CEO Regan Davis takes a STEP in the right direction
STEP Energy Services has seen better days for growing its earnings. But the company has made bold plays that could position it for a future windfall
by Jesse Snyder
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Photo Bluefish Studios/Hand Lettering Jenn Madole
Head office: Calgary
CEO: Regan Davis
2015 Revenue: $132 million
Regan Davis is the first to admit that Canada’s oil and gas sector is not exactly in growth mode. “The reality is that it’s a really tough environment,” says the CEO of STEP Energy Services, a Calgary-based coil tubing and fracturing services provider. “Very few companies are profitably growing their business this year, there’s no question in my mind.”
But that didn’t stop the company from undertaking an ambitious play to position itself for future growth in the highly competitive U.S. shale market. In April 2015, STEP closed its acquisition of GASFRAC Energy Services, a company that had been forced into receivership earlier in the year (STEP would not disclose the full value of the acquisition). The deal added 115,000 horsepower of pumping pressure to STEP’s asset base, allowing the company – which was until then primarily a coiled tubing provider – to enter the fracking market. The acquisition also provided STEP with two new operating bases in Alberta, as well as a base in Floresville, Texas. “It’s kind of abstract to be talking about growth in this current environment, but right now the goal is to position ourselves for future growth,” Davis says.
STEP’s decision to enter the U.S. market and bulk up on fracturing services equipment is a departure from the approach of many other service companies during this downturn, which is simply to sell off assets and lie low until the market picks back up. Davis says the company saw an opportunity to enter the Eagle Ford, a shale formation lying mostly in Texas, after it became clear that options were limited in Canada.
But Davis and his team saw a more specific reason to enter the U.S. shale market. STEP’s coiled tubing division is mostly comprised of large capacity, high-diameter coiling, a market that appears to be underserved – or, at least, relatively underserved – in the Texas play. Combining that large fleet of high-capacity coiled tubing with its newly purchased fracking equipment could make the company a more complete service provider. The open question for now, besides where commodity prices will go, is how seamlessly STEP can meld together its coiled tubing and fracturing services divisions. “The [U.S.] market is hyper-competitive, so we’re trying to find our way into it and build a business there,” Davis says. “The fracturing services line was very complementary to our coil tubing line; they’re often on the same lease at the same time and share the same customers. We think it was the right decision as this downturn lasts longer and competitiveness in the industry continues. Time will tell whether or not we’re successful.”
Step was established in 2011 after receiving $75 million in financing from ARC Financial. It enjoyed a few years of growth amid soaring commodity prices and easy access to private capital. That growth peaked in 2014, when STEP posted annual revenues of just under $132 million, compared to $79 million the year before. Davis doesn’t expect to see anywhere near that same level of growth in 2015, but he says the potential for future growth is there – depending on the trajectory of oil prices. “We have an asset base between our coil tubing operations and fracking operations that could create four to five times the revenue we did last year under the right market,” he says. “We’re excited about that.”
Like all companies in the oil and gas sector, STEP is focused on cutting operating costs to maintain its balance sheet. That includes shedding non-core equipment and technologies: Soon after the GASFRAC acquisition, STEP sold the propane-gel fracking segment of the company to a U.S. company. The propane technology, which was billed as a water-free replacement to the “conventional” fracking process, was for years a pillar of GASFRAC’s business model, but STEP mothballed the equipment to focus on its core business.
STEP is also paring back costs in other areas, whether by squeezing vendors, rolling back salaries and benefits, or reaching long-term fuel pricing agreements. The company is also experimenting with new technologies, like an infrared camera technology in its fracking division that allows operators to monitor the wear-and-tear of downhole equipment, in turn cutting maintenance costs. Davis says the company is also piloting a semi-automated technology that will help guide its downhole coiled tubing operations more efficiently. “I think the real cost savings are found in developing ways to do things smarter and quicker,” he says. “As much as this industry has had some great success with tech I think there’s a lot more that can be done.”
Aside from cost-cutting measures, though, STEP’s plan for growth is more of a waiting game than anything else. “I think most people today are working under the mindset to build their business in defensive mode to ensure they stay viable through this downturn in order to participate in the eventual upturn,” Davis says. “That’s certainly STEP’s position. We’re looking at the market very critically and saying, ‘We want to keep the company healthy.’ We will start to look more ambitiously at growth only after we see strong, sure signs that there’s a recovery underway.”