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spk02: Good morning and welcome to the STEP Energy Services Q1 2022 results conference call and webcast. At this time, all participants are in a listen-only mode. Following management's presentation, there will be a question and answer session open to financial analysts only. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, May 12, 2022, at 9 o'clock Mountain Time. On the call today are Regan Davis, Chief Executive Officer, Klaas Deemter, Chief Financial Officer, and Steve Glanville, President and Chief Operating Officer. I'll now turn the conference over to Regan Davis. Please go ahead.
spk08: Good morning, everyone. Thank you for joining us for this call.
spk06: The format this morning will be class. We'll give an update on finances. Steve will give an update on operations. And I'll provide some closing comments, summarizing what you probably already will hear from them. So I'll turn it over to class at this time.
spk05: Morning, everybody. Thanks, Regan. Just before we begin, I'd like to remind everyone that During this call, we're going to refer to several common industry terms and certain non-IFRS measures that are gain more fully described in our MD&A, which is, again, on the website where you are. So I'm going to give a brief overview of our past results, and then I'll turn the mic over to Steve, who's going to provide some operational detail. So the first quarter of 2022 delivered the cost. Revenue for the quarter was $219.5 million, which is about 60% higher. in Q4 of 2021. Utilization was higher across the board and the strong demand from our oil-focused customers allowed us to field a low-pressure crew that specifically targeted this oil-focused work. Steve will get into the details of the crew, We were able to move prices up 10% to 15% in Canada and 20% to 25% in the U.S. However, we won't get full benefit of these increases until the coming quarters, given the timing of how they rolled up in Q1. We're keeping prices steady through Q2 in Canada and haven't had to gauge the price discounting typically happens during the spring break-up period. Our U.S. team is continuing to push pricing higher through the quarter, following the lead of our much larger competitors. We generated $36.9 million in adjusted EBITDA in Q1 2022, up from $16 million in Q1 of last year, which, I'd like to point out, also included $3.5 million in Qs. And we were also up from the $17 million that we earned in Q4 2021. As noted in our MD&A, inflation limited the returns that we were able to achieve in this quarter, but I want to point out that this is the highest first quarter EBITDA since Q1 2018. And we're extremely proud of the hardworking professionals in our company that made this possible. The strong EBITDA performance translated into the first quarter of positive net income since Q3 of 2018. The $9.2 million net income earned this quarter translated to an earnings per share of $13.5 million. on our credit facilities to fund the higher working capital demands in the business. We maintain adequate liquidity through the quarter and expect that our lines will touch zero this week as we harvest that working capital following a small lull in activity here in Canada due to the spring break-up. We remain in compliance with all our covenants
spk06: I think class and good morning. Take a few minutes to talk about some of the operational highlights that we realized in the first quarter as well. Provide brief commentary on how the second quarter is progressing for the business. You isolation was very strong through most Q1, despite the difficult cold weather impacts early in the quarter and the Omicron COVID-19 variant, which caused some operational disruptions. I'd like to take this opportunity and really thank our operational challenges. The high utilization for the quarter is a direct effect of the increase in drilling activity due to the surge in commodity prices. If you remember, WTI rose from the start of the quarter at $77 a barrel and averaged $95 a barrel through the quarter. Also, the exciting part about the current commodity cycle for our business, and in particular our Canadian business, is the increase in natural gas prices. Since most of our The start of the year, NYMAX gas prices were around $4, and today they're hovering around that $7 per NMVTU. The U.S. rig count averaged 636 rigs, up 17% from the past quarter, and a 68% increase year over year. In Canada, the rig count averaged around 193, and on a combined basis, we pumped over This was a 10% increase from the previous quarter on 615 operating days for our active FRAC crews. I'll dive a bit deeper and discuss operational results from each of our geographic regions. Starting with our U.S. FRAC business, we continue to operate three large FRAC crews, with each crew having between 50 and 60,000 horsepower available. The majority of the work was where we were active in the Permian Basin. Profit and last-mile delivery bottlenecks resulted in some minor delays, which impacted optimum track efficiencies. The quick ramp-up in the base and activity put us straight on supply chain and third-party infrastructure. However, we believe this will correct itself in the coming quarters as additional resources will be added. One other highlight for the quarter is one of our In the U.S., our co-tipping business had a slower start at the beginning of the quarter as activity typically follows the frack completions and since most operators took time off during the holiday season. This created about a two-week lag to reach full utilization in January due to wells not being handed over for milling operations. At the end of the quarter, we staffed an additional unit in the Rockies region as high demand warranted the expansions. This additional overhead was captured in that quarter. However, revenue was not, and we'll be following in the subsequent quarters. So this would put us at nine deep active coal turbines currently in the U.S. We are very pleased with the results that our U.S. business put up in Q1, and we look forward to improving our bottom line margins as we continue to work with our dedicated clients to increase pricing. Over to our Canadian business. On the frac side, we operated five frac spreads with 215,000 horsepower during the quarter. And as Klaas had mentioned, we did reactivate a fifth frac spread, and it was mainly focused on lower-intensity work in the Viking and Cardium areas. And we really were able to capitalize with our bundled services with our co-comming assets. Total operating days for the quarter surged One other interesting note for our quarter for the Brockside is, as Klaus had mentioned, our idle reduction control kits, we have 10% of our fleet installed without on our horsepower. And with the delays and constraints from a third-party trucking perspective, we were able to remove some of our tractors off of our horsepower units and use that as our internal hauling business. So pretty excited about that technology. On the cultivating side of our Canadian business, we were also extremely active in the first quarter and we operated eight deep capacity cultivating units, which was an increase from the previous quarter. As we look into the outlook, recounts of course in 2022 are expected to track approximately 25% higher in Canada relative to 2021 and over 25% or more in the US. The increase in recount will drive demand for our services, Our operations both in Canada and the U.S. have experienced very strong levels of activity thus far in the quarter. Besides the typical slowdowns that happen in Canada during the breakup period, which of course is due to road restrictions. We are expected record-breaking quarters for both our U.S. and our Canadian business units as we've been able to increase pricing across every business unit versus in the past provided a discount in Canada for the slow Q2 period. Looking forward into the third quarter, we are seeing increased activity prior to Q3 of 2021 for both geographic reasons. Currently, our Canadian frac schedule is filling up and we expect it to be fully utilized or sold out in the coming weeks. And in the U.S., with the increased drilling activity, we expect similar utilization metrics as we are seeing in Q2. Our pricing discussion from our clients, they have responded positively with I'll now turn it over to Regan for some closing comments. Thanks, Pete. Again, I think most of my comments will sort of touch on stuff that Steve and Klaas have already spoken to so well. I'll start with, like, I couldn't be happier than Q1 and how it turned out. It really was a great momentous quarter for the company. Utilization was strong. The cooperation was with our clients to ultimately result in net margin improvements for our business. The incredible execution from our field professionals. And then in April, just outside of the first quarter, we were able to complete our first IOR job. Now, IOR is a technology that ultimately results in, it's applied to existing wells from those wells. And given our suite of global IP from GasTrack, we are in a really neat position to be able to develop that market with very little competition. As I look at the outlook, I think it's worth noting that we've had quarter-over-quarter improvements since Q4 of 2020. And we've got an obviously very constructive outlook this year and into 2023. I think we've all had the benefit of reading some of the commentary from global energy producers, from large industry leaders, OFS leaders in our space to support that outlook. We have obviously had great success moving pricing up through Q1, and as Steve mentioned, that pricing is going to carry through into Q2, resulting in improved margins, with virtually no discounts in recognition of how tight supply of our business assets are. U.S. pricing is literally improving by the month. And I would like to note that if you look at our Q1 results for the U.S. condition, I think they stand up very well, if not better than many of our larger U.S. competitors. The Canadian rate count is the highest at this time of year since 2014. The U.S. rate count is 57% higher year over year. We have a very strong visibility to strong utilization for our manned assets for the back half of the year. And I would suggest as we think about it moving into Q123, assuming this environment maintains that, We would look at additional capacity into the market in Q1 2023. All this stuff, I think it's appropriate given the profitability in the sector that our business and our sector, OFS sector, it gets comfortable with pursuing top of cycle margins, but it's only appropriate. I would once again thank you, thank all of our professionals for the fantastic execution during Q1. And note that during a very busy time, we continue to have success advancing our digital and operational optimization strategies. I would highlight that our team is a very, very proud participant in the energy supply network, which is most recently been gaining respect globally. Final comment would be we're very pleased to share that we've released our first ESG report. This report clarifies the company's progress and ongoing commitment to supporting our clients with emissions reductions. It speaks to our track record of strong governments, and it establishes our commitment to our team through safety and our culture. That brings my comments to a close. back to you, the operator.
spk02: Thank you. If you'd like to ask a question, please press star then one on your telephone keypad. First question today is from Cole Pereira with Stievel. Your line is open.
spk01: Hi, good morning, everyone, and congrats on the quarter. I just wanted to refer back to the commentary on Canada, so talking about it being largely sold out. Pricing obviously improving on a net basis. I mean, I'm just wondering, you know, it's obviously fair to think that that Q3 EBITDA could be equal to, if not materially higher than Q1 here.
spk06: Hey, Paul, it's Steve here. Yeah, great question. You know, just what I had mentioned, we're definitely, we have minimal white space on our calendar for Q3 EBITDA. And, yeah, we probably expect that quarter to be equal or higher than our Q1, even in numbers. Okay, perfect. Yeah, I mean, that's the Canadian business. And, of course, our U.S. business definitely is getting higher traction from a pricing standpoint. And utilization has been there already. So, you know, the additional revenue, of course, will help from the bottom line perspective.
spk01: Okay, great. And yeah, just coming back to your comments on it being a record quarter for the US business. I mean, I assume that's for a record Q2. I mean, if I look back to 2019 2018, this business was generating call it 15 $25 million of EBITDA quarter. I mean, are you kind of looking at a different metric other than EBITDA with that comments? Or is or is there some potential to get within that range?
spk05: Sorry, just for the U.S. business, Cole?
spk01: Yeah, sorry, just for the U.S. business.
spk05: Yeah, I think if we take a look at the recent context, we're certainly going to be much stronger than we've been there before.
spk06: get accrued in place. Okay, perfect. And, yeah, go ahead. Well, it's probably worth noting that, you know, as we look at our results month over month and kind of annualize the EBITDA per fleet, we're comfortably inside the mid-teens now on EBITDA per fleet. And, you know, all indications are that's going to continue if not accrued.
spk01: Okay, got it. No, that makes sense. And I'm just wondering, are you able to provide any goalposts around how we should be thinking about working capital changes in Q2 and then in the second half of the year? Acknowledging there's obviously still some uncertainty.
spk05: Yeah, so we're going to see, I mentioned there in my commentary, we had a bit of a lull. We talked about that in the MENA as well, kind of April and early May in our Canadian business. So we're seeing some harvests come back into our account. back up again here as we wrap up here. So I would say on that basis for Q2, we'll see a harvest there, and then we'll see a bit of a buildup again in Q3, and then kind of depending on how Q4 goes with that end of the December kind of timeframe. We're looking really deeply into the crystal ball here, but I expect we'll see a bit of a recovery there. So on a net basis, I guess, over the year, I would say that Q1 is probably our high point. And we'll probably, on a net basis through the year, we'll come down a bit. I guess that.
spk01: Okay, perfect. That's helpful. Thanks. That's all for me. I'll turn it back.
spk02: The next question is from Keith. Your line is open.
spk00: Hi, thanks, and good morning. Can you maybe just talk about, you know, given the current and future price increases, certainly have talked about where you kind of expect margins to see, but really where, you know, going into Q2, 3, and 4, how should we be thinking about, you know, margins on a consolidated basis relative to Q1?
spk08: I mean, our expectation is they're going to improve. I mean, do you want more detail than that?
spk06: I mean, I think the U.S., as we mentioned, is showing improving results month over month. And our clients are very cooperative in Canada as we seek to improve net margins as we move through the year.
spk05: I can't remember how much one of our trailers said it, but they were talking about pricing increases to the point of, I don't know if it was painful or maybe it was uncomfortable. I can't remember the exact wording, but The drillers who typically lead with these things, they're pushing that pricing narrative extremely strongly down in the U.S. If you recall from the U.S. bumpers, the message is we're full and the prices are going up and up and up. So we're happy to that. I mean, we're not a big presence in that market the way we are in Canada. We're happy to hitch our wagons to that train. considered sequential improvement.
spk00: Perfect. No, that's helpful. Maybe just secondly, on the balance sheet a little bit. So certainly operationally, the outlook for margins and EBITDA is quite strong with capital not expected to go up to too much. So it sounds like there should be some free cash flow through 22 and likely 23 to but how are you thinking now about the term loan maturity into 2023 and with refinancing that and maybe just a little bit more about your approach there and if when we should expect to see something happen on refinancing of that.
spk05: Yeah, so our facility goes, it expires, I guess, at the end of July of 2023. We've had preliminary conversations with our lenders, quite constructive around kind of our proposed structure. Our goal internally, and it's certainly something we're communicating to the market as well, is that we've got a strong debt reduction focus. The best way for us right now to add value to our shareholders is to pay down that debt and to give us that flexibility when that inevitable downturn comes again. So I anticipate that we'll have... some news coming out towards the end of this quarter, maybe it's the beginning of Q3 around that. The precast flow that we're starting to generate is meaningful, and we should be able to knock that debt down to a much more manageable number. We're around two and a half times on a trailing 12 basis, I think, if I recall correctly, here at the end of Q1. And if you can align that out to where we expect to be
spk08: Perfect. Thanks very much for the color.
spk02: Our next question is from Wakar Syed with ATB Capital Markets. Your line is open.
spk08: Okay.
spk04: Good morning and congrats on a great quarter. My first question relates to input inflation. Are you seeing any stability in – inflation that you're experiencing, and you talked about some of the price increases that you're getting. Could you also talk about the net price increases that you're getting versus just the gross price increases?
spk05: So, Carl, I'll start just by touching on that, the gross versus net. So, when we raised prices in Q1, it was a bit reactive to kind of what we saw in January. And as they reacted, we were pushing the price narrative continually through Q4 and into January and thought we were staying ahead of it until we saw how hard inflation kind of hit in that month. So if we take a look at Canada, I think it quoted around 10% to 15% in the MD&A. Our net number on a quarterly basis there was probably around 5%. coming on that, but Steve's going to talk to you in a second about where we're seeing all those pricing pressures. It's not going away, and it's something that we're continually talking to our clients around, and it gets, you know, our sales guys are getting tired of the revolving door going back to their clients, but it's like we're seeing the same thing coming in through our front door, and we have to pass those price increases on.
spk08: Yeah, we're hard. Yeah.
spk06: Sorry, I'll just add on to what Klaas was commenting on. You know, obviously our main focus is making sure that we have a happy employee base. And that was our first, obviously, we've had to increase wages there, which was well needed. It's been a long time since our field professionals were receiving an increase. So, you know, of course we implemented that into our business for the beginning of the year. And, uh, From that, of course, we saw increases from a supply chain standpoint. So higher profit costs, higher fuel, of course. Everybody's filling up their vehicles today. They know the price of that. That's obviously impacting our business. And then, of course, the biggest things are profits. I've mentioned just from a net standpoint. We need to get margin back in the business so that we can continue to invest in the capital intensity of our equipment. So our clients are understanding that and have been really, really willing to work with us on those price increases.
spk05: Carl, I'll give you a couple of examples that we talked about yesterday. of her order. Kat is hardly even willing to commit to any kind of pricing, even if we give them a PO. Kenworth, it'll take 18 to 24 months to get a tractor as we ordered it today. The list goes on. So there's a bit of a feeling that we may have caught up to inflation, but it feels like there may be another leg coming. And if you think about the pressures that we're facing, labor and everything else, every other business is doing the same thing, talking about raising wages. And this is where we get into that whole economic discussion around inflation and visa transitory is about our feeling is it's not transitory. And we're going to continue to see that pressure here for the coming year.
spk04: Yeah. Okay. Then could you also talk about the qualitative market? What are you seeing there in terms of pricing?
spk06: Hello, Carl. It's Steve here. You know, I'll just start in the U.S. market, and particularly the Permian. There's probably an oversupply still today in the Permian market when it comes to cold tubing completions. So it's been a little bit harder to move prices. We've been very successful. We've locked up two out of our three cold tubing units on long-term contracts with a large client in that area, and we that. But later on in the quarter, we didn't really realize that until the really kind of March timeframe. So we expect to see that obviously coming into Q2. Into Canada, you know, there's such a limited amount of, I guess, competitors in this space. And we had high utilization, of course, in the Canadian market. And I typically see that going obviously forward into Q2 and Q3. and have been leading the price march on our co-living business since we did a motion to enjoy the market share for that.
spk04: And, you know, your U.S. equipment, you're already running at a very high utilization level. How much room do you have to increase equipment of three and two-fourths?
spk06: Yeah, I mean, we would look at increasing it to just one additional fleet if we see the demand there. We would be wanting to secure a long-term contract before we even look at that with CARP. One thing that we don't really – we don't talk – I mean, Regan mentioned it in his closing comments about our IR technology. We are starting to see some traction there, and –
spk04: Could you maybe expand on that a little bit? I know you were doing some field tests on that technology. Could you maybe provide some more color?
spk06: Yeah, I mean, the job itself was extremely successful. You know, we were able to see some diversion happen, which was exactly what we wanted. Well results initially so far have been holding in there. In fact, it's increased the field around it. So pretty early on right now, but we're extremely ecstatic about the level of safety that was performed on the job and high level of execution. We had a number of clients or potential clients that were waiting for this first job to be done. And now they're talking with us about some work that they want to put in the calendar. I think a couple of other more technical aspects. Part of this process, the chemical cocktail that It's intended to change the wettability for the surface tension of the reservoir and liberate water, toning water, and of course, change the viscosity of the oil. And we've seen success with that part of the technology as well, which is very encouraging and validates the modeling. And the other piece that it was in cleaning up wax in the wellbore. The well, the tubing, the wellbore itself was highly plugged with wax, near wellbore damage, or plugging due to the wax. And our fluid that we injected was very, very effective at essentially dissolving and liberating that wax problem. Another really encouraging side benefit from the technology.
spk04: Do you think the customer would wait for another, would wait for 90 days or so to get production data or more like 180 days or, you know, how long do you think the customer would feel comfortable with the data set to go ahead with the additional programs?
spk06: I would think it'd be 90 days. the timeframe we're thinking, but Steve referred to other clients that were in advanced discussions with working through just sort of administrator-type hurdles at the moment. So we have several levels in the queue that we expect to complete and start getting results on in the coming weeks and months.
spk04: And just my last question, Klaus, in terms of working cash flow from working capital changes. What's your expectations for Q2 and for the second half of this year?
spk05: Yeah, we'll get a harvest coming out of Q2. And then as we go back into Q3, we'll probably build up that a little bit. And then in Q4, we'll see probably a bit of a harvest come through there again. Operationally, if we're If we see the ramp that we're optimistically seeing, we may actually see a bit more of a build in Q4 as winter activity really begins to pick up. But for now, we're kind of on the conservative side saying we'll model a bit of a recovery there in Q4. Okay.
spk04: Great. Thank you very much. Appreciate the call.
spk08: Thanks, Mark.
spk02: As a reminder, it's star one to ask a question. Our next question is from John Daniel with Daniel Energy Partners. Your line is open.
spk03: Hey, guys. Just a question on the, Steve, I think you mentioned the bulk on kits for fuel. Can you remind us what percent of the fleet has that capability and what the plans are to expand that capability?
spk06: Good question, John. So, we, you know, class had mentioned some of our capital expansion plans that got approved from our board yesterday, and that would be adding some additional kits for our U.S. business. So if you kind of look at it, we're around 60,000 horsepower. We'll get up to close to 80,000 horsepower by the end of Q3. Got it.
spk03: And then the... just curious if you can say, the kit, the bolt-on, is that from the engine OEM or is that from a third party?
spk06: It is from a third party. It was a proven system actually used in a mining operation. Same engines that we used on our track pumps that we're using on haul trucks from a mining perspective. So the technology is proven in that aspect and we were the first ones to bring it into the North American market and
spk03: Okay. Thank you. And then the final one for me, I think you mentioned the 10-worth lead times of 18 to 24 months to secure new tractors. Did I hear those numbers correctly?
spk08: Yeah.
spk05: Yeah, you did, John. That's feedback from our ops guys at that meeting just recently.
spk03: I'm curious.
spk06: If you wanted to order, sorry, John, I'll just add on to what Klaus's comments were. I mean, obviously a lot of our our tractors would be, you know, special order, particularly hauling coal tubing units, heavy loads, so, you know, large, you know, large transfer cases, heavy haul units, and those custom tractors are, you know, you're at least 18 months out for that.
spk03: Okay. I don't want you to have to speak for the industry. I'm going to ask this question anyway. Are we looking at a situation where the trucking situation gets worse i mean because you guys put lots of miles on tractors today right you can't you know spare parts are harder to get what's going to happen what's your view nine to twelve months from now on just how you move equipment whether it be sand or whatever your thoughts on that yeah good question i mean as you know i mean most of our uh i mean all of our tractors on
spk06: four weeks at a time, not putting on any miles. We have a fleet of tractors that are maybe age-wise old, but obviously able to have lots of life in them. I talked about our idle reduction control system. We have 10% of our fleet in Canada. We're adding some more capacity there. These kits are one in Canada, and we'll continue to invest in that technology going forward in North America.
spk03: Okay. All right. Well, thank you guys for letting us know some questions your way.
spk08: Thanks, John.
spk02: We have no further questions at this time. We'll turn it back to the presenters for any closing remarks.
spk06: Thank you, everyone, for joining. We appreciate your interest. Have a good day.
spk02: Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for participating. You may now disconnect.
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