Long-term Contracts In Montney And Duvernay Will Secure Future Revenue Stability

Key Takeaways

• Increased fracturing activity and efficiencies in Canada, along with long-term contracts, are set to boost revenue growth and earnings stability.
  
• Investments in dual fuel engine technology could lower operational costs, while growing LNG demand enhances future revenue opportunities.
  
• Financial volatility, challenging market conditions, and potential strategic uncertainties suggest difficulties in revenue growth and investor confidence 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.

• The substantial increase in fracturing activity and operating efficiencies in the Canadian region, including record sand pumping volumes, is expected to drive future revenue growth and improve operating margins.
  
• Long-term contracts secured with key clients in promising regions such as Montney and Duvernay should provide stable revenue streams and enhance earnings stability.
  
• The company's significant investment in Tier 4 dual fuel engine technology for its fracturing fleets could reduce operational costs and improve net margins by aligning with client demands for sustainable and cost-efficient solutions.
  
• High utilization expected in Q1 2025, along with anticipated easing of margin pressures in the second half of the year due to rising LNG prices, could boost revenue and earnings.
  
• Potential growth in North American LNG export capacity, as projected by the U.S. Energy Information Administration, could positively impact revenues as demand for energy services increases in line with export capacity expansion.

STEP Energy Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STEP Energy Services's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 5.2% in 3 years time.
• Analysts expect earnings to reach CA$54.1 million (and earnings per share of CA$0.77) by about January 2028, up from CA$41.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$59.9 million in earnings, and the most bearish expecting CA$45.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, up from 7.6x today. This future PE is lower than the current PE for the CA Energy Services industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

STEP Energy Services Future Earnings Per Share Growth

Risks

• The net loss of $5.5 million in Q3 2024, a reversal from gains in previous quarters and years, highlights financial volatility that could deter potential investors, impacting net margins and earnings.
  
• The $12.7 million impairment in the U.S. fracturing market signals challenging conditions and possible struggles with asset efficiency, potentially reducing future revenues in that segment.
  
• Declining U.S. regional revenues from $98 million in Q3 last year to $45 million this year suggest persistent market difficulties that could hinder overall company revenue growth.
  
• Anticipated Q4 slowdown due to weakened commodity prices and pricing pressures indicates potential for reduced short-term revenues and sustained margin pressure.
  
• The proposed take-private transaction by ARC Financial raises questions about future strategic direction and shareholder value, potentially leading to uncertainties in financial performance and stock liquidity.

Valuation

• The analysts have a consensus price target of CA$5.21 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$5.75, and the most bearish reporting a price target of just CA$4.75.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.0 billion, earnings will come to CA$54.1 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 8.1%.
• Given the current share price of CA$4.36, the analyst's price target of CA$5.21 is 16.4% 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.