Mr. Steve Glanville reports

STEP ENERGY SERVICES LTD. REPORTS THIRD QUARTER 2023 RESULTS

Step Energy Services Ltd. has released its financial and operating results for the three and nine months ended Sept. 30, 2023. This news release should be read in conjunction with the management's discussion and analysis (MD&A), and unaudited condensed consolidated interim financial statements and notes thereto, as at Sept. 30, 2023. All financial amounts and measures are expressed in Canadian dollars unless otherwise indicated. Additional information about Step is available on SEDAR+, including the company's annual information form (AIF) for the year ended Dec. 31, 2022, dated March 1, 2023.

Third quarter 2023 highlights:

• Consolidated revenue for the three months ended Sept. 30, 2023, of $255.2-million, increased 4 per cent from $245.1-million for the three months ended Sept. 30, 2022, and increased 10 per cent from $232.1-million for the three months ended June 30, 2023.
• Net income for the three months ended Sept. 30, 2023, was $20.7-million (28 cents per diluted share), compared with $30.9-million (43 cents per diluted share) in the same period of 2022 and $15.3-million (21 cents per diluted share) for the three months ended June 30, 2023.
• For the three months ended Sept. 30, 2023, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $52.3-million or 21 per cent of revenue, compared with $58.1-million or 24 per cent of revenue in Q3 2022 and $47.4-million or 20 per cent of revenue in Q2 2023.
• Free cash flow for the three months ended Sept. 30, 2023, was $37.1-million, compared with $40.1-million in Q3 2022 and $34.8-million in Q2 2023.
• Step made significant progress on debt reduction during the quarter, achieving its year-end goal of reducing net debt to less than $100-million one quarter early, while continuing investment into the long-term sustainability of the business:
  • The company had net debt of $89.8-million at Sept. 30, 2023, compared with $142.2-million at Dec. 31, 2022. Step has reduced net debt by nearly $230-million from peak levels in 2018.
  • The company invested $25.2-million into sustaining and optimization capital equipment in the quarter. The company completed conversion of nine Tier 4 direct injection dual-fuel pumps in the United States and had 16 Tier 4 dual-fuel units in the field in Canada at the end of Q3, providing diesel substitution rates of up to 85 per cent.

Third quarter 2023 overview

The third quarter of 2023 continued the trend of positive financial results since the first quarter of 2022. Revenue of $255.2-million and adjusted EBITDA of $52.3-million were driven by solid performance across all service lines. Despite the unstable market environment, the adjusted EBITDA in Q3 2023 was the best quarterly financial results for the current year. While adjusted EBITDA showed a modest decline year over year, it showed a slight improvement sequentially as a result of improved activity in the Canadian fracturing and U.S. coiled tubing segments of the company's business.

Commodity prices stabilized in the third quarter after a volatile second quarter. West Texas Intermediate (WTI), the benchmark U.S. oil price, rose from approximately $70 per barrel at the start of the quarter to approximately $90 per barrel at the close. Strong global demand, coupled with cuts from the Organization of the Petroleum Exporting Countries (OPEC), finally began to impact the physical oil market, driving the price of crude oil higher. U.S. natural gas prices rallied approximately 20 per cent quarter over quarter, with the benchmark Henry Hub natural gas price responding to the drop-off in drilling activity. The U.S. land rig count continued to slide, declining 10 per cent from Q2 to an average count of 630 rigs in Q3 20231. The average Q3 2023 rig count in the Permian basin, home of Step's three U.S. fracturing crews, was 326 rigs, down 24 rigs since Q2 20231. Rig counts in Canada increased to 187 rigs in Q3 2023 from 116 in Q2 2023 (1).

Step's Canadian fracturing service line had another solid quarter, despite residual impacts from wildfires and floods in Q2 that delayed operations to start the third quarter. The Canadian fracturing service line generated $127.4-million in revenue on 308,000 tonnes of proppant pumped, the best third quarter in the company's history. Activity in the U.S. fracturing service line was down sequentially on weak client activity at the start of the quarter but finished strong with all three fracturing fleets fully utilized.

U.S. coiled tubing continues to demonstrate the advantages of scale in that business, setting another quarterly record for operating days while generating $50.0-million in revenue for the quarter. Step shifted units to capitalize on the higher demand northern regions during the quarter. Clients in these regions have been very receptive to Step's technical competency and fleet capability, laying a strong foundation for growth in these areas in 2024. The U.S. coiled tubing division also set a depth record of 8,253 metres (27,075 feet) for a client in the Permian basin. Canadian coiled tubing levels were sequentially higher in Q3, although decisions by some clients to shift budgets from 2023 to 2024 negatively impacted the service line in the quarter. Early in Q4 2023, the Canadian coiled tubing division also set a depth record, reaching 8,101 metres (26,578 feet) for a client in the Duvernay.

Net income was $20.7-million in Q3 2023 (28 cents of diluted earnings per share), sequentially higher than the $15.3-million in Q2 2023 (21 cents of diluted earnings per share) and lower than the $30.9-million in Q3 2022 (43 cents of diluted earnings per share). Net income included $2.9-million in finance costs (Q2 2023 -- $2.8-million, Q3 2022 -- $1.3-million) and $4.0-million in share-based compensation expense (Q2 2023 -- $1.4-million, Q3 2022 -- $1.4-million).

Free cash flow was $37.1-million in Q3 2023, sequentially higher than the $34.8-million in Q2 2023 but lower than the $40.1-million in Q3 2022. This strong free cash flow enabled Step to reduce net debt to $89.8-million at the close of Q3 2023 from $115.8-million at close of Q2 2023, achieving its year-end target of sub-$100-million one quarter early. This debt reduction was accomplished while investing $27.6-million into capital expenditures during Q3 2023. Step has now reduced debt by nearly $230-million from peak levels in 2018. The reduction in debt and improvement in adjusted EBITDA resulted in a 12-month trailing funded debt to adjusted bank EBITDA of 0.56:1, well under the limit of 3:1 in the company's credit facilities (as defined in capital management -- debt below).

(1) Baker Hughes North American rotary rig count, Sept. 29, 2023

Market outlook

Oil prices are expected to remain volatile in the near term, as recessionary concerns over the macro economic outlook are being overshadowed by geopolitical events in Europe and the Middle East. Notwithstanding immediate geopolitical tensions, the tight supply demand balance is anticipated to continue into 2024, as OPEC balances production to maintain a target price of $80 to $90 per barrel for Brent crude, while remaining sensitive to inflationary concerns in the world's leading economies. This strategy provides price support for North American producers to moderately increase their capital programs for 2024.

Near-term natural gas prices are expected to rise with the seasonal demand for winter heating in both Canada and the United States. Two thousand twenty-four prices are expected to increase modestly relative to 2023 levels but will remain relatively range-bound until additional liquefied natural gas (LNG) capacity under construction in Canada and the U.S. is completed in the second half of the year. Economics of Canadian gas production are boosted by the price for natural gas liquids (NGLs), particularly for diluent. Prices for NGLs are correlated more closely to oil prices, creating attractive returns for NGL-focused producers.

The long-term outlook for 2025 and onward for oil field services is very constructive. The recent Supreme Court of Canada reference ruling that found the Impact Assessment Act (Bill C-69) and the related regulations to be unconstitutional in part may be a positive signal for Canadian energy production. While not binding on the federal government, it may create an opportunity for Canada to develop a policy framework that recognizes climate concerns while supporting an energy industry that is among the most environmentally sensitive in the world.

Creating a North American regulatory framework to unleash the power of clean, safe and secure energy, particularly LNG, will immediately lower emissions and improve living standards across the world, while continuing to advance global climate goals. Step is proud to be part of an energy industry in Canada and the U.S., countries that have the natural resources, the regulatory frameworks, and the technical expertise to deliver safe and affordable energy to the world.

Canada

As with most years, Canadian Q4 activity levels are expected to show a sequential decline as client budget exhaustion and seasonal holiday activity begins to slow activity in the basin. Despite stronger commodity prices, producers are not expected to materially add to their 2023 budgets, preferring instead to maintain tight capital discipline to support shareholder return frameworks. Fracturing job mix is expected to see a higher mix of smaller jobs, resulting in less efficient activity levels through the quarter. Coiled tubing activity is anticipated to remain steady until the seasonal slowdown begins in early to mid-December.

Step will use the moderating of activity in Q4 2023 to complete more intensive maintenance on equipment to prepare it for the extremely intensive utilization anticipated for Q1 2024. Step also has the flexibility to redeploy professionals from operating fracturing equipment to operating sand transport trucks, reducing the payroll burden during slower periods while also reducing logistics costs. Step has one of Western Canada's largest sand hauling fleets, a critical advantage in the basin that is often tight for sand hauling capacity.

Activity in 2024 is expected to increase, with multiple clients signalling that their 2024 capital budgets will be higher than 2023. The discipline in global oil markets and anticipated completion of the Trans Mountain pipeline project and the Coastal Gas Link pipeline/LNG Canada projects are creating an opportunity for Canada to materially increase production in 2024. Demand for oil and gas is projected to continue growing, creating an opportunity for Canada to deliver among the most sustainably produced energy in the world. Step is similarly committed to sustainability, introducing its first Tier 4 dual fuel fracturing fleet in 2023. In response to strong client demand for this equipment, which displaces up to 85 per cent of diesel with cleaner burning natural gas, Step will upgrade an additional fleet with Tier 4 dual fuel technology, with anticipated completion in Q2 2024.

The first quarter fracturing schedule is almost fully booked, supported by an expected incremental year-over-year increase in work scope following the award of a two-year fracturing service and ancillary services agreement from a leading Montney gas producer. First quarter sand volumes are expected to hit record levels, making sand logistics critical to meeting client expectations in the quarter. Step has an industry-leading sand hauling and logistics capability, which it will continue to invest into through 2024 to meet client demand. The demand for fracturing equipment will likely also exceed Step's Canadian fleet capacity, necessitating the transfer of some U.S. fracturing equipment to Canada. Step's geographic diversity creates flexibility to move equipment between countries to capitalize on opportunities that deliver the highest return, a key competitive advantage for Step.

Demand for coiled tubing is expected to grow in 2024. Since inception, Step pursued a differentiation strategy of bringing the most technically capable equipment and crews to client locations. Step's equipment is purpose built for the deepest, most technically challenging wells found in the Montney and Duvernay, which are key growth areas that underpin Canada's LNG feedstock. The recent competitor consolidation is expected to drive positive change in the coiled tubing market, bringing more price discipline and will more clearly delineate Step's value proposition.

United States

U.S. land rig counts have steadily declined from 756 at the start of 2023 to 603 at the close of Q3 2023, a decline of 20 per cent. Fracturing spreads have fluctuated more dramatically through the year, with intra-quarter peak-to-trough declines of approximately 17 per cent but only an overall decline of 1 per cent from the start of 2023 to the close of Q3 2023. The tightening of the rig count to frac spread ratio has resulted in a short-term oversupply in Q4 2023, putting pressure on pricing for spot market opportunities. Step has two fracturing crews committed with longer-term clients through to the close of 2023, with the third crew likely to remain utilized until late in the quarter before being transferred to Canada.

Step's 12 coiled tubing units are anticipated to remain highly utilized for much of the quarter, although the holiday season is likely to affect efficiencies in November and December. Step's performance in the northern basins continues to outpace many of the existing competitors that are unable to bring the technology and equipment that comes with the Step service offering. The consolidation in the premium coiled tubing market has been supportive for pricing in these regions, maintaining rates at more consistent levels. As the Permian and Eagle Ford basins remain under pressure due to equipment oversupply, Step has transferred coiled tubing units from these areas to the northern basins in order to capitalize on the opportunities that exist in those areas.

Sustained oil prices in the $80-to-$90-per-barrel range are expected to drive a modest recovery in rig counts through the first half of the year, particularly in the Permian, home of Step's fracturing crews and four of its 12 coiled tubing fleets. The continuing capacity constraints within the U.S. natural gas transportation, storage and liquefaction system are not expected to improve until the second half of the year, which may result in uneven fracturing activity levels in the first half of the year. The second half of the year is expected to see the completion of additional LNG capacity on the Gulf Coast, which should provide an additional source of demand for U.S. natural gas oriented fracturing activity.

Consolidated

Step's focus for the balance of 2023 and into 2024 is on the generation of free cash flow while continuing to invest in emission reducing technologies on the company's asset base, including the recently deployed Tier 4 dual fuel engines in Step's Canadian and U.S. fracturing fleet. The strong results posted year-to-date support the company's goals to reduce its balance sheet leverage and make disciplined investments that support Step's goal of building a resilient company and creating shareholder value.

Canadian financial and operations review

Step has a fleet of 16 coiled tubing units in the Western Canadian sedimentary basin (WCSB), all of which are designed to service the deepest wells in the basin. Step's fracturing business primarily focuses on the deeper, more technically challenging plays in Alberta and northeast British Columbia. Step deploys or idles coiled tubing units and fracturing horsepower as dictated by the market's ability to support targeted utilization and economic returns.

Third quarter of 2023 compared with the third quarter of 2022

Revenue for the three months ended Sept. 30, 2023, was $157.7-million, compared with $141.1-million for the same period of the prior year. Increased intensity on fracturing jobs resulted in higher daily average revenue year-over-year despite continued pricing pressure. This was partially offset by reduced operating days, which decreased to 250 for Q3 2023 from 271 during the same period of 2022. Residual effects from the fire and flood conditions during Q2 slowed drilling activity, which impacted timing for completion services. Step remains focused on proper client alignment, which contributed to steady utilization in the coiled tubing business during the quarter, however, overall days decreased to 448 for Q3 2023 from 536 during the comparable period of 2022. Coiled tubing revenue was also impacted by client delays to start the quarter, however, an increase in ancillary services contributed to revenue remaining flat year over year.

Adjusted EBITDA for the third quarter of 2023 was $41.2-million (26 per cent of revenue) versus $41.0-million (29 per cent of revenue) in the third quarter of 2022. While adjusted EBITDA increased slightly, year-over-year adjusted EBITDA per cent fell slightly due to the change in job mix.

Nine months ended Sept. 30, 2023, compared with the nine months ended Sept. 30, 2022

Revenue for the nine months ended Sept. 30, 2023, was $468.0-million, compared with $453.0-million for the nine months ended Sept. 30, 2022. Revenue increased compared with the prior year despite decreasing activity levels as changes in client mix and work scope has improved average daily revenue even with continued pressure on pricing. Fracturing operating days decreased to 771 for the first nine months of 2023 from 945 during the same period of 2022. The general decline in market activity as a result of lower natural gas prices, combined with fire and flood conditions during Q2 and Q3, was the primary reason for declining activity year over year. The same conditions contributed to the decline in coiled tubing operating days from 1,468 for the first nine months of 2022 to 1,368 for the comparable period of 2023. An increase in ancillary services contributed to an increase of total coiled tubing revenue year over year.

The company's Canadian operating expenses were relatively flat as cost management remains a focus. Despite these efforts, the higher inflationary environment combined with continued supply chain disruptions, commodity price appreciation and strong industry activity has costs escalating across most expense categories.

Canadian operations generated adjusted EBITDA of $119.4-million (26 per cent of revenue) for the first nine months of 2023, compared with $112.5-million (25 per cent of revenue) in the same period of 2022. Continued cost management while retaining pricing improvements achieved since 2022 was the most significant factor in the $6.9-million increase in adjusted EBITDA. The margin improvement provides the critical cash flow needed to reinvest into the business to ensure that clients receive the best equipment on their well sites.

United States financial and operations review

Step has a fleet of 19 coiled tubing units in the Permian and Eagle Ford basins in Texas, the Bakken shale in North Dakota, and the Uinta-Piceance and Niobrara-DJ basins in Colorado, while the U.S. fracturing business primarily operates in the Permian basin in Texas. The company deploys or idles coiled tubing units and fracturing horsepower as dictated by the market's ability to support targeted utilization and economic returns.

Third quarter of 2023 compared with the third quarter of 2022

Revenue for the three months ended Sept. 30, 2023, was $97.6-million, compared with $104.0-million at Sept. 30, 2022. The increase in active coiled tubing units and resultant increase in operating days offset much of the declines in fracturing revenue resulting from the transition to client-supplied product. Key acquisitions in 2022 have enabled Step to deploy additional coiled tubing units to key basins and benefit from strong oil field activity levels in those regions. Proper client alignment within the coiled tubing business has been a main driver to the company's continued success in this segment as operating days increased to 863 for Q3 2023 from 663 during the comparable period of 2022. Fracturing activity stabilized in the third quarter, however, market conditions have continued to put pressure on pricing compared with the prior year.

U.S. operations generated adjusted EBITDA of $15.4-million (16 per cent of revenue) for the third quarter 2023, versus $20.8-million (20 per cent of revenue) in the third quarter of 2022. While coiled tubing rates have remained stable, the change in job mix and downward pressure on rates for fracturing services were the primary contributors to the drop in adjusted EBITDA compared with the prior year.

Nine months ended Sept. 30, 2023, compared with the nine months ended Sept. 30, 2022

Revenue for the nine months ended Sept. 30, 2023, was $282.7-million, compared with $284.6-million for the nine months ended Sept. 30, 2022. U.S. operations realized a 36-per-cent increase in operating days for the coiled tubing service line, reflecting the additional assets acquired during 2022 that increased the company's depth capacity and allowed Step to expand its operating footprint. Operating days across the company's U.S. fracturing operations were relatively flat at 3,767 for the first nine months of 2023, compared with 3,678 days during the same period of 2022, however, the transition to client supplied product resulted in significantly lower revenue.

The year-over-year increase in operating expenses reflects increased maintenance costs from the increase in fracturing intensity compared with the prior year and from the intensive preventative maintenance program completed during the first quarter of 2023. Inflationary pressures and supply chain constraints have eased slightly during Q3 2023, but costs remain higher on a year-over-year basis across most expense categories.

U.S. operations generated adjusted EBITDA of $38.5-million (14 per cent of revenue) for the nine months ended Sept. 30, 2023, compared with an adjusted EBITDA of $51.0-million (18 per cent of revenue) for the nine months ended Sept. 30, 2022. The transition to client supplied product and declining fracturing rates were the primary contributors to the adjusted EBITDA decline and were partially offset by improved activity in coiled tubing.

Corporate financial review

The company's corporate activities are separated from Canadian and U.S. operations. Corporate operating expenses include expenses related to asset reliability and optimization teams, as well as general and administrative costs, which include costs associated with the executive team, the board of directors, public company costs, and other activities that benefit the Canadian and U.S. operating segments collectively.

Third quarter of 2023 compared with the third quarter of 2022

For the three months ended Sept. 30, 2023, expenses from corporate activities were $7.7-million, compared with expenses of $4.5-million for the same period in 2022. The increase in these expenses was primarily due to the mark to market adjustment on cash settled share-based compensation in the current period. Corporate expense were $3.2-million higher in Q3 2023 relative to Q3 2022, as the company's share price increased by 98 cents from June 30, 2023, to Sept. 30, 2023, compared with a share price decrease of 21 cents during the same period of the prior year. Adjusted EBITDA of negative $4.2-million for the three months ended Sept. 30, 2023, remained aligned with adjusted EBITDA of negative $3.7-million for the same period in 2022.

Nine months ended Sept. 30, 2023, compared with the nine months ended Sept. 30, 2022

For the nine months ended Sept. 30, 2023, expenses from corporate activities were $12.1-million, compared with $26.4-million for the same period in 2022. Cash settled share-based compensation expense was lower in the first nine months of 2023 as a decrease in number of cash settled instruments outstanding combined with the share price decreasing $1.09 from Dec. 31, 2022, to Sept. 30, 2023, resulted in lower expenses from the mark-to-market adjustment in the current period. Adjusted EBITDA of negative $12.8-million for the nine months ended Sept. 30, 2023, was relatively consistent with adjusted EBITDA of negative $13.1-million for the same period of the prior year.

Non-IFRS (international financial reporting standards) measures and ratios

This news release includes terms and performance measures commonly used in the oil field services industry that are not defined under IFRS. The terms presented are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. These non-IFRS measures have no standardized meaning under IFRS and therefore may not be comparable with similar measures presented by other issuers. The non-IFRS measures should be read in conjunction with the company's quarterly financial statements and annual financial statements and the accompanying notes thereto.

About Step Energy Services Ltd.

Step is an energy services company that provides coiled tubing, fluid and nitrogen pumping, and hydraulic fracturing solutions. Its combination of modern equipment along with its commitment to safety and quality execution has differentiated Step in plays where wells are deeper, and have longer laterals and higher pressures. Step has a high performance, safety-focused culture, and its experienced technical office and field professionals are committed to providing innovative, reliable and cost-effective solutions to its clients.

Founded in 2011 as a specialized deep-capacity coiled tubing company, Step has grown into a North American service provider delivering completion and stimulation services to exploration and production (E&P) companies in Canada and the United States. Its Canadian services are focused in the WCSB, while in the U.S., its fracturing and coiled tubing services are focused in the Permian and Eagle Ford in Texas, the Uinta-Piceance and Niobrara-DJ basins in Colorado, and the Bakken in North Dakota.

The company's four core values -- safety, trust, execution and possibilities -- inspire Step's team of professionals to provide differentiated levels of service, with a goal of flawless execution and an unwavering focus on safety.

We seek Safe Harbor.