STEP Energy Services Ltd. (STEP) has released its financial figures for the second quarter of 2024, revealing a slight downturn in consolidated revenues at $231 million, matching the performance of the same period in the previous year.
The company reported an adjusted EBITDA of $42 million and a net income of $11 million. While the Canadian operations maintained a steady pace with revenues of $161 million, the U.S. segment, contributing $70 million, is expected to face headwinds.
STEP has successfully reduced its net debt to $76 million and is focusing on generating free cash flow, debt reduction, and share buybacks. Management anticipates steady work in Canada for the second half of the year, while the U.S. fracturing line will be more selective to avoid losses. The coiled tubing service line is projected to continue its growth trajectory.
Key Takeaways
- Consolidated revenues for Q2 2024 stood at $231 million, mirroring the same quarter last year.
- Adjusted EBITDA was reported at $42 million, with net income at $11 million.
- Canadian operations generated $161 million in revenue; U.S. operations brought in $70 million.
- Net debt was reduced to $76 million.
- The company expects steady work in Canada but anticipates challenges in the U.S. fracturing line.
- Coiled tubing service line is poised for growth.
- Strategic priorities include free cash flow, debt reduction, share buybacks, and asset upgrades.
- Investments have been made in sand handling capacity, enhancing the logistics division in Canada.
- The CapEx budget has been lowered due to decreased U.S. activity.
- The company remains open to equipment demand from other markets and is disciplined in the RFP process for 2025.
Company Outlook
- Expectation of a similar budget exhaustion pattern in the U.S. for 2025 as in 2024.
- Focus on selective U.S. fracturing work to avoid operating at a loss.
- Continued growth expected for the coiled tubing service line.
- Diverse geographic business allows leveraging profit-generating regions.
- Completion activity in Canada expected to be balanced, with potential for additional equipment demand.
Bearish Highlights
- U.S. fracturing line facing operational challenges.
- Reduction in the CapEx budget due to lower activity in the U.S. market.
- Company not planning to relocate the U.S. pumping fleet to Canada at this time.
Bullish Highlights
- Strategic focus on generating free cash flow and reducing debt.
- Potential future cash flow distribution to shareholders via dividends or buybacks.
- Investments in additional sand handling capacity to strengthen Canadian logistics.
- Upgraded fleets to dual fuel for improved efficiency and market positioning.
Misses
- Decline in consolidated revenues compared to the previous quarter.
- U.S. segment's revenue challenges impacting overall performance.
Q&A Highlights
- Klaas Deemter and Steve Glanville discussed the state of the fracking fleet and future plans.
- Texas market expected to rebound by 2025, with one fleet operational and another intermittently utilized.
- Company invested $30 million in upgrading the U.S. frac business to dual fuel.
- Emphasis on not accepting bids below $5,000 an hour to maintain profitability.
- Openness to international coiled tubing opportunities, particularly in the Middle East.
STEP Energy Services maintains a cautious yet strategic approach as it navigates through market fluctuations and operational challenges. With a disciplined stance on pricing and bidding, and a commitment to operational excellence, the company is positioning itself for sustainable growth and profitability. Investors and stakeholders are looking forward to the next earnings call in November for further updates on the company's progress.
Full transcript - None (SNVVF) Q2 2024:
Operator: Good morning and welcome ladies and gentlemen to STEP Energy Services Second Quarter 2024 Conference Call and Webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, August 7, 2024. I would now like to turn the conference over to Mr. Steve Glanville, President and CEO. Please go ahead.
Steve Glanville: Thank you operator and good morning. Welcome to our Q2 2024 conference call. My name is Steve Glanville and I'm the President and CEO of STEP Energy Services. I'd like to invite Klaas Deemter, our CFO, to provide an overview of our financial results for Q2 and then I'll provide some comments on operating conditions in the quarter and what we're seeing for the remainder of 2024. Then we'll open the call up for questions. Over to you, Klaas.
Klaas Deemter: Thanks, Steve and good morning, everyone. My comments today will include forward-looking statements regarding STEP's future results and prospects. Please note that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our results to differ materially from our expectations. For more information on the forward-looking statements and these risk factors, please refer to our SEDAR filings for this quarter as well as our 2023 AF. Finally, please note that all numbers are in Canadian dollars, unless noted otherwise, then all round or possible. During Q2, STEP generated consolidated revenues of $231 million, down from the prior quarter revenue of $320 million but in line with the prior year Q2 revenue of $232 million. Adjusted EBITDA for the quarter came in at $42 million which is a 20% margin as compared to $80 million or a 25% margin in Q1 and $47 million or 20% margin in Q2 of the prior year. Lower sequential and year-over-year results are largely attributable to the spring breakup conditions in Canada and the Northern U.S. and the challenging conditions in the U.S. frac market. STEP's net income of $11 million or $0.14 per diluted share in Q2 of this year as compared to $41 million or $0.55 per diluted share in the prior quarter and $15 million or $0.21 per diluted share in Q2 of the last year. I'll now turn to the geographical regions to provide key highlights on the quarter. In the Canadian segment, Q2 revenue was $161 million, comprised of $125 million in fracturing revenue and $36 million in coiled tubing revenue. We always see a sequential drop in Canadian revenue due to spring breakup but the quarter compares very favorably to the $136 million we earned in Canada in Q2 of last year. Adjusted EBITDA for the Canadian region was $37 million versus $72 million in Q1 and $33 million in the second quarter of 2023. We're very pleased with the year-over-year increase in EBITDA contribution and see this as further validation of our strategy to pursue our utilization clients that see the value of load leveling their CapEx programs. Turning to the U.S. region. Q2 revenues of $70 million were comprised of about $23 million for fracturing and $47 million for coiled tubing. The quarterly revenue was down from $79 million in Q1 and $96 million in Q2 of 2023. Our U.S. fracturing service line is contributing less than it has in previous years given the very competitive market dynamics. In contrast to the unsettled fracturing market, our coiled tubing service line has continued to maintain a strong market position with higher revenue year-over-year. Adjusted EBITDA of $9 million was down from $13 million in Q1 and $18 million a year ago. The adjusted EBITDA margin was 13%, down from 16% in Q1 and 19% in Q2 of last year. Turning now to the allocation of our cash flow on our balance sheet. In addition to adjusted EBITDA, one of STEP's other key non-GAAP measures is free cash flow. During the quarter, we had $33 million in funds flow from operations. And after deducting sustaining capital lease payments, this resulted in the second quarter free cash flow of $20 million compared to $35 million in Q2 '23 and $54 million in Q1 of this year. This translates to free cash flow of $0.28 per diluted share using our quarter-end share price of $4.08. This reflects a 7% quarterly yield. Our rolling 4-quarter free cash flow per diluted share is $1.44 which translates to a 36% yield. In the quarter, we spent $29 million on capital expenditures. This is made up of $9 million of sustaining capital, $17 million of optimization capital and $3 million of right-of-use assets. Our 2024 capital budget has been adjusted downwards to $100 million, of which about 60% has been spent or committed thus far in 2024. STEP has purchased approximately 1.9 million shares through the NCIB at an average price of $4.16 per share, of which about $900,000 were purchased in the second quarter. For reference, our June 30 book value per share was $5.70, demonstrating the excellent value in SEP shares. Finally, STEP ended the quarter with net debt of $76 million, down from approximately $108 million at the end of Q1. Debt reduction remains a core focus for our management team and we expect this debt balance to continue reducing through the remainder of this year. I'll now turn it back to Steve for his comments on operations and outlook.
Steve Glanville: I'd like to start by addressing the current market conditions. Natural gas prices remained volatile in the quarter and AECO pricing was weak throughout much of Q2, although the impact was lessened for many Canadian producers because of the reliance on natural gas liquids which are tied more closely to oil prices. Henry Hub recovered from the lows experienced earlier in the year, although they didn't crack the crucial $3 per MMBtu level. Oil prices remain relatively steady with WTI hovering near $80 per barrel for much of the quarter. Rig counts came down a bit in the U.S., reflecting the current state of the stock market. Canada was down as well but that is typical for the second quarter. It is worth noting that as an indication of relative market strength. Canadian rig counts were at the higher end of the 5-year average, whereas the U.S. rig counts trended towards the low end of the 5-year average. Despite the lower rig count, we had a successful second quarter, showcasing the strength of our business through a combination of consistent utilization, high-intensity work programs and a dedication to operational excellence. Turning to the operations for the quarter. I'll start with Canada. Our reputation in the Canadian market as a technical leader and alignment with strong clients were key drivers of our success this quarter. Our business strategy has focused on securing long-term agreements with large clients which has proven to be highly effective. Both of our crews are engaged in long-term agreements with active producers ensuring steady and predictable utilization of our crews. The quarter started strong with spillover work from Q1 carrying into April. We had favorable weather conditions that allowed us to continue to work through until May which was slower due to spring breakout. This was a much needed reset up for our crews who have been working steadily since the beginning of the year. We used this time to catch up on maintenance and prepare the equipment for a busy June and third quarter. We saw higher year-over-year activity in our fracturing operations. The improvements in utilization and efficiencies are evident in the amount of proppant we pumped. Last quarter, I spoke about the staggering amounts of sand pumped in our Canadian operations. And again, our quarterly volumes of sand outpaced the volume pumped in the same period last year by over 60%. We pumped 500,000 metric tons in the quarter which equates to almost 12,000 truckloads of sand hauled to our clients' job sites in just the 90 days. Activity levels in our coiled tubing and fluid services also experienced an uptick compared to the previous year. As I noted, one of the key factors contributing to this improvement is our focus on collaborating with clients with large-scale completion programs. This has enabled us to maximize our operational efficiencies and utilizations. Next, let's turn to the U.S. business unit. In our U.S. geographic region, we experienced a sequential and year-over-year decline in revenue this quarter. The oversupplied market has posed challenges for our U.S. fracturing business, resulting in significantly fewer operating days compared to the prior year and Q1. In contrast to these difficulties, the result from our U.S. coiled tubing business highlighted the strength of this business line which saw increasing activity levels both sequentially and year-over-year. Although we have seen some pricing pressure, our line with numerous blue-chip clients in each basin continues to be a positive factor for this business. We're finding that these clients increasingly value the technology that we bring to their well sites, such as our real-time data acquisition tool called STEP-conneCT, Eline and our ultra-deep capacity coiled tubes that can mill out 3 and even now 4-mile laterals. In response to the market demand, we reactivated an additional coiled tubing unit during that second quarter. I want to take a minute to highlight the technical sophistication of our business which is a key differentiator for STEP in the marketplace. Our strategic investment in equipment enhancements such as upgrading our asset base to Tier 4 dual fuel capable systems, demonstrates our commitment to leading-edge technology. Additionally, we deploy real-time data acquisition tools like STEP-conneCT that help our clients better understand their closely milling operations. The integrations of our services which include hydraulic fracturing, pump downs, coiled tubing, industrial services as well as logistics of sand and chemicals. Chemicals provide a complete solution offering both efficiency and security for our clients. This is an incredibly complex business and not everyone can do what we do. Our clients expect exceptional, safe, reliable and timely services and we make it look easy. This is a testament to the effort and dedication of our professionals and our focus on continuous improvement and innovation. As we look ahead, our strategic focus is on maintaining operational excellence and capitalizing on market opportunities. In Canada, we expect to see steady work for our fracturing and coiled tubing divisions through the third quarter and into the fourth. We anticipate a decrease in activity compared to the first quarter. Our level should surpass last year's Q3 performance. We anticipate a slowdown in activity midway through the fourth quarter as clients reach the end of their capital budgets. We are very excited about what 2025 holds, with increased oil flowing through the TMX and the completion of LNG Canada, we anticipate that our first quarter in 2025 will be similar to what we demonstrated in 2024. Similar to Canada, we expect that our U.S. clients' budgets will be exhausted midway through the fourth quarter, resulting in a tapering off of activity following the Thanksgiving holiday. As noted earlier, the outlook for steps U.S. fracturing line is more challenging. We are not going to operate this equipment at a loss so we will be selective in the work that we take on. Accordingly, we don't expect the service line to meaningfully contribute to our earnings through the remainder of the year but see more opportunities in 2025. The advantage of having a geographic diverse business like ours, it provides the flexibility of assets to profit-generating regions when long-term opportunities arise. In contrast, we anticipate that our coal tubing service line will continue to grow its position in the market. As I noted, we added a coiled tubing unit in the second quarter and have more equipment that could be reactivated as market conditions allow. Our strategic priorities remain centered on generating free cash flow to support our shareholder return model of debt reduction and share buybacks as well as upgrading our asset base. We are committed to delivering shareholder returns through technological leadership and operational excellence. Finally, I want to recognize our exceptional professionals at STEP for the dedication and achievements. Ultimately, they are the key to our success. We would not have the incredible STEP community and culture without them and I'm very grateful for all they do. Now, I invite the operator to open the floor for any questions or comments.
Operator: [Operator Instructions] Your first question comes from the line of Jim Byrne from Acumen Capital.
Jim Byrne: Steve, you mentioned, obviously, the tremendous amount of sand, you've been pumping here in Canada in particular. Maybe just give us an update on your logistics business, security and supply of that sand and how you guys are dealing with that amount of sand.
Steve Glanville: This is an area that we've been focused on for a number of years is just bolstering up that last mile logistics business. I can give you some numbers that basically in the first 7 months of the year, we've surpassed what we pumped last year for total sand volumes. So we knew this was a very important part of our business. Understanding that supply chain and really getting the proppant to location and having the storage on location is very, very crucial when you're pumping these large volumes of sand. And I think the alignment that we have with our clients of having steady work programs allow us to not only get best prices from the problem but also to be efficient in putting it in the ground. And our crews when we're pumping 22, 23 hours per day. We can pump on average, call it 6,000 to 7,000 tonnes per crew. So it's a very large volumes and you have to really manage that. And we have what we believe is the best supply chain logistics division in Canada to be able to support the growth.
Klaas Deemter: As part of our capital program in 2024, Jim, we did invest in some additional sand handling capacity, knowing that there was this volume of work coming and that continues to be a focus.
Steve Glanville: And I would add that we talked about it in the past, just the frac intensity that we've seen increase. The laterals are getting longer in the Montney and the Duvernay. And with that, couple that with the frac intensity, just the amount of proppant per well has increased.
Jim Byrne: And then I appreciate the comments about the U.S. frac market. I know you're down to 2 crews down there. Is this implying that you might be laying those crews down for the back half or just into the fourth quarter? Or what's the plan with those 2 frac crews down there?
Steve Glanville: As I mentioned on the call, we don't need to be working on this equipment at a loss. We have that geographic diversity to move these assets around. Right now, in West Texas, it's obviously an oversaturated market. Back in 2022, there was over 300 frac crews working in the U.S. And today, there's mixed data but we believe it's less than 200 that are active. So it's a very kind of decrease. We have obviously upgraded our asset base to compete with the dual fuel technology. But when you're not getting the returns that you need out of that business, we have to look at other options. And for us, it's perhaps moving some of those assets to different regions. We also have the ability to use it to support our coiled tubing operations, some of the assets. But as of today, we've been very selective at where that asset base goes to work. We have a number of RFPs that are currently in its RFP season in the U.S. right now and we're participating in that and we'll see where that ends up.
Jim Byrne: And then just one more for me. I think I saw you pulled down the CapEx budget for the year a little bit. Just wondering if there's any specific projects that you're pushing out or? Any commentary around that would be great.
Klaas Deemter: It's just to reflect the reduced activity in the U.S. So we just pulled it down by about $5 million, $6 million for sustaining capital.
Operator: Your next question comes from the line of Keith MacKey from RBC Capital Markets.
Keith MacKey: Just maybe to start out in Canada. Just curious for your thoughts on does current Canadian completion activity likely reflect the amount of crews needed to fill Phase 1 of LNG Canada? Or do you think there's another leg of equipment demand that will be needed in the nearer term for that?
Steve Glanville: Yes, I think the overall, I would say, supply dynamics in Canada, it's fairly balanced and that would take in consideration Phase 1 of LNG Canada which we expect end of this year or beginning of Q1 of next year to start off taking product. I think the real question, Keith, is really the other markets that we have the ability or producers have the ability to sell into, obviously, the TMX, another great win for Canada to have that flowing as an export, we believe the Duvernay will continue to see uptick in activity because of the diluent coming out of that formation like crude. And so when we look at the Duvernay from an intensity standpoint, there will require some additional horsepower in there if it becomes full-scale production in the Duvernay. So I guess, for us, it's looking at rig counts in the regions like the Duvernay and Montney that would really impact our decision to look at bringing more horsepower.
Keith MacKey: And just sticking with Canada, there was an announcement recently about a transload facility for sand being built in Northeast BC area. Can you talk about any impact of that on your business? Will you be able to deliver sand out of there as opposed to trucking as much further distances or that kind of thing. Can you just talk a little bit more about how you see that area unfolding and whether this will affect your business?
Steve Glanville: Yes. It won't affect our business but I think it's an important infrastructure that has been put in place because as we see BC continue to be active for the Montney, we need to have additional facilities for storage and transload and we've augmented that with some of our partners as well to be able to provide that. Obviously, regional mines having to truck it from long distance the way is very uneconomical. So most of these transloads are imported sand from Wisconsin or other areas. So yes, I think there's infrastructure that's required if we expect Phase 2 to be developed for LNG Canada and the other offtake opportunities that we have with Slims and Rockies LNG, I think it's going to be a pretty active area.
Keith MacKey: And just finally for me, the release talked about Phase 1 of your capital return program being debt repayment Phase 2 with buying back shares. Can you just talk a little bit more about your free cash flow priorities for this year? Certainly, you're buying back stock but you are relatively or structurally limited based on how many buybacks you can do given the float and the amount of free cash flow coming in. So does this mean that you might be looking at something like a dividend? Or should we just expect more buybacks and debt repayment for the next 2 to 3 quarters?
Klaas Deemter: So just touch a minute on debt. So we're focused on getting our debt down to, we talked a lot about that $60 million number. So that remains a focus of ours. Certainly, as we look forward into 2025 and you point out the float being a constraint which we recognize as well, we're pretty close to that target. So that does give us more meaningful cash flow to distribute to the shareholders and that is something under active consideration through our 2025 strategic planning cycle.
Operator: Your next question comes from the line of Waqar Syed from ATB Capital Markets.
Waqar Syed: Steve, if you were to move a pumping fleet from the U.S. to Canada, would it require any upgrades? And if so, to winterize it or anything else? And if so, what would the cost be generally?
Steve Glanville: It's a bit of a tough question to really answer. There was some minor capital required to put kind of cold weather kits on this asset base. It would range between, I would say, $200,000 to $300,000 per pump to get that done. As of today, I just want to be very clear, though, we're not in a position around talking about that. As we've mentioned, I think the U.S. market will sort itself out. I believe that we're at the bottom of this right now from an overall activity perspective. And I think this requires some time to get drilling activity back going again. And so we expect 2025 to be an opportunity for us to look at that exceeding business market. And as I mentioned before, we love our geographic diversity. In 2022, I think people have a short memory that 2022 was a fantastic year for our business in the U.S. and in Canada wasn't so great. So I think having the mix is exactly what we need for our business.
Klaas Deemter: And the other point I would add to is there are other regions besides Canada. We've got very strong market presence in the Northern U.S. regions as well. And we've been asked a number of times about our about bringing our frac capacity to complement our coiled business up there, too. So we have options. We've got that geographic diversity, both within the country and between countries.
Waqar Syed: So you think the Rockies or Bakken, is that could be a logical market for the fracturing fleet?
Klaas Deemter: There's options available to us. Just to point to the Texas market will see a rebound. We're at a low point now. And if you look at the commentary coming out of the producers down there, certainly indicative of 2025 starting to turn the corner there.
Waqar Syed: And just to be clear, are the fleets now manned or not manned right now?
Steve Glanville: Yes. We have one fleet that has banned currently today. So we have 2 fleets that can go to work that we've upgraded to dual fuel. And yes, we are not going to run this business at a loss. We're losing bids at less than $5,000 an hour and we're not prepared to go there.
Klaas Deemter: And just with respect to the second fleet, we moved over a lot of our key professionals to fill vacancies within our coiled tubing business. So there's the ability to transfer personnel between the service lines there to reactivate in pretty quick short order.
Waqar Syed: So one feet is currently working or it's manned but not working? Could you maybe clarify that for us?
Klaas Deemter: No, we're seeing intermittent utilization on that crew in Q3. And that's where our comment there about limited contribution from that service line. It just stems from the intermittent utilization that's expected there.
Operator: [Operator Instructions] Your next question comes from the line of John Daniel from Daniel Energy Partners.
John Daniel: Steve, I want to ask a little bit about the RFP process, if you will, that are underway for '25 and I don't know what you'd be willing to share. But clearly, current spot pricing is not sustainable and your peer group that's running at those levels will run themselves out of business. So knowing that, how do we approach the quotes for '25 without letting out too much of the competitive secrets but it can't be at $5,000 an hour. You follow me?
Steve Glanville: John, I would say we've been quite disciplined on not going to those levels because we know how to run this business. We're sophisticated enough. We spent over $30 million on capital last year, upgrading our U.S. frac business to dual fuel which, of course, I think, is a right investment. And when we go through these RFP processes, we know what we can do differently. Our operations team have delivered high execution levels with our crews. And it's a differentiator for sure. And I think there's a bunch of clients that would prefer just to get a better discount for this pad per se but then they realize quite quickly that the efficiencies they end up losing. And I think we can stand by our name and our reputation in the U.S. that we will deliver what we say we're going to do and I think it's fair for both sides. But I just want to highlight, John, what you said it's running at $5,000 an hour on a 50,000, 60,000 horsepower frac crew, that is a going out of business model and we're not prepared to go there.
John Daniel: Yes. In a really twisted sense, it's bullish because you're going to lose some competition. They might not be here 3 to 4 quarters from now. And it feels like a repeat of coming out of COVID, where the industry is not going to be ready to meet the needs of the customers because stuff will be in a state of disrepair and there'll just be less competition but that's my own view. Coiled tubing internationally, what are some of the opportunities there?
Steve Glanville: We've been in this business for, call it, 13.5 years in our coiled tubing business and it is a reputation that we have upheld being a technology leader in North America and that has obviously allowed us to; number one, have lots of great discussions about international opportunities. I think what coiled tubing has demonstrated to this industry that the 3-mile laterals that we talk about back 3 years ago, 4 years ago was how do we mill these out and we've proven to mill them out. Now the 4-mile laterals, how do we mill them out? Well, we've proven that we know how to mill them out. And so I think the limitations that we were concerned with on coiled tubing have gone away. A lot of that has to do with not only string design but capacity as well as different techniques to put weight on bit. But to answer your question in regards to overseas opportunities. I think for us, it needs to be meaningful, it needs to be with a producer that has long-term commitments. And I think areas like the Middle East, where they require technology, our company would fit in nicely over there.
Operator: There are no further questions at this time. I will now turn the call back to Mr. Steve Glanville. Please continue.
Steve Glanville: Yes. Thank you, operator. I'd just like to thank everyone for joining us for our Q2 conference call and I look forward to talking to everybody in November for our Q3. Thank you very much.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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