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

Ladies and gentlemen, welcome to the Annual Meeting of STEP Energy Services Ltd. Please note, the meeting will be recorded. I would like to introduce Jeremy Gackle, Director of the Corporation and Chair of the meeting. Mr. Gackle, the floor is yours.

Thank you, and welcome to the Annual Meeting of Shareholders of STEP Energy Services Ltd. I am Jeremy Gackle, a member of STEP Board of Directors, and I will chair this meeting. This year, STEP is holding a virtual meeting, meaning that it is a virtual audio-only online format using TSX Trust Company's virtual meeting platform. There is not an in-person component to this meeting. STEP believes that the virtual-only format is the most successful way for shareholders to attend the AGM regardless of their geographic location. Shareholders and validly appointed proxy holders are able to participate, submit questions and vote online using the virtual meeting platform. Only registered shareholders who held shares in their name as of April 16, 2025, the 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 this meeting and 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. STEP's executive officers attending virtually are Steve Glanville, President and CEO; Klaas Deemter, CFO; Josh Kane, Vice President, Legal and General Counsel. Please note that Mr. Glanville is attending the meeting in person in his capacity as both the director and officer of the company. Several current and proposed directors of STEP Energy Services are also in virtual attendance today. 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 virtually, representing in the aggregate, not less than 15% of the shares entitled to vote at the meeting. The preliminary scrutineers report has been received. It shows that approximately 57.9 million common shares are represented at the meeting being approximately 80.31% of the shares eligible to be voted at the 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. The business of the meeting is described in the management information circular dated April 7, 2025, which accompanied the notice of meeting. I've received a 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 2, 2025. 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'll take the notice of meeting as read and with the consent of the meeting, we'll dispense with reading it. We will conduct the votes on the matters before us by ballot. Each registered shareholder or the duly appointed proxy holder is entitled to vote on the matter. As 1 vote in respect of each share entitled to be voted on 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 of 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 into the text box. Questions can be submitted at any time. Once discussions 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, you 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, 2024, 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 relating 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. We will proceed with voting. All polls are open on the virtual platform, and I ask that you please cast your vote if you have not already done so. [Voting]

The 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 or until their successors are elected or appointed. Please note that in normal course effort to refresh the Board, Mr. Douglas Freel, and Ms. Evelyn Angelle are no longer standing for reelection. Ms. Angelle has served the Board since 2019 and we value her dedication and collaboration and wish her the best with her future endeavors. And Mr. Freel has been a Director and Chair of our Board since the founding of the company on March 25, 2011. We have a STEP, I'd like to thank Mr. Freel for his leadership to have seen the company achieve significant milestones. We look forward to building on a strong foundation that has been laid. STEP is excited to put forward 2 new directors, Ms. Jacque Forrest and Mr. Michael Kelly for consideration by the company's shareholders. Shall director elections before the shareholders today be successful. It is expected that I will serve as the new Chair of the Board, an opportunity that I'm looking forward to. An appointment of a lead director and appointments to the various Board committees will also follow today's AGM. All other proposed nominees have consented to stand for reelection and serve as the directors if elected. STEP has adopted a majority voting policy, whereby in an uncontested election, if any nominee or director receives a greater number of votes withheld from his or her election than votes for such election. He or she shall tender the 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 of extraordinary circumstance warrant, the applicable director continues 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 a motion to nominate each of the directors listed in STEP's management information circular being: Jacque Forrest, Jeremy Gackle, Steve Glanville, James Harbilas, Michael Kelly, Ed LaFehr and Rachel Moore for election as directors of the corporation to hold office until the next annual meeting of the shareholders or until their successors are 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 the nominations closed. If there are no questions, we will proceed with voting. All polls are open on the virtual platform, and I'd ask that you please cast your vote if you have not already done so. [Voting]

The 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 auditor of the corporation until the close of the next annual meeting of the shareholders and authorize the directors to fix the remuneration. If there are no questions, we will proceed with voting. All polls are open on the virtual platform, and I ask that you please cast your vote if you've not already done so. [Voting]

The motion is carried. 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 3:11 p.m. Mount Center Time. I will close the polls on all resolutions at 3:12 p.m. Mount Center Time to allow online viewers to catch up. [Voting]

If there is no further business to be brought before the meeting, the meeting will be terminated. The polls are now closed. I declare all resolutions carried and to terminate the meeting. We will now proceed with the corporate presentation and any formal discussion regarding the business affairs of STEP hosted by CEO, Steve Glanville; Klaas Deemter, CFO, during which time, we will respond to questions from shareholders. Steve?

Thank you, Jeremy. Really appreciate it, and thank you, everyone, for joining our Annual General Meeting. I'll probably take the next call it, 5 to 10 minutes, I want a bit of a highlight that where STEP is currently at today. So operator, if you wouldn't mind flipping to the next slide. Perfect. So what does STEP look like today? So currently, we are operating 474,800 horsepower, which, of course, is how we calculate amount of equipment we have on the hydraulic fracturing side. That equates to 6 fracturing fleets located in Canada. We have 22 active coiled tubing units 10 of which are operating in Canada and 12 of which are operating in the U.S. Currently today, we have about 1,250 employees. We call them professionals and about 72 million of shares that are outstanding. I just want to highlight this map slightly. And you can see the areas colored in orange, which is where we typically operate and really the unconventional shale plays that are located in North America. Our asset base today that we've designed is extremely technology-advanced work in the most high pressure and extended reach wells that are in the basins and the Montney and the Duvernay and particularly in Canada, are areas that we are focusing on, and we believe there's huge potential growth in Canada in those 2 plays. As we move into the U.S., you'll see it's located in the Permian, which, of course, that's been obviously a very, very well-positioned area for us, high utilization. And so we're kind of keeping an eye on other areas that are in the U.S., particularly the gas plays, we think that's going to be a major driver in the next 5 years when we see our natural gas usage increase in North America. Would you please turn to the next slide. We wanted to put this picture up and it's a really good illustration of all of our services that we offer all in 1 location. If I just start on the right side of the picture, you'll see a number of ancillary pumps. We call that our pump down division, our ancillary pumping services. And so we have a fleet of equipment in Canada that supports that operation. And you'll see 2 massive tubing units in the picture as well. That represents about 10% of our overall fleet capacity that's active today. In the middle of the fleet or the picture, you'll see the fleet of fracturing equipment. That frac fleet right there is about 40,000 horsepower of equipment, which again is about kind of around that 10% and a little bit less than 10% of our overall active horsepower. On the very top of the screen, you'll see some sand bins. We've really invested in the infrastructure of this location and of our services to have it fully integrated. So it's a big part of our business is being able to not only pump our proppant into the well, but also the store and to actually haul it from transload to location. Would mind moving to the next slide, please. As we look at 2024, it seems like such a long time ago now that we're talking in June, this business seems to fluctuate quite often, but provides us a bit of reflection on how a 2024 had turned out for the company, and it was really fantastic. We generated kind of close to $1 billion of revenue, so $954 million of revenue -- and we ended the year at our second highest EBITDA margin since we've been in the business at $169 million of adjusted EBITDA. And when I look at Q1 or look at 2024 as a whole, Q1 of '24 was absolutely amazing for the company, everything was going extremely well from an activity standpoint. The commodity prices back Q1 of '24, we were close to $90 per barrel and gas prices were very high as well. And so as the year kind of unfolded, we actually saw kind of a decrease in commodity prices, natural gas and particularly has dropped about 30%. And so we're pretty happy with how the year unfolded for us even with a decrease in commodity prices. The bottom chart talks a little bit about free cash flow, and I'll talk a little bit about that in future slides. But what's really important to highlight is just the amount of free cash flow that the company has been able to generate in 2024, has allowed us to pay down some debt has allowed us to really put some optimization capital to the company, to the asset base and get a structured or basically structure the company for future growth. Next slide, please. As we look in just the last quarter that we had Q1 of 2025, another great quarter for the company where we generated close to $307 million of revenue in the quarter and adjusted EBITDA of $58 million, which created a net income of about $24 million. In the quarter, we saw a significant utilization in basically our Canadian fracturing business and our coiled tubing business, both in Canada and the U.S. We made a decision from the corporation to wind down our U.S. fracturing operations in the quarter where we suspended it in late Q1 and has since been basically winding down the operations as returns did not support continued operations. Let's move to the next slide. This is what I talked about a little bit earlier, just the overall financial performance when it comes to free cash flow in our business. You can see since 2021 we've been able to generate close to $308 million of free cash flow, which really has enabled us to pay down about $139 million of debt, which has put the company in a great position. We've also been able to spend about $153 million in that time period in optimization capital and optimization capital for us is basically converting our fleet from diesel to natural gas, which, of course, has been really important to keep up with technology. It's something our clients are looking for, and it's great from a sustainability standpoint. When we look at our capital budget for 2025, we're going to spend roughly about $79 million of capital, which is comprised about $47 million of optimization capital and $32 million of sustaining capital, which basically allows us to run the fleet today and keep it current. And once again, we'll be focusing on the optimization capital into natural gas upgrades -- we'll talk a little bit about that later on in some slides. We've also been current with our NCIB renewal from a shareholder return perspective. And how we look at our NCIB is our book value today is around $5.45. So any time it's lower than our book value, we'll be participating in buying back our shares. You're going to see on that bottom slide, the biggest -- I guess the biggest thing that we have been focusing on over the last 4 years is paying off our debt. We entered into COVID close to $300 million of debt on our balance sheet, which is the black line that you see on the bottom of the screen. And as you can see, we ended 2024 off at about $52 million of debt. And as we look into '25 we expect it to be kind of around that $40 million of debt. If we move to the next slide, please. Let's quickly look at some operational performance that we've highlighted for Q1. I don't want to get into too much detail here. But what we've really seen, particularly in Canada, as we've seen -- the increase in pumping proppant, the sand intensity, I guess, has been really growing. You see that on the bottom chart where we look at the overall proppant pump and we measure it kind of total proppant pumped and then proppant pumped per day. And we had a few company records where we pumped over 6,000 metric tons of sand in 1 day in Canada. And then 2024 alone, we pumped about 2.3 million metric tons of sand. On the right side, you can look at our coiled tubing business line, and you can continually see the overall running meters that we ran and the overall basically depth of these wells that we're seeing today. And we've hit a depth record in the U.S. of 9,208 meters and our 30,000 feet. And when we started this company in 2011, we were thinking if we could reach 6,000 meters, that would be a milestone in the company, and now we're reaching out to 9,000 meters. So it's a tremendous effort that our team has been able to accomplish. The next slide, please. Just wanted to highlight here our last mall logistics fleet. Currently, we've had up to 60 trucks that are operating around the clock, 24 hours a day, holding sand to our or efficient frac fleets. And this allows us to really control the over supply chain to get our proppant from point A to point B. It's kind of hard to see, but you can see on the left side, just the -- the overall transloads are in blue and the regional mines are in red. If we look at just Canada alone, there's about 10 million tons of sand that would be pumped in Canada in 2025, about 6 million tons of that still has to come from, call it, out of Wisconsin, so import supply. So we -- we have a large amount of, I would say, reliance on sea and rail to get it to areas in our working interest. And of course, sand storage is really important. And you can see that's something that we've invested in. Go to the next slide, please. Of course, this is a picture of our coiled tubing fleet is something that we started the company with. But what's really unique about our business today is that we've been able to use a lot of technology that we've developed some real-time data services, which we call STEP-conneCT. And what that provides us with is this information that's bottom hole related, that's real time. So we can make decisions on the fly. Our professionals that are operating in the field can see this data coming in and be able to react quickly with the information, and it creates a lot more efficiencies. And ultimately, we want to get to basically complete automation of our coiled tubing fleet and this will help us get there. From the extended reach side of the wells, it's -- we're starting to work on wells in the U.S. that are 4 miles from a lateral length, which is really difficult to get coil tubing out to that -- to the depths of those wells. So we've developed a procedure which we call Coil+ and basically allows us to reach these steps without much issue and unlocks a lot of reservoirs, I think that our clients are looking at today, particularly in the Permian, we're working on some of the wells that are Tier 2 acreage that they need to get the extra lateral length to get the production of the wells. So we're positioned really well in that area. Next slide, please. Just want to highlight some of the investors that we talked about earlier in regards to our next gen or we call it the NGX fleet. And it's -- this unit that you see on the top right is the latest prototype that we have that's actually working in the field today and it's a 100% natural gas reciprocating engine. So what this does is it basically eliminates all diesel on location, and that's the strategy that we want to move going forward. In the bottom 2 pictures are just some ancillary assets that we have. We have an electric blender that's on the bottom left. And then we're going to be trialing our first fully integrated natural gas tractor that's going into our logistics fleet and you see that on the bottom right. Next slide, please. This is the last slide that I'll be talking about, which is, of course, where we see the 2025 going and then into beyond from the -- going into the next few years into the back end of the decade, what's really interesting for us, particularly we're seeing in Canada is we're finally going to get our first LNG shipment off in the next month or so out of LNG Canada. And what we want to highlight is the amount of growth that we're seeing on the LNG side in North America, which is going from about 10 Bcf per day up to 25. So it's a very large increase over the next 4 years. And how we see it today is in order to get a molecule of gas out of the ground or these unconventional shales that needs to be hydraulic fracture. We're positioned really well for growth. We see hopefully the Canadian government working with this industry to be able to exploit the gas plays that we have, which are prolific in Canada. So with that, I'll turn it back over to the operator, and have Jeremy close off the meeting.

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