Calgary, Alberta – August 2, 2018 - STEP Energy Services Ltd. (the "Company" or "STEP") is pleased to announce its financial and operating results for the three and six months ended June 30, 2018. This news release should be read in conjunction with Management's Discussion and Analysis ("MD&A"), condensed unaudited consolidated interim financial statements and notes thereto as at and for the three and six months ended June 30, 2018 and the MD&A and audited consolidated financial statements as at and for the year ended December 31, 2017. The above documents are available on STEP's website at www.stepenergyservices.com or on SEDAR at www.sedar.com.
Q2 2018 FINANCIAL AND OPERATING HIGHLIGHTS
On April 2, 2018 STEP advanced our strategic entry into the U.S. fracturing market with the closing of the Tucker Energy Services Holdings, Inc. ("Tucker") acquisition (the "Tucker Acquisition") and began the integration of Tucker's operations in Oklahoma. The Tucker Acquisition positions STEP to capitalize on U.S. opportunities in key high-growth basins, reduces commodity price concentration risk, reduces earnings variability caused by seasonality and increases capital allocation flexibility. In addition to the Tucker Acquisition, the Company continued to post strong operational performance. Canadian results were affected from the seasonal slowdown period caused by extended spring breakup conditions.
(1) See Non-IFRS Measures. "Adjusted EBITDA" is a financial measure not presented in accordance with IFRS and is equal to net income before finance costs, depreciation and amortization, loss (gain) on disposal of property and equipment, impairment, current and deferred income tax, share-based compensation, transaction costs, unrealized foreign exchange forward contracts (gain) loss and foreign exchange (gain) loss.
The Company's consolidated second quarter financial and operating highlights are presented below.
While STEP entered the quarter with a strong backlog of completion commitments, seasonal delays experienced in the Canadian Segment caused fracturing services work to be rescheduled for the second half of 2018. While these deferrals impacted second quarter activity, the Company anticipates high utilization of STEP’s current active asset base during the third quarter of 2018.
Second quarter consolidated fracturing operating days increased 52% relative to the same period in 2017. The U.S. fracturing operation contributed 242 operating days which more than offset the reduction in utilization in the Canadian fracturing operation.
In the second quarter of 2018, the Company’s Canadian operations were comprised of 297,500 fracturing HP, of which eight fracturing spreads, representing 225,000 HP, and 13 purpose-built coiled tubing spreads were all staffed for 24-hour operations.
Revenue in the second quarter of 2018 was $68.0 million, a decrease of 26% from the same quarter of 2017. The year over year change is primarily related to fewer fracturing days worked in response to challenging weather through spring break-up, coupled with a modest softening of average revenue per fracturing operation as the market balanced between available horsepower and demand. Coiled tubing activity remained strong and led to a 3% increase in operating days relative to the second quarter of 2017. Average revenue per coiled tubing operating day increased 11% in comparison to the second quarter of 2017. The increases realized during the period are largely attributable to the change in the mix of services to include more standalone coil tubing activity. For the six months ended June 30, 2018, revenue increased by 15% compared to the prior year period.
The Canadian segment posted a second quarter loss in Adjusted EBITDA of $3.4 million (or -5%), compared with positive Adjusted EBITDA of $13.3 million (or 14%) in the comparable period the prior year.
On June 30, 2018, STEP had eight active coiled tubing spreads in the U.S. servicing an expanding client list in the Permian and Eagle Ford basins in Texas and the Haynesville shale in Louisiana. STEP plans to take delivery of three additional coiled tubing spreads during the second half of the year. On April 2, 2018, the U.S. operating segment began integrating the Tucker Acquisition which included four fracturing spreads, totalling 192,500 horsepower, including the fourth spread of 50,000 HP that was deployed in the second half of the quarter.
Revenue increased significantly for the three and six months ended June 30, 2018 to $116.6 million and $139.0 million, respectively, from $13.0 million and $21.2 million during the same periods of 2017, largely driven by the addition of Tucker’s U.S. fracturing business. Fracturing contributed 76% of STEP’s U.S. revenue in the second quarter. Strong demand across all operating districts over an expanded coiled tubing fleet was realized in the quarter. STEP is working to identify opportunities to provide integrated services to our growing U.S. client base.
The U.S. segment generated Adjusted EBITDA for the three and six months ended June 30, 2018 of $24.5 million (or 21%) and $32.1 million (or 23%), respectively, compared to $3.1 million (or 24%) and $3.8 million (or 18%) for the same periods in 2017. The increases in Adjusted EBITDA are attributable to the addition of fracturing assets from Tucker, strong utilization from the coiled tubing fleet and our continued focus on cost control.
STEP adopted the policy of expensing fluid ends to repairs and maintenance for the U.S. operations, which is consistent to STEP’s policy of expensing items that have an estimated useful life of less than 12 months, in contrast to Tucker’s policy of capitalizing. In conjunction with this change, STEP is refiling an Amended Business Acquisition Report to align the pro-forma historical results to STEP’s policy.
Significant amounts of snowfall during the first quarter of 2018 and the subsequent wet field conditions impacted the second quarter and resulted in slower activity in Canada. Although the quarter had a healthy level of completion commitments, these delays led to work deferrals which are anticipated to be executed in the third quarter, leading to expected strong utilization of STEP’s current active asset base. Currently, STEP has commitments for the fourth quarter for over half of our manned Canadian fracturing fleets, with ongoing client discussions suggesting the quarter may see strong utilization. Most encouraging is discussions with clients looking to accelerate some first quarter 2019 programs forward into the fourth quarter of 2018.
Management characterizes the completions market in Canada as balanced to slightly over supplied. This is manifesting in a competitive pricing environment. While oil prices remain above levels where most producers have budgeted, we are seeing a measured approach to capital spending; however, we do expect client capital budgets to expand. Management anticipates the Canadian completions market could shift to a shortage of equipment with a modest increase in drilling activity. Currently, capital budgets continue to favour oil and liquids-rich gas plays, supporting STEP’s 2018 strategy of investing in fit-for-purpose equipment to target shallow, oil-weighted areas.
In the U.S., completions activity remains robust although egress issues in the Permian have led to some E&P companies adjusting their capital deployment strategy. Utilization amongst the U.S. fracturing asset base is expected to remain strong through the end of the year, though management is monitoring transitory Permian basin takeaway issues and the effects it has on utilization and service pricing in the broader U.S. market. Specific to coiled tubing services, STEP continues to have strong demand supporting deployment of additional coiled tubing spreads. With coiled tubing services being a recent bottleneck in completions related work, management anticipates strong utilization for the remainder of the year.
STEP expects supply chain inputs to modestly drive cost inflation. Management will maintain a disciplined focus on operational efficiencies and will work to offset inflationary pressure. As an example, STEP recently implemented the SandCan® system in Canada, a containerized sand solution system combining transportation and on-site storage that provides ease of transportation from mine to well-site. The SandCan® system delivers efficiencies through reduced logistics costs and load/unload times; requires fewer trucks on site; and has no associated pneumatics or belts reducing repair and maintenance costs.
The U.S. and Canada imposed a 25% tariff on steel products that impacts operating costs for the Canadian oil and gas industry. Specific to STEP’s operations, coiled tubing strings are sourced from U.S. manufacturers, whom secure steel from different parts of the world. Management is evaluating options to minimize the cost impact to our client base.
With the integration of the Tucker Acquisition, the board of directors has approved a revised 2018 capital program of $139 million, comprised of expansion capital of $86 million, maintenance capital of $42 million, and infrastructure and related investment of $11 million. The increase is partially a result of maintenance and refurbishment capital ascribed to the Tucker assets and other initiatives to enhance operational efficiencies and asset deployments. Expansion capital includes the purchase of auxiliary equipment, construction of fit-for-purpose equipment to target oil plays, and refurbishment and rebranding of idle fracturing assets.
STEP plans to continue to refurbish the remainder of its Canadian fracturing asset base. Completion of our ninth fracturing spread will provide optionality to deploy it as market conditions warrant. Our two fit-for-purpose Viking spreads will be field ready and manned during the second half of the year. These Viking spreads may displace our existing smaller capacity spreads, enabling horsepower to potentially be redeployed to bolster existing spreads, supporting higher intensity operations. As a result, upon completion of the 2018 capital program, in Canada STEP expects to operate between eight to ten fracturing spreads and will have one unstaffed fracturing spread along with 16 coiled tubing spreads, and expects to operate four fracturing spreads and 12 coiled tubing spreads in the U.S. (one coiled tubing spread is expected to remain inactive).
Please see the discussion in the Non‐IFRS Measures section of the MD&A for the reconciliation of non‐IFRS items to IFRS measures.
This document contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "should", "believe", "plans" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this document contains forward- looking information and statements pertaining to the following: commissioning and staffing of equipment; utilization; timing of delivery and deployment of additional fracturing and coiled tubing spreads; timing of refurbishment of asset base; cost inflation; market conditions and industry activity levels; and the amount of capital expenditures in 2018.
The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; future oil, natural gas and natural gas liquids prices; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; the impact of seasonal weather conditions; the Company’s ability to deploy equipment; and certain cost assumptions. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but, no assurance can be given that these factors, expectations and assumptions will prove to be correct.
The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in the demand for or supply of the Company's services; unanticipated operating results; market uncertainty; the ability to access key components and shop capacity; the ability to attract and retain qualified personnel; changes in tax or environmental laws, or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavourable or a lack of access to capital markets; increased costs; the impact of competitors; and reliance on industry partners.
The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws. The reader is cautioned not to place undue reliance on forward-looking information.
STEP Energy Services is an oilfield service company that provides fully integrated coiled tubing and fracturing solutions. STEP’s combination of modern, fit-for-purpose fracturing and coiled tubing equipment has differentiated it in plays where wells are deeper, have longer laterals, and higher pressure.
Initially operating as a specialized, deep capacity coiled tubing provider, STEP’s service offering expanded to include fully integrated coiled tubing and fracturing solutions. STEP operates in the Montney, Duvernay, and Viking in Canada, and in the Anadarko, Arkoma, Permian, Eagle Ford, and Haynesville in the U.S. STEP’s continuing track record of safety, efficiency and execution drives repeat business from its blue-chip exploration and production clients.
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President & Chief Executive Officer