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Step Energy Services Ltd. Reports Second Quarter 2019 Results


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Source: STEP Energy Services Ltd.

CALGARY, Alberta, Aug. 08, 2019 (GLOBE NEWSWIRE) — 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, 2019. The following press release should be read in conjunction with the unaudited condensed consolidated interim financial statements and notes thereto as at and for the three and six months ended June 30, 2019 (the “Financial Statements”), the MD&A dated August 7, 2019 and audited consolidated financial statements as at and for the year ended December 31, 2018.   The above documents are available on STEP’s website at www.stepenergyservices.com or on SEDAR at www.sedar.com.

FINANCIAL AND OPERATING HIGHLIGHTS

STEP achieved strong second quarter results in challenging market conditions and expected Canadian seasonal slowdowns. Canadian operations were confronted by a slow start to the period, typical for the second quarter, but recovered mid-quarter. Beneficial weather, combined with active key clients who executed pad work and exceptional execution by our field professionals led to high pumping efficiencies and record proppant placed per day. STEP secured several key contracts in late 2018, which supported base line activity in the quarter. U.S. operations benefited from an increased contribution from fracturing services but results continued to be tempered by competitive pressures stemming from new coiled tubing entrants to the market and a fundamental over-supply of fracturing equipment. Demand for fracturing services increased from the first quarter due to our key client relationships and having repositioned our assets.  U.S. Coiled tubing managed staffed units to meet near term demand and moved assets within the operating region to drive additional utilization. Management was successful in leveraging client relationships to create new opportunities across business lines in the U.S.

“I am pleased with the company’s performance in the second quarter. Our operational execution and financial performance has been exceptional in a challenging, over-supplied market, which speaks to the high efficiency operations we continue to deliver to our clients,” said Regan Davis, President and CEO. “Our clients remain disciplined with their capital programs, as STEP continues to focus on cost control initiatives, securing and executing on strategic work programs and conservative deployment of capital in this uncertain market.”

In reaction to challenging market conditions in both Canada and the U.S., management focused on the variables within the Company’s control. As has been previously discussed, we are enjoying success with cost reduction, securing and executing on larger strategic work programs, pumping efficiencies, relocation of assets to create new opportunities and conservative deployment of capital. These activities allowed the Company to maintain positive margins and generate improved results from Canadian operations relative to 2018.

CONSOLIDATED HIGHLIGHTS           

FINANCIAL (unaudited) Three months ended June 30, Six months ended June 30,
($000s except percentages and per share amounts) 2019 2018       2019 2018
Consolidated revenue $ 186,577 $ 184,601     $ 363,046 $ 372,194
Net (loss) income attributable to shareholders $ (6,024 ) $ (8,431 )     $ (6,629 ) $ 9,985
Per share-basic $ (0.09 ) $ (0.13 )     $ (0.10 ) $ 0.16
Per share-diluted $ (0.09 ) $ (0.13 )     $ (0.10 ) $ 0.15
Weighted average shares – basic 66,719,341 66,409,034 66,709,806 63,431,219
Weighted average shares – diluted 66,719,341 68,941,930 66,709,806 65,791,902
Adjusted EBITDA (1) $ 20,339 $ 21,104     $ 46,955 $ 62,884
Adjusted EBITDA % (1) 11 % 11 %       13 % 17 %

(1) “Adjusted EBITDA” is a financial measure not presented in accordance with IFRS and is equal to net (loss) income before finance costs, depreciation and amortization, loss (gain) on disposal of property and equipment, current and deferred income tax provisions and recoveries, share-based compensation, transaction costs, foreign exchange forward contract (gain) loss, foreign exchange (gain) loss, and impairment losses. “Adjusted EBITDA %” is calculated as Adjusted EBITDA divided by revenue.

BALANCE SHEET (unaudited) As at June 30, As at December 31,
($000s except shares and per share amounts)   2019 2018
Cash and cash equivalents $ 1,113 $ 364
Working capital (including cash and cash equivalents) (2) $ 87,678 $ 67,158
Total assets $ 885,948 $ 887,908
Total long-term financial liabilities (2) $ 268,097 $ 260,451
Shares outstanding   66,761,417 66,682,319

(2) “Working capital” and “Total long-term financial liabilities” are financial measures not presented in accordance with IFRS.  “Working capital” is equal to total current assets less total current liabilities.  “Total long-term financial liabilities” is comprised of Loans and borrowings, Long-term lease obligations and Other liabilities.   

  • Generated consolidated revenue for the three and six months ended June 30, 2019 of $186.6 million and $363.0 million, respectively, compared to $184.6 million and $372.2 million in the same periods of 2018. The quarter over quarter increase of 1% is primarily attributable to increased Canadian fracturing activity over the prior year.  Revenue for the six months ended June 30, 2019 decreased by 2% over the prior year primarily due to less coiled tubing days worked, client supplied sand in Canada and pricing pressure in the U.S.
  • Adjusted EBITDA was $20.3 million (or 11% of revenue) in the second quarter of 2019 compared to $21.1 million (or 11%) in the same period of 2018. Adjusted EBITDA margins were maintained quarter over quarter due to a continued focus on cost management and operating efficiencies. Also contributing to margin performance was the higher volume of client supplied sand programs undertaken in the quarter. These programs typically yield higher operating margin percentages but will have a lower total invoice value. For the six months ended June 30, 2019, Adjusted EBITDA decreased by 25% primarily due to the decreased revenue compared to the same six month period in the prior year combined with severance and restructuring costs incurred in the first quarter of 2019.
  • Net loss for the three and six months ended June 30, 2019 was $6.0 million and $6.6 million, respectively, compared to net loss of $8.4 million and net income of $10.0 million in the same periods of 2018. Net loss for the quarter ended June 30, 2019 decreased from the prior year as 2018 included transaction costs related to the Tucker Acquisition. For the six months ended June 30, 2019 net income decreased from the prior year due to the general activity slow down in the WCSB offset by a full six month contribution of U.S. Fracturing.
  • Effective January 1, 2019, the Company implemented the following accounting changes:
    • IFRS 16 replaces existing lease guidance including IAS 17, Leases. IFRS 16 requires the recognition of most leases previously recognized as operating leases onto the balance sheet. These are recognized as right-of-use assets and additional lease liabilities. The Company has applied the standard using the modified retrospective approach in which the cumulative impact of initial application is recognized as an adjustment to the opening balance of retained earnings with no restatement of prior period information. As a result of the implementation of IFRS 16, for the three and six months ended June 30, 2019, $0.6 million and $1.3 million of expenses that otherwise would have been booked to operating and selling, general and administrative expenses was recorded as a reduction to the lease liability, respectively.
    • The Company reorganized the composition of its operating segment disclosure to reflect how management makes strategic decisions and assesses the performance of the Company’s operations. Corporate activities are now separated from Canadian and U.S. Operations. The Company has reclassified prior period information to align with the new composition of operating segments.

OPERATIONS REVIEW

Canadian Segment

($000’s except per day, days, units, proppant pumped and HP) Three months ended June 30, Six months ended June 30,
(unaudited) 2019 2018(4) Change %   2019 2018(4) Change %
Revenue:          
Fracturing $ 53,224 $ 41,017 30 $ 135,575 $ 168,624 (20 )
Coiled tubing   22,881 27,021 (15 )   48,756 64,545 (24 )
  76,105 68,038 12   184,331 233,169 (21 )
Expenses:        
Cost of sales   78,241 79,608 (2 )   173,432 213,526 (19 )
Selling, general and administrative   2,488 3,561 (30 ) 4,784 7,159 (33 )
Results from operating activities $ (4,624 ) $ (15,131 ) (69 ) $ 6,115 $ 12,484 (51 )
Add non-cash items:        
Depreciation   12,897 11,949 8   25,738 20,306 27
Share-based compensation   599 665 (10 )   875 1,197 (27 )
Adjusted EBITDA (1) $ 8,872 $ (2,517 ) (452 ) $ 32,728 $ 33,987 (4 )
Adjusted EBITDA % (1)   12 % (4 %) (400 )   18 % 15 % 20
Sales mix (% of segment revenue)        
Fracturing   70 % 60 % 17   74 % 72 % 3
Coiled tubing   30 % 40 % (25 )   26 % 28 % (7 )
Fracturing services      
Fracturing revenue per operating day(1) $ 208,722 $ 238,472 (12 ) $ 205,729 $ 245,449 (16 )
Number of fracturing operating days (2)   255 172 48   659 687 (4 )
Proppant pumped (tonnes)   186,000 101,000 84   420,000 310,000 35
Stages completed   2,367 1,352 75   5,592 6,341 (12 )
Horsepower        
Active pumping HP, end of period   225,000 225,000 0   225,000 225,000 0
Idle pumping HP, end of period   72,500 72,500 0   72,500 72,500 0
Total pumping HP, end of period (3)   297,500 297,500 0   297,500 297,500 0
Coiled tubing services      
Coiled tubing revenue per operating day(1) $ 50,399 $ 45,954 10 $ 49,649 $ 43,819 13
Number of coiled tubing operating days (2)   454 588 (23 )   982 1,473 (33 )
Active coiled tubing units, end of period   9 13 (31 )   9 13 (31 )
Idle coiled tubing units, end of period   7   7
Total coiled tubing units, end of period   16 13 23   16 13 23

(1) See Non-IFRS Measures.
(2) An operating day is defined as any coiled tubing and fracturing work that is performed in a 24-hour period, exclusive of support equipment. 
(3) Represents total owned HP, of which 225,000 HP is currently deployed and some of the remainder requires certain maintenance and refurbishment.
(4) 2018 amounts were reclassified as the Company reorganized the composition of its operating segments. See “Corporate review” section.

Revenue for the three and six months ended June 30, 2019 was $76.1 million and $184.3 million, respectively, compared to $68.0 million and $233.2 million for the same periods in 2018. The increase in quarterly revenue is primarily due to 48% more fracturing days worked in 2019 offset by fracturing revenue per day declining by 12% when compared to the same period of the prior year. Many clients provide their own proppant which decreases revenue and revenue per day but is expected to yield higher operating margins. Clients provided approximately 61% of the proppant placed in the quarter. Dry conditions, particularly in June, allowed key clients to commence their summer completion programs. Revenue for the six months ended June 30, 2019 decreased by 21% compared to the prior year due to the general market activity slow-down in the WCSB and the impact of client supplied proppant. The ongoing political uncertainty in Canada, pipeline take-away capacity and commodity price volatility have reinforced client spending caution and supported the desire to manage capital expenditures within cash flows.

Adjusted EBITDA for the three and six months ended June 30, 2019 was $8.9 million (or 12% of revenue) and $32.7 million (or 18%), respectively, compared to a loss of $2.5 million (or -4%) and positive $34.0 million (or 15%) for the same periods in 2018. The second quarter 2019 Adjusted EBITDA increase of $11.4 million over the second quarter of 2018 is primarily due to higher fracturing activity and the Company’s 2018 response to continued industry uncertainty by reducing headcount, deferring or cancelling growth capital and re-evaluating overhead and selling, general and administrative spending. The $1.3 million decrease for the six months ended June 30, 2019 Adjusted EBITDA compared to the prior year is primarily attributable to decreased activity. The Company’s vendors have been collaborative in a challenging Canadian oil and gas sector by offering competitive pricing and helping us maintain a lean and efficient supply chain.

Management is committed to improving returns on capital employed by managing capacity and a focus on efficiency and cost control.

U.S. Segment

($000’s except per day, days, units, proppant pumped and HP) Three months ended June 30,  Six months ended June 30,
(unaudited) 2019 2018(4) Change %   2019 2018(4) Change %
Revenue:          
Fracturing $ 85,158 $ 88,524   (4 ) $ 125,393 $ 88,524 42
Coiled tubing   25,314 28,039 (10 )   53,322 50,501 6
  110,472 116,563 (5 )   178,715 139,025 29
Expenses:        
Cost of sales   104,006 100,514 3   175,526 115,975 51
Selling, general and administrative   3,355 2,172 54 5,505 3,325 66
Results from operating activities $ 3,111 $ 13,877 (78 ) $ (2,316 ) $ 19,725 (112 )
Add non-cash items:        
Depreciation   11,830 11,923 (1 )   23,740 13,760 73
Share-based compensation   686 662 4   1,210 1,063 14
Adjusted EBITDA (1) $ 15,627 $ 26,462 (41 ) $ 22,634 $ 34,548 (34 )
Adjusted EBITDA % (1)   14 % 23 % (39 )   13 % 25 % (48 )
Sales mix (% of segment revenue)        
Fracturing   77 % 76 % 1   70 % 64 % 9
Coiled tubing   23 % 24 % (4 )   30 % 36 % (17 )
Fracturing services        
Fracturing revenue per operating day (1) $ 397,935 $ 444,842 (11 ) $ 398,073 $ 444,842 (11 )
Number of fracturing operating days (2)   214 199 8   315 199 58
Proppant pumped (tonnes)   224,000 159,000 41   319,000 159,000 101
Stages completed   1,087 1,064 2   1,611 1,064 51
Horsepower        
Active pumping HP, end of period   142,500 192,500 (26 )   142,500 192,500 (26 )
Idle pumping HP, end of period   50,000   50,000
Total pumping HP, end of period (3)   192,500 192,500 0   192,500 192,500 0
Coiled tubing services      
Coiled tubing revenue per operating day(1) $ 49,733 $ 53,715 (7 ) $ 49,927 $ 52,225 (4 )
Number of coiled tubing operating days (2)   509 522 (2 )   1,068 967 10
Active coiled tubing units, end of period   9 8 13   9 8 13
Idle coiled tubing units, end of period   4 2   4 2
Total coiled tubing units, end of period   13 10 30   13 10 30

(1) See Non-IFRS Measures.
(2) An operating day is defined as any coiled tubing and fracturing work that is performed in a 24-hour period, exclusive of support equipment. 
(3) Represents total owned HP, some of which will require capital for maintenance and refurbishment.
(4) 2018 amounts were reclassified as the Company reorganized the composition of its operating segments. See “Corporate review” section.

Revenue of $110.5 million in the three months ended June 30, 2019 decreased by $6.1 million from the same quarter in 2018. Fracturing services saw pricing pressure as the revenue per day declined by 11% over the prior year, offset by fracturing operating days increasing by 8%. During the second quarter 2019, the fourth U.S. fracturing spread was deployed intermittently to service key clients, although it has not been permanently staffed. For the six months ended June 30, 2019 revenue was $178.7 million, a 29% increase from $139.0 million in 2018. The year to date increase in revenue of $39.7 million is primarily due to the U.S. fracturing operations being acquired in April 2018, whereas the assets generated revenue for a full six months of 2019. Fracturing revenue year to date increased by 42% as a result. Coiled tubing had consistent operating days year over year with the strongest demand noted at the end of the second quarter 2019. As a result of competitors continuing to bring coiled tubing equipment to market further price deterioration was noted in the quarter. Management will continue to monitor and adjust operating capacity and efficiencies to optimize margin contributions.

In the U.S., seasonality is generally not a factor and, as a result, the prior quarter is often utilized when comparing financial results. Revenue and adjusted EBITDA increased by 62% and 123%, respectively due to the repositioning of fracturing assets into South and West Texas which allowed us to service key fracturing clients and resulted in 113 more pumping days in the second quarter. Day rates for both fracturing and coiled tubing services remained relatively unchanged from the prior quarter.

Adjusted EBITDA for the second quarter 2019 was $15.6 million (or 14% of revenue) compared to $26.5 million (or 23%) for the same quarter in the prior year. Adjusted EBITDA percentage was impacted by pricing pressure across all service lines and increased operating costs related to field professionals and equipment maintenance. Compared to the prior year, the six-month ended June 30, 2019 Adjusted EBITDA decreased by 34%.

Corporate

Corporate results from operating activities were $5.8 million in expenses for the second quarter of 2019 compared to $4.7 million in 2018. Selling, general and administrative expenses increased 25% when compared to the same period of 2018. The increase is primarily due to professional, tax and legal fees that are not expected to recur in the future.

OUTLOOK

During the second quarter, commodity prices were volatile. The news of global trade, geopolitical and economic uncertainty will continue to influence commodity prices as the year progresses. Drilling and completion activity is unlikely to improve materially in the second half of the year, as clients complete 2019 capital programs and remain focused on spending within cash flows. As clients finalize their mid-year capital reviews during July and August, management expects to have additional clarity on activity for the second half of the year. Within STEP service markets, equipment over-supply has challenged asset utilization and increased pressure on an already-competitive pricing environment.

Canadian Operations

Solid contributions from key contracts, consistent asset utilization, and larger pad work, coupled with better weather in June, contributed to second quarter results. For both fracturing and coiled tubing services, STEP anticipates maintaining current manned capacity at second quarter exit levels for the balance of the year.  Active capacity adjustments may be made as management continues to monitor industry demand, evaluates economic returns, and receives additional clarity on client activity post mid-year capital reviews. Pricing is expected to remain generally flat from current levels through the second half of the year.

U.S. Operations

STEP delivered strong execution and utilization of manned equipment in both fracturing and coiled tubing in the second quarter. During the quarter, a fourth fracturing spread was deployed intermittently to service key clients, while coiled tubing utilized nine staffed units throughout the quarter. The over-supplied fracturing market led some providers to stack equipment during the quarter. Conversely, more coiled tubing equipment came into the market, further pressuring pricing.

The outlook remains cautious for fracturing and coiled tubing services through the back half of the year. STEP has good visibility on work volumes for three fracturing spreads through mid-fourth quarter.  In the U.S., pricing is expected to remain generally flat through the second half of the year.

Capital update

There have been no changes to the previously approved $48 million 2019 maintenance capital program or the reserved $14.2 million from the 2018 program for the reactivation of the fourth U.S. spread. Management will prudently control all capital expenditures based on near term demand and active horsepower expectations.

CREDIT FACILITY UPDATE

On June 25, 2019, the Company amended its syndicated borrowing agreement to extend the maturity of the facility to June 25, 2022. As of August 8, 2019, the amended credit facilities will be further amended to increase the U.S. operating facility to U.S. $20.0 million to accommodate growth in U.S. operations. This will be achieved with a corresponding decrease in the revolving credit facility.  The facilities will be comprised of a Canadian $313.3 million revolving credit facility, a Canadian $10.0 million operating facility, and a U.S. $20.0 million operating facility.

MANAGEMENT UPDATE

STEP is pleased to announce that Mr. Brock Duhon has been appointed President of STEP’s U.S. Operations. Mr. Duhon previously led the U.S. coiled tubing operations where his exceptional leadership skills allowed him to build a robust business and high performance team. STEP is also pleased to announce that Mr. Mike Burvill has been appointed to the role of VP, Business Development and Innovation. Mr. Burvill will lead our business development and innovation initiatives and explore strategic opportunities to support the evolution of our business in North America.

NON‐IFRS MEASURES

Please see the discussion in the Non‐IFRS Measures section of the MD&A for the reconciliation of non‐IFRS items to IFRS measures.

FORWARD‐LOOKING INFORMATION & STATEMENTS

Certain statements contained in this MD&A constitute “forward-looking statements” or “forward-looking information” within the meaning of applicable securities laws (collectively, “forward-looking statements”). These statements relate to the expectations of management about future events, results of operations and STEP’s future performance (both operational and financial) and business prospects. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “objective” and “capable” and similar expressions are intended to identify forward-looking statements. These 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 statements. While STEP believes the expectations reflected in the forward-looking statements included in this MD&A are reasonable, such statements are not guarantees of future performance or outcomes and may prove to be incorrect and should not be unduly relied upon.

In particular, but without limitation, this MD&A contains forward-looking statements pertaining to: 2019 operation outlook; anticipated market recovery; supply and demand for oilfield services and industry activity levels, including the Company’s integrated service offerings; the Company’s anticipated business strategies and expected success; effect of weather conditions on the Company’s operations; expected completions activity, utilization levels and operating margins in 2019; expected profitability for fracturing services in 2019; ability of the Company to maintain its track record of returns and margin performance; the Company’s expected performance in 2019; future development activities; planned redeployment of a fourth fracturing crew in the U.S; the Company’s ability to retain existing clients and attract new business; monitoring of industry demand, client capital budgets and market conditions; and increased clarity on client activity in the third and fourth quarters of 2019.

The forward-looking information and statements contained in this MD&A reflect several material factors and expectations and assumptions of the Company including, without limitation: 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; pricing of the Company’s services; the Company’s ability to market successfully to current and new clients; the Company’s ability to utilize its equipment; the Company’s ability to obtain qualified staff and equipment in a timely and cost effective manner; levels of deployable equipment; future capital expenditures to be made by the Company; future funding sources for the Company’s capital program; the Company’s future debt levels; the impact of competition on the Company; the Company’s ability to obtain financing on acceptable terms; completion of, and timing for availability of, additional pipeline capacity; and client activity levels. 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 correct.

Actual results could differ materially from those anticipated in these forward-looking statements due to the risk factors set forth below and elsewhere in this MD&A: volatility of the oil and natural gas industry; excess equipment levels; competition in the oilfield services industry; restrictions on access to capital; reliance on suppliers of raw materials, diesel fuel and component parts; reliance on equipment suppliers and fabricators; direct and indirect exposure to volatile credit markets; fluctuations in currency exchange rates; merger and acquisition activity among the Company’s clients; federal and provincial legislative and regulatory initiatives could result in increased costs and additional operating restrictions or delays; health, safety and environment laws and regulations may require the Company to make substantial expenditures or cause it to incur substantial liabilities; loss of a significant client could cause the Company’s revenue to decline substantially; negative cash flows from operating activities; third party credit risk; hazards inherent in the oilfield services industry which may not be covered to the full extent by the Company’s insurance policies; difficulty in retaining, replacing or adding personnel; seasonal volatility due to adverse weather conditions; reliance on a few key employees; legal proceedings involving the Company; failure to maintain the Company’s safety standards and record; inability to manage growth; failure to continuously improve operating equipment and proprietary fluid chemistries; actual results may differ materially from management estimates and assumptions; and the risk factors set forth under the heading “Risk Factors” in the AIF.

ABOUT STEP

STEP is an oilfield service company that provides stand-alone and fully integrated fracturing, coiled tubing and wireline solutions. Our combination of modern equipment along with our commitment to safety and quality execution has differentiated STEP in plays where wells are deeper, have longer laterals and higher pressures.

Founded in 2011 as a specialized deep capacity coiled tubing company, STEP now provides an integrated solution for deep capacity coiled tubing services and fracturing to exploration and production (“E&P”) companies in Canada and the U.S. Our Canadian integrated services are focused in the Western Canadian Sedimentary Basin (“WCSB”), while in the U.S. our fracturing and coiled tubing services are focused in the Permian and Eagle Ford in Texas, the Haynesville in Louisiana and the SCOOP/STACK in Oklahoma.

A cornerstone of STEP’s success is our high-performance, safety-focused culture. Our four core values; Safety, Trust, Execution and Possibilities inspire our team of professionals to provide differentiated levels of service, with a goal of flawless execution and an unwavering focus on safety.

For more information please contact:

Regan Davis
President & Chief Executive Officer
Michael Kelly
Executive VP & CFO
Rob Kukla
Director, Corporate Development
Telephone:  403-457-1772 Telephone: 403-457-1772 Telephone: 281-606-3644


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