STEP Energy Services Ltd.

calls, you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, March 12, 2024. I would now like to turn the conference over to Steve Glanville. Please go ahead.

Thank you and good morning. Welcome to our Q4 and year-end 2023 conference call. My name is Steve Glanville and I'm the President and CEO of STEP Energy Services. I'd like to invite Klaas Diemter, our Chief Financial Officer, to provide an overview of our financial results for Q4 and the full year. And then I'll provide some comments on operating conditions in 2023 and what we're seeing in 2024. And then we'll open the call up for questions.

Thanks, Steve, and good morning, everyone. Before I begin, I'd like to remind listeners 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 2023 MD&A. A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to our annual information form for the year ended December 31, 2023, or more complete description of the business risks and uncertainties facing STEP. The AIF, along with our financial statements and MD&A, are available on our website and on CDAR. Finally, please note that all numbers are in Canadian dollars unless noted. Otherwise, I know around where possible. Most of my comments will pertain to the fourth quarter of 23 with additional discussion around the 2023 year as a whole. Full details again can be found in our ND&A. Fourth quarter consolidated revenue is $195 million, which is lower than Q4 revenues of $251 million. Budget exhaustion and commodity prices were a factor, but we also had approximately $30 to $35 million of scheduled work that slipped out of the quarter. The Canadian work largely pushed into Q1, setting up for a highly utilized first quarter, but the U.S., unfortunately, did not. We were on the wrong side of an M&A transaction with one crew and the second crew had their pad pushed later into the quarter to the point where it would have conflicted with another client's start date. For the 2023 year, STEP generated $946 million in revenue, second only to the 2022 revenues of $989 million. Turning to consolidated adjusted EVA, STEP earned $18 million in Q4 2023 as compared to $49 million in Q4 2022. Similar to revenue, adjusted EBITDA was lower in Q4-23 due to the decreased activity. However, earnings were also eroded by higher fixed costs, an increase in operating expenses related to preparing equipment for a busy Q1, and some one-time costs. For the full year, STEP earned $164 million in adjusted EBITDA as compared to $199 million in 2022. Our consolidated adjusted EBITDA margin was 17% for the year versus 20% last year, which although lower year over year, it is still considered a notable achievement in a lower activity environment and given the fixed cost nature of the pressure pumping business model. STEP earned $50 million or $0.67 per diluted share in net income on a full year basis in 2023, despite the tough Q4, which showed a net loss of $5 million or $0.07 per diluted share. For reference, our net income in 2022 was $95 million, which included a $38 million impairment reversal on property and equipment. I'll turn now to the geographical regions of Canada and the U.S. to provide some key highlights on the quarter. In the Canadian segment, Q4 revenue was $112 million, down 29% from Q3 2023 levels, but our full-year Canadian segment revenue of $580 million was up year over year, setting a new Canadian revenue record. Canadian fracturing was $82 million in the quarter, down 36% from Q3-23. Revenue fell quarter over quarter due to the typical Q4 slowdowns, as previously mentioned, including decisions by some clients to push Q4 projects into Q1, as well as a change in fracturing job mix to include more lower-intensity completions, which have a lower revenue profile. Notwithstanding the slower Q4, full-year revenue results in the Canadian fracturing business were very commendable and posted a new record of $461 million, up from last year's record of $454 million in revenue. The Canadian Coil Tubing Business Unit, which also includes ancillary fluid and nitrogen pumping crews, generated Q4 revenues of $31 million, in line with Q3 revenues of $30 million. Revenue on a year-over-year basis was also up, coming in at $120 million. Q4 segment adjusted EBITDA was $15 million versus $41 million in the third quarter of 2023. Adjusted EBITDA margin was 13%, which was down from 26% in Q3. Full-year adjusted Canadian EBITDA in 2023 was $134 million, or a margin of 23%, coming in just below the prior year's record of $136 million, which reflected a 24% margin. Turning to the U.S., Q4 revenue of $83 million was down 15%, versus Q3 23 revenues of $98 million, and our full year revenue was $366 million, down from $421 million in 2022. U.S. coil tubing Q4 revenue was $43 million, which was up 10% from a year ago, although down sequentially from the third quarter. We ran 12 units in Q4, which is unchanged from the third quarter and is up from 11 units a year ago. In U.S. fracturing, Q4 revenues of $40 million were down 15% from the third quarter and down 59% from a highly utilized Q4 in 2022. As mentioned a moment ago, we had about $17 to $19 million in scheduled revenue disappear from the quarter due to M&A and shifting client schedules, which hurt our fracturing business in the quarter. Full year revenue of $186 million was lower than the $297 million earned in 2022, due in part to the utilization challenge experiences through the year, but also due to the shift in client-supplied sand, which reduces revenue and margin for pressure pumpers. Adjusted EBITDA of $7 million was down from $15 million in Q3. Adjusted EBITDA margin was 9% down from 16% in Q3. Full-year adjusted EBITDA in the U.S. was $46 million or a margin of 13%, down from the previous year's EBITDA of $80 million or 19%. Turning now to the allocation of our cash flow in our year and balance sheet. We spent $40 million on capital in the quarter, up from the $25 million we spent in the third quarter. Our full year spend was $105 million in 2023 compared to $100 million in 2022. Our Q4 capital spend was the highest quarterly spend for the year, partly due to the completion of various capital projects, but we also accelerated payments on a number of large invoices right at the end of the year, to take advantage of the benefits associated with early payment and possession, ultimately transitioning working capital into capital assets. Our working capital fluctuates with the seasonality of our business, and we expect it to tick higher at the end of Q1 as a highly utilized quarter pushes up our AR balances. We ended the year with a net debt of $88 million, down from approximately $142 million a year ago. Going further back since 2018, we are extremely proud of the accomplishments that we've achieved there, We've paid down almost $230 million of net debt since that time. This reduction of debt is the first phase of our shareholder return framework, and we've seen that value accrue to equity holders. In addition to adjusted EBITDA, one of STEP's other key non-GAAP measures is free cash flow. STEP calculates free cash flow as cash from operating activities, less changes in non-cash working capital, sustaining capital investments, term loan principal repayments, and lease payments. We had negative free cash flow in the fourth quarter, but our full year free cash flow was $83 million compared to $112 million in 2022. This translates to $1.15 per share, a 29% yield, which is comparable to the prior year's results of $1.56 per share, which was also a 29% yield. More details are available in the non-GAAP measure section of our MD&A. Finally, we are very pleased to announce that we started a normal course issuer bid in late December. the second phase of our shareholder return framework. On a number of different metrics, we feel that our equity is undervalued. As an example, our book value per share is $4.93, and the replacement cost of our assets is in the $18 to $20 per share range. We are authorized to purchase and cancel up to 3.6 million shares, and we have been active in the market, having bought back just over 800,000 shares already, and we intend to remain active. I'll now turn it back to Steve for his comments on operations and outlook.