STEP Energy Services Ltd.

Q3 2024 Earnings Conference Call

11/14/2024

spk03: Good morning, ladies and gentlemen, and welcome to the STEP Energy Services Q3 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 at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, November 14, 2024. I would now like to turn the conference over to Steve Glanville, President and CEO. Please go ahead.
spk01: Thank you and good morning. Welcome to our Q3 2024 conference call. We're glad you could join us to hear about the quarter, our expectations for the future, and the latest developments at STEP. First, I'd like to invite Klaus Diemter, our CFO, to provide an overview of our financial results for Q3, and then I'll provide some comments on operating conditions in the quarter and what we're seeing for the remainder of 2024 and into 2025. Then we'll open it up for questions. Over to you, Klaas.
spk02: Thanks, Steve, and good morning, everyone. My comments today will include forward-looking statements regarding SEP's 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 in Canadian dollars unless noted otherwise, and I will round where possible. In Q3, STEP consolidated revenues rose to $256 million from the prior quarter revenue of $231 million and was in line with the Q3-23 revenue of $255 million. Adjusted EBITDA for the quarter came in at $44 million, or a 17% margin. compared with $42 million or an 18% margin in Q2 and $52 million or 21% margin in Q3 of the prior year. Steph had a net loss of $5.5 million or $0.08 per diluted share in Q3 compared to earnings of $10.5 or $0.14 per diluted share in the prior quarter and $21 million and $0.28 per diluted share in Q3 of the last year. Listeners should note that we recognize an impairment of $12.7 million in our US fracturing CGU as a result of the challenging conditions in that market. The impairment was taken on legacy Tier 1 and Tier 2 diesel-powered fracturing equipment and on a property in Oklahoma that is being conditionally sold. I'll now turn to the geographical regions to provide key highlights in the quarter. In the Canadian segment, Q3 revenue rose to $211 million from $158 million in Q3 of last year. and was comprised of $173 million in fracturing revenues and $38 million in coil tubing revenues. Adjusted EBITDA for the Canadian region rose to $49 million from $37 in Q2 and $41 million in Q3 of last year, marking an outstanding result for the Canadian business. Turning to the U.S. region, Q3 revenues of $45 million were comprised of about $3 million for fracturing and $42 for coil tubing. The quarterly revenue was down from $70 million in Q2 and $98 million in Q3 of last year. The adjusted EBITDA loss of $1 million compares with an adjusted EBITDA of $9 million in Q2 and $15 million a year ago. The negative 3% adjusted EBITDA margin was down from a 13% margin in Q2 and 16% in Q3 of the prior year. During the quarter, we had $38 million in funds flow from operations after deducting sustaining capital and lease payments. This resulted in a third quarter free cash flow of $28 million compared to 37 in Q3 of last year and 20 million in Q2 of this year. In the quarter, we spent 21 million on capital expenditures. This was made up of 7 million of sustaining capital, 10 million of optimization capital, and 4 million of right-of-use asset additions. In response to the slowing market conditions, the 2024 capital budget has been adjusted downward to 91 million. Finally, STEP ended the quarter with net debt of 61 million, down from approximately 76 million in Q2. Since 2018, we've paid down nearly $250 million of debt, an accomplishment that we're extremely proud of. Debt reduction was the first phase of our shareholder return strategy, with the second being a normal course issuer bid. We allocated approximately $8 million to the NCIB this year before pausing it when the ARCTIC private process was initiated. Despite the expected slowdown in Q4 earnings, we will manage our cash flow to hold our year-end debt balance at these levels. And I'll turn it back to Steve for his comments on operations and outlook.
spk01: Thank you class. During the quarter our operations demonstrated our resilience and adaptability in a challenging market. First I'll share a few operational highlights in our Canadian geographic region. STEP's exceptional performance this quarter is once again driven by strong client alignment and our technical expertise. Our reputation for operational excellence in the Canadian market remains a key advantage. Our fracturing operations have seen increased activity levels and operating efficiencies resulting in higher operating days and profit volumes compared to the previous year. In recent quarters, we have spoken about the incredible volumes of sand pumped in our Canadian operations. Just in Q3 alone, we pumped the record 570,000 metric ton and 1.6 million tons year to date, a remarkable amount that represents about an 80% increase year over year. This achievement is due to our logistical and operational expertise, managing larger scale programs as fracturing intensity continues to increase. In the Montney, well performance is showing a clear correlation to the amount of profit pumped. As a result, we're seeing some wells now reaching profit intensity of over four tons per meter. Our quilt tubing operations also significantly improved with operating days increasing by 23%, compared to the same period in 2023. The long term contracts we have secured with key clients in the Monty and Duvernay are also an important part of our success. Turning down to our US business. Despite an increasingly competitive spot market, our US cultivating business remains resilient with only a slight sequential decline in activity through year over year activity is though year over year activity is higher. Pricing pricing pressure continue, but alignment with major operators in each patient basin has been a valuable strategy. The tight market conditions resulted in scaling back to 12 active coal tubing units in the third quarter, but we will continue to look for opportunities to reactivate these units when market conditions support further expansion. Challenging market conditions continue to affect our US fracturing operations. We only had one crew working at the beginning of the quarter and then again at the end of the quarter, resulting in significantly fewer operating days compared to the prior year. Prices have reached COVID levels or worse, but we remain disciplined in our approach of only working at rates that garner a return. We are evaluating alternatives for this service line and have had to carry additional costs to preserve value and maintain optionality. Combining technology and operational expertise continues to be a differentiator for our company. We have invested heavily in upgrading our fracturing fleets with the latest tier four dual fuel engine technology, which displaces up to 85% of diesel with natural gas. This investment not only helps us reduce our environmental footprint, but also aligns us with our clients growing demand for cost efficient and sustainable solutions. At the end of the third quarter, 75% of our Tier 2 and Tier 4 engines in the fracturing fleet have this dual fuel technology. Our real-time data acquisition called StepConnect delivers valuable real-time insights into our clients' co-tubing milling operations. We have seen an uptick in the demand and use of this technology as clients love to optimize the performance and outcome of their milling programs. Recent improvements in co-tubing technology have enabled us to reach depths previously unattainable. In Q3, we set an industry-leading milestone in the Wilson Basin, completing a milling program to a record depth of 30,200 feet or 9,200 meters, which is 10% deeper than our previous record. This sets a new benchmark in co-tubing as the lateral lengths of wells extends to two or three or even four mile laterals. Coal tubing continues to play a critical role in the market, allowing us to mill out these extended reach wells safely and efficiently. Finally, I'd like to highlight a recent accomplishment by our Canadian fracturing logistics teams. In Q3, one of our crews set a new company record pumping over 5,400 metric tons of sand in just under 20 hours. To put this into perspective, That's about 135 truckloads moving in and out of the well site with each 40 ton trailers offloading every nine minutes. This level of coordination demonstrates our ability to efficiently handle large scale profit operations and really highlights our expertise in logistics and operational performance. Our clients rely on us to deliver safe, efficient services, which include hydraulic fracturing, pump down services, co-tubing and industrial services. The success we have achieved over the past year is a testament to our professionals' dedication and our ongoing commitment to improving and innovating. To all our professionals, I'm so grateful for your continued efforts in providing exceptional services to our clients. And now on to our outlook. Our fourth quarter will see a slowdown in activity for both our Canadian and US operations. This is something that we typically see as our clients wind down their capital budgets. But this year it is made worse by weakening commodity prices. Natural gas prices have recovered slightly from the lows seen earlier this year, but the high gas storage levels in Canada and the US have discouraged producers from adding any capital to this year's drilling and completion plans. We have also seen substantial pricing pressures on spot work during the quarter. As a result of these factors, we'll see a weaker Q4 than we had expected for a number of years, and we're managing this period cautiously as we expect to have high utilization in the first quarter again next year for our coal tubing and Canadian fracturing service lines. We'll continue to evaluate alternatives for our U.S. fracturing service line and do not expect it to be meaningfully contributed through the next few quarters. While we are disappointed with how the year is expected to finish after a tremendous start, it's worth noting that we expect our Canadian business to have its best year ever, and our U.S. cultivating business will only be slightly below last year's performance. despite a sizeable reduction in rate count from the start of the year to the end of September. Looking ahead, we expect high utilization in Q1, but the persistent pricing pressures experienced in the second half of 2024 will carry into the first half of 2025 in both countries. Margin pressure is expected to ease in the second half as additional LNG capacity comes online. Market indicators reflect this already, with the Henry Hub forward strip ticking over $3 per BTU in July and north of $4 per BTU in 2026. We're tremendously optimistic about what LNG will do for our industry. The U.S. Energy Information Administration forecasts a doubling of North America's LNG export capacity by 2028. with Canada's capacity expected to grow from zero to six BCF in that timeframe. To wrap up, I'd like to touch on the announcement we shared last week. STEP has agreed to take private transaction by ARC Financial, our largest shareholder, after ARC Financial approached the board with a proposal. This proposed transaction highlights ARC's strong confidence in our leadership, operational strengths, and strategic direction. As one of STEP's founding members and having served as COO and now President and CEO, I've had the privilege of leading this company from a startup to a major player in the energy services space. From our early days to going public and through various industry cycles, we have remained committed to our clients, communities, and the incredible professionals who make STEP what it is today. We're deeply proud of the company we've built and have consistently explored avenues to maximize value for our shareholders, which has led to this proposed transaction. Management unanimously believes that this is the best interest of STEP and our shareholders, and we joined the board in recommending that shareholders vote in support of this transaction. Further details included how shareholders can participate in and vote at the step meeting on December 19th will be provided in an information circular expected be mailed to shareholders around November 27th. We anticipate the transaction will close at the end of December. On behalf of the board and management team, I want to express our gratitude to our shareholders for your support over the past 13 years. Thank you for being an essential part of our journey. We're excited about the future and look forward to beginning this new chapter with ARC Financial. With that, I'll turn it back to the moderator for questions from our analyst. Just a reminder that the press release contains all the details about the transaction, so I won't be able to comment beyond what is already in the release. However, we're happy to take questions on our Q3 operational performance and our outlook for Q4 and 2025.
spk03: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star button followed by the number one 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 the star button followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys.
spk04: One moment for your first question.
spk03: Just a reminder, should you have a question, please press the star button followed by the number one on your touchstone phone. You'll 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 two. If you are using a speakerphone, please lift the handset before pressing any key. Looks like there are no further questions at this time. I'd now like to turn the call back over to Steve Glanville, President and CEO, for closing comments.
spk00: Yeah, thanks very much, operator. Once again, just like to thank all of our shareholders for listening in to our Q3 2024 conference call.
spk04: And thank you very much. Thank you.
spk03: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
Disclaimer

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