STEP Energy Services Ltd.

Good morning, ladies and gentlemen, and welcome to the STEP Energy Services first quarter 2024 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, May 9, 2024. I would now like to turn the conference over to Steve Glanville, President and CEO. Please go ahead.

Thank you and good morning. Welcome to our Q1 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 Chief Financial Officer, to provide an overview of our financial results for Q1, and then I'll provide some comments on operating conditions thus far in 2024, and what we're seeing for the remainder of the year. And then we'll open the call for questions. Over to you, Klaus.

Good morning. Thanks, Steve. Before I begin, I'd like to remind listeners 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 Q1 2024 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 for a 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 all numbers are in Canadian dollars unless noted otherwise and I will round where possible. STEP had an exceptional Q1 with consolidated revenues of $321 million up from both the Q4 and Q1 2023 revenues of $195 million and $263 million respectively. Adjusted EBITDA for the quarter came in at $80 million as compared to $18 million in Q4 and $45 million in Q1 of the prior year. And free cash flow was $53 million for the quarter compared to negative $4 million in Q4 and $17 million in Q1 of last year. These results are mainly attributable to higher utilization, exceptional operating efficiencies, and tight cost management in the quarter, as well as the transfer of some U.S. fracturing equipment to Canada. Stepper in $41 million for $0.55 per diluted share in net income for Q1 of 2024 compared to a loss of $5 million in Q4 or $0.07 per diluted share and $20 million or $0.26 per diluted share in Q1 of 2023. These first quarter results demonstrate the powerful economic potential of steady utilization and is a template for what this company is capable of doing. Turning now to the geographical regions of Canada and the US, I'll provide a few key highlights. In the Canadian segment, Q1 revenue was $241 million and was a record quarter for the company. As a reminder, previous high watermark was 174M achieved in Q1 of 2023. Compare this to 112M for Q4 of last year. Canadian fracturing revenues were approximately 198M in the quarter, up from both Q4 and Q1 of the prior year, representing STEP's highest revenue quarter for Canadian fracturing. Steve will touch more on this, but the key factor in this performance was strong client alignment, which enabled STEP to operate extremely efficiently and maintain high utilization through the quarter, increasing operating days to 450 from 233 in Q4 and 312 in Q1 of 23. The Canadian Coil Tubing Business Unit, which also includes ancillary fluid and nitrogen pumping crews, also generated a record quarter, earning revenue of $43 million, surpassing the revenue of $31 million in Q4 and $35 million in Q1 of 2023. Operating days were also higher for this service line, increasing to 615 days from $510 in Q4 and $572 in Q1 of 2023. Q1 segment Adjusted EBITDA for the Canadian region was $72 million versus $15 million in Q4 and $45 million in the first quarter of 2023. Pricing has come off a bit in Canada this year, but the higher utilization and tight cost management gave the company better leverage on its fixed cost structure, resulting in an adjusted EBITDA margin of 30%, up from 13% in Q4 and 26% in Q1 of 2023, both quarters that had lower utilization. Turning to the U.S., we had Q1 revenues of $79 million, down from $83 in Q4 and $89 in Q1 of last year. Q1 fracturing revenues of $38 million were down 6% from Q4 and 23% from the first quarter of 2023. U.S. fracturing had three active fracturing fleets in Q1 of last year, but only two active fracturing fleets in Q1 of this year and Q4 of last year. Utilization was steady through much of the quarter, with some weakness towards the end of the period. U.S. coral tubing Key 1 revenue was $41 million, which was down 3% from Key 4, but up 4% from a year ago. Utilization was affected by inclement weather conditions in both the southern and northern operating basins during the quarter, but was down only marginally from Key 4 and was up from Key 1 of 2023. Adjusted EBITDA of $13 million was up from $7 million in Q4 and $5 million in Q1 of 2023. Adjusted EBITDA margin was 16% up from 9% in Q4 and 5% in Q1 of 2023. Turned out of the allocation of our cash flow on our balance sheet, we spent $36 million on capital in the quarter, up from $27 million in the first quarter of 2023. Our Q1 capital spend can be divided into 11 million of sustaining capital, 19 million of optimization capital, and 5 million of right-of-use asset additions. Approximately two-thirds of the ROU asset additions were units that we had been renting on a short-term basis and have now converted to a long-term lease. Our cash flow commitment won't change, but the reclassification will result in a slight boost to our EBITDA. The intensity of the work scope in the first quarter resulted in a substantial working capital build of $49 million, Our working capital fluctuates with the seasonality of our business, and as expected, working capital is higher at the end of Q1 compared to Q4 due to the high utilization in the quarter, pushing up our AR balance. We expect working capital to go lower at the end of Q2 as we harvest these receivables. A consequence of our working capital build is that we ended the quarter with the net debt of $108 million, up from approximately $88 million at the end of last year. Debt reduction remains a core focus of our management team, and we expect that this balance will reduce at our Q2 release and continue reducing through the balance of the year. Going back to 2018, the company has paid down over $200 million of debt. 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 the steps other key non-GAAP measures is free cash flow. We had free cash flow in the first quarter of $54 million compared to $17 million in Q1 of 2023. This translates to free cash flow of $0.72 per diluted share or 20% quarterly yield, which is higher than the prior year's Q1 23 results of $0.23 per share or 7% quarterly yield. Our rolling four-quarter free cash flow per diluted share is $1.62 or 46% yield. You can read more details on this in the non-GAAP measures section of our MD&A. Finally, I'd like to provide an update on our normal course issuer bid, which began at the end of 2023. To date, STEP has purchased just over 1.5 million shares at an average price of $4.16 per share, of which just over 900,000 shares were repurchased in Q1. For reference, our book value per share at Q1 was $5.56, substantially higher than where we're trading at today. We continue to see excellent value in step shares, and we'll continue with our share buyback program. I'll now turn it back to Steve for his comments on operations and outlook.