Source Energy Services Reports Q1 2021 Results and Other Matters

Calgary, Alberta (May 5, 2021) TSX: SHLE

Source Energy Services Ltd. (“Source” or the “Company”) is pleased to announce its 2021 first quarter financial results.

SUMMARY

The first quarter of 2021 follows an unprecedented year in the history of the oil and gas industry, where Source made significant changes to the Company’s balance sheet and cost structure. These initiatives put Source in a solid position to benefit from the return of completion activities in the Western Canadian Sedimentary Basin (“WCSB”). Over the last three quarters, Source’s customers have cautiously resumed completion activities and the first quarter realized continued growth in activity levels from previous quarters. This resulted in Source achieving the following highlights for the three months ended March 31, 2021:

• realized sand sales volumes of 645,566 metric tonnes (“MT”) and sand revenue of $66.1 million;
• achieved a new service record in March which saw seven Sahara units fully utilized for the month;
• achieved a 25% increase in sand volumes trucked to customer wellsites;
• distributed 698,298 MT of proppants and chemicals through Source’s WCSB terminal network;
• realized gross margin of $10.7 million and Adjusted Gross Margin⁽⁴⁾ of $18.3 million;
• realized Adjusted EBITDA⁽⁴⁾ of $12.7 million; and
• reported net loss of $5.4 million, an improvement of $180.0 million from the same period last year.

Notes:

1. One MT is approximately equal to 1.102 short tons.
2. The average Canadian to United States (“US”) dollar exchange rate for the three months ended March 31, 2021 was $0.7899 (2020 - $0.7435).
3. Prior year amounts have been restated to reflect the 12:1 share consolidation completed in 2020.
4. Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’ below.

Q1 2021 RESULTS

The recovery of activity levels witnessed in the latter half of 2020 continued into the first quarter of 2021, fueled by the ongoing strength of commodity prices. Extreme weather in February caused some delays in customer completions programs; however, Source was able to continue to effectively service customers and the spot market from the Company’s in-basin inventories. Source realized a recovery of sand sales volumes for the three months ended March 31, 2021, generating $66.1 million of sand revenue. Sand revenue was lower by $16.9 million compared to the first quarter of 2020 due to lower sand sales volumes and lower realized average sand prices, as lingering uncertainty and continued price instability resulting from the impact of the coronavirus pandemic (“COVID-19”) continued to influence customers.  Sand revenue for the quarter was also impacted by a stronger Canadian dollar on US dollar denominated sand sales.

Wellsite solutions revenue was $14.1 million for the first quarter, an increase of 17%, compared to the first quarter of 2020. The increase was due to a higher number of customers that utilized Source’s dispatch services to orchestrate the movement of large volumes of frac sand to the wellsite in the quarter. Many of these customers have also adopted Sahara as a key component in their frac programs, resulting in the seven Sahara units located in Canada achieving 100% utilization for the month of March, and an average utilization rate of 81% for the quarter.

Cost of sales, excluding depreciation, was favorably impacted by cost savings initiatives and production efficiencies implemented last year as well as the impact of the stronger Canadian dollar on US dollar denominated production costs.

For the three months ended March 31, 2021, gross margin increased by $4.3 million while Adjusted Gross Margin fell by $1.5 million compared to the first quarter in 2020. Gross margin was favorably impacted by lower cost of sales - depreciation realized, attributed to a lower equipment asset base resulting from the impairment recognized in the first quarter of 2020.  Adjusted Gross Margin was negatively impacted by lower volumes and continued pricing pressure realized in the quarter; however, as a percentage of revenue, Adjusted Gross Margin improved on a quarter-over-quarter basis due to Source’s focus on maintaining lower costs and production efficiencies.

Operating expense was lower by $0.6 million, or 13%, for the three months ended March 31, 2021, resulting from workforce optimization efforts implemented as part of cost control measures undertaken in 2020. The receipt of proceeds from the Canada Emergency Wage Subsidy (“CEWS”) program of $0.1 million also favorably impacted operating expense. General and administrative expense remained unchanged from the same period last year, as higher variable incentive compensation expense was offset by the receipt of proceeds from the CEWS program of $0.1 million and lower professional fees incurred in the quarter.

For the quarter ended March 31, 2021, Adjusted EBITDA was $12.7 million, $1.9 million lower than the first quarter of 2020, as lower sand sales volumes was offset by improved gross margin and lower operating costs.

LIQUIDITY AND CAPITAL RESOURCES

The Company has a banking operating facility, comprised of an asset backed loan facility (“ABL”), a standby letter of credit facility and a senior secured term loan (collectively, the “Credit Facility”). As of March 31, 2021, Source had $7.5 million drawn under its ABL. The Credit Facility was also being used to support $9.9 million of letters of credit leaving $26.5 million of available liquidity. Source is subject to externally imposed capital requirements for the Credit Facility. As of March 31, 2021, Source Energy Services and its subsidiaries were compliant with all covenants of the Credit Facility.

Source’s capital expenditures fall into three main categories: capital expenditures at existing terminals and mine facilities to make improvements and maintain operations, growth capital expenditures for new capacity to grow production or distribution and overburden removal. Capital expenditures for the first quarter of 2021 were $1.3 million, a decrease of $0.3 million from the same period last year.

Source believes its previous investment in processing assets and logistics infrastructure will allow for modest capital expenditures through 2021 and beyond even as industry activity returns to more normalized levels.

OPERATING ENVIRONMENT AND COVID-19

The global economic environment and commodity pricing remain uncertain, as COVID-19 continues to impact global energy demand while countries wrestle with the third wave of the virus and the speed of vaccination program delivery. Commodity price fluctuations are continuing to influence exploration & production (“E&P”) capital spending programs, which remain disciplined as these companies remain focused on protecting balance sheets. Renewed measures to prevent the spread of the virus could result in further global business disruption, with economic repercussions that are yet to be determined.

Source has implemented effective procedures that have allowed the Company to safely operate through the pandemic. Source continues to prioritize the safety of its employees, contractors and customers through its COVID-19 program which minimizes exposure for employees and contractors in the field, at the production plants and at its corporate offices.

Certain operational cost reductions and other measures implemented last year in response to the weakened economic climate resulting from COVID-19 continue to be monitored, including staffing levels and the receipt of governmental wage subsidies, as Source accommodates increased customer demand while remaining focused on maximizing operational efficiencies.

BUSINESS OUTLOOK

The recovery of Source’s activity levels continued through the first quarter of 2021, supported by the ongoing strength of commodity prices which stabilized late in 2020. Source’s customers continue to be focused on strengthening their balance sheets; however, Source believes the generation of stronger cash flows may result in enhanced capital expenditures in the last half of the year, as well as the possible expansion of drilling and completion programs in 2022.

Source continues to remain optimistic about the longer-term industry prospects, including increased demand for WCSB natural gas driven by LNG, coal to natural gas power generation conversions and increased gas pipeline capacity. In addition, planned expansion of oil pipeline egress capacity and the potential for additional hydrocarbon shipments by rail continue to support the Company’s expectation that activity levels should steadily increase in the coming years.

Source continues to see E&P companies require large volumes of frac sand, but now they are driving additional efficiencies in their completion programs by completing fracs over much shorter periods of time. Source’s terminal network and logistics capabilities have become a key component in the success of these accelerated frac programs in the Montney and the Duverney, and Source’s success in capturing a large portion of this market is further enhanced by the delivery capability of the Sahara units. Source’s reliability of supply and wellsite service offering have become a key component in many large Western Canadian completions programs. In April, Source’s service offering allowed a customer to complete a frac very quickly through its delivery of 8,459 MT of sand to one pad with a dual completion in a single day. Source is ideally positioned to serve the increase in demand for frac sand and logistics services as activity levels rebound.

Source continues to focus on improving logistics for other items needed at the wellsite in response to customer requests to expand its service offerings, and continues to develop opportunities to further utilize its existing Western Canadian terminals to provide additional diversification of its business. Over the longer-term, Source anticipates that these new terminal services will be a meaningful part of its business.

Source cannot predict the extent of the impact COVID-19 or its variants may have on energy demand, or how OPEC will react to those changes in demand and how those events could impact the Company’s operations. Source cannot reasonably estimate the period of time that adverse business conditions will persist, the impact they will have on the Company’s business, liquidity, consolidated results of operations and consolidated financial condition, or the pace of any subsequent recovery.

FIRST QUARTER CONFERENCE CALL

A conference call to discuss Source’s first quarter financial results has been scheduled for 7:30 am MST (9:30 am ET) on Thursday, May 6, 2021.

Interested analysts, investors and media representatives are invited to register to participate in the call. Once you are registered, a dial-in number and passcode will be provided to you via email. The link to register for the call is on the Upcoming Events page of our website and as follows:

Source Energy Services Q1 2021 Results Call

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until June 6, 2021, using the following dial-in:

Playback Number
Toll-Free: 1-800-319-6413

Playback Passcode
6529

2021 ANNUAL MEETING OF SHAREHOLDERS

Source’s 2021 Annual Meeting of Shareholders (the “AGM”) will be held on Friday, May 7, 2021 at 9:00 a.m. MST in a virtual, audio only, webcast format due to the COVID-19 pandemic and upon the recommendations of federal, provincial, and municipal governments to mitigate risks to public health and safety. Shareholder engagement is extremely important to Source and all shareholders will have equal opportunity to ask questions. Below are the details to attend the virtual-only AGM:

Log in: https://web.lumiagm.com/210563632

Password: source2021 (case sensitive)

If you experience technical or logistical issues related to accessing the virtual AGM, technical support is available:

1-800-564-6253 (toll-free in Canada and the United States)
514-982-7555 (long distance charges may apply)

ABOUT SOURCE ENERGY SERVICES

Source is a company that focuses on the production and distribution of high quality Northern White frac sand, as well as the distribution of other bulk completion materials not produced by Source. Source provides its customers with an end-to-end solution for frac sand supported by its Wisconsin mines and processing facilities, its Western Canadian terminal network and its “last mile” logistics capabilities. Source also provides storage and logistics services for other bulk oil and gas well completion materials and has developed Sahara, a proprietary wellsite mobile sand storage and handling system.

Source’s full-service approach allows customers to rely on its logistics platform to increase reliability of supply and to ensure the timely delivery of their requirements for frac sand and other bulk completion materials at the wellsite.

IMPORTANT INFORMATION

These results should be read in conjunction with each of Source’s unaudited condensed consolidated interim financial statements for the three months ended March 31, 2021 and 2020, and Source’s audited consolidated financial statements for the year ended December 31, 2020, together with the accompanying notes (the “Financial Statements”) and its corresponding MD&A for such periods. The Financial Statements and MD&A and other information relating to Source, including the Annual Information Form (“AIF”), are available under the Company’s SEDAR profile at www.sedar.com. The Financial Statements and comparative statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Unless otherwise stated, all amounts are expressed in Canadian dollars.

NON-IFRS MEASURES

In this press release Source has used the terms Adjusted Gross Margin and Adjusted EBITDA, including per MT, which do not have standardized meanings prescribed by IFRS and Source’s method of calculating these measures may differ from the method used by other entities and, accordingly, they may not be comparable to similar measures presented by other companies. These financial measures should not be considered as an alternative to, or more meaningful than, net income (loss), gross margin and other measures of financial performance as determined in accordance with IFRS. For additional information regarding non-IFRS measures, including their use to management and investors and reconciliations to measures recognized by IFRS, please refer to the MD&A, which is available online at www.sedar.com and through Source’s website at www.sourceenergyservices.com.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this press release constitute forward-looking statements relating to, without limitation, expectations, intentions, plans and beliefs, including information as to the future events, results of operations and Source’s future performance (both operational and financial) and business prospects. In certain cases, forward-looking statements can be identified by the use of words such as “expects”, “estimates”, “intends”, “anticipates”, “believes”, “plans”, “projects” or variations of such words and phrases, or state that certain actions, events or results “may” or “will” be taken, occur or be achieved. Such forward-looking statements reflect Source’s beliefs, estimates and opinions regarding its future growth, results of operations, future performance (both operational and financial), and business prospects and opportunities at the time such statements are made, and Source undertakes no obligation to update forward-looking statements if these beliefs, estimates and opinions or circumstances should change unless required by applicable law. Forward-looking statements are necessarily based upon a number of estimates and assumptions made by Source that are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Forward-looking statements are not guarantees of future performance. In particular, this press release contains forward-looking statements pertaining, but not limited, to: our continued optimism for longer term industry prospects and increased demand for LNG on WCSB activity levels; anticipated improvements in pipeline egress and transportation capacity, coal to natural gas power generation conversions and the potential for additional hydrocarbon shipments by rail; outlook for operations and sales volumes; expectations respecting future conditions; revenue and profitability; industry activity levels; the impact of COVID-19 on the global economy and the effect it may continue to have on the Company’s business, liquidity, operations and financial condition and the pace of any subsequent recovery; industry conditions pertaining to the frac sand industry; the benefits that Source’s “last mile” services provide to customers; expectations regarding customer relationships and counterparty risk; the anticipated effect of terminal services on Source’s business; expectations regarding funding for future working capital and capital expenditures; Source’s planned cash outflows relating to lease commitments and financial liabilities; the ability to secure future funding; expectations on Source’s ability to meet their capital needs; expectations regarding fluctuations in foreign currency; and expectations regarding the outcome of legal claims and proceedings, including but not limited to the outcome of Source’s anticipated claim for damages related to the structural failure of its Fox Creek Terminal Facility.

By their nature, forward-looking statements involve numerous current assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Source to differ materially from those anticipated by Source and described in the forward-looking statements.

With respect to the forward-looking statements contained in this press release  assumptions have been made regarding, among other things: proppant market prices; future oil, natural gas and natural gas liquids prices; future global economic and financial conditions; future commodity prices, demand for oil and gas and the product mix of such demand; levels of activity in the oil and gas industry in the areas in which Source operates; the continued availability of timely and safe transportation for Source’s products, including without limitation, Source’s rail car fleet and the accessibility of additional transportation by rail and truck; the maintenance of Source’s key customers and the financial strength of its key customers; the maintenance of Source’s significant contracts or their replacement with new contracts on substantially similar terms and that contractual counterparties will comply with current contractual terms; operating costs; that the regulatory environment in which Source operates will be maintained in the manner currently anticipated by Source; future exchange and interest rates; geological and engineering estimates in respect of Source’s resources; the recoverability of Source’s resources; the accuracy and veracity of information and projections sourced from third parties respecting, among other things, future industry conditions and product demand; demand for horizontal drilling and hydraulic fracturing and the maintenance of current techniques and procedures, particularly with respect to the use of proppants; Source’s ability to obtain qualified staff and equipment in a timely and cost-efficient manner; the regulatory framework governing royalties, taxes and environmental matters in the jurisdictions in which Source conducts its business and any other jurisdictions in which Source may conduct its business in the future; future capital expenditures to be made by Source; future sources of funding for Source’s capital program; Source’s future debt levels; the impact of competition on Source; and Source’s ability to obtain financing on acceptable terms.

A number of factors, risks and uncertainties could cause results to differ materially from those anticipated and described herein including, among others: the effects of competition and pricing pressures; risks inherent in key customer dependence; effects of fluctuations in the price of proppants; risks related to indebtedness and liquidity, including Source’s leverage, restrictive covenants in Source’s debt instruments and Source’s capital requirements; risks related to interest rate fluctuations and foreign exchange rate fluctuations; changes in general economic, financial, market and business conditions in the markets in which Source operates; changes in the technologies used to drill for and produce oil and natural gas; Source’s ability to obtain, maintain and renew required permits, licenses and approvals from regulatory authorities; the stringent requirements of and potential changes to applicable legislation, regulations and standards; the ability of Source to comply with unexpected costs of government regulations; liabilities resulting from Source’s operations; the results of litigation or regulatory proceedings that may be brought against Source; the ability of Source to successfully bid on new contracts and the loss of significant contracts; uninsured and underinsured losses; risks related to the transportation of Source’s products, including potential rail line interruptions or a reduction in rail car availability; the geographic and customer concentration of Source; the impact of climate change risk; the ability of Source to retain and attract qualified management and staff in the markets in which Source operates; labour disputes and work stoppages and risks related to employee health and safety; general risks associated with the oil and natural gas industry, loss of markets, consumer and business spending and borrowing trends; limited, unfavourable, or a lack of access to capital markets; uncertainties inherent in estimating quantities of mineral resources; sand processing problems; implementation of recently issued accounting standards; the use and suitability of Source’s accounting estimates and judgments; the impact of information systems and cyber security breaches; and risks and uncertainties related to COVID-19 or its variants, including changes in energy demand.

Although Source has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will materialize or prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement. Readers should not place undue reliance on forward-looking statements. These statements speak only as of the date of this press release. Except as may be required by law, Source expressly disclaims any intention or obligation to revise or update any forward-looking statements or information whether as a result of new information, future events or otherwise.