Calgary, Alberta, Aug. 11, 2021 (GLOBE NEWSWIRE) — STEP Energy Services Ltd. (the “Company” or “STEP”) is pleased to announce that its three and six months ended June 30, 2021 Monthly Financial and Operating Results. The following press release should be shared with Management’s Discussion and Analysis (“MD&A”) and the unaudited condensed consolidated interim financial statements for the month ended June 30, 2021 and notes thereto (the “Financial Statements” ) to read together.Readers should also refer to the “Forward-Looking Information and Statements” Legal Advice and “Non-IFRS Measures” sections at the end of this press release.All financial amounts and measures are in Canadian dollars unless otherwise stated.For more information on STEP, please visit the SEDAR website at www.sedar.com, including the Company’s Annual Information Form for the year ended December 31, 2020 (dated March 17, 2021) (“AIF”).
(1) See Non-IFRS Measures.”Adjusted EBITDA” is a financial measure not presented in accordance with IFRS and is equal to net of finance costs, depreciation and amortization, losses (gains) on disposal of property and equipment, current and deferred tax provisions and recoveries net (loss) income, equity compensation, transaction costs, foreign exchange forward contract (gain) loss, foreign exchange (gain) loss, impairment loss.”Adjusted EBITDA %” is calculated as Adjusted EBITDA divided by revenue.
(2) See Non-IFRS Measures.’Working capital’, ‘Total long-term financial liabilities’ and ‘Net debt’ are financial measures that are not presented in accordance with IFRS.”Working capital” equals total current assets minus total current liabilities.”Total long-term financial liabilities” includes long-term borrowings, long-term lease obligations and other liabilities.”Net debt” equals loans and borrowings before deferred financing charges less cash and cash equivalents.
Q2 2021 Overview The second quarter of 2021 continued the momentum generated in the first quarter as increased vaccination rates led to a further easing of measures previously implemented to manage the COVID-19 virus and related variants.Attempts to resume pre-COVID social and economic activity have led to declines in commodity inventories as global oil production lags a recovery in demand.The increase in production is due to a disciplined approach by the Organization of the Petroleum Exporting Countries (“OPEC”), Russia and certain other producers (collectively “OPEC+”), coupled with supply cuts by U.S. sanctions on Iran and Venezuela is gradual.This led to higher commodity prices throughout the quarter, with West Texas Intermediate (“WTI”) crude oil spot prices averaging $65.95 per barrel, up 135% from a year earlier.An improving commodity price environment led to an increase in U.S. drilling activity, with the rig count up 15% from a year earlier.Natural gas prices remained stable sequentially, with AECO-C spot prices averaging C$3.10/MMBtu, up 55% from the second quarter of 2020.
STEP’s second quarter of 2021 reflected an ongoing economic recovery, with revenue up 165% from a year earlier and an unprecedented slowdown in activity due to the response to the COVID-19 pandemic.Despite the seasonal industry slowdown typically experienced during spring break, STEP was able to achieve higher-than-expected utilization in its Canadian operations due to higher levels of drilling activity beginning in the first quarter of 2021, coupled with available staffing Limited, resulting in carry-over completion activities.During the second quarter of 2021, demand for our fracturing services in the U.S. business was stable, but coiled tubing services were impacted by intermittent activity as the market remained oversupplied.Despite the challenges, the U.S. business performed in line with expectations and entered the third quarter with strong momentum and strong execution in our field business.Trends that will continue in the second quarter of 2021 are global supply chain constraints (long lead times for steel, equipment parts) and labor shortages.
Industry Conditions The first half of 2021 showed a positive improvement compared to 2020, which has been a difficult year for the North American oil and gas services industry.Rising global vaccination rates and multibillion-dollar government stimulus packages have supported a modest rebound in global economic activity, leading to a recovery in crude oil demand.Although activity levels have increased, they have not yet reached pre-pandemic levels.
We believe that the global economic recovery is taking hold, requiring increased drilling and completions to meet increased demand for crude oil in the second half of 2021 and throughout 2022.The recovery in global crude oil demand is supporting higher and more stable commodity prices and should lead to increased capital plans by North American E&P companies as operators will need to offset production decline rates.In the U.S., we saw private companies lead the way in completing activity, in part due to higher-than-expected commodity prices.
Supply and demand for coiled tubing and fracturing equipment in the Canadian market are basically balanced.In the United States, the gap between available fracking equipment and fracking equipment demand is balancing.Some major industry players predict that equipment demand and availability will be faster than previously expected, as equipment wear and labor constraints over the past two years have limited the amount of equipment available in the market.Demand for low-emission equipment is high and supply is limited.The cost of steel, parts and labor shortages for pressure pumps is also increasing.Pricing will have to continue to rise, not only to cover inflationary costs but also equipment improvements.
Some industry players recently said they expected the global economic recovery to trigger an international energy industry supercycle, which would lead to higher activity levels and bigger profit margins.Recently, our customers, especially in the United States, have begun to inquire about long-term arrangements for the services offered by STEP due to growing concerns about the availability of equipment planned for 2022.
Global crude supply and pricing will continue to be influenced by the discipline of OPEC+ members, as the group recently agreed to increase production by 400,000 barrels per day per month from August to December 2021.A further increase in production is allowed in early 2022.
Some uncertainty continues as the COVID-19 delta variant spreads and other COVID-19 variants develop.The North American and global economic recovery could be threatened by the reimposition of government restrictions to mitigate the spread of new COVID-19 variants.Early signs from several European countries suggest that lockdowns could be imposed in the fall if cases continue to rise.That has raised concerns about a slowdown in consumer spending, particularly a deterioration in industrial, tourism and transportation demand.
North American pressure pump pricing can be described as a period of discipline followed by an explosion of aggressive pricing to gain or retain market share.Pricing in Canada remains sensitive to device additions, and while many industry players say prices need to recover before more devices can be activated, major players have already signaled their intention to add devices.Pricing in the U.S. has improved, first to cover rising costs and more recently to improve profitability and fund new capacity investment, but overall pricing recovery has been impacted by equipment restart rates and new capacity launches.Some service providers have invested in advanced technologies that align with clients’ environmental, social and governance (“ESG”) strategies or reduce overall cost of completion.Equipment using these advanced technologies can command a higher premium than conventional equipment, however, current market pricing does not support the return on capital required to build such equipment on a large scale.Given the current market balance, we expect Canadian prices to remain at current levels and moderately improve in the US for the remainder of 2021.
Third Quarter 2021 Outlook In Canada, the second quarter of 2021 beat expectations as activity during this period typically decreases significantly due to weather conditions and government regulations restricting the mobilization of drilling and completion equipment.Markets remain competitive, and attempts to achieve meaningful price recovery beyond cost inflation have met resistance.During the third quarter, STEP’s Canadian operations are expected to continue to build on the activity levels seen in the second quarter as our customers restart their drilling and completion programs.Staffing equipment has become an important constraint on operations, and management is taking steps to attract and retain top talent.STEP’s strong execution and best-in-class dual-fuel fleet capabilities drive cost efficiencies and support ESG initiatives, continuing to differentiate the company from its peers.STEP continues to upgrade its fleet by launching our idle reduction equipment.This important initiative reduces the environmental impact of STEP operating fleets by reducing idling time and reducing fleet emissions, while saving fuel and repair and maintenance costs.
STEP’s U.S. operations improved in the second quarter, creating momentum for a constructive view on the third quarter.Drilling and completion activity remained strong, and demand for equipment kept prices up.Fracturing has visibility into the utilization of existing equipment, and the company expects to reactivate a third fracturing crew in the third quarter to meet customer demand.Following the conversion of one of its US operating fleets in the second quarter, STEP now has a 52,250-horsepower (“HP”) frac facility in the US with dual fuel capability.There has been a lot of interest in these units and STEP has been able to charge a premium for their use.
U.S. coiled tubing services were challenged by aggressive pricing by local suppliers, but those pressures began to fade later in the quarter.The third quarter is expected to see opportunities for fleet expansion and continued price recovery.As in Canada, field staffing challenges remain a significant constraint on returning equipment to the field.
Full Year 2021 Outlook Canada’s activity in the second half of 2021 is expected to have a strong start in the third quarter and transition to intermittent activity in the fourth quarter consistent with the previous fourth quarter.STEP’s strategic clients have requested commitments for the remainder of the year and into 2022, but capital decisions are made on a project-by-project basis.Pricing is expected to remain competitive, but STEP is largely able to achieve increases to compensate for the impact of inflation.STEP’s Canadian operations are expected to maintain existing operating capacity and will continue to monitor and adjust capacity based on the near-term demand outlook.
The U.S. business is expected to benefit from increased drilling and completions activity supported by strong commodity prices and the restart of the third fracking crew.STEP is aligned with strategic customers to ensure utilization is at a base level for the rest of the year, barring any negative events or economic shutdown, the U.S. business is expected to end the year better.Pricing improvements are expected to take effect in the third quarter, and capacity expansion will largely depend on attracting and retaining quality employees.
Capital Expenditure S In the second quarter of 2021, the company approved an additional $5.4 million in optimization and maintenance capital to support restart and maintenance capital costs for a third U.S. fracturing crew and increase the company’s U.S. fracturing services Fire extinguishing ability.Prior to this increase, STEP’s 2021 capital plan was $33.7 million, which included $28.8 million in maintenance capital and $4.9 million in optimization capital.Approved capital plans now total $39.1 million, including $31.5 million in maintenance capital and $7.6 million in optimization capital.STEP will continue to evaluate and manage its manned equipment and capital programs based on market demand for STEP services.
Subsequent events On August 3, 2021, STEP entered into a second amended agreement with a consortium of financial institutions to extend the expiry date of its credit facility to July 30, 2023, and to amend and extend the covenant forbearance period ( Certain covenants as defined in Credit Facility).For more information, see Capital Management – Debt in the Company’s MD&A dated August 11, 2021.
STEP has 16 coiled tubing units at WCSB.The company’s coiled tubing units are designed to service WCSB’s deepest wells.STEP’s fracturing operations are focused on deeper and more technically challenging blocks in Alberta and northeastern British Columbia.STEP has 282,500 HP, of which 15,000 HP needs funds for refurbishment.About 132,500 horsepower is available with dual fuel capability.Companies deploy or idle coiled tubing units or fracturing horsepower based on the ability of the market to support target utilization and economic returns.
(1) See non-IFRS measures.(2) An operating day is defined as any coiled tubing and fracturing operations performed within a 24-hour period, excluding support equipment.(3) Represents all HP owned in Canada, of which 200,000 are currently deployed and the remaining 15,000 require some maintenance and refurbishment.
Q2 2021 Compared to Q2 2020 Q2 2021 Canadian business improved significantly from the same period last year.Compared to the second quarter of 2020, revenue increased by $59.3 million, of which fracturing revenue increased by $51.9 million and coiled tubing revenue increased by $7.4 million.The increase in revenue was due to WCSB’s drilling and completion activities and an increase in customer mix.The increase in activity was due to higher commodity prices from lows in the second quarter of 2020, which improved economics for customers.
Adjusted EBITDA for the second quarter of 2021 was $15.6 million (21% of revenue) compared to $1.0 million (7% of revenue) in the second quarter of 2020.The margin improvement was the result of a lower support cost structure due to a reduction in the headcount of sales, general and administration (“SG&A”) implemented in 2020 and largely maintained through the second quarter of 2021.Cost reductions due to reduced headcount are partially offset by wage rollback reversals effective January 1, 2021.A further improvement in margins was the absence of severance packages, which totaled $1.3 million in the second quarter of 2020.The second quarter of 2021 included $1.8 million in CEWS (June 30, 2020 – $2.8 million), which was recorded as a reduction in staff costs.
Canadian Fracking operated four spreads in the second quarter of 2021, compared to two spreads in the second quarter of 2020, as increased drilling activity improved demand for the service.Activity benefited from strategic customers remaining more active in the second quarter, which is often marked by an overall slowdown in the industry caused by spring break-ups.Further increasing utilization is a large pad that was moved from STEP Q1 2021 to Q2 2021.This resulted in an increase in business days from 14 days in the second quarter of 2020 to 174 days in the second quarter of 2021.
The sharp increase in activity resulted in a revenue increase of $51.9 million compared to the second quarter of 2020.Revenue per business day also increased from $242,643 in the second quarter of 2020 to $317,937 due to customer and formation mix.STEP worked with customers on large platform operations with multiple wells, increasing horsepower and support equipment requirements, while treatment design of the stimulated formation resulted in increased proppant pumping.The increased revenue coupled with the cost efficiencies associated with working on larger pads resulted in an immediate profit improvement.
STEP capitalizes the current end when its estimated useful life exceeds 12 months.Based on a review of the history of use, in Canada, the fluid end is capitalized.However, if the company accounted for the fluid end, operating expenses for the three months ended June 30, 2021 would have increased by about $0.9 million.
Canadian coiled tubing also benefited from an unusually active spring cracking period, with 304 days in operation compared to 202 days in the second quarter of 2020.The increase in operating days resulted in revenue of $17.8 million for the three months ended June 30, 2021, a 70% increase from revenue of $10.5 million for the same quarter in 2020.The increase in employee units and the reversal of pay cuts implemented in 2020 resulted in higher payroll expenses, resulting in a slight decrease in direct profit margins as a percentage of revenue.
Q2 2021 compared to Q1 2021 Total Canadian revenue for Q2 2021 was $73.2 million, down from $109.4 million in Q1 2021.Operations carried some of the momentum generated in the first quarter of 2021 into the second quarter, despite a 50% reduction in the rig count from 145 in the first quarter of 2021 to 72 in the second quarter of 2021.The second quarter has traditionally been marked by an industry-wide slowdown due to the unraveling of the spring.Fracturing revenue decreased by $32.5 million, while coiled tubing revenue decreased by $3.7 million.
Adjusted EBITDA in the second quarter of 2021 was $15.6 million (21% of revenue) compared to $21.5 million in the first quarter of 2021 (20% of revenue).Margins were impacted by higher payroll expenses, but were offset by a significant reduction in outsourced logistics, which provided an opportunity for in-house procurement of proppant transportation due to lower activity.The second quarter of 2021 included CEWS of $1.8 million, a significant decrease from the $3.6 million recorded in the first quarter of 2021.
Revenue and Adjusted EBITDA for the second quarter of 2021 beat expectations due to higher activity levels as limited equipment availability and crowded schedules in the first quarter pushed client capital projects into the second quarter.
The company has sufficient work to ensure continued operation of the four fracturing zones in the second quarter of 2021, however, the arrival of the Spring Festival transport resulted in a 38% reduction in operating days to three from 280 in the three months ended March 31, 2021 174 days of the quarter for the month ending June 30, 2021.STEP withdraws 275,000 tonnes of proppant and 142 tonnes per stage in Q2 2021 and 327,000 tonnes and 102 tonnes per stage in Q1 2021.
Coiled Tubing was able to continue staffing seven coiled tubing units as operations benefited from increased milling and various other interventions resulting from higher drilling and fracturing activity.Business days in the second quarter of 2021 were 304 days, down from 461 days in the first quarter of 2021, but above the moderated expectations associated with a slowdown in spring breakups.
For the six months ended June 30, 2021, compared to the six months ended June 30, 2020, as the North American economy begins to recover from a historic downturn, revenue from Canadian operations increased in the first half of 2021 compared to the same period last year $59.9 million epidemic.The improvement was driven by fracturing operations, which increased revenue by $56.2 million while operating days increased by only 11%.Compared to 2020, STEP-supplied proppant workloads increased revenue per business day by 48%.Coiled tubing revenue increased by $3.7 million from pumping services and a modest rate recovery, despite a 2% decrease in operating days due to an increase in auxiliary fluids.
Adjusted EBITDA for the six months ended June 30, 2021 was $37.2 million (20% of revenue) compared to $21.9 million (18% of revenue) for the same period in 2020.Margins are subject to inflationary pressures on material costs due to global supply chain constraints and the reversal of wage cuts in early 2021.These were offset by higher revenue and a more streamlined overhead and support structure that management implemented at the end of the first quarter of 2020.Profit margin for the six months ended June 30, 2020, at the onset of the pandemic, $4.7 million in severance related to properly sizing operations was negatively impacted.For the six months ended June 30, 2021, CEWS for the Canadian business was recorded at $5.4 million, compared to $2.8 million for the same period in 2020.U.S. Financial and Operational Review
STEP’s U.S. operations began operations in 2015, providing coiled tubing services.STEP has 13 coiled tubing installations in the Permian and Eagle Ford Basins in Texas, the Bakken Shale in North Dakota, and the Uinta-Piceance and Niobrara-DJ Basins in Colorado.STEP entered the US fracturing business in April 2018.The U.S. fracking business has 207,500 HP and operates primarily in the Permian and Eagle Ford Basins in Texas.Management continues to adjust capacity and regional deployment to optimize utilization, efficiency and returns.
(1) See non-IFRS measures.(2) An operating day is defined as any coiled tubing and fracturing operations performed within a 24-hour period, excluding support equipment.(3) Represents total HP owned in the United States
Q2 2021 vs. Q2 2020 Q2 2021 was a key milestone in the U.S. as the business generated positive growth for the first time since an unprecedented decline in economic activity due to the pandemic at the end of the first quarter of 2020. of adjusted EBITDA.In the second quarter of 2021, the United States retrofitted a 52,250-horsepower frac pump with dual-fuel equipment that uses natural gas alternatives to minimize diesel consumption and reduce environmental impact.Our customer base sees these capital expenditures as beneficial as they look to strengthen their ESG programs and lead to higher prices for fracking operations.Revenue for the three months ended June 30, 2021 was $34.4 million, an increase of 28% from $26.8 million for the three months ended June 30, 2020.Fracking revenue in the second quarter of 2021 was $19 million compared to $20.5 million in the second quarter of 2020.Coiled tubing revenue in the second quarter of 2021 was $15.3 million, compared to $6.3 million in the second quarter of 2020.
Adjusted EBITDA for the three months ended June 30, 2021 was $1.0 million (3% of revenue) compared to an adjusted EBITDA loss of $2.4 million (3% of revenue) for the three months ended June 30, 2020 negative 9% of income).Margins were impacted by higher material costs due to inflation and global supply chain delays, as well as higher compensation as it became more expensive to hire and retain experienced personnel.
During the second quarter of 2021, STEP US operated two fracking spreads, an increase from the second quarter of 2020 when the outbreak of the pandemic caused the operating spread to narrow to match the reduction in activity.Higher commodity prices led to higher drilling and completions activity, resulting in 146 business days in the second quarter of 2021, compared to 59 days in the second quarter of 2020.
Revenue per business day decreased to $130,384 in the second quarter of 2021, compared to $347,169 in the second quarter of 2020, as customer and contract mix resulted in a significant decrease in proppant revenue as customers opted to source their own proppant.STEP was able to achieve modest price increases by the end of the second quarter of 2021, but the market remains competitive.
Coiled tubing utilization improved by 422 days in the second quarter of 2021, while operating eight coiled tubing units, compared to four units operating for 148 days in the second quarter of 2020.While Q2 activity in West and South Texas was sporadic, STEP was able to capitalize on spot market opportunities due to market presence and execution reputation.The coiled tubing business also gained some market share in the Bakken and Rocky Mountains regions, and STEP expects to continue this trend into the third quarter, while securing the commitment of customers with a sizable work envelope.Like fracturing, coiled tubing is facing price pressure as competitors try to gain market share due to a persistent oversupply of equipment and aggressive pricing practices​​.Revenue per day in the second quarter of 2021 was $36,363 per day, compared to $42,385 per day in the second quarter of 2020.
Second quarter 2021 compared to first quarter 2021 U.S. revenue for the three months ended June 30, 2021 was $34.4 million, an increase of $6.9 million from $27.5 million in the first quarter of 2021.The increase in revenue was driven by a recovery in drilling and completions activity that continued to be driven by strong commodity prices.Fracturing contributed $2.6 million to incremental revenue, while coiled tubing contributed $4.3 million.
Adjusted EBITDA for the second quarter of 2021 was $1 million or 3% of revenue, an improvement from the adjusted EBITDA loss of $3 million or negative 11% of revenue for the first quarter of 2021.The improved performance can be attributed to an increase in revenue covering the fixed cost base of the US business.Overhead and SG&A cost management measures implemented in 2020 continued into the quarter.
The U.S. fracking services market is highly competitive and STEP can only operate two fracking spreads in the second quarter of 2021, however, pricing improvements and a number of opportunities forgoing due to scheduling conflicts provide an opportunity to add additional spreads in the third quarter Four one part.Fracking had 146 business days in Q2 2021, a slight improvement from 134 days in Q1 2021.Revenue per business day increased from $122,575 in the first quarter of 2021 to $130,384 in the second quarter of 2021 due to work mix and price recovery.
STEP US coiled tubing revenue improved materially compared to the first quarter of 2021 as activity levels increased.Business days increased from 315 days in Q1 2021 to 422 days in Q2 2021.Coiled tubing revenue was $36,363 per day in the second quarter of 2021, an increase from $35,000 per day in the first quarter of 2021 as pricing improvements began to materialize.The cost profile remained relatively stable sequentially, resulting in operating margins improving as revenue increased.
For the six months ended June 30, 2021 compared to the six months ended June 30, 2020 In the United States, revenue from this business was $61.8 million for the six months ended June 30, 2021, compared to the six months ended June 30, 2021 Revenue of $112.4 million for the six months ended June 30, 2020 was down 45%.STEP US reported improving results in early 2020 until an unprecedented drop in economic activity due to the pandemic has driven commodity prices to historic lows, leading to a significant reduction in drilling and completions activity.In 2020, as the growth rate of the industry slowed down, STEP immediately adjusted the scale of operations and focused on the company’s controllable factors.While not at pre-pandemic levels, recent improvements in revenue and operating margins are positive indicators of recovery.
Adjusted EBITDA loss for the six months ended June 30, 2021 was $2.0 million (negative 3% of revenue), compared to adjusted EBITDA of $5.6 million (5% of revenue) for the same period in 2020.Margins were affected by revenue plus material cost inflationary pressures from global supply chain constraints and higher compensation costs from a competitive labor environment.
The company’s corporate activities are separate from its Canadian and U.S. operations.Corporate operating expenses include those related to asset reliability and optimization teams, and general and administrative costs include those related to the executive team, board of directors, public company costs, and other activities that benefit both Canadian and U.S. operations.
(1) See Non-IFRS Measures.(2) Percentage of Adjusted EBITDA calculated using comprehensive income for the period.
Second quarter 2021 compared to second quarter 2020 The second quarter 2021 expense was $7 million, which was $3.3 million higher than the second quarter 2020 expense of $3.7 million.The increase includes $1.6 million in legal fees and costs to resolve litigation matters, as well as an increase in compensation costs.Compensation expenses were higher compared to the second quarter of 2020, which cited temporary compensation rollbacks and removal of bonuses as measures to reduce the cost of managing the impact of the pandemic.CEWS benefits also decreased in Q2 2021 ($0.1 million in Q2 2021 compared to $0.3 million in Q2 2020), and stock-based compensation (“SBC”) increased by $0.4 million, primarily Due to mark-to-market cash-based Long Long Term Incentive Units (“LTIP”), and increased recruitment costs.The company has largely maintained the layoff plan it implemented in the previous year to minimize support structure costs.