- Our linear regression model suggests revenue growth deceleration between NTM 2023 and NTM 2024 and a decline in NTM 2025.
- EBITDA growth rate can be sharp in NTM 2023 but may fall steeply in NTM 2024.
- The model suggests a relative undervaluation and upside potential in stock returns.
Part 1 of this article discussed STEP Energy Services’ (STEP) outlook, performance, and financial condition. In this part, we will discuss more.
Linear Regression Based Revenue Forecast
Based on a regression equation between the key industry indicators (crude oil price and Canada rig count) and STEP’s reported revenues for the past eight years and the previous four quarters, we expect its revenues to increase by 9% in the next 12 months (or NTM) in 2023. The growth rate can decelerate to 4% in NTM 2024, while revenues can decline by 4% in NTM 2025. For the short-term trend, we have also considered seasonality.
Based on the same regression models and the forecast revenues, we expect the company’s EBITDA to increase by 15% in NTM 2023. The EBITDA growth rate can come to a near halt in NTM 2024.
Target Price And Analysts’ Rating
Returns potential using the forward EV/EBITDA multiple (1.9x) is much lower (22% upside) than the expected returns using the Wall Street analysts’ expected returns (153% upside) from the stock.
The sell-side analysts’ target price for STEP is $8.9, which, at the current price, has a return potential of 153%. Six sell-side analysts rated STEP a “buy” or a “strong buy,” and one a “Hold”, while none recommended a “Sell” in the past 90 days.
Relative valuation
STEP’s forward EV/EBITDA multiple contraction versus the current EV/EBITDA is in line with its peers, typically resulting in a similar EV/EBITDA multiple to its peers. The company’s EV/EBITDA multiple (2.55x) is much lower than its peers’ (Calfrac, Trican Well Services, and NINE Energy) average (6.9x). So, the stock is undervalued compared to its peers at this level.
What’s The Take On STEP?
STEP is moving away from the traditional Permian-centric business model to benefit from the potential US and Canada LNG export facilities. In FY2022, the company acquired four ultra-deep capacity coiled tubing units and arranged pre-funding for a tier four dual fuel frac spread upgrade. The efforts resulted in solid revenue and adjusted EBITDA in Q4. Also, in Q2 2023, it expects to take delivery of its first upgraded Tier 4 dual fuel frac fleet in Canada. The high-spec rig market has remained strong, particularly in the Permian basin. Coiled tubing utilization has been substantial. So, the stock significantly outperformed the previous year’s TSX Index (SPTSX).
The company’s robust cash flow generation has helped it reduce net debt. However, due to significant drilling delays, STEP’s low US frac fleet utilization was low in Q4. Because many energy operators will likely keep their capex limited in 2023, utilization may not improve much shortly. The stock appears undervalued relative to its peers, and we see an upside at this level. We suggest the stock is a “Buy” at this level.
