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.S. fracturing business primarily operates in the Permian basin 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.
($000's except per day, days, units, proppant pumped and HP) | Three months ended | ||||||
March 31, | March 31, | ||||||
2024 | 2023 | ||||||
Revenue: | |||||||
Fracturing | $ | 37,971 | $ | 49,317 | |||
Coiled tubing | 41,106 | 39,616 | |||||
79,077 | 88,933 | ||||||
Expenses | 77,077 | 96,056 | |||||
Results from operating activities | $ | 2,000 | $ | (7,123 | ) | ||
Adjusted EBITDA (1) | $ | 12,826 | $ | 4,816 | |||
Adjusted EBITDA % (1) | 16 | % | 5 | % | |||
Sales mix (% of segment revenue) | |||||||
Fracturing | 48 | % | 55 | % | |||
Coiled tubing | 52 | % | 45 | % | |||
Fracturing services | |||||||
Number of fracturing operating days(2) | 116 | 161 | |||||
Proppant pumped (tonnes) | 271,000 | 214,000 | |||||
Fracturing crews | 2 | 3 | |||||
Coiled tubing services | |||||||
Number of coiled tubing operating days (2) | 737 | 691 | |||||
Active coiled tubing units, end of period | 12 | 12 | |||||
Total coiled tubing units, end of period | 19 | 19 | |||||
(1) Adjusted EBITDA is a non-IFRS financial measure and Adjusted EBITDA % is 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 $79.1 million compared to $88.9 million for the three months ended March 31, 2023. The decline in operating fleets reduced U.S. fracturing revenue compared to the prior year however this was partially offset by increased pumping efficiencies. One of STEP's fracturing fleets achieved a monthly pumping record of 547 hours during the quarter, a testament to the capabilities of this team. The change in client mix to start the year resulted in more consistent fracturing operations which resulted in improved profitability for this group. U.S. coiled tubing revenue and operating days were higher than the prior year due to consistent operations of twelve units for the entire quarter. The coiled tubing operations would have seen further increases if it were not for weather conditions in the northern basins that pushed work to later in the year.
Despite the slight revenue decline, the U.S. operations saw significant improvement in profitability compared to the prior year. U.S. operations generated Adjusted EBITDA of $12.8 million (16% of revenue) for the first quarter of 2024 versus $4.8 million (5% of revenue) in the first quarter of 2023. The improved profitability is a result of more consistent work schedules for both fracturing and coiled tubing combined with strong cost management during the period.
CORPORATE FINANCIAL REVIEW
The Company's corporate activities are separated from Canadian and U.S. operations. Corporate operating expenses include expenses related to asset reliability and optimization teams, as well as general and administrative costs which include costs associated with the executive team, the Board of Directors, public company costs and other activities that benefit Canadian and U.S. operating segments collectively.
($000's) | Three months ended | ||||||
March 31, | March 31, | ||||||
2024 | 2023 | ||||||
Expenses: | |||||||
Operating expenses | 588 | 485 | |||||
Selling, general and administrative | 5,278 | (1,466 | ) | ||||
Results from operating activities | $ | (5,866 | ) | $ | 981 | ||
Add: | |||||||
Depreciation | 118 | 221 | |||||
Share-based compensation | 328 | (5,442 | ) | ||||
Adjusted EBITDA (1) | $ | (5,420 | ) | $ | (4,240 | ) | |
Adjusted EBITDA % (1) | (2 | %) | (2 | %) | |||
(1) Adjusted EBITDA is a non-IFRS financial measure and Adjusted EBITDA % is a non-IFRS financial ratio. They are not defined and have no standardized meaning under IFRS. See Non-IFRS Measures and Ratios. | |||||||
FIRST QUARTER 2024 COMPARED TO FIRST QUARTER 2023
For the three months ended March 31, 2024, STEP had expenses from corporate activities of $5.9 million compared to the recovery of $1.0 million for the same period in 2023. The Company saw an increase in overall compensation expense compared to the prior year following a change in managements estimate of annual variable compensation accruing based on quarterly profitability rather than accruing a consistent amount each quarter. STEP recorded share-based compensation expense of $0.3 million in the current period compared to a share-based compensation recovery of $5.4 million in the prior period. During Q1 2024 the share price decreased by $0.22 resulting in a slight share-based compensation recovery for cash settled units, which was offset by the expense related to equity settled units. In Q1 2023, the share price decreased by $1.97 resulting in significant compensation recovery for cash settled units which was not offset by the expense related to equity settled units.
NON-IFRS MEASURES AND RATIOS
This press release includes terms and performance measures commonly used in the oilfield services industry that are not defined under IFRS. The terms presented are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. These non-IFRS measures have no standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. The non-IFRS measures should be read in conjunction with the Company's quarterly financial statements and Annual Financial Statements and the accompanying notes thereto.
"Adjusted EBITDA" is a financial measure not presented in accordance with IFRS and is equal to net (loss) income before finance costs, depreciation and amortization, (gain) loss on disposal of property and equipment, current and deferred income tax provisions and recoveries, equity and cash settled share-based compensation, transaction costs, foreign exchange forward contract (gain) loss, foreign exchange (gain) loss, and impairment losses. "Adjusted EBITDA %" is a non-IFRS ratio and is calculated as Adjusted EBITDA divided by revenue. Adjusted EBITDA and Adjusted EBITDA % are presented because they are widely used by the investment community as they provide an indication of the results generated by the Company's normal course business activities prior to considering how the activities are financed and the results are taxed. The Company uses Adjusted EBITDA and Adjusted EBITDA % internally to evaluate operating and segment performance, because management believes they provide better comparability between periods. The following table presents a reconciliation of the non-IFRS financial measure of Adjusted EBITDA to the IFRS financial measure of net income (loss).
($000s except percentages) | Three months ended | ||||||
March 31, | March 31, | ||||||
2024 | 2023 | ||||||
Net income | $ | 41,357 | $ | 19,656 | |||
Add (deduct): | |||||||
Depreciation and amortization | 20,668 | 20,774 | |||||
Gain on disposal of equipment | (358 | ) | (273 | ) | |||
Finance costs | 2,909 | 2,900 | |||||
Income tax expense | 13,783 | 6,169 | |||||
Share-based compensation - Cash settled | (295 | ) | (6,418 | ) | |||
Share-based compensation - Equity settled | 1,135 | 1,322 | |||||
Foreign exchange loss | 2,317 | 170 | |||||
Unrealized (gain) loss on derivatives | (1,983 | ) | 1,052 | ||||
Adjusted EBITDA | $ | 79,533 | $ | 45,352 | |||
Adjusted EBITDA % | 25 | % | 17 | % | |||
"Free Cash Flow" is a financial measure not presented in accordance with IFRS and is equal to net cash provided by operating activities adjusted for changes in non-cash Working Capital from operating activities, sustaining capital expenditures, term loan principal repayments and lease payments (net of sublease receipts). The Company may deduct or include additional items in its calculation of Free Cash Flow that are unusual, non-recurring or non-operating in nature. Free Cash Flow is presented as this measure is widely used in the investment community as an indication of the level of cash flow generated by ongoing operations. Management uses Free Cash Flow to evaluate the adequacy of internally generated cash flows to manage debt levels, invest in the growth of the business or return capital to shareholders. The following table presents a reconciliation of the non-IFRS financial measure of Free Cash Flow to the IFRS financial measure of net cash provided by operating activities.
($000s) | Three months ended | ||||||
March 31, | March 31, | ||||||
2024 | 2023 | ||||||
Net cash provided by (used in) operating activities | $ | 10,242 | $ | 45,836 | |||
Add (deduct): | |||||||
Changes in non-cash Working Capital from (used in) provided by operating activities | 56,736 | (12,203 | ) | ||||
Sustaining capital | (11,121 | ) | (14,702 | ) | |||
Lease payments (net of sublease receipts) | (2,374 | ) | (1,861 | ) | |||
Free Cash Flow | $ | 53,483 | $ | 17,070 | |||
"Working Capital", "Total long-term financial liabilities" and "Net Debt" are financial measures not presented in accordance with IFRS. "Working Capital" is equal to total current assets less total current liabilities. "Total long-term financial liabilities" is comprised of loans and borrowings, long-term lease obligations and other liabilities. "Net Debt" is equal to loans and borrowings before deferred financing charges less cash and cash equivalents and CCS derivatives. The data presented is intended to provide additional information about items on the statement of financial position and should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS.
The following table represents the composition of the non-IFRS financial measure of Working Capital (including cash and cash equivalents).
($000s) | March 31, | December 31, | ||||||
2024 | 2023 | |||||||
Current assets | $ | 292,466 | $ | 154,715 | ||||
Current liabilities | (201,568 | ) | (112,611 | ) | ||||
Working Capital (including cash and cash equivalents) | $ | 90,898 | $ | 42,104 | ||||
The following table presents the composition of the non-IFRS financial measure of Total long-term financial liabilities.
($000s) | March 31, | December 31, | ||||||
2024 | 2023 | |||||||
Long-term loans | $ | 114,288 | $ | 86,149 | ||||
Long-term leases | 18,284 | 18,731 | ||||||
Other long-term liabilities | 10,193 | 14,090 | ||||||
Total long-term financial liabilities | $ | 142,765 | $ | 118,970 | ||||
The following table presents the composition of the non-IFRS financial measure of Net Debt.
($000s) | March 31, | December 31, | ||||||
2024 | 2023 | |||||||
Loans and borrowings | $ | 114,288 | $ | 86,149 | ||||
Add back: Deferred financing costs | 1,368 | 1,637 | ||||||
Less: Cash and cash equivalents | (7,427 | ) | (1,785 | ) | ||||
Less: CCS Derivatives (asset) liability | (304 | ) | 1,843 | |||||
Net Debt | $ | 107,925 | $ | 87,844 | ||||
RISK FACTORS AND RISK MANAGEMENT
The oilfield services industry involves many risks, which may influence the ultimate success of the Company. The risks and uncertainties set out in the AIF and Annual MD&A are not the only ones the Company is facing. There are additional risks and uncertainties that the Company does not currently know about or that the Company currently considers immaterial which may also impair the Company's business operations and can cause the price of the Common Shares to decline. Readers should review and carefully consider the disclosure provided under the heading "Risk Factors" in the AIF and "Risk Factors and Risk Management" in the Annual MD&A, both of which are available on www.sedarplus.ca, and the disclosure provided in this press release under the headings "Market Outlook". In addition, global and national risks associated with inflation or economic contraction may adversely affect the Company by, among other things, reducing economic activity resulting in lower demand, and pricing, for crude oil and natural gas products, and thereby the demand and pricing for the Company's services. Other than as supplemented in this press release, the Company's risk factors, and management thereof has not changed substantially from those disclosed in the AIF and Annual MD&A.
FORWARD-LOOKING INFORMATION & STATEMENTS
Certain statements contained in this press release constitute "forward-looking statements" or "forward-looking information" within the meaning of applicable securities laws (collectively, "forward-looking statements"). These statements relate to the expectations of management about future events, results of operations and the Company's future performance (both operational and financial) and business prospects. All statements other than statements of historical fact are forward-looking statements. The use of any of the words "anticipate", "plan", "contemplate", "continue", "estimate", "expect", "intend", "propose", "might", "may", "will", "shall", "project", "should", "could", "would", "believe", "predict", "forecast", "pursue", "potential", "objective" and "capable" and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. While the Company believes the expectations reflected in the forward-looking statements included in this press release are reasonable, such statements are not guarantees of future performance or outcomes and may prove to be incorrect and should not be unduly relied upon.
In particular, but without limitation, this press release contains forward-looking statements pertaining to: 2024 and 2025 industry conditions and outlook, including demand for oil and gas; the effect of new LNG facilities on industry activity levels, including the completion of LNG Canada and the resulting LNG feed stock requirements; the effect of proposed Federal loan guarantee programs on LNG activity; OPEC+ production as it relates to oil prices; anticipated 2024 utilization levels, commodity prices, and pricing for the Company's services; recession and inflation risk, including its effect on oil prices; the timing of completion of the Company's tier 4 dual fuel conversions and anticipated substitution rates in the Company's dual fuel fleets; the Company's target of having natural gas capabilities in 90% of its fracturing fleets by 2025; the Company's ability to test and evaluate next generation technologies; completion of the Trans Mountain Pipeline and a resulting increase in transport capacity; the potential for an equipment oversupply position to result in intermittent utilization and reduced margins; near term softness of pricing and utilization for the Company's U.S. services; E&P consolidation benefiting utilization of STEP's ultra-deep capacity coil units; the effect large clients and their programs may have on the Company's activity levels; supply and demand for the Company's and its competitors' services, including the ability for the industry to respond to demand increases; the effect of inflation and related cost increases; the effect of natural gas transportation, storage and liquefaction system constraints; the impact of weather and break up on the Company's operations; the competitive labour market; the potential for commodity price volatility; the effect of changes in work scope and awards on expected margins and the location of deployed equipment; the Company's focus on Free Cash Flow and investment in emissions reduction technologies; the Company's ability to meet all financial commitments including interest payments over the next twelve months; the Company's plans regarding equipment; the Company's ability to manage its capital structure; expected debt repayment and Funded Debt to Adjusted Bank EBITDA ratios; expected income tax and derivative liabilities; adequacy of resources to funds operations, financial obligations and planned capital expenditures; the Company's ability to retain its existing clients; the monitoring of impairment, amount and age of balances owing, and the Company's financial assets and liabilities denominated in U.S. dollars, and exchange rates; supply chain constraints impact on new-build and refurbishment timelines; and the Company's expected compliance with covenants under its Credit Facilities and its ability to satisfy its financial commitments thereunder.
The forward-looking information and statements contained in this press release reflect several material factors and expectations and assumptions of the Company including, without limitation: the effect of macroeconomic factors, including global energy security concerns and levels of oil and gas inventories; market concerns regarding economic recession; levels of oil and gas production, LNG export capacity, and the effect of OPEC+ related capacity and related uncertainty on the market for the Company's services; that the Company will continue to conduct its operations in a manner consistent with past operations; the Company will continue as a going concern; the general continuance of current or, where applicable, assumed industry conditions; pricing of the Company's services; the Company's ability to market successfully to current and new clients; predictability of 2024 activity levels; predictable effect of seasonal weather and break up on the Company's operations; the Company's ability to utilize its equipment; the Company's ability to collect on trade and other receivables; Client demand for dual fuel fleets and emissions reduction technologies; the Company's ability to obtain and retain qualified staff and equipment in a timely and cost effective manner; levels of deployable equipment; future capital expenditures to be made by the Company; future funding sources for the Company's capital program; the Company's future debt levels; the availability of unused credit capacity on the Company's credit lines; the impact of competition on the Company; the Company's ability to obtain financing on acceptable terms; the Company's continued compliance with financial covenants; the amount of available equipment in the marketplace; and client activity levels and spending. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable, but no assurance can be given that these factors, expectations and assumptions will prove correct.
Actual results could differ materially from those anticipated in these forward-looking statements due to the risk factors set forth under the heading "Risk Factors" in the AIF and under the heading Risk Factors and Risk Management in this press release.
Any financial outlook or future orientated financial information contained in this press release regarding prospective financial performance, financial position or cash flows is based on the assumptions about future events, including economic conditions and proposed courses of action based on management's assessment of the relevant information that is currently available. Projected operational information, including the Company's capital program, contains forward looking information and is based on a number of material assumptions and factors, as are set out above. These projections may also be considered to contain future oriented financial information or a financial outlook. The actual results of the Company's operations will likely vary from the amounts set forth in these projections and such variations may be material. Readers are cautioned that any such financial outlook and future oriented financial information contains herein should not be used for purposes other than those for which it is disclosed herein.
The forward-looking information and statements contained in this press release speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws. The reader is cautioned not to place undue reliance on forward-looking information.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION
As at | March 31, | December 31, | ||||||
Unaudited (in thousands of Canadian dollars) | 2024 | 2023 | ||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 7,427 | $ | 1,785 | ||||
Trade and other receivables | 229,470 | 96,156 | ||||||
Inventory | 49,368 | 47,523 | ||||||
Prepaid expenses and deposits | 6,201 | 9,251 | ||||||
292,466 | 154,715 | |||||||
Property and equipment | 436,259 | 419,751 | ||||||
Right-of-use assets | 30,442 | 27,857 | ||||||
Intangible assets | 112 | 122 | ||||||
Other assets | 4,160 | 4,074 | ||||||
$ | 763,439 | $ | 606,519 | |||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Trade and other payables | $ | 173,723 | $ | 91,785 | ||||
Current portion of lease obligations | 12,011 | 8,753 | ||||||
Current portion of other liabilities | 4,823 | 4,536 | ||||||
Income tax payable | 11,011 | 7,537 | ||||||
201,568 | 112,611 | |||||||
Deferred tax liabilities | 20,328 | 19,390 | ||||||
Lease obligations | 18,284 | 18,731 | ||||||
Other liabilities | 10,193 | 14,090 | ||||||
Loans and borrowings | 114,288 | 86,149 | ||||||
364,661 | 250,971 | |||||||
Shareholders' equity | ||||||||
Share capital | 451,291 | 455,679 | ||||||
Contributed surplus | 37,301 | 36,060 | ||||||
Accumulated other comprehensive income | 15,158 | 10,138 | ||||||
Deficit | (104,972 | ) | (146,329 | ) | ||||
398,778 | 355,548 | |||||||
$ | 763,439 | $ | 606,519 | |||||
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF NET INCOME AND OTHER COMPREHENSIVE INCOME
For the three months ended March 31, | ||||||||
Unaudited (in thousands of Canadian dollars, except per share amounts) | 2024 | 2023 | ||||||
Revenue | $ | 320,146 | $ | 263,368 | ||||
Operating expenses | 250,607 | 228,955 | ||||||
Gross profit | 69,539 | 34,413 | ||||||
Selling, general and administrative expenses | 11,504 | 4,729 | ||||||
Results from operating activities | 58,035 | 29,684 | ||||||
Finance costs, net | 2,909 | 2,900 | ||||||
Foreign exchange loss | 2,317 | 170 | ||||||
Unrealized (gain) loss on derivatives | (1,983 | ) | 1,052 | |||||
Gain on disposal of property and equipment | (358 | ) | (273 | ) | ||||
Amortization of intangible assets | 10 | 10 | ||||||
Income before income tax | 55,140 | 25,825 | ||||||
Income tax expense (recovery) | ||||||||
Current | 12,890 | 8,352 | ||||||
Deferred | 893 | (2,183 | ) | |||||
13,783 | 6,169 | |||||||
Net income | 41,357 | 19,656 | ||||||
Other comprehensive income | ||||||||
Foreign currency translation gain (loss) | 5,020 | (1,240 | ) | |||||
Total comprehensive income | $ | 46,377 | $ | 18,416 | ||||
Net Income per share: | ||||||||
Basic | $ | 0.58 | $ | 0.27 | ||||
Diluted | $ | 0.55 | $ | 0.26 | ||||
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
For the three months ended March 31, | ||||||||
Unaudited (in thousands of Canadian dollars) | 2024 | 2023 | ||||||
Operating activities: | ||||||||
Net income | $ | 41,357 | $ | 19,656 | ||||
Adjusted for the following: | ||||||||
Depreciation and amortization | 20,668 | 20,774 | ||||||
Share-based compensation expense (recovery) | 840 | (5,096 | ) | |||||
Unrealized foreign exchange loss | 2,205 | 114 | ||||||
Unrealized (gain) loss on derivatives | (1,983 | ) | 1,052 | |||||
Gain on disposal of property and equipment | (358 | ) | (273 | ) | ||||
Finance costs | 2,909 | 2,900 | ||||||
Income tax expense | 13,783 | 6,169 | ||||||
Income taxes paid | (9,417 | ) | (9,850 | ) | ||||
Cash finance costs paid | (3,026 | ) | (1,813 | ) | ||||
Changes in non-cash working capital from operating activities | (56,736 | ) |
| 12,203 | ||||
Net cash provided by operating activities | 10,242 | 45,836 | ||||||
Investing activities: | ||||||||
Purchase of property and equipment | (30,535 | ) | (25,992 | ) | ||||
Proceeds from disposal of equipment and vehicles | 12 | 326 | ||||||
Changes in non-cash working capital from investing activities | 6,767 | (9,304 | ) | |||||
Net cash used in investing activities | (23,756 | ) | (34,970 | ) | ||||
Financing activities: | ||||||||
Issuance (repayment) of loans and borrowings | 25,770 | (10,526 | ) | |||||
Repayment of obligations under finance lease | (2,382 | ) | (1,999 | ) | ||||
Common shares repurchased | (4,282 | ) | - | |||||
Net cash provided by (used in) financing activities | 19,106 | (12,525 | ) | |||||
Impact of exchange rate changes on cash and cash equivalents | 50 | 111 | ||||||
Increase (decrease) in cash and cash equivalents | 5,642 | (1,548 | ) | |||||
Cash and cash equivalents, beginning of the period | 1,785 | 2,785 | ||||||
Cash and cash equivalents, end of the period | $ | 7,427 | $ | 1,237 | ||||
ABOUT STEP
STEP is an energy services company that provides coiled tubing, fluid and nitrogen pumping and hydraulic fracturing solutions. Our combination of modern equipment along with our commitment to safety and quality execution has differentiated STEP in plays where wells are deeper, have longer laterals and higher pressures. STEP has a high-performance, safety-focused culture and its experienced technical office and field professionals are committed to providing innovative, reliable and cost-effective solutions to its clients.
Founded in 2011 as a specialized deep capacity coiled tubing company, STEP has grown into a North American service provider delivering completion and stimulation services to exploration and production ("E&P") companies in Canada and the U.S. Our Canadian services are focused in the Western Canadian Sedimentary Basin ("WCSB"), while in the U.S., our fracturing services are focused on the Permian basin and our coiled tubing services are focused on the Permian and Eagle Ford in Texas, the Uinta-Piceance, and Niobrara-DJ basins in Colorado and the Bakken in North Dakota.
Our four core values; Safety, Trust, Execution and Possibilities inspire our team of professionals to provide differentiated levels of service, with a goal of flawless execution and an unwavering focus on safety.
STEP will host a conference call on Thursday, May 9, 2024 at 8:00a.m. MT to discuss the results for the First Quarter of 2024.
To listen to the webcast of the conference call, please click on the following:
https://onlinexperiences.com/Launch/QReg/ShowUUID=31A28C66-F3A0-475A-B3BD-D8845C1883C5&LangLocaleID=1033
You can also visit the Investors section of our website at www.stepenergyservices.com and click on "Reports, Presentations & Key Dates".
To participate in the Q&A session, please call the conference call operator at: 1-800-717-1738 (toll free) 15 minutes prior to the call's start time and ask for "STEP Energy Services First Quarter 2024 Earnings Results Conference Call".
The conference call will be archived on STEP's website at www.stepenergyservices.com/investors
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
