Step Energy Services Ltd T.STEP

Alternate Symbol(s): SNVVF

Energy Oil & Gas Equipment & Services

STEP Energy Services Ltd. is a Canada-based energy services company. The Company is engaged in providing coiled tubing, fluid and nitrogen pumping and hydraulic fracturing solutions. The Company’s segments include Canadian Operations and the United States Operations segments. It delivers completion and stimulation services to exploration and production (E&P) companies in Canada and the United States. The Company’s Canadian services are focused on the Western Canadian Sedimentary Basin (WCSB), while in the United States, its fracturing services are focused on the Permian basin and its coiled tubing services are focused on the Permian and Eagle Ford in Texas, the Uinta-Piceance, and Niobrara-DJ basins in Colorado and the Bakken in North Dakota.

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Step Energy Services Ltd

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Post by retiredcfon Mar 03, 2023 9:53am

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Post# 35317244

More RBC

Their upside scenario target is $10.00. GLTA

March 3, 2023

STEP Energy Services Ltd.
4Q22 – Downgrading to Sector Perform

Our view: Through 2022, STEP shares benefited from the strong upward rate of change in North American fracturing markets, as well as its efforts to strengthen its balance sheet. Looking ahead, we see a more balanced investment reward/risk equation given normalization in fracturing market growth. As a result, we lower our rating to Sector Perform from Outperform. We also remove our Speculative Risk qualifier given the company’s improved financial position. Our reduce our price target to $7 from $9.

Key points:

US: Less of an under-supplied market pressure pumping market. Revenue and EBITDA of $137MM and $29MM compared to our estimates of $130MM and $27MM, respectively. STEP recorded approximately 82% utilization on its three active pressure pumping fleets during 4Q22. Looking ahead, weather delays in the first quarter have reduced effective utilization and led to some localized pricing pressure. The company expects the impacts of the first quarter to normalize going forward, but this underscores the utilization risk on the company’s three-fleet US footprint, in our view.

Canada: Sees excess market capacity. Revenue and EBITDA of $115MM and $24MM were slightly below our estimates of $117MM and $26MM, respectively. STEP has been delivering its previously announced Tier 4 Dynamic Gas Blending engines into the field and expects the fleet to be transitioned by 2Q23. STEP sees excess capacity in the frac market in the first half of the year, which may get soaked up as additional Montney activity resumes.

Removing Speculative Risk qualifier on improved balance sheet strength. STEP’s net debt/EBITDA leverage was 0.7x at YE22. Through $40MM of FCF generation in 2023, we expect balance sheet leverage to further decrease to 0.4x at YE23. The company plans to spend $103MM capital in 2023.

Lowering estimates. We lower our 2023E/24E EBITDA to $228MM/245MM (Street $236MM/249MM). The revisions are primarily based on 4% lower revenue in both years and associated margin flow-through.

Discounted valuation. STEP is trading at 2023E/24E EV/EBITDA multiples of 2.1/1.9x, which is a slight discount to our frac peer coverage averages of 2.5/2.4x. We think the 0.5x discount is appropriate due to lower projected FCF margins in FY23 (6% vs. LBRT, TCW, CFW avg of 9%), smaller relative US operating scale, and lower stock liquidity.

Downgrading to Sector Perform (from Outperform) and lowering price target to $7 (from $9). Our price target is based multiple of our 2024 EBITDA estimate. We apply a discount to frac peers due to our stock-specific factors.