STEP Energy Services Ltd (TSX: STEP) has agreed to acquire the issued and outstanding capital stock of Tucker Energy Services Holdings Inc, a Houston-based provider of fracturing and completion solutions to the U.S. oil and gas industry. The deal has a total cash consideration of about $350 million (US$275 million). STEP, a Calgary-based oilfield service company, said the acquisition will give it strategic entry into the U.S. fracturing market in key high-growth basins. It will fund the buy with cash, credit facilities, and $50 million to be raised through an equity offering. STEP, which went public last year, is backed by Canadian energy private equity firm ARC Financial Corp.
Step Energy Services Ltd. Announces Acquisition of U.S. Fracturing and Completion Solutions Company and $50 Million in Equity Financing
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Calgary, Alberta – February 22, 2018 – STEP Energy Services Ltd. (the “Company” or “STEP”) is pleased to announce that, consistent with its strategic growth plans, it has entered into an agreement to acquire all of the issued and outstanding capital stock of Tucker Energy Services Holdings, Inc. (“Tucker”) for total cash consideration of US$275 million, before closing adjustments (the “Acquisition”). Tucker is a privately owned and geographically focused provider of fracturing and completion solutions operating primarily in the SCOOP/STACK and Woodford plays in Oklahoma. The Acquisition includes four fracturing spreads representing 192,500 horsepower (HP) (three spreads comprising of 142,500 HP currently operating, and a fourth fracturing spread of 50,000 HP expected to be delivered in the second quarter of 2018), two coiled tubing spreads and 15 wireline units. In addition, STEP is pleased to provide an operational update for the fourth quarter of 2017 and first quarter of 2018.
Strategic Entry into the U.S. Fracturing Market in High-Growth U.S. Basins
Pro forma the Acquisition, STEP will have greater scale and efficiency with total fracturing capacity of 490,000 HP (an increase of 65%), a total of 22 coiled tubing spreads (an increase of 10%) and 15 wireline units.
The Acquisition provides STEP with an efficient and strategic entry into the U.S. fracturing market in key high-growth basins, including the SCOOP/STACK and Woodford plays in Oklahoma. Additionally, Tucker has historical operating experience in the Haynesville play, which is one of the leading shale gas plays in the U.S.
Rig count in Cana-Woodford (which includes the SCOOP/STACK play) has increased 103% during the past two years, the second-fastest rate of activity growth among U.S. basins (based on data compiled by management from the February 16, 2018 Baker Hughes North American Rotary Rig Count).
The members of the senior leadership team of Tucker, who have been instrumental in building the U.S. business from Tucker’s inception, have agreed to join STEP and will continue to operate the business.
STEP expects to leverage new business from its existing coiled tubing client relationships in the Permian and Eagle Ford plays with Tucker’s fracturing and coiled tubing clients in Oklahoma.
Enhanced geographic diversification as, pro forma the Acquisition, STEP will have approximately 40% of its fracturing horsepower and coiled tubing spreads in the U.S., with the balance remaining in Western Canada continuing to primarily serve the Montney, Duvernay and Deep Basin resource plays.
The geographic and commodity diversification will enhance STEP’s flexibility in allocating equipment and capital between the U.S. and Western Canada in response to evolving market dynamics, thereby enhancing asset utilization and margin generation potential.
Significant Value Expected for STEP Shareholders
STEP believes that Tucker generates industry-leading Adjusted EBITDA margins. The organization is professionally managed, has a demanding and sophisticated client base and aligns well with STEP’s focus on safety and execution. Tucker generated US$42.3 million in Adjusted EBITDA1 (US$13.2 million of net income) during the first nine months of 2017. Financial performance was generated with an average of approximately 110,000 HP during the nine-month period, consisting of two fracturing spreads (totaling 95,000 HP) during the first half of the year, and three fracturing spreads (totaling 142,500 HP) during the third quarter. Upon delivery of the fourth fracturing spread, which is expected during the second quarter of 2018, Tucker will have a total active fleet of 192,500 HP.
Excluding the capital cost of the fourth fracturing spread scheduled for delivery in the second quarter of 2018 of US$42 million from the purchase price, the Acquisition of Tucker represents a valuation of 4.1x Tucker’s annualized Adjusted EBITDA1 for the nine-month period ended September 30, 2017 of US$56.4 million (annualized net income for the nine-month period ended September 2017 was US$17.6 million).
STEP is utilizing approximately $30 million available cash on its balance sheet, proceeds from the $50 million equity Offering (as described below) and the remainder from the New Credit Facilities (as described below) to finance the Acquisition, which implies accretion of greater than 40% for STEP’s funds flow per share (greater than 15% for STEP’s net income per share) based on the nine months ended September 30, 2017.
STEP plans to continue the conservative management of its balance sheet and maintain its low-risk capital structure through the cash flow generation of the combined businesses, maintaining capital expenditures within operating cash flow, and adjusting corporate spending based on market conditions.
Well Positioned to Capitalize on U.S. Growth
U.S. fracturing demand is expected to continue to increase with a rise in horizontal drilling activity and fracturing intensity, particularly in the Permian Basin and SCOOP/STACK plays.
STEP management believes U.S. fracturing supply may be constrained by the attrition of older equipment and the potential for supply chain limitations that may result in increasingly longer lead times for the construction and delivery of new capacity.
The Acquisition provides STEP with a position of scale in the high-growth SCOOP/STACK plays that complements its existing coiled tubing presence in the Permian Basin and Eagle Ford shale, affording the Company exposure to some of the most significant and active plays in the U.S.
Strong, Active and Growing Clients
Tucker currently provides fracturing solutions to a long-tenured client base that includes supermajors and large independents that control large acreage positions with multi-year drilling inventories in the SCOOP/STACK and Woodford plays in Oklahoma, in addition to the Haynesville play in Texas and Louisiana.
Tucker has contracts in place with major clients, two of which include a right of first refusal for all fracturing services in the Mid-Continent region of the U.S. As a result, Tucker is well positioned to capture increased activity in conjunction with completion programs by those clients.
Performance & Safety Driven Culture Aligned with STEP
Tucker’s long-tenured field professionals have a deep understanding of the organization’s policies and procedures.
As its clients have come to expect, Tucker is committed to safety and has an ISO 9001 certification; Tucker’s culture aligns well with STEP’s four core values of Safety, Trust, Execution and Possibilities.
“The Acquisition represents an incredibly exciting and unique opportunity for STEP and its shareholders. Expansion into the U.S. fracturing and completion solutions business has been a strategic goal and part of the Company’s growth plan. The acquisition of Tucker provides STEP with a launching pad into the U.S. fracturing market with established exposure to high-growth plays such as the SCOOP/STACK and Woodford and a loyal, high-quality client base. STEP and Tucker share the same commitment to a safety-driven, high-performance culture, and we look forward to welcoming Tucker’s professionals to STEP,” said Regan Davis, STEP’s President & Chief Executive Officer.
OVERVIEW OF TUCKER
Tucker provides fracturing and completion solutions to the U.S. oil and gas industry, primarily in the SCOOP/STACK and Woodford plays in Oklahoma, and to a client base which includes supermajor oil and gas companies and large independent exploration and production companies.
Tucker operates in the following three segments, with the majority of its revenue and Adjusted EBITDA coming from fracturing solutions:
Fracturing: Tucker’s largest revenue-generating segment is currently comprised of three highly utilized fracturing spreads consisting of an aggregate of 142,500 HP. In response to client demand, Tucker plans to introduce a fourth fracturing spread consisting of 50,000 HP in the second quarter of 2018, increasing its total fleet size to 192,500 HP.
Coiled Tubing: Tucker owns and operates two coiled tubing spreads consisting of one 2” unit and one 2-3/8” unit. Coiled tubing services include mill outs, cleanouts, plug/packer setting, fishing and acid stimulation, among other activities.
Wireline Services: Tucker currently owns 15 wireline units, including five cased-hole units and 10 open-hole units, that provide logging, perforating, pipe recovery and production logging services.
Tucker owns a field service center in McAlester, Oklahoma that is the base for its fracturing spreads, coiled tubing units and cased-hole wireline logging services. Tucker has an additional facility in Abilene, Texas and operates a research and development facility in Tulsa, Oklahoma that also provides a base for open-hole wireline and other related services. Tucker currently employs approximately 400 professionals.
During the nine months ended September 30, 2017, Tucker generated approximately US$6.0 million in Adjusted EBITDA per fracturing spread per quarter (US$1.9 million in net income). A full-year deployment of four spreads at the same performance metrics achieved during the nine months ended September 30, 2017 would equate to an illustrative full-year Adjusted EBITDA1 of US$96.7 (US$30.2 million in net income).
STEP has entered into an agreement (the “Acquisition Agreement”) to acquire all of the issued and outstanding capital stock of Tucker for total consideration of US$275 million in cash, subject to certain closing adjustments. The Acquisition Agreement contains customary representations and warranties by the parties, and the parties have agreed to customary indemnities relating to breaches of representations, warranties, covenants and agreements. The closing of the Acquisition remains subject to the satisfaction of certain customary closing conditions, including receipt of regulatory approvals (including expiry of the applicable waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976).
The Acquisition is not subject to any financing condition. STEP expects that the cash required to close the Acquisition of US$275 million, before closing adjustments, will be funded with cash on hand and the net proceeds of the $50 million Offering of subscription receipts (“Subscription Receipts”), with the balance funded from borrowings under the New Credit Facilities.
For purposes of financing the Acquisition, STEP has obtained committed financing in respect of a $330 million revolving syndicated credit facility, $10 million operating facility and US$7.5 million operating facility (the “New Credit Facilities”). The New Credit Facilities will replace STEP’s existing credit facilities and are expected to be available on or prior to closing of the Acquisition.
STEP has also entered into an agreement with a syndicate of underwriters (the “Underwriters”) co-led by CIBC Capital Markets and Peters & Co. Limited as joint bookrunners, pursuant to which the Underwriters have agreed to purchase on a bought deal basis an aggregate of 5,380,000 Subscription Receipts at an offering price of $9.30 per Subscription Receipt (the “Offering Price”) for total gross proceeds of $50 million (the “Offering”).
In connection with the Offering, STEP has granted the Underwriters an over-allotment option (the “Over-Allotment Option”), exercisable in whole or in part, at any time for a period of 30 days following the closing of the Offering, to purchase up to an aggregate of an additional 807,000 Subscription Receipts at the Offering Price.
The gross proceeds from the Offering (the “Escrowed Funds”) will be held in escrow pending completion of the Acquisition. If all conditions, undertakings and other matters to be satisfied, completed, or otherwise met prior to the completion of the Acquisition have been satisfied, completed, or otherwise met, or waived (other than payment of the purchase price, which is to be satisfied in part by the release of the Escrowed Funds) on or before 5:00 p.m. (Calgary time) on June 29, 2018, the Escrowed Funds, net of any fees owing to the Underwriters, will be released to STEP in connection with completion of the Acquisition and each Subscription Receipt will be exchanged for one Common Share, without payment of additional consideration or further action on the part of the holder thereof. If the Acquisition is not completed on or before 5:00 p.m. (Calgary time) on June 29, 2018, then holders of the Subscription Receipts will receive an amount equal to the full purchase price attributable to each Subscription Receipt held together with their pro rata entitlement to interest accrued on such amount, if any.
A preliminary short form prospectus (the “Prospectus”) relating to the Offering will be filed by no later than February 28, 2018 with the securities commissions of each of the provinces of Canada. The Subscription Receipts may also be placed in the United States with certain qualified institutional buyers in transactions exempt from registration under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) and applicable state securities laws. The Offering is subject to the receipt of all necessary regulatory and stock exchange approvals and is expected to close on or about March 15, 2018.
No securities regulatory authority has either approved or disapproved of the contents of this press release. This press release is not for distribution, directly or indirectly, in or into the United States (including its territories and possessions, any state of the United States and the District of Columbia) or any other jurisdiction outside Canada. This press release does not constitute or form a part of any offer or solicitation to buy or sell any securities in the United States or any other jurisdiction outside of Canada. The securities have not been and will not be registered under the U.S. Securities Act, or the securities laws of any state of the United States and may not be offered or sold within the United States or to or for the benefit of a U.S. person absent registration or pursuant to an available exemption from the registration requirements of the U.S. Securities Act and applicable state securities laws. There will be no public offering of securities in the United States.
OPERATIONS UPDATE & OUTLOOK
STEP’s Canadian operations experienced strong demand and utilization during the fourth quarter of 2017, aside from the well-publicized break in activity that occurred in late December. This break provided a window to perform maintenance and prepare for a busy first quarter. STEP’s U.S. operations benefited from ongoing high utilization, improved pricing and the deployment of six coiled tubing spreads for the entire quarter. The Company anticipates realizing Adjusted EBITDA of between $34.5 million and $37.4 million, or 22.7% to 23.8% of the corresponding low and high point of the expected consolidated revenue range, and net income of between approximately $17.0 million and $18.0 million in the fourth quarter of 2017. See “Revenue and Reconciliation of Adjusted EBITDA to Net Income” below. We are pleased to once again be delivering results in line with market expectations.
First Quarter of 2018
STEP is pleased to report that its eighth fracturing spread has been put into service in the first quarter of 2018 consistent with the Company’s deployment schedule. All of the Company’s deployed fracturing and coil tubing equipment has a full calendar of work for the remainder of the first quarter of 2018. STEP is encouraged by its booking schedule for the second quarter of 2018, and expects the quarter will be more active than a typical spring breakup period. In the U.S., the Company’s seventh coiled tubing spread has been tested and deployed, while the eighth coiled tubing spread is expected to be operational before the end of the first quarter. Ongoing client inquiries continue to be supportive of deploying new equipment to the U.S. markets. The information in this paragraph about first quarter 2018 is before giving effect for the Acquisition.
All figures and information indicated in this “Operations Outlook & Update” section with respect to the three month period ended December 31, 2017 are preliminary, have not been reviewed by the Company’s auditors and are subject to change as the Company’s financial results are finalized. The preliminary results and information (including with respect to active fracturing and coiled tubing capacity, revenue, Adjusted EBITDA and net income) provided in this section constitute forward-looking information within the meaning of Applicable Securities Laws, are based on a number of assumptions and are subject to a number of risks and uncertainties. See “Forward-Looking Statements”.
CIBC Capital Markets acted as exclusive financial advisor to STEP with respect to the Acquisition. Simmons & Company International, Energy Specialists of Piper Jaffray, acted as exclusive financial advisor to Tucker Energy Services Ltd.
STEP Energy Services is an oilfield service company founded in 2011 that provides fully integrated coiled tubing and fracturing solutions. The Company’s combination of modern, fit-for-purpose fracturing and coiled tubing equipment has differentiated STEP in plays where wells are deeper, have longer laterals, and higher pressure.
Initially operating only in Canada as a specialized, deep capacity coiled tubing company, in 2015, STEP expanded into the U.S., and also began offering fracturing services to its Canadian clients. Currently, STEP is a fully integrated, deep capacity coiled tubing and fracturing solutions provider focused primarily in the Montney and Duvernay in Canada, and as coiled tubing services provider in the Permian and Eagle Ford basins in Texas and the Haynesville play in Louisiana. STEP’s U.S. business is a key differentiator for STEP, as the rate of expansion and profitability from that segment is expected to contribute meaningfully to the Company’s growth. STEP’s continuing track record of safety, efficiency and execution drives repeat business from our blue-chip exploration and production clients.
For more information please contact:
President & Chief Executive Officer
Photo courtesy of STEP Energy Services Ltd