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. It delivers completion and stimulation services to exploration and production (E&P) companies in Canada and the United States. In Canada, the Company delivers coiled tubing and fracturing services in the Western Canadian Sedimentary Basin. The Company's Canadian services are focused on the Western Canadian Sedimentary Basin (WCSB), while in the United States, its fracturing and 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 May 12, 2023 10:18am

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Post# 35445275

RBC

Their upside scenario target is $8.00. GLTA

May 11, 2023

STEP Energy Services Ltd. 1Q23 – Controlling the controllables

Our view: STEP's 1Q23 results were in-line with its pre-release. Looking ahead, we see continued revenue and margin growth in Canada, while the US fracturing division remains subject to quarterly variability. The company continues to focus on debt reduction, and we believe lower debt levels should ultimately support valuation accretion for STEP and the OFS industry alike. Our FY23/24 EBITDA estimates adjust by +1/-3%, and we maintain our Sector Perform rating with a $5 price target ($6 prior).

Key points:

Client delays lead to softer q/q US segment results. Revenue and EBITDA of $89MM and $5MM compared to our estimates of $88MM and $11MM, respectively. STEP recorded approximately 60% utilization on its three active pressure pumping fleets. First quarter was impacted by client delays that STEP expects will normalize going forward, but underscores the utilization risk on the company’s three-fleet US footprint, in our view.

Canada shines ahead of full Tier 4 DGB fleet deployment. Revenue and EBITDA of $174MM and $45MM were slightly above our estimates of $174MM and $38MM, respectively. STEP has been delivering its previously announced Tier 4 Dynamic Gas Blending engines into the field and expects the full fleet to be transitioned by 2Q23. Service contract pricing is linked to commodity prices and input inflation, and remains the company's expectation for a three-year payback.

Balance sheet improving. After $99MM of planned capital spending this year, we expect STEP to generate free cash flow of $73MM. Free cash generation maps to a 7% margin of revenue (Frac peers: 7%) and 32% yield (frac peers: 17%). Net bank debt/EBITDA leverage reduces to 0.4x at YE23 from 0.7x at YE22.

Tweaking estimates. We adjust our FY23/24 EBITDA estimates to $193MM/205MM from $190/211MM (Street $189/214MM). We have increased our Canadian segment EBITDA margins, while reducing US segment margins.

Maintain Sector Perform rating with a $5 price target ($6 prior). Our price target is based ultiple of our 2024 EBITDA estimate. STEP is trading at 2023E/24E EV/EBITDA multiples of 1.8/1.7x, a slight discount to our frac peer coverage averages of 2.2x in both years. We think the discount reflects smaller relative US operating scale, modestly higher financial leverage, and perceived market liquidity discount.