U.S. Markets open in 8 hrs 21 mins

Edited Transcript of STEP.TO earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Step Energy Services Ltd Earnings Call

CALGARY Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of STEP Energy Services Ltd earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Michael G. Kelly

STEP Energy Services Ltd. - CFO & Executive Vice resident

* Regan Davis

STEP Energy Services Ltd. - CEO, President & Director

* Stephen Glanville

STEP Energy Services Ltd. - COO & VP of Operations

================================================================================

Conference Call Participants

================================================================================

* Elias A. Foscolos

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Greg R. Colman

National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst

* Ian Brooks Gillies

GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure

* Jon Morrison

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Josef I. Schachter

Schachter Energy Research Services Inc. - Author & President

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the STEP Energy Services second quarter results conference call. This conference call is being recorded today and will be webcast on STEP's website that may not be recorded or rebroadcasted without the expressed consent of STEP Energy Services. All amounts discussed today are in Canadian dollars, unless otherwise stated. The complete financial statement and management's discussion and analysis for the period ending June 30, 2019, were announced this morning and are available on STEP's website at www.stepenergyservices.com and on the SEDAR website.

During the call, management may make projections or other forward-looking statements regarding future events or future financial performance. Actual performance, events or results may differ materially. Additional information or factors that could affect STEP's operational or financial results are included in STEP's most recent annual information form, which may be accessed through the company's website, the SEDAR website or by contacting STEP Energy Services.

Management also calls your attention to the forward-looking information and non-GAAP measures sections of the news release issued earlier today.

I would now like to turn the meeting over to Mr. Regan Davis, STEP's President and Chief Executive Officer. Please go ahead, Mr. Davis.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone. Thank you for joining STEP's Second Quarter 2019 Conference Call -- Results Conference Call. With me this morning are Michael Kelly, our CFO; Steve Glanville, our COO; and Rob Kukla, our new Director of Corporate Development.

I am very pleased with the company's operational and financial performance this quarter. Achieving similar results compared to the second quarter of last year under a much more challenging market conditions is something we are very proud of.

Our strong client relationships, exceptional field execution and disciplined approach to asset allocation have helped drive these outstanding results. We remain fanatical in our cost management focus, which played a big role in our performance.

Michael will now provide a brief overview of our second quarter 2019 results. I will then provide an update on our North American operations and STEP's go-forward business outlook. We will then open the call up to questions. Michael?

--------------------------------------------------------------------------------

Michael G. Kelly, STEP Energy Services Ltd. - CFO & Executive Vice resident [3]

--------------------------------------------------------------------------------

Thanks, Regan. All financial comparisons I'm going to provide related to the second quarter of 2019 compared to the second quarter of 2018, unless otherwise noted.

During the second quarter, STEP generated consolidated revenue of approximately $187 million, up 1% due to increased fracturing activity in Canada. The Canadian segment, second quarter revenue was $76 million, up $8 million or 12%, driven by increased fracturing activity, increased pad work and favorable weather conditions. Partially offsetting the increase was lower coiled tubing activity and increased level of client-supplied sand.

Canadian operations contributed adjusted EBITDA of $9 million or 12% margin compared to a $3 million loss. The increase in adjusted EBITDA was largely due to the year-over-year increase in production activity arising from the contracts secured in 2018, that included a more active second quarter 2019 program. This is also aided by reductions in overhead and G&A spending undertaken early in the year to align with the reduced activity outlook.

The U.S. segment generated revenue of $110 million, down $6 million or 5%, primarily related to pricing pressure arising from competitive market conditions.

The U.S. operations contributed adjusted EBITDA of $16 million or a 14% margin compared to $26 million or a 23% margin. Adjusted EBITDA margin was impacted by pricing pressure across all service lines.

Compared with the first quarter of 2019, revenue and adjusted EBITDA from U.S. operations increased 62% and 123%, respectively. The repositioning of our fracturing assets undertaken earlier in the year led to increased utilization, while quarterly revenue per operating day for both fracturing and coiled tubing services remained relatively constant.

Expenses related to the corporate segment, excluding depreciation and share-based compensation, were $4.2 million for the quarter compared with $2.8 million.

During the quarter, we recorded approximately $700,000 of costs related to professional tax and legal fees that are not expected to recur going forward.

As a result, consolidated adjusted EBITDA was $20.3 million, down $800,000 or 4%, with a comparable 11% margin.

Strong execution, operating efficiencies and a continued focus on cost management contributed to the adjusted EBITDA results. Total capital expenditures in the quarter, excluding right-of-use assets, were $12.1 million, most of which related to maintenance CapEx programs.

At the end of the quarter, the company had a positive working capital of $87 million, an increase of $67 million from the end of 2018. Available financial resources were approximately $93 million, consisting of cash on hand and the remaining capacity on our credit facility.

Excluding changes in noncash working capital, the company had positive cash flow from operations in the second quarter and year-to-date of $17 million and $34 million, respectively.

After subtracting capital expenditures from these amounts, the company produced $5 million and $12 million for the second quarter and year-to-date, respectively.

During the year, we netted our credit facility -- pardon me. During the quarter, we netted our credit facility to extend maturity to June 2022. The effective borrowing rate for the quarter was approximately 4.6%. Debt net of cash and deferred financing charges at the end of the quarter was $254 million, up approximately $2 million from the prior year-end.

At the end of the quarter, we were on side of all financial covenants. In addition, subsequent to the quarter end, we increased our U.S. operating line from $7.5 million to $20 million to better support these growing operations. The revolving credit facility was correspondingly reduced, leaving the total amount available under our operating lines and syndicated facility unchanged.

Additional details on the amended credit facility can be found in our MD&A or press release.

I will now turn the call back to Regan for the operations review and outlook.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [4]

--------------------------------------------------------------------------------

Thanks, Mike. Overall, we're very pleased with the second quarter results, which came in above our initial expectations. Our field execution is strong, and our management teams have done an excellent job executing on cost control initiatives and operating -- optimizing asset deployment to navigate through the volatility and uncertainty in our markets. At the end of the first quarter, there was cautious optimism that the Canadian and U.S. markets may see a modest pickup in activity and demand through the remainder of the year. However, we expect that drilling and completion activity is unlikely to materially improve in the second half of the year now.

Our clients remain conservative with their outlook and focus on spending within their cash flows. An oversupplied service market and a competitive pricing environment has challenged asset utilization.

In the fracturing market, we are seeing some providers stacking equipment, just as we did back in Q4 of 2018. This should help to alleviate pricing pressure and bring stability to the market. However, in the first half of the year, we did witness more coiled tubing units equipment come to the market in the U.S., and we believe this will subside for the remainder of the year and expect very limited, if any, new additions of coiled tubing equipment to the market.

I'll now give you some -- a few highlights and outlook in our geographic areas. I'd like to start by first acknowledging our outstanding safety performance during the quarter. I'd like to thank all of our field professionals for their commitment to our #1 core value.

Our Canadian operations delivered strong results in a typically slow seasonal quarter. I am pleased with the high level of utilization in the field, efforts on cost management and the outstanding delivery of services to our clients.

Technology remains a differentiator for our company. During the quarter, we saw ongoing adoption of some of our new coiled tubing technologies. We also deployed our second STEP Express unit. This unit is partially electric-driven, it's compact, integrating frac and coil services together, has a smaller footprint and fewer operational -- operations professionals required on site.

We staffed an average of 9 coiled tubing units throughout the quarter with good utilization. We will, of course, diligently manage our mandated capacity as we progress through this year. We are exceeding client expectations on key strategic contracts with solid execution and improving efficiencies.

Larger pad work resulted in increased utilization and reduced mobilization in travel time, contributing to our fracturing operating results.

Compared to the second year of last year, fracturing operation days were up 48%, and total profit pump was up 84%. Interestingly, this quarter was a STEP record for profit pump per operating day.

We stopped an average of 6 fracturing spreads during the second quarter. With the foundation of our strategic contracts, we anticipate this manned capacity to be stable through the third quarter. We also expect -- we also expect pricing to remain stable in the third quarter.

Turning to our U.S. operations, activity levels for both coiled tubing and fracturing services were solid during the second quarter, and we were able to achieve increased utilization from first quarter levels.

For fracturing operations, strong client relationships that came along with our coiled tubing business in the course of the Tucker operation and effective deployment of equipment -- redeployment of equipment in South Texas and West Texas drove improvements in utilization and steady revenue per day relative to the first quarter.

We also intermittently used -- utilized our fourth frac spread in the U.S. to help fill work volumes with our larger clients. Through mid-fourth quarter, we have good visibility for strong utilization of 3 fracturing spreads, but at this time, there is not enough certainty around activity levels to justify staffing a fourth spread on a full time basis. We will remain very nimble and will respond to client opportunities as they are presented.

We are also seeing a shift to more client-supplied sand in the U.S., which will change our revenue mix -- service our revenue mix, but should correlate to increased margins. Coiled tubing operations averaged 9 units during the quarter. April was a little slower than expected, but utilization picked up nicely as the quarter progressed. Despite increased competition and pricing pressure, due to our service quality and deep relationships, we are able to maintain stable revenue per operating day.

We remain cautious with our outlook for the remainder of the year as market conditions are competitive and our customers focus on capital discipline.

We have demonstrated our ability to react quickly and our engaged team of professionals remain opportunistic and nimble.

Overall, this was a strong quarter for STEP. Our operational teams are providing exceptional execution and our leadership teams continue to deliver results and strategic initiatives.

Despite the uncertainty as we look ahead, our strategy has not changed. We will remain disciplined with our asset allocation to optimize utilization, while maintaining our nimbleness to adapt if markets improve. Managing our staff capacity is one of the best levers we have to differentiate operating results.

We will remain diligent on cost management programs and anticipate ongoing -- sorry, we will remain diligent on cost management programs and anticipate ongoing cost improvements and efficiencies. And we will continue to deliver exceptional service and exceed our clients' expectations, which is at the core of what we do.

That concludes my comments, and I'll now turn the conference over to the operator, who will open the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And your first question comes from Greg Colman with National Bank.

--------------------------------------------------------------------------------

Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [2]

--------------------------------------------------------------------------------

Congratulations on the strong quarter, guys. I wanted to dive into some of your commentary about the U.S. and also the results of your U.S. division which were materially lower than what we were expecting. You mentioned that drilling and completion is unlikely to improve in the second half of the year in the U.S.; we wouldn't disagree with you there. But should we interpret from that, that the profitability from your U.S. division in H2 should approximate H1, i.e., not likely to deteriorate from here?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Mike, do you want to take that on?

--------------------------------------------------------------------------------

Michael G. Kelly, STEP Energy Services Ltd. - CFO & Executive Vice resident [4]

--------------------------------------------------------------------------------

Sure. As we've discussed at the end of our first quarter, one of our principal objectives was to get our utilization of our fracturing assets higher on a quarter-over-quarter basis. You can see from results, we're able to do that. We do believe that with the work programs that we have currently on the books that we should see continued good utilization through the third quarter and into the fourth quarter. Unlike a lot of our peers, our vision on the fourth quarter is limited right now. We are concerned with some capital -- sorry, some calendar gaps later in the year. And so we expect to see strong results or improved results in the third quarter, similar to what we saw in the second quarter, but we could see some diminishment in the fourth quarter. It really depends on the activity levels we see then.

--------------------------------------------------------------------------------

Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [5]

--------------------------------------------------------------------------------

That's great color. And I agree with you, it's really tough to forecast what's going to happen during the year-end, but it sounds like based on what you're seeing so far in Q3, seeing a continuation of Q2 into Q3 is very likely.

--------------------------------------------------------------------------------

Michael G. Kelly, STEP Energy Services Ltd. - CFO & Executive Vice resident [6]

--------------------------------------------------------------------------------

Yes. It's -- again, it's a fluid situation, it's a competitive situation as Regan talked about, but based on our current view, that would be correct.

--------------------------------------------------------------------------------

Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [7]

--------------------------------------------------------------------------------

Got it. Okay. Switching over for Canada for a second here. Record proppant was pumped per quarter -- per day during the quarter in Canada. How should we be thinking about that in the context of repair and maintenance for your Canadian equipment and the associated capital spend for the back half of the year and into 2020?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [8]

--------------------------------------------------------------------------------

Yes, Greg. I think as you dig into our numbers, you'll see that we've managed our maintenance CapEx spend pretty diligently through the first half of the year. As expected, it was up a bit in the second quarter as we caught up on some maintenance relative to the first quarter. It is important, I think, to note that pumping record volumes of proppant occurs because you're pumping record hours per day. And of course, that is creating incremental hours of use on the equipment. So it will translate into higher operating R&M as well as maintenance capital. That all said, we, at this point, do not see a reason to change our maintenance capital forecast for the balance of the year.

--------------------------------------------------------------------------------

Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [9]

--------------------------------------------------------------------------------

And can you just remind us where fluid ends shake out for you? It's different depending on which frac you look at. Is that an income statement item or part of your maintenance CapEx?

--------------------------------------------------------------------------------

Michael G. Kelly, STEP Energy Services Ltd. - CFO & Executive Vice resident [10]

--------------------------------------------------------------------------------

So in the U.S., so our policy is driven by the life of the fluid end. So in the U.S., our experience has indicated that lasts less than a year, so we expensed them. In the -- in Canada, it's over a year, so we capitalize it. And we do provide the details on that in the MD&A.

--------------------------------------------------------------------------------

Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [11]

--------------------------------------------------------------------------------

Got it. Okay. Just moving over a little bit here. What are you seeing in terms of demand for your e-frac units? I think you added 1 during the quarter. Are there plans to add any additional units this year?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [12]

--------------------------------------------------------------------------------

Yes. So I mean I think we should be cautious about calling them e-frac. I mean part of the frac spread has been electrified, which, of course, has created some great efficiencies for those smaller spreads. They're not totally electrified, but we do have 2 of them. That was our commitment, we plan to build them through last year and put them in the field this year. And we expect to see them remain steady throughout the balance of the year, certainly through Q3. But we have no plans to add additional capacity in that regard going forward.

--------------------------------------------------------------------------------

Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [13]

--------------------------------------------------------------------------------

Okay. And then just, this is the last one for me, and I might have missed this in your prepared remarks, but what are you seeing in terms of activity level for your customers in Canada for the back half of the year? And would you mirror sort of commentary from the U.S.? And when would you expect to have more clarity as to what Q3 and Q4 look like?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [14]

--------------------------------------------------------------------------------

Yes, that -- I think, overall, it's interesting. We do tend to see the market the same way Halliburton and Schlumberger see it -- it's a market that is oversupplied. It's unlikely that with the outlook that it's going to get busier as the year goes on. And in Canada, I think the same thing. I mean when you're looking at rig counts that are 30% to 40% below where they were last year, it's just really tough to get excited about increased activity in the back half of the year. That said, a strategy we implemented about this time last year was to ensure we had arrangements with the larger -- some of the larger players in the basin, and we're committed to continuing to -- to maintain those relationships and hopefully see that work -- those work packages continue going throughout the balance of the year and into next year.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

(Operator Instructions) And your next question comes from Josef Schachter with Schachter Energy Research.

--------------------------------------------------------------------------------

Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [16]

--------------------------------------------------------------------------------

I have 2 questions. One of your competitors announced that some of their lower horsepower older equipment that was, I think, mid-teens years old was sold internationally. Do you have any old new equipment that would do better in the international markets and take away some of the excess capacity on your side?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [17]

--------------------------------------------------------------------------------

It's a good question, Josef. We have -- we still have equipment stack from our -- sorry, from our GASFRAC and Sanjel acquisition. It's that we basically have still have another spread that we could put in the field that is yet to go to the field. So we have excess capacity. We believe that equipment is suitable for the Western Canadian market. And at this point, see no reason to move that capacity elsewhere, particularly given the values that equipment sells for in order to complete those transactions.

--------------------------------------------------------------------------------

Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [18]

--------------------------------------------------------------------------------

Okay. Same question. We know that there's an associate minister working on the natural gas side. And are you getting any feeling that there might be some kind of an apportionment or something to stabilize natural gas prices that could increase your business activity in Canada in the fourth quarter? Or is CAODC involved in that? Or is that just more like a tap in e-back, dealing with the government? Or are they bringing the drilling industry, the fracking industry into the picture to come up with solutions to stabilize on the strength in the industry?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [19]

--------------------------------------------------------------------------------

I mean I can say that we sit as a spectator in that activity. That is really a producer-driven initiative, working directly with the government. And I think, again, at the risk of sounding critical, if there's an apportionment in production, it's unlikely you're going to see incremental drilling, given there would be limited takeaway capacity for new volumes. So frankly, we see that sort of the dry gas business remaining subdued with its activity levels for some time to come.

--------------------------------------------------------------------------------

Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [20]

--------------------------------------------------------------------------------

Because the only advantage would be is if there's more cash flow in the industry, the liquids-rich plays would get drilled up and the dry gas would get shut in.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [21]

--------------------------------------------------------------------------------

Yes, that certainly could...

--------------------------------------------------------------------------------

Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [22]

--------------------------------------------------------------------------------

Could be more activity.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [23]

--------------------------------------------------------------------------------

That certainly could be an outcome or to the extent people have a portfolio that could direct some cash flow to oil activity. But the dry -- yes, I guess, specific to dry gas, I just don't see that being a catalyst to additional activity until there's incremental market egress.

--------------------------------------------------------------------------------

Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [24]

--------------------------------------------------------------------------------

Yes, I think we're both on the same page there. And congratulations from a relatively good quarter in Canada, given all the challenges.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Your next question comes from Elias Foscolos with Industrial Alliance.

--------------------------------------------------------------------------------

Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [26]

--------------------------------------------------------------------------------

And I'll probably repeat what everyone else said, congratulations on a good quarter. I normally don't say that. Moving to a couple questions. I want to focus on Canada, which was a good quarter, but I want to try to segment the results if possible, between -- or the improvement in results between having key client relationships and weather. Was the increase, kind of like 50-50 in your mind? I know this will be tough to quantify. Or was it tilted more towards one end or the other? Or should I just not even be going down this path?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [27]

--------------------------------------------------------------------------------

It's an interesting thing to ponder. I think if you go back to -- when we had visibility to securing these contracts, there was a schedule that showed that there would be certain levels of activity in Q2. And that schedule will always change to some degree depending on producer spending, ultimate spending plans, et cetera. But the ability to execute that schedule in the second quarter is highly, highly influenced by weather. And so we were fortunate that the schedule was built, and we were able to actually deliver and execute on the schedule because the weather cooperated. Does that make sense?

--------------------------------------------------------------------------------

Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [28]

--------------------------------------------------------------------------------

Yes. Yes, it does. So what you're really saying is you can't separate the 2. They worked in tandem.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [29]

--------------------------------------------------------------------------------

Yes. I think people plan things. And to the extent the weather cooperates and allows you to get in the field to do it, the plan moves forward, but sometimes the weather doesn't cooperate.

--------------------------------------------------------------------------------

Michael G. Kelly, STEP Energy Services Ltd. - CFO & Executive Vice resident [30]

--------------------------------------------------------------------------------

Just adding to Regan's comments, Elias, as we indicated before and in press releases late last year that we believe that the contracts that we secured gave us a solid base of solid foundation of work for the second quarter that would allow year-over-year improvements, subject to weather. And I think those core contracts were there. They gave us that support. The weather really contributed to maybe a stronger finish in the last week to 10 days in the quarter than we may have expected. But we certainly would point to those contracts as a major contributor.

--------------------------------------------------------------------------------

Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [31]

--------------------------------------------------------------------------------

Okay. You kind of led into my next question, which was, if we take a look at the quarter in Canada, we probably had, of course, a ramp-up ending the quarter with a higher run rate than the average. Do you see that run rate in the quarter in Canada continuing from where you tailed off Q2? Or would it be sort of like the average of Q2? I know it's a strange question.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [32]

--------------------------------------------------------------------------------

Yes. I mean I guess, as I listen to your question, I think the comment I would have is, is we go into -- we're going through the third quarter with decent visibility to bookings, but it's far from chock a block full. We do see gaps in our schedule between projects. So the third quarter, well, we're going to be happy with how it turns out, we believe. It's not a back-to-back sort of quarter, jamming optimum utilization and it's just that -- there isn't the activity to support that kind of utilization.

--------------------------------------------------------------------------------

Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [33]

--------------------------------------------------------------------------------

Got it. And of course, you have less visibility at this point in time for Q4?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [34]

--------------------------------------------------------------------------------

Yes, we expect both in Canada and the U.S. to get some clarity as August rolls on to just to help producers are thinking about the fourth quarter. We're highly sensitive to the movements in crude oil. I think that if crude oil finds a reason to move upward dramatically in the next month or 2, you could see Q4 being a little stronger. But the inverse could happen as well if crude oil withdraws from its current levels.

--------------------------------------------------------------------------------

Michael G. Kelly, STEP Energy Services Ltd. - CFO & Executive Vice resident [35]

--------------------------------------------------------------------------------

So I'll just add to Regan's comments, we are expecting to see sequential improvement coming out of Q2 into Q3, as you would typically see in Canada, and as voiced by our other peers in this space. As Regan points out, though, if you look at a year-over-year basis, we don't see the same robust level of demand in Q3 this year that we saw last year.

--------------------------------------------------------------------------------

Elias A. Foscolos, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [36]

--------------------------------------------------------------------------------

Got it. That provides really good goalpost for Canada. Now if I can take the same question into the U.S. and again, with company concentration or client concentration, could you kind of add color similar to what you just gave for the U.S.?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [37]

--------------------------------------------------------------------------------

Yes. Again, one of the key attributes to the Tucker business was the deep relationships they had with a couple of key clients, and those relationships remain intact. The location of the work that those relationships provide has moved. So of course, we've transferred equipment to take advantage of that. We do have a good visibility to work with those key clients through -- well into Q4. And we've had a lot of success as we've had excess capacity in the calendar, adding new clients. So I think we're really pleased with how our U.S. operations are unfolding as far as client relationships. And again, extremely pleased that we've been able to maintain the relationships with Tucker's key clients.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Your next question comes from Jon Morrison with CIBC Capital Markets.

--------------------------------------------------------------------------------

Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [39]

--------------------------------------------------------------------------------

You talk about pricing being stable in Canada over the quarter, and that dynamic should largely hold in the back half of the year. But did you see any major disparate bidding for spot work in Q2 as, obviously, there were some platforms that had fairly marked differences in performance just based on customer mix?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [40]

--------------------------------------------------------------------------------

Let me answer that question this way. We didn't win all the work we bid on in Q2.

--------------------------------------------------------------------------------

Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [41]

--------------------------------------------------------------------------------

Okay. Was the strength that you saw at the end of Q2 largely capturing everything that you had contracted in Q2? Or did you see some of that roll over into Q3 based on not getting it all completed because of the weather challenges in the front part of the quarter?

--------------------------------------------------------------------------------

Stephen Glanville, STEP Energy Services Ltd. - COO & VP of Operations [42]

--------------------------------------------------------------------------------

Jon, it's Steve here. We did see a little bit rolled into Q3, but it was pretty much planned, how Q2 shaped up. We did mention the first part of the quarter was still pretty soft from a weather-related standpoint, but the back half did dry up nicely to be able to complete a lot of that work that we had scheduled.

--------------------------------------------------------------------------------

Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [43]

--------------------------------------------------------------------------------

So overall, Q2 kind of unfolded as you would have expected in Canada. That was just a function of shifting it more to the back end of the quarter than the front end, is kind of the right way to think about it?

--------------------------------------------------------------------------------

Stephen Glanville, STEP Energy Services Ltd. - COO & VP of Operations [44]

--------------------------------------------------------------------------------

That is correct. Yes.

--------------------------------------------------------------------------------

Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [45]

--------------------------------------------------------------------------------

And Steve, does the visibility that you have for the back half of the year in Canada right now leave you believing that you've got the right number of frac crews active in the market at this stage? Or is there any chance that you might end up running 1 less crew at the end of the year compared to where you are today, just to try to keep active utilization high? And maybe that means that you don't backfill some of the natural field attrition that could unfold as the year progresses?

--------------------------------------------------------------------------------

Stephen Glanville, STEP Energy Services Ltd. - COO & VP of Operations [46]

--------------------------------------------------------------------------------

Yes, great question, Jon. I mean as of today, we do see visibility to keep our 6 active frac crews busy into the back half of the year. However, as we've mentioned on the call, there's some limited visibility on the -- especially Q4 on what our clients are looking at from a CapEx standpoint. I think it really depends on the volatility of what WTI ends up trading at, to see if our clients have additional cash, cash flow and/or CapEx that they want to move forward and what we've seen in the past of Q1 2020, that move into Q4 of '19. But as of today, we don't have that, any type of visibility on that.

--------------------------------------------------------------------------------

Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [47]

--------------------------------------------------------------------------------

So as the concerns that you guys have around kind of the calendar gaps in both Canada and the U.S. in Q4 largely just underpinned by the fact that you don't have firm contracts at this point? Or would you say that you're just being broadly sensitive to the fact that budget exhaustion could be a concern this year, especially just given the spending constraint that a lot of the producers are starting to message?

--------------------------------------------------------------------------------

Stephen Glanville, STEP Energy Services Ltd. - COO & VP of Operations [48]

--------------------------------------------------------------------------------

Yes, I would say, it's exactly right. I mean for what we're seeing today, it's just not a lot of visibility. So I don't see, obviously, a demand, a major demand increase in horsepower. We're not seeing a lot of additional activity moving into the Duvernay in Canada, which, of course, would swallow up some horsepower. We're not seeing a lot of that today. So I would say that we're pretty flat into the back half of the year.

--------------------------------------------------------------------------------

Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [49]

--------------------------------------------------------------------------------

Perfect. That's helpful.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [50]

--------------------------------------------------------------------------------

And I just -- again, in my prepared comments, if we do see Q4 tailing off, you should expect us to park some equipment to accommodate for that. It's just -- you have to manage costs so critically at this type of -- in this type of environment. So we'll do that. We'll balance that with the outlook for Q1. And just ensure that we're adequately prepared for Q1, but we're not above putting some equipment on the defensive, if things slow down.

--------------------------------------------------------------------------------

Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [51]

--------------------------------------------------------------------------------

That's helpful, Regan. Just a point of clarification. You talked about having good visibility for the 3 crews in the U.S. in the mid-Q4. And there isn't enough work right now to run the fourth crew on a full-time basis. But what would you need to see to put that fourth crew out into the field? And if you had a steady month of activity either for one customer, a couple of customers, could you or would you staff it at that point for that type of scope of work or you need to have more regular, consistent work to think about staffing that crew in the short term?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [52]

--------------------------------------------------------------------------------

Well, it's a very core question. I think if we think about Q2 with that 4 spread, again, we didn't have it fully staffed. We have a really nimble sort of staffing strategy in the U.S. that enables us to put that crew in the field on short notice, if we need to. And we'll continue to look for those opportunities. I think for us, it's -- the critical thing is to make sure our key clients get serviced by us. So we'll have that flexibility. But if we saw -- we wouldn't staff that unit full time for 1 month of work. You would -- for us, we'd have to see visibility for months of work in order to staff that unit on a full-time basis. And frankly, those opportunities are out there. We're working on trying to do that. But today, we just don't have that certainty.

--------------------------------------------------------------------------------

Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [53]

--------------------------------------------------------------------------------

That's helpful. And maybe just the last one for me. Mike, is there anything that could structurally alter CapEx higher or lower at this point? Or is it really just different than what maybe 2020 CapEx is going to look like if there is variability?

--------------------------------------------------------------------------------

Michael G. Kelly, STEP Energy Services Ltd. - CFO & Executive Vice resident [54]

--------------------------------------------------------------------------------

Yes. In terms of -- as we've mentioned, Jon, this year, our CapEx program is largely focused on maintenance. And you can see by our spend in the first half of the year. I think we're about $22 million. Half of that was a carryover from last year and half of it relates to this year's program. So we've been pretty disciplined in how we've been seeing their equipment. And the guys have done a great job in ensuring that they work within those budgets. We don't see any revisions to our budget at this point in time, but what could revise it up or down would be if we were to change our operating capacity. If we reduce the operating units, it will go down and correspondingly, if we increase it we respond up.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

(Operator Instructions) And your next question comes from Ian Gillies with GMP.

--------------------------------------------------------------------------------

Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [56]

--------------------------------------------------------------------------------

Could you maybe spend a bit of time to compare and contrast your buy fuel kits to e-frac on a capital investment returns profile and emission standpoint? Like solely in relation to Step and perhaps not so much for your customers?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [57]

--------------------------------------------------------------------------------

Sure thing. Well, that's a big topic, Ian. And if we talk about e-frac, I think it's been broadly acknowledged that if you're going to build an e-frac spread, it would cost more than a conventional spread, even a Tier 4 conventional spreads. So -- and then within the e-frac sort of offerings, you have quite a broad range of costs. So I think, overall, we have a -- well, we have a real challenge in wanting to build new capacity in a market that currently has excess capacity. And we think the best return you can get today is putting owned assets back in the field.

Now specific to bi-fuel, at the risk of bragging, we think we've got through our electronics, programming and operational sort of dynamics, we think we've got the most efficient bi-fuel operations in the basin. Our results and the feedback from our clients confirm that. So we do have a very large bi-fuel fleet that is in demand with our clients, primarily because of cost savings on fuel. And as I said, our asset base seems to be able to -- seems to be the most efficient at displacing diesel with the bi-fuel operations.

Now comparing emissions between bi-fuel and diesel -- or sorry, bi-fuel and e-frac, I think, again, that's a very big topic. I mean we're implementing technology that it's going to reduce the idle time of our conventional assets, such that when they're not pumping, we can -- we'll shut them off instead of idling them. When you factor in the fact that you're in a position where you can actually bring emissions to 0 with that sort of technology we're introducing, and contrast that to, say, a turbine-driven natural gas and power source that has to run 24/7, I think it would be interesting to compare bi-fuel with this on-off technology to a gas-driven turbine, which, of course, has a lower efficiency of converting energy to electricity to begin with.

If one does the calculations, one might find that from a CO2 emissions point of view that they're not that far apart. Does that make sense?

--------------------------------------------------------------------------------

Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [58]

--------------------------------------------------------------------------------

No, that makes sense. And it's very helpful in the context of some of the developments happening in the space. And I mean maybe this is a bit easier, not quite as wide ranging, but what percent of the frac fleet do you think you can run on bi-fuel today?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [59]

--------------------------------------------------------------------------------

Well, in Canada, probably 85% to 90% --

--------------------------------------------------------------------------------

Stephen Glanville, STEP Energy Services Ltd. - COO & VP of Operations [60]

--------------------------------------------------------------------------------

85% to 90%, Ian, would bi-fuel.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [61]

--------------------------------------------------------------------------------

And in the U.S., I mean in the U.S. with our asset base, you could run all of it on bi-fuel if we chose to.

--------------------------------------------------------------------------------

Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [62]

--------------------------------------------------------------------------------

Okay. Moving back into, I guess, a more simple topic or something a bit more straightforward. With respect to new entrants for coil in the U.S., I mean do you -- are you see still seeing new units being delivered? And based on your market intel, do you expect that to continue through the remainder of the year? Or do you think the new build programs have largely stopped, given the outlook for frac into F19?

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [63]

--------------------------------------------------------------------------------

Yes. I think again, in my comments, I may not have said them as clearly as I should have. But we saw new entrants in the first half of the year down in the states. We think that's ended. There's enough capacity, the new entrants are coming into a market that is not as generous as they probably thought it was. So to the extent that there's new equipment that has yet to be finished in the shops, we don't expect that to come to the field. And if it does, it will be because it displaces an older, sort of less capable unit in someone's fleet.

--------------------------------------------------------------------------------

Operator [64]

--------------------------------------------------------------------------------

I am showing no further questions at this time. I will now turn the conference back to Mr. Davis for closing remarks.

--------------------------------------------------------------------------------

Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [65]

--------------------------------------------------------------------------------

Well, thanks, everyone, for listening in. Again, we're sitting here feeling pretty pleased with how the quarter has turned out. We have a cautious optimistic outlook for the balance of the year, and we'll look forward to reporting on the coming quarters. So we'll say bye for now.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.