tsx: step acquisition of tucker energy services … · 2018-03-27 · tsx: step acquisition of...
TRANSCRIPT
TSX: STEP
Acquisition of Tucker Energy Services Holdings, Inc.March 2018
Disclaimer
1
The information contained in this presentation does not purport to be all-inclusive or to contain all information that readers may require regarding STEP Energy Services Ltd. (“STEP” or the “Company”) or STEP’s proposed acquisition (the “Acquisition”) of all of the issued and outstanding capital stock of Tucker Energy Services Holdings, Inc. (“Tucker”) from Tucker Energy Services Ltd. Readers are encouraged to conduct their own analysis and review of STEP, the Acquisition and of the information contained in this presentation. Without limitation, readers should read the entire record of publicly filed documents relating to the Company, consider the advice of their financial, legal, accounting, tax and other professional advisors and such other factors they consider appropriate in investigating and analyzing the Company. A reader should rely only on the information provided by the Company and is not authorized to rely on parrts of that information to the exclusion of others. STEP has not authorized anyone to provide readers with additional or different information, and any such information, including statements in media articles about STEP, should not be relied upon. In this presentation, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars. Unless otherwise noted or the context indicates otherwise, "STEP" refers to STEP Energy Services Ltd. and its subsidiaries, collectively.
This presentation does not constitute an offer or solicitation in any jurisdiction or to any person or entity. No representations or warranties, express or implied, have been made as to the accuracy or completeness of the information in this presentation and this presentation should not be relied on in connection with, or act as any inducement in relation to, an investment decision.
Forward-Looking Statements
Certain statements contained in this presentation constitute “forward-looking statements” or “forward-looking information” within the meaning of applicable securities legislation (collectively, “forward-looking statements”). These statements relate to management’s expectations about future events, results of operations and the Company’s future performance (both operational and financial) and business prospects. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “objective” and “capable” and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. While STEP believes the expectations reflected in the forward-looking statements included in this presentation are reasonable, such statements are not guarantees of future performance or outcomes, may prove to be incorrect and should not be unduly relied upon. These statements speak only as of the date of this presentation. In addition, this presentation may contain forward-looking statements and forward-looking information attributed to third-party industry sources.
In particular, this presentation contains forward-looking statements pertaining to the following: the completion of the Acquisition and the timing thereof; the financing of the Acquisition, including expectations regarding the availability of the New Credit Facilities (as defined herein) and the timing thereof; the anticipated benefits of the Acquisition; the pro forma financial and operational information of STEP after completion of the Acquisition; expectations regarding growth in the U.S. oilfield services industry; future development activities of both the Company and Tucker; and the Company’s capital plan.
With respect to forward-looking statements contained in this presentation, assumptions have been made regarding, among other things: timing of receipt of applicable regulatory approvals for the Acquisition; the Company’s ability to complete the Acquisition and integrate Tucker’s business and operations with STEP’s business and operations; the Company’s ability to market successfully to current and new clients; the Company’s ability to utilize its equipment; the Company’s ability to obtain qualified staff and equipment in a timely and cost-efficient manner; the regulatory framework governing royalties, taxes and environmental matters in the jurisdictions in which the Company conducts its business and any other jurisdictions in which the Company may conduct its business in the future; levels of deployable equipment; future capital expenditures to be made by the Company; future sources of funding for the Company’s capital program; the Company’s future debt levels; the impact of competition on the Company; and the Company’s ability to obtain financing on acceptable terms.
A number of factors, risks and uncertainties could cause results to differ materially from those anticipated and described herein including, among others: possible failure to realize the anticipated benefits of the Acquisition; inability to complete the Acquisition on the terms specified or at all; potential undisclosed liabilities associated with the Acquisition; volatility of the oil and natural gas industry; excess equipment levels; competition in the oilfield services industry; restrictions on access to capital; fluctuations in currency exchange rates; merger and acquisition activity among the Company’s clients; federal and provincial legislative and regulatory initiatives could result in increased costs and additional operating restrictions or delays; loss of a significant client could cause the Company’s revenue to decline substantially; negative cash flows from operating activities; third-party credit risk; and inability to manage growth.
Although STEP has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in its forward-looking statements, there may be other factors, including those set forth in the final short form prospectus dated March 8, 2018 (the “Prospectus”), those set forth under the heading "Risk Factors" in STEP’s final prospectus dated April 25, 2017 (the “IPO Prospectus”) and those described in STEP’s management discussion and analysis of financial condition and result of operations for the three and nine month periods ended September 30, 2017, dated November 7, 2017 (the “Interim MD&A”), that cause actions, events or results not to be anticipated, estimated or intended. Actual results could differ materially from those anticipated in these forward-looking statements. The forward-looking statements included in this presentation are expressly qualified by the foregoing cautionary statements and are made as of the date of this presentation. Readers should not place undue reliance on forward-looking statements. The Company does not undertake any obligation to publicly update or revise any forward-looking statements except as required by applicable securities laws.
Non-IFRS Measures
In addition to using financial measures prescribed by IFRS, references are made in this presentation to “Adjusted EBITDA” as it relates to both STEP and Tucker and “funds flow per share” as it relates to STEP and STEP pro forma the Acquisition, which are measures that do not have any standardized meaning as prescribed by IFRS. Accordingly, the Company’s use of such terms may not be comparable to similarly defined measures presented by other entities. These financial measures should not be considered as an alternative to, or more meaningful than, measures of financial performance as determined in accordance with IFRS as an indicator of performance.
“Adjusted EBITDA” is a financial measure not presented in accordance with IFRS and is equal to net income before finance costs, depreciation and amortization, loss (gain) on property and equipment, current and deferred income tax provisions and recoveries, share-based compensation, impairment, transaction costs and foreign exchange (gain) loss. Losses (gains) on property and equipment are excluded because they are not part of the regular business activities of STEP or Tucker, as applicable. Adjusted EBITDA is presented because it is widely used by the investment community as it provides an indication of the results generated by the normal course business activities of STEP or Tucker, as applicable, prior to considering how the activities are financed and the results are taxed. STEP uses Adjusted EBITDA internally to evaluate operating and segment performance, because management believes it provides better comparability between periods.
“Funds flow” is a financial measure not presented in accordance with IFRS and is equal to cash flow from operations before non-cash changes in working capital. “Funds flow per share” is funds flow divided by the weighted average number of Common Shares outstanding for the period. Funds flow per share is presented because it allows management and investors to assess the ability of the Company to generate the funds necessary to finance operating activities and capital expenditures and reduce indebtedness.
The following table presents a reconciliation of the non-IFRS financial measure of Adjusted EBITDA to the IFRS financial measure of net income (loss) as it relates to STEP, Tucker and STEP pro forma the Acquisition.
The following tables present a reconciliation of the non-IFRS financial measure of funds flow per share to the IFRS financial measure of cash flow from operations as it relates to STEP and STEP pro forma the Acquisition.
Tucker
(US$000’s – U.S. GAAP)
STEP Pro Forma the Acquisition
(C$000’s – IFRS) 1
Nine Months Ended
September 30, 2017 Nine Months Ended
September 30, 2017
Net income (loss) $ 13,166 $ 51,148 Add (deduct):
Depreciation and amortization 20,383 51,566 Loss (gain) on disposal of property and
equipment 42 (2,041) Finance costs 1,328 11,249 Income tax expense (recovery) 7,381 23,562 Share-based compensation - 5,059 Impairment - - Transaction costs 1,983 Foreign exchange (gain) loss - 338
Adjusted EBITDA $ 42,300 $ 142,864
STEP
(C$000’s – IFRS)
Nine Months Ended
September 30, 2017 Year Ended
December 31,
2016 2015 Net income (loss) $ 40,167 $ (19,956) $ (5,615) Add (deduct):
Depreciation and amortization 24,946 22,783 15,936 Loss (gain) on disposal of property and equipment (2,096) (1,511) (6,942) Finance costs 1,003 937 881 Income tax expense (recovery) 16,221 (5,033) 767 Share-based compensation 5,059 8,918 2,633 Impairment - - 6,387 Transaction costs 1,983 - - Foreign exchange (gain) loss 338 84 (170)
Adjusted EBITDA $ 87,621 $ 6,222 $ 13,877
Disclaimer (continued)
2
Notes:1. Tucker figures converted to Canadian dollars at 1.31 CAD/USD. This
reconciliation table should be read in conjunction with the STEP ProForma Financial Statements, including the notes thereto.
2. Reflects adjustments for finance costs and income tax provisionsderived from the adjustments described in Notes 4(g) and 4(h),respectively, to the STEP Pro Forma Financial Statements.
Notes:1. Tucker figures converted to Canadian dollars at 1.31
CAD/USD. This reconciliation table should be read inconjunction with the STEP Pro Forma FinancialStatements, including the notes thereto.
STEP
Tucker
STEP Pro Forma the Acquisition (C$000’s –
IFRS) 1 (C$000’s – IFRS) (US$000’s – U.S. GAAP)
Nine Months Ended September 30, 2017
Nine Months Ended September 30, 2017
Nine Months Ended September 30, 2017
Cash flow from operations $ 37,112 $ 23,205 $ 61,383 2 Adjusted for the following:
Changes in working capital from operations 45,723 - 45,723 Changes in operating assets and liabilities
Trade accounts receivable - 22,335 29,169 Unbilled revenues - (83) (108) Due from related parties - 217 283 Inventory - 1,246 1,627 Prepaid expenses and other assets - 854 1,115 Outstanding checks in excess of bank
balance - (3,062) (3,999)
Accounts payable - (5,423) (7,082) Accrued expenses and other liabilities - 1,341 1,751 Advance payments from customers - 39 51 Due to related parties - 595 777 Income tax payable - (753) (983)
Funds flow $ 82,835 $ 40,511 $ 129,707
Weighted average shares outstanding 55,408,863
60,788,863
Funds flow per share $ 1.49
$ 2.13 Cash flow from operations per share $ 0.67
$ 1.01
Disclaimer (continued)
3
Readers are cautioned not to consider these non-IFRS measures in isolation or place undue reliance on ratios or percentages calculated using these non-IFRS measures. These non-IFRS measures should be read in conjunction with STEP’s unaudited condensed interim consolidated financial statements as at September 30, 2017, and for the three and nine month periods ended September 30, 2017 and 2016, together with the notes thereto, the Interim MD&A, the audited consolidated financial statements of STEP as at and for the years ended December 31, 2016 and 2015, together with notes thereto and the auditor’s report thereon included in the IPO Prospectus and the Annual MD&A, each of which can be found on STEP’s SEDAR profile and are incorporated in the Prospectus. These non-IFRS measures should also be read in conjunction with the financial statements of Tucker (the “Tucker Financial Statements”) and the pro forma financial statements of STEP (the “STEP Pro Forma Financial Statements”) which are included in the Prospectus.
Presentation of Financial Information
This presentation contains pro forma financial and other disclosure relating to STEP, assuming, and after giving effect to, the completion of the offering and the Acquisition. Readers are cautioned that Tucker’s financial information was prepared in accordance with U.S. GAAP and reconciled to IFRS for those IFRS adjustments relevant to the Acquisition. Such unaudited pro forma consolidated financial information has been prepared using certain of STEP’s financial statements as well as Tucker’s financial statements. Actual results may differ from those presented in the pro forma financial information.
Additionally, this presentation makes use of the following abbreviations:
MM millions
HP horsepower
4
Transaction Overview
1 Includes 675,000 subscription receipts issued pursuant to the partially exercised over-allotment option.2 New credit facilities consist of a $330 million revolving syndicated facility, $10 million operating facility and a US$7.5 million operating facility (collectively, the “New Credit Facilities”). These facilities will replace
STEP’s existing credit facilities.3 See “Non-IFRS Measures”. Transaction value used for the acquisition multiple is based on the US$275 million acquisition price less US$42 million representing the new-build cost of the fourth fracturing spread.
• STEP to acquire Tucker Energy Services Holdings, Inc. (“Tucker”) for US$275 million in cash (the “Acquisition”)• Tucker provides fracturing and completion solutions to the U.S. oil and gas industry and the Acquisition includes four
fracturing spreads (192,500 HP), two coiled tubing spreads and 15 wireline unitsOverview
• Tucker provides STEP with a strategic entry into the U.S. fracturing market with immediate exposure to high-growth plays such as the SCOOP/STACK and Woodford in Oklahoma
• Ability to leverage and build upon the existing client relationships with STEP’s U.S. coiled tubing business in the Permian and Eagle Ford plays and Tucker’s fracturing and coiled tubing clients in Oklahoma
• Tucker’s clients include supermajors and large independents with existing service agreements and two right of first refusal agreements
Acquisition Rationale
• Cash consideration of US$275 million (the Acquisition includes four fracturing spreads representing 192,500 HP (three spreads comprising of 142,500 HP currently owned and operating and a fourth fracturing spread of 50,000 HP expected to be delivered in the second quarter of 2018)). The Acquisition is made possible as a result of STEP’s clean balance sheet
• In connection with the Acquisition, STEP completed a bought-deal equity financing raising approx. $56 million by issuing 6,055,000 subscription receipts for $9.30 each1
• The remainder of the cash consideration will be paid from cash on hand and borrowings under New Credit Facilities2
Transaction Consideration & Financing
• Tucker’s Adjusted EBITDA3 and net income for the nine months ended September 30, 2017 were US$42.3 million and US$13.2 million, respectively • Financial performance was generated with an average of approximately 110,000 HP during the 9-month period, two
fracturing spreads (totaling 95,000 HP) during 1H17, and three fracturing spreads (totaling 142,500 HP) during 3Q17• Excluding the capital cost of the fourth fracturing spread of US$42 million from the purchase price, the Acquisition of Tucker
represents a valuation of 4.1x Tucker’s annualized Adjusted EBITDA of US$56.4 million for the nine months ended September 30, 20173 (13.3x Tucker’s annualized net income for the nine months ended September 30, 2017 was US$17.6 million)
• The Acquisition implies accretion of greater than 40% for STEP’s funds flow per share3 (greater than 50% for STEP’s cash flow from operations per share) based on the nine month period ended September 30, 2017
Valuation and Accretion
• Expiry of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 in addition to other customary regulatory approvals and closing conditionsApprovals
• Expected to close on or before April 2, 2018Closing
5
Acquisition Rationale
Significant Value Expected for STEP ShareholdersAcquisition represents a valuation of 4.1x Tucker’s annualized Adjusted EBITDA (13.3x Tucker’s annualized net income)1
Accretion of greater than 40% for STEP’s funds flow per share and greater than 50% for STEP’s cash flow from operations per share based on the 9 month period ended September 30, 20171
Strategic Entry into the U.S. Fracturing Market in High-Growth U.S. BasinsTucker operates primarily in the SCOOP/STACK and Woodford plays in Oklahoma
The SCOOP/STACK is the second‐fastest growing play in the U.S., based on drilling rig activity2
Well Positioned to Capitalize on U.S. GrowthU.S. fracturing demand is expected to increase with a rise in horizontal drilling activity and fracturing intensity
Financially Strong, Active and Growing ClientsTucker’s large‐cap exploration and production client base controls expansive acreage positions with
multi‐year drilling inventories in the plays in which Tucker operates
Performance & Safety Driven Culture Aligned with STEPTucker’s dedication to safety, and its focus on operational excellence, aligns well with STEP’s culture
Tucker’s experienced, senior leadership team built the business and has agreed to join STEP
1 See “Non-IFRS Measures”. Transaction value used for the acquisition multiple is based on the US$275 million acquisition price less US$42 million representing the new-build cost of the fourth fracturing spread and annualized Adjusted EBITDA of US$56.4 million (annualized net income of US$17.6 million) for the nine-month period ended Sep 30, 2017.
2 Based on data compiled by management from Baker Hughes North American Rotary Rig Count as of February 16, 2018 with SCOOP/STACK data based on the rig count for Cana-Woodford, which includes the SCOOP/STACK play.
Tucker Overview
6
• Began operations in 2001 and provides fracturing and completion services to the U.S. oil and gas industry, primarily in the SCOOP/STACK and Woodford plays in Oklahoma
• Primary client base is comprised of supermajor and large independent oil and gas companies• Tucker owns and operates equipment in the following three segments:− Fracturing: three fracturing spreads consisting of 142,500 HP and expanding to four spreads with 192,500 HP
o Two fracturing spreads (totaling 95,000 HP) were operating for the January to June 2017 period, followed by a third fracturing spread (representing 47,500 HP) which was deployed in July 2017, increasing the fleet size to 142,500 HP
o Fourth fracturing spread consisting of 50,000 HP is expected to be delivered in Q2 2018, increasing total fleet size to 192,500 HPo Represents Tucker’s largest revenue-generating segment (approximately 90% of revenue for the nine months ended September 30, 2017)
− Coiled Tubing: two coiled tubing spreads: one 2” unit and one 2-3/8” unit− Wireline Services: 15 wireline units: five cased-hole units and 10 open-hole units• Approximately 400 professionals• Tucker demonstrates strict quality control, environmental and occupational health and safety standards, including ISO 9001 and OHSAS 18001
certifications, with an ISO 14001 certification currently pending
192,500 Fracturing HP1 Two Coiled Tubing Units 15 Wireline Units
Tucker Is a Growing Completion Solutions Service Provider in the U.S.
1 Includes Tucker’s fourth fracturing spread with 50,000 HP anticipated to come online in Q2 2018.
Tucker Financial Performance and Growth
7
Historical Fracturing Fleet Activity
Operational Highlights – Nine Months Ended September 30, 20171
Illustrative Full-Year Fracturing Fleet Activity
Tucker Historical Activity - Nine Months Ended Sep 30, 2017 Tucker Illustrative Full Year Activity – Four Fracturing Spreads
Perspectives on Full-Year Activity
• The horizontal drilling rig count in the SCOOP/STACK plays has increased 103% during the past two years, the second-fastest rate of growth in activity in the U.S.3
• Tucker has contracts in place with two major clients that include a right of first refusal for all fracturing services required by those clients in the Mid-Continent region of the U.S.
Revenue US$134.3
Adjusted EBITDA2 US$42.3
Net Income US$13.2
Fracturing Quarters in Period 7
Adjusted EBITDA2 per Fracturing Spread per Quarter4 US$6.0
Net Income per Fracturing Spread per Quarter4 US$1.9
HP Q1 Q2 Q3 Q4
Spread 1 47,500
Spread 2 47,500
Spread 3 47,500
Spread 4 50,000
HP Q1 Q2 Q3
Spread 1 47,500
Spread 2 47,500
Spread 3 47,500
Spread 4 50,000
Individual Fracturing Spread Activity for Seven Quarters in Period Individual Fracturing Spread Activity for 16 Quarters Based on Full Year
Tucker Fracturing Spread Activity and Metrics
1 Millions, except “Fracturing Quarters in Period”. 2 See “Non-IFRS Measures”. 3 Based on data compiled by management from Baker Hughes North American Rotary Rig Count as of February 16, 2018 with SCOOP/STACK data based on the rig count for Cana-Woodford, which includes the
SCOOP/STACK play.4 Based on nine months ended September 30, 2017 results, with seven fracturing quarters during this nine month period.5 Assuming four fracturing spreads in use for four quarters with no downtime and pricing consistent with the pricing for the nine months ended September 30, 2017. Management believes this provides important information
regarding Tucker’s expected fracturing capacity upon delivery of the fourth fracturing spread which is expected to be delivered in the second quarter of 2018.
Fracturing Quarters in Period 16
Adjusted EBITDA2 per Fracturing Spread per Quarter4 US$6.0
Illustrative Full-Year Adjusted EBITDA2 US$96.7
Net Income per Fracturing Spread per Quarter4 US$1.9
Illustrative Full-Year Net Income US$30.2
Illustrative Economics on Full-Year Fracturing Fleet Activity1,5
8
Tucker ’s Facilities Are in Close Proximity to Key, High-Growth Oil and Gas Basins
Tucker Facilities and Operations
- Active Fracturing Spreads
• 13 acres; 2,100 square feet office space; 3,900 square feet shop/warehouse space
• Wireline shop with three bays
• Three open-hole wireline units
• 3.1 acres; 134,000 square feet
• Seven open-hole wireline units
• 23.6 acres; 1.0 million square feet
• Three fracturing spreads
• Two coiled tubing spreads
• Five cased-hole wireline units
• Sand warehouse with 18 million pounds of flat storage served by the UP and KCS railways
• Acid dock
Tulsa, OK (R&D Facility)
McAlester, OK
Abilene, TX
26%
74%
62%
38%
13
7
2
Current Pro Forma
Current Pro Forma
33%
67%
91%
9%
STEP Pro Forma the Acquisition of Tucker
9
Potential Fracturing Horsepower (HP) 1
Coiled Tubing Spreads (#) Segment Breakdown of Q1-Q3 2017 Revenue (%)3
297,500
490,000
2022
Current Pro Forma
Geographic Breakdown of Q1-Q3 2017 Revenue (%) 2
Current Pro Forma
192,500
1 Includes Tucker’s fourth fracturing spread with 50,000 HP anticipated to come online in Q2 2018 and the additional 72,500 HP that STEP has available for deployment (some of which will require capital for maintenance, refurbishment and rebranding).
2 Based on US$139.0 million revenue for the nine months ended September 30, 2017 in the Tucker Financial Statements converted to Canadian dollars at an exchange rate of 1.31 CAD/USD and STEP's revenue of $361.4 million and $37.5 million in its Canadian and U.S. segments, respectively, during the same period.
3 Based on management estimates.4 Coiled tubing includes wireline and ancillary services.
Coiled Tubing4 Fracturing
Canada U.S.
- STEP Service Centre- STEP Head Office
Canadian Fracturing and Coiled Tubing Markets
U.S. Fracturing and Coiled Tubing Markets
U.S. Pro Forma Revenue Growth of 482%
Fracturing Pro Forma Revenue Growth of 60%Increase of ~10%
Increase of ~65%
U.S.Canada U.S. Acquired
Canada U.S. Acquired
- Tucker Facility
- Plays
STEP Pro Forma the Acquisition of Tucker
101 Includes Tucker’s fourth fracturing spread with 50,000 HP anticipated to come online in Q2 2018 and the additional 72,500 HP that STEP has available for deployment (some of which will require capital for
maintenance, refurbishment and rebranding).2 Based on an exchange rate of 1.31 CAD/USD. See the STEP Pro Forma Financial Statements, including the notes thereto.3 See Non-IFRS Measures.
490,000 Fracturing HP
22 Coiled Tubing Spreads
15 Wireline Units
Nitrogen Solutions
Operational
STEP Tucker Pro Forma % Change
Fracturing HP1 (HP) 297,500 192,500 490,000 65%Coiled Tubing Spreads (#) 20 2 22 10%Wireline Units (#) - 15 15 -
Financial - STEP Pro Forma - September 30, 2017 (unaudited)2
STEP Tucker Pro Forma % Change(C$ - IFRS) (US$ - U.S. GAAP) (C$ - IFRS)
9M 2017 Revenue ($MM) $399.0 $139.0 $580.6 45.5%9M 2017 Net Income ($MM) $40.2 $13.2 $51.1 27.2%9M 2017 Net Income Margin (%) 10.1% 9.5% 8.8% (1.3%)9M 2017 Adjusted EBITDA3 ($MM) $87.6 $42.3 $142.9 63.0%9M 2017 Adjusted EBITDA Margin3 (%) 22.0% 30.4% 24.6% 2.6%
• STEP plans to continue its prudent management of its balance sheet by monitoring the market and appropriately adjusting capital expenditures to fit within operating cash flow
• STEP also plans to continue to reduce leverage on the balance sheet to maintain its low risk capital structure
11
Acquisition Highlights
Significant Value Expected for STEP Shareholders
Strategic Entry into the U.S. Fracturing Market in High-Growth U.S. Basins
Well Positioned to Capitalize on U.S. Growth
Financially Strong, Active and Growing Clients
Performance & Safety Driven Culture Aligned with STEP
