STEP Energy Services Ltd. 2Q22 – Busy spring in Canada
Our view: We have increased our 2022/23 EBITDA estimates by 11/19% to $195/238MM reflecting strong 2Q22 guidance and higher service pricing. We maintain our Outperform, Spec. Risk rating with an increased $11.00 price target ($10.00 prior).
Key points:
US market remains strong. STEP recorded approximately 84% utilization on its three active pressure pumping fleets. As a portion of the company's fleet is operating on pad-to-pad work, STEP can engage in regular price escalations to reflect market tightness. We expect US industry fracturing horsepower utilization to average +80-90% in 2022/23 with pricing to remain strong, particularly in the Permian where inflation has been sharpest. We estimate STEP's 2Q22 annualized EBITDA/fleet to be approximately $15-20MM, which we expect to improve to $20-25MM per fleet in 2023. We are seeing US frac peers with a similar trajectory.
Canada: Working through spring break-up. Results were ahead of estimates as Canada saw strong utilization for its five frac fleets, primarily driven by improved efficiencies from large pad operations, despite spring conditions. Large well pads with upgraded road access and rig matting can continue through the Spring, as observed in our recent tour to one of STEP's jobsites (here). We forecast WCSB pressure pumping horsepower utilization at approximately 80/85% in 2022/23, enabling strong company utilization and pricing.
Focusing on margins and FCF generaton. STEP expects continued positive as margins remains below prior cycle peaks, despite recent pricing gains.We forecast STEP to generate $84/102MM pre-dividend FCF in 2022/23.At 2Q22, STEP had $196MM outstanding loans and borrowings. STEP istargeting net debt/EBITDA of less than 1.0x for 2022, we estimate STEP's 2022/23 net debt/EBITDA leverage will improve to 0.7/0.3x.
Increasing estimates. For 2022/23, we have increased our EBITDA estimates to $195/238MM (Street $175/205MM), primarily on stronger corporate margins reflecting increased service pricing.
Maintain Outperform, Spec. Risk rating with an $11.00 ($10.00 prior) price target. Our price target is based on a 4.0x (4.5x prior) multiple of our increased 2023 EBITDA estimate. We decrease our target multiple as growth becomes priced into our forecast.