STEP Energy Services Ltd. (STEP) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Annual General Meeting of STEP Energy Services Ltd. Please note that the meeting will be recorded. I would like to introduce Mr. Douglas Freel, Chair of the Board of Directors of STEP Energy Services Ltd, who will also chair this meeting. Mr. Freel, the floor is yours.

Thank you, Sara. Welcome to the Annual Meeting of the Shareholders of STEP Energy Services Ltd. I am Douglas Freel, Chair of the Board, and I will chair this meeting. This year, STEP is holding this meeting in a virtual audio-only online format using TSX Trust Company's virtual meeting platform. This meeting is accessible to all of our shareholders, and all our shareholders and validly appointed proxy regardless of physical [ location ] to participate, submit questions and vote. Only registered shareholders who held shares in their name as of the May 5, 2022, record date of this meeting or their validly appointed proxy holder are entitled to vote in this meeting. Shareholders were also encouraged to vote in advance of the meeting and to submit questions in advance by e-mail through STEP's Investor Relations. This meeting will be conducted in 2 parts. I will proceed with the formal business required to be addressed, all in which we will have a corporate presentation and open the meeting to questions. A number of STEP's officers have joined this meeting, including Steve Glanville, President and Chief Operating Officer; Klaas Deemter, Chief Financial Officer; and Josh Kane, Vice President Legal and General Counsel. This meeting will now come to order. I will ask Josh Kane, STEP's General Counsel, docked as Secretary of the Meeting and TSX Trust Company, docked as scrutineer. Pursuant to the current bylaws of the corporation, business may only be transacted at this meeting if at least 2 shareholders or duly appointed proxy holders are present in person, virtually or representing in the aggregate not less than 15% of the shares entitled to vote at the meeting. The preliminary scrutineers reporting has been received and shows that approximately 46,220,000 common shares are represented at the meeting, being approximately 68% of the shares eligible to be voted at the meeting. I'm therefore advised that there is quorum present, and I now declare that the meeting is regularly called and properly being constituted for the transaction of business. I direct a copy of the scrutineer's report be attached to the minutes of this meeting by the Secretary. I will now commence the formal business of the meeting. The business of the meeting is described in the management information circular dated April 25, 2022, which accompanied the notice of meeting. I have received the declaration prepared by TSX Trust company indicated -- indicating that either a notice of this meeting via company proxy materials or the notice and access notice as applicable, was duly mailed to shareholders of record as at May 5, 2022. I address a copy of the notice of meeting, the accompanying proxy materials and the notice and access notice as proof of mailing will be attached to the minutes of this meeting by the Secretary. I will think the notice of meeting as read, and with the consent of the meeting, I will dispense with the reading of it. We will conduct the votes on the matters before us by ballot. Each registered shareholder or their duly appointed proxy holder is entitled to vote on the matter and has 1 vote in respect of each share entitled to be voted on the matter held by that shareholder. The polls will be open for all resolutions at the same time. Tick the Voting button on the left menu on your screen when the vote is announced. This will allow you to choose to vote on each resolution immediately or wait until the conclusion of discussion on each resolution prior to casting your vote. There will be an opportunity to ask questions on each resolution in turn. To submit a question, click the Ask a Question button on the left menu of your screen and type your question in the text box. Questions can be submitted at any time. Once the discussion on all items of business has concluded, I will give you a minute to enter your votes and then their voting closed on all resolutions. Following the meeting, the results of the meeting will be filed out in STEP's SEDAR profile and available on our website. We will run through each of the items on the agenda in turn, responding to questions on that item of business while it is before the meeting. I now declare the polls open on all resolutions. Registered shareholders and duly appointed proxy holders, please click on the Voting button in order to cast your votes. If you have already submitted your votes in advance and do not wish to change your vote, you do not need to take further action. [Voting]

Based upon the results of the proxy submitted prior to the meeting each item of business to be dealt with today, has already received the direct shareholder approval to be passed. The first item of business concerns the presentation of STEP's financial statements for the year ended December 31, 2021, which have been approved by the Board of Directors and to copies of the annual financial statements, together with the auditor's report on the financial statements and related management's discussion and analysis are available online, shareholders who wish to receive a paper copy of these should contact our transfer agent, TSX Trust company. With the consent of the meeting, we shall dispense with the reading of the financial statements and the auditor's report. If there are no questions related to these documents, we will move to the next item on the agenda. The next item of business is to fix the number of directors. STEP's articles allow for a maximum of 11 Directors. There are presently 7 Directors, and it is proposed that 7 Directors be elected to the Board of Directors at the meeting. As Chair, I propose a motion to fix the number of directors to be elected at this meeting at 7. Are there any questions related to this motion?

There are no questions.

If there no questions, please cast your votes. [Voting]

Next item of business is the election of the Board of Directors of STEP. The shareholders at STEP have determined that 7 Directors be elected at this meeting for the ensuing year or until their successors are elected or appointed. All proposed nominees have consented to stand for reelection and serve as directors if elected. STEP has adopted a majority voting policy, whereby in an uncontested election, if any nominee for director receives a greater number of votes at held of his or her election that votes for such election, he or she shall send their resignation to the Board following the meeting. The Compensation and Corporate Governance Committee -- as the Board of Directors will consider the resignation, which is expected to be promptly accepted except in situations where extraordinary circumstances warrant the applicable director continuing to serve as a member of the Board of Directors. The Board will disclose its election decision via a press release within 90 days of the meeting. It is now in order to proceed with the election of directors. As Chair, I propose the motion to nominate each of the directors listed in STEP's management information circular being Evelyn Angelle, Regan Davis, myself Douglas Freel, Jeremy Gackle, Donna Garbutt, James Harbilas and Jason Skehar, for election as directors of the corporation to hold office until the next annual meeting with the shareholders or until their successors are earlier elected or appointed. As no additional nominations were received prior to the meeting, in accordance with the advanced notice of permissions corporation's bylaws, I now declare the nominations closed. As there are no questions, please cast your vote. [Voting]

The next item of business is the appointment of auditors and the authorization of the Board of Directors to fix the remuneration of the auditors. As Chair, I post a motion to appoint KPMG LLP Chartered Accountants as the auditor of the corporation until the close of the next Annual Meeting of the Shareholders and authorize the directors to fix their remuneration.

There are no questions.

If there are no further questions, please cast your votes. [Voting]

For those of you who have not voted on all of the resolutions, please do so now as I will shortly close the poll. I'll give you -- we'll give you another minute to cast your votes. All right. We'll continue on. As there is no further business to be brought before the meeting, the meeting will be terminated. Polls are now closed. I declare all resolutions carried and to terminate the meeting. We will now proceed with the corporate presentation and informal discussion regarding the business affairs of STEP by Steve Glanville, President and Chief Operating Officer and Klaas Deemter, CFO, during which time, we will respond to questions from the shareholders. Steve?

Thank you, Douglas, and welcome, everyone, to the AGM. Myself and Klaas will run through a brief kind of slide deck, I'll give you a bit of history of the company, then talk a little bit about some highlights of 2021 but focus more about the outlook on what we see in front of us. Before I get started, I'd really like to thank all of our professionals over the last few years has been quite a journey that we've had, and it's nice to be in better times that we see our industry in today. Just a disclaimer at the start of the presentation, we will be talking about some forward-looking statements. So we wanted to make sure this is front and center for everyone. Just looking at the company, a bit of an overview. We've been in business for 11.5 years now. STEP was founded on 4 simple core values that make up our name: safety, trust, execution and possibilities. And it's a corporate culture that fosters a sense of community that we have within our company. We operate 3 service lines: fracturing, coiled tubing and then, of course, fluid and nitrogen pumping services. Just like to highlight, our fluid and nitrogen pumping services, we've added a somewhat of a new service line in the industrial services for the nitrogen business. And that's really helped out on -- from a pipeline integrity standpoint. We operate in North America, kind of most of the prolific basins on shale type oil and gas reservoirs. We do have a deliberate focus on our people. That is something that we are very, very proud of. We've -- basically drives executional excellence, is one of our KPIs that we have. And it's delivered with what we coined our phrase for our exceptional client experience by our professionals. We have an extremely diverse client base. We work from the large blue-chip E&P clients such as EOG, CNRL as well, we have a really, really niche market in some of the junior and private companies with a lot of our services, because we align extremely well with the core values. Here's just a slide of our operating areas, start as far north as Fort St. John in the Montney area. Quite excited to be in that area because of LNG Canada. And of course, the Montney is a very, very prolific gas plate that we have in Canada. We have operations in basically the renter area Grande Prairie, Fort St. John and Medicine Hat in Canada. And then our head office is in Calgary. In the U.S., we have operations in the Bakken, in the DJ Basin, in West Texas and the Permian. And then, of course, Eagle Ford and our head offices in the Eagle Ford. Currently, today, we have 365,000 horsepower of fracturing equipment, which equates to 5 spreads in Canada and 3 in the U.S. The 3 spreads in the U.S. are focused in the Permian. And we have active 17 coiled tubings altogether, 8 are in Canada and 9 are in the U.S. And we have a total of 29 deep capacity coiled tubing units, which puts us the largest deep capacity coiled tubing company in Canada. Just as a highlight in Q1, we hit a depth record for our company for coiled tubing, and that's 8,030 meters or 26,000 feet. And when you look at that, it's obviously large numbers. But when you compare it to something that is visual aid for us, the Calgary Tower. It's 50 of them, but on top of each other. So it's quite an achievement that the company has achieved. So pretty proud of that. If we look back at 2021, it seems like a long time ago, but it was a short of 6 months ago, I guess. And we were dealing with a lot of things with the pandemic still. We -- COVID, of course, was around us. And this company managed extremely well through the COVID [indiscernible] of the pandemic. We obviously had strict safety policies in place and, of course, been able to operate effectively during this time. We kept a lot of our key members as we went from -- we had 1,400 employees at the start of the pandemic, and we scaled our operation down to 475 and I'm happy to announce today that we are almost back to prepandemic levels for about 1,350 employees. So that's been bought a lot of hard work, by a lot of our key team members within our company that have had to not only take pay cuts, rollbacks, et cetera, RSP reductions, 401(k) reductions, et cetera, and even have taken different roles in order to help the company through some tough times. So I really want to make sure that we let people know the gratitude that we have as a team to be able to be in a position we are today to be back to pre-pandemic levels. In order to get to where we are today, we've also had a laser beam focused on aspects of our business that -- retired debt and we are in such a better position today. Klaas will talk a little bit about that further on in this presentation. And true to our core values, we've really ensured safety is top priority. That is our #1 core value. Like I mentioned, we are a leading [indiscernible] compared to the industry. We exited 2021 with a 0.98 total recordable incident frequency, and we're very proud of that. This slide here just talks a little bit about where we see our commodity cycle is today. I mean, we've obviously been seeing a massive growth from a crude oil perspective on commodity price. And of course, that's helping our clients benefit from shoring up their balance sheets, being able to pay a dividend and really put some capital towards a drill bit at which we really benefit from. So a great position and the big story for us as well is natural gas prices particularly in Canada where we see our first LNG facility being built and we see future expansion for the natural gas side of our business. This slide here just talks about the rig count and I mentioned it's -- our business really is correlated off the drill bit. You can see the accelerated drill rigs both in U.S. and Canada. In U.S. today we are about 725 active driller rigs so if you back out to kind of the prepandemic -- it was close to 800 in the U.S. So we are not quite there yet but we are stretching towards that target. And then Canada as well, we are getting back -- getting out of our break-out period that we've experienced over the last couple of month and expect to hit 200 drill rigs by this summer. The grey line you see on the chart is our share price, we are really excited to see where that is headed this year. Start of the year we were about $1.50 and today we are about $4.50 so Klaas will get in to talk a little more about where our share price is today and the fundamentals behind that. We are going to talk a little bit about the 3 important strategic priorities that we have set out in place. One is investing in leading technology; second is driving our ESG performance; and the third is generating stakeholder returns. Something that we have started from day 1, it's just investing in leading technology which of course drives incremental margin. Of course our clients are feeling the effects of that with having our increased value to our clients, with high execution levels that we have because of our equipment base that we've invested in. We talk a little bit about ESG strategy. We have 72% of our equipment on the frac side that is active horsepower, either it's Tier 4 or [ dual fuel ]. We are definitely proud of that fleet and we are seeing substitutional percentages up to 80% on our Tier 4 fleet that we have or engines that we have. We also invested into large bore treating manifolds. This helps us from reduced connections on site as well as increase their efficiencies on location. The business innovation part of the company, we -- through the GASFRAC acquisition we kept our patents healthy and we invested in a technology called Single Shot IOR where we completed our first job in April. Now it's going into basically existing large bores that have lower production. It's able to recover some of the bypass pay and unlock some of the remaining oil that's in the reservoir. A little bit about ESG, this was something that is extremely important for our company. And we are proud to have our first ESG Report release, which was on May 11, it is on our website. You're more than welcome to download that and our team has put a lot of effort into gathering all the information and we are very proud of that report. As to our shareholder returns, this is something that is laser-beam focus for our company. We've been able to reactivate equipment in 2021. We added 4 cold tubing units, 105,000 horsepower. We've also increased our head count by over 33%. This, in return, is helping getting our share price up and getting free cash flow into the business. I will now pass it over to Klaas, our CFO, to go through our financial position.

Good afternoon, everybody. Thank you, Steve, for walking us through that. Lots of information there. Thank you for sharing. 2021 was a strong recovery year for STEP. We went from a Canadian business that was fairly steady to maintain strong margins through the quarter, through the successive quarters. The U.S. business went from a loss position in the first quarter of 2021 and profitability continued to improve throughout the year. One of the things that we're particularly proud of as we take a look at our share performance, as Steve talked about there a moment ago, we're 1 of the top returning OFS share -- shares since COVID started. So we kind of take a look at April 20 to today, we are 1 of the leaders in the space. And we are thankful for the support that the market has given us. We still think that there's opportunity there. We trade at a discount to some of our major peers despite having similar revenue and EBITDA profile. Overall, the financial performance, you can see there on the following on the slide here, the Canadian business generated 2/3 of the revenue, generated 33% U.S. generated 33% of revenue. Overall, strong growth in both those divisions and very pleased with how the business performed. The strong financial performance also led to a reduction in our debt, where we reduced our debt from about $207 million at the start of the year to closing the year at $187 million. Debt reduction remains a strong focus for the company, for management and we expect to see continued debt reduction there as the economic conditions improve. Q1 was just recently published in May. Q1 saw a significant increase in activity over the prior year. And also on a sequential basis, it was the strongest first quarter in the company's history and the best quarter since Q3 of 2018, really marking a change in the industry as conditions started to tighten up and pricing now will return a little bit to the OFS service providers. So we continue to see inflationary pressures. Today, we're felt acutely in the first quarter and particularly in [ San ] and in our parts and major components, we see continued stress there into the rest of the year. Our maintenance teams have a very strong predictive maintenance program and they are able to predict from a long-range basis. So we've been able to take advantage of that expertise so the longer supply chain or longer supply chain times are less of a concern given that -- when we look into the future. The Board approved the capital budget at the end of 2021 of about $46 million, which has increased by $8 million to support investments into low emission equipment and additional maintenance required to support ongoing operations. This is a visual that shows you how -- how much progress the company has made since taking on $300 million of debt in Q3 of 2018. You can see that black line represents some trend. And it shows the green lines on the end are based on analyst projections. And it shows us getting another $50 million in production towards the end of 2022. And that should put us below one-to-one on adjusted debt to EBITDA or debt to adjusted EBITDA basis.

I'll take this one over class. As we look into -- the back half of the year, basically, in Q2, we had a press release on Monday. After markets closed that we've -- we're experiencing a fairly high utilized quarter -- and so we are expect our EBITDA to range between $42 million and $50 million versus $37 million that we had in Q1 this quarter of this year, I should say. So really, really happy with the work programs that our sales team have been able to drum up for the quarter, both in Canada and the U.S. We're continuing to see high demands for our services across the board, both on frac, coil tubing, and of course, for fluid pumping and nitrogen. Just as our Q2 2020 revenues are on track to be around that $250 million to $265 million range. And that, of course, has been driven between -- by the higher pricing that we've been able to get on our large multi-well pads, both in Canada and the U.S. Klaas, do you want to talk about the balance sheet?

Yes. So the strong EBITDA performance that we're expected to see this year is giving a lot of extra free cash flow, which is allowing us to reduce our debt burden. The company has been making considerable progress since the early days of 2018, so the midpoint of 2018, reducing debt by over $100 million that we expect to gain to get that down to a ratio of debt to adjusted EBITDA of less than 1:1. And our goal in 2023 would be to continue to reduce that debt.

And that concludes the presentation, Mr. Chair.

Thank you, guys. So that concludes the AGM presentation. Thank you.

Ladies and gentlemen, thank you for attending today's meeting. You may now disconnect.