowdown related to wind down of client capital programs in the fourth quarter, which is expected to result in a decline in revenue, adjusted EBITDA and net profit. STEP will manage expenses through this period, while also preparing for a Q1 in 2025 that is anticipated to be highly utilized.
The long-term outlook for oilfield services is very constructive. North America is expected to double its LNG export capacity by 2028, with Canada finally expected to participate in the growth that has driven the U.S. natural gas market. U.S. gas prices are expected to strengthen into 2025 in part due to the increase in LNG capacity coming from Golden Pass, Plaquemines and Corpus Christi Stage 3. LNG Canada is expected to start shipping meaningful volumes in 2025, which will draw down storage volumes and contribute to a strengthening of natural gas prices in Canada.
Canada
Canadian fourth quarter activity levels are expected to show a sequential decline as client budget exhaustion and seasonal holiday activity begins to slow activity in the basin. Weak commodity prices and tight capital discipline are expected to further discourage producers from pulling work forward from Q1 2025 into Q4 2024.
Fracturing job mix is expected to see a higher mix of smaller jobs, resulting in less efficient activity levels through the quarter. Coiled tubing activity will see spotty utilization in the quarter as a result of the slowdown in fracturing activity. STEP will focus on cost control in the quarter, while also preparing for a highly utilized first quarter in 2025.
The first quarter 2025 fracturing schedule is almost fully booked, a reflection of STEP’s focus on securing longer term work agreements with leading producers in the basin. Coiled tubing services are similarly booked for the first quarter of 2025. Pricing for contracted fracturing and coiled tubing work in the first quarter has come under pressure in response to lower commodity prices and increased service capacity in the basin, which will likely result in margin compression relative to the same period in 2024.
United States
Competitive pressures are expected to continue through the fourth quarter as the market continues to struggle with equipment oversupply and weak client demand. STEP’s coiled tubing service line will likely see utilization taper as the quarter plays out, with the impact particularly felt in the highly competitive southern operating districts. STEP has one fracturing fleet active in the fourth quarter, with only intermittent utilization expected.
Activity levels for coiled tubing are expected to increase into the first quarter of 2025 as client budgets are reset. Pricing for coiled tubing operations have been shielded from much of the intense pressure seen in the fracturing market, but some margin compression is expected. Fracturing continues to be challenged by the extremely competitive market conditions and although some relief is expected in the first quarter as client budgets are reset, this service line is not expected to make a meaningful contribution to U.S. revenue. Management continues to evaluate all options for the fracturing service line, including those 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 reduce balance sheet leverage and 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.
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 |
Nine months ended |
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|
|
September 30, |
September 30, |
September 30, |
September 30, |
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|
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
|
Revenue: |
|
|
|
|
|
|
|
|
||||
|
Fracturing |
$ |
172,980 |
$ |
127,415 |
$ |
496,225 |
$ |
378,784 |
||||
|
Coiled tubing |
|
37,675 |
|
30,241 |
|
116,485 |
|
89,224 |
||||
|
|
|
210,655 |
|
157,656 |
|
612,710 |
|
468,008 |
||||
|
Expenses |
|
172,834 |
|
125,414 |
|
486,335 |
|
375,512 |
||||
|
Results from operating activities |
$ |
37,821 |
$ |
32,242 |
$ |
126,375 |
$ |
92,496 |
||||
|
Adjusted EBITDA (1) |
$ |
49,414 |
$ |
41,235 |
$ |
158,203 |
$ |
119,401 |
||||
|
Adjusted EBITDA % (1) |
|
23% |
|
26% |
|
26% |
|
26% |
||||
|
Sales mix (% of segment revenue) |
|
|
|
|
|
|
|
|
||||
|
Fracturing |
|
82% |
|
81% |
|
81% |
|
81% |
||||
|
Coiled tubing |
|
18% |
|
19% |
|
19% |
|
19% |
||||
|
Fracturing services |
|
|
|
|
|
|
|
|
||||
|
Number of fracturing operating days (2) |
|
349 |
|
250 |
|
1,104 |
|
771 |
||||
|
Proppant pumped (tonnes) |
|
573,000 |
|
308,000 |
|
1,634,000 |
|
914,000 |
||||
|
Fracturing crews |
|
6 |
|
5 |
|
6 |
|
5 |
||||
|
Coiled tubing services |
|
|
|
|
|
|
|
|
||||
|
Number of coiled tubing operating days (2) |
|
549 |
|
448 |
|
1,691 |
|
1,368 |
||||
|
Active coiled tubing units, end of period |
|
10 |
|
9 |
|
10 |
|
9 |
||||
|
Total coiled tubing units, end of period |
|
16 |
|
16 |
|
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. |
||||||||||||
THIRD QUARTER 2024 COMPARED TO THIRD QUARTER 2023
Revenue for the three months ended September 30, 2024 was $210.7 million compared to $157.7 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. Operating days and proppant volumes continued to increase compared to the prior year with operating days increasing by 40% and proppant volumes increasing by 86%. The Canadian coiled tubing operations also continued to improve compared to the prior year with operating days increasing by 23% to 549 operating days in the period from 448 operating days in the same period in 2023. Client alignment has been a key driver for the improvements for these operations through the long-term contracts secured with key clients in the highly utilized Montney basin.
Adjusted EBITDA for the third quarter of 2024 was $49.4 million (23% of revenue) versus $41.2 million (26% of revenue) in the third 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.
NINE MONTHS ENDED SEPTEMBER 30, 2024 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2023
Revenue for the nine months ended September 30, 2024 was $612.7 million compared to $468.0 million for the nine months ended September 30, 2023. The positive momentum experienced through the first half of the year continued into the third quarter. Alignment with key clients and favourable weather conditions allowed for consistent activity through the first nine months of the year. Coiled tubing operating days increased to 1,691 for the first nine months of 2024 from 1,368 during the comparable period of 2023, a 24% increase. STEP’s focus on modernizing its fracturing fleet, client alignment and favourable weather conditions resulted in increased operating days for the fracturing service line to 1,104 for the first nine months of 2024 from 771 during the same period of 2023, an increase of 43%.
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
