Deal adds 4 frac spreads and 192,500 HP, mostly in SCOOP/STACK, Woodford

STEP Energy Services Ltd. has entered into an agreement to acquire all of the issued and outstanding capital stock of Tucker Energy Services Holdings, Inc. for total cash consideration of US$275 million.

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.

Pro forma the acquisition, STEP will have 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.

Tucker, the company acquired, has historical operating experience in the Haynesville play, STEP said in a press release.

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 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.

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 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.

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.

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 reported.

Financing the deal

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, 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 few 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 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 total gross proceeds of $50 million.

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