STEP Energy Services Ltd.

Q2 2024 Earnings Conference Call

8/7/2024

spk00: Good morning, ladies and gentlemen, and welcome to the 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. If at any time during this call you require immediate assistance, please press star zero for the operator. 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.
spk04: 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 class Dean to 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 class.
spk03: Thanks Steve and good morning everyone. My comments today will include forward looking statements regarding steps, 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 CDAR Plus filings for this quarter, as well as our 2023 AIF. Finally, please note that all numbers are Canadian dollars and less noted otherwise than all round where 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 an 80% margin, as compared to $80 million, or a 25% margin in Q1, and $47 million, or a 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. frack market. Stepper in 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, at $15 million, or $0.21 per diluted share in Q2 of the last year. We'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 coil 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 higher 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 Steph's other key non-GAAP measures is free cash flow. During the quarter, we had $33 million in funds flowed from operations, and after deducting sustaining capital and 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. A rolling four-quarter free cash flow per diluted share is $1.44, which translates to a 36% yield. In a quarter, we spent 29 million on capital expenditures. This was 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 to the NCIB at an average price of 416 per share, of which about 900,000 were purchased in second quarter. For reference, our June 30th book value per share was 570, demonstrating the excellent value in STEP shares. Finally, STEP ended the quarter with net debt of 76 million, down from approximately 108 at the end of Q1. Debt reduction remains a core focus We're 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.
spk04: Yeah, thanks, Klaas. I'd like to start by addressing the current market conditions. Natural gas prices remained volatile in the quarter, and ACO 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 mm BTU level. Oil prices remained 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 that 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 rate counts were at the higher end of the five-year average, whereas the US rate counts trended towards the low end of the five-year average. Despite the lower rate 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. Most 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 breakup. This was a much-needed reset up for our crews, who have been working steadily since the beginning of the year. We use 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 profit 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 co-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. co-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 alignment 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 StepConnect, E-Line, and our ultra-deep capacity cold tubing units that can mill out three and even now four-mile laterals. In response to the market demand, we reactivated an additional cold 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, quotiving, industrial services, as well as logistics of sand and 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 co-saving 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 floating 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 STEP's 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 to move assets to profit-generating regions when long-term opportunities arise. In contrast, we anticipate that our cultivating service line will continue to grow its position in the market, As I noted, we added a coal 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're 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.
spk00: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number 1 on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys.
spk02: One moment please for your first question.
spk00: Your first question comes from the line of Jim Byrne from Acumen Capital. Your line is now open.
spk07: Yeah, good morning, guys. 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 kind of your logistics business security supply about sand and how you guys are dealing with that amount of sand.
spk04: Good morning, Jim, and great question. You know, this is an area that, you know, we've been focused on for a number of years. It's just bolstering up that last mile logistics business. It, you know, I can give you some numbers that basically, you know, in the first seven months of the year, we've surpassed what we pumped last year for total sand volume. So we knew this was a very important part of our business strategy. Understanding that supply chain and really getting the crop into 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 kind of steady work programs allow us to kind of not only get kind of best prices from the problem, but also to be efficient in putting it in the ground. And our crews, when we're pumping, you know, 22, 23 hours per day, we can pump on average, call it 6,000 to 7,000 ton per crew. So it's very large volumes, and you have to really manage that. We have what we believe is the best kind of supply chain logistics division in Canada to be able to support the growth.
spk03: Yeah, as part of our capital program in 2024, Jim, we did invest in some additional sand handling projects. Capacity, knowing that there was this volume of work coming and that continues to be a focus.
spk04: And I would add that, you know, we talked about in the past, just the frac intensity that we've seen increase. The laterals are getting longer in the Montney and then in the Duvernay. And with that, you know, couple that with the frac intensity, just, you know, the amount of prop and per well is increased.
spk02: Right, OK. Yeah. Go ahead, Steve.
spk04: No, keep going, Jim.
spk07: Okay. And then I appreciate the comments about the U.S. frack market. I know you're down to two crews down there. Is this kind of 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 two frack crews down there?
spk04: 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 frack crews working in the U.S., and today there's mixed data, but we believe it's kind of less than 200 that are actively 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 cold 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 – it's kind of RFP season in the U.S. right now, and we're participating in that, and we'll see where that ends up.
spk07: Okay, 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.
spk03: It's just to reflect the reduced activity in the U.S. So we just pulled it down by about five, six million.
spk02: Okay. But it's more sustaining capital. All right, that's it for me. Thanks, guys. Thanks, Chip.
spk00: Your next question comes from the line of Keith Mackey from RBC Capital Markets. Your line is now open.
spk01: Hi, good morning. Just maybe to start out in Canada, just curious for your thoughts on, you know, does current Canadian completion activity – likely reflect the amount of crews needed to fill phase one of LNG Canada? Or do you think there's another leg of equipment demand that will be needed in the nearer term for that?
spk04: Yeah, good morning, Keith. Yeah, I think the overall, I would say, supply dynamics in Canada is fairly balanced. And that would take into consideration kind of phase one of LNG Canada, which we expect kind of end of this year or beginning of Q1 of next year to start, you know, 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 – you know, great win for Canada to have that flowing as an export. And, you know, 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 a, you know, intensity standpoint, there will require some additional horsepower in there if it becomes kind of full-scale production. in the Duvernay. So I guess for us, it's looking at rig counts in the regions like the Duvernay and the Montigny that would really impact our decision to look at bringing more horsepower.
spk01: Yeah, okay. Got it. Just sticking with Canada, there was an announcement recently about a transload facility for sand being built in kind of 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 it 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?
spk04: Yeah, 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 distances away is very uneconomical. So most of these trans loads are imported sand from Wisconsin or other areas. So, yeah, I think there's infrastructure that's required if we expect, you know, phase two to be developed for LNG Canada and the other offtake opportunities that we have with sealisms and Rocky's LNG. I think it's going to be a pretty active area.
spk01: Got it. And just finally for me, the release talked about phase one of your capital return program being debt repayment, phase two 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 You know, does this mean that you might be looking at something like a dividend or should we just expect more buybacks and debt repayment, you know, for the next two to three quarters?
spk03: Thanks, Keith. It's Klaas here. So just touch a minute on debt. So we're focused on getting our debt down. We've talked a lot about kind of that $60 million number, so that remains kind of a focus of ours. Certainly, as you 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.
spk02: Perfect. Okay. Well, thanks very much. I'll turn it back. Thanks, Keith.
spk00: Your next question comes from the line of Waqar Syed from ATB Capital Markets. Your line is now open.
spk05: Thank you for taking my question. 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?
spk04: Yeah, good morning, Wakar. That's a bit of a tough question to really answer, but there's some minor capital required to put kind of cold weather kits on this asset base. You know, it would range between, I would say, $200,000 to $300,000 per pump to get that done. You know, as of today, I just want to be very clear, though, we're not in a position, we're not, you know, kind of 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. And in 2022, I think people have a short memory that, you know, 2022 was a fantastic year for our business in the U.S. And in Canada, it wasn't so great. So I think that having the mix is exactly what we need for our business.
spk03: The other point I would add, too, is there are other regions besides Canada. We've got very strong market presence there. in the northern U.S. regions as well. And we've been asked a number of times about bringing our frack capacity to complement our coil business up there too. So we have options. We've got that geographic diversity both within the country and between countries.
spk05: So you think the Rockies or Bakken, that could be a logical market for the fracturing fleet?
spk03: There's options available to us. So just going back to Steve's point too, 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, it's certainly indicative of 2025 starting to turn the corner there.
spk05: Sure. And just to be clear, are the fleets now manned or not manned right now?
spk04: And we have one fleet that is manned currently today. So we have two fleets that can go to work that we've upgraded to dual fuel. And, yeah, we're 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.
spk03: Just with respect to that second fleet, we were just – with respect to the second fleet, we moved over a lot of our key professionals – to fill vacancies within our coil tubing business. So there's ability to transfer personnel between the service lines there to reactivate in pretty quick, short order.
spk05: So there is one feed is currently working or it's manned but not working. Could you maybe clarify that for us?
spk03: We're seeing intermittent utilization on that crew in Q3. So that's And that's where our comment there about limited contribution from that service line, it kind of just stems from the intermittent utilization that's expected there.
spk02: Okay. That's all for me. Thank you very much.
spk00: As a reminder, if you have a question, please press star 1 on your telephone keypad. Your next question comes from the line of John Daniel from Daniel Energy Partners. Your line is now open.
spk06: Hey, guys. Thanks for including me. Steve, I want to ask a little bit about the RFP process, if you will, that are underway for 2025, 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 kind of knowing that, how, how do you approach the, how 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? I mean, like, and you're hopefully your customer.
spk04: Yeah. Yeah. I mean, 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. You know, we spent over $30 million on capital last year upgrading our U.S. frack business to dual fuel, which, of course, I think is a great investment. And, you know, when we go through these RFP processes, you know, we know what we can do differently. Our operations team have delivered everything. high execution levels with our crews. And it's a differentiator for sure. And I think, you know, 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, you know, I think we can stand by our name and our reputation in the U.S. that 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, Joe, on what you said. It's, you know, running at $5,000 an hour on a 50-, 60,000-horsepower frack crew, that is a going-out-of-business model, and we're not prepared to go there.
spk06: Yeah. I mean, in a really twisted sense, it's bullish, right, because you're going to lose some competition. They might not be here three to four 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. Coil tubing internationally, what are some of the opportunities there? Do you see anything?
spk02: Yeah.
spk04: Yeah, another good question. I mean, we've been in this business for, call it, 13 and a half years in our quilt tubing business, and it is a reputation that we have upheld of being a technology leader in North America, and that has obviously allowed us to, you know, number one, have lots of great discussions about international opportunities. I think what quilt tubing has demonstrated to this industry that, you know, the three-mile laterals that we talk about, you know, back three years ago, four years ago, is how do we mill these out? And we've proven to mill them out. Now the four-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 quilt zipping have kind of gone away. A lot of that has to do with not only string design, but capacity as well as, you know, kind of different different techniques to be able to put weight on bit. But to answer your question in regards to, you know, overseas opportunities, I think for us it needs to be meaningful. It needs to be with a producer that has long-term commitments. And, you know, I think, you know, areas like the Middle East where they require technology, our company would fit in nicely over there.
spk02: Okay. That's all I got. Thank you for including me. Thanks, John. There are no further questions at this time.
spk00: I will now turn the call back to Mr. Steve Glanville. Please continue.
spk04: Yeah, 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.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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