Step Energy Services Ltd
TSX:STEP
Earnings Call Analysis
Q4-2023 Analysis
Step Energy Services Ltd
The year 2023 proved to be the second-best year in revenue for STEP, achieving $946 million, slightly behind the 2022 record of $989 million. This performance came even as Q4 2023 saw a decline in consolidated revenue to $195 million from the $251 million reported in the same quarter of 2022.
Adjusted EBITDA for Q4 pointed towards a decreased activity effect, with STEP earning $18 million, a drop from the $49 million of the previous year's quarter. The full year adjusted EBITDA was $164 million versus $199 million in 2022. A margin of 17% reflects a respectable achievement despite being lower than the 20% margin of last year. Net income for the year stood strong at $50 million, or $0.67 per diluted share, overcoming a challenging Q4 that recorded a net loss of $5 million, or $0.07 per diluted share.
In Canada, the full year segment revenue reached a record $580 million. However, Q4 revenue dipped to $82 million in Canadian Fracturing, down 36% from the previous quarter, primarily due to a typical slowdown and a change in job mix. The Canadian Coiled Tubing unit reported Q4 revenues aligning with Q3 at $31 million, contributing to an overall annual boost to $120 million. Over in the United States, Q4 saw a 15% decrease in fracturing revenue from Q3 and a significant 59% decrease from Q4 2022. The adjusted EBITDA in the U.S. for the year was $46 million, marking a decrease from $80 million the previous year.
STEP reduced its net debt to $88 million, coming down from approximately $142 million a year earlier, continuing a trend of significant debt reduction over recent years. Additionally, the company's free cash flow for the year was reported at $83 million. Reflecting confidence in the value of its shares, the company has initiated a share buyback program, having re-acquired over 800,000 shares. Management emphasizes that on various metrics, including a book value per share of $4.93 and an asset replacement cost estimate between $18 to $20 per share range, the equity appears undervalued .
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Good morning, ladies and gentlemen and welcome to the STEP Energy Services Fourth Quarter and Year End 2023 Conference Call and Webcast. [Operator Instructions] This call is being recorded on Tuesday, March 12th, 2024.I will now like to turn the conference over to Steve Glanville. Please go ahead.
Yes. Thank you and good morning. Welcome to our Q4 and year end 2023 conference call. My name is Steve Glanville and I'm the President and CEO of STEP Energy Services. I'd like to invite Klaas Deemter, our Chief Financial Officer, to provide an overview of our financial results for Q4 and the full year. And then I'll provide some comments on operating conditions in 2023 and what we're seeing in 2024 and then we'll open the call up for questions.
Thanks, Steve and good morning, everyone. Before I begin, I'd like to remind listeners, this conference call may contain forward-looking statements and other information based on current expectations or results for the Company. Certain material factors or assumptions that were applied in drawing conclusions or making projections are reflected in the forward-looking information section of our Q4 2023 MD&A. A number of business risks and uncertainties could cause actual results to differ materially from these forward-looking statements and our financial outlook. Please refer to our annual information form for the year end of December 31, 2023 for more complete description of the business risks and uncertainties facing STEP. The AIF, along with our financial statements and MD&A are available on our website and on SEDAR.Finally, please note that all numbers are in Canadian Dollars unless noted otherwise and I'll round where possible. Most of my comments will pertain to the fourth quarter of '23, with additional discussion around the 2023 year as a whole. Full details again can be found in our MD&A.Fourth quarter consolidated revenue was $195 million, which is lower than Q4 revenues of $251 million. Budget exhaustion and commodity prices were a factor, but we also had approximately $30 million to $35 million of scheduled work that slipped out of the quarter. The Canadian work largely pushed into Q1, setting up for a highly utilized first quarter, but the U.S. unfortunately did not. We were on the wrong side of an M&A transaction with 1 crew and the second crew had their pad pushed later into the quarter to the point where it would have conflicted with another client's start date.For the 2023 year, STEP generated $946 million in revenue, second only to the 2022 revenues of $989 million. Turning to consolidated adjusted EBITDA, STEP earned $18 million in Q4 2023 as compared to $49 million in Q4 2022. Similar to revenue, adjusted EBITDA was lower in Q4 '23 due to the decreased activity. However, earnings were also eroded by higher fixed costs, an increase in operating expenses related to preparing equipment for a busy Q1 and some one-time costs.For the full year, STEP earned $164 million in adjusted EBITDA as compared to $199 million in 2022. Our consolidated adjusted EBITDA margin was 17% for the year versus 20% last year, which although lower year-over-year, it is still considered a notable achievement in a lower activity environment and given the fixed cost nature of the pressure pumping business model.STEP earned $50 million or $0.67 per diluted share in net income on a full year basis in 2023, despite the tough Q4, which showed a net loss of $5 million or $0.07 per diluted share. For reference, our net income in 2022 was $95 million, which included a $38 million impairment reversal on property and equipment.I'll turn now to the geographical regions of Canada and the U.S. to provide some key highlights on the quarter. In the Canadian segment, Q4 revenue was $112 million, down 29% from Q3 2023 levels, but our full year Canadian segment revenue of $580 million was up year-over-year, setting a new Canadian revenue record.Canadian Fracturing was $82 million in the quarter, down 36% from Q3 '23. Revenue fell quarter-over-quarter due to the typical Q4 slowdowns as previously mentioned, including decisions by some clients to push Q4 projects into Q1, as well as a change in fracturing job mix to include more lower intensity completions which have a lower revenue profile. Notwithstanding the slower Q4 full year revenue results in the Canadian Fracturing business, we're very commendable and posted a new record of $461 million, up from last year's record of $454 million in revenue.The Canadian Coiled Tubing business unit, which also includes ancillary fluid and nitrogen pumping crews, generated Q4 revenues of $31 million in line with Q3 revenues of $30 million. Revenue on a year-over-year basis was also up, coming in at $120 million. Q4 segment adjusted EBITDA was $15 million versus $41 million in the third quarter of 2023. Adjusted EBITDA margin was 13%, which was down from 26% in Q3. Full year adjusted Canadian EBITDA in 2023 was $134 million or a margin of 23%, coming in just below the prior year's record of $136 million, which reflected a 24% margin.Turning to the U.S., Q4 revenue of $83 million was down 15% versus Q3 '23 revenues of $98 million and our full year revenue was $366 million, down from $421 million in 2022. U.S. Coiled Tubing Q4 revenue was $43 million, which was up 10% from a year ago, although down sequentially from the third quarter. We ran 12 units in Q4, which is unchanged from the third quarter and is up from 11 units a year ago.In U.S. Fracturing, Q4 revenues of $40 million were down 15% from the third quarter and down 59% from a highly utilized Q4 in 2022. As mentioned a moment ago, we had about $17 million to $19 million in scheduled revenue disappear from the quarter due to M&A and shifting client schedules, which hurt our Fracturing business in the quarter. Full year revenue of $186 million was lower than the $297 million earned in 2022, due in part to the utilization challenges experiences through the year, but also due to the shift in client supplied sand, which reduces revenue and margin for pressure pumpers.Adjusted EBITDA of $7 million was down from $15 million in Q3. Adjusted EBITDA margin was 9%, down from 16% in Q3. Full year adjusted EBITDA in the U.S. was $46 million or a margin of 13%, down from the previous year's EBITDA of $80 million or 19%. Turning out to the allocation of our cash flow when our year and balance sheet, we spent $40 million on capital in the quarter, up from the $25 million we spent in the third quarter. Our full year spend was $105 million in 2023 compared to $100 million in 2022. Our Q4 capital spend was the highest quarterly spend for the year, partly due to the completion of various capital projects, but we also accelerated payments on a number of large invoices right at the end of the year to take advantage of the benefits associated with early payment and possession, ultimately transitioning working capital into capital assets.Our working capital fluctuates with the seasonality of our business and we expect it to tick higher at the end of Q1, as a highly utilized quarter pushes up our AR balances. We ended the year with a net debt of $88 million, down from approximately $142 million a year ago. Going further back since 2018, we are extremely proud of the accomplishments that we've achieved there. We've paid down almost $230 million of net debt since that time. This reduction of debt is a first phase of our shareholder return framework and we've seen that value accrue to equity holders. In addition to adjusted EBITDA, one of STEP's other key non-GAAP measures is free cash flow.STEP calculates free cash flow as cash from operating activities, less changes in non-cash working capital, sustaining capital investments, term loan principal repayments and lease payments. We had negative free cash flow in the fourth quarter, but our full year free cash flow was $83 million compared to $112 million in 2022. This translates to $1.15 per share or 29% yield, which is comparable to the prior year's results of a $1.56 per share, which was also a 29% yield. More details are available in the non-GAAP measure section of our MD&A.Finally, we are very pleased to announce that we started a normal course issuer bid in late December, the second phase of our shareholder return framework. On a number of different metrics, we feel that our equity is undervalued. As an example, our book value per share is [ $4.93 ] and the replacement cost of our assets is in the $18 to $20 per share range. We were authorized to purchase and cancel up to 3.6 million shares and we have been active in the market, having bought back just over 800,000 shares already and we intend to remain active.I'll now turn it back to Steve for his comments on operations and outlook.
Yes. Thanks, Klaas. I have said this before in previous calls, but I want to highlight how important it is to look at completion sector as a project based business, which requires us to evaluate the success of the business year-over-year rather than quarter-over-quarter. Each quarter has its challenges with shifting client schedules, but the fourth quarter in particular has become less predictable and as a consequence we're seeing lower utilization compared to the first and third quarters. It's not just the typical budget exhaustion, it's also that the pads are becoming larger and larger. So we're less and less likely to see work kick off in late November or early December because of the Christmas holiday season. In the same vein, these large pads also make it easier to work through the second quarter, which was historically our weakest quarter.We're obviously happy to see the second quarter utilization pick up, but we need four quarters of utilization in this sector. This creates a more stable operating environment for service providers, along that keep their workforce steadily employed, which improves safety and operational efficiency and ultimately will drive costs down for E&P companies. We hear a lot that we're moving into a manufacturing or mining phase of this industry, so we need to change how we operate to reflect that.I'm proud to say that 2023 was our second best year ever in terms of top line revenue and adjusted EBITDA. Just a couple of things I want to draw your attention to here. The first thing, despite the challenges presented by weaker oil and gas prices, 2023's revenue only dropped by 4% year-over-year, which we see as a positive signal that the [ OFS ] sector is becoming more disciplined in the pricing. The second thing is there's 3 of our 4 business units outperformed their 2022 top line revenue figures, which clearly reflects the resiliency and flexibility of our operations and the teams of professionals who come to work each day with a mindset to deliver safe, repeatable and exceptional services to our clients.In 2023, just over 60% of our revenue came from Canada, led by our Fracturing business. We ran 5 fracturing crews in Canada, 4 of which are focused on the large-scale technical challenging -- technically challenging work in the Montney and Duvernay, with the fifth focus on smaller scale lower pressure work, often in conjunction with our Coiled Tubing division. The Fracturing division delivered outstanding results, recording its highest ever divisional revenue and making a significant contribution to the Canadian EBITDA.2023 wasn't without challenges as the volatility in commodity prices led some clients to defer work out of 2023, which affected our utilization. A key trend that we benefited from was a significant increase in profit intensity per well. We have a slide in our IR deck that shows how the sand required to frac Montney wells is starting to approach the levels we have seen in the Permian for several years. We expect to see this trend continue with the Duvernay expected to be a fast follower.To address the growing requirement for sand handling and hauling, we added capital to our Canadian logistics team and now have one of the largest internal hauling fleets in the basin. This capacity has greatly improved field efficiencies for these sand intensive operations, as it reduces reliance on third-party hauling and minimizes non-productive time.In Coiled Tubing operations, despite the impact of volatile commodity prices and client decisions to defer work to 2024, STEP operated at 9 cold tubing units. We saw a decrease in operating days, but an increase in revenue per day year-over-year. STEP is committed to bringing the best technology to the market. An example of this is Canada's largest and deepest fleet of e-line capable coiled tubing strengths. Our Coil Tubing division set a company depth record of 8,101 meters, demonstrating our technical capabilities and expertise in the deep complex wells in the WCSB.I also want to highlight our pump down services. We have seen an increase in plug-and-perf operations in Canada, creating this opportunity to bolster our pumping services. Our professionals and pump-down services have built capacities in this business segment and a reputation for delivering exceptional service to our clients. They have opened doors to additional opportunities and I'm very proud of what this team has accomplished in 2023.Turning now to the U.S. Our fracturing service line faced significant headwinds right out of the gate in 2023. If you recall, in late 2022, many analysts, if not most, were forecasting gas over $5 per MMBtu and oil over $90 WTI, but very quickly in Q1, we saw prices come off and we saw the private operators slow down their capital programs aggressively, leaving many frac crews looking for work. This trend was exacerbated by the E&P M&A activity where 1 plus 1 often does not equal to further reducing demand for fracturing services.We saw the industry shrink through the year from a peak of about 300 frac crews to about 225. Our crews can compete with the best in the U.S. delivering excellent diesel substitution and pumping hours per day, but we're not prepared to sacrifice our equipment in a mad rush for the bottom. So we made the difficult decision to transfer some fracturing coming back to Canada, so we can staff the fixed crew.On paper, it was an easy decision as returns are stronger in Canada, but these decisions also have a human impact and for a company with STEP's culture, we don't make these decisions lightly. We are also very pleased with our U.S. Coiled Tubing business. The acquisition we made in September of '22 was a key factor in our ability to expand this business into the Northern U.S. operating regions. Our decision to add a 12th Coiled Tubing unit as well as transfer one of our Southern units to the north, drove a year-over-year increase in operating days of up to 30%. This team also set a depth record of 8,252 meters or 27,075 feet. We're also seeing growing interest in our equal technology in the U.S., which we believe will be a differentiator for STEP going forward.Turning to the outlook. As we look to 2024 and beyond, headwinds persist in the current market environment. However, we believe STEP is well positioned to navigate these uncertainties and capitalize on opportunities. The long-term outlook for oilfield services remain constructive and we see a slight shift in the narrative surrounding the importance of oil and gas in the energy mix. We are proud to operate in Canada and the U.S. countries with abundant natural resources and the technical expertise to deliver safe and affordable energy globally. The completions of major energy infrastructure projects in both Canada and the U.S., like the Trans Mountain Expansion Project, LNG Canada's facility and numerous LNG projects in the U.S. will support increased drilling and completion activity in our sector.In the near-term, the volatility in commodity price is expected to continue, but I'm confident in the initiations that we have put in place to reduce the impact on our business. For example, our strategic investment in Tier 4 dual fuel assets, which reduce diesel consumption in place of cleaner burning natural gas, coupled with our technical capabilities, delivered the expertise that leading E&Ps rely on to complete their programs. Our ability to optimize asset performance consistently operating up to 22 hours per day contributes significantly to completing wells faster and more efficiently. We have control over our value chain and strong relationships with our proppant suppliers.Moving on to our capital program. In late 2023, our Board approved a capital budget of $120 million, with just under half allocated to maintenance capital and the balance to optimization capital. By the end of 2024, we expect 75% of our fleet will be dual fuel capable, with a target of 90% by the end of 2025. We're taking a cautious quarter-by-quarter approach to spending this capital, recognizing that extremely low gas prices are creating some uncertainty about activity levels in the near term. We're continuing to explore the opportunities that exist with next-generation technology, but the cost of this equipment would require a client capital commitment similar to what we saw with our first Tier 4 dual fuel fleet.In Canada, Q1 2024 has been exceptionally busy, especially in the fracturing service line. The deferral of work from Q4 into Q1 meant that our crews were pumping right out of the gate, so the cold weather in January had minimal impact on our operations. Our Coiled Tubing crew is going a little bit later, which is typical for the service line as they follow fracturing.One more quick word on the cold weather. We easily take that for granted the standard of leveling we have here. I wanted to express my extreme gratitude for the hard working professionals, not just in our company but across the sector, who work day and night on the coldest nights in Canada and the hottest days of Texas. So we can enjoy this amazing standard of living. We have a moral responsibility as a major energy-producing nation to export this prosperity to the world. There is increasing concern around the impact of drought in Canada and how that will affect or how will affect the availability of water for our clients.Our teams are engaging in discussion with clients and our product supplies -- product suppliers about solutions that will reduce the amount of freshwater used in fracturing operations. We have Brian tolerant the chemistries and alternative fracturing systems such as nitrogen or carbon dioxide that reduce water consumption and we even have proprietary fracturing systems use liquefied petroleum gas to eliminate water completely.We still got almost 3 weeks of work left in March, but I can say that our Fracturing, Coiled Tubing and pump-down crews have never been busier and I'm extremely proud of the work that these teams are doing. Our Q2 calendar is filling up as well, although there is still a handful of RFPs that will determine just how much work we'll see in the quarter, as well as the second half of the year. We'll have more to say on our second half activity expectations at our Q1 conference call in May.In the United States, our 2 fracturing fleets in the Permian have experienced consistent activity in Q1, supported by securing long-term work scopes with active producers. The oversupplied U.S. fracturing market will continue to see some near-term softness in pricing and utilization. Our 12 Coiled Tubing fleets have maintained steady activity and we may see an opportunity to add a 13th unit given the demand for our services. Pricing in the Coiled Tubing market is down modestly relative to 2023, but as crew more resilient than what we're hearing in the fracturing market.Visibility in the second half of the year hinges on the natural gas pricing. Strengthening prices in the third and fourth quarters will bring stability to the fracturing market. Finally, at the beginning of the year, we launched our nitrogen industrial services, but not only focus on completion activities and supporting services, but provides our nitrogen pumping expertise to large-scale projects in the midstream and industrial facilities. We see tremendous opportunities in this market and look forward to establishing a stronger presence there.With that, I will thank you all for your continued support and a special acknowledgment to the professionals at STEP. We have managed extremely well through another year of fluctuations and uncertainties. But we have also accomplished great things and achieved many milestones. Thank you for all you do.Operator, we'd be pleased to take any questions.
Thank you. [Operator Instructions] Your first question comes from Cole Pereira from Stifel.
So one of your competitors guided to EBITDA being lower year-over-year, I realize you're a bit different. You're bringing another fleet into Canada, but hard not to think that completions activity isn't lower year-over-year. So how should we be thinking about STEP maybe in the U.S. and Canada on a year-over-year basis?
I think, Cole, what we're seeing here is there's still some RFPs that are in play here for the back half of the year. We have more capacity here in Canada than we did last year. So I think it would be reasonable to expect a higher level of activity here in Canada. Conversely, we have less presence in the U.S. and then just given the gas price issues down there, reasonable to think that GR is going to be a little bit weaker on the Fracturing side.
And then going back to the U.S., can you just remind us, are those 2 fleets down there on long-term contracts? Or is there any spot exposure there?
Yes, Cole, it's Steve here. Yes, there on, I would say, long-term contracts, but the undisciplined pricing that we've seen in the U.S., it's just the -- it's a very, very fragmented market today. So those are our risk, but I think there's some opportunity for us to continue to look at high utilization in the basin.
Your next question comes from John Gibson from BMO Capital Markets.
Just first, in terms of margins, Q4 was obviously impacted by the deferred revenue in U.S. How would margins outperformed during the quarter, absent these deferrals? And I know Q4 is a ways out, but how do you think about limiting some of the impacts going forward if additional work gets deferred?
So that $30 million to $35 million was worked out was on the board scheduled and then with particularly well books actually with very short notice, the work was pushed. So if you think about our fixed cost structure, all those costs are largely continuous. So the work that we lost there, that $30 million to $35 million, that would largely have been a kind of a gross margin, direct margin type of margin profile. So higher certainly than our typical EBITDA numbers. So I think you can -- there have been a significant uptick in our EBITDA. How we've been able to capitalize on that. So as we think about Q4 of this coming year and Steve talked about it in his script, we are more cautious around what Q4 utilization looks like. The challenge we have here is, if we've got work scheduled, there's very little that commits a client to keeping that intact. And for various reasons, that work can shift. So if you lose the work in June or July and there's always some spot work that you can pick up. But if you lose work at the end of November, middle of December type of stuff, it's very hard to backfill that work.So we worked through that with our sales guys. They work extremely hard with their clients to dial it in. But at the end of the day, we're somewhat subject to the mercies of the market.
Yes, I'd just add on to that, John, like -- our clients are extremely disciplined on their capital. And we even tried to -- as knowing our Q1 was going to be -- is basically overbooked, we tried to get some of our clients to move some capital into December and November and there was no goal. And as I mentioned, like these pads are getting like large, so call it 6 to 10 well pads and our operators aren't rigging up on the 1st of December because they know it's going to work into the Christmas season. And so they basically have decided to defer it to January. So we're going to look at that for next -- for this year coming up, if there's a way that we can minimize the down the choppiness in the quarter. But I just want to remind everyone, this is -- I go back to it's a year-over-year -- you kind of have to compare on a year-over-year basis. And with commodity prices being off 30% this year, still is a great year for our company.
Appreciate that. And apologies if I missed this. I know you touched on U.S. pricing under pressure. How has the Canadian pricing been to start the year?
Sorry, John, how was the Canadian pricing is that what you said?
Yes, exactly.
I would say it's holding up nicely. We are seeing some pricing pressure. I would think that, in general, it's holding up a lot better obviously than the U.S. And I would consider that the market in Canada is under supplied here in Q1. And we're going to really look at Q2 and beyond what we do with that 6 frac crew. As of today, we're -- we don't -- if there's no work for it, we're going to park it. So that's kind of the strategy that we have right now.
You've made great progress on the balance sheet. Wondering what your capital priorities or capital allocation priorities are short term, do you expect down levels to fall a bit further? Or is it just kind of full go on the NCIB?
Well, we got a great buying opportunity today on our NCIB. So we'll continue to focus on that here in the days to come. As noted, we see good value in our equity book value of around $5 replacement value of $18 million to $20 million. So we're going to continue to focus on that. As the year progresses, we're -- I made a -- Steve made a comment there about our capital budgeting. We'll monitor that to make sure that we're calibrating that to kind of our operational cadence. I think there's still room for us to push our debt down lower. We've often talked about a net debt balance of roughly similar to our working capital. So call that in the $50 million to $60 million range. We think that's achievable by the end of the year.
Your next question comes from Josef Schachter from Schachter Energy Research.
You mentioned in your -- you just recently in your comments that the first quarter was overbooked. It was an oversupply during Q4. How does things look for Q2 and Q3? And is it really up to the natural gas price that we need to be looking for a 250-plus or something for you to -- for the industry to be in equilibrium in Q2 through Q4?
We're actually seeing quite a bit of activity in Q2 in Canada, started in Canada right now. And I think a lot of that is to do with the clients that we have aligned with for the year. Our sales team has done a great job of looking at clients that have kind of full-time projects or good line of work for the year in '24. We haven't seen any pullback in capital per se today. But obviously, that is a concern that we have gas at $1.70 or whatever that's trading at today, it's not sustainable. And so we're being cautious with that.I do believe that the 2 infrastructure projects that I commented on LNG Canada and the Trans Mountain Expansion is great for the Canadian activity long term. I think we're just going to see a little bit of choppiness coming out of the gate here this year. But as that gets on stream, I think you're going to see a lot more stability in gas prices going forward. And for the U.S., same sort of thing, we're actually seeing the private operators talking about adding more rigs in the Permian in particular, so more oil-focused regions. You saw EQT pull back gas production. So there's just some things that are, I think, will set up for a better back half of '24 because of that.
And my next question is, you mentioned new equipment, e-coil equipment. What is that? What going to do? Is there better pricing for that, better margins? Can you give a little more insight into that?
Yes, yes. No, for sure, Joe. So that's our, call it, our STEP-conneCT technologies and what it allows us to do is read real-time bottom hole temperature, pressure, torque on the bit face as we're remoting out these plugs. And the advantage with that is not only we improve the efficiencies, ultimately we want to get to a completely autonomous coiled tubing unit. So you can basically send it and forget about it in mill it to the end of the well. That obviously reduces the concerns from an operator air perspective, but also from any efficiencies perspective. So it's kind of one step into that technology and our clients are quite happy with what they're seeing so far.
Is there higher margins for you on that?
Yes. We're seeing some good margins for sure. We run it all internally as well.
[Operator Instructions] Your next question comes from Keith MacKey from RBC.
So the U.S., as you mentioned has become a much more competitive frac market of late, given utilization and so forth. Now U.S. companies are increasingly bringing in electric equipment into the market and you did mention, I think, that you trialed some electric equipment in the Permian in the quarter. Can you just talk a little bit about what that was, how it came about? And if there's any capital associated with electric equipment or electric frac equipment for 2024, the budget?
I'll just start by -- there's about 60 electric frac crews that are operating in the U.S. today out of, call it, 250 altogether frac crews. So there's still a big market of Tier 2 diesel, Tier 4 diesel with dual fuel and then, of course, electric. We're curious about the technology. We have been really since 2017 when we got into the frac business. And so we ended up traveling a pump and kind of complete system and we really like it. The challenge, of course, is the overall capital required for that asset base. And I know there's some creative solutions that we're looking at today to input that. But we do not have that slated on our capital budget for 2024.
And Steve, how do you think about the competitiveness of your U.S. business then with 2 fleets running, like do you think you'd need to go electric right away in order to remain competitive? Or is there still a significant enough market where you can make some decent returns with the footprint that you've got in the U.S. market as it stands today and through the rest of the year?
Yes, I mean, Keith, we're seeing pumping hours per frac fleet that are operating or 2 that are down there north of 500 hours per fleet or around that. And so you can generate some good returns with that. We're happy with that. Scale is obviously one of our concerns that we have in the U.S., but we have been upgrading our asset base. Basically, the 2 fleets that are active today are substituting high quantities of diesel up to 75%. So it's a very sought-after fleet and there's a market for it today. As I mentioned that the fleet that or the 13 pumps that we brought up from the U.S. to Canada to really support our Canadian business, we're really Canadian pumps to begin with. They were part of the GASFRAC acquisition in 2015. And we'll look at if there's an opportunity to depending on where the -- these RFPs land, we have a number of them both in Canada and the U.S. that we're participating in. And so we'll just put that equipment where the best margin is in the business.
And maybe just one for Klaas on free cash flow for 2024. You ended the year at about $87 million, $88 million of net debt and I think you mentioned you could potentially see 2024 getting down to that $50 million or $60 million target. Is that essentially how we should be thinking about backing into free cash flow for 2024? And maybe if you could just talk a little bit about some of the levers into that number that might affect it as well, it would be helpful.
Yes. If you think about where we are today, we're roughly 0.5x. We anticipate 2024 to be a better year for us. And I think -- so from a debt perspective, we're continuing to push that down, but there's a little less pressure on us where we feel a little less pressure to continue hammering down that debt and we're -- that's why we introduced that NCIB gains to capitalize on the value gap that we saw there. So depending on how that market condition is going to determine the spend there on the NCIB capital, well, like Steve said, we're going to kind of take that on a quarter-by-quarter basis. So -- and then kind of the squeeze here a little bit to a certain extent is going to be on the debt side. We don't have as aggressive of targets that we have to hit this year internally. And we see that we're able to diversify our free cash flow allocation a little bit now.
And there are no further questions at this time. I will turn the call back over to Steve Glanville for closing remarks.
Yes. Thank you, everyone, for joining our Q4 year-end conference call. We look forward to talking to each other in about 6 weeks from now when we report our Q1.
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines. Thank you.