Earnings call transcript: STEP Energy Q1 2025 earnings beat forecasts

STEP Energy Services Ltd (market cap: $4.44 billion) reported its financial results for the first quarter of 2025, surpassing revenue forecasts and aligning closely with earnings per share (EPS) expectations. Despite the positive earnings report, STEP Energy’s stock experienced a decline of 4.46% in after-hours trading. According to InvestingPro, the company shows strong potential with multiple positive indicators. InvestingPro analysis reveals 6 additional key insights about STEP Energy’s performance and outlook, available to subscribers.

Key Takeaways

• STEP Energy reported Q1 2025 revenue of $308 million, exceeding forecasts by 9%.
• EPS came in at $0.33, slightly below the forecast of $0.3352.
• Stock fell by 4.46% in after-hours trading.
• The company introduced Canada’s first 100% natural gas reciprocating engine.
• STEP Energy is focusing on debt repayment and natural gas market opportunities.

Company Performance

STEP Energy showed robust performance in Q1 2025, with consolidated revenues reaching $308 million, marking a strong start to the year. The company’s impressive revenue growth of 118.88% over the last twelve months reflects its strong market position, though InvestingPro data indicates the company faces challenges with gross profit margins of 1.2%. The company continues to leverage its innovative technology and strong client relationships to maintain a competitive edge in the energy services sector. This quarter’s results underscore STEP Energy’s strategic focus on natural gas and efficient operations.

Financial Highlights

• Revenue: $308 million, up from the forecast of $282.38 million.
• Earnings per share: $0.33, slightly below the forecast of $0.3352.
• Adjusted EBITDA: $59 million, representing a 19% margin.
• Net income: $24 million.
• Free cash flow: $32 million.
• Capital expenditures: $17 million.
• Net debt: $85 million.

Earnings vs. Forecast

STEP Energy’s revenue of $308 million outpaced the forecast of $282.38 million by 9%, showcasing the company’s ability to exceed market expectations. However, EPS of $0.33 narrowly missed the forecast of $0.3352, reflecting a minor deviation from analyst predictions.

Market Reaction

Despite the positive revenue surprise, STEP Energy’s stock declined by 4.46% in after-hours trading, closing at $3.86. With a beta of 1.37, the stock shows higher volatility than the broader market. This movement contrasts with the stock’s 52-week high of $5.26 and low of $3.35, indicating investor concerns over the minor EPS miss or broader market conditions. Based on comprehensive analysis from InvestingPro, the stock appears to be trading near its Fair Value, with detailed valuation metrics available in the Pro Research Report.

Outlook & Guidance

Looking ahead, STEP Energy is cautiously optimistic about Q4 2025, with activity levels expected to mirror those of 2024. The company is closely monitoring geopolitical tensions and commodity prices, which could impact future performance. STEP Energy is also exploring opportunities in the natural gas market, aligning with its strategic focus.

Executive Commentary

CEO Steve Glanville highlighted the company’s positive momentum in the natural gas market, stating, "We are seeing positive momentum in the natural gas market." CFO Klas Dienter emphasized the company’s commitment to financial health, noting, "That’ll be further debt repayment."

Risks and Challenges

• Potential oil-directed activity slowdown if prices remain below $60/barrel.
• Geopolitical tensions affecting global energy markets.
• Pricing pressures and tariff impacts on operations.
• Market saturation in the energy services sector.
• Dependence on natural gas price trends.

Q&A

During the earnings call, analysts focused on the NGX pump technology and its potential for fleet expansion. Discussions also covered pricing pressures and the company’s strategy for US assets held for sale, with management reiterating their focus on maintaining profitability and reducing debt.

Overall, STEP Energy’s Q1 2025 performance highlights its strategic focus on innovation and market opportunities, despite the stock’s negative reaction to the earnings report. With analyst consensus maintaining a moderate buy rating and the company expected to remain profitable this year, STEP Energy presents an interesting case for investors. For deeper insights into STEP Energy’s financial health and growth prospects, access the comprehensive Pro Research Report, part of the 1,400+ company coverage available on InvestingPro.

Full transcript - STEP Energy Services Ltd (STEP) Q1 2025:

Conference Operator: Good morning, ladies and gentlemen, and welcome to the STEP Energy Services Q1 twenty twenty five Conference Call and Webcast. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, 05/15/2025. I would now like to turn the conference over to Steve Glanville, President and CEO of STEP Energy Services.

Please go ahead.

Steve Glanville, President and CEO, STEP Energy Services: Thank you and good morning. Welcome to our Q1 twenty twenty five conference call. We’re glad you could join us to hear about the first quarter of twenty twenty five and our outlook for the year. First, I’d like to invite Klas Dienter, our CFO, to provide an overview of our financial results for Q1 and then I’ll provide some comments on operating conditions in the first quarter and what we’re seeing as we move through 2025. Then we’ll open it up for questions.

Vas?

Klas Dienter, CFO, STEP Energy Services: 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 forward looking 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 SEDAR filings for this quarter as well as our 2024 AIF. Finally, please note that all numbers are in Canadian dollars unless noted otherwise, and I will round when possible.

Listeners should also note that during the first quarter, STEP made the decision to terminate its US fracturing division, which resulted in an internal leadership reorganization and the decision to aggregate into one operating segment. Going forward, the information provided will be on one reporting segment as all remaining divisions have similar characteristics. The US fracturing division termination did not meet the test for discontinued operations as some of the related assets are being transferred to Canada. To provide clarity on the ongoing business operations, we will refer to these results as terminated operations and have provided additional disclosure in our Q1 financial statements and MD and A related to these operations. STEP’s Q1 consolidated revenues increased to $3.00 $8,000,000 from the prior quarter revenue of $148,000,000 Q1 is typically when client capital budgets reset, so it is our strongest quarter while Q4 is typically our weakest quarter as client budgets wind down.

The contrast between quarters was particularly stark this year given the slowdown induced the commodity price induced slowdown that we experienced in 2024. Q1 total revenue included $14,000,000 in revenues related to the terminated U. S. Operations compared to the $3,000,000 included in the prior quarter. Prior year Q1 revenues were $320,000,000 which also included $38,000,000 in revenues related to terminated operations.

STEP has expanded the definition of adjusted EBITDA to exclude the results from terminated operations to provide clarity on the company’s normal course business activities. Therefore, note that adjusted EBITDA from previous periods has also been updated to comply with this definition. Adjusted EBITDA for the first quarter came in at $59,000,000 or 19% margin compared with $8,000,000 or a 5% margin in the prior quarter and $71,000,000 or a 22% margin in Q1 of the prior year. STEP had net income of $24,000,000 or $0.33 per diluted share in Q1 of this year compared to a loss of $45,000,000 or negative $0.62 per diluted share in the prior quarter, which included an impairment of $24,000,000 related to our terminated U. S.

Operations. Included in the Q1 net income was a net loss from terminated operations of 4,000,000 compared to a $32,000,000 net loss from terminated operations in the prior quarter, again, which included the impairment. Prior year Q1 earnings were $41,000,000 or $0.55 per diluted share, which included $1,000,000 of net income from terminated operations. During the quarter, we had free cash flow of $32,000,000 compared to $17,000,000 negative free cash flow in the prior quarter and free cash flow of $53,000,000 in Q1 of last year. In the quarter, we spent $17,000,000 on capital expenditures.

This was made up of $8,000,000 for sustaining capital, 8,000,000 for optimization capital, and $1,000,000 for right of use asset additions. Dollars 1,900,000.0 of the $17,000,000 was spent on equipment related to the terminated U. S. Operations to complete the remaining Q1 work scope that the company was committed to. In conjunction with the terminated operations of the US fracturing CGU, the company has a plan to sell a group of assets by the end of twenty twenty five.

The company has $17,400,000 of assets held for sale listed on the balance sheet at the end of the quarter, which includes both inventory and equipment. We also purchased 617,000 shares during the first quarter under our NCIB and subsequent to the quarter we purchased an additional 177,000 shares. We see deep value in our shares and we’ll continue to use free cash flow to purchase opportunistically under our buyback program. Finally, SEP ended the quarter with net debt of $85,000,000 which was up from approximately $53,000,000 in the prior quarter. The swing between Q4 and Q1 is driven by the slowdown in activity in Q4 and the ramp up in Q1, which results in a large working capital build and draws on our bank line.

We saw a $68,200,000 increase in working capital since the prior quarter which is impacted by the higher than expected client receipts. Again at the close of Q4 and lower than expected receipts at the close of Q1. I’ll now turn it back to Steve for his comments on operations and outlook.

Steve Glanville, President and CEO, STEP Energy Services: Thank you, Klas. By now you would have had the opportunity to look at our most recent results and read through our operational highlights. I won’t reiterate what is included in our MD and A, but I will speak about a few key operational achievements in Q1 and provide our outlook for the rest of the year. Our North American closed shipping operations posted excellent results running 22 units throughout the quarter. Long term contracts with key clients in the Montney and Duvernay, as well as relationships with blue chip clients in the Bakken, Permian and Eagle Ford Basins are an important part of our success.

We continue to see an expansion of the Coil Plus extended reach lateral mill outs, where we completed the first two fiveeight coiled tubing job in the Rockies and the first three mile clean out using two fiveeight in the DJ Basin. This service line is a differentiator for our company as it allows clients to contemplate longer drilling programs to access more rock volume with the confidence that they will be able to reach total depth during their mill operations. Utilization for our fracturing services business remained extremely high with crews achieving near record levels. We ran seven frac crews in the quarter, which included one from our now terminated US fracturing operations. We pumped an incredible amount of sand for the quarter, which was 787,000 metric tonnes, and we broke our previous record in Canada, is 631,000 tonnes for the quarter.

For contacts with just over 15,000 truckloads of sand, with one unloading every eight minutes around the clock for ninety days straight. STEP handles the majority of our clients sand, hauling just over 60% of the sand we pumped in Q1. This is a core differentiator that consistently delivers strong margins because we do it exceptionally well. We have built a top tier team and a reliable fleet that takes logistical burden off of our clients’ shoulders. I also want to highlight our capital investment in next generation technologies as part of our long term diesel reduction strategy.

Just in Q1, through our collaboration with a major OEM, we introduced Canada’s First One Hundred Percent natural gas reciprocating engine designed for fully natural gas powered fracturing operations. We call it the NGX, and it is purpose built, which has 3,600 horsepower internal combustion engine integrated with proprietary systems and an advanced automation platform. This engine delivers twice the pumping capacity of a conventional pump and operates seamlessly alongside of our Tier two and Tier four dual fuel assets. This allows for hybrid completions today and positions us for a full natural gas operation as we continue to expand capacity. Although we only have one of these NGX pumps so far in the field, we have seen diesel displacement rates of up to 90% during initial field trials, which is a game changer in our space.

In addition, we are deploying electric driven backside equipment, including a blender hydration unit, sand handling equipment, and a chemical additive unit, and we’re planning to trial 100% natural gas powered tractor for our logistics team. These innovations strengthens our ability to deliver reliable, cost effective solutions while aligning with our clients’ evolving business priorities. The current energy landscape is fraught with challenges that have contributed to significant instability. Geopolitical tensions, particularly those related to global trade, continue to shape our industry outlook. The retaliatory tariffs recently implemented by the Canadian government are an immediate concern as these measures will place additional pressure on operating costs.

In response, we have engaged with several industry associations and collaborated with peers to submit remission applications. While we do not expect to see the positive outcome of these efforts for several months, we are working closely with our clients to help manage the impact on margins. Commodity pricing has fluctuated over the quarter. That said, natural gas prices have demonstrated a consistent upward trend over the past few years. In the WCSB, approximately 75% of our programs are comprised of natural gas and liquids rich wells.

Additionally, the anticipated launch of LNG Canada’s first shipment in June of this year will continue to support capital activity in the region. We have not seen a significant contraction in client spending to date, although we do anticipate a potential slowdown in oil directed activity if prices fall and remain below the $60 per barrel mark. Looking ahead to Q2, we anticipate the typical seasonal breakup conditions in our northern regions before seeing momentum build in the later part of the quarter and into Q3. The activity levels for both business lines are expected to be comparable to those in the same period in 2024. Our third quarter schedule is filling in nicely with fracturing clients largely maintaining their previously disclosed programs.

Coil tipping is more dependent on call out work and as a result is more difficult to project. However, we are engaged with many of our leading producers in the basins that we operate in and expect to see good utilizations throughout the quarter. We remain cautiously optimistic about the fourth quarter while carefully managing expectations. We will provide an update on Q4 when we release our Q2 results in August. But today our view is that the disruption caused by the geopolitical events this year has created more uncertainty than usual which continues to impact commodity prices.

We are seeing positive momentum in the natural gas market given the structural changes happening on the demand side, but weakness in oil prices may limit the upside potential as we move into the fourth quarter. We are working to fill the remaining white space in the second half of the year and are actively engaged with our clients to manage the impact of commodity prices and tariffs, demonstrating to them that STEP is a trusted partner through all phases of the cycle. Before I turn the call back to the operator, I want to close by expressing how proud I am of what we accomplished during an exceptional busy period. Our professionals rose to the challenge, delivering an exceptional client experience and strong results for our shareholders. Our team’s focus on safety, operating efficiencies and excellence made Q1 another very successful quarter.

Operator, we are pleased to take any questions.

Conference Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Please go ahead.

Waqar, Analyst: Thank you for taking my question. Steve, would you please remind us how many tier four fleets do you have in Canada now?

Steve Glanville, President and CEO, STEP Energy Services: Yeah. Good morning, Makar. We’re running about two and a half fleets in Canada right now. Of course, we had mentioned that we’re moving some assets into Canada from our US terminated operation, and that will bring in basically another fleet when we see time to deploy that into the field.

Waqar, Analyst: So once The US fleet comes in, you’ll be at three and a half fleets, tier four?

Klas Dienter, CFO, STEP Energy Services: That’s correct. Yeah. I think the car

Steve Glanville, President and CEO, STEP Energy Services: is classy.

Klas Dienter, CFO, STEP Energy Services: It also depends a bit on how you define the size of a fleet depending on which basin they’re working in. Deep Basin versus Montney versus Duvernay that’ll affect the size of the fleet as well. As that equipment moves around, three fleets could turn into four fleets.

Waqar, Analyst: Okay, enough. And so once you have this extra fleet, would your number of active fleets in Canada go from six to seven or would it stay at six?

Steve Glanville, President and CEO, STEP Energy Services: Well, our current plan is to stay at six until we see a bit better commodity price cycle. We think there’s opportunity, of course, with LNG Canada kicking off here in a month’s time, plus some additional LNG opportunities, but we’re not going to throw it to the field until we see pricing that’s stable.

Waqar, Analyst: Okay. Fair enough. And so, you know, you have your NGX pump. What is kind of the long term plan? Do you have, like, a continued upgrading plant that like next year you may have an extra fleet of NGX or what’s the long term thinking there?

Steve Glanville, President and CEO, STEP Energy Services: Yeah, mean, early stages with the trial, we’re pretty happy of how it’s performed so far. Like we mentioned, we’ve been able to have it in the field. So a number of clients are excited to try it out. I think what the long term view for us is as older equipment, we need to retire that. The question is, do you upgrade it to tier four?

Do you put this new technology into the field, which we think is a big game changer? And so that’s something that the team’s working through right now. But what I can tell you is the cost per horsepower of this unit compared to anything else that we’ve seen, it’s basically, it’s more, you know, it’s less cost or cheaper per horsepower. And so that’s what we like about it. It replaces basically two units for one.

And so we’re excited to see how that performs.

Waqar, Analyst: Now when you say cheaper per horsepower, is that does that mean CapEx per horsepower for new build or and OpEx as well? Or would you need to clarify that a little bit?

Steve Glanville, President and CEO, STEP Energy Services: Yeah. No, it’s CapEx for right now, but I do believe that we’re going to see some savings. You see that typically as you get new equipment in the field, your R and M is a lot cheaper. And I think it comes down to is you’re basically using one pump versus two. So at the end of the day, you will have less R and M with it.

John Gibson, Analyst, BMO Capital Markets: Okay, great.

Waqar, Analyst: Now, you mentioned about potential slowdown in oil related activity based on, you know, oil prices. Are you have you seen any indication with in customer discussions where they’re saying, you know, that they would like to reduce activity or not yet?

Steve Glanville, President and CEO, STEP Energy Services: I would break it down into like the two regions that we operate Canada and The US. I think you’re seeing a bit more pressure in The US than we are seeing in Canada. You know, the Canadian business we operate 75 to 80% of our clients are in the natural gas liquid rich field. So we haven’t seen any type of reduction in CapEx yet. But if oil prices, you know, kind of hover in that, kind of below 60, kind of mid-50s, you should expect to see some CapEx reduction.

It was different about Canada, particularly the Duvernay where we’ve seen quite a bit of activity in Q1 and we’re seeing it continue on through Q2 is, know, they’re not subject to the tariffs because most of that condensate goes to the oil sands. It’s, I think you got to look at it that way as well, Waqar.

Waqar, Analyst: Yeah, That makes sense.

Klas Dienter, CFO, STEP Energy Services: And what I would say is in our in the oil affected regions, Waqar, we we work for a lot of the larger blue chip clients. So as we look through the q one releases, we haven’t really seen that that much for as far as CapEx reductions go, maybe maybe one or 2%, but haven’t really seen any significant CapEx reductions in the clients we work with.

Waqar, Analyst: Is that comment also for The US market for coiled tubing, or it’s just Canadian, Canada specific?

Steve Glanville, President and CEO, STEP Energy Services: Both. Yeah, for both. Yeah.

Waqar, Analyst: Okay. Great. Well, thank you very much. Appreciate the color.

Closing Remarks: Thank you, Waqar.

Conference Operator: Thank you. The next question comes from John Daniel at Daniel Energy Partners. Please go ahead.

John Daniel, Analyst, Daniel Energy Partners: Thank you. Good morning, guys. Steve, if you guys decided to push the accelerator and and bring on more of the new pump design, what’s the sort of the manufacturing cadence from where would it how many could you get this year if you wanted to?

Steve Glanville, President and CEO, STEP Energy Services: Yeah, John, it’s I don’t know if we’ve identified exactly how many we can get it. We’re we’re going through this prototype phase. We don’t wanna hurry up and, you know, kind of push the accelerator until we’re really happy with the design. And so far it’s turned out pretty good. You know, I think we would, you know, let us trial it for a little bit before we can commit to anything on the call on this, but we are pretty excited about the ability to expand that business or that technology.

John Daniel, Analyst, Daniel Energy Partners: And I know you guys have had a positive experience at the pump. What is your customer telling you? And do you get the sense that those customers would embrace some sort of contractual arrangement for you guys to build one of those fleets?

Steve Glanville, President and CEO, STEP Energy Services: Yeah, so far, John, the feedback from our clients has been exceptional. We’ve only had it up for a few clients. The challenge I think, and this will be a get fixed with us supplying enough natural gas to the job sites. So today, most of our operators that are in the Montney and the Duvernay do have field gas available. But as you could imagine, you’re going to be needing a bit higher pressure or larger lines to be able to supply the fleet.

So that’s why when we think about what’s the most ideal fleet in Canada, it has a combination of, call it, tier four, that you have some diesel available to you, but majority of it would be these NGX pumps, which is a % natural gas.

John Daniel, Analyst, Daniel Energy Partners: Okay. All right. That’s all I got. Thank you for including me.

Steve Glanville, President and CEO, STEP Energy Services: Thanks, John.

Conference Operator: Thank you. Next question from John Gibson at BMO Capital Markets. Please go ahead.

John Gibson, Analyst, BMO Capital Markets: Good morning all. Thanks for taking my questions. First on the balance sheet and capital allocation, mean debt came up a little bit. I think that was mostly working capital related. Just wondering where you’re gonna direct the majority of free cash flow this year.

Is it further debt repayment or could you look to maybe ramp the buyback a bit more?

Klas Dienter, CFO, STEP Energy Services: That’ll be further debt repayment, John. That’s always been our primary focus.

John Gibson, Analyst, BMO Capital Markets: K. Great. And then just on pricing, how much is it down year over year in Canada? And and do you see any sort of green shoots for the remainder of the year? Is it sort of to be determined right now?

Steve Glanville, President and CEO, STEP Energy Services: Yeah. I can say that, like the coiled tubing prices does kind of held in line year over year, John, in Canada. I think The US we’re seeing a bit of a bit of pricing kind of pressure in our US culturing business, but not, you know, we’re talking maybe 5%, but nothing too crazy. I think on the frac side, we see is Q1 was extremely busy all of our pressure pumping peers. And so I think you saw Q1 kind of holding in there from pricing, but as we enter into kind of Q2, Q3, there’s some RFPs that we’re participating in.

And I would say pricing is down kind of a couple 3%, four %. I think for us, it’s lower than we’d like. The challenge I think that all of us are going to face is just the rising costs of these tariffs. I’m not just talking proppant and coiled tubing, talking all of the materials, you know, parts and etcetera, it’s going to show up in our business. So you’ve to be very careful on how you price these things today because we want to make sure that we are profitable going forward.

John Gibson, Analyst, BMO Capital Markets: Okay. Great. And then last one for me. You’ve got some assets held for sale on on the balance sheet. Wondering if that’s a good price to think about or is, you know, where we stand now, like, the likely scenario that you move that equipment back into Canada or at least keep it?

Klas Dienter, CFO, STEP Energy Services: Yeah. We’re we’re going through that discovery process right now, John. We did impair the assets at the end of Q four and we also did some in Q three there. So we’re comfortable with the value today. It’s a blend of inventory and equipment.

So some of that inventory that the plan is we’ll bundle that with the equipment. Some of that could come north as well to support Canadian operations if not successful in bundling it. That’s still a little bit TBD at this time but I think we’re comfortable with the value as it stands today.

John Gibson, Analyst, BMO Capital Markets: Okay, great. Thanks a lot guys. I’ll turn it back.

Steve Glanville, President and CEO, STEP Energy Services: Thanks, John.

Conference Operator: Thank you. We have no further questions. I’ll turn the call back over to Steve Glanville for closing comments.

Closing Remarks: Thank you, everyone, for joining our Q1 twenty twenty five conference call. We’ll now conclude it and look forward to having our conference call in August for Q2. Thank you very much, everyone.

Conference Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.

Steve Glanville, President and CEO, STEP Energy Services: Service Line is a differentiator for our company as it allows clients to contemplate longer drilling programs to access more rock volume with the confidence that they will be able to reach total depth during their mill operations. Utilization for our fracturing services business remained extremely high with crews achieving near record levels. We ran seven frac crews in the quarter, which included one from our now terminated US fracturing operations. We pumped an incredible amount of sand for the quarter, which was 787,000 metric tons, and we broke our previous record in Canada, is 631,000 tons for the quarter. For contacts with just over 15,000 truckloads of sand, with one unloading every eight minutes around the clock for ninety days straight.

STEP handles the majority of our clients sand, hauling just over 60% of the sand we pumped in Q1. This is a core differentiator that consistently delivers strong margins because we do it exceptionally well. We have built a top tier team and a reliable fleet that takes logistical burden off of our clients’ shoulders. I also want to highlight our capital investment in next generation technologies as part of our long term diesel reduction strategy. Just in Q1, through our collaboration with a major OEM, we introduced Canada’s First One Hundred Percent natural gas reciprocating engine designed for fully natural gas powered fracturing operations.

We call it the NGX, and it is purpose built, which has 3,600 horsepower internal combustion engine integrated with proprietary systems and an advanced automation platform. This engine delivers twice the pumping capacity of a conventional pump and operates seamlessly alongside of our Tier two and Tier four dual fuel assets. This allows for hybrid completions today and positions us for a full natural gas operation as we continue to expand capacity. Although we only have one of these NGX pumps so far in the field, we have seen diesel displacement rates of up to 90% during initial field trials, which is a game changer in our space. In addition, we are deploying electric driven backside equipment, including a blender hydration unit, sand handling equipment, and a chemical additive unit, and we’re planning to trial a % natural gas powered tractor for our logistics team.

These innovations strengthens our ability to deliver reliable, cost effective solutions while aligning with our clients’ evolving business priorities. The current energy landscape is fraught with challenges that have contributed to significant instability. Geopolitical tensions, particularly those related to global trade, continue to shape our industry outlook. The retaliatory tariffs recently implemented by the Canadian government are an immediate concern as these measures will place additional pressure on operating costs. In response, we have engaged with several industry associations and collaborated with peers to submit remission applications.

While we do not expect to see the positive outcome of these efforts for several months, we are working closely with our clients to help manage the impact on margins. Commodity pricing has fluctuated over the quarter. That said, natural gas prices have demonstrated a consistent upward trend over the past few years. In the WCSB, approximately 75% of our programs are comprised of natural gas and liquids rich wells. Additionally, the anticipated launch of LNG Canada’s first shipment in June of this year will continue to support capital activity in the region.

We have not seen a significant contraction in client spending to date, although we do anticipate a potential slowdown in oil directed activity if prices fall and remain below the $60 per barrel mark. Looking ahead to Q2, we anticipate the typical seasonal breakup conditions in our northern regions before seeing momentum build in the later part of the quarter and into Q3. The activity levels for both business lines are expected to be comparable to those in the same period in 2024. Our third quarter schedule is filling in nicely with fracturing clients largely maintaining their previously disclosed programs. Coat tipping is more dependent on call out work and as a result is more difficult to project.

However, we are engaged with many of our leading producers in the basins that we operate in and expect to see good utilization throughout the quarter. We remain cautiously optimistic about the fourth quarter while carefully managing expectations. We will provide an update on Q4 when we release our Q2 results in August. But today our view is that the disruption caused by the geopolitical events this year has created more uncertainty than usual which continues to impact commodity prices. We are seeing positive momentum in the natural gas market given the structural changes happening on the demand side, but weakness in oil prices may limit the upside potential as we move into the fourth quarter.

We are working to fill the remaining white space in the second half of the year and are actively engaged with our clients to manage the impact of commodity prices and tariffs, demonstrating to them that STEP is a trusted partner through all phases of the cycle. Before I turn the call back to the operator, I want to close by expressing how proud I am of what we accomplished during an exceptional busy period. Our professionals rose to the challenge, delivering exceptional client experience and strong results for our shareholders. Our team’s focus on safety, operating efficiencies and excellence made Q1 another very successful quarter. Operator, we are pleased to take any questions.

Conference Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Please go ahead.

Waqar, Analyst: Thank you for taking my question. Steve, would you please remind us how many tier four fleets do you have in Canada now?

Steve Glanville, President and CEO, STEP Energy Services: Yeah. Good morning, Makar. We’re running about two and a half fleets in Canada right now. Of course, we had mentioned that we’re moving some assets into Canada from our US terminated operation, and that will bring in basically another fleet when we see time to deploy that into the field.

Waqar, Analyst: So once The US fleet comes in, you’ll be at three and a half fleets, tier four?

Klas Dienter, CFO, STEP Energy Services: That’s correct. Yeah. I think the cards class. It also depends a bit on how you define the size of the fleet, depending on which basin they’re working in. Deep Basin versus Montney versus Duvernay, that’ll affect the size of the fleet as well.

That equipment moves around, three fleets could turn into four fleets.

Waqar, Analyst: Okay. Fair enough. And so once you have this extra fleet, would your number of active fleets in Canada go from six to seven or would it stay at six?

Steve Glanville, President and CEO, STEP Energy Services: Well, current plan is to stay at six until we see a bit better commodity price cycle. We think there’s opportunity, of course, with LNG Canada kicking off here in a month’s time, plus some additional LNG opportunities, but we’re not going to throw it to the field until we see pricing that’s stable.

Waqar, Analyst: Okay, fair enough. And so, you know, you have your NGX pump, what is kind of the long term plan? Do you have like a continued upgrading plant that like next year you may have an extra fleet of NGX? Or what’s the long term thinking there?

Steve Glanville, President and CEO, STEP Energy Services: Yeah, mean, stages with the trial, we’re pretty happy of how it’s performed so far. Like we mentioned, we’ve been able to have it in the field. So a number of clients are excited to try it out. Think what the long term view for us is as older equipment, we need to retire that. The question is, do you upgrade it to tier four or do you put this new technology into the field, which we think is a big game changer?

And so that’s something that the team’s working through right now. But what I can tell you is the cost per horsepower of this unit compared to anything else that we’ve seen, it’s basically, it’s more, you know, it’s less cost or cheaper per horsepower. And so that’s what we like about it. It replaces basically two units for one. And so we’re excited to see how that performs.

Waqar, Analyst: Now when you say cheaper per horsepower, does that mean CapEx per horsepower for new build or and OpEx as well? Or would you need to clarify that a little bit?

Steve Glanville, President and CEO, STEP Energy Services: Yeah. No, it’s CapEx for right now, but I do believe that we’re going to see some savings. You see that typically as you get new equipment in the field, your R and M is a lot cheaper. And I think it comes down to is you’re basically using one pump versus two. So at the end of the day, you will have less R and M with it.

John Gibson, Analyst, BMO Capital Markets: Okay, great.

Waqar, Analyst: Now, you mentioned about potential slowdown in oil related activity based on, you know, oil prices. Are you have you seen any indication with in customer discussions where they’re saying, you know, that they would like to reduce activity or not yet?

Steve Glanville, President and CEO, STEP Energy Services: I would break it down into like the two regions that we operate Canada and The US. I think you’re seeing a bit more pressure in The US than we are seeing in Canada. You know, the Canadian business we operate 75 to 80% of our clients are are in the natural gas liquid rich field. So we haven’t seen any type of reduction in CapEx yet. But if oil prices, you know, kind of hover in that, kind of below 60, kind of mid 50s, you should expect to see some CapEx reduction.

It was different about Canada, particularly the Duvernay where we’ve seen quite a bit of activity in Q1 and we’re seeing it continue on through Q2 is, know, they’re not subject to the tariffs because most of that condensate goes to the oil sands. It’s, I think you got to look at it that way as well, Waqar.

Waqar, Analyst: Yeah, That makes sense.

Klas Dienter, CFO, STEP Energy Services: And what I would say is in our in the oil affected regions, Waqar, we we work for a lot of the larger blue chip clients. So as we look through the q one releases, we haven’t really seen that that much for as far as CapEx reductions go, maybe one or two percent, but haven’t really seen any significant CapEx reductions in the clients we work with.

Waqar, Analyst: That comment also for US market for coiled tubing or it’s just Canadian, Canada specific?

Steve Glanville, President and CEO, STEP Energy Services: Both. Yeah, for both. Yeah.

Waqar, Analyst: Okay. Great. Well, thank you very much. Appreciate the color.

Closing Remarks: Thank you, Waqar.

Conference Operator: Thank you. The next question comes from John Daniel at Daniel Energy Partners. Please go ahead.

John Daniel, Analyst, Daniel Energy Partners: Thank you. Good morning, guys. Steve, if you guys decided to push the accelerator and and bring on more of the new pump design, what’s the sort of the manufacturing cadence from where would they how many could you get this year if you wanted to?

Steve Glanville, President and CEO, STEP Energy Services: Yeah, John, it’s I don’t know if we’ve identified exactly how many we can get it. We’re going through this prototype phase. We don’t wanna hurry up and, you know, kind of push the accelerator until we’re really happy with the design. And so far it’s turned out pretty good. You know, I think we would, you know, let us trial it for a little bit before we can commit to anything on the call on this, but we are pretty excited about the ability to expand that business or that technology.

John Daniel, Analyst, Daniel Energy Partners: And I know you guys have had a positive experience at the pump. What is your customer telling you? And do you get the sense that those customers would embrace some sort of contractual arrangement for you guys to build one of those fleets?

Steve Glanville, President and CEO, STEP Energy Services: Yeah. So far, John, the feedback from our clients has been exceptional. We’ve only had it up for a few clients. The challenge I think, and this will be a get fixed with us supplying enough natural gas to the job sites. So today, most of our operators that are in the Montney and Duvernay do have field gas available.

But as you could imagine, you’re going to be needing a bit higher pressure or larger lines to be able to supply the fleet. So that’s why when we think about what’s the most ideal fleet in Canada, it has a combination of, call it, tier four that you have some diesel available to you, but majority of it would be these NGX pumps, which is a % natural gas.

John Daniel, Analyst, Daniel Energy Partners: Okay. All right. That’s all I got. Thank you for including me.

Steve Glanville, President and CEO, STEP Energy Services: Thanks, John.

Conference Operator: Thank you. Next question from John Gibson at BMO Capital Markets. Please go ahead.

John Gibson, Analyst, BMO Capital Markets: Good morning all. Thanks for taking my questions. First on the balance sheet and capital allocation, I mean that came up a little bit. I think that was mostly working capital related. Just wondering where you’re gonna direct the majority of free cash flow this year.

Is it further debt repayment, or could you look to maybe ramp the buyback a bit more?

Klas Dienter, CFO, STEP Energy Services: That’ll be further debt repayment, John. That’s always been our primary focus.

John Gibson, Analyst, BMO Capital Markets: K. Great. And then just on pricing, how much is it down year over year in in Canada? And and do you see any sort of green shoots for the remainder of the year? Is it sort of to be determined right now?

Steve Glanville, President and CEO, STEP Energy Services: Yeah. I can say that, like the coiled tubing prices does kind of held in line year over year, John, in Canada. I think The US, we’re seeing a bit of a bit of pricing kind of pressure in our US culturing business, but not, you know, we’re talking maybe 5%, but nothing too crazy. I think on the frac side, we see is Q1 was extremely busy for all of our pressure pumping peers. And so I think you saw Q1 kind of holding in there from pricing, but as we enter into kind of Q2, Q3, there’s some RFPs that we’re participating in.

And I would say pricing is down kind of a couple 3%, four %. I think for us, it’s lower than we’d like. The challenge I think that all of us are going to face is just the rising costs of these tariffs. I’m not just talking proppant and coiled tubing, talking all of the materials, you know, parts and etcetera, it’s going to show up in our business. So you’ve to be very careful on how you price these things today because we want to make sure that we are profitable going forward.

John Gibson, Analyst, BMO Capital Markets: Okay. Great. And then last one for me. You’ve got some assets held for sale on on the balance sheet. Wondering if that’s a good price to think about or is, you know, where we stand now, like, the likely scenario that you move that equipment back into Canada or at least keep it?

Klas Dienter, CFO, STEP Energy Services: Yeah, we’re going through that discovery process right now, John. We did impair the assets at the end of Q4 and we also did some in Q3 there. So we’re comfortable with the value today. It’s a blend of inventory and equipment. So some of that inventory that the plan is we’ll bundle that with the equipment.

Some of that could come north as well to support Canadian operations if not successful in bundling it. That’s still a little bit TBD at this time, but I think we’re comfortable with the value as it stands today.

John Gibson, Analyst, BMO Capital Markets: Okay, great. Thanks a lot guys. I’ll turn it back.

Steve Glanville, President and CEO, STEP Energy Services: Thanks, John.

Conference Operator: Thank you. We have no further questions. I’ll turn the call back over to Steve Glanville for closing comments.

Closing Remarks: Thank you, everyone, for joining our Q1 twenty twenty five conference call. We’ll now conclude it and look forward to having our conference call in August for Q2. Thank you very much, everyone.

Conference Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.

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