STEP Energy Services Ltd. is pleased to announce a client-backed upgrade to our Canadian fracturing fleet as well as a capital budget and balance sheet update.
Tier Four Canadian Fracturing Fleet Upgrade Program
STEP announces that it has entered into a three-year services agreement with a leading intermediate E&P company (“Producer”) in Canada whereby STEP will refurbish 16 pumps with 2,500 horsepower (“HP”) Caterpillar Tier 4 Dynamic Gas Blending (DGB) engines at a cost of $26.8 million. The 40,000 HP upgrade has been secured by a $10 million prepayment commitment to STEP by the Producer and a three-year, first-right-of-use agreement.
Tier 4 DGB engines with dual-fuel (natural gas and diesel) technology offer up to 85% reduction in diesel fuel use, in addition to reducing nitrogen oxide and particulate matter emissions relative to diesel-powered Tier 2 engines. STEP’s experience has shown that over a 12-month period at high utilization, leading-edge Tier 4 DGB engines can save clients up to $10 million in fuel costs while adding enhanced reliability.
Pricing on the Tier 4 fracturing work is linked to commodity prices and includes cost inflation adjustment mechanisms, apportioning these risks between STEP and the Producer. This creates a formula that delivers both cost and availability certainty to the Producer, while generating returns that will be sufficient to meet STEP’s internal return thresholds. STEP anticipates refurbishments will occur at a rate of roughly two pumps per month over an eight-month period starting in October 2022 and ending in mid-Q2 2023. Given the staggered upgrade timing and the cycling in of other pumps held out for maintenance back-up, STEP does not anticipate any reductions to its effective fracturing capacity over this period. Importantly, the deployment of this technology does not represent additional capacity to a Canadian fracturing market that is viewed as roughly in balance from a supply-demand perspective.
STEP’s President and Chief Operating Officer, Steve Glanville, commented “STEP began operations in Western Canada as a technology leader committed to ESG principles. This upgrade program continues that legacy, combining all elements of STEP’s core values and uniquely aligning us with a leading E&P company. We’ve consistently said that the optimal working relationship between energy service and E&P companies is a partnership whereby both parties benefit from a close working arrangement that meets their own economic and ESG requirements. We believe that the Canadian energy industry’s ability to meaningfully participate in the world’s growing demand for energy will benefit from a model where risks and returns are shared by resource owners and key service providers. We are thrilled to put an arrangement like this in place.”
In addition to the Tier 4 DGB upgrade, STEP will retrofit certain other assets, including the upgrade of Tier 2 diesel-powered fracturing pumps to add the Company’s industry-leading Tier 2 dual-fuel kits. At the conclusion of the upgrade program, STEP will have 227,500 HP of dual-fuel capable fracturing equipment, representing approximately 46% of the Company’s total fracturing horsepower. STEP also operates 80,000 HP of Tier 4 conventional equipment in the U.S., bringing the total proportion of low emissions horsepower in STEP’s fleet to just over 60%.
Capital Spending and Balance Sheet Update
STEP’s Board of Directors has approved an increase to the Company’s 2022 capital program to $87.5 million. The increased budget reflects the Tier 4 DGB announcement as well as the cash component of the recently announced transaction of acquired coiled tubing assets in the U.S.
STEP expects a cash outlay of $75 million within calendar 2022, offset in part by the receipt of the $10 million prepayment which will be received in increments based on agreed completion milestones. The remaining balance will fall into 2023.
STEP remains on track to exit 2022 with a Net debt to Adjusted EBITDA ratio of less than 1.0x. The Company will continue to focus on debt repayment but will invest opportunistically where returns can be justified. The global community of energy investors is increasingly relying on free cash flow generation to value companies and STEP believes that this fleet upgrade combined with the recent acquisition of deep coil assets and field professionals will strengthen that free cash flow profile going forward.