September 15, 2022
STEP Energy Services Ltd.
Model update on recent business development activity
Our view: We update our 2022/23 EBITDA estimates by 1/3% following STEP's announcement to deploy a Tier 4 DGB fleet in Canada and acquisition of coiled tubing units in the Permian. We maintain our Outperform; Speculative Risk rating and $11.00 price target.
Key points:
Set to be second Tier 4 DGB provider in Canada with capacity-neutral upgrade. STEP will upgrade 40k horsepower to Tier 4 Dynamic Gas Blending (DGB) for $26.8MM. The deal includes a $10MM prepayment by the E&P customer, a publicly traded Canadian E&P, for a three-year right of use arrangement. Importantly, the upgrade does not add incremental fleet capacity to the market, given engines will be swapped out of existing pumping equipment.
Expands US coiled tubing footprint with acquisition of 4 deep capacity units. STEP recently purchased four deep capacity coil tubing units from competitor, ProPetro (NYSE: PUMP, not covered). Three units are currently active in the Permian, with the fourth expected to be deployed in 2023 after minor capital upgrades. STEP expects the $17.2MM purchase to payback in 18-24 months, implying approximately a 1.5-2.0x EBITDA multiple versus STEP's FY23 multiple of 2.4x. STEP financed the deal through issuance of 2.62MM shares at $5.20 and US$2.7MM cash.
Increases 2022 capital budget to reflect upgrade capex. STEP increased its 2022 capital budget to $87.5MM, of which $75MM will be spent this year. The increased budget reflects the Tier 4 DGB announcement as well as the cash component of the acquired coiled tubing assets in the US. STEP is targeting a net debt/EBITDA less than 1.0x in 2022, we estimate STEP's 2022/23 net/EBITDA will improve to 0.8/0.3x, while generating $73/108MM of pre-dividend FCF in 2022/23.
Minor estimate changes. Our 2022/23 EBITDA estimates increase by 1/3% as a result of additional coil tubing units added to STEP's US division, and premium pricing achieved for its upgraded Canadian Tier 4 DGB fleet in 2023.
Maintain Outperform, Spec. Risk rating and $11.00 price target. Our price target is based on a 4.0x multiple of our increased 2023 EBITDA estimate.