Investing In Natural Gas Technologies And Projects Like TMX And LNG Canada Will Improve Future Prospects

Key Takeaways

• Strategic investments and technological advancements could enhance revenue and margins through improved efficiency and reduced costs.
  
• Focus on high-value projects and favorable market conditions supports growth, while debt reduction and asset optimization enhance shareholder value.
  
• Inability to compete with larger firms and volatile market conditions could lead to margin compression and unpredictable revenue swings for STEP Energy Services.

Catalysts

An energy services company, provides integrated coiled tubing, fluid and nitrogen pumping, and hydraulic fracturing to service oil and natural gas industry in Canada and the United States.

• STEP Energy Services is seeing growth in proppant demand, reflecting increased operational complexity and intensity. Investment in dual fuel and natural gas-powered technologies is reducing costs and emissions, which could improve both revenue and net margins.
  
• The company has a strategic focus on the Montney and Duvernay plays, where increased activity and complex drilling requirements align with STEP's specialized equipment. This could boost revenue and margins through high-value projects.
  
• STEP’s technological advancements, such as Coil+ and the STEP-conneCT tool, provide unique market offerings that increase efficiency and reduce operational costs, potentially enhancing earnings.
  
• The anticipated increase in North American energy demand and major project completions, such as TMX and LNG Canada, create a favorable environment for STEP's growth, positively impacting revenue and earnings.
  
• Continued debt reduction and asset optimization, along with share buybacks, position STEP for better cash flow and potential EPS growth, driving long-term shareholder value.

STEP Energy Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STEP Energy Services's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 5.2% in 3 years time.
• Analysts expect earnings to reach CA$49.3 million (and earnings per share of CA$0.7) by about March 2028, up from CA$1.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$54.6 million in earnings, and the most bearish expecting CA$44 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 173.8x today. This future PE is greater than the current PE for the CA Energy Services industry at 8.4x.
• Analysts expect the number of shares outstanding to grow by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.2%, as per the Simply Wall St company report.

STEP Energy Services Future Earnings Per Share Growth

Risks

• The decision to wind down the U.S. fracturing service line due to losing contracts to larger competitors indicates an inability to compete with larger firms, which could impact future revenue and profitability.
  
• Supplying processes like their own proppant at lower margins could lead to ongoing margin compression, impacting both revenue and earnings.
  
• The dynamics around pricing, especially in context of equipment intensity and the weakening Canadian dollar against the U.S. dollar, could further reduce net margins if not adjusted appropriately.
  
• Volatility in commodity prices, as seen with the significant decrease in demand from clients when prices were low, can cause unpredictable swings in revenue.
  
• Potential political and regulatory risks arising from the dynamic landscape in Canada and the U.S. could introduce uncertainties affecting revenue and overall business stability.

Valuation

• The analysts have a consensus price target of CA$5.25 for STEP Energy Services based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$946.8 million, earnings will come to CA$49.3 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of CA$4.25, the analyst price target of CA$5.25 is 19.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.