Source Energy Services Reports Q1 2022 Results

Calgary, Alberta (May 5, 2022) TSX: SHLE

Source Energy Services Ltd. (“Source” or the “Company”) is pleased to announce its financial results for the three months ended March 31, 2022.

Q1 2022 PERFORMANCE HIGHLIGHTS

Key achievements for the three months ended March 31, 2022 included the following:

• realized sand sales volumes of 726,101 MT, a 12% increase from the first quarter of 2021, and sand revenue of $80.7 million, a 22% increase from the first quarter of 2021;
• distributed 692,338 MT of proppants and chemicals through Source’s Western Canadian Sedimentary Basin (“WCSB”) terminal network;
• realized a 13% increase in average realized sand price, excluding revenue from mine gate sales volumes;
• deployed Source’s first ever high-capacity drive over Sahara unit, and deployed Source’s ninth Sahara unit in the US for a contract with a large exploration and production customer commencing in the second quarter;
• achieved utilization for the Sahara fleet of 72%, and added one new Sahara customer during the quarter;
• repaid $7.5 million on the senior secured term loan;
• realized gross margin of $14.6 million and Adjusted Gross Margin⁽¹⁾ of $20.4 million;
• reported net loss of $6.6 million;
• realized Adjusted EBITDA⁽¹⁾ of $14.2 million, a 12% increase from the first quarter of 2021; and
• subsequent to quarter end, closed a transaction with Canadian Silica Industries (“CSI”) to assume operations of CSI’s Peace River frac sand facility which will complement Source’s Northern White proppant resources.

Note:

1. Adjusted Gross Margin (including on a per MT basis) and Adjusted EBITDA are not defined under IFRS, refer to ‘Non-IFRS Measures’ below. For additional information and reconciliations to measures recognized by IFRS, please refer to Source’s MD&A available online at www.sedar.com.

RESULTS OVERVIEW

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, 2022 was $0.7898 (2021 - $0.7899).
3. Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’ below. For additional information and reconciliations to measures recognized by IFRS, please refer to Source’s MD&A available online at www.sedar.com.

Q1 2022 RESULTS

Sustained strength in oil and gas commodity prices continued to buoy strong activity levels in the WCSB, generating $80.7 million of sand revenue, an increase of 22%, over the first quarter of 2021. Higher sand revenue generated was attributable to a 12% increase in sand sales volumes and a 13% increase in average realized sand price, or $13.66 per MT, excluding the impact of mine gate sand sales volumes, compared to the first quarter last year. Strong industry activity levels for the quarter drove a 141% increase in spot sales volumes on a quarter-over quarter basis, which benefited the average sand price realized, as spot sales prices improved significantly.

During the first quarter, cost of sales, excluding depreciation, was impacted by higher costs for transportation and freight, due to increased prices for fuel and a tighter trucking market, as well as terminal mix changes, compared to the same period last year. These costs were partially offset by Source’s continued focus on streamlining production, as improved production efficiencies mitigated cost pricing pressure realized during the quarter.

Excluding gross margin from mine gate volumes, Adjusted Gross Margin was $28.54 per MT, favorably impacted by improved spot market pricing and continued production efficiencies. Compared to the first quarter last year, Adjusted Gross Margin for the first quarter of 2022 did not benefit from proceeds from the Canada Emergency Wage Subsidy (“CEWS”) program, a favorable property tax adjustment or higher deferred terminal revenue. Excluding these items in the first quarter of 2021, the first quarter 2022 Adjusted Gross Margin per MT increased by 6.5% when compared to 2021. For the three months ended March 31, 2022, Adjusted Gross Margin per MT increased by 80% compared to the fourth quarter of 2021. Gross margin was favorably impacted by lower cost of sales - depreciation realized, attributed to lower rates of inventory depreciation per MT relative to the first quarter last year.

Higher selling costs, attributed to increased royalty expense, combined with no proceeds from the CEWS program (compared to $0.1 million for 2021), drove higher operating expense for the first three months of 2022, compared to the same period last year, while general and administrative expense was slightly lower on a quarter-over-quarter basis. Adjusted EBITDA was $14.2 million for the first quarter of the year, a reflection of the strong sand sales volumes and sand sales pricing realized, partially offset by the unfavorable impact of higher costs incurred for diesel and freight during the quarter.

Peace River Transaction

In April 2022, Source entered into a transaction with CSI to assume operation of its Peace River frac sand facility. The frac sand facility adds approximately 400,000 MT of annual production capability to Source’s existing production capabilities, and consolidates Source’s adjacent mineral resource exploration rights with the production facility. The transaction complements Source’s existing product and service offerings.

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, 2022, Source had $24.0 million drawn under its ABL facility. The Credit Facility was also being used to support $9.8 million of letters of credit, leaving $16.2 million of available liquidity. Source is subject to externally imposed capital requirements for its Credit Facility and as of March 31, 2022, Source and its subsidiaries were compliant with all covenants of its credit facility. Source is focused on reducing its debt levels in 2022.

Source’s capital expenditures for the first quarter of 2022 were $2.0 million, an increase of $0.7 million compared to the same period last year. The increase in expenditures for maintenance and sustaining capital was primarily related to higher expenditures associated with overburden removal for mining operations and the Sahara unit configuration. Growth capital expenditures for the quarter included costs related to assessments and the drilling program at the Peace River mine, as well as the completion of Source’s ninth Sahara unit, compared to the first quarter last year.

ESG UPDATE

Source is committed to operating in a sustainable manner and works closely with its stakeholders to go above and beyond current regulatory requirements through initiatives such as voluntary enrollment with the Department of Natural Resources Sustainable Growth Program and Managed Forest Program, as well as Source’s production water recycling process. Source is continually looking to implement efficiencies to lessen the impact of Source’s activities on the environment and specifically to reduce greenhouse gas emissions, and has several additional initiatives currently underway at its processing and terminal facilities to further reduce Source’s operational emissions.

Source is currently finalizing the results of its annual environment, social and governance (“ESG”) performance, which will benchmark Source’s 2022 ESG performance relative to the Sustainability Accounting Standards Board framework. Source’s 2022 ESG report is expected to be released in the second quarter of 2022.

To view Source’s 2021 ESG report, please visit www.sourceenergyservices.com.

BUSINESS OUTLOOK

With increased industry activity levels across North America, frac sand supply and demand fundamentals have improved and are expected to remain tight for 2022. These fundamentals, coupled with Source’s leading service offerings and logistics capabilities, have translated into meaningful pricing gains in the spot market in 2022, a trend that is expected to continue for the balance of the year. Despite increased activity levels as industry demand outpaces supply growth, Source’s sand sales volumes through the first quarter were somewhat slower than anticipated as customer programs were pushed out due to delays in having pads ready to complete and the impacts of cold weather. Source expects the expansion of capital programs will increase through the balance of the year, as Source customers signal increasing activity levels and growing confidence related to ongoing permitting issues in the northeastern British Columbia region, as well as continued strength in commodity pricing.

In the longer-term, Source believes the increased demand for natural gas, driven by the conversion of coal-fired power generation facilities, increased natural gas pipeline export capabilities and liquefied natural gas exports will drive incremental demand for Source’s services in the WCSB. Source continues to see increased demand from customers that are primarily focused on the development of natural gas properties in the Montney, Duvernay and Deep Basin. This trend is consistent with Source’s view that natural gas will be an important transitional fuel that’s critical for the successful movement to a less carbon intensive world.

In support of the move to a less carbon intensive world, Source has begun focusing on developing economic growth opportunities which transition from traditional fossil fuels to less carbon intense energy solutions. As a pathway to diversifying Source’s business, and to participate in the decarbonization of the economy, Source is advancing opportunities in its own operations as well as at the well site and at its terminals. Source also continues to focus on increasing its involvement in the provision of logistics services for other items needed at the wellsite in response to customer requests to expand its service offerings and to further utilize its existing Western Canadian terminals to provide additional services. Over the longer-term, it is anticipated that these opportunities will be a meaningful part of Source’s business.

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 Friday, May 6, 2022.

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 2022 Results Call

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until June 6, 2022, using the following dial-in:

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

Playback Passcode: 8749

2022 ANNUAL MEETING OF SHAREHOLDERS

Source’s 2022 Annual Meeting of Shareholders (the “AGM”) will be held on Friday, May 6, 2022 at 10:00 a.m. MST (12:00 pm ET) in a virtual, audio only, webcast format. 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://meetnow.global/MF4MCAX

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 integrated production and distribution of high quality 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 and Peace River mines and processing facilities, its Western Canadian terminal network, its “last mile” logistics capabilities and 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 frac sand and other bulk completion materials at the wellsite.

IMPORTANT INFORMATION

These results should be read in conjunction with each of Source’s audited consolidated financial statements for the three months ended March 31, 2022 and 2021, 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) and gross margin, respectively, which represent the most directly comparable 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 ‘Non-IFRS Measures’ section of 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”, “anticipates”, “believes”, “continues”, “focus” 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 belief that the transaction with CSI complements Source’s existing product and service offerings; Source's optimism that the trend of large volumes of frac sand being sold with higher margins will continue; our focus on reducing debt levels in 2022; investments in production equipment generating increased yields in Source's sand processing activities; our belief that will have modest capital expenditures in 2022 and beyond; Source’s search for efficiencies to implement in order to lessen the impact of Source’s activities on the environment; expectations regarding our 2022 annual ESG performance report; our expectation that frac sand supply and demand will remain tight for 2022; our expectation that pricing gains in the spot market will continue for the remainder of 2022; our expectation that the expansion of capital programs will increase through the balance of 2022; increased demand for natural gas, increased natural gas pipeline export capabilities and liquefied natural gas exports will drive incremental demand for Source’s services in the WCSB; industry activity levels, including the continued increase in demand from customers primarily focused on the development of natural gas properties in Montney, Duvernay and Deep Basin; the Company’s view that natural gas is an important transitional fuel for the successful movement to a less carbon intensive world; our focus on exploring and developing, and advancement of economic growth opportunities related to the transition to less carbon intense energy solutions; our focus on and expectations regarding increasing Source’s involvement in the provision of logistics services for other wellsite items; outlook for commodity prices and sales volumes; expectations respecting future conditions; revenue and profitability; expectations regarding funding for capital expenditures; and the availability of any additional future funding.

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 liquefied natural gas 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; labor 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, unfavorable, 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.

Any financial outlook and future-oriented financial information contained in this press release regarding prospective financial performance, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action based on management’s assessment of the relevant information that is currently available. Projected operational information contains forward-looking information and is based on a number of material assumptions and factors, as are set out above. These projections may also be considered to contain future oriented financial information or a financial outlook. The actual results of Source’s operations for any period will likely vary from the amounts set forth in these projections and such variations may be material. Actual results will vary from projected results. Readers are cautioned that any such financial outlook and future-oriented financial information contained herein should not be used for purposes other than those for which it is disclosed herein. The forward-looking information and statements contained in this document speak only as of the date hereof and have been approved by the Company’s management as at the date hereof. The Company does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.