Canada LNG Expansion And Advanced Drilling Will Shape Demand

Key Takeaways

• Strategic technology adoption and focus on premium service lines position STEP to capture market share, improve margins, and stabilize earnings.
  
• Exit from underperforming operations and reinvestment in core markets enhance capital efficiency, reduce volatility, and support sustained growth.
  
• Reliance on Canadian markets, industry overcapacity, rising costs, and energy transition pressures increase long-term risks to STEP's revenue, margins, and growth prospects.

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.

• Commissioning of Canada's first large-scale LNG export facility is expected to create a step change in natural gas demand and upstream drilling activity, particularly in the Montney and Duvernay, supporting higher long-term utilization rates for STEP and driving topline revenue growth.
  
• Adoption of NGx natural gas-powered fracturing technology and enhanced fuel flexibility positions STEP to capture market share from clients demanding lower costs and ESG-compliant operations, with the NGx fleet expected to boost margins and stabilize earnings through differentiated, premium offerings.
  
• Ongoing expansion and uptake of Coil Plus and advanced coiled tubing technologies for extended lateral wells enables STEP to address the increasing complexity of horizontal completions, supporting both revenue growth through higher-value services and improved net margins due to operational efficiencies.
  
• Strategic exit from underperforming U.S. fracturing and focused reinvestment in high-return Canadian and U.S. service lines is expected to improve capital efficiency, reduce earnings volatility, and enhance free cash flow generation.
  
• Anticipated multi-year increase in well counts (notably an analyst-predicted 40% boost in Montney drilling by 2030) driven by population growth, industrial energy demand, and energy security priorities should underpin a positive demand outlook, supporting sustained revenue growth and higher long-term utilization rates for STEP's service fleets.

STEP Energy Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STEP Energy Services's revenue will decrease by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.1% today to 5.4% in 3 years time.
• Analysts expect earnings to reach CA$46.2 million (and earnings per share of CA$0.66) by about August 2028, up from CA$-20.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$65.2 million in earnings, and the most bearish expecting CA$29 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from -15.5x today. This future PE is greater than the current PE for the CA Energy Services industry at 9.8x.
• Analysts expect the number of shares outstanding to grow by 1.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

STEP Energy Services Future Earnings Per Share Growth

Risks

• The termination and wind-down of U.S. fracturing operations reduces revenue diversification and limits exposure to a major North American energy market, increasing reliance on Canadian operations and potentially exposing STEP to regional demand fluctuations, which could negatively impact long-term revenue and earnings growth.
  
• The overall industry trend of advancements in drilling and completions performance enables oil and gas producers to meet production targets with fewer wells and reduced capital expenditures, leading to constrained demand for pressure pumping and coiled tubing services; this oversupply of service capacity is prompting price reductions and compressing STEP's operating margins and EBITDA over time.
  
• STEP continues to face persistent inflation and tariff-related cost pressure on consumables and skilled labor, and although there has been some tariff relief, these cost challenges may not be fully offset by pricing power, which could further erode net margins and diminish net income.
  
• High capital expenditure requirements for innovation and fleet upgrades (such as NGx pumps) and the need to continuously invest in technology to remain competitive could strain free cash flow and limit STEP's ability to expand margins or return capital to shareholders, particularly if market conditions soften.
  
• While STEP's near-term growth is linked to Canadian unconventional plays (Montney and Duvernay), the accelerating global energy transition away from fossil fuels, increasing ESG mandates, and potential institutional capital flight from hydrocarbons present significant long-term risks to revenue growth, market valuation, and STEP's access to capital.

Valuation

• The analysts have a consensus price target of CA$5.208 for STEP Energy Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$6.0, and the most bearish reporting a price target of just CA$4.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$855.2 million, earnings will come to CA$46.2 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 6.9%.
• Given the current share price of CA$4.26, the analyst price target of CA$5.21 is 18.2% 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.