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

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

Thank you, and welcome to the Annual General Meeting and Special Meeting of the shareholders of STEP Energy Services Limited. As mentioned, I am Douglas Freel, Chair of the Board of Directors of STEP, 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 our shareholders and validly appointed proxy holders regardless of physical location, to participate, submit questions and vote. Only registered shareholders who held shares in their name as of the May 3, 2023, record date of this meeting, or their validly appointed proxy holders, are entitled to vote at 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 e-mail. This meeting will be conducted in 2 parts. I will proceed with the formal business required to be addressed, following 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 Executive Officer; Klaas Deemter, Chief Financial Officer; and Josh Kane, Vice President, Legal and General Counsel. The meeting will now come to order. I will ask Josh Kane, STEP's VP Legal and General Counsel, to act as Secretary of the Meeting and TSX Trust Company to act 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 represented -- representing in the aggregate not less than 15% of the shares entitled to vote at the meeting. The preliminary scrutineer's report has been received and shows that approximately 46.3 million common shares are represented at the meeting, being approximately 64.7% of the shares eligible to be voted at the meeting. I am, therefore, advised that there is a quorum present, and I now declare that the meeting is regularly called and properly constituted for the transaction of business. I direct a copy of the scrutineer's report to 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 20, 2023, which accompanied the notice of meeting. I have received a declaration prepared by TSX Trust Company indicated that -- indicating that either a notice of this meeting and the accompanying proxy materials or the notice and access notice, as applicable, was duly mailed to shareholders of record as at May 3, 2023. I direct a copy of the notice of meeting, accompanying proxy materials and the notice and access notice with proof of mailing be attached to the minutes of this meeting by the secretary. I will take the notice of meeting as read, and with the consent of the meeting, 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 and held by that shareholder. The polls will be open for all resolutions at the same time. Click 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 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 discussion on all items of business has concluded, I will give you a minute to enter your votes and then declare voting closed on all resolutions. Following the meeting, the results of the meeting will be filed on 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. Based upon the results of the proxies submitted prior to the meeting, each item of business to be dealt with today has already received the requisite shareholder approval to be passed. First item of business concerns the presentation of STEP's financial statements for the year ended December 31, 2022, which have been approved by the Board of Directors of STEP. 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 documents 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 thereon. 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 the meeting to fix the number of directors to be elected at this meeting at 7. Are there any questions related to this motion? There being no question, please cast your votes. [Voting]

The next item of business is the election of the Board of Directors of STEP. The shareholders of 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 a director receives a greater number of votes withheld from his or her election than votes for such election, he or she shall tender their resignation to the Board following the meeting. The Compensation and Corporate Governance Committee and 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 press release within 90 days of this 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, myself, Douglas Freel, Jeremy Gackle, Donna Garbutt, Stephen Glanville, James Harbilas and Jason Skehar, for election as directors of the corporation to hold office until the next annual meeting of 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 provisions of the corporation's bylaws, I now declare the motions closed. As there are no questions, please cast your votes. [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 propose the motion to appoint KPMG LLP Chartered Accountants as auditor of the corporation until the close of the next annual meeting of the shareholders and authorize the directors to fix their remuneration. Please cast your votes. [Voting]

The next item of business is to approve the option plan as set forth on Page 8 of STEP's management information circular. The key amendments to the option plan are summarized on Pages 8 and 9 of the circular, and the full text of the option plan is set forth in Schedule B to the circular. In order to be effective, resolution to approve the option plan requires the approval of more than 50% of the votes cast by, or on behalf of shareholders present in person or represented by proxy at this meeting. As Chair, I propose the motion to approve the full text of the option plan, which is set forth in Schedule B to STEP's circular dated April 20, 2023, and for greater certainty, approve the amendments to the amending provisions to approve and authorized to be issued all unallocated options entitled to be granted pursuant to the option plan until June 22, 2026, and to authorize STEP's officers or directors to carry out the activities to execute the necessary documents or instruments for approval of the option plan. Please cast your votes. [Voting]

The final item of business is to approve the performance and restricted share unit plan as set forth on Page 9 of STEP's management information circular. The key amendments to the PRSU Plan are summarized on Pages 9 and 10 of the circular, and the full text of the PRSU Plan is set forth in Schedule C to the circular. In order to be effective, the resolution to approve the PRSU Plan requires the approval of more than 50% of the votes cast by or on behalf of shareholders present in person or represented by proxy at this meeting. As Chair, I propose the motion to approve the full text of the PRSU plan, which is set forth as Schedule C to STEP's circular dated April 20, 2023, and for greater certainty approve the amendments to the amending provisions to approve and authorize to be issued all unallocated entitlements to be granted pursuant to the PRSU plan until June 22, 2026, and to authorize STEP's officers or directors to carry out the activities to execute the necessary documents or instruments or approval of the PRSU plan. As there are no 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. It is now 03:12 Calgary Time, and I will close the poll on all resolutions in another minute. If 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 recording the business -- regarding the business affairs of STEP, hosted by Steve Glanville, President and Chief Executive Officer; and Klaas Deemter, Chief Financial Officer, during which time, we will respond to questions from the shareholders.

Thank you, Douglas. So Klaas, we have the presentation loaded up on the screen. What we thought we -- Yes. What I thought we would do is to spend the next probably 20, 25 minutes going through our updated slide deck and this will be posted on our website for further information. So thank you, and welcome, everyone. My name is Steve Glanville, I'm the President and Chief Executive Officer. I have with me Klaas Deemter, who is our CFO. Just a quick disclaimer. There will be some forward-looking statements that we talk about from an outlook, so I'd invite you to review this disclaimer report that's in our presentation. And then if you go to the next slide, so just a bit of history in regards to the company and where we're at today. So we were founded in 2011. We are focused on our main 4 core values, which is an acronym of our name, which is safety, trust, execution and possibilities. Today, we have about 1,500 employees, both in Canada and the U.S. combined. And we are running 8 frac fleets and 21 coiled tubing units. If you go to the next slide, we'll just give you a bit of a geographic footprint of where we're located. So in Canada, we are focused primarily on the deeper, higher pressure plays, so the Montney and Duvernay is where our assets fit really well. And then, of course, we are focused as well in the Viking. So currently, today, we are operating 5 frac spreads out of 8 in Canada. And then we also have 9 deep capacity coiled tubing units that are operating in Canada. Switching over to the U.S. We have 3 frac spreads that are focused in the Permian. The Permian is a -- obviously, a very, very prolific play in the U.S., where there is a very, very large rig count. We're positioned extremely well in that basin for future activity. And so currently, today, we have 3 frac spreads that are working in the Permian. And then in our U.S., we've been able to expand our U.S. coiled tubing footprint to a total of 12 coiled tubing units. One thing to note, as we've built the company on the frac site since 2015, we've been investing heavily into what we call our dual fuel or emission-friendly fleet. So as of today, or the end of June, we'll have 60% of our fleet that is low-emission friendly. So looking at 2022, just some highlights that I want to cover. Our #1 core value is safety. I'm very proud to record the results. So we had a 30% reduction in safety incidents in 2022. And so that's a very, very large improvement, 30% improvement from what we had. And just a very large thank you to our professionals for using the dedication and laser-beam focus to our core values on that. Another thing that I'm very proud of is giving back to the community. And what we do every year as we put together a Christmas Spirit Campaign. And this year, we we're able to donate over $336,000 to charities that were in need. So now that's a very, very -- I guess, very, very important for our organization that we continue to do that, and it's great to see people reaching into their wallets and donating. Another big news for 2022 is we signed a multiyear contract with a medium-sized E&P company in Canada. What they -- what the contract was -- allowed us to do was refurb 16 of our Tier 2 engines to Tier 4, which is the latest technology displacing up to 85% diesel. So with that, when you look at an overall fleet consumption of diesel, it's a reduction of about 70% altogether. So it's a huge win, not only from an environmental standpoint, but also from a savings standpoint from our client. And also there's a few other slides. Maybe Klaas will flip to the next slide. So when we look at our year review, 2022 was a great year from an overall revenue and EBITDA perspective. So I'll pass it over to Klaas to go in a bit more detail in regards to the financials of the year.

Good afternoon. My name is Klaas Deemter, Chief Financial Officer of the company. In the financial section of this presentation, I'm going to use certain financial terms or industry-specific terms. Our 2022 annual MD&A will have the definitions and formulas and calculations for some of these terms I will used. As mentioned by Steve, 2022 was an exceptional year for the company. We set records in many areas, and I'll focus on a couple of the financial ones here. So our top line revenue was just shy of $1 billion, coming in at $989 million, which is up 84% in 2021. Both Canada and the U.S. regions set revenue records, coming in at $567 million and $421 million, respectively as record revenue came from strong operational performance in both the fracturing and coiled tubing service lines in Canada and the U.S. And we are extremely grateful as a management team to all the men and women in this company who made the success possible. The strong revenue performance also delivered record EBITDA of nearly $200 million, which is more than 3x the $63 million we earned in 2021. The strong EBITDA also translated to full year cash flow of $112 million, which we allocated judiciously towards debt reduction and investments back into our fleet. Also after a number of difficult years with net losses, STEP generated full year net income of $95 million, which also includes a $38 million reversal of the impairment loss taken in 2020. Earnings per share also improved from a loss of $0.41 in 2021 to positive $1.31 in 2022 on a fully diluted basis. So on the next slide here, you can see how dramatic the improvement has been for our company over the last few years. We talked a lot about earnings torque in our business, which refers to the leverage we get on our fixed costs -- the earnings leverage we get on our fixed cost. As you can see, once our industry gets going, and utilization recoveries, we have tremendous earnings power. The graphs that you have in front of you on the left side shows consolidated revenue in the bars, and it shows EBITDA percentage in the line. You can see there how significantly our EBITDA has improved on a year-over-year basis since the depths of the 2020 COVID year. On the right side, you can also see the split in EBITDA earned between the U.S. and Canada. We're extremely proud of our U.S. division and how they contributed to the overall corporate EBITDA in 2022, a dramatic difference. Many analysts say that we're still in the early stages of a commodity super cycle, which we're super excited about, particularly when we compare the margins today to the high margins earned by pressure pumpers in the early part of the last decade. We talk a lot about creating shareholder value when Steve and I are on the road. And one of the things that we've focused on, our key focus really for the company has been to deliver shareholder value through debt reduction. So we reduced our long-term debt from just over $300 million in 2018 to just a touch over $140 million in 2022, and then further reduced that to $132 million by the end of Q1 2023. We have a very supportive lending syndicate. But for Steve and I, and the rest of the management team, debt reduction remains a key goal for us. I spoke a moment ago about free cash flow. I'd also like to highlight that we are 1 of the leaders in the industry for free cash flow yield. These metrics are used by analysts and investors -- increasingly used by analysts and investors in global energy as they best reflect the ability of the company to continue investing into its business or provide direct shareholder returns. The next slide here, slide 12 shows our return on equity, also trending back to a healthy level. And it really reflects STEP's prudent historical capital strategy, buying companies at low dollars based on the bankruptcy and generating positive net income in 2022. We're extremely proud of how we ranked against the basket of our peers in both ROE as well as free cash flow yield. So a quick word about our first quarter results. We had a really good quarter in Q1, showing record revenue in Canada. Our U.S. geographic region had a record coiled tubing revenue, although fracturing had a softer quarter due to some client well site delays. Our total revenue of $263 million resulted in an EBITDA of $45 million, which I note is after the change for how we account [indiscernible]. More detail on that can be found in our Q1 MD&A document. I'll now turn it over to Steve for some additional color on our outlook for the rest of the year.

Yes. Thanks, Klaas. Yes, we see 2023 being very similar to 2020. We've seen some, obviously, commodity price drops. If we think back a year ago, oil was approaching $100 WTI, and even as we looked into the summer, it was greater at $120. So we've seen a pullback in commodity prices in WTI as well as natural gas. But our clients, I believe, are in a lot better position today with the balance sheet improvements. And so they've been still quite active, both in Canada and the U.S. One thing for sure that when we look into the future LNG, particularly in Canada, we're starting to see some LNG offtake. And we'll talk a little bit about that later on in the presentations. When we talk about capital budgets, we had Board approval of a $99 million capital budget, and that was broken up into really 2 parts: 1 being a sustaining capital budget, which is $51 million required to continue to operate our fleet that we have going today. And we were able to get an approval of an additional $48 million what we call optimization budget capital, and that was allowed to upgrade some of our assets into the latest technology, which, of course, benefits our clients as well as our professionals on running the latest technology. And so we're very happy about that budget approval. When you look at our Tier 4 upgrades, I've mentioned a little bit about that before, but it is a platform that we're going to continue to invest in within our company. As I mentioned, we have a 60% number today from a low-emission standpoint. Our goal as a management company by the end of 2025 that we want to have up to 90% of our fleet on dual fuel in Tier 4. So we're going to continue to invest in this technology going forward. If you look at the coiled tubing market, we made an acquisition back in September of 2022, which was the division of ProPetro's coiled tubing business. And what got excited about this business in particular is that it was a very, very large deep capacity coiled tubing business that they had. It really complemented our current business that we operate in the Permian. And so it gave us some scale, which we're benefiting from today. Where we see the -- in the Permian itself is, people have heard that the Tier 1 acreage is getting drilled up. So the Tier 2 acreage is starting to be developed. What that means is the wells are going to get -- wells are going to get deeper. There's more and more stages. So this was a great complement to our existing business that we have, and we believe that will create more service intensity in the future, and these units will be very, very well suited as the wells are getting deeper. I talked a little bit about LNG off the very beginning, but this graph chart really shows the opportunity that's in front of us from a North American structure. We -- there's -- obviously, we have prolific plays both in Canada and the U.S., the Montney, of course, in Canada, the Haynesville in the U.S. are very, very large gas plays and -- which will be a great resource for the growth of LNG. When we look at the U.S. itself, it's quite remarkable to see the amount of projections on 1 million tons per annum. So going from about 80 million tons per annum up to 200 by the end of this decade is a very, very large growth profile. So this is what we're focused on. Our assets are very, very capable of participating in this growth. And I believe this is what -- from a global [indiscernible] energy poverty and having the ability to bring clean energy to the world, this is where I believe our company participates in, for sure. And then, of course, the last thing is just the Canadian LNG opportunity. Of course, it's a huge advantage of getting from the West Coast of B.C. over to Asia, where the market is, the global markets are, and we expect that to be completed by the end of 2024, and the first trains to be exported by 2025. So with that, the very last page is just a summary of creating value. We proved it in 2022, our asset base that we currently have, generating a free cash flow of $111 million. We're going to continue to obviously work on getting our debt. We're in a very, very comfortable position today, but the direction is to continue to pay down our debt and then focus on our capital budgets and bringing the latest equipment to the industry. So with that, Klaas, is there any comments that you would like to make before we close out the meeting and ask for some questions?

I would just remind the viewers here that the financial metrics that we have are amongst the best in our peer group. The ones that we quoted were for 2022. For those who have access to forward-looking information available on Bloomberg or other similar panels or instruments there, you'll see a really healthy profile for us going forward. We're quite excited about what the future means for STEP. We think we offer great value to investors today. And we thank you all for your interest and participation today.

So there are no questions? We'll maybe give it a few seconds. Still no questions, so with that, thank you very much for joining our Annual General Meeting. We'll now call the meeting to an end. Thank you.

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