STEP Energy Services, Q4 and Year-End 2024 Conference Call and Webcast. If at any time during this call you require immediate assistance, please press star 0 for the operator. Also note that this call is being recorded on Wednesday, March 12, 2025. I would now like to turn the conference over to Mr. Steve Glanville, President and CEO. Please go ahead, sir. Thank you and good morning. Welcome to our Q4 and Year-End 2024 Conference Call. We're glad you could join us to hear about the Q4, the 2024 full-year results, our outlook for 2025, and the latest developments at STEP Energy Services. First, I'd like to invite Klaas Deemter, our CFO, to provide an overview of our financial results for Q4 and the full year. I will provide some comments on operating conditions in 2024 and what we're seeing for 2025. We will open up the call for questions after that. Klaas, why don't you take it over? Thanks, Steve, and good morning, everyone. My comments today will include forward-looking statements regarding STEP's future results and prospects. Please note that these statements are subject to a number of known and unknown risks and uncertainties that could cause our results to differ materially from our expectations. For more information on the forward-looking statements and these risk factors, please refer to our year-end 2024 SEDAR+ filings as well as our 2024 AIF. Finally, please note that all numbers are in CAD unless noted otherwise, and I will round where possible. During Q4, STEP had consolidated revenue of CAD 147 million, down sequentially from CAD 256 million in Q3. Adjusted EBITDA for the quarter came in at CAD 4 million, or a 3% margin, compared to CAD 44 million, or a 17% margin, in Q3. Q4 is typically a bit slower sequentially, given that most clients complete their programs by mid to late October. Sorry, November, but the depressed commodity prices during 2024 led to a number of clients curtailing their capital spend early, which exacerbated the slowdown this year. For the 2024 year, STEP had consolidated revenue of CAD 955 million, up from the prior year revenue of CAD 946 million. Adjusted EBITDA for the year came in at CAD 169 million, or an 18% margin, up from the CAD 164 million, or a 17% margin, in the prior year. For Q4 of this year, STEP had a net loss of CAD 45 million, or CAD 0.23 per share, compared to a net loss of CAD 5.5 million, or CAD 0.08 per share in the prior quarter. Included in this loss was $2.5 million of stock-based comp and $2.2 million in expense associated with a terminated transaction with ARC Financial. We also incurred a non-cash impairment of $23.9 million as a result of our decision to wind down the US fracturing service line. This was in addition to the impairment that we took in Q3. That impairment was taken on legacy diesel equipment and a property about to be sold, while the Q4 impairment was taken on the Tier 2 dual-fuel equipment along with some ancillary equipment. The decision to wind down our US operations was made after we were advised in late February by our client that despite executing at a high level in Q1, they were awarding the work scope beyond Q1 to a larger competitor. This has happened repeatedly to STEP since the wave of consolidation washed over the US E&P space. As clients become larger, they want their service companies to match their scale, which is making it increasingly difficult for smaller-scale operators like STEP to find a niche. For the 2024 year, STEP had net income of CAD 2 million, or CAD 0.02 per diluted share, compared to net income of CAD 50 million, or CAD 0.67 per diluted share in 2023. Again, included in net income for 2024 was CAD 6.3 million for share-based compensation, a non-cash impairment expense of CAD 36.7 million, and CAD 2.2 million of transaction costs. Without these last two unusual items, our net income would have been CAD 41 million, pardon me, CAD 41 million, or about CAD 0.56 per share. I will now turn to the geographical regions to provide key highlights on the quarter. Q4 revenue for the Canadian segment was CAD 110 million compared to CAD 211 million in Q3 and was comprised of CAD 79 million in fracturing revenues and CAD 31 million in coil tubing revenues. Adjusted EBITDA for the Canadian region of CAD 11 million, or 10%, was down from CAD 49 million, or 23%, generated in Q3. Despite the slower Q4, 2024 was a record year for the Canadian geographic region. Full-year revenue was CAD 723 million, up significantly from the CAD 580 million generated in 2023. Adjusted EBITDA on the year was CAD 169 million, also up significantly from the CAD 134 million, or 23%, generated in the prior year. We are extremely proud of the team that accomplished this. Turning to the U.S. region, Q4 revenues of $37 million were comprised of about $3 million for fracturing and $34 million for coil tubing. The quarterly revenue was down from the CAD 45 million generated in Q3 of 2024. The adjusted EBITDA loss of CAD 3 million compares with a CAD 1.4 million loss in Q3. The negative 8% adjusted EBITDA margin in Q4 was down from a 3% negative margin in the prior quarter. U.S. revenue for the full year came in at CAD 232 million, compared to the CAD 366 million earned in 2023. Adjusted EBITDA for the year was CAD 18 million, or 8%, compared to CAD 46 million, or 13%, in the prior year. In addition to adjusted EBITDA, one of our other key non-IFRS measures is free cash flow, which is calculated by taking the cash flow from operations less changes in non-cash working capital, sustaining capital, and lease payments. In the Q4, we had free cash flow of negative CAD 17 million, compared to CAD 28 million positive cash flow in Q3. For the full year, we had free cash flow of CAD 86 million, up from CAD 83 million in 2023. Looking just at capital expenditures, we spent CAD 19 million in the Q4, split CAD 8 million for sustaining and CAD 11 million for optimization capital. For the full year, we spent CAD 94 million, close to our full-year depreciation of CAD 83 million on our property and equipment. This was down from CAD 105 million spent in 2023. This year, we—or in 2024, we allocated CAD 36 million for sustaining capital and CAD 57 million for optimization capital, along with CAD 1 million on intangible assets related to our acquisition of the proprietary technology behind our STEP-conneCT coil tubing offering. Our full-year capital expenditures were offset by proceeds of disposal of CAD 9 million, compared to proceeds of CAD 3 million in 2023. We also had an active NCIB program through the first half of the year, buying nearly 1.9 million shares at an average price of CAD 4.17. We see tremendous value in buying our shares, given our book value per share of just over CAD 5 and our low multiple, and will continue to remain active on our NCIB in 2025. Finally, STEP ended the quarter with net debt of CAD 53 million, down from CAD 88 million at the end of 2023 and down from CAD 142 million at the end of 2022. Since 2018, we've paid down over CAD 250 million of debt, an accomplishment that we're extremely proud of. I'll now turn it back to Steve for his comments on operations and outlook. Yeah, thank you, Klaas. I am pleased to share some of the operational highlights from 2024, and I'll provide an outlook into 2025. Firstly, I'll begin by addressing the take-private transaction proposed by our major shareholder, which is ARC Financial. The transaction was mutually terminated when it became clear that the transaction would not meet the required approval thresholds from minority shareholders. While we were disappointed by the outcome, I'm extremely proud of how we navigated through this period of uncertainty. We continued to execute at a high level throughout the process, and our company operations and client relationships remained strong. Moving on to our operating performance, the complexities of our clients' drilling and completion programs have grown significantly in recent years, with operators drilling more wells, using more sand, and extending lateral lengths to maximize production. In formations such as the Montney and Duvernay, sand intensities have reached unprecedented levels, with some operators on track to pump close to over a million tons of proppant per year in their completion programs. In 2024, STEP's North American pressure pumping business pumped the record 2.3 million tons of proppant, which is an 8% increase from 2023. In Canada alone, we saw an increase of over 64% year-over-year of proppant pumped. While we track various key performance metrics, one that really highlights the increasing intensity of these wells is proppant placed per well. In Canada, we saw a nearly 7% increase in the lateral length of wells drilled by operators, but more notably, proppant pumped per meter rose by over 30%. This upward trend in proppant intensity signals increasingly complex operational demands, which is precisely the kind of challenge that STEP's professionals, our upgraded asset base, and new technology are built to handle. Since 2022, STEP has invested CAD 162 million of optimization capital, enabling us to develop a state-of-the-art fleet. 88% of our fracturing capacity is now dual-fuel capable, which is a key differentiator in reducing costs, diesel consumption, and associated emissions. Increasing natural gas usage is a key tool to reduce emissions and costs for operators, and we are leading the way to 100% gas-powered fracturing operations. STEP is the only Canadian company selected to participate in a trial of the industry's first fracturing pump that has a 100% natural gas-powered reciprocating engine. This engine produces around 3,600 horsepower versus 2,500 horsepower from a Tier 4 engine. This will reduce the onsite footprint of a frac fleet. We are also deploying our first suite of electric backside equipment. This would include a blender hydration unit, CAMAD units, and we plan to also trial a 100% natural gas-powered tractor, part of our logistics fleet, later in 2025. STEP operates one of the largest internal hauling fleets in Canada, with specialized equipment, which reduces the reliance on third-party hauling. Approximately 75% of our sand pump is imported by rail from the US, requiring extensive last-mile logistics. In 2024, our clients experienced zero NPT, which is non-productive time, related to our sand logistics department, which is a real testament to the efficiencies and expertise of our integrated logistics team. We are also the technology leaders in coil tubing operations, with the largest deep-capacity coil tubing fleet in North America. We take great pride in our professionals and the exceptional level of execution achieved in 2024 across both Canada and the U.S. Last year, we collaborated with a major U.S.-based operator to further expand our ultra-deep coil tubing capabilities. The result of this is called Coil +, which is an extended-reach solution that has redefined well completions. Coil + enables faster, more efficient completions in horizontal wells that continue to increase in lateral length, some which are exceeding over 5 mi of lateral length. In Q3, STEP set a new depth record, reaching 30,210 ft, or 9,288 m, using this technology. This really highlights our ability to push boundaries and deliver industry-leading results. In 2024, we also acquired the proprietary technology and intellectual property behind the STEP-conneCT units downhole tool, making STEP the exclusive provider of this technology across North America. This tool allows operators to make real-time decisions during their milling operations, saving clients time and money. Full ownership of this technology will allow us to continue to expand our market share and deliver innovative solutions to our clients. Now on to our outlook. As we look ahead to 2025, we are cautiously optimistic about the growth potential in the North America energy market. Key drivers such as higher commodity prices, rising natural gas demand, and the completions of major infrastructure projects create a strong foundation for growth. However, we are also aware of the dynamic political landscapes in Canada and in the U.S., which presents potential risks and uncertainties for our industry. In Canada, we anticipate increased activity levels year over year, supported by the completion of major projects such as the TMX and LNG Canada. We are fortunate that the Montney and Duvernay plays in Alberta and British Columbia will be the primary growth engines for the growing gas and natural gas liquids demand. The Montney play, which produces roughly half of Canada's gas production, is really still in the early stages of production. The Duvernay is a growing domestic source of natural gas liquids that will help supplement imported condensate and support Alberta's drive to increase oil sands production. Our company's fracturing and coil tubing equipment is specifically designed for the high-pressure continuous duty work needed in these basins, which positions us well to capitalize on the anticipated growth. Q1 activity in Canada is expected to be robust, with high utilization across our fracturing and coil tubing fleets. Alignment with key clients has driven strong activity in January and February, with sand volumes already tracking ahead of Q1 2024. Our industry-leading logistics fleets have handled a significant portion of this volume, delivering additional value to our business. Coil tubing, pumping, and nitrogen services are similarly busy, with activity in line with Q1 2024 levels. We continue to work closely with our clients to enhance their completion programs and maximize well performance. Recently, a key client in the Montney adopted a new completion technique that uses a single entry point for each fracturing stage. This shift has driven strong demand for our coil tubing services, keeping two units consistently active. Just in Q1, our team set a record, completing 299 stages in one single well using this method. We also pumped over 14,000 tons of proppant during the simul-frac ops. Pricing for services has improved sequentially from the Q4 of 2024, but remains lower than the Q1 of 2024. The weakening of the Canadian dollar against the US dollar has led to further margin compression, particularly on proppant, which is purchased out of the US. We have good visibility into Q2, which should track similar to the same period in 2024. The second half of the year is difficult to project with certainty, but we have a good base of work already scheduled and are actively working to help our clients level through the completion programs throughout the later part of the year, particularly in the Q4. The expected first delivery of cargo from the LNG Canada facility in early Q3 could spur additional activity in the second half of the year. In the United States, following some delays early in Q1 due to cold weather, our coil tubing activity levels are expected to stay fairly steady throughout the first half of the year, with some cautious optimism for an uptick in the back half as several large LNG projects are completed. Natural gas prices have bounced back from the low 2024 levels, helped by cold weather that has drawn down inventories, offering a bit more stability as we head into 2025. The reset of E&P budgets in January provided a moderate lift to oil field service levels. Partway through Q1, we reactivated an additional coil tubing unit that was idled in Q4 2024, which will bring the total unit count in the U.S. to 12. We expect to reactivate another unit during the first half of 2025 if demand for our services continues to grow. The fracturing market has recovered sequentially, but conditions remain challenging, and activity remains below 2024 levels. The significant consolidation in the E&P space that occurred in 2024 resulted in a reduction in the number of drilling rigs and fracturing crews, intensifying price competition for the remaining service providers. One of our two dual-fuel fracturing crews was utilized for much of the Q1 of 2025, but despite performing well in late February, this work was awarded to a larger competitor for the balance of the year. As our clients continue to grow in scale through consolidation, smaller service providers have found it increasingly difficult to compete. This past year has been a challenge for our fracturing service business, and after careful consideration, we have decided to suspend our U.S.-based fracturing operations and will begin an orderly wind-down process once the remaining Q1 work scope is complete. I want to emphasize that this is a wind-down which only includes our U.S. fracturing service business and not our coil tubing business. To close, I want to thank our professionals for their hard work and dedication. The time is a very challenging year, but I'd especially like to acknowledge our U.S. fracturing crews, whose unwavering commitment to delivering safe and exceptional service in a volatile market is a true reflection of their character and professionalism. Looking ahead, we remain optimistic about the strong opportunities in 2025. However, we are also mindful of potential risks, particularly from the evolving political landscape. The upcoming elections in Canada, along with the recent turbulence in U.S.-Canada relations, could have significant implications for our industry. We will continue to monitor these developments closely and take proactive measures to navigate any challenges that may arise. Thank you, and Operator Klaas and I look forward to answering any questions you may have. Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by 1 on your touch-tone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by 2. If you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star 1 now if you do have any questions. First, we will hear from Keith Mackey at RBC. Please go ahead, Keith. Hi, good morning. I understand the decision to wind down the U.S. business. Can you just talk to us a little bit about what you plan to do with the equipment that remains, that hasn't been written down, and how this decision might change your capital allocation for 2025? Yeah, Keith, obviously, this is kind of tough news for us to swallow. We've been working on that U.S. frac business for quite some time. Particularly after COVID, we saw some surges that we were pretty happy with, so we invested in some dual-fuel assets to obviously keep up with the current technologies. It just became really apparent to us that we were always on the losing end of acquisitions, working for small to mid-cap companies that were being bought up by large companies. Tough decision that we had. As far as your question in regards to the asset base, we'll look at perhaps selling some of that assets through auction. There are some assets that we spent quite a bit of capital on, as mentioned, that we'll either look at patriating it back to Canada, but not to stand up an additional equipment, to be more just to offset some of the older assets that may be at the end of their life usage, and then we'll go from there. As of today, our plan is just to kind of marshal that equipment and get ready for what we hope is the worst of the time in the U.S. Yeah, fair enough. Maybe just to follow up, a lot of moving pieces with respect to the outlook. Near-term Canada frac looks good, but maybe pricing is down, and coil tubing looks like it's relatively steady for the most part. Can you just give us a little bit more direction on how you think these factors all map out to your year-over-year adjusted EBITDA growth or decline from 2024 to 2025? Yeah. We have, as I mentioned, great visibility. Our Q1 is going to be solid compared to kind of Q1 of 2024 from a utilization perspective. You'll see a bit of margin degradation, but it really comes back to kind of the work scope that we had. We took on a lot more of supplying our own proppant in Canada with some clients, so that usually comes with a bit less of a margin versus just the supplying horsepower. Q2 looks good. I think what you'll see in Q2 is a bit more Duvernay activity. We've seen that from a rig count increase in Q1. I think the Duvernay is going to be pretty exciting. Of course, that requires lots of intensity. I think the real question, Keith, is kind of the back half of the year. As we saw last year, gas prices dropped kind of below the dollar AECO mark, and I think the clients that we have, they'll continue to drill, but what we saw last year is that they basically had DUCs building. There is a bit of an inventory that we believe is going into this year. If we can see gas prices holding in around that $354, I think it's going to be a pretty robust back half of the year. Understood. Thank you very much. I'll turn it back. I will just add one other thing, Keith. I know there was some equipment brought up by some competitors from the U.S. All that obviously puts pressure on margins. I think clients today are looking for sort of fully integrated business models that can supply their prop and logistics, pump-down services, coil tubing services. I think that's the big differentiator that we have. Of course, our large market share, not only in coil tubing, but being the second largest in Canada from an overall market share perspective on the frac business, provides us with some optimism that we can increase back half utilization and increase market share in Canada. Okay. Thanks a lot. Thank you. Next question will be from Josef Schachter at Schachter Energy Research. Please go ahead, Josef. Thank you very much. Glad to be talking to you, Steve. Yeah, you bet, Josef. Can you walk me through a little more of the CGU of writing down? You've got GG4 equipment. Is it worthwhile, especially given the long replacement times of a lot of this most modern equipment, to bring some up as backstopping for the equipment you do have? Is there potentially, in 2026, a demand increase for one more frac fleet that it might be worthwhile to move it up during 2025 so that you are in a position to take into account any Northeast BC pickup and activity? Yeah, I would say that we have kind of 26 of the Tier 4 pumps down in the U.S. that would not require a lot of capital to make it kind of cold weather operating for Canada. That is something the team is working on right now just to get an understanding of it. We will, obviously, if we're not going to get a good price for it in the U.S. from an auction perspective, our plan would be to bring it to Canada. As I mentioned earlier, the plan isn't to right away put an additional fleet into Canada, but it does provide that flexibility to be able to add horsepower when needed. I think just to add on a bit of the complexities of the business today, I kind of talked a little bit about it, but I'll just share. We were on a pad for, call it, 32 days in Q1, and we pumped over 365 stages in 30 days. When you start thinking about all that and pumping at, call it, 16 cubes a minute, you need a lot of additional capital, a lot of additional equipment to be able to support that operations. Having some additional horsepower, I think, would ease some strain off of our Canadian team on how well they've been executing. Is it going to be, given the higher pressure, the more stages, the more prop, is there going to have to be a price increase to cover the costs of the incremental rough work on the equipment, especially in the Duvernay? Yeah, I would say that there are some older fleets that are out there that are not continuous duty, so they haven't upgraded to the pumps that we have. Yeah, I mean, I'm not going to say it's a great business. It still is a great business, but it's tough. It is really tough because you have delays in your schedule, and this industry has, I would say, overbuilt. Right today, you need to pump 20-25 days a month to make a profit. Our clients are enjoying this. They're enjoying, obviously, the pricing has went down year over year. I think from an efficiency standpoint, the OFS sector doesn't get enough credit for the amount of work that we put into making our clients efficient, and they're generating some great cash flow. I think it's time for us to do a bit of a reset to replace these assets. I've mentioned on the calls before, it's about CAD 80 million per frac crew. You start thinking about that long-term, Josef, there's going to be needing some price increases going forward. Okay. Last one for me. If you are able to sell some of your U.S. equipment, bring up to others here and have it for yourself here. Debt's now CAD 57 million, down from CAD 86 million. Good move there. What is the target debt level? At what point would you then say, "Okay, if we're at CAD 30 million or whatever the number is, you'd be more interested in NCIB or dividend"? How do you look at shareholder returns after you get to whatever comfort zone you have on the debt level? Yeah, Josef, it's Klaas here. That's a great question. Thank you for that. We're going to continue to push down that debt number. We do have an NCIB that is active right now, and we expect that to remain active through the rest of the year here. I think you could see debt closing in on CAD 40 million, maybe plus or minus that a little bit. As we think about potential proceeds from the sale of any U.S. equipment, one of the things that we're really interested in is continuing to solidify our market-leading presence on our coil tubing side. We do know that there are some companies that are running out of cash. We have been able to introduce new technology to the various basins that we operate in. We know others just do not have the capacity to do that. They do have some equipment that is attractive to us, so there is opportunity for us to consolidate a little bit. A lot of those companies are private down there. We are one of the few publics that operate. Consolidating some of those smaller private companies will allow you to stabilize the market a little bit and continue to deliver that industry-leading service that we have. I am going to invite Steve here to talk a minute about those laterals. We are seeing a huge explosion in growth in those things that Steve will touch on here. Yeah, I talked a little bit about it, Josef, in the call, but we're seeing—I will just give you an example. One operator drilled, call it, less than 70 wells that were three-mile laterals in 2024. They plan to drill over 200 wells this year. Having our technology, which we talked about, the Coil +, just allows them to have no doubt in their mind that they can reach TD when we start milling out these wells. I think that is going to be really interesting to pay attention to. Having some additional assets that Klaas talked about, the pumping assets, we are going to transfer some into the coil tubing business to be able to support that. I think there is going to be a very niche market that hopefully will demand a premium price. Super. Wonderful. Thanks very much for answering my questions, and look forward to chatting with you going forward. Thank you. Once again, ladies and gentlemen, a reminder to please press star one if you have any questions. Next, we will hear from Waqar Syed at ATB Capital. Please go ahead. Hi, Steve. Good morning. How much horsepower do you have in the U.S. market? I would call it just over, call it 125,000, I think, Waqar. I do not have the exact number, but call it two fleets that we have. We had three fleets down there. The third fleet was kind of diesel assets. As I mentioned before, we have been supporting our growing coil tubing business with some additional horsepower. I think we are about 125,000 horsepower. That is right. 48, 50 pumps. Yeah. In that number. Yeah, there you go. All right. Good. Then just on the Canadian side, how much horsepower do you have in Canada? We're north of 300,000, Waqar. Okay. Sounds good. All right. Good. On tariffs, do you expect tariffs to have an impact on your frac sand costs? Do you think that that's going to be excluded, as one of your competitors mentioned? If you could give us an update on that. On chemicals and others, similarly, you're thinking about upgrades, things like that, on your optimization capital. Does the cost of that go up? Similarly, both OpEx and CapEx, could you maybe talk about how the tariffs could impact? Yeah, I'll talk about the tariffs. Maybe Klaas, you can talk a little bit about the OpEx, CapEx. The pressure pumping group in Canada has set up a committee through Enserva to look at these tariffs. We have obviously been sending letters to the feds as well as our provincial government. The challenge on the tariffs as of today is more on proppant being imported from Wisconsin. We have looked at that as it is obviously going to be a pass-through cost to our client if the tariffs do go on. I do not think it is going to be as large as what we had first thought because it is really just on the proppant itself and not on the cartridge. We are hoping to get an exemption. There have been some letters sent, as I mentioned, to the feds and to our provincial leaders, and they have been really supportive of not slowing down the oil and gas industry. This would be a crutch if it were to come in. We are talking 40,000-50,000 jobs that the service sector basically contributes to. I'm pretty sure our government is very concerned about any type of cost increases going into the business. Yeah. Just speaking of cost increases, Waqar, the deterioration in the FX rate on this side of the border effectively turns into a tax on everything. We did talk about it in our MD&A that we are seeing some margin compression on sand. It's a big input cost for us. There's that. A lot of our parts are sourced out of the US. We do see some inflationary pressure just coming from the exchange rates. Steve talked about pricing. This is something that's a very active discussion right now. Our clients obviously benefit from weakening Canadian dollar, whereas it hurts us. There is some talk with clients around rebalancing the impact of FX through pricing increases. We think that's a fair request just to cover the cost. In terms of our overall budgets, we haven't made any big changes. As a result of that, we're still—I mean, these tariffs, they do change quite frequently. We're keeping an eye on it, and we'll react accordingly as best as we can. That's about all we can do right now. Yeah. Sure. Great. Thank you very much. Thanks for your answers. Thanks, Waqar. At this time, Mr. Glanville, we have no other questions registered. Please proceed, sir. Yeah. I'd just like to thank everybody for joining our year-end Q4 conference call. Just a reminder, it was a great year for STEP. I look forward to hosting a conference call for Q1. Thank you very much. Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines.