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Edited Transcript of STEP.TO earnings conference call or presentation 12-Mar-20 2:00pm GMT

Q4 2019 Step Energy Services Ltd Earnings Call

CALGARY Mar 31, 2020 (Thomson StreetEvents) -- Edited Transcript of STEP Energy Services Ltd earnings conference call or presentation Thursday, March 12, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael G. Kelly

STEP Energy Services Ltd. - Executive VP & CFO

* Regan Davis

STEP Energy Services Ltd. - CEO, President & Director

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Conference Call Participants

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* Greg R. Colman

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

* Jon Morrison

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

* Keith MacKey

RBC Capital Markets, Research Division - Analyst

* Matthew Weekes

Industrial Alliance Securities Inc., Research Division - Analyst

* Waqar Mustafa Syed

AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the STEP Energy Services Fourth Quarter and Full Year 2019 Results Conference Call. This conference call is being recorded today and will be webcast on STEP's website but 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 December 31, 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 section 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.

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

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Thank you, and good morning, everyone. Welcome to STEP's Fourth Quarter and Full Year 2019 Results Conference Call. With me this morning, I have Michael Kelly, our Executive VP and Chief Financial Officer; Stephen Glanville, our VP of Operations and Chief Operating Officer; and Rob Kukla, our Director of Corporate Development.

I am pleased with our performance for the fourth quarter and full year, given the many headwinds the oilfield services market faced in 2019. During the year, we implemented strategies that gave us the flexibility to deploy and optimize our manned equipment and align our cost structures to anticipated market conditions.

Through our exceptional field service, disciplined asset allocation, client relationships and effective cost management and given the overall market backdrop, we generated strong margin performance. Our consolidated full year 2019 adjusted EBITDA margin of 12% compared well to 2018 despite a more difficult operating environment. Likewise, our consolidated adjusted EBITDA margin for the fourth quarter was on par with last year's fourth quarter at 7%. In fact, our Canadian operations posted stronger adjusted EBITDA margins for both the fourth quarter and full year at 13% and 18%, respectively. That is 4 percentage points and 2 percentage points better than the corresponding time periods last year.

I am also pleased with STEP's activity levels during the fourth quarter in light of budget exhaustion, traditional year-end holiday slowdowns and reduced drilling and completion market activity. At these increased activity levels, we kept our people and equipment working, we maintained manned capacity at third quarter levels in both Canada and the U.S. in anticipation of increased market activity, which is expect -- was expected for the first quarter, supported by our successful 2020 RFP season.

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

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

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Thanks, Regan. I will begin with a few comments on our consolidated full year 2019 results. Consolidated revenue for the full year was approximately $668 million, down 15% from last year primarily due to lower industry activity, which put pressure on pricing for our services. The ongoing shift to client-supplied proppant from 13% in 2018 to 41% in 2019 also impacted revenue, partially offsetting the decline was the full 12-month contribution of the U.S. fracturing operations compared to 9 months in 2018.

Consolidated adjusted EBITDA for 2019 was approximately $79 million, down about 33% as a result of the decrease in revenue. Adjusted EBITDA benefited from the implementation of cost-saving initiatives and the rightsizing of the organization as both operating and SG&A expenses were down 8% and 5% from 2018, respectively. Adjusted EBITDA margin was 12% for the year, which compared well to the 15% for 2018. This reflects the company's continued focus on generating margins despite a difficult operating environment.

Now let me provide greater details on our fourth quarter performance. All financial comparisons I'm going to provide relate to the fourth quarter of 2019 compared to the fourth quarter of 2018, unless otherwise noted. During the fourth quarter, STEP generated consolidated revenue of approximately $127 million, down 25%, due primarily to pricing pressure from the increased competition and the impact of increased levels of client supplied sand. However, our activity levels were strong as consolidated fracturing and coiled tubing operating days increased by 19% and 8%, respectively.

For the Canadian segment, fourth quarter revenue was $73 million, down $25 million or 26%. And fracturing revenue was impacted by reduced revenue per days, client self-supplied 60% of the proppant pumped compared to 48% last year. Also impacting revenue per day was a shift in job mix to less intensive work. Coiled tubing revenue per day was down 20% as competition for limited work pressured pricing.

Canadian operations contributed adjusted EBITDA of $9 million, up slightly with a strong adjusted EBITDA margin of 13%, which was 4 percentage points up from last year's fourth quarter. The adjusted EBITDA margin performance was due to solid field execution, measures to rightsize our manned equipment, increased utilization and reductions in overhead and G&A spending that align with a reduced activity outlook. When comparing our full year 2019 performance, we were able to improve adjusted EBITDA margin by 2 percentage points over last year to 18% due to the optimization measures I previously mentioned.

The U.S. segment generated revenue of $54 million, down $17 million or 24%. As Regan mentioned earlier, fracturing had increased operating days as coiled tubing remained largely the same. Both operations generate increased utilization through effective deployment of equipment to more active areas. However, this was not enough to overcome the revenue impact from increased volumes of client-supplied sand as well as increased pricing pressure from an imbalanced equipment market.

U.S. operations contributed adjusted EBITDA of $2 million or a 4% margin compared to $9 million or a 12% margin. The adjusted EBITDA margin was impacted primarily by increased pricing pressure across all service lines. Compared to the third quarter of 2019, revenue and adjusted EBITDA from U.S. operations decreased 33% and 42%, respectively. As expected, the market experienced slower overall activity from the third quarter, resulting in lower operating days for both businesses. As a result of cost-saving initiatives, adjusted EBITDA margin only decreased 1 percentage point to 4% despite the decreased levels of activity. Expenses related to the corporate segment, excluding depreciation and share-based compensation, were $2.4 million. This compares to the $5.5 million for the fourth quarter 2018 and the $4.2 million in the third quarter of this year.

Throughout the year, we initiated several cost-saving programs to reduce overhead and SG&A expenses, including rightsizing corporate functions, adjustments to annual incentive accruals, limiting consulting expenses and careful review of other ancillary costs. As a result, consolidated adjusted EBITDA was $9 million compared to $12 million. However, strong execution and continued focus on cost management helped to offset some market pricing pressure and helped preserve consolidated adjusted EBITDA margins of 7%, on par with last year's fourth quarter.

The total capital expenditures in the quarter and full year, excluding right-of-use assets, were $14.4 million and $49.1 million, respectively, primarily related to maintenance CapEx. As noted in the MD&A, in February 2020, STEP's Board of Directors approved a 2020 capital program of $47 million based on expected work programs. The approved capital program was evenly split between Canadian and U.S. operations. The program was comprised of $42 million of maintenance CapEx to sustain operating equipment deployed and $5 million to support several equipment optimization programs. With the current market uncertainty, management will evaluate and balance the company's manned equipment fleet and capital program with market conditions and will suspend or cancel expenditures as warranted. At the end of the quarter, the company had positive working capital of $72 million, an increase from $67 million at the end of 2018. Available financial resources were approximately $117 million, consisting of cash on hand and the remaining capacity on our credit facilities.

Excluding changes in noncash working capital. The company had positive cash flow from operations in the fourth quarter of $5 million and $60 million for the full year. Net of capital expenditures to come to produce free cash flow of $11 million for the year, which compared to a use of cash of $19 million in 2018.

As at December 31, net debt consisting of loans net of cash was approximately $233 million, down $22 million from the end of 2018. The effective borrowing rate for the year ending December 31 was approximately 4.9%. We were on side with all financial covenants at the end of the year. In January 2020, we entered into an agreement with our syndicated lenders to amend our credit facilities. The amendment was a change to the required funded debt-to-EBITDA ratio. As we looked into 2020, we expect to remain on side with our financial covenants. However, given the volatility in commodity prices and demand for our services, we felt it prudent to amend the facilities to provide increased financial flexibility. Please see our MD&A we filed this morning for a table with the amended ratios. I will now turn the call back to Regan for the operations review and outlook.

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

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Thanks, Mike. As I mentioned in my opening comments, for our Canadian operations, I am really pleased with the solid adjusted EBITDA margin performance for the fourth quarter and full year. Effective cost management and strong utilization levels in the field in both fracturing and coiled tubing drove the margin performance. For our U.S. operations, the fourth quarter performance was better than our expectations as we headed into the quarter. For fracturing operations, we maintained deployment of 3 spreads. We started coiled tubing operations in the Bakken at the end of the year, operations and staffing are progressing well. We have been successful in securing a first call option, and we see additional opportunities to expand our client base in that region.

I am very pleased to announce we executed our first STEP-conneCT job in the U.S. in early January of this year for a major producer. STEP-conneCT is a downhole data acquisition tool that provides real-time data to the surface during milling operations and allows operations -- operators to make instant decisions. This technology has been utilized very effectively by us in Canada. So I am excited about the possibilities to provide this unique technology solution to our U.S. clients.

Now I'll take a few moments to talk about our outlook for 2020. As we previously reported in a press release dated January 22, 2020, we were pleased with the results for tenders in both Canada and U.S. We were successful in renewing major work programs and aligned ourselves with clients we felt would support strong utilization throughout the year. First quarter has largely unfolded as expected. However, global trade, geopolitical and economic uncertainty are impacting global oil supply and demand outlooks, which continue to influence commodity prices and demand for our services. Commodity prices were volatile in the first 2 months of 2020 with oil prices falling 27% to approximately $45 per barrel by the end of February 2020. The decline in oil price was primarily due to the uncertainty around the impact of the coronavirus outbreak and the uncertainty that is created on global oil demand.

Most recently, an impasse at OPEC regarding future cooperation and production cuts has enhanced market uncertainty and negatively impacted commodity prices, resulting in the WTI dropping further. These developments have created further ambiguity to the outlook for 2020. The extreme volatility in commodity prices has reinforced caution amongst STEP's clients and could lead to a deferral or cancellation of completion programs. The company anticipates these emerging issues will have a negative impact on demand for services, client capital spending and activity levels. The full extent of these events on the oilfield service market and STEP is currently unfolding and is uncertain. STEP has a history of reacting quickly to the emerging market challenges, and we'll continue to monitor the markets and diligently manage costs and engage with our clients on an ongoing basis. Additionally, STEP will adjust the amount of manned equipment deployed to optimize utilization in these changing market conditions.

Before the -- turning the call over to questions, I would like to thank our professionals for their amazing commitment to STEP. Under difficult and uncertain market conditions, they delivered exceptional service to our clients while keeping safety as a top priority. That concludes my comments, and I'll now turn the conference over to the operator, who will open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Greg Colman with National Bank Finance (sic) [Financial].

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

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Volatile times, but that's how the markets are these days. I was wondering if I could start by talking about your U.S. operations, contract coverage or MOUs and downside on that side of the business. With the volatility in the markets, I know there's no certainties here. However, in downside for frackers, which are largely fixed cost businesses, we have seen Canadian frackers operating in the U.S., have their U.S. division move at or below 0 from an EBITDA perspective. When you take a look at your cost structure and you take a look at your customers and you take a look at any agreements you may have with those customers, is there any reason to believe that STEP would be insulated or immune from those conditions that we've seen in previous stressful times?

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

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Greg, Regan here. Good question. So to be -- to reinforce, we have 3 fracturing spreads operating in the U.S. We have them aligned with clients that we were deliberately pursuing to ideally shelter us from this kind of volatility. Currently, those 3 active -- or those 3 spreads are still active in the field. The clients they're working for have given us no indication that they intend to alter their plans. We'll continue to monitor the situation as the days unfold here, but I can reinforce, our strategy was to ensure we work for clients that we felt could be sheltered from these commodity price volatility, given their development plans. And to date, we've heard nothing to cause us to think differently.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [4]

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And why do you believe that their activity would be sheltered from the volatile commodities? Can you just give us a bit more color? You said development plans, can you give me some idea what you mean by that?

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Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [5]

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Yes. I mean the clients are larger multinationals. The bulk of our revenue comes from that source. And -- as we understand their plan, we're obviously a small service provider. They've aligned with us because they have programs that are in the evolving stages. They're developing infrastructure. They're putting in the pieces to support a larger program, and while they're doing that, they're doing a modest amount of drilling to support reserve development around these areas. So these are companies that have cash flow from multiple jurisdictions. They have the ability to allocate capital differently than, say, someone sole purposed in the Permian. And I guess that's what gives us the comfort. But I'm not going to sit here and tell you that, that change can't happen. I mean in the event that it does, we've proven we can manage our cost structure, and we'll react accordingly.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [6]

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And on that cost structure side, you have shown a more variable cost structure versus a fixed cost structure. In the downside scenario where your customers' plans change dramatically, do you see the ability to maintain positive EBITDA in a dire situation? Or is there a dire scenario where you would be like almost every other fracker tripping into the negative territory on the downside?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [7]

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I think that -- as you said, we have worked to variabilize our cost structure where we can and I think that, as Regan said, we do have a history of being able to respond to changes to market and adapt our cost structure. We had put a press release out earlier in the year, kind of walking through what our outlook was with respect to our RFP wins for 2020 and how pleased we're at the position it gave us. Q1 has largely been executed in -- as we expected it would be, in line with these programs. We're talking to our clients every day to try to figure out what they think the impact is going to be. Some have indicated that, as Regan said, they've got a multiyear focus and they intend to execute. That's always subject to change. There are no guarantees provided, but we work with them to have a better understanding of what their plans are. Hedging is an important component in those considerations. And certainly, that varies from client to client. So we are, like many others, work with our clients to better understand. I think they're in the process of trying to understand the impact on their plans. And we'll need to understand, once they've gained that vision, we'll be able to understand for ourselves and react accordingly.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [8]

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Got it. And then in the context of that, in the last 6 months in the U.S., Q3 and Q4, you generated cumulatively about $6 million in EBITDA. Based on your current understanding of the client's development program, and again, I'm simply focusing on the U.S. here, do you think it's reasonable that those types of levels could be achieved? Or is declining in pricing and declining of levels likely to result in something drastically different?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [9]

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Yes, it's difficult to predict. We are kind of in uncharted territory right now. So it's difficult to predict exactly how things are going to move. I can tell you that our strategy and focus was on aligning ourselves with clients who had -- would give us more utilization, which would allow us to produce a better financial result. As we've said, indications are, those plans haven't changed, and we'll have to wait to see if they change. But if they don't change, we believe we're well positioned to provide better financial performance from those assets than we were in 2019.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [10]

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How is your utilization in Q1 in the U.S. relative to your expectations relative to the Q3 and Q4 quarters?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [11]

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Utilization met our expectations in Q1, both in Canada and the U.S. Now in Canada, the challenge always is breakup, and how much of the -- how much of March does the weather allow you to complete. So far, it's been cooperative, but we are aware that it's getting warmer, and we'll see how -- when breakup really hits.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [12]

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And what were your expectations for utilization in Canada -- or sorry, in the U.S. in Q1 relative to, say, a quarter that's already been released?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [13]

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We were -- I think our expectations would have been certainly aligned with -- for Canada last year, 2019.

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

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In the U.S.

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Greg R. Colman, National Bank Financial, Inc., Research Division - MD and Energy Services & Special Situations Analyst [15]

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U.S. sorry.

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [16]

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And in the U.S., it would have been higher certainly than Q1 prior year because, as you recall, Q1 of 2019, we were reallocating equipment between basins. And so we weren't -- we didn't realize strong utilization of those assets until the latter part of the quarter.

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Operator [17]

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Our next question comes from Waqar Syed with AltaCorp Capital.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [18]

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Regan, what's the flexibility that you have in your capital spending program for 2020?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [19]

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Well, our capital program is really -- it's maintenance CapEx, Waqar. So we're going to -- we will adjust that program based on the amount of operating equipment we have. Obviously, with the uncertainty we have right now, we've already started to adapt and adjust and wait until we have better clarity from our clients as to what their plans are. So we have the ability to manage that number based on the activity levels that we see ahead of us.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [20]

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Okay. Great. Now you mentioned about some of the discussions on the U.S. side, you're not really seeing any change so far, how about in the Canadian side? What are your clients telling you about the second half based on some of the recent changes in commodity prices?

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

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Waqar, Regan, here. So I guess I -- what I can share with you is what we've been hearing publicly. We're talking to our clients. Obviously, we're interfacing with them daily. And to date, we have not received anything that would give us clarity around how the balance of the year is going to unfold. We're receptive to the public announcements, where clients have conceded. They're going to reduce their capital spending. But as we sit today, we don't have details on that. And we certainly expect that will start to come in, in the coming days as they have time to sit and sort of digest where their -- what their priorities will be.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [22]

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And for your U.S. clients, even if you -- if they don't change their programs, is there any risk to pricing there if pricing, in general, falls? Or the pricing is pretty locked up with those customers?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [23]

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Yes, we have a pricing arrangement in place with our customers that we expect to extend through the year. Our customers are focused on many things, price is one of them. Obviously, utilization and effectiveness and job efficiencies and other. And we were -- we can share one story we heard from a client, where they were -- had already received a potential offer and had indicated that they weren't interested in pursuing it because they didn't believe that the service provider can provide them with the optimal levels of performance that they were looking for. And so price is certainly part of the consideration. But I think also, job execution, the ability to complete the programs with the expected level of efficiencies in the other part of that equation. So we'll work with our clients. We haven't had those conversations yet. We're not sure if we will. I think right now, as Regan said, people are trying to digest the news and determine how this will impact their plans. Until they gain that understanding, it's going to be difficult for us to have much clarity.

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Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [24]

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Okay. And then from an operational perspective, the coronavirus, is that affecting your supply chain or running operations on a daily basis?

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Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [25]

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As of today, Waqar, it is not. I can say we had to manage around a modest disruption out of some products coming out of China, but that was a minor hiccup. As it sits today, we are not experiencing any impact from that virus at an operational or supply level. But it's obvious as time goes on, we're continuing to hear different sort of impacts from that virus, and we're -- we've developed a multistage response plan to ensure that we can continue to manage our business in the event that things escalate.

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Operator [26]

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(Operator Instructions) Our next question comes from Keith MacKey with RBC.

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Keith MacKey, RBC Capital Markets, Research Division - Analyst [27]

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I just wanted to maybe start with the bank line and the covenant relief that you received earlier this year. Maybe if you could just talk about some of the assumptions that went into that level of covenant relief and how you're feeling about that now relative to what we could be seeing based on what we've seen in public markets with budget cuts and things like that from various operators?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [28]

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So when we undertook a review. As we indicated in the press release earlier in the year, we didn't anticipate having any covenant issues based on our plan. How we felt it was prudent, given the volatility of the marketplace and uncertainty to give ourselves some extra headroom. We are, as I've indicated in past calls, we do have an ongoing dialogue with our banks, so they understand our outlook and our business. We appreciate the support that they've afforded us and continue to afford us. And so we were -- we felt it was prudent just to give ourselves additional cushion in the event of some unforeseen events. Obviously, at the time that we were entering those conversations, we weren't anticipating this type of event. So we're very thankful to have that additional financial flexibility given what's unfolded here recently. We continue to talk to our banks and give them updates. It's prudent to do. And we'll have to see how the situation unfolds as the year progresses. I think the -- like we were saying, we know it will have some level of impact. We just don't know the quantum as of yet. So we're thankful to have that additional financial flexibility, and we'll just continue to assess the situation.

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Keith MacKey, RBC Capital Markets, Research Division - Analyst [29]

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Okay. Now you mentioned a bit about potentially reducing manned equipment in -- under various scenarios. Can you maybe just talk a little bit more about where you see that most likely happening? Is it Canada? Is it U.S.? Do you foresee having to move equipment amongst geographies at this point or conceivably in the near term?

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Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [30]

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Yes, sure. The -- so I think we -- on a prior question, we talked about the U.S. frac outlook quite extensively. So I won't need to address that again. But our coil business in the U.S. and in Canada, it's a business that we can add equipment and park equipment relatively easily. We can be very dynamic and responsive. So again, we'll just continue to monitor the need to do that. On the Canadian frac side, it's certainly an area that, if activity drops, we won't be immune to that, so we'll have to adjust capacity. And again, we've proven -- I think if you were to look back in our history, you'll often -- you would find consistently that STEP's at the more proactive end of that scale. So we will react quickly if needed and manage our cost structure to ensure that it's rightsized for the market.

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Keith MacKey, RBC Capital Markets, Research Division - Analyst [31]

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Okay. And just last one on G&A, came down a fair bit this last quarter. How much of that would you say is variable? And can we expect to see further reductions to that number around $2 million or so?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [32]

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Yes. I think we've been -- our run rate had been a bit higher prior to that. We had some year-end accrual adjustments that brought it down. So I think our run rate would be closer to $3 million right now. And of course, in a down market, that number would be adjusted downward. And so like he said, Regan's indicated, we do have a history of reacting quickly when we believe that there's been a change in the market, we're trying to assess the impact of that change now, and we will adjust our cost structures accordingly.

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Operator [33]

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

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [34]

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Mike, just a point of clarification. From a CapEx perspective, is it best to just assume that the maintenance spend is going to be recalibrated after every quarter based on utilization rates? And would it be logical to assume that based on everything that we know today, which is fluid, but everything that we know today, it would be reasonable to assume that you're going to come below or perhaps decently below the maintenance number you've thrown out in the past?

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

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I think those are fair judgments -- assumptions, Jon. I mean the -- as we've said, we do have the ability, and if you look at our past track record, we do adjust our CapEx budget based on where we think the market is. And so we set that CapEx budget earlier this quarter with the expected view to where activity would be for the year and what our manned equipment count would be. If we adjust that, we'll be adjusting that CapEx budget accordingly. Given the amount of uncertainty we have right now, and we're still trying to figure things out, we're obviously being very judicious with our CapEx plans, and we're managing it actively today. So we're not waiting for full confirmation, we'll manage it, and we'll make sure that we have -- ensuring that we don't spend dollars for equipment that doesn't go back into the field.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [36]

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Perfect. But it's basically an act of utility right now to try to recalibrate a full year plan when we really don't know what the next 3 months is going to look like?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [37]

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Precisely, precisely. So again, and I guess, we can just kind of reiterate what you're hearing from others. And we're waiting, we're in contact with our customers every day, they're determining their plans, and we'll have gained a better understanding of that over time. As Regan intimated, these are complex issues that each will impact different clients differently. It will be depending upon multiyear development plans, it will be depending upon hedge positions. Obviously, our expectation right now is that there will be a negative bias. And we're preparing various plans to adjust, should any of those -- should that trajectory prove to be the case. But we'll continue to evolve and adapt our business based on what our clients are telling us their needs will be.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [38]

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Of any of the programs that you guys signed agreements for in the U.S., would they come with some form of a base notification for work cancellation like 2 or 4 weeks? Or is it something shorter than that if the client ultimately decides to pull back on the development program?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [39]

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Yes, I think that's part of the reason, Jon, that we're in constant contact with them, to gain as early an understanding and work with them in evolving their plans. And so we would expect that as they gain better insight into their plans, that we'll get the notice as quickly as possible.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [40]

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Okay. Mike, is it fair to assume that, I mean, people's minds go to fairly negative places in past cycles anytime you're going into a downturn like this. Is it fair to assume that you're unwilling to do any work at any sort of a negative field margin independent of kind of what happens in the coming period?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [41]

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I think that's -- I don't think that's unique to STEP. I think as an industry as a whole, people have made statements that we are down to the point where it's just not cost effective to continue to work at some of the prices that were being offered. You've seen dramatic reductions in the volume of equipment that is manned, both in Canada and the U.S. The U.S., obviously, went through their adjustment a little bit later in the year, but did it in a very proactive way.

And so we are going into this down period with -- or this period of uncertainty, pardon me, with significantly less manned equipment than we would have had throughout 2019. So I think that does provide us with a better starting point. And then I think ourselves and many others have indicated that we are at a price level that if we were asked to drop further, it wouldn't make much sense to continue to go to work. And so we'll assess that on a customer-by-customer basis. But our conviction is that we need to be able to provide enough capital to operate our business and maintain our equipments, and we need to take pricing that allow us to do that.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [42]

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Perfect. At this stage, it's obviously very challenging to try to predict financial performance, just given all of the unknowns. But should the market continue to deteriorate, would it be fair to assume that you'll be very proactive in trying to get adjustments to your bank lines, if needed? And that, that wouldn't be inconceivable in your view of needing to do on a short-term basis?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [43]

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Yes. Look, we're -- obviously, we're having conversations with all of our stakeholders right now, both our clients and our lenders. I can tell you that the conversations that we're having had been well received. They have -- they acknowledged the uncertainty in the marketplace and also indicate that they have supported the industry in the past and expect to continue to support the industry. At this stage, Jon, everyone is kind of trying to figure out what the extent of the problem is going to be. And once we have a better understanding of that, we can start putting plans in place. So I can just kind of go by past experience, we've had extremely good relations with our banking syndicates. We continue to have good relations with them. They've proven and demonstrated the willingness to support STEP and our team, and my expectation is that should we need their support again, I would expect it'll be there for us.

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Jon Morrison, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [44]

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Okay. Last one just for me. In the U.S., is it fair to assume that some of the largest customers that you guys were referencing earlier in the call. Obviously, they had development programs that should be ramping up meaningfully over the coming years. Would it be fair to assume that all your conversations with them would say that even if that wasn't to happen from a ramp perspective, they're still fully committed to having some base form of work as they will to advance those plans at some point, maybe it just isn't right now given the opaqueness in the market?

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Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [45]

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Yes. I think that's certainly the view we have. Again, speaking about the scale of some of our clients in the U.S. and the -- and on a global basis and the magnitude of their capital expenditures as they are developing shale plays in the U.S., it's very reasonable to expect that they'll have an ongoing program.

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Operator [46]

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Our next question comes from Matthew Weekes with Industrial Alliance.

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Matthew Weekes, Industrial Alliance Securities Inc., Research Division - Analyst [47]

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Just focusing a little bit on pricing a little bit more. And specifically kind of looking on a quarter-on-quarter basis. We saw some continued pressure deterioration in the pricing. As you go forward and you have some line of sight for continued work programs with your large clients, are these prices you saw this quarter are pretty reflective of what you expect to see going forward? Or do you expect that it will be a little bit of an improvement?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [48]

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The -- I think we went through a period, as we mentioned, Q4, there was -- we did experience pricing pressure. We're able to go through the RFP season and be able to gain work programs. I think that the pricing that we're seeing in Q4 would be reflective of what we're expecting in 2019 with some -- actually, pardon me, 2020 with some variations for with the volume of sand supplied by clients or not. It does have a -- actually a material impact on our month-over-month and quarter-over-quarter results. We had -- up until this most recent set of events, we certainly were not having any pricing discussions with any of our clients. And we're still not having pricing discussions with our clients. And so events are still unfolding, and we'll have to wait until we have a little bit more information to be able to assess if it will have any impact on pricing going forward. I just kind of want to reiterate that we've -- ourselves and many other industry participants have kind of indicated that there's not a lot left to give. And so it will be very difficult, I think, to be able to offer further pricing concessions, notwithstanding the drop in commodity prices.

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Matthew Weekes, Industrial Alliance Securities Inc., Research Division - Analyst [49]

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Right. Okay. Next question for me was on the -- there were some asset sales and committed asset sales mentioned in the MD&A. I was wondering, first, just a clarification. With the CapEx number you're forecasting for the year, is that a gross Capex? Or is that a net CapEx after sales of assets?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [50]

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That would be a gross CapEx. And just to kind of add some color to that. These are noncore assets that we acquired through some of the acquisitions that STEP took down over its history. We've determined that they would be available for sale. And are currently evaluating opportunities to liquidate those assets. This is not a material number and would not be core to our business.

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Matthew Weekes, Industrial Alliance Securities Inc., Research Division - Analyst [51]

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Okay. So it basically more or less the kind of legacy assets that are idle, not really generating returns?

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Michael G. Kelly, STEP Energy Services Ltd. - Executive VP & CFO [52]

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Yes, these could be assets that we would have acquired in conjunction with one of the past acquisitions that we did, that we would not consider core to our business.

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Operator [53]

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I'm showing no further questions in the queue at this time. I'd like to turn the call back to Regan Davis for any closing remarks.

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Regan Davis, STEP Energy Services Ltd. - CEO, President & Director [54]

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Thanks, everyone, for dialing in. Again, we're in a very interesting environment, and we're kind of receiving information real time. So expect, as we know more, we'll update as we can. So thank you for calling in.

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Operator [55]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.