Step Energy Services Ltd T.STEP

RBC

[retiredcf]

September 15, 2022

STEP Energy Services Ltd.
Set to become second Tier 4 DGB provider with capacity-neutral upgrade for $26.8MM

TSX: STEP | CAD 6.03 | Outperform | Speculative Risk | Price Target CAD 11.00

Sentiment: Neutral

Our view: We are not overly surprised to see STEP announce its first Tier 4 Dynamic Gas Blending (DGB) frac fleet upgrade. This type of equipment is becoming the standard across the pressure pumping industry and enables fuel cost savings, driving enhanced Producer and ServiceCo economics. While seemingly not a “take or pay” contract, STEP has secured a $10MM prepayment and a three-year first right of service commitment, in our view signaling increased scarcity value for quality fracturing equipment. STEP will swap out existing pumps in stages over the next several months and will not add incremental fleet capacity to the market. We expect a broadly neutral share price reaction in today’s trading as increased capital expenditures lower STEP’s ability to de-lever on an absolute basis in the near term, though offset by potential margin accretion from premium Tier 4 pricing in 2023.

Set to become second Tier 4 DGB provider with capacity-neutral upgrade for $26.8MM. STEP will refurbish 16 pumps with 2,500 HP Tier 4 DGB engines for a cost of $26.8MM ($670/HP). The 40,000 HP upgrade has been secured by a $10MM prepayment from the customer (an Intermediate Canadian E&P) and a three-year first right of use arrangement. Pricing on the fleet is also linked to commodity prices and includes cost-inflation adjustments. The refurbishment should be completed at a rate of two engines per month, beginning in October 2022. On the back of the equipment upgrade and recent coiled tubing asset acquisition, STEP increased its 2022 capital budget to $87.5MM (RBCe $64MM), of which $75MM will be spent in 2022, partially offset by the customer prepayment.