MANAGEMENT S DISCUSSION AND ANALYSIS

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1 MANAGEMENT S DISCUSSION AND ANALYSIS This Management s Discussion and Analysis ( MD&A ) for STEP Energy Services Ltd. ( STEP or the Company ) has been prepared by management as of March 19, 2018 and is a review of the Company s financial condition and results of operations based on International Financial Reporting Standards ( IFRS ). It should be read in conjunction with the audited consolidated financial statements and notes thereto as at and for the years ended and 2016 (the Financial Statements ). Readers should also refer to the Forward-looking statements legal advisory at the end of this MD&A. All financial amounts and measures are expressed in Canadian dollars unless otherwise indicated. Readers should review the section regarding Non-IFRS Measures. Additional information about STEP is available on the SEDAR website at including the Company s Annual Information Form for the year ended dated March 19, 2018 (the AIF ). CORPORATE OVERVIEW STEP Energy Services is an oilfield service company that provides fully integrated fracturing and coiled tubing solutions. Our combination of modern, fit-for-purpose fracturing and coiled tubing equipment along with our commitment to safety and quality execution has differentiated STEP in plays where wells are deeper, have longer laterals and higher pressures. Founded in 2011, as a specialized, deep capacity coiled tubing company, STEP is a Canadian market leader for fully integrated, deep capacity coiled tubing and fracturing solutions and has taken its successful focus on safety, efficiency, and execution to U.S. markets. Our Canadian fracturing and coiled tubing services are focused in the Western Canadian Sedimentary Basin ( WCSB ), while in the United States ( U.S. ), we focus our coiled tubing services in the Permian and Eagle Ford in Texas and the Haynesville in Louisiana. Our continued track record drives repeat business from our broad exploration and production ( E&P ) client base. Fracturing services continue to expand STEP s fracturing business is primarily focused on the deeper, more technically challenging plays in Alberta and northeast British Columbia, with growing exposure to oilier plays in eastern Alberta and south Saskatchewan. STEP currently operates eight fracturing spreads representing 225,000 horsepower ( HP ) (including 100,000 HP with dual fuel capabilities). STEP has an additional 72,500 HP available for deployment, some of which will require capital for maintenance, refurbishment, and rebranding. The Company will continue to deploy HP as dictated by the markets ability to support the equipment. Subsequent to, STEP announced the acquisition of Tucker Energy Services Holdings, Inc. ( Tucker ), which will expand the Company s fracturing operations to the U.S. Coiled tubing services in Canada & the U.S. offers future growth STEP provides coiled tubing services to Canadian and U.S. E&P companies for completion operations of new wells and workovers to improve producing wells. STEP s coiled tubing units are designed to service the deepest wells in North America. We currently operate a fleet of 21 coiled tubing spreads, including eight in the U.S. STEP has plans to build and deploy additional coiled tubing spreads into both markets in 2018 as supported by market demand. STEP s culture and equipment sets us apart A cornerstone of STEP s success is our high-performance, safety-focused culture. Our four core values; Safety, Trust, Execution and Possibilities inspire our team of professionals to provide differentiated levels of service, with a goal of flawless execution and an unwavering focus on safety. Our commitment to these values results in fewer non-productive hours, is instrumental in attracting and retaining top talent and helps STEP attract and retain high-quality clients with similar values. STEP scored 95% in its Certificate of Recognition safety audit and is an award-winning service provider, receiving the EY Entrepreneur Of The Year award in oil and gas services, the OGM Safety Award, Top Safety Culture Award - Large Enterprises Category, and being a recipient of Canada s Best Managed Companies. STEP believes our commitment to modern fit-for-purpose equipment differentiates us in the market place. We are continually developing and deploying technology to advance our business. Such advancements include: fiber optics; e-line and Coil Link real time downhole data; STEP-PLEX diverting agents used in recompletion activities and inter-stage diversion on new wells; and SandCan, a containerized proppant delivery system. Annual MD&A I Page 1

2 ($000) ($000) STEP Energy Services CONSOLIDATED HIGHLIGHTS FINANCIAL ($000s except percentages, shares and per share amounts) Three months ended Year ended Consolidated revenue $ 154,253 $ 64,162 $ 553,220 $ 169,153 $ 115,471 Net income (loss) attributable to $ 17,548 $ (2,615) $ 57,718 $ (19,956) $ (5,615) shareholders Per share-basic $ 0.29 $ (0.05) $ 1.02 $ (0.47) $ (0.21) Per share-diluted $ 0.28 $ (0.05) $ 1.00 $ (0.47) $ (0.21) Adjusted EBITDA (1) $ 35,962 $ 5,255 $ 123,584 $ 6,222 $ 13,877 Adjusted EBITDA % (1) 23% 8% 22% 4% 12% BALANCE SHEET As at ($000s except shares and per share amounts) Cash and cash equivalents $ 36,859 $ 2,151 $ 8,226 Working capital $ 121,032 $ 29,872 $ 11,781 Total assets $ 533,845 $ 335,140 $ 230,951 Total long-term financial liabilities $ 8,049 $ 33,994 $ 6,797 Shares outstanding Basic 60,309,738 47,719,703 32,185,974 Weighted average shares basic 56,528,016 42,400,845 26,783,024 Weighted average shares diluted 57,752,867 42,400,845 26,783,024 (1) See Non-IFRS Measures. Adjusted EBITDA is a financial measure not presented in accordance with IFRS and is equal to net income before finance costs, depreciation and amortization, loss (gain) on disposal of property and equipment, impairment, current and deferred income tax, share based compensation, impairment, transaction costs and foreign exchange (gain) loss. CONSOLIDATED REVENUE 200, , ,000 50,000 64,162 0 Q Canadian Operations 117, , , ,253 Q2 Q3 United States Operations CONSOLIDATED ADJUSTED EBITDA (1) 60,000 45,000 30,000 15, , ,140 16,439 Q1 Canadian Operations Q2 50,043 Q3 35,962 United States Operations (1) See Non-IFRS Measures. FINANCIAL HIGHLIGHTS STEP reported fourth quarter and annual consolidated revenue of $154.3 million and $553.2 million, respectively. Record annual revenue is a result of market absorption of additional equipment deployments and improved pricing. STEP generated record annual Adjusted EBITDA of $123.6 million and fourth quarter Adjusted EBITDA of $36.0 million, driven by pricing improvements, strong utilization and cost control and operating efficiency initiatives. STEP continues to maintain a strong financial position with $36.9 million in cash and an undrawn $100 million available on its credit facility. The Initial Public Offering ( IPO ) on May 2 nd, provided significant financial flexibility to execute on our capital program and pursue accretive opportunities. Annual MD&A I Page 2

3 Fracturing ($000) Coiled tubing ($000) STEP Energy Services As previously announced, the Board approved a 2018 capital program of $109 million, comprised of expansion capital of $73 million, maintenance capital of $29 million, and infrastructure and related investment of $7 million. OPERATIONAL ($000 s except per day, days, units, and HP) Three months ended Year ended Total fracturing operating days (1) , Fracturing revenue per operating day $ 259,866 $ 166,353 $ 246,527 $ 157,985 Fracturing capacity (HP): Average active HP 187, , ,688 75,000 Exit active HP 209, , , ,000 Total HP (2) 297, , , ,500 Total coiled tubing operating days (1) 1, ,259 2,546 Coiled tubing revenue per operating day $ 45,290 $ 38,520 $ 44,053 $ 38,205 Coiled tubing capacity: Average active coiled tubing units Exit active coiled tubing units Total coiled tubing units Capital expenditures $ 32,020 $ 11,622 $ 110,955 $ 100,124 (1) An operating day is defined as any coiled tubing and fracturing work that is performed in a 24 hour period, exclusive of support equipment. (2) Represents total owned HP, of which 225,000 HP is currently deployed and the remainder of which requires certain maintenance and refurbishment. OPERATING DAYS REVENUE PER OPERATING DAY 1,500 1, Q1 Q2 Q3 Total Fracturing Operating Days Total Coiled Tubing Operating Days Q1 Q2 Q3 Fracturing Revenue Per Operating Day Coil Tubing Revenue Per Operating Day 20 OPERATIONAL HIGHLIGHTS During, STEP s Canadian operations deployed four additional fracturing spreads representing 109,000 HP and three additional coiled tubing spreads to the WCSB, while in the U.S. two additional coiled tubing spreads were delivered. The additional deployed equipment in combination with strong demand for our services enabled STEP to increase total combined operating days by 63% and 91% for the three months and year ended, respectively, compared to the comparable periods in STEP s fracturing services delivered growth in revenue per day due to improved pricing fundamentals and a shift in work to more intensive plays where wells are deeper, laterals are longer, and larger volumes of proppant are pumped. Coiled tubing services in both Canada and the U.S. exhibited stronger revenue per day over the comparative 2016 periods which is attributed to demand driving incremental pricing throughout. Over 1,100 professionals operated for approximately 2.5 million man hours with no lost time incidents in. Annual MD&A I Page 3

4 SUBSEQUENT EVENTS U.S. STRATEGIC ACQUISITION OF TUCKER Consistent with STEP s strategic growth plans, on February 22, 2018, the Company announced an agreement to acquire all of the issued and outstanding capital stock of Tucker for total cash consideration of U.S.$275 million, before closing adjustments (the Acquisition ). Tucker is a privately-owned and geographically-focused provider of fracturing and completion solutions. The Acquisition provides STEP an efficient and strategic entry into the U.S. fracturing market in key high-growth basins, with access to existing long-tenured clients holding large acreage positions and expansive drilling inventories in the SCOOP/STACK and Woodford plays in Oklahoma. This geographic expansion reduces STEP s commodity price concentration risk and provides the Company with flexibility to allocate capital between our U.S. and Western Canadian operations, with the potential to improve asset utilization and realize stronger margins. Through the Acquisition, STEP will add four fracturing spreads representing 192,500 horsepower (HP) (three spreads comprised of 142,500 HP are currently operating, and a fourth fracturing spread of 50,000 HP is expected to be delivered in the second quarter of 2018), two coiled tubing spreads and 15 wireline units. STEP s scale and operational efficiency are enhanced through the Acquisition, with a total fracturing capacity of 490,000 HP (an increase of 65%), a total of 23 coiled tubing spreads and 15 wireline units. STEP intends to integrate the assets, client and supplier relationships, operational experience and expertise from the senior Tucker leadership team into our existing business and operations. STEP expects that the cash required to close the Acquisition of U.S.$275 million, before closing adjustments, will be funded with cash on hand and the net proceeds of the Offering of common shares, with the balance funded from borrowings under the New Credit Facilities. 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) and is expected to close on or about April 2, FOREIGN CURRENCY HEDGE STEP entered into seven forward contracts subsequent to the year ended. The goal of these instruments is to limit exposure to U.S. dollar fluctuations as it relates to the purchase price of the Acquisition. The contracts were entered into between March 7, 2018 and March 16, 2018 for a total amount of U.S.$180 million at an average rate of one (1) U.S. dollar = All contracts settle between March 26, 2018 and April 30, EQUITY ISSUANCE On March 15, 2018, STEP closed its previously announced bought-deal equity financing (the Offering ) raising gross proceeds of $56,311,500 by issuing 6,055,000 subscription receipts (the Subscription Receipts ) for $9.30 each, which included 675,000 Subscription Receipts issued pursuant to the partially exercised over-allotment option granted to the syndicate of underwriters. The proceeds of the offering will be used to partially fund the Acquisition. The conversion of the Subscription Receipts to common shares of the Company is contingent on completion of the Acquisition. LOANS AND BORROWINGS To finance the Acquisition, the Company obtained a $330 million revolving syndicated credit facility, $10 million operating facility and U.S.$7.5 million operating facility (together the New Credit Facilities ). The New Credit Facilities will replace STEP s existing credit facilities and are subject to the closing of the Acquisition. The New Credit Facilities mature three years from the closing date and may be extended for a period of up to 3 years with syndicate approval. Security for the New Credit Facilities is provided by a general security agreement of the assets of the Company. The New Credit Facilities are secured by all present and after acquired personal property of the Company and all of its subsidiaries including mortgages on certain properties. Interest is payable monthly, at the bank s prime lending rate plus 50 basis points to 200 basis points, dependent on the Funded debt to Adjusted bank EBITDA ratio of the Company as defined below. Annual MD&A I Page 4

5 The New Credit Facilities are expected to include certain financial and non-financial covenants, including: 1. Funded debt to Adjusted bank EBITDA ratio refers to the ratio of total outstanding interest-bearing debt including capital lease obligations and letters of credit less cash and cash equivalents held with approved financial institutions to earnings before interest, share-based compensation, non-recurring gains and losses on the sale of property and equipment, unrealized foreign exchange gains and losses, taxes, depreciation, amortization, impairment, and transaction costs ( Adjusted bank EBITDA ) of the Company for the twelve preceding months. Adjusted bank EBITDA for the purposes of the covenant calculations differ from the Company s non-ifrs measure Adjusted EBITDA by the exclusion of realized foreign exchange (gain) loss. Funded debt to Adjusted bank EBITDA ratio is required to be 3.00:1 or less. 2. Fixed Charge Coverage Ratio is calculated as Free Cash Flow to cash interest expense and scheduled principal repayments in respect of indebtedness. Free Cash Flow is defined as Adjusted Bank EBITDA, defined above, less maintenance capital expenditures, cash distributions and cash tax. This ratio is not to fall below 1.20:1. INDUSTRY CONDITIONS & OUTLOOK In Canada, STEP has experienced strong demand for its asset base during the first quarter of 2018, with visibility to above normal activity levels in the second quarter. At the beginning of the year, extreme weather conditions and clients third party related delays resulted in operational downtime. Due to these operational delays, we anticipate that our revenue mix in the first quarter will have a higher component of standby related charges, which could in turn impact margin performance. Furthermore, sand delivery interruptions resulted in minor scheduling delays and modest cost inflation. As a result of the recent weakness in Canadian natural gas prices, 2018 completions activity is expected to shift to oil and liquids-rich gas formations, reinforcing our strategy to construct fit-for-purpose equipment to target oil plays. In the U.S., the market for completions activity remains robust and client inquiries continue to be supportive of deploying new equipment. We anticipate that our coiled tubing and newly acquired fracturing assets will experience strong demand through In addition to increasing U.S. activity, management believes fracturing supply may be constrained by the attrition of older equipment and the potential for supply chain limitations resulting in longer lead time for construction and delivery of new capacity. Modest cost inflation is expected to persist due to continuing market demand for supply chain inputs. STEP will continue to focus on operational efficiencies to drive its financial performance in Management will continue to employ a realtime approach to assessing the markets ability to absorb new capacity and adjust accordingly. Prior to the impact of the Acquisition, the Board approved a 2018 capital program of $109 million, comprised of expansion capital of $73 million, maintenance capital of $29 million, and infrastructure and related investment of $7 million. Expansion capital includes the purchase of auxiliary equipment to support our Montney, Duvernay, and Viking activities, construction of fit-for-purpose equipment to target oil plays, and refurbishment and rebranding of idle fracturing assets. After giving effect to the Acquisition and upon completion of the 2018 capital program we anticipate operating 15 fracturing spreads representing approximately 497,500 HP (305,000 HP in Canada and 192,500 in the U.S.), 16 coiled tubing spreads in Canada, 13 coiled tubing spreads in the U.S. and 15 wireline units in the U.S. STEP s decision to deploy additional equipment will be influenced by market conditions, access to key components, shop capacity and the availability of qualified personnel to staff equipment. Annual MD&A I Page 5

6 CANADIAN OPERATIONS OVERVIEW The Canadian operating segment provides fracturing and coiled tubing services to E&P companies operating in the WCSB. As at, our Canadian operations were comprised of 297,500 fracturing HP, of which a fleet of seven fracturing spreads representing 209,000 HP was staffed with 24-hour operations; and 13 purpose-built coiled tubing spreads, also staffed for 24-hour operations. The Canadian segment took delivery of the seventh fracturing spread in late December and deployed an eighth fracturing spread in the first quarter of 2018 bringing total deployed HP to 225,000. ($000 s except per day, days, units, and HP) Revenue: Three months ended Year ended Fracturing $ 98,229 $ 33,770 $ 365,599 $ 71,883 Coiled tubing 35,639 20, ,695 75,290 Expenses: 133,868 54, , ,173 Cost of sales 109,950 54, , ,668 Selling, general and administrative 4,755 3,836 18,483 14,274 Results from operating activities $ 19,163 $ (4,439) $ 72,555 $ (24,769) Add non-cash items: Depreciation 8,055 5,547 29,323 19,600 Share-based compensation 1,258 1,560 5,844 8,392 Adjusted EBITDA (1) $ 28,476 $ 2,668 $ 107,722 $ 3,223 Adjusted EBITDA % (1) 21% 5% 22% 2% Sales mix (% of segment revenue) Fracturing 73% 62% 74% 49% Coiled tubing 27% 38% 26% 51% Fracturing services Fracturing revenue per operating day $ 259,866 $ 166,353 $ 246,527 $ 157,985 Number of fracturing operating days (2) , Active pumping HP, end of period 209, , , ,000 Idle pumping HP, end of period 88, ,500 88, ,500 Total pumping HP, end of period (3) 297, , , ,500 Coiled tubing services Coiled tubing revenue per operating day $ 43,356 $ 37,115 $ 43,391 $ 37,739 Number of coiled tubing operating days (2) ,989 1,995 Active coiled tubing units, end of period Idle coiled tubing units, end of period Total coiled tubing units, end of period (1) See Non-IFRS Measures. (2) An operating day is defined as any coiled tubing and fracturing work that is performed in a 24 hour period, exclusive of support equipment. (3) Represents total owned HP, of which 225,000 HP is currently deployed and the remainder of which requires certain maintenance and refurbishment. Annual MD&A I Page 6

7 (Days) ($000) ($000) STEP Energy Services OPERATING DAYS AND REVENUE PER DAY 1, ADJUSTED EBITDA (1) 50, Q1 Q2 Q ,000 30,000 20,000 10, Q1 Q2 Q3 (1) See Non-IFRS Measures. Fourth quarter and annual highlights Canada Completions activity in Canada improved dramatically over 2016, allowing STEP to activate 109,000 HP and three deep capacity coiled tubing spreads during the year. Through a combination of additional capacity, improved utilization and pricing, revenue increased 146% and 237% for the fourth quarter and full year, respectively, over the comparable periods in Adjusted EBITDA in Canada for the three months and year ended was $28.5 million (or 21%) and $107.7 million (or 22%), respectively, in comparison with $2.7 million (or 5%) and $3.2 million (or 2%) in the respective 2016 periods. The improvements are primarily attributable to improved pricing, an expanded client base, improved utilization over an expanded fleet of deployed equipment, cost containment measures and better operating efficiencies. Revenue generated from jobs that combined STEP s coiled tubing services and fracturing services totalled approximately 27% and 26% for the three months and year ended, respectively, as STEP continues to increase value to our clients through our integrated services. Fracturing services Higher Canadian activity and strong demand for STEP s increased fracturing capacity allowed the Company to grow operating days by 86% and 226% for the three months and year ended, respectively, over the comparable periods in Average revenue per fracturing operating day increased 56% for both the three months and year ended December 31,, relative to the same periods in Improvements in both periods stem from increased stages and proppant pumped on a per well basis due to increased exposure to the Duvernay and Montney formations. STEP pumped 646,000 tonnes of proppant over 14,100 stages in, while the fourth quarter saw 151,000 tonnes pumped over 3,600 stages. The addition of the Medicine Hat operating base in the third quarter of allowed for more efficient operations in the active Viking play and closer proximity to the Shaunavon and Bakken plays. Coiled tubing services Higher activity and increased capacity in Canada allowed coiled tubing services to improve operating days by 48% and 50% for fourth quarter and full year, respectively, over the comparable periods in Average revenue per coiled tubing operating day increased 17% and 15% in the fourth quarter and full year, respectively, over the comparable periods in Increases in both periods are largely attributable to improved pricing driven by stronger industry activity. Annual MD&A I Page 7

8 (Days) ($000) ($000) STEP Energy Services UNITED STATES OPERATIONS OVERVIEW The U.S. operating segment provides coiled tubing services to an expanding client list in the Permian and Eagle Ford basins in Texas and the Haynesville shale in Louisiana. At, STEP s U.S. operations included six active coiled tubing spreads. The U.S. operation took delivery of a seventh and eighth coiled tubing spread in the first quarter of ($000 s except per day, days, and units) Three months ended Year ended Revenue $ 20,385 $ 9,794 $ 57,926 $ 21,980 Expenses: Cost of sales 13,692 7,694 44,221 20,729 Selling, general and administrative ,127 1,385 Results from operating activities $ 5,878 $ 1,630 $ 10,578 $ (134) Add non-cash items: Depreciation 1, ,605 2,608 Share-based compensation Adjusted EBITDA (1) $ 7,486 $ 2,587 $ 15,862 $ 2,999 Adjusted EBITDA % (1) 37% 26% 27% 14% Coiled tubing services Coiled tubing revenue per operating day $ 49,120 $ 41,854 $ 45,611 $ 39,890 Number of coiled tubing operating days (2) , Active coiled tubing units, end of period Idle coiled tubing units, end of period Total coiled tubing units, end of period (1) See Non-IFRS Measures. (2) An operating day is defined as any coiled tubing and fracturing work that is performed in a 24 hour period, exclusive of support equipment. OPERATING DAYS AND REVENUE PER DAY ADJUSTED EBITDA (1) ,000 6,000 4,000 2, Q1 Q2 Q Q1 Q2 Q3 Coiled tubing revenue per operating day Number of coiled tubing operating days Adjusted EBITDA (1) See Non-IFRS Measures. Fourth quarter and annual highlights U.S. U.S. completions activity has shown meaningful improvements year-over-year, and STEP responded by deploying two additional coiled tubing spreads in. Strong demand for all units across all operating districts coupled with an expanded client base contributed to a 108% and 164% percent increase in revenue for the three months and year ended, respectively, over the comparable periods in Depreciation in the U.S. dollar versus the Canadian dollar over the course of the year offset the revenue per day improvements realized in the second half of by approximately 6%. Adjusted EBITDA in the U.S. for the three months and year ended was $7.5 million (or 37%) and $15.9 million (or 27%), respectively, an increase of 189% and 429% over the comparable periods in The increases are Annual MD&A I Page 8

9 attributable to robust utilization over a larger fleet of deployed equipment, improved pricing fundamentals and operating efficiencies. The consistently improving Adjusted EBITDA over the year is due to strong utilization, pricing improvements, a full quarter of activity with recently deployed units and a focus on cost control. Coiled tubing services The rebound in U.S. industry activity combined with more active equipment allowed coiled tubing services to improve operating days by 77% and 130% for the fourth quarter and year, respectively, over the comparable periods in Average revenue per coiled tubing operating day increased 17% and 14% in the fourth quarter and full year, respectively, over the comparable periods in Increases in both periods are largely attributable to improved pricing driven by robust demand. The addition of the Midland Texas and Arcadia Louisiana operating bases in strategically positioned STEP s U.S. operations to benefit from increased geographical diversification. Midland increases proximity to the Permian play, and Arcadia to the Haynesville play. CONSOLIDATED FINANCIAL REVIEW ($000 s except per share amounts) Three months ended Year ended Revenue $ 154,253 $ 64,162 $ 553,220 $ 169,153 Cost of sales 123,642 62, , ,397 Gross profit (loss) 30,611 1, ,743 (9,244) Selling, general and administrative 5,571 4,307 21,610 15,659 Results from operating activities 25,040 (2,810) 83,133 (24,903) Finance costs , Foreign exchange loss Loss (gain) on disposal of property and 247 (68) (1,849) (1,511) equipment Transaction costs 175-2,158 - Amortization of intangibles Income (loss) before income tax 24,130 (3,404) 80,521 (24,989) Income tax expense (recovery) 6,582 (789) 22,803 (5,033) Net Income (loss) 17,548 (2,615) 57,718 (19,956) Other comprehensive income (loss) (36) 735 (2,678) (676) Total comprehensive income (loss) $ 17,512 $ (1,880) $ 55,040 $ (20,632) Net income (loss) $ 17,548 $ (2,615) $ 57,718 $ (19,956) Net income (loss) per share basic $ 0.29 $ (0.05) $ 1.02 $ (0.47) Net income (loss) per share diluted $ 0.28 $ (0.05) $ 1.00 $ (0.47) Adjusted EBITDA (1) $ 35,962 $ 5,255 $ 123,584 $ 6,222 Adjusted EBITDA % (1) 23% 8% 22% 4% (1) See Non-IFRS Measures. Annual MD&A I Page 9

10 Fourth quarter and annual capital expenditures ($000s) Three months ended Year ended Canada $ 23,685 $ 9,263 $ 79,935 $ 92,889 United States 8,335 2,359 31,020 7,235 Total capital expenditures $ 32,020 $ 11,622 $ 110,955 $ 100,124 STEP funds capital expenditures from a combination of cash, cash provided by operating activities, issuance of share capital and available credit facilities. OTHER ITEMS Depreciation and amortization For the three months and year ended, depreciation and amortization expense increased by 45% and 51% to $9.5 million and $34.4 million, respectively, from $6.5 million and $22.8 million in the comparable periods of The increase was the result of assets built, activated and deployed over the past twelve months. Finance costs STEP s finance costs of $0.1 million for the three months ended decreased from $0.3 million in the same period of 2016, as the outstanding balance on the Company s credit facilities was higher in the fourth quarter of The increased finance costs of $1.1 million for the year ended compared to $0.9 million for the comparable period of 2016 is primarily the result of a higher average balance drawn on the Company s credit facilities through the first half of compared to 2016, in addition to arrangement fees on the larger facility in. Additionally, interest on finance leases increased in due to STEP s expanded fleet of leased vehicles. Foreign exchange gains and losses STEP recorded foreign exchange losses of $0.4 million and $0.7 million for the three months and year ended, respectively, versus losses of $0.2 million and $0.1 million in the comparable periods in 2016, due to U.S. dollar depreciation in the second half of combined with increased U.S. activity. Foreign exchange gains and losses arose primarily from the translation of net monetary assets or liabilities that were held in U.S. dollars. Gains or losses on disposal of property and equipment The Company recorded a loss on disposal of non-core property and equipment of $0.2 million and a gain of $1.8 million for the three months and year ended, respectively, compared to gains of $0.1 million and $1.5 million in the comparable periods in 2016, respectively. Proceeds on sale of $0.1 million and $6.0 million were recognized in the three months and year ended, respectively. Impairment STEP reviews for indicators of impairment at each reporting period. Based on management s review, no indicators of impairment existed at. Transaction costs Transaction costs expensed of $0.2 million and $2.2 million for the three months and year ended, respectively, relate to the secondary offering that closed on December 1, and the IPO that closed May 2,. In addition, $1.3 million of the transaction costs were capitalized to share capital in the year ended. Income taxes STEP recorded income tax expense of $6.6 million and $22.8 million in the three months and year ended, respectively, compared to a recovery of $0.1 million and $5.0 million in the comparable periods of The average combined tax rate was approximately 27% in the three months and years ended and Annual MD&A I Page 10

11 Share-based compensation For the three months and year ended, STEP recorded share-based compensation expense of $1.5 million and $6.5 million, respectively, compared to $1.7 million and $8.9 million in the comparable periods of The prior year comparative includes a charge pertaining to the extension of options and performance warrant grants issued in 2011 that were set to expire in Prior to the IPO, the Company s share-based compensation plans for employees and directors consisted of prior stock options and performance warrants. The Company implemented new share-based compensation plans following the IPO including a new stock option plan, a performance and restricted share unit plan and a deferred share unit plan. Effective May 2,, no further awards under the prior stock option plan or performance warrants may be granted. LIQUIDITY AND CAPITAL RESOURCES ($000s) Net cash provided by (used in) Three months ended Year ended Operating activities $ 12,020 $ 3,108 $ 49,143 $ (15,967) Investing activities (29,471) (7,279) (90,284) (91,843) Financing activities (5,945) 4,717 75, ,850 Impact of foreign exchange on cash 49 (101) (149) (115) Increase (decrease) in cash and cash $ (23,347) $ 445 $ 34,708 $ (6,075) equivalents Ending cash balance $ 36,859 $ 2,151 $ 36,859 $ 2,151 Net cash provided by (used in) operating activities Net cash provided by operating activities totaled $12.0 million and $49.1 million for the three months and year ended, respectively, compared to net cash provided by operating activities of $3.1 million and net cash used in operating activities of $16.0 million in the comparable periods in The increase in net cash provided by operating activities was due to increased activity and pricing partially offset by an increase in non-cash working capital requirements. Trade and other receivables increased from $47.9 million at 2016 to $139.3 million at, due to increased revenue in the three months and year ended, compared to the comparable periods in Trade and other payables increased to $70.5 million at from $33.6 million at 2016 due to increased activity. Net cash used in investing activities Net cash used in investing activities totaled $29.5 million and $90.3 million for the three months and year ended, respectively, compared to $7.3 million and $91.8 million in the comparable periods in Relative to 2016, the increase in fourth quarter of is the result of more cash directed towards the deployment of assets under our capital program, while the year-to-date decrease can be attributed to the asset acquisition completed in the second quarter of 2016, substantially offset by the build and activation of assets in. Net cash provided by (used in) financing activities Net cash used in financing activities of $5.9 million for the three months ended decreased compared to $4.7 million provided by financing activities in the comparable period of 2016 due to the drawing on the debt facilities in the third quarter of Net cash provided by financing activities decreased to $76.0 million in the year ended from $101.9 million in the comparable period of 2016 due to debt repayments offsetting the issuance of share capital in the current period. In February, the Company issued 2.4 million common shares in the capital of STEP ( Common Shares ) for aggregate proceeds of $15.0 million pertaining to a subscription agreement entered into between the Company and ARC Energy Fund 8 Canadian Limited Partnership, ARC Energy Fund 8 United States Limited Partnership, ARC Energy Fund 8 International Limited Partnership and ARC Capital 8 Limited Partnership (collectively, ARC Annual MD&A I Page 11

12 Energy Fund 8 ) on April 2, This represents the final financing under the subscription agreement. On May 2,, STEP completed an IPO for aggregate gross proceeds to STEP of $100.0 million. The proceeds were initially used to repay indebtedness and for general corporate purposes and positioned the Company to execute on its capital program. Working capital and cash requirements As at, STEP had positive working capital of $121.0 million (including cash of $36.9 million), compared to $29.9 million (including cash of $2.1 million) as at Contributing to the increase is the net proceeds from the IPO. As at, trade and other receivables increased to $139.3 million from $47.9 million as at 2016, due to higher activity across all service lines. As at, trade and other payables increased to $70.6 million from $33.6 million as at 2016, with the growth related to the increased need for non-cash working capital to support ongoing operations and the capital program. Capital management ($000s) As at As at 2016 Shareholders equity $ 431,040 $ 259,939 Obligation under finance lease 11,764 6,848 Loans and borrowings 1,813 30,302 Total capital $ 444,617 $ 297,089 The Company s objectives when managing its capital structure are to maintain a balance between debt and equity and enable STEP to withstand industry and seasonal volatility, maintain investor, creditor and market confidence and to sustain future growth of the business. The Company considers the items included in shareholders equity, loans and borrowings and finance leases as capital. Debt includes the current and long-term portions of bank indebtedness, vendor financings and obligations under finance leases. Equity: As at March 19, 2018, there were 60,434,971 Common Shares issued and outstanding. Debt: During the first quarter of, the Company entered into a new credit agreement with a syndicate of financial institutions. The agreement is comprised of an operating facility and a revolving facility (together the Existing Credit Facilities ). The Existing Credit Facilities mature May 31, 2020 and include a committed operating facility up to a maximum of $10.0 million and a committed revolving facility up to a maximum of $90.0 million, with an additional $25.0 million accordion feature available upon request by the Company, subject to review and approval by the agent and syndicate. The maturity date of the Existing Credit Facilities may be extended once for a period of up to 3 years. The Existing Credit Facilities include a general security agreement providing a security interest over all present and after acquired personal property of the Company and all of its subsidiaries. The amount of Existing Credit Facilities available to the Company is the lesser of $100.0 million and the sum of the following: 1. 85% of the Eligible Accounts Receivable owed by Investment Grade Debtors at such time and 75% of the Eligible Accounts Receivable owed by Non-Investment Grade Debtors; plus 2. 50% of the net book value (as determined in accordance with IFRS) of all Eligible Inventory, to a maximum of $5.0 million; plus 3. 50% of the net book value (as determined in accordance with IFRS) of all Eligible Real Estate and Eligible Equipment, to a maximum of $65.0 million; less 4. Priority payables. Annual MD&A I Page 12

13 The Existing Credit Facilities require the Company to maintain certain covenants, including: 1. Funded debt to Adjusted bank EBITDA ratio refers to the ratio of total outstanding interest-bearing debt including capital lease obligations and letters of credit less cash and cash equivalents held with approved financial institutions ( Funded debt ) to earnings before interest, share-based compensation, non-recurring gains and losses on the sale of property and equipment, unrealized foreign exchange gains and losses, taxes, depreciation, amortization, and impairment ( Adjusted bank EBITDA ) of the Company for the twelve preceding months. Adjusted bank EBITDA for the purposes of the covenant calculations differ from the Company s non-ifrs measure Adjusted EBITDA by the exclusion of realized foreign exchange (gain) loss and transaction costs. Funded debt to Adjusted bank EBITDA ratio will not be tested until the first quarter of 2018 when it is required to be 4.00:1 or less for the fiscal quarter ending March 31, 2018, 3.75:1 or less for the fiscal quarter ending June 30, 2018, 3.50:1 or less for the fiscal quarter ending September 30, 2018, and 3.00:1 for the fiscal quarters ending 2018 and thereafter. During the fiscal quarters ending in, the Funded debt to Adjusted bank EBITDA ratio will not be tested pursuant to the agreement. Although not required to be measured per the agreement, at, the Funded debt to Adjusted bank EBITDA ratio was 0.00:1 ( :1). 2. Funded debt to capitalization ratio refers to the ratio of Funded debt, defined above, to Shareholders Equity and Funded debt. The Funded debt to capitalization ratio is required to be 0.30:1 or less. At, the Funded debt to capitalization ratio was 0.00:1 ( :1). 3. Debt service coverage ratio is calculated as Adjusted bank EBITDA, defined above, to interest expense and scheduled principal repayments in respect of Funded debt. This ratio is not to fall below 1.25:1. At, the Debt service coverage ratio was 19.05:1 ( :1). The Company shall ensure that, as at the end of each fiscal quarter: 1. The tangible assets of STEP and the Guarantors (material subsidiaries) are not less than 95% of the consolidated tangible assets; and 2. The Adjusted bank EBITDA of STEP and the guarantors (material subsidiaries) is not less than 95% of the Adjusted bank EBITDA of STEP on a consolidated basis. Interest is payable monthly, at the bank s prime lending rate plus 50 basis points to 450 basis points, dependent on certain financial ratios of the Company. At, the full amount was available to be drawn on the Existing Credit Facilities of which there were no amounts outstanding and the Company was in compliance with all covenants. At, loans and borrowings outstanding are comprised of long term vendor financing related to the acquisition of property and equipment. Amounts incur no interest and payments commence in the fourth quarter of 2018 and are repayable in six equal monthly installments from November 2018 to April Contractual obligations, commitments, and provisions ($000s) Total Thereafter Trade and other payables $ 70,548 $ 70,548 $ - $ - $ - Operating leases and office space (1) 10,679 2,126 1,841 2,215 4,497 Finance leases (2) 12,339 5,321 5,726 1,292 - Loans and borrowings (3) 2, , Capital expenditure commitments (4) 41,318 41, Total commitments $ 137,422 $ 120,217 $ 9,076 $ 3,632 $ 4,497 (1) The Company leases certain office and operating facilities. The lease terms range from one to seven years with an option to renew upon expiry. (2) Balance includes interest portion of finance lease obligations. (3) Balance relates to the long-term portion of a vendor financing agreement and standby fees on the Facilities. (4) A capital expenditure commitment is defined as a legally binding purchase agreement between the Company and the supplier as it relates to the Company s capital program. Annual MD&A I Page 13

14 Litigation Periodically, the Company may become involved in, named as a party to, or be the subject of various legal proceedings, arbitration and actions. The results of such legal proceedings or related matters cannot be determined with certainty. The Company s assessment of the likely outcome of such matters is based on input from internal examination of the facts of the case and advice from external legal advisors, which is based on their judgment of a number of factors including the applicable legal framework and precedents, relevant financial and operational information and other evidence and facts specific to the matter as known at the time of the assessment. In January, Calfrac Well Services Ltd. ( Calfrac ) filed a statement of claim in the Judicial District of Calgary in the Court of Queen s Bench against the Company and an employee of the Company seeking $10 million in damages among other relief. Calfrac alleges that the employee, who is a former employee of Calfrac, misappropriated certain competitively sensitive materials from Calfrac. Calfrac further alleges that STEP benefited or made use of such materials, resulting in damages to Calfrac. STEP is presently investigating the claim and at this time intends to contest allegations made in the claim. While management does not believe that this action will have a material adverse effect on the business or financial condition of the Company, no assurance can be given as to the final outcome of this or any other legal proceeding. If this claim, or any claims which the Company may be subject to in the future, were to be concluded in a manner adverse to the Company or if the Company elects to settle one or more of such claims, it could have a material adverse effect on its business, financial condition, results of operations and cash flows. SELECTED QUARTERLY INFORMATION STEP s quarterly financial performance is affected by the seasonality (1) of the business in Canada, assets deployed, asset utilization, pricing, changes in STEP s clients capital programs, foreign exchange rates, product costs, and other significant events impacting operations. Quarterly Results Summary (2) ($000 s, except per share amounts) Q3 Q2 Q1 Q3 Q2 Q Revenue Canadian Operations 133, ,211 92, ,778 54,368 51,088 16,907 24,810 United States Operations 20,385 16,326 13,009 8,206 9,794 7,094 2,323 2, , , , ,984 64,162 58,182 19,230 27,577 Net income (loss) attributable to shareholders 17,548 28,575 2,600 8,992 (2,615) (1,242) (7,471) (8,626) Adjusted EBITDA (3) Canadian Operations 28,476 45,483 13,318 20,445 2,668 3,640 (3,019) (66) United States Operations 7,486 4,560 3, ,587 1,314 (634) (268) 35,962 50,043 16,439 21,140 5,255 4,954 (3,653) (334) Capital expenditures Canadian Operations 23,685 17,486 24,305 14,459 9,263 11,946 66,125 5,555 United States Operations 8,335 7,852 8,349 6,484 2,359 3, ,007 32,020 25,338 32,654 20,943 11,622 15,571 66,369 6,562 Per Common Share Net income (loss) basic (0.05) (0.03) (0.18) (0.27) Net income (loss) diluted (0.05) (0.03) (0.18) (0.27) Adjusted EBITDA (3) basic (0.09) (0.01) Annual MD&A I Page 14

15 Adjusted EBITDA (3) diluted (0.09) (0.01) (1) STEP s business is seasonal with the periods of greatest activity in Canada being in the first, third and fourth quarters. The U.S. is generally not affected by seasonality. (2) Totals may not add due to rounding. (3) See Non-IFRS Measures. Quarterly Operating Summary (000 s, except units) Q3 Q2 Q1 Q3 Q2 Q Canada Exit active fracturing spreads Exit active HP (000 s) Total HP (000 s) Exit active coiled tubing units Total coiled tubing units United States Exit active coiled tubing units Total coiled tubing units Fourth quarter - STEP generated revenue of $154.3 million, Adjusted EBITDA of $36.0 million, and net income of $17.6 million. Strong quarterly results are reflective of consistent demand for our services and resulting high utilization. Decrease in financial and operational performance relative to the third quarter of is due to a combination of weather delays and lower industry activity during the second half of December. The Company had approximately 63% of its total fracturing HP and all of its coiled tubing capacity active during the quarter. Management believes pricing has plateaued and will focus on operational efficiencies to drive Company returns. Third quarter - The Company generated record quarterly revenue of $175.5 million, Adjusted EBITDA of $50.0 million, and net income of $28.6 million. The record financial results reflect increasing demand for our services and increasing activity levels coming out of spring break-up. Average pricing increased approximately 15-20% since the first quarter of and arguably plateaued in response to uncertainty surrounding future capital plans and volatility of commodities supporting our clients cash flow. The Company had approximately 59% of its total fracturing HP and all of its coiled tubing capacity active during the quarter. Activity was marginally impacted by adverse weather conditions in Canada and Hurricane Harvey in the U.S. While there was no impact to assets, infrastructure or supply chain, Harvey did result in minor work deferrals in impacted areas. Cost inflation continues as suppliers continue to restore capacity and profitability. Second quarter - STEP generated revenue of $105.5 million, Adjusted EBITDA of $16.4 million, and positive net income of $2.6 million, a quarter generally resulting in net losses in the industry due to seasonality. A backlog of work was created during the first quarter of by the undersupply of active fracturing equipment, resulting in some first quarter drilling and completion programs being deferred to the second quarter (or later) of. The Company had approximately 50% of its total fracturing HP and approximately 94% of its coiled tubing capacity active during the quarter. Improved pricing for our services in response to continued demand was partially offset by inflation in input costs such as chemicals, hauling, proppant, coiled tubing strings, and personnel. The improvement in industry conditions has resulted in a tightening of the supply chain, including major components, select proppants, and chemicals. First quarter - The Company generated revenue of $118.0 million, Adjusted EBITDA of $21.1 million, and net income of $9.0 million. Increased North American drilling activity combined with relative strength in crude oil prices through the fourth quarter of Annual MD&A I Page 15

16 2016 and the start of led to improved demand for the Company s services in the first quarter of. STEP realized increased utilization across its entire fleet compared to the fourth quarter of Strong demand and improved pricing combined with additional U.S. coiled tubing capacity enabled the Company to achieve improved results over the fourth quarter of The Company had approximately 50% of its total fracturing HP and approximately 88% of its coiled tubing capacity active during the quarter. The increase in industry activity led to some inflation in input costs, including personnel, chemicals, hauling, proppant, and coiled tubing strings. FINANCIAL INSTRUMENTS Fair values The carrying values of cash and cash equivalents, trade and other receivables, and trade and other payables, approximate their fair value due to the relatively short periods to maturity of the instruments. Loans and borrowings utilize both fixed and floating rates and, due to their short term nature, fair market value approximates carrying value. Interest rate risk The Company is exposed to interest rate risk on its floating rate bank indebtedness. Credit risk The majority of the Company s accounts receivable are with clients in the oil and natural gas industry and are subject to normal industry credit risks that include fluctuations in oil and natural gas prices and the ability to secure adequate debt or equity financing. The Company s clients are subject to an internal credit review, together with ongoing monitoring of the amount and age of balances in order to minimize the risk of non-payment. The carrying amount of accounts receivable reflects the maximum credit exposure and management s assessment of the credit risk associated with its clients. The Company continually monitors individual client trade receivables, taking into account numerous factors including industry conditions, payment history and financial condition in assessing credit risk. The Company establishes an allowance for doubtful accounts for specifically identifiable client balances which are assessed to have credit risk exposure. Foreign currency risk As the Company operates in both Canada and the U.S., fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar can have an impact on the operating results and the future cash flows of the Company s financial assets and liabilities. The Canadian segment is exposed to foreign exchange risk on U.S. dollar denominated purchases made in the normal course of business. The Company manages risk to foreign currency exposure by monitoring financial assets and liabilities denominated in U.S. dollars and exchange rates on an ongoing basis. Off-balance sheet arrangements The Company has no off-balance sheet arrangements as at other than the operating leases described under Contractual obligations and commitments. NON-IFRS MEASURES This MD&A includes a term or performance measure commonly used in the oilfield services industry that is not defined under IFRS: Adjusted EBITDA. The data presented is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. This non-ifrs measure has no standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. The non-ifrs measure should be read in conjunction with the Company s audited and unaudited Financial Statements and the accompanying notes thereto. Adjusted EBITDA is a financial measure not presented in accordance with IFRS and is equal to net income before finance costs, depreciation and amortization, loss (gain) on disposal of property and equipment ( P&E ), current and deferred income tax, share-based compensation, impairment, transaction costs and foreign exchange (gain) loss. Adjusted EBITDA is presented because it is widely used by the investment community as it provides an indication of the results generated by the Company s normal course business activities prior to considering how the activities are financed and the results are Annual MD&A I Page 16