STEP Energy Services Ltd.

Welcome to the Step Energy Services fourth quarter end-year end conference call and webcast. At this time, all lines are in a lesson-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, March 2, 2023. I would now like to turn the conference over to Mr. Benner, Advisor, Investor Relations. Please go ahead.

Thanks, Operator, and good morning, everyone. Welcome to STEP's fourth quarter and year-end 2022 conference call and webcast. The quarter capped off a terrific year for the company. I am pleased to introduce today's roster of speakers. Steve Glanville, our President and CEO, will give some opening remarks. Plus, Dean Turr, our CFO, will follow with an overview of the financial highlights before turning it back to Steve for some strategy and outlook-focused commentary. We will host a Q&A session to follow. Before I turn it over to Steve, I would like to remind everyone that this conference call may contain forward looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward looking information section of our Q4 2022 MD&A. Several business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to the Risk Factor and Risk Management section of our MD&A for the quarter ended December 31, 2022 for a more complete description of business risks and uncertainties facing STEP. This document is available both on our website and on CDAR. During this call, we will also refer to several common industry terms and certain non-IFRS measures that are fully described in our MD&A which again is available on CDAR and on our website. With that, I will pass the call over to Steve.

Thanks Dana and good morning. Thank you for joining our year end 2022 conference call. As noted, my name is Steve Glanville and I am the President and CEO of STEP Energy Services. We will be providing an operational update and commentary about our Q4 and full year results. By now, hopefully you will have the opportunity to look at them. The year 2022 set new records for revenue and adjusted EBITDA. And interestingly, each of the quarters showed a different standard quality on what makes STEP successful in the pressure pumping and cold tubing space. Our first quarter featured our return to profitability, which reflected years of balancing continued investment in our people and equipment with strong cost management along the way. The return to profitability happened more quickly at STEP than with many companies in the energy services space. Our second quarter showed the power of our field efficiencies when working with Western Canadian clients on large, well-planned, path-based programs. It was one of the strongest results for a second quarter that I've seen in my 30 years in this business. This was during a period of extreme inflationary pressures, something that our sales and supply chain professionals did an excellent job at managing. Our third quarter showed further evidence of our strong operating efficiencies by achieving even higher consolidated adjusted EBITDA than Q2, and that occurred on a modest takedown in revenue. It is very unusual for a pressure pumping company to achieve this given the fixed costs in the business. We also made an important acquisition of four ultra deep capacity coal tubing units in the premium. And we also announced a novel funding arrangement for a tier four dual fuel frac fleet upgrade, one backed by a $10 million prepayment from one of our major clients. Finally, our fourth quarter showed the power of the North American business model, where our US well fracturing and coal tubing business units both put up record quarters on a revenue and adjusted EBITDA basis. Thinking back to the full year, our achievements support the notion that pressure pumping is a project-based business. It is rare for everything to go perfectly all at the same time. What you'll often see is that a sound company and business model will show different strengths at different times, which is good for all shareholders. I liken this year's performance to a hockey team that wins a championship or at least goes deep into the playoffs. A successful team needs everyone to contribute and needs scoring from all four lines. We scored from all four lines this year, from both the U.S. and Canada, and in both fracturing and co-tripping. We have entered 2023 with a different set of opportunities and challenges in front of us, but I genuinely feel that we are in great shape to face them. Before I address our outlook more specifically and take questions, I want to hand the call over to Class Dean Sir, our CFO, to go over our financial highlights of the quarter and full year.

Thanks, Steve, and good morning, everyone. Before I start, a quick reminder to our listeners that all numbers are in Canadian dollars unless noted otherwise. So our consolidated revenue in the quarter was $251.4 million, the second highest quarter in our history. Over four quarters revenue was just slightly under 1Billion dollars, a truly impressive achievement. Accomplished by everyone who works at STEP. Approximately 76% of this revenue was in fracturing and the remaining 24% was in co-op tuning. Turning to consolidated adjusted EBITDA, STEP posted 48.6Million in Q4 as compared to the roughly 58Million in Q3 and 55Million in our exceptional Q2. For the full year, STEP earned $198.9 million in adjusted EBITDA, more than three times the $63 million that we earned in 2021. Our consolidated adjusted EBITDA margin was 20% for the year versus 12% last year. Great progress, although we feel that the best days are still yet to come. I'm going to turn to the geographic regions now to provide more color on a solid quarter and a very exciting year overall. The full detail is in our MD&A, so I'm just going to hit the important highlights. And given the record quarter that we had in the U.S., I'll start there. The U.S. had a revenue of $136.6 million, which is up 31% versus Q3 2022, while adjusted EBITDA of $28.6 million is up 38% sequentially. Adjusted EBITDA margin was 21% in the U.S. for Q4, up from 20% in Q3. The fourth quarter in the U.S. was our best quarter ever for both of the business units, frack and coal tubing. For context, the Baker Hughes land rig count was up 2% sequentially, while the U.S. fracturing activity was also up 2% sequentially, according to the Ristad Energy consulting firm. Foliar results were similarly impressive, with segment revenues of $421.2 million, up 136% year-over-year. Foliar adjusted EBITDA in the U.S. was $79.6 million, almost eight times higher than the 2021 level of $10 million, and demonstrating the earnings potential in our business model. U.S. frac revenue in Q4 was $97.7 million, up 44% from Q3 levels and up 20% from our very strong Q2. Fracturing operating days increased about 31% sequentially. Prop and pump was up 27%, while the number of stages was up 16% versus Q3. Step me back a little. The largest factor in the growth of our fracturing service line was on the pricing side. Consider that full-year U.S. frac operating days are up around 20%. Prop and pump was up 22%. while U.S. fracturing revenues overall were up about 170%. Another factor in the substantial year-over-year growth was the amount of steps applied profit. For 2022, this proportion was 49% of total volumes pumped, while in 2021 it was 36%. Strong U.S. coil tubing performance also contributed nicely in Q4 and the full year. As noted earlier, U.S. coil tubing had its best top line for a quarter ever, with revenue of $38.9 million, up roughly 7% from Q3 2022. Operating days are roughly flat sequentially, but pricing notched higher. On a full year basis, the acquisition of the four Permian-based deep ultracapacity coil tubing units in September 2022 increased our scale and allowed operating days to rise almost 37% over all of 2022 versus 2021. This acquisition enabled us to put 12 coil tubing units in the field today. And it's also important to note that this acquisition was from a US pressure pumping competitor that took step equity in the transaction, something we saw as a good endorsement of where we're headed as a company. Full-year coil tubing revenue was $412 million, up 80% versus 2021, and reflective of the better pricing in addition to higher operating days. Turning to Canada, we had a bit of a mixed fourth quarter. Q4 can be a tough quarter as clients begin to wind down their capital programs, and without a strong commodity price prompt to pull capital forward, activity can start to slow in December, if not sooner at times. We saw this in our business, but also in industry stats. The Canadian rig count was down 7% versus Q3, while fracturing activity was down 17% sequentially. By contrast, a year ago, against a more stable and actually rising commodity price backdrop, Q4 fracturing activity was in line with Q3 2021. So Q4 revenue in the Canadian segment was $114.8 million, down 19% from the previous quarter. Segment adjusted EBITDA was 23.6 versus 40.9 in the third quarter. Adjusted EBITDA margin was 21%, which is down from 29% in Q3 2022, which was the highest quarterly Canadian margin that we achieved this year. Our full-year Canadian segment revenue was a record $567.8 million, which is up 59% year-over-year. Adjusted EBITDA in Canada was $136 million, which is also our best-ever achievement, and roughly doubled the 2021 level. Full year margins in this segment were 24% up from 19% last year. In Canada, fracturing made up 72% of revenue in Q4 and 80% of full year revenue, so we'll start there. Revenue on our five fracturing crews is $83.1 million in the quarter, down 25% from Q3. Operating days were 8% shy of what we had in Q3, while profit pumped was 38% less than Q3, indicative of the lower intensity completions in our job mix. Beyond these two factors, a third factor in our fourth quarter Canadian results was the addition of fracturing capacity, which put the market into an oversupply position. Notwithstanding the slower Q4, full year results in the Canadian fracturing were very commendable and posted a new high water mark of 453.6 million, up 64% year over year, and up 24% from the previous high water mark of 2017. We ran eight coal tubing units in 2022, up from seven in 2021. Our Canadian Coil Tubing Business Unit, which also includes ancillary fluid and nitrogen pumping crews, had its best quarter of the year in Q4, with revenue of $31.7 million, up 5% sequentially. This top line was achieved despite the number of operating days declining 7.5% from Q3. Full-year performance was also commendable, with revenue increasing to $114.2 million, up 42% year-over-year, and the highest level since 2018. Moving to the balance sheet and our free cash flow performance, Our year-end net debt was $142.2 million, $45 million lower than a year ago. Measured against our full-year 2022 adjusted EBITDA of $198.9 million, the net debt to adjusted EBITDA ratio has improved 0.7 times. One year ago, our net debt of $186.9 million was almost three times our 2021 adjusted EBITDA of $63 million. It's been a remarkable year of balance sheet improvement for STEP, and more broadly, the company has paid down about $170 million since our peak in 2018 during some pretty challenging market conditions. Free cash flow is the other half of the story. In Q4, STEP generated over $22.4 million of free cash flow, while for the full year, the number was $111.8 million. While the free cash generation and debt paydown have been a bit oppressive, what many investors may not realize is the extent to which we have invested in our fleet along the way. It's important for companies to keep CapEx at a level where it matches longer-term depreciation, something that we view as a sign of a properly maintained asset base. We have a slide in our IR deck which compares our ratio on this against our North American peers, and you'll see that STEP compares very favorably against the group. On the capital spending side, STEP's board of directors approved a budget for 2023 of $103.2 million. with $55 million allocated towards sustaining capital and $48 million for optimization capital. The budget for sustaining capital is tied to activity levels and is generally geared towards replacing the major components required for daily operations. The optimization capital is for projects that improve efficiency or reliability and also includes capital for our fleet refurbishments. We review this capital budget against current market conditions quarterly, and we will adjust up or down as needed. The last couple things I want to address is our earnings per share and bulk value per share, something we haven't had good news report on for a while. As Steve noted, we returned to profit earlier this year, posting four quarters of positive net earnings and even during the seasonally challenged second quarter. Q4 EPS was 23 cents diluted versus 43 cents in Q3. Full year EPS was $1.31 diluted versus a loss of 41 cents in 2021. Consistent and positive EPS will hopefully introduce a much larger focus on earnings and returns on invested capital, which is where we feel STEP excels. Finally, our book value per share has increased to $4.27 as of year-end, up from $2.60 a year ago. That's measurable value creation for equity holders. With that, I'll turn it back to Steve for some key remarks on our strategy and outlook.

Yeah, thanks, Klaas. At the beginning of the call, I highlighted that STEP put up record results this year because we received a strong contribution from each of the business units and that when we saw a bit of a slowdown in performance in one unit another one was there to pick up the slack and power us forward at step we firmly believe that this that it makes the most sense to be a full north american player in the pressure pumping space because each of the major geographic regions offer different opportunities and often at different times Today, LNG is clearly the biggest story in global energy going forward to at least 2030, particularly in the U.S., and it reminds me of how the Permian became the biggest story in global energy five to six years ago. The best business models should strive to have exposure to these major energy growth areas, and at STEP we have that. We are largely Permian-focused today in our U.S. operations. that are within operating range of the Hainesville natural gas play as it becomes a major source area of the natural gas that will flow through the growing list of US LNG export facilities. Although natural gas prices are weaker today, we see prices recovering as the year progresses and are excited to see how the industry develops as new LNG capacity comes online in 2024 and onwards. Interestingly, Whereas the U.S. exports roughly tended to 12% of its natural gas production today, research suggests that that level will move up to 20% and beyond in the coming years, which will start to decouple U.S. natural gas prices from domestic factors. U.S. natural gas prices should start to better reflect global supply-demand forces and move to a tighter competitive spread with global oil prices. Our diverse business model also puts us in a good position to benefit from the anticipated startup of Canada's first LNG project and all the completion activity that will be needed to reach the over two BCF a day of target expert capacity by 2025 or early 2026. The recent agreement with the Blueberry River First Nations on regional development combined with What may be even a doubling of LNG Canada's eventual export capacity to over four BCF per day gives us great confidence in Canada as a growth market going forward. Our diverse business model also features STEP as one of North America's largest coal tubing companies. One with the technical capability and expertise to serve the growing extended reach well market. And what we see the same trends unfolding in this area as in the fracturing market. Size and scale are keys to success in co-tubing, and we continue to pursue that growth initiative by activating idle units or through acquisitions as we did last year. These are the pillars of STEP's strategy going forward, and we have the people, the equipment, the technology, and the balance sheet to make it happen. I'm very excited at the platform right now.

Finally, I want to finish by offering up some comments on our outlook.

Every year brings a different set of opportunities and challenges, and that is a good place to start with 2023. Canada has started strongly for us, and the market has soaked up the extra capacity brought to it later in 2022 by a competitor. Our Canadian fracturing crews are all very busy, and although our Canadian cold tubing operation had a typical start to January, today we have nine cold tubing units working in Canada, which is up from eight a year ago. Overall, we have good visibility in the Canadian business to end the quarter in both fracturing and co-fitting. Whatever work we can't complete in Canada in Q1 shows every indication of being pushed out into Q2, which suits us fine as it helps us level load our operation like last year. Having said that, we think we will be hard-pressed to duplicate the outstanding Canadian second quarter of 2022 as everything came together perfectly, including a sizable number of large pads to work on, while spring conditions slowed everything else down. Also in Q2, we anticipate taking delivery of our first upgraded Tier 4 dual fuel frac fleet in Canada, the one I spoke of earlier that is partially funded by a client. It's an exciting development for us, and it shows how energy service companies and EMP companies can partner and work to each other's benefit. Finally, activity should remain fairly robust in the back half of 2023 as a result of agreements signed with the Blueberry River First Nations. Large fracturing crews are required to perform the bulk of the stimulation operations in this region, so that should help to keep the fractured market as tight as possible. In the U.S., it's been a slower start to 2023 than we were expecting. First, there is the backdrop of the U.S. land rate count rolling over from lower natural gas prices, which has freed up some fracturing capacity, caused a modest rollover in some pricing, and led to some margin compression. Second, more specific to STEP, we have seen lower U.S. fleet utilization due to significant drilling delays on two of our clients' locations. These are large multi-wall pads that take 20 to 30 days to complete, so having these delays come at the start of the year when capital programs and schedules had just been reset meant we couldn't find a replacement work for these crews. Once client activity was able to move forward on the same locations, they were affected by winter storms in early February. Utilization has since picked up and we expect this level of solid U.S. fracturing activity to continue in the Q2. On the coal-tipping side, utilization has been strong so far this quarter, helped by the strong Q4 drilling and fracturing activity levels in the U.S. Other than some spring breakup effects with part of the fleet in the U.S. Rockies and in North Dakota in late Q1 and early Q2, we expect continued strong utilization of our U.S. fleet. We are now running 12 coal-tipping units in the U.S., which is up from 10 in our last quarter. Before I turn the call back to the operator, I want to close by saying how proud I am of what we accomplished together at STEP in 2022. It was a total team effort and it could not have happened without the efforts of our exceptional team and the deep collaborative relationships we have with our clients. We have much to look forward to in the coming quarters and years in this business. Operator, we would be pleased to take any questions.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to withdraw your question, please press the star followed by the two. One moment, please, for your first question. Your first question comes from Cole Pereira from Stifel. Please go ahead.

Hi. Morning, all. Just wanted to start on the Q2 activity outlook in Canada. I mean, Steve, you touched on it a little bit. And that last Q2 is really a perfect quarter. But are you seeing any factors other than that? Like, are you seeing E&Ps pulling back? Have you seen a shift in work mix, maybe some customer changes or losses or anything like that?

Good morning, Cole. Not really. We haven't seen any pullback at all in the Canadian market whatsoever. You know, it's going to be really hard to obviously duplicate, as I mentioned, our Q2 unfolded last year. It was a pretty remarkable quarter. So to have that high bar set and to try to overcome, that's going to be a bit difficult. But I can tell you, we're starting to see, you know, a lot of, you know, work kind of pile into kind of that June timeframe for us. And even April may seem to be fairly steady. So You know, although I don't think we're going to hit the top line revenue that we did last year, it's still going to be a great quarter for Canada. And I think where that comes from, Cole, is a lot of our clients are looking at level loading their programs on a yearly basis. And the cost to heat water in the wintertime, particularly, you know, in the northern regions, they've been able to access these paths, you know, close to highway, which helps from a breakup point. you know, having the road band situation alleviated. So I think, as I mentioned before, we should see more of that going forward as a more level-loaded kind of Q2.

And the other factor to consider, Cole, is that there's a couple more frog fleets on the market, which will soak up some of that work in Q2.

Got it. So you talked about it a little bit, but can you touch on the visibility you have for the second half right now, how customer conversations are going, and how we should think about the balance of lower natural gas prices with perhaps some incremental LNG and blueberry development?

Yeah, I mean, we're... Early signs right now, Cole, on that.

We are obviously filling the back half of the year. You know, I think some of the holdup on our activity could be based on the drilling rig supply. And what I'm hearing is, you know, there's some rigs moving from the U.S. up into Canada to support some of the additional growth. And so we see that as perhaps a minor bottleneck. I know that will get sorted out in time. But we do expect the back half of the year, as we mentioned in the call, just the LNG development, it needs to get going. And we're starting to hear signs of we're going to see some of that back in the back half of this year.

Okay, got it. Thanks. And obviously the U.S. business looked very strong this quarter. You have some weather issues early in the year, which it is what it is, but Do you think that's kind of a peak for the business, or do you think pricing and utilization can go higher, and maybe you can beat that in 2023?

Yeah, if you look at Q4, I mean, gas prices were at $6. Today, we're at $2.75. And, you know, there's been a bit of a rollover, but I can honestly say that our business is positioned extremely well in the Permian world. It's still a tight market on the fracturing side in the Permian. And, you know, I talk about in our Q1 delays, that's sort of a one-off situation that it was literally the two of our clients had drilling rig problems that just pushed out the schedule. We are seeing visibility, you know, past Q2 with a lot of our fleets to be highly utilized. So,

Yeah, I think it's an important point. Just again, the beginning of the year, all those schedules, like client schedules, pumper schedules, like all OFS schedules, basically get reset after Christmas, right? So everybody starts from zero. We're all the starting line together. The drilling delays that we had with these particular clients, because everybody else is basically ready to go, you don't have that same kind of slipping and sliding of schedules where it's easier to backfill. Had this happened in April, May, June, whatever, pick a month, summer, mid-year, it's much easier to find kind of backup work. And in this case, it just happened to be where they just came right at the beginning of the year, which made it really challenging for us to find work right away. We were able to start some other work a little bit earlier, but going back to getting that, you know, it's 20 to 30 days sometimes on these pads, so it's hard just to pick up another job and just move over. These are not two or three day jobs.

Got it. And just one more from me. Obviously, you're bringing your tier four into service here shortly. I mean, any desire to, you know, increase that footprint in the near term? You're sort of happy with that one fleet for now?

Yeah, no, I think I could tell you we've been talking to many clients who are really interested in how that deal came apart or came together. And so we've had lots of interest and we're very excited about moving forward as our equipment gets to an end of life cycle on the major components. We will be looking at upgrading that with tier four. So that's our plan. Our team's working really hard. Our sales team is working hard on getting additional contracts in place. And we would only do that with additional kind of commitments from clients to want to expand into tier four.

Got it. Okay, that's all for me. Thanks. I'll turn it back. Thanks, Cole.

Your next question comes from John Daniel from Daniel Energy Partners. Please go ahead.

Hey, guys. Thanks for putting me on. I want to dig a little bit more into the tier four upgrades that you've got. I know there's the one fleet, but really with respect to the customer interest, if they We keep hearing about the long lead times on capital equipment. Do you have to, forgive me for being sort of forward, but should you not order some of the stuff ahead of time in anticipation of a contract that presumably could be forthcoming? How are you playing that angle?

Hey, good morning, John. We've got some Tier 4 engines in reserve, and we also have builders that have major components that are ready to go. I acknowledge the question around lead times. We feel like we have that in hand, and if we have an opportunity that presents itself, we should be able to respond.

Fair enough. We always tend to talk about Tier 4 dual fuel, but you also have Tier 2 dual fuel. Do customers – is there a willingness to use that? I would think that the lead times would be a bit shorter.

Yeah, I mean, we have –

Two different types of engines in our fleet. One, of course, CAT is primarily in Canada that are Tier 2, and we're getting superior substitution with our CAT engines up to 55% on a Tier 2 fleet. And then in the U.S., we've went ahead and we've spent some money in the last year and a half developing a technology. And on our Tier 2 fleet, we're actually getting up to 70% substitution. and it's right so it's almost a similar system to to the tier four that's a direct injection versus a fogging system so a lot different we're really excited about that john and you know i guess it comes down to you know the natural gas prices uh being lower today it's a huge advantage to our clients to go with obviously a natural gas fleet and so we're Pretty happy that, you know, 65% of our fleet today is on that or continue to invest. And that's the platform that you should expect us to continue to invest in.

Okay, I would say too, John, on that tier four theme, as you look at the development of engine technology, what's on the kind of the horizon there with the full gas powered is that's a really exciting development. That's something that we were quite interested in pursuing and something that we think has a lot of opportunity for the industry.

Okay, well, I'll ask more about that offline. Thank you all very much for putting me in.

Thanks, John.

Your next question comes from Waqar Saeed from ATB Capital Markets. Please go ahead.

Good morning. Thanks for taking my question. Steve, the Tier 4 fleet that's going to be coming on in Q2, Would that become your sixth fleet, or would you continue to have, like, you know, take out the smaller fleet and just, you know, keep five crews running?

Yeah, it's really replacing some assets. The car that we have, we're refurbishing existing assets. So we'll continue to maintain four large fleets, so Montney Duvernay fleets in Canada, and then the fifth fleet, Uh, you know, it's, it's fairly specialized where we have a electric combination blender, uh, data van hydration unit, uh, all in one unit. So it's really specific for our, our bundled services offering, uh, with cold tubing. So, more, more angular type of fracks, uh, that, that, you know, will be tied up with.

Okay. Sounds good. And then could you talk about, you mentioned pricing pressure in the U.S. Could you maybe elaborate to that and what the magnitude are we talking about here?

Sort of early days right now, Lekar, seeing some minor competitive pressures, I guess, in the U.S. And it's really kind of pad by pad basis. The U.S. market is interesting when it's a tight market, you can really move prices. When it's more of a balanced market, there's a bit more competitors that are kind of aggressively looking to fill gaps. So I can't really put a number on it, because it is pad by pad that we're seeing it. On our coal tubing business in the US, we've actually been able to increase price. We believe that's a an undersupplied market for sure on our unique offering with our deep capacity units. We're seeing more three-mile laterals being drilled, particularly in the Permian, and it suits our equipment complement extremely well.

Hey, Makar, and also just to add, it's interesting, we go to various industry events and we chat with our peers in the industry, not necessarily competitors, one of the things that we've been hearing a lot is the the incident the number of drilling delays through that happened because of cementing and wells or side tracking or or other kind of just kind of really weird one-off things that can really be tied more to kind of inexperienced crews and we heard it even at our at the last caller at the thrive conference the efficiencies are starting to drop so the beginning of the year going back to what i said to cole we had um you know, there's a few delay. It wasn't just us that had some delays. There's a few others. So then all of a sudden you see there's a bunch of rock crews that gets sprung loose. And then there's a bit of a scramble for that little bit of spot work that's out there. So that's really when we talk about pricing pressure. I would say it's more localized to that. We feel it was more of a January, early February thing. And what we're seeing now from client inbounds is that we're much more back to a balanced market here. And pricing pressure has kind of

relieved, been relieved.

Oh, thank you. That's very helpful commentary. And then just, I missed a little bit of your explanation of how many days of work was actually lost in January from these delays in drilling?

Yeah, you know, it's about three weeks of delays for CARP. You know, 20 to 30 days is what we've estimated.

On how many fleets? On all three fleets?

On basically two fleets, yeah. But we've been able to pick that up. Obviously right now we're at full utilization and we see visibility really till the end of April, beginning of May for all three fleets.

Okay. And then could you talk about your input cost inflation? You know, what are you seeing in Canada and the U.S. in terms of prices for frax sent?

Yeah, I would say those inflationary pressures that we saw last year, you know, obviously were pretty stabilized right now compared to what we went through last year. We haven't seen much from an inflationary standpoint on on any Products we're seeing some on, you know, some capital equipment, but as far as. You know, any type of products, it's, it's quite stabilized right now.

Okay, and how about label availability?

Yeah, you know, we've been extremely successful at. You know, we're very, very proud of our, our retention percentage within our company. You know, we're back to call it 1,450 employees, which is which is back to a pre-COVID level. And, you know, I would say it's been a bit of a challenge more. Well, I would say in the U.S. on our cold tubing business, we've been obviously successful at reactivating two additional fleets here this year. Took some time, but we were able to get it done. And yeah, I would say. It's always an ongoing problem with labor. We've had to obviously increase our labor rates, which is a well-needed thing for our professionals in the field. We did that back in November last year. Okay.

Great. That's all I have. Thank you very much.

Thank you, Wakart.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Andrew Bradford from Raymond James. Please go ahead.

Good morning, guys.

Hi, Andrew.

Hi, thanks. Okay, so maybe just begin with your U.S. customer base. So, you know, having those delays, that's unfortunate.

And if you're running three crews, then, you know, obviously that can – that can have a, you know, having one crew down or two crews down for a couple of weeks can have an impact in the quarter. I just wanted me, if you could describe your customer base a bit, how that's changed to the extent to which it hasn't changed and the extent to which your guidance is predicated on work with the existing customer base. And I guess like couched in this is sort of the uncomfortable question is, do you have the right customers in the, in the Permian?

Yeah, Andrew, that's a good question, of course.

We have obviously a small footprint in the U.S. It's one thing that we're focusing on wanting to grow our business would be in the U.S., just to be able to handle a bit of these ups and downs. Our client base that we have today is Permian-focused, primarily the larger private companies. And what Klaas had mentioned in regards to drilling delays, We're not the only ones that have seen this. It's happened across the industry. You know, having these kind of short notice delays and, of course, trying to fill that has been difficult. But from our client base, we have basically one dedicated fleet that is with a large private, and the other two fleets work between three or four other clients on the spot market. We're obviously focusing on getting longer-term commitments for those two fleets, and by the addition of our dual fuel assets to make it more competitive to the market up down there, we expect to have that happen in the back half of the year.

Okay. Yeah, I did. Thank you very much. Yeah.

Okay, so some of these questions are going to seem like they're disjointed, but they're in a weird-about-way tied together. Shift gears to technology a bit. So in the U.S., you described sort of this proprietary approach to increasing the gas mix in your Tier 2 dual fuels. I guess the first question I have about that is, do your customers see it? as competitive with tier four or is tier four kind of like you know checking a tier four box like it comes from as directive from the top get us some uh we need more tier four engines in our service mix and i don't care how good your upgraded tier two is uh i still need a tier four is that is that or is it sort of like well 70 is almost 85 uh substitution or whatever you can achieve with tier four and that's uh you know we're most the way there and that's

you know, at the margin, a very similar technology.

I would say in general, Andrew, most of the clients today that we are working for, you know, Tier 4 has a higher substitution percentage, obviously, but it's not because they're ticking a box on ESG. It's really on the overall savings that they're achieving. And it makes a big difference, 10%, 15%, or 30%. And with gas prices being as low as it is right now, it's not that big of a differentiator today. And so we have basically 80,000 horsepower of tier four in the US that is not on dual fuel. And that is some of the capital that we are that we talked about on our optimization will be put towards that fleet to make it dual fuel.

Do you play this technology in Canada?

It's a different asset quality in Canada. We're primarily CAT engines up here, and so our Tier 2 is the CAT technology. Of course, the Tier 4 upgrade that we announced is CAT as well.

Okay. Okay.

Then, you know, I'll just ask, when it comes to your strategy here, I think you've had a very sensible approach when it comes to, you know, bringing in these upgrades and where you need customer commitments on the one hand, and it was really nice to get customer involvement in the capital cost of the upgrade. My feeling is that in the current environment, that's going to be a bit more challenging to get arrangements like that. And so as you look at this, is one of the concerns that you're addressing that if we wait around to get really good commercial terms like we did in that last upgrade, that full system upgrade, that we'll just sort of start slipping in terms of

competitiveness because we don't have the same amount of Tier 4 as maybe some of our competitors.

I talked a little bit about our life cycle of our engines and it's about a $300,000 upgrade to go from Tier 2 to Tier 4 or even a little bit more. Since we've done a great job of getting our balance sheet in a pristine position, you should expect some of that as we move forward. And ideally, you know, getting a client commitment is what we are striving for. But as the units end up, the engines start getting to end of life, it will be our focus to convert them to Tier 4.

And I guess I would add to that, Andrew, as I said in my commentary, we adapt to what market conditions are.

We review that quarterly and we'll respond accordingly Okay, I appreciate that. I'm going to shift gears for just one second here to COIL.

Obviously killing it in the US with that acquisition doing really well there. And in your commentary, Steve, if I didn't mishear you, you said you're still looking to advance that business further. And I think you even used the acquisition word, or at least I wrote it down. And I'm wondering now, Is that, like, as you sort of, as you keep pushing the balance sheet towards effectively zero debt, how do you compare the value in doing that versus the value in continuing to advance that obviously profitable business in the U.S.? And I'm kind of thinking about this in the context of valuation as well, not just yours, but also of what you could be buying, because looking at my screen, the world seems to be on sale right now.

Yeah, you know, extremely happy with the acquisition that we made back in September. That's helped our U.S. business get scale. Currently, today, we're really operating. I'll just talk on North American basis. We're operating 21 coal tubing units, and we have 33 that could go to work. So we have a very, very large, you know, asset base that is relevant to today's market. and wouldn't require a lot of capital. So the team has looked at that on ways to add to perhaps different basins with that asset base. But when you're talking acquisition, it would have to be a fireside kind of sale price that we would be looking at to want to kind of grow that business outside of our current assets that we have. And you got to think we have extremely like assets. Um, you know, they're very similar made. We actually bought some assets through an auction. Um, back in November, uh, that were, that was a competitor that ended up, um. You know, kind of selling some assets through an auction and we were, we were the beneficiaries of that on a low price. So we do have some. Uh, additional capacity to add to the market and just go on to your M and a comment there.

Um, and do the, it's been interesting to. The bid ask has really changed today versus what we saw, you know, kind of October, November back when we're still riding the crest of that six dollar gas price. Parties who were pretty confident in a very high valuation back in those days have come back to us with a much reduced valuation. But to Steve's point, with Coil, we run some of the best equipment in the business. And if you take a look at our client list, these are all large blue chip clients who are using us and very happy with the work. Some of those surplus assets that we picked up at the auction were from a competitor who didn't appreciate the value and couldn't run that equipment the same way we can. So to do an M&A transaction, it would have to be very compelling from an equipment technology perspective. Otherwise, we feel like we're diluting the brand. When we have good quality equipment sitting on the fence, there's not a lot of interest in doing that.

Okay, I appreciate that discussion. Thank you.

I'm not meaning to hog the puck here, so I'll just ask one last question. um shifting gears just a second when you talk about your visibility for the second half either in canada or the us um i i i find that kind of a it's a difficult thing to do because you know you never really know what your customers are going to be doing but so maybe we could contextualize it your visibility for the second half here sitting here at the beginning of march um how would if you can remember how do you recall your visibility a year ago in March? And then, like, do you also remember, like, how your expectations a year ago actually played out? You know, did your visibility kind of match realizations from a year ago as well?

Yeah, a year ago seemed like a long time ago in this business, but I do remember it. Uh, you know, we, we were seeing our back half of the year starting to fill up really. Call it kind of right after breakup and, you know. As you can remember, we were increasing prices, et cetera, trying to catch the inflationary pressures that we had in our business. You know, passing them on the clients, of course, we were able to be successful with majority of our clients on. on moving pricing forward. Some didn't like it. Some went to market to look at it, and we were very disciplined on keeping our prices to be able to get the margins that we need out of this business. And this year, I would say, well, I'll go back to Q4. There was too much frack capacity in Canada. There was absolutely, I would call it probably two to three too many crews that were added Um, you know, they were obviously some of our competitors were staffing up to to get ready for some work in Q1, but having that extra capacity, you know, ends up hurting the market, of course. And we saw a couple of clients of ours that decided to take a cheaper price, I guess, for the services. So, as I look into this year, that capacity is going to get soaked up. I believe, you know, as we, as I mentioned about LNG and getting getting that development kicked off. Blueberry River agreements in place. Starting to see a lot of permits. You know, when you look at the drilling rate count, that is for our mix of services, you know, Montanay, Duvernay, we're up 40% from the beginning of December. 65 drilling rigs working in the Montanay today. And, of course, that is high-intensity frack work, and the crews will be on location a long time. So I do believe, come the back half of the year, you know, starting in July, August, that the tightness of the frack supply will be there.

Nice. And the U.S. market, there's that bit of that shifting going on from gas-year markets to oil-year markets, and so clients aren't as concerned about locking up frack capacity, so some of that longer-term discussions, there's not as much There's not as much pressure on there. That being said, I guess we're looking at some Q2, Q3 work that carries us kind of from the back half of Q2 into Q3. So there's still interest there. It's just not quite the same intensity as it was last year, Andrew, kind of as it shifts to a bit more of a balanced market. Okay.

I lied. I do have one more question. I apologize for that. But when you look at your operating metrics in Canada, the operating statistics, whether it's fracturing operating days or profit pumped or stages completed, any of those numbers, how would you position how the first quarter is looking compared to the first quarter last year?

Yeah, a lot higher. A lot higher. Okay. That's it for me, guys. Thank you very much. Thanks, Andrew.

There are no further questions at this time. Steve, please proceed with your closing remarks.

I just want to thank everyone for joining the call. As I mentioned, we're really excited about how the business unfolded for us in 2022 and look forward to the opportunities that we have in 2023. So thank you very much.

Ladies and gentlemen, this concludes your conference offer today. We thank you for joining and you may now disconnect your lines. Thank you.