CALGARY, Alberta, May 08, 2019 (GLOBE NEWSWIRE) -- STEP Energy Services Ltd. (the “Company” or “STEP”) is pleased to announce its financial and operating results for the three months ended March 31, 2019. The following press release should be read in conjunction with the unaudited condensed consolidated interim financial statements and notes thereto as at and for the three months ended March 31, 2019 (the “Financial Statements”) and the MD&A and audited consolidated financial statements as at and for the year ended December 31, 2018. The above documents are available on STEP’s website at www.stepenergyservices.com or on SEDAR at www.sedar.com.
FINANCIAL AND OPERATING HIGHLIGHTS
Management is pleased to announce the first quarter 2019 results during which STEP achieved strong results in challenging market conditions. Canadian operations were challenged by a slow start to the quarter, unusually cold weather in February and an overall decrease in activity relative to 2018 of approximately 30%. Despite these challenges, and through the efforts of our field professionals, the Company maintained high levels of operating execution and finished the quarter with strong utilization. STEP secured several key contracts in 2018 which secured base line activity for the quarter and we were pleased with our execution on these programs. Results for our U.S. operations continued to be tempered by competitive pressures and egress issues in the Permian. Coiled tubing operations enjoyed strong utilization and performance for the quarter while demand for fracturing services remained spotty but firmed up as the quarter progressed. Management was successful in leveraging both coiled tubing and fracturing client relationships to create new opportunities while continuing to focus on execution and efficiencies.
- Generated first quarter consolidated revenue of $176.5 million, a 6% decline from $187.6 million in the first quarter of 2018. The decrease is primarily attributable to slowing activity in the Canadian market partially offset by the revenue contribution of the U.S fracturing operations. The U.S. fracturing operations, acquired in the second quarter of 2018, contributed $40.2 million of fracturing revenue in the first quarter of 2019.
- Adjusted EBITDA was $26.6 million (or 15%) in the first quarter of 2019 compared to $41.8 million (or 22%) in the same period of 2018. The decrease in Adjusted EBITDA was due to decreased demand over the prior year and margin compression brought on by heightened competition for available work. Also impacting first quarter results were approximately $1.2 million of restructuring costs that were incurred in first quarter.
- Net loss for the first quarter was $0.6 million compared to net income of $18.4 million in the same quarter of 2018. The 2019 net loss was impacted by decreased revenue and Adjusted EBITDA as well as increased finance and depreciation expenses related to the U.S. Fracturing acquisition.
- Working capital at March 31, 2019 was $77.8 million (including cash and cash equivalents of $7.0 million).
CONSOLIDATED HIGHLIGHTS
| FINANCIAL (unaudited) | | Three months ended March 31, | |
| ($000s except percentages and per share amounts) | | | 2019 | | | 2018 | |
| Consolidated revenue | | $ | 176,469 | | $ | 187,593 | |
| Net (loss) income attributable to shareholders | | $ | (602 | ) | $ | 18,416 | |
| Per share-basic | | $ | (0.01 | ) | $ | 0.30 | |
| Per share-diluted | | $ | (0.01 | ) | $ | 0.29 | |
| Adjusted EBITDA (1) | | $ | 26,617 | | $ | 41,780 | |
| Adjusted EBITDA % (1) | | | 15 | % | | 22 | % |
| Capital | | | | | |
| Capital program additions | | $ | 10,347 | | $ | 22,800 | |
| Lease right-of-use asset additions | | | 8,465 | | | 1,797 | |
| Total capital expenditures | | $ | 18,812 | | $ | 24,597 | |
(1) See Non-IFRS Measures. “Adjusted EBITDA” is a financial measure not presented in accordance with IFRS and is equal to net (loss) income before finance costs, depreciation and amortization, loss (gain) on disposal of property and equipment, current and deferred income tax provisions and recoveries, share-based compensation, transaction costs, foreign exchange forward contract (gain) loss, foreign exchange (gain) loss, and impairment losses.
| BALANCE SHEET (unaudited) | | As at March 31,
| | As at December 31, | |
| ($000s except shares and per share amounts) | | | 2019 | | | 2018 | |
| Cash and cash equivalents | | $ | 7,040 | | $ | 364 | |
| Working capital (including cash and cash equivalents) | | $ | 77,787 | | $ | 67,158 | |
| Total assets | | $ | 880,896 | | $ | 887,908 | |
| Total long-term financial liabilities | | $ | 265,718 | | $ | 260,451 | |
| Shares outstanding | | | | | | | |
| Basic | | | 66,702,386 | | | 66,682,319 | |
| Weighted average shares – basic | | | 66,683,211 | | | 65,033,085 | |
| Weighted average shares – diluted | | | 66,683,211 | | | 65,352,565 | |
As has been previously reported, due to our conservative 2019 outlook, we have been focused on: cost reduction, securing and executing on strategic work programs, relocation of assets to create new opportunities and conservative deployment of capital. In relation to these objectives, we undertook the following:
- In the later part of 2018, the Company reduced its operating fleet to meet near-term demand expectations, rebalanced our headcount to support the anticipated levels of activity and implemented other cost reductions. These efforts were successful as we realized strong utilization of manned equipment while minimizing turn down work in the first quarter of 2019.
- STEP focused on efficient execution of work performed under larger, strategic work programs. The Company was very pleased with the results achieved under these programs, as they were often undertaken in challenging operating conditions. The Company exceeded its internal benchmarks and demonstrated efficiency gains as work progressed.
- Utilized existing infrastructure to relocate operating assets to different basins. By targeting areas with higher activity and leveraging client relationships, management was able to deploy fracturing assets to south and west Texas which better positions the Company to benefit from any activity uplift;
- Management remained cautious in the redeployment of assets and the associated capital spend. The Company chose to turn down short term work programs in the first quarter that would have required the manning and deployment of parked equipment with no clear visibility for sustained demand.
- Effective January 1, 2019, the Company implemented the following accounting changes:
- IFRS 16 replaces existing lease guidance including IAS 17, Leases. IFRS 16 requires the recognition of most leases previously recognized as operating leases onto the balance sheet. These are recognized as right-of-use assets and additional lease liabilities. The Company has applied the standard using the modified retrospective approach in which the cumulative impact of initial application is recognized as an adjustment to the opening balance of retained earnings with no restatement of prior period information. The result of the policy had positive impact on Adjusted EBITDA of $0.6 million in the first quarter of 2019. See the “New Accounting Pronouncements” section of the MD&A for more details.
- The Company reorganized the composition of its operating segment disclosure to reflect how management makes strategic decisions and assesses the performance of the Company’s operations. Corporate activities are now separated from Canadian and U.S. Operations. The Company has restated prior period information to align with the new composition of operating segments.
OPERATIONS REVIEW
Canadian Segment
| ($000’s except per day, days, units, stages, proppant pumped and HP) | | Three months ended March 31, | | Change | |
| (unaudited) | | | 2019 | | | 2018(4) | | % | |
| Revenue: | | | | | | |
| Fracturing | | $ | 82,352 | | $ | 127,606 | | (35 | ) |
| Coiled tubing | | | 25,874 | | | 37,524 | | (31 | ) |
| | | | 108,226 | | | 165,130 | | (34 | ) |
| Expenses: | | | | | | |
| Cost of sales | | | 95,191 | | | 133,918 | | (29 | ) |
| Selling, general and administrative | | | 2,296 | | | 3,914 | | (41 | ) |
| Results from operating activities | | $ | 10,739 | | $ | 27,298 | | (61 | ) |
| Adjusted EBITDA (1) | | $ | 23,856 | | $ | 36,505 | | (35 | ) |
| Adjusted EBITDA % (1) | | | 22 | % | | 22 | % | 0 | |
| Fracturing services | | | | | | |
| Fracturing revenue per operating day | | $ | 203,842 | | $ | 247,779 | | (18 | ) |
| Number of fracturing operating days (2) | | | 404 | | | 515 | | (22 | ) |
| Proppant pumped (tonnes) | | | 234,000 | | | 209,000 | | 12 | |
| Stages completed | | | 3,225 | | | 4,989 | | (35 | ) |
| Horsepower | | | | | | |
| Active pumping HP, end of period | | | 225,000 | | | 225,000 | | - | |
| Idle pumping HP, end of period | | | 72,500 | | | 72,500 | | - | |
| Total pumping HP, end of period (3) | | | 297,500 | | | 297,500 | | - | |
| Coiled tubing services | | | | | | |
| Coiled tubing revenue per operating day | | $ | 49,004 | | $ | 42,400 | | 16 | |
| Number of coiled tubing operating days (2) | | | 528 | | | 885 | | (40 | ) |
| Active coiled tubing units, end of period | | | 9 | | | 13 | | (31 | ) |
| Idle coiled tubing units, end of period | | | 5 | | | - | | |
| Total coiled tubing units, end of period | | | 14 | | | 13 | | 8 | |
(1) See Non-IFRS Measures.
(2) An operating day is defined as any coiled tubing and fracturing work that is performed in a 24 hour period, exclusive of support equipment.
(3) Represents total owned HP, of which 225,000 HP is currently deployed and the remainder of which requires certain maintenance and refurbishment.
(4) 2018 amounts were reallocated as the Company reorganized the composition of its operating segments. See “Corporate review” section.
Revenue in the first quarter of 2019 was $108.2 million, a decrease of 35% from the same quarter of 2018. The decrease is related to the market activity slow-down driven by ongoing political uncertainty, pipeline take-away capacity in the WCSB and commodity price volatility. Consistent with activity in the WCSB and drill counts, first quarter 2019 fracturing operating days decreased by 22% and coiled tubing operating days decreased by 40% relative to the first quarter of 2018. Fracturing revenue per operating day decreased by 18% as clients supplied a greater portion of proppant and chemicals compared to the same period in 2018. First quarter 2019 pricing compared to fourth quarter 2018 pricing remained flat. Coiled tubing revenue per operating day increased due to the type of work and client mix.
Adjusted EBITDA in respect of STEP’s Canadian operations for the three months ended March 31, 2019 was $23.9 million (or 22%), in comparison with $36.5 million (or 22%) in the comparable 2018 period. The decrease in Adjusted EBITDA is due to the decrease in total revenue and operating days in 2019. At the end of 2018, the Company responded to continued industry uncertainty by reducing headcount, deferring or cancelling capital and re-evaluating overhead and selling, general and administrative spending. Severance costs in Canada related to this were $0.4 million in the quarter. These measures allowed the Company to maintain consistent margin percentages first quarter 2019 versus first quarter 2018.
Management continued to demonstrate its commitment to improving returns on capital employed as it chose not to reactivate equipment for available spot work in first quarter 2019.
U.S. Segment
($000’s except per day, days, units, stages, proppant pumped and HP)
| | Three months ended March 31, | | Change | |
| (unaudited) | | | 2019 | | | 2018(4) | | % | |
| Revenue: | | | | | | |
| Fracturing | | $ | 40,234 | | $ | - | | - | |
| Coiled tubing | | | 28,009 | | | 22,463 | | 25 | |
| | | | 68,243 | | | 22,463 | | 204 | |
| Expenses: | | | | | | |
| Cost of sales | | | 71,520 | | | 15,461 | | 363 | |
| Selling, general and administrative | | | 2,149 | | | 837 | | 157 | |
| Results from operating activities | | $ | (5,426 | ) | $ | 6,165 | | (188 | ) |
| Adjusted EBITDA (1) | | $ | 7,009 | | $ | 8,086 | | (13 | ) |
| Adjusted EBITDA % (1) | | | 10 | % | | 36 | % | (72 | ) |
| Fracturing services | | | | | | |
| Fracturing revenue per operating day | | $ | 398,356 | | $ | - | | |
| Number of fracturing operating days (2) | | | 101 | | | - | | |
| Proppant pumped (tonnes) | | | 95,000 | | | - | | |
| Stages completed | | | 524 | | | - | | |
| Horsepower | | | | | | |
| Active pumping HP, end of period | | | 142,500 | | | - | | |
| Idle pumping HP, end of period | | | 50,000 | | | - | | |
| Total pumping HP, end of period (3) | | | 192,500 | | | - | | |
| Coiled tubing services | | | | | | |
| Coiled tubing revenue per operating day | | $ | 50,106 | | $ | 50,478 | | (1 | ) |
| Number of coiled tubing operating days (2) | | | 559 | | | 445 | | 26 | |
| Active coiled tubing units, end of period | | | 9 | | | 8 | | 13 | |
| Idle coiled tubing units, end of period | | | 3 | | | - | | |
| Total coiled tubing units, end of period | | | 12 | | | 8 | | 50 | |
(1) See Non-IFRS Measures.
(2) An operating day is defined as any coiled tubing and fracturing work that is performed in a 24 hour period, exclusive of support equipment.
(3) Represents total owned HP, some of which will require capital for maintenance and refurbishment.
(4) 2018 amounts were reallocated as the Company reorganized the composition of its operating segments. See “Corporate review” section.
Revenue of $68.2 million in the three months ended March 31, 2019 increased by $45.8 million from the same quarter in 2018. Fracturing services contributed $40.2 million and coil-tubing services contributed $5.6 million of the increase. First quarter coiled tubing operating days increased by 26% versus the same period in 2018 as the Company benefited from increased equipment deployed. With a competitive spot market pricing environment, coiled tubing revenue per operating day decreased modestly in U.S. dollars year-over-year but benefited from U.S. dollar strengthening relative to the Canadian dollar.
Revenue in the three months ended March 31, 2019 decreased $3.0 million (-4%) from $71.3 million for the three months ended December 31, 2018 primarily due to decreased utilization and pricing pressures in a competitive environment. Fracturing revenue decreased from $49.2 million in the three months ended December 31, 2018 to $40.2 million in the three months ended March 31, 2019. Fracturing operating days decreased 22 days from fourth quarter 2018 and fracturing revenue per operating day of $398,356 is consistent with $400,568 revenue per operating day from fourth quarter 2018. As per our previous comments, the Company successfully repositioned some of its fracturing assets into the Eagle ford and Permian basins and saw improved utilization near the end of the first quarter 2019. Coiled tubing revenue increased from $22.0 million in the fourth quarter of 2018 to $28.0 million in the first quarter of 2019 primarily due to a 30% increase in operating days. Coiled tubing revenue per operating day was 2% lower in first quarter 2019 compared to fourth quarter 2018. In the U.S., seasonality is generally not a factor and, as a result, the prior quarter is often utilized when comparing financial results.
Adjusted EBITDA for first quarter 2019 was $7.0 million (or 10%) compared to $8.1 million (or 36%) for the same quarter in prior year. Prior year results did not include U.S. fracturing. Adjusted EBITDA for first quarter 2019 was $7.0 million (or 10%) compared to $8.8 million (or 12%) for fourth quarter 2018. Adjusted EBITDA percentage was impacted by low utilization due to competitive pressure, costs from repositioning of assets and increasing costs for field professionals.
Corporate
Corporate results from operating activities were $5.0 million in expenses for the first quarter of 2019 compared to $3.8 million in 2018. Selling, general and administrative expenses increased 38% when compared to the same period of 2018. The increase is primarily due to $0.8 million restructuring and severance costs incurred in 2019 in conjunction with the previously disclosed realignment of overhead and general and administrative activities to support a reduced complement of equipment.
OUTLOOK
Canadian operations
Commodity prices stabilized and strengthened during the quarter after the extreme price volatility experienced at the end of 2018. Despite improved economics, clients have maintained a cautious outlook on capital spending. Pricing pressure felt during much of the later part of 2018 abated in the quarter with the improved activity levels and a balancing of demand and supply, however management sees limited ability to improve pricing in the year with the current demand outlook. Our clients continue to live within operating cash flows and the discipline of capital returns.
Outlook on Canadian completions activity for the second quarter is constructive but will be heavily influenced by weather. STEP’s decision to align ourselves with clients with broader work programs provides line of sight to improved utilization during the second quarter relative to last year. However, actual results will again be influenced by weather. Management expects additional visibility regarding the second half of 2019 will emerge as our clients complete their mid-year capital reviews. STEP’s Canadian operations intend to maintain its existing operating capacity and will monitor and adjust capacity based on industry demand and long-term economic returns.
U.S. Operations
STEP’s outlook for its U.S. operations remains largely unchanged from our previous disclosure in the Annual MD&A. The current market for fracturing services is competitive as Texas pipeline-related egress issues and capital discipline from our clients have tempered demand. Industry observers expect Texas pipeline-related egress issues to be alleviated in the second half of 2019 giving way to the potential for increased activity and demand for completions. Demand for coiled tubing services is expected to be impacted by the arrival of new equipment in some of the Company’s key markets during the remainder of the year. Some of this pressure was felt in the later part of the first quarter and is expected to continue until market demand improves, which is expected to occur later in the year.
With the redeployment of some of the fracturing assets undertaken in the first quarter, the Company has line of sight to improved utilization extending into the later part of the year. The Company is also engaged in discussions with clients regarding the potential redeployment of a fourth fracturing crew which could occur before mid-year.
Capital update
In keeping with management’s cautious outlook for 2019, the previously announced $48 million of primarily maintenance capital remains unchanged. Management has also reserved an additional $14.2 million from the 2018 capital program for the reactivation of a fourth fracturing spread for U.S. operations. Management remains committed to balancing the Company’s capital expenditures and available equipment based on market demands and economic returns on capital employed.
NON‐IFRS MEASURES
Please see the discussion in the Non‐IFRS Measures section of the MD&A for the reconciliation of non‐IFRS items to IFRS measures.
FORWARD‐LOOKING INFORMATION & STATEMENTS
Certain statements contained in this MD&A constitute “forward-looking statements” or “forward-looking information” within the meaning of applicable securities laws (collectively, “forward-looking statements”). These statements relate to the expectations of management about future events, results of operations and STEP’s future performance (both operational and financial) and business prospects. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “objective” and “capable” and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. While STEP believes the expectations reflected in the forward-looking statements included in this MD&A are reasonable, such statements are not guarantees of future performance or outcomes and may prove to be incorrect and should not be unduly relied upon.
In particular, but without limitation, this MD&A contains forward-looking statements pertaining to: 2019 operation outlook; anticipated market recovery; supply and demand for oilfield services and industry activity levels, including the Company’s integrated service offerings; the Company’s anticipated business strategies and expected success; effect of weather conditions on the Company’s operations; expected completion of Permian pipeline projects in the second half of 2019; expected reduction in pricing pressure; expected completions activity and utilization levels in 2019; expected profitability for fracturing services in 2019; ability of the Company to maintain its track record of returns and margin performance; the Company’s expected performance in 2019; future development activities; planned redeployment of a fourth fracturing crew in the U.S; the Company’s ability to retain existing clients and attract new business; and monitoring of client capital budgets and market conditions.
The forward-looking information and statements contained in this MD&A reflect several material factors and expectations and assumptions of the Company including, without limitation: the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; pricing of the Company’s services; the Company’s ability to market successfully to current and new clients; the Company’s ability to utilize its equipment; the Company’s ability to obtains qualified staff and equipment in a timely and cost effective manner; levels of deployable equipment; future capital expenditures to be made by the Company; future funding sources for the Company’s capital program; the Company’s future debt levels; the impact of competition on the Company; the Company’s ability to obtain financing on acceptable terms; completion of, and timing for availability of, additional pipeline capacity; and client activity levels. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove correct.
Actual results could differ materially from those anticipated in these forward-looking statements due to the risk factors set forth below and elsewhere in this MD&A: volatility of the oil and natural gas industry; excess equipment levels; competition in the oilfield services industry; restrictions on access to capital; reliance on suppliers of raw materials, diesel fuel and component parts; reliance on equipment suppliers and fabricators; direct and indirect exposure to volatile credit markets; fluctuations in currency exchange rates; merger and acquisition activity among the Company’s clients; federal and provincial legislative and regulatory initiatives could result in increased costs and additional operating restrictions or delays; health, safety and environment laws and regulations may require the Company to make substantial expenditures or cause it to incur substantial liabilities; loss of a significant client could cause the Company’s revenue to decline substantially; negative cash flows from operating activities; third part credit risk; hazards inherent in the oilfield services industry which may not be covered to the full extent by the Company’s insurance policies; difficulty in retaining, replacing or adding personnel; seasonal volatility due to adverse weather conditions; reliance on a few key employees; legal proceedings involving the Company; failure to maintain the Company’s safety standards and record; inability to manage growth; failure to continuously improve operating equipment and proprietary fluid chemistries; actual results may differ materially from management estimates and assumptions; and the risk factors set forth under the heading “Risk Factors” in the AIF.
ABOUT STEP
STEP Energy Services is an oilfield service company that provides stand-alone and fully integrated fracturing, coiled tubing and wireline solutions. Our combination of modern equipment along with our commitment to safety and quality execution has differentiated STEP in plays where wells are deeper, have longer laterals and higher pressures.
Founded in 2011 as a specialized deep capacity coiled tubing company, STEP now provides an integrated solution for deep capacity coiled tubing services and fracturing to exploration and production (“E&P”) companies in Canada and the U.S. Our Canadian integrated services are focused in the Western Canadian Sedimentary Basin (“WCSB”), while in the U.S. our coiled tubing services are focused in the Permian and Eagle Ford in Texas and the Haynesville in Louisiana. The Tucker Acquisition in the second quarter of 2018 allowed STEP to add fracturing services to its U.S. service offerings and provided an entry into key, high-growth oil and gas basins in Oklahoma and Texas.
A cornerstone of STEP’s success is our high-performance, safety-focused culture. Our four core values; Safety, Trust, Execution and Possibilities inspire our team of professionals to provide differentiated levels of service, with a goal of flawless execution and an unwavering focus on safety.
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