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

All right. Thank you, everybody, who's being here for our AGM. Welcome to the Annual Meeting of the Shareholders of STEP Energy Services Ltd. I'm Douglas Freel, Chair of the Board of Directors of STEP and I will chair this meeting. This year, STEP is holding a hybrid meeting, meaning that it is a virtual audio-only online format using TSX Trust Company's virtual meeting platform as well as in person in the Northcote Conference Room at Bow Valley Square II. This meeting is accessible to all our shareholders and validly appointed proxy holders regardless of physical location, to participate, submit questions and vote in-person and online. Only registered shareholders who held shares in their name as of April 17, 2024, record date of this meeting or their validly appointed proxy holders, are entitled to vote at this meeting. Shareholders were also encouraged the Board in advance of the meeting and submit questions in advance by e-mail through STEP's Investor Relations e-mail. This meeting will be conducted in two parts. I'll first proceed with formal business required to be addressed, following which, we will have a corporate presentation and open the meeting for questions. A number of STEP's executive officers have joined this meeting, including Steve Glanville, President and Chief Executive Officer; Klaas Deemter, Chief Financial Officer; Josh Kane, Vice President, Legal and General Counsel, and President from STEP -- Our -- yes, Rory, the President -- COO. COO and we have Directors present Steve Glanville, Rachel Moore, Jeremy Gackle and myself. Meeting will now come to order. I will ask Josh Kane, STEP's VP, Legal and General Counsel to act as the Secretary of the meeting and TSX Trust Company to act as the 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 or virtually or representing in the aggregate, not less than 15% of the shares entitled to vote at the meeting. Preliminary scrutineers' report has been received and chose that approximately 47.4 million common shares are represented at the meeting, being approximately 66% of the shares eligible to be voted at this meeting. I'm, 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 scrutineers' report to be attached to the minutes of this meeting by the Secretary. I will now commence the formal business of the meeting. Business of the meeting is described in the Management Information Circular dated April 8, 2024, which accompanied the notice of meeting. I have received the declaration prepared by TSX Trust Company, 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 of May 6, 2024. I direct a copy of the notice of the 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 the meeting as read. And with the consent of the meeting, we'll dispense with the reading of it. We will conduct the votes on the matter 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. For virtual attendees 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 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 left menu have 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. For in-person attendees, votes will be conducted by a show of hands unless a ballot is requested, the votes to elect the individual directors will be conduct by ballot. 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 attending this meeting virtually, 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. The first item of business concerns the presentation of STEP's financial statements for the year ended December 31, 2023, 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 document 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 reform 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 of the meeting. As Chair, I propose the motion to fix the number of directors to be elected at this meeting at 7. Are there any questions related to this motion? As there are no questions, we will proceed with voting. All those in favor, signify in the usual manner by raising your right hand. [Voting]

Opposed? [Voting]

Motion is carried. 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 until their successors are elected or appointed. All proposed nominees have consented to stand for reelection and service 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 withheld from his or her election than votes for such election, he or she shall tender their resignation to the Board following the meeting. Compensation and Corporate Governance Committee and the Board of Directors will consider the resignation, which is expected to be promptly accepted, except in circumstances where extraordinary circumstances warrant the applicable director continuing to serve as a member of the Board of Directors. The Board will disclosed its selection 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 a motion to nominate each of the directors listed in STEP's Management Information Circular being Evelyn Angelle, myself, Douglas Freel, Jeremy Gackle, Steve Glanville, James Harbilas, Edward LaFehr and Rachel Moore, are stand 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 in the corporation's bylaws, I now declare that the nominations closed. We will proceed with voting. All those in favor, signify in the usual manner by raising your right hand. [Voting]

Opposed? [Voting]

Motion is carried. 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 Charted Accountants as our auditor of the corporation until the close of the next Annual Meeting of the Shareholders and authorize the directors to fix their remuneration. Are there any questions? As there are no questions, we will proceed with the voting. All those in favor, signify by raising your right hand. [Voting]

Opposed? [Voting]

Motion is carried. For those of you who have not voted on all the resolutions, please do so now as I will shortly close the poll. It is 3:10 and I'll close the pole in one minute. [Voting]

Polls are closed. If there is no further business to be brought before, the meeting will be terminated. Okay. So I declare all resolutions carried and to terminate the meeting. We will now proceed with a corporate presentation and a formal discussion 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.

Thank you, Douglas, and good afternoon, everyone. I thought we would spend the next probably 10 minutes -- 10, 15 minutes probably just going over some of the highlights that we had for 2023. So I'll spend a few minutes talking about that. Klaas will get into talking a bit about the financial performance of the company, and then we'll just finish off with an outlook, what we see the future looking like. So with that, there will be some forward-looking estimates in here and our Legal Counsel, Josh, has advised us to put the disclaimer up on this presentation. So there it is. So just a bit about the company. For those of you who are not familiar with it, we've been around for 13.5 years. We were founded in 2011, and where we sit today, we're about 1,380 employees currently operating in the field. We have 8 frac crews and 23 coiled tubing units. Just our geographic location of where we operate are in the -- really the deep high pressure basins across North America. We're very -- fortunately, we've been able to design equipment to be able to handle the intensities that we're seeing, particularly, Montney and the Duvernay and the Permian is where we operate most of our hydraulic fracturing equipment. As I mentioned, we have 8 frac crews, 6 of which are in Canada, 2 are in the U.S. Just out of the 8 frac crews, we've been -- over the last number of years, we've been upgrading our asset base to dual fuel. So having the ability to run natural gas and diesel with it. So really today, we have about 70% of our fleet that is capable of running dual fuel. By the end of this year, we will have 75% and our internal corporate goal is by the end of kind of 2025 we're going to have close to 90% of our fleet on dual fuel. And there's different stages of dual fuel. Of course, technology always is increasing, but the latest advancements in technology of dual fuel is what's called Tier 4, that's really a low emission engine that Caterpillar puts out. And we have basically 3 out of our 8 fleets are the latest technologies that are operating today. And we're seeing substitution rates up to 80%, which is not only great for the environment, but fantastic from our clients' perspective on savings in diesel costs. When we look at our coiled tubing business, we would be ranked #1 in Canada. And then in the U.S., we're definitely growing our position as to being increasing our market share. We -- as kind of our cornerstone on where we started the company. It's -- there's been a number of companies that have tried to replicate what we do under the 13.5 years in business, we probably have seen 14 to 15 coiled tubing companies go out of business, because it's really turned into a sophisticated business. And what I mean by that is the coiled tubing material itself, it wears out over time. So as you cycle it across points in the gooseneck are basically going into the well. I always refer to it as a paper clip but only can cycle so many times and then it breaks. And so with some of our technology and our great engineering support that we have within our company, we've been able to really predict when that material is going to fail. We want to retire that stream prior to that. And so those strings of material, the coiled tubing strings, when we started at 13.5 years ago, it cost about $150,000 to buy a string of pipe. Today, it's between $300,000 and $400,000. So it's a very, very large capital investment that we've made into our coiled tubing business. We are running the deepest largest capacity fleet in North America where we run 33 units that are capable up to 2-5/8s of -- 30,000 feet of 2-5/8s pipe, so 9,000 meters. Some of the operational highlights. 2023 is our second best year ever in the company where we generated -- cost will get into the numbers with close to $1 billion of top line revenue. Some of the highlights of the year is really based on where we see the tight shale reservoirs going. And what we're seeing is this going -- the wells are getting longer, so more horizontal stages per well. So which increases not only the amount of stages per well, but the frac intensity. We saw that in Canada in Q1 of just the amount of profit that we pumped in Q1 in Canada was extraordinary, and it's really based on the intensities are increasing the number of stages per well are increasing. And how does that help STEP out as well, number one, we're obviously, a pressure pumping company. But we have the ancillary services as well. So we have pump-down services where we actually pump the plugs in the well, the isolation plugs. And then secondly is our coiled tubing business where we go in afterwards, and we actually mill the plug. So it's benefiting kind of STEP as a whole is as these wells are getting longer. And just we're heading on one of our clients' locations in the next 3 weeks, and they've declared publicly that they'll have the deepest Canadian well in history that just over 9,000 meters in the Duvernay. So we're proud to be a partner of theirs and be able to mill that out. In the U.S., what we've been able to see is pumping time matters. And happy to see that back -- last year, we had 3 fleets that were pumping up to 1,500 hours combined. So call it, 500 hours per month per fleet, and that is extraordinarily where we're seeing over 20 hours of pumping time per day. And how we model our business is really on pumping time and not on standby. And so our -- our team of professionals in the field, our team of professionals from a maintenance standpoint, from a sales perspective lining out the jobs, it's absolutely extraordinary what we're seeing as our pumping average, which is a little over 20 hours per day now. In the U.S., we're definitely hitting depth records of, see right here, 8,200 meters that is extraordinary. We have some new technology that we've been partnering up with a client to be able to get deeper than that without having fractioning out that we're excited to move forward with. That is some of the highlights on the year. I'll let Klaas talk about our financial performance. Over to you, Klaas.

Good afternoon. My name is Klaas, CFO for the company. Just a quick couple of highlights. So last year was our second best year ever. We did just a shade under $950 million top line revenue. $164 million, nearly $164 million in EBITDA revenue. Second best year, despite the uncertainty that existed in the commodity price [indiscernible] market from a price perspective, particularly in the gas market. So we're able to generate significant free cash flow. It's the best than [indiscernible] of the company. Steve talked about our dual fuel commitments that we've made. So we're continuing to invest in the latest technology there. On the fracturing side as well as on the coiled tubing side, where we continue to set a depth records as well as bring new technology to the field for our clients. So the free cash flow also allowed us to continue pushing down our debt numbers. So since 2018, we've paid down about $200 million in debt. We continue to pay down debt, we expect debt to be in the range of $60 million by the end of this year, which is roughly equal to our working capital and average working capital number. And as we continue to pay down that debt, we see the value that we create there being accrued to the shareholders. Second part of our shareholder return strategy was launched at the end of last year in December, where we initiated an NCIB. So we're permitted by the TSX to repurchase 3.6 million shares. We've been very active in the market. We're active daily through our broker partners, we purchased about 1.5 million shares to date. We expect to continue buying back shares. We see those tremendous value in our share price. As you can see there, our book value per share was $5.50 at the end of March. And on the replacement cost exercise that we've conducted for our insurers. We have a replacement cost value of approximately $1.4 million to $1.5 million. So roughly equal to $18 to $20 per share, very rough numbers. So we continue to see benefit in repurchasing shares, and we'll continue to do that through the rest of this year and then into coming years as well more likely.

2024 has turned out to be, obviously, an extraordinary year so far for the company where we generated record revenues in Q1. When we think about that is what's the driver behind that? And I mentioned a little bit about the intensities of increase, but also we've aligned ourselves with clients that are extremely active, which has been beneficial for long and higher utilization with our asset base, allowing multiple business units to work for the same client, which is creating long-term relationships with our clients. The oil prices, I think we're going to see around this $70 to $75 or even higher. I think we've kind of hit -- I hope, I'm [ staying afloat ], but we have levers within the company to be able to pull back capital if we start seeing any additional decreases. I mean natural gas is, AECO is at $1.50 [indiscernible] , is that what AECO is at, something like that. So our clients in Canada are continuing to drill. They see opportunities with the LNG expansion -- with LNG Canada coming online, which is obviously amazing for Canada as well as the TMX expansion to continue to develop our Montney world-class gas field and Duvernay. So we see 2024 being another great year for the company, both in Canada and the U.S. on our coiled tubing business, we've introduced some technology was called STEP-conneCT into the U.S., which is running e-coil inside of the coiled tubing string itself. We are really the ones that are providing that service today down in the U.S. that's helping obviously differentiate us in different basins within the U.S. The Canadian -- or the U.S. frac business, it's a bit of an oversupplied market that we're seeing today. I think that is starting to clear up as more and more companies either get bought up or they're turning to park some of the older diesel fleets. We're starting to see a bit more activity particularly from the private E&Ps that are starting to pick up drilling rigs, you'll see that in the drilling rig forecast going forward that more and more private companies in the U.S. are starting to go back to work. So with that, I'm going to leave it open to any questions if there are any questions, but we're excited for what 2024 is going to bring for the company. No questions. I guess I will conclude our AGM. Thank you very much for attending. Appreciate it.

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