Calgary, Alberta, Nov. 3, 2021 (GLOBE NEWSWIRE) — STEP Energy Services Ltd. (the “Company” or “STEP”) is pleased to announce that its financial and operating results for the month of September 2021. The following press release should be combined with the management discussion and analysis (“MD&A”) for the three and nine months ended September 30, 2021 and the unaudited condensed consolidated interim financial statements and (“Quarterly Financial Statements” Statements”). 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. Unless otherwise stated, the All financial amounts and measures are expressed in Canadian dollars. For more information on STEP, please visit the SEDAR website www.sedar.com, including the company’s annual information sheet for the year ended December 31, 2020 (dated March 2021 17) (“AIF”).
(1) See Non-IFRS Measures.”Adjusted EBITDA” is a financial measure not presented in accordance with IFRS and is equal to net before finance costs, depreciation and amortization, losses (gains) on disposal of property and equipment, current and deferred tax provisions and recovery (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.
Q3 2021 Overview The third quarter of 2021 was STEP’s strongest quarter since the start of the pandemic in early 2020.This performance was driven by stringent internal cost controls and increased activity by our clients as commodity prices rose to multi-year highs and global inventories continued to decline due to increased economic activity and liquidity.
Rising hydrocarbon demand and prices have led to a gradual increase in production in Canada and the United States, and improved drilling activity has driven demand for the company’s services.Taken together, STEP pulled out 496,000 tonnes of proppant in Q3 2021, compared to 283,000 tonnes in Q3 2020 and 466,000 tonnes in Q2 2021.U.S. rigs averaged 484 rigs in the third quarter of 2021, up 101% year over year and 11% sequentially.The Canadian rig count averaged 150 rigs during the quarter, a 226% increase from the third quarter of 2020 and a 111% increase from the seasonal decrease in activity seen in the second quarter of 2021 due to the spring breakup.
STEP’s revenue for the third quarter of 2021 increased 114% from the same period last year and 24% from the second quarter of 2021, climbing to $133.2 million.The year-over-year growth was driven by a strong recovery in 2020 from a slowdown in activity.Revenue was also supported by higher utilization in Canada and the U.S. and moderately higher pricing.
STEP generated adjusted EBITDA of $18.0 million in the third quarter of 2021, an increase of 98% from the $9.1 million generated in the third quarter of 2020 and a 54% increase from the $11.7 million in the second quarter of 2021.For the three months ended September 30, 2021, the company recognized $1.1 million under the Canada Emergency Wage Subsidy (“CEWS”) program (September 30, 2020 – $4.5 million, June 30, 2021 – $1.9 million USD) grants to reduce staff costs.Companies are seeing cost inflation creep into the business, reflecting tight labor markets and global supply chain constraints, which have led to higher costs, longer lead times, and sometimes outright shortages.
The company recorded a net loss of $3.4 million (basic earnings per share of $0.05) in the third quarter of 2021, an improvement from a net loss of $9.8 million (basic earnings per share of $0.14) and a net loss of $10.6 in the first quarter of 2021 $0.16 million in the second quarter (basic earnings per share of $0.16).Net loss includes finance costs of $3.9 million (Q3 2020 – $3.5 million, Q2 2021 – $3.4 million) and stock-based compensation of $0.3 million (Q3 2020 – $0.9 million), Q2 2021 – $2.6 million).The decrease in net loss was due to higher revenue resulting from higher activity, coupled with disciplined growth and maintenance of overhead and economies of scale from the selling, general and administrative (“SG&A”) structure.
The balance sheet continued to improve as activity increased.As part of its Environmental, Social and Governance (“ESG”) goals, the company continues to make targeted investments to improve efficiency and reduce the environmental impact of its operations.It also invests in working capital to accommodate increased accounts receivable and inventory levels to meet higher income levels.Working capital at September 30, 2021 was $33.2 million, down from $44.6 million at December 31, 2020, primarily due to the inclusion of $21 million in current liabilities related to scheduled debt repayments beginning in 2022 (2020 December 31st – none).
The strengthened balance sheet and constructive outlook for the 2021 and 2022 balances allow the company to extend the maturity of its credit facility to July 30, 2023 (see Liquidity and Capital Resources – Capital Management – Debt).As of September 30, 2021, the company remains in compliance with all financial and non-financial covenants under our credit facility and is not expected to seek an extension of the covenant relief provisions.
Industry Conditions The first nine months of 2021 saw a constructive improvement in economic activity, leading to optimism for the remainder of 2021 and into 2022.While crude oil demand has not reached pre-pandemic levels, crude demand has improved, while supplies have gradually recovered, leading to a drawdown in inventories.This underpinned strong commodity prices, reaching multi-year highs, spurring increased drilling and completion activity and demand for our services.
We expect the global economic recovery to continue, with increased liquidity and pent-up consumer demand driving economic activity.The Organization for Economic Co-operation and Development (“OECD”) projects that Canada’s Gross Domestic Product (“GDP”) will grow by 6.1% in 2021 and 3.8% in 2022, while U.S. GDP will grow by 3.6% in 2021 and 3.6% in 20222.This is expected to drive an increase in energy demand.Regular production growth in the Organization of the Petroleum Exporting Countries (“OPEC”), Russia and certain other producers (collectively “OPEC+”), combined with recent underinvestment and production decline curves resulting in North American supply constraints are expected to maintain global energy Supply balance.
Higher and more stable commodity prices should lead to a modest increase in capital plans for North American oil and gas producers.We are starting to see a divergence in the market as public companies are limiting their spending due to investor pressure to return capital to shareholders, while private companies are increasing their capital plans to take advantage of improving commodity pricing.North American supply has also been impacted by growing staffing and supply chain challenges that have slowed activity growth.The current pandemic wave, driven by the Delta variant, has disrupted operations more severely than previous waves, requiring constant communication with customers and operations staff to adequately staff existing staff.The labor market is battling scarcity, with intense competition in multiple industries, and eligible workers opting out of resource industries, leading to increased costs as current and potential employees demand higher wages.Supply chains for parts, steel, proppants and chemicals in the oilfield services industry have also been affected by long lead times, with some delivery quotes more than 12 months after ordering, and increasing costs.
The Canadian coiled tubing and fracturing equipment market is approaching equilibrium.Rising drilling and completion activities are expected to increase the demand for additional market capacity.STEP will continue to advocate for the industry to maintain self-discipline, adding staff only when pricing reflects producers’ awareness of the economic improvement brought about by higher commodity prices.
1 (Canada Economic Snapshot, 2021) Retrieved from https://www.oecd.org/economy/canada-economic-snapshot/2 (U.S. Economic Snapshot, 2021) Retrieved from https://www.oecd.org/economy /US Economic Snapshot/
In the U.S., the coiled tubing and fracturing equipment market is slightly oversupplied, but is expected to reach equilibrium in the near term.The recent increase in activity has led to some new small and medium market entrants.These entrants have largely reactivated legacy assets that did not have the technology as efficient and economical as the top assets operated by STEP and other market leaders.Although these new players have added capacity, demand and availability of equipment is expected to tighten as labor shortages will limit the number of equipment available in the market.
Higher pricing is needed to ensure the oilfield services industry can keep up with expected activity growth and avoid further margin squeeze due to inflationary pressures.The benefits of higher commodity prices have transferred only marginally to the services sector, which remains priced below sustainable levels.STEP is in pricing discussions with customers in Canada and the U.S. and expects to see further improvements in Canadian and U.S. pricing in Q4 2021 and H1 2022
These improvements are critical to enabling the oilfield services sector to respond to the growing ESG narrative in the industry.STEP was an early leader in introducing low emission equipment and will continue to do so, consistent with its commitment to bringing innovative solutions to the market.It runs a 184,750-horsepower (“HP”) dual-fuel frac pump and an 80,000-horsepower Tier 4 powered frac pump, and is adding idle reduction technology to a growing number of installations to further reduce their environmental impact.The company has also taken steps to electrify, developing the STEP-XPRS integrated coil and fracturing unit, which reduces equipment and personnel footprints by 30%, reduces noise levels by 20%, and reduces emissions by approximately 11%.
Q4 2021 and Q1 2022 Outlook In Canada, Q4 2021 is expected to surpass Q4 2020 and Q4 2019.The outlook for the first quarter of 2022 is expected to be similarly strong.The market remains competitive and sensitive to price increases, but the expected increase in activity in the first quarter of 2022 has prompted some producers to move drilling and completion plans to the fourth quarter of 2021 to secure equipment.The company also received inquiries about device availability in the second quarter of 2022, although visibility into the quarter remained limited.Staffing equipment has become an important constraint on operations, and management is taking steps to attract and retain top talent.This industry-wide challenge is expected to limit the supply of additional equipment in the market.
STEP’s U.S. operations showed improved revenue growth in the third quarter of 2021, a trend we expect to continue through the rest of the year and into 2022.Drilling and completion activity continues to improve at a faster rate than Canada, and the supply-demand balance should continue to tighten.High utilization of the company’s three fracturing fleets is expected from the fourth quarter of 2021 to 2022, and customers will book equipment in the middle of the second quarter.U.S. coiled tubing service is also expected to increase, with higher utilization expected between the fourth quarter and the middle of the second quarter of 2022.The company expects prices to continue to recover and has the opportunity for disciplined fleet expansion.As in Canada, field staffing challenges in the United States remain a significant constraint on returning equipment to the field.
Financing Improved results for the three and nine months ended 30 September 2021 allowed STEP to successfully manage the covenant relief period with the support of our consortium of banks (see Liquidity and Capital Resources – Capital Management – Debt).The company expects to return to normal capital and credit metrics by mid-2022 and, therefore, does not expect to extend the credit relief terms.
Capital Expenditure The company’s 2021 capital plan remains at $39.1 million, including $31.5 million in maintenance capital and $7.6 million in optimization capital.Of this, $18.2 million was for Canadian operations and the remaining $20.9 million was for U.S. operations.The company allocated $25.5 million for capital expenditures for the nine months ended September 30, 2021, and expects the 2021 budget to carry over to fiscal 2022.STEP will continue to assess and manage its manned equipment and capital plans based on market demand for STEP services and will release a 2022 capital budget following the conclusion of the annual business planning cycle.
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.The STEP has 282,500 horsepower, of which about 132,500 is dual-fuel capable.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.
The Canadian business continued to improve in the third quarter of 2021 compared to the third quarter of 2021, with revenue increasing by $38.7 million or 86% compared to the third quarter of 2020.Fracturing increased by $35.9 million, while coiled tubing revenue increased by $2.8.An increase of $ million compared to the same period in 2020.Increased drilling and completion activity and our customer mix resulted in increased operating days for both service lines.
The Canadian business generated adjusted EBITDA of $17.3 million (21% of revenue) in the third quarter of 2021, slightly higher than the $17.2 million (38% of revenue) generated in the third quarter of 2020.Despite higher revenue, Adjusted EBITDA remained unchanged due to lower CEWS in the quarter.The third quarter of 2021 included CEWS of $1.3 million compared to $4.1 million in the third quarter of 2020.The quarter was also impacted by the recovery of compensation-related benefits and the reversal of wage rollbacks effective January 1, 2021.While the overhead and SG&A structure has scaled up to support increased field operations compared to the third quarter of 2020, the company is committed to maintaining a lean cost structure.
Canadian fracking revenue of $65.3 million increased significantly compared to the same period in 2020 as STEP operated four spreads compared to three spreads in the third quarter of 2020.Reasonable utilization of the service line was 244 days, compared to 158 days in the third quarter of 2020, but was impacted by a period of inactivity in early September.Part of this inactivity is due to the industry’s shift to a “just-in-time” service model, which was more severely disrupted by the pandemic this quarter, and continued competitive pricing pressure.Revenues of $268,000 per day increased from $186,000 per day in the third quarter of 2020, primarily due to a customer mix that resulted in STEP supplying the majority of the proppant pumped.About 67% of the treatment wells are natural gas and condensate in the Montney formation, with the remainder from light oil formations.Strong natural gas prices continue to drive demand for our fracking services in northwestern Alberta and northeastern British Columbia.
Operating costs increase with activity, with product and shipping costs most notable due to increased proppant supplied by STEP.Payroll expenses are also higher due to increased headcount and a recovery in compensation.Despite higher costs, the contribution of fracturing operations to operating results was higher than in the third quarter of 2020 due to high workloads and strong operating performance at customer locations.
Canadian coiled tubing revenue in the third quarter of 2021 was $18.2 million, up from $15.4 million in the same period in 2020, with 356 business days compared to 319 days in the third quarter of 2020.STEP operated an average of seven coiled tubing units in the third quarter of 2021, compared to five units a year earlier.Staffing increases and the reversal of pay cuts implemented in 2020 resulted in higher payroll expenses, while customer and job mix resulted in higher product and coiled tubing costs.The resulting impact is that operating activities contributed less to the Canadian performance compared to the third quarter of 2020.
Q3 2021 compared to Q2 2021 Total Canadian revenue in Q3 2021 was $83.5 million, up from $73.2 million in Q2 2021 Season restarts with seasonal reductions due to spring break – up.This was driven by higher capital expenditures by our customers as a result of the improved commodity price environment.The rig count in the third quarter more than doubled to 150 from 71 in the second quarter of 2021.
Adjusted EBITDA for the third quarter of 2021 was $17.3 million (21% of revenue) compared to $15.6 million (21% of revenue) for the second quarter of 2021.Adjusted EBITDA increased sequentially as variable costs increased in proportion to the increase in revenue and fixed costs were largely consistent.The third quarter of 2021 included CEWS of $1.3 million, a decrease from the $1.8 million recorded in the second quarter of 2021.
Fracking continued for four spreads, 244 days in Q3 2021 compared to 174 days in Q2.The $65.3 million in revenue did not increase with the number of business days due to a 16% decrease in revenue per day.While pricing remained consistent quarter-over-quarter, the client and work mix required less pump horsepower and field equipment, resulting in lower daily revenue.A further decrease in daily revenue was a reduction in proppant pumping as STEP pumped 218,000 tons of proppant per stage at 63 tons in Q3 2021 compared to 275,000 tons per stage in Q2 2021 142 Ton.
The coiled tubing business continued to operate seven coiled tubing units with 356 operating days, generating revenue of $18.2 million in the third quarter of 2021, compared to $17.8 million in the second quarter of 2021 with 304 operating days.Utilization was largely offset by a decrease in revenue per day from $59,000 to $51,000 per day in the second quarter due to increased annular fracturing operations, which involved fewer coiled tubing string cycles and reduced associated revenue.
For the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, revenue from the Canadian business for the first nine months of 2021 increased 59% year over year to $266.1 million.Fracturing revenue increased by $92.1 million, or 79%, due to higher operating days combined with higher daily revenue, primarily due to increased proppant workloads supplied by STEP.The coiled tubing business improved from the prior year, with revenue up $6.5 million, or 13%, due to intense market competition.Days of operation increased by only 2%, while daily revenue increased by 10% due to modest pricing improvements and higher contributions from fluid and nitrogen pumping services.
Adjusted EBITDA for the nine months ended September 30, 2021 was $54.5 million (20% of revenue) compared to $39.1 million (23% of revenue) for the same period in 2020.Adjusted EBITDA improved as revenue growth outpaced cost growth as operations maintained the lean overhead and SG&A structure implemented in the previous year.Operating expenses were impacted by material cost inflationary pressures due to global supply chain constraints and the reversal of wage cuts in early 2021.Adjusted EBITDA for the nine months ended September 30, 2020 was negatively impacted by a $3.2 million severance package related to adjusting the scale of operations at the onset of the pandemic.For the nine months ended September 30, 2021, CEWS for the Canadian business was recorded at $6.7 million, compared to $6.9 million for the same period in 2020.
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 US fracking operation has 207,500 fracking HPs, of which approximately 52,250 HPs are dual-fuel capable.Fracking takes place 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.
In the third quarter of 2021 compared to the third quarter of 2020, the U.S. business continued to trend in improved performance and adjusted EBITDA.Rising commodity prices spurred an increase in drilling and completions activity, which allowed STEP to launch its third fracking fleet in the third quarter of 2021.Revenue for the three months ended September 30, 2021 was $49.7 million, an increase of 184% from $17.5 million in the same year Compared to the previous year, economic activity in 2020 saw an increase in response to the pandemic unprecedented reduction.Compared to the third quarter of 2020, fracturing revenue increased by $20.1 million and coiled tubing revenue increased by $12 million.
Adjusted EBITDA for the three months ended September 30, 2021 was $4.2 million (8% of revenue) compared to an adjusted EBITDA loss of $4.8 million (8% of revenue) for the three months ended September 30, 2020 negative 27% of income).2020 EBITDA was due to insufficient revenue to cover the fixed cost base despite layoffs and other measures to mitigate the impact of the recession.The business continued to see modest pricing improvements in the third quarter of 2021, but it became increasingly expensive to hire and retain experienced personnel due to inflation and global supply chain delays, as well as higher material and parts costs due to higher compensation, The results pose a challenge to performance.
U.S. fracking revenue was $29.5 million, up 215% from the same period in 2020, as STEP operated three fracking spreads compared to just one last year.Fracking operations gradually expanded in 2021, with the service line able to achieve 195 business days in the third quarter of 2021, compared to 39 in the same period in 2020.Revenue per day decreased from $240,000 in the third quarter of 2020 to $151 in the third quarter of 2021 due to lower proppant revenue due to changes in customer mix as customers opted to source their own proppant.
Operating costs increased with activity levels, but less than revenue growth, resulting in a significantly higher contribution from operating activities to U.S. performance.Due to a tight labor market, personnel costs continue to increase and lead times for critical components are increasing, adding to inflationary pressures on costs.Prices continued to rise but moderated due to a slight oversupply of equipment and a still competitive market.The gap is expected to narrow in the fourth quarter and in 2022.
U.S. coiled tubing continued its momentum with revenue of $8.2 million in 2020, up from $8.2 million in the third quarter of 2020.STEP is equipped with 8 coiled tubing units and has a run time of 494 days, compared to 5 and 216 days in the third quarter of 2020.The increase in utilization was combined with revenue of $41,000 per day, compared to $38,000 in the year-ago period, as rates began to increase in North Dakota and Colorado.West Texas and South Texas continue to face sporadic activity and depressed pricing due to fragmented markets and smaller competitors lowering their prices to gain leverage.Despite intense market competition, STEP has made progress in securing utilization and price recovery due to its strategic market presence and reputation for execution.Like fracturing, coiled tubing faces increased costs associated with labor as well as materials, parts, and steel for the coiled tubing string.
Q3 2021 vs. Q2 2021 US Operations for the three months ended September 30, 2021 generated $49.7 million based on higher revenue expectations for the second quarter of 2021.Fracturing revenue increased by $10.5 million, while coiled tubing revenue increased by $4.8 million sequentially.Rising commodity prices continue to fuel a recovery in drilling and completion activity, and STEP’s operations are well-positioned to take advantage of increased utilization.
Adjusted EBITDA increased $3.2 million in the third quarter of 2021 compared to the second quarter of 2021 as the business was able to increase capacity and utilization with minimal increases in overhead and SG&A structure.These businesses remain focused on sustainable growth in the support structure while pursuing pricing improvements and a consistent work plan for the remainder of the year and into 2022.
The increase in third fracturing spreads, coupled with a shift in customer mix and improved demand, resulted in higher fracturing services revenue.The service line had 195 business days in the third quarter of 2021 compared to 146 days in the second quarter of 2021.Revenue per day increased to $151,000 from $130,000 in the second quarter due to improved pricing as well as increased proppant chemicals being pumped out due to greater workload.Operating activity’s contribution to the U.S. performance improved as the second quarter of 2021 included transitional charges related to the start-up of a third fracturing fleet, due to higher flows from proppant and chemical sales and a correspondingly lower maintenance expense.Service line overhead increased to support higher levels of activity and additional equipment fleets.
U.S. coiled tubing revenue increased by $4.8 million compared to the second quarter of 2021 due to increased activity levels, resulting in 494 business days in the third quarter of 2021 compared to 422 in the second quarter of 2021.Coiled tubing revenue in the third quarter was $41,000 per day, up from $36,000 per day in the second quarter of 2021 due to higher contributions from industrial nitrogen services and higher string recycle expenses.Variable costs remained stable sequentially, rising as activity increased, but labor costs, the largest single expense item in the service line, improved performance as revenue increased.
For the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 U.S. revenue from operations for the nine months ended September 30, 2021 was $111.5 million, while in the nine months ended September 30, 2021 For the nine months ended September 30, 2020, revenue was $129.9 million.The decrease was primarily due to a change in customer mix, with customers opting to use their own procuring proppant.The U.S. operations improved in the first quarter of 2020 until the pandemic led to an unprecedented drop in economic activity and commodity prices to historic lows, which led to a sharp reduction in drilling and completions.The second and third quarters of 2021 saw substantial improvements compared to the same period in 2020, but activity did not return to pre-pandemic levels.The recent improvement in earnings, along with an improved outlook, is a positive indicator of an ongoing recovery.
Based on sequential improvement in activity, the U.S. operations generated positive Adjusted EBITDA of $2.2 million (2% of revenue) for the nine months ended September 30, 2021, compared to Adjusted EBITDA of $0.8 million (2% of revenue) for the same period 1%) in 2020.Adjusted EBITDA improved slightly due to improved equipment pricing, lower SG&A structure and improved product sales flow.However, due to global supply chain constraints, the company is seeing inflationary pressure on material costs, as well as increased compensation costs due to a competitive labor environment.The nine months ended September 30, 2021 also include incremental costs associated with activating additional capacity to meet increasing demand for our services.
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.