STEP Energy is facing a challenging quarter for its US fracking business, analysts at Stifel GMP believe.
The energy company provided first quarter 2023 guidance that was below prior Stifel and consensus estimates, with EBITDAS expected between $43 million and $48 million, which is “well below” Stifel estimates of $57 million.
That figure is down from $49 million in the fourth quarter of 2022, Stifel analysts flagged in a note.
The broker noted that nearly $3 million of that 1Q guidance figure is the result of an accounting policy change to now expense Canadian fluid ends, analysts believe the larger culprit is a “challenging quarter for its US fracturing business, which saw lower than expected utilization and spot work.”
STEP’s US business delivered lower quarter-over-quarter revenue for the service line.
“Positively, STEP's other three service lines set quarterly records for revenue,” Stifel analysts wrote.
On a more positive note, analysts highlighted that Canadian fracturing, Canadian coiled tubing and US coiled tubing each set quarterly revenue records.
“STEP's four Canadian heavy frac crews saw meaningful work related to natural gas and condensate in the Montney, while its fifth smaller crew was active in the Cardium and Viking,” Stifel wrote.
“For its U.S. fracturing business, STEP no longer expects to pursue the activation of a fourth crew until supply and demand fundamentals improve, which is consistent with our prior modelling. Positively, STEP expects a busy 2Q and forecasts utilization to remain steady into (the second half of 2023) across its four service lines.”
Even so, Stifel has a Buy rating along with a C$8.50 target price on the stock, which is currently trading around C$3.50.
“We view the recent improvement in STEP's financial results and outlook for its North American business along and declining leverage metrics as having de-risked the stock,” analysts explained.
“We believe the company remains an attractively valued avenue for exposure to North American pressure pumping, with significant de-leveraging to occur over 2022E and 2023E.”
STEP is one of the largest operators of hydraulic fracturing and coiled tubing assets in the Western Canadian Sedimentary Basin and has operations in the US coiled tubing market.
STEP entered the US fracturing market in March 2018.
Contact Angela at angela@proactiveinvestors.com
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