June 23, 2022
STEP Energy Services Ltd.
Site visit highlights & updated estimates
Our view: In this note, we highlight key takeaways from our trip to one of STEP's fracturing sites in Central Alberta and its market position in the East Shale Duvernay region. We have also increased our 2022/23 EBITDA estimates by 26% to $175/200MM reflecting strong 2Q22 guidance and higher service pricing. We maintain our Outperform, Spec. Risk rating with an increased price target of $10.00 ($8.00 prior).
Key points:
Touring a Duvernay fracturing job site. We recently toured one of STEP's fracturing job sites in the East Shale Duvernay basin, near Red Deer, Alberta. STEP is providing 45,000 horsepower of dual-fuel pumping capacity and associated trucking to the three-well pad for PrivateCo client, Vesta Energy. During the tour, STEP highlighted its commitment to operational execution, safety, and stakeholders. The East Duvernay is a key area of fracturing demand and STEP has a strong market position through its relationship with Vesta Energy. Please see pages 7-10 for additional details from the tour.
Canadian fracturing market remains tight, particularly in deep formations. We forecast WCSB pressure pumping horsepower supply/ demand at 1.32/1.04MM in 2022 and 1.40/1.20MM in 2023. Most horsepower demand is consumed in the Montney and Duvernay regions in Alberta and Northwest British Columbia, where deeper, higher pressure formations require more equipment. In these regions we see utilization tighter than the overall basin. As a result, we expect pricing and margins for providers to move higher through 2H22.
Increasing estimates. We update our estimates to incorporate STEP's recent operational update. The Company sees 2Q22 revenue and EBITDA of $250-265MM and $42-50MM, respectively. As a relatively small company, favourable contract wins can affect STEP's profitability significantly, which we believe accounts for a portion of the 2Q strength, alongside better operating conditions. For 2022/23, we have increased our 2022/23 EBITDA estimates to $175/200MM (Street $165/194MM), primarily on stronger margins of 18/19% (16/17% prior) reflecting on stronger service pricing.
Credit facility extension outstanding. STEP is in discussions with its banking syndicate to renew its $200MM term loan credit facility. The company ultimately targets to reduce its debt/adj. EBITDA leverage below 1.0x. We model STEP's net debt/EBITDA at 0.8x and 0.5x at YE22 and YE23, respectively.
Maintain Outperform, Spec. Risk rating with a $10.00 price target ($8.00 prior). Our price target is based on a 4.5x multiple of our increased 2023 EBITDA estimate. Our target multiple remains a discount to our frac coverage universe (LBRT, TCW, CFW) average of 6.5x.