Stifel GMP analysts anticipate a challenging quarter for STEP Energy’s US fracturing operations.
The energy company projected EBITDAS between $43 million and $48 million for the first quarter of 2023, which is “well below” prior Stifel and consensus estimates of $57 million.
Stifel analysts noted in a note that this is a decrease from the $49 million recorded in the fourth quarter of 2022.
The broker noted that nearly $3 million of the 1Q guidance figure is the result of a change in accounting policy to now expense Canadian fluid ends. However, analysts believe the larger culprit is a “challenging quarter for its US fracturing business, which saw lower utilization and spot work than anticipated.”
STEP’s US operations generated a decrease in service line revenue from the previous quarter.
Stifel analysts wrote that STEP’s other three service divisions achieved quarterly revenue milestones.
Positively, analysts noted that Canadian fracturing, Canadian coiled tubing, and American coiled tubing all established quarterly revenue milestones.
“STEP’s four Canadian heavy frac crews performed significant work related to natural gas and condensate in the Montney, while the company’s fifth lesser crew was active in the Cardium and Viking,” Stifel wrote.
STEP no longer expects to activate a fourth crew for its U.S. fracturing business until supply and demand fundamentals strengthen, which is consistent with our prior modeling. Positively, STEP anticipates a busy second quarter and consistent utilization across its four service lines through the second half of 2023.
Nevertheless, Stifel has a Buy rating and an C$8.50 price target on the stock, which is currently trading at approximately C$3.50.
Analysts explained that the recent improvement in STEP’s financial results and outlook for its North American business, along with declining leverage metrics, reduced the stock’s risk.
“We believe that the company remains an attractively valued way to gain exposure to the North American pressure pumping industry, with significant deleveraging expected between 2022E and 2023E.”
STEP is one of the main operators of hydraulic fracturing and coiled tubing assets in the Western Canadian Sedimentary Basin and has operations in the coiled tubing market in the United States.