CALGARY, Alberta, March 06, 2019 (GLOBE NEWSWIRE) -- STEP Energy Services Ltd. (the “Company” or “STEP”) is pleased to announce its financial and operating results for the three and twelve months ended December 31, 2018. The following press release should be read in conjunction with the management’s discussion and analysis (“MD&A”) and audited consolidated financial statements as at and for the year ended December 31, 2018. The above documents are available on STEP’s website at www.stepenergyservices.com or on SEDAR at www.sedar.com.
FINANCIAL AND OPERATING HIGHLIGHTS
STEP’s operations in the fourth quarter and year end 2018 resulted in positive Adjusted EBITDA(1) margins for both periods despite extreme commodity price volatility and significantly reduced activity levels in the fourth quarter.
“In the context of the headwinds encountered by the industry in the fourth quarter, we are encouraged with our 2018 results – particularly in the U.S. where our team has done a fantastic job of securing work at a time where competition remains high. Reduced customer activity levels have required us to right-size our asset base and reinforce processes to reduce costs across the organization; sadly, this includes sending some of our professionals home.” said Regan Davis, President and CEO. “We continue to focus on the balance sheet and opportunities to optimize our capital structure and believe that our long-term focus on returns will add value on a per share basis.”
- Generated fourth quarter and full year consolidated revenue of $169.0 million and $781.8 million, respectively, compared to $154.3 million and $533.2 million in the same periods of 2017. The improvements were primarily attributable to the acquisition of all of the issued and outstanding stock of Tucker Energy Services Holdings, Inc. (the “Tucker Acquisition”), increased equipment deployed, and modest increases in revenue per operating day.
- Adjusted EBITDA(1) in the fourth quarter of 2018 totaled $12.3 million (or 7%) and was $117.6 million (or 15%) for full year 2018, compared to $36.0 million (or 23%) and $123.6 million (or 22%), respectively, in the same periods of 2017. Adjusted EBITDA(1) margin was impacted by decreased utilization levels and declining pricing in the back half of the year as a result of client hesitation to spend capital in a volatile commodity price market.
- Net loss for Q4 2018 was $58.5 million and totaled $39.3 million for the year ended December 31, 2018, compared to net income of $17.5 million and $57.7 million, respectively, in the same periods of 2017. 2018 net loss was impacted by $46.0 million of impairment charges to goodwill associated with the U.S. fracturing cash generating unit.
- Successful completion of the acquisition and integration of Tucker Energy Services Holdings, Inc., a U.S.-based, privately-held provider of fracturing and completion solutions. The Tucker Acquisition gave STEP strategic diversification from the Canadian market and entry into the U.S. fracturing market, positioning the Company to provide integrated services to a broader client base.
- Subsequent to year end, the Company entered into an agreement with its syndicate of lenders to make certain amendments to its credit facilities in order to provide increased financial flexibility. These amendments comprise of a change to the maximum Funded debt to Adjusted bank EBITDA ratio, the replacement of the Fixed Charge Coverage ratio with an Interest Coverage Ratio, and the inclusion of an equity cure provision. Further details can be found in the “Credit Facility Update” section below.
(1) See Non-IFRS Measures. “Adjusted EBITDA” is a financial measure not presented in accordance with IFRS and is equal to net (loss) income before finance costs, depreciation and amortization, loss (gain) on disposal of property and equipment, current and deferred income tax provisions and recoveries, share-based compensation, transaction costs, foreign exchange forward contract (gain) loss, foreign exchange (gain) loss, and impairment losses.
|The Company’s consolidated fourth quarter financial and operating highlights are presented below.|
|FINANCIAL||Three months ended |
|Year ended |
|($000s except percentages, shares and per share amounts)||2018||2017||2018||2017|
|Net (loss) income attributable to shareholders||$||(58,549)||$||17,548||$||(39,304)||$||57,718|
|Adjusted EBITDA (1)||$||12,302||$||35,962||$||117,637||$||123,584|
|Adjusted EBITDA % (1)||7%||23%||15%||22%|
|(1) See Non-IFRS Measures.|
|OPERATIONAL||Three months ended |
|Year ended |
|($000s except per day, days, units, and HP)||2018||2017||2018||2017|
|Total fracturing operating days (1)||424||378||1,933 (2)||1,483|
|Fracturing revenue per operating day||$||290,292||$||259,866||$||286,343||$||246,527|
|Fracturing capacity (HP):|
|Average active HP||367,500||187,500||341,000||160,688|
|Exit active HP||367,500||209,000||367,500||209,000|
|Total HP (3)||490,000||297,500||490,000||297,500|
|Proppant pumped (tonnes)||287,000||151,000||1,070,000||646,000|
|Total coiled tubing operating days (1)||911||1,237||4,666||4,259|
|Coiled tubing revenue per operating day||$||50,432||$||45,290||$||48,920||$||44,053|
|Coiled tubing capacity:|
|Average active coiled tubing units||21||19||21||16|
|Exit active coiled tubing units||17||19||17||19|
|Total coiled tubing units||26||19||26||19|
|(1) An operating day is defined as any coiled tubing and fracturing work that is performed in a 24-hour period, exclusive of support equipment.|
|(2) Q2 2018 U.S fracturing operating days were revised to align with the corporate definition of an operating day. As a result, the operating days for U.S. fracturing have been amended to 199 from the previously disclosed 242.|
|(3) Represents total owned HP, of which 367,500 HP is currently deployed.|
|(4) Capital expenditures includes non-cash expenditures from the addition of capital leases for light duty vehicles.|
|Balance Sheet |
($000s except shares and per share amounts)
|As at December 31,|
|Cash and cash equivalents||$||364||$||36,859|
|Working capital (including Cash and cash equivalents)||$||67,158||$||121,032|
|Total long-term financial liabilities||$||260,451||$||8,049|
|Shares outstanding Basic||66,682,319||60,309,738|
|Weighted average shares year to date – basic||65,033,085||56,528,016|
|Weighted average shares year to date – diluted||65,352,565||57,752,867|
The fourth quarter of 2018 was challenged with extreme volatility in commodity prices, reinforcing caution among STEP’s clients spending plans and leading to a deferral or cancellation of completion programs. This manifested into an oversupply of service equipment which negatively impacted equipment utilization and pricing. This was most pronounced in Canada as an overall reduction in commodity prices was exacerbated by market egress limitations that drove Canadian producer netbacks to dangerously low levels. In the U.S., pipeline egress issues continued to be a near term industry hurdle as a deferral of completion programs resulted in a growing inventory of drilled and uncompleted Permian wells. The Company was quick to react to this new environment as it restructured its operations to match management’s conservative outlook and implemented the following measures:
- Reducing staffed equipment to meet near term demand expectations. In Canada, STEP reduced staffed coiled tubing units to nine units and reconfigured the composition of horsepower to have six fracturing spreads active and deployed, representing 225,000 HP (which includes 117,500 HP with bi-fuel capabilities). In the U.S., STEP reduced its active staffed equipment to eight coiled tubing units and during the third quarter of 2018, reduced fracturing operating capacity from four fleets to three in response to lower demand and uneconomic spot pricing.
- Placing a hiring freeze in the fourth quarter and implementing plans to reduce overhead and general and administrative spending that lead to a reduction of overhead positions by 13% early in 2019. These very difficult reductions were required to bring overhead and administrative levels in line with near term activity expectations. The result of the reduction in positions and hiring freeze is expected to save approximately $4.1 million annually. Alongside the reduction of STEP’s operating capacity, the Company also reduced field staffing by 12% since the end of the third quarter. All severance and related costs will be reflected in STEP’s first quarter financial statements.
- Utilizing cash flow from operations to pay down debt in the fourth quarter of 2018 by $39.7 million to bring total outstanding debt at December 31, 2018 to $254.6 million (before deferred financing costs). In addition, the Company optimized its payment cycle to better represent industry practices.
- Reducing the 2018 capital budget by $20 million to $141 million. Spending on ongoing projects was focused on critical items. Management elected to defer spending approximately $14 million of its remaining capital that was largely slated to reactivate select equipment and will monitor market demand and activity levels to determine timing and needs for this spend.
- Subsequent to year end, the Company entered into an arrangement with its syndicate of lenders to make certain amendments to its credit facilities, including a change to the maximum Funded debt to Adjusted bank EBITDA ratio and replacing the prior Fixed Charge Coverage ratio to an Interest Coverage ratio.
Revenue for the fourth quarter and full year 2018 for the Canadian segment totaled $97.8 million and $478.9 million, respectively, compared to $133.9 million and $495.3 million for the same periods in 2017. The changes year-over-year are largely attributable to extreme commodity price differentials, weather challenges, caution around industry capital spending, and client budget exhaustion in the fourth quarter which slowed down activity and impacted utilization, pricing, and revenue per operating day.
Adjusted EBITDA for the fourth quarter and full year 2018 was $6.7 million (or 7%) and $72.7 million (or 15%), respectively, compared with adjusted EBITDA of $28.5 million (or 21%) and $107.7 million (or 22%) in the prior year periods. The fourth quarter and full year margin percentage decreases are a result of lower utilization and pricing, activity deferrals, and general operating expenses including maintenance performed during the fourth quarter.
On April 2, 2018, STEP closed the Tucker Acquisition positioning the Company into the U.S. fracturing market. This important transaction affords the Company numerous advantages including having access to the sizeable U.S. market, diversifying our revenue stream to be less dependent on Canada, mitigating risk and increasing opportunity across clients, commodities and formations, and having the ability to offer integrated coiled tubing and fracturing services to U.S. customers.
Revenue for the U.S. segment for the fourth quarter and full year 2018 totaled $71.3 million and $302.9 million, respectively, compared to $20.4 million and $57.9 million for the same periods in 2017. The significant increases in both periods relative to 2017 are due to the fracturing assets added through the Tucker Acquisition at the start of the second quarter and the increased deployment of coiled tubing equipment. Fracturing contributed 69% of U.S. revenue in the fourth quarter and 67% of annual revenue in 2018, demonstrating the importance of this business unit to STEP’s U.S. segment and overall business.
Adjusted EBITDA in the U.S. for the fourth quarter and full year was $5.6 million (or 8%) and $45.0 million (or 15%), respectively, compared to $7.5 million (or 37%) and $15.9 million (or 27%) for the same periods in 2017. Adjusted EBITDA percentage was impacted by low fracturing pricing and utilization in the fourth quarter as many clients elected to defer capital programs or demonstrated capital discipline amidst a declining commodity market. Increased competitive pressures in Oklahoma resulted in service pricing pressure.
CREDIT FACILITY UPDATE
On March 5, 2019, the Company entered into an agreement with its syndicate of lenders to make certain amendments to its credit facilities in order to provide increased financial flexibility (the "Amended Credit Facilities"). The primary amendments include a change to the Funded debt to Adjusted bank EBITDA ratio, the removal of the Fixed Charge Coverage ratio, and an addition of the Interest Coverage ratio. Interest continues to be payable monthly, at the bank’s prime lending rate plus 50 basis points to 300 basis points depending on certain financial ratios of the Company. Under the Amended Credit Facilities, any leases accounted for as an operating lease in effect on December 31, 2018 will continue to be recognized as operating leases for the purposes of calculating the financial covenants. Key changes to financial covenants are summarized below:
- Funded debt to Adjusted bank EBITDA ratio is calculated the same as the previous facility, however it is now required to meet the following ratios:
|Quarters Ended||Required Funded debt to |
Adjusted bank EBITDA ratio
|March 31, 2019||3.50:1 or less|
|June 30, 2019||4.00:1 or less|
|September 30, 2019 to December 31, 2019||4.50:1 or less|
|March 31, 2020||4.00:1 or less|
|June 30, 2020||3.50:1 or less|
|September 30, 2020 and thereafter||3.00:1 or less|
- Interest coverage ratio refers to the ratio of Adjusted bank EBITDA to interest expense for the preceding twelve months. Interest expense includes interest charges, capitalized interest, interest on capitalized lease obligations, fees payable in respect of letters of credit and letters of guarantee, and discounts incurred and fees payable in respect of bankers’ acceptance advances. This ratio is not to fall below 3.00:1 or less.
An equity cure is available for the purposes of determining compliance with the Funded Debt to Adjusted bank EBITDA ratio. The equity cure is available for use up to two times, in non‐consecutive quarters, until the expiry of the Amended Credit Facilities. Each use of the equity cure is limited to $25 million from the issuance of equity securities and must be utilized to repay borrowings under the Credit Facilities.
Extreme commodity price volatility at the end of 2018 has created a cautious outlook for industry capital spending in 2019. Recent client budgets underpin a commitment to spend within cash flow which has resulted in lower expected year over year activity. This is evidenced by 30% to 35% lower rig counts to begin 2019. STEP expects to realize normal utilization for its manned equipment through the remainder of the first quarter, barring a negative impact of an early spring.
Outlook on Canadian completions activity beyond the first quarter remains less clear as producers are opting to position themselves defensively with the current cautious market backdrop and have yet to provide clarity for second half completion programs. As mentioned in STEP’s business update on October 25, 2018, securing long term arrangements with tier 1 clients who are expected to have active work programs has proven to be fortuitous considering current industry conditions. STEP began 2019 operating nine coiled tubing units and six fracturing spreads, representing 225,000 HP, and will continue to monitor its operating capacity based on industry demand and long term economic returns.
STEP’s outlook for its U.S. operations remain unchanged from its third quarter disclosure, as management continues to expect the current market for fracturing services to be challenged as a result of the decline in oil prices in the fourth quarter and until Texas pipeline-related egress issues are alleviated. Industry watchers expect that this will occur in the second half of 2019, with client discussions continuing to support a tightening of fracturing capacity alongside pipeline capacity additions. Management also anticipates short-term demand for coiled tubing services will remain tempered until completions activity increases.
Specific to STEP’s U.S. fracturing services, the Oklahoma market continues to exhibit an oversupply of equipment leading to competitors bidding for jobs with minimal margin contribution. The Company has been successful in retaining its core client relationships but has seen the spot market demand deteriorate, resulting in weak utilization quarter-to-date. Management continues to evaluate its fleet distribution strategy and is analyzing potential long-term arrangements in other basins. STEP’s U.S. operations began 2019 operating eight coiled tubing units and three fracturing spreads, representing 142,500 HP.
As previously disclosed, STEP opted to reduce the 2018 capital spending program by $20 million to $141 million based on an assessment of market conditions. Due to continued commodity price volatility and client spending uncertainty in the fourth quarter, the Company also elected to defer spending approximately $14 million of this remaining capital which was largely slated to reactivate select equipment. Management will continue to monitor market conditions and may choose to spend this deferred capital to reactive equipment if economic and strategic justification materializes.
In keeping with management’s conservative outlook for 2019, STEP’s board of directors has approved a 2019 capital program of $48 million which is largely comprised of maintenance capital to sustain its current operating fleet. Total 2019 capital spend is projected to be $60 million, should the Company elect to spend the 2018 carry forward capital. Management will conservatively balance the Company’s capital program and available equipment levels based on market dynamics and economic returns.
ADDITION TO BOARD OF DIRECTORS
STEP is pleased to announce the immediate appointment of Ms. Evelyn Angelle as an independent director of the Company and a member of STEP’s audit committee.
Ms. Angelle is a private investor and is currently serving as a director of Forum Energy Technologies (FET), a position she has held since February 2011. She also serves on the Board of Directors of several charitable organizations. Ms. Angelle served as the Executive Vice President and Chief Financial Officer of BJ Services from January 2017 to November 2017. Her distinguished career includes senior leadership roles at Halliburton, serving as Senior Vice President – Supply Chain from January 2014 to January 2015, and various finance and accounting roles from April 2003 to December 2013, including Senior Vice President and Chief Accounting Officer and Vice President of Investor Relations.
Before joining Halliburton, Ms. Angelle worked for 15 years in the audit department of Ernst & Young LLP. Ms. Angelle, a graduate of Saint Mary’s College, Notre Dame, is a certified public accountant in Texas and a certified management accountant.
Please see the discussion in the Non‐IFRS Measures section of the MD&A for the reconciliation of non‐IFRS items to IFRS measures.
FORWARD‐LOOKING INFORMATION & STATEMENTS
This document contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "should", "believe", "plans" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this document contains forward- looking information and statements pertaining to the following: 2019 operation outlook; anticipated market recovery; expected completion of Permian pipeline projects in the second half of 2019; expected reduction in pricing pressure; expected completions activity and utilization levels in 2019; expected profitability for fracturing services in 2019; ability of the Company to maintain its track record of returns and margin performance; the Company's expected performance in 2019; market conditions and industry activity levels; and the Company's anticipated business strategies and expected success.
The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; completion of, and timing for availability of, additional pipeline capacity; future oil, natural gas and natural gas liquids prices; the impact of seasonal weather conditions; the Company’s ability to take delivery of and deploy equipment; integration of cross-border operations; client activity levels; access to capital investment; the Company's capital program; expected utilization levels; and certain cost assumptions. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but, no assurance can be given that these factors, expectations and assumptions will prove to be correct.
The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in the demand for or supply of the Company's services; unanticipated operating results; market uncertainty; reduction in client activity levels; operational volatility due to adverse weather conditions; the ability to access key components and shop capacity; the ability to attract and retain qualified personnel; changes in tax or environmental laws, or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavourable or a lack of access to capital markets; increased costs; the impact of competitors; reliance on industry partners; and the risk factors set forth under the heading “Risk Factors” in the Company’s annual information form dated March 5, 2019.
The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws. The reader is cautioned not to place undue reliance on forward-looking information.
STEP is an oilfield service company founded in 2011 that provides fully integrated coiled tubing and fracturing solutions. STEP’s combination of modern, fit-for-purpose fracturing and coiled tubing equipment has differentiated it in plays where wells are deeper, have longer laterals, and higher pressure.
Initially operating as a specialized, deep capacity coiled tubing provider, STEP’s service offering expanded to include fully integrated coiled tubing and fracturing solutions. STEP operates primarily in the Montney, Duvernay, and Viking in Canada, and in the Anadarko, Arkoma, Permian, Eagle Ford, and Haynesville in the U.S. STEP’s track record of safety, efficiency and execution drives repeat business from its blue-chip exploration and production clients.