STEP Energy Services Ltd.
2Q22 quick take — Strong results; Positioned for FCF generation
TSX: STEP | CAD 4.88 | Outperform | Speculative Risk | Price Target CAD 10.00
Sentiment: Positive
Our view: We have a positive first impression of STEP’s 2Q22 results. Adj. EBITDA of $55.3MM beat its June 20 pre-release range of $42-50MM on strong results in Canada. The company continues to benefit from strong pressure pumping market dynamics, and has generated 154% and 1,115bps y/y revenue growth and EBITDA margin expansion, respectively. STEP's recent credit facility refinancing also improves its financial flexibility heading into a constructive 2H22.
Key points:
• Revenue and adj. EBITDA above recent guidance. Revenue of $273MM was 7/3% ($17MM/8MM) above Street/RBC estimates, while Adj. EBITDA of $55.3MM beat its guidance of $42-50MM. The Canadian segment drove the variation, where STEP's adj. EBITDA of $40MM was 38% above our $29MM estimate on improved efficiencies from large pad operations through spring break-up. US reported adj. EBITDA of $20MM was broadly in line with our $21MM estimate. STEP generated $33MM FCF and reduced its net debt by $20MM q/q. Notably, STEP reversed a $32.7MM impairment recorded to its Canadian business in 1Q20, given improved outlook for cash generation.
• Constructive outlook; Focused on FCF generation. STEP's clients have not messaged plans to reduce spending due to recent oil price volatility, and STEP anticipates maintaining steady utilization through 2H22. The company expects US pricing to further increase on the tight equipment supply/demand dynamics, but sees the Canadian market as more balanced. STEP is constructive on 2023 and expects increased rig counts to lead to a rising call on pressure pumping supply. The company's focus remains on strong FCF generation.
• Conference call Thursday, August 11 at 11:00 AM ET; webcast.