Source Energy Services Reports Q2 2019 Results

TSX: SHLE

Calgary, Alberta - TheNewswire - (August 1, 2019) (TSX:SHLE)

Source Energy Services Ltd. ("Source") is pleased to announce its 2019 second quarter financial results.

HIGHLIGHTS

Source achieved the following results for the three months ended June 30, 2019:

- realized sand sales volumes of 504,907 metric tonnes ("MT") and sand revenue of $64.7 million;

- distributed total volumes through Source's WCSB terminal network of 522,281 MT, including third party sand and other products;

- successfully renewed the outstanding credit facilities, now maturing December 8, 2021;

- reduced operating costs, leading to an 18.7% increase in gross margin/MT and an 11.7% increase in adjusted gross margin/MT compared to the first quarter of 2019;

- realized gross margin of $8.9 million and Adjusted Gross Margin(1) of $19.7 million; and

- realized Adjusted EBITDA(1) of $12.6 million and net loss of $19.0 million or $(0.31) per share.

Note:

1. (1)Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, see "Non-IFRS Measures" below.

RESULTS OVERVIEW

Notes:

1. (1)One MT is approximately equal to 1.102 short tons.
2. (2)The average Canadian to US dollar exchange rate for the three and six months ended June 30, 2019 was $0.7476 and $0.7499, respectively (2018

- $0.7745 and $0.7824, respectively).

1. (3)Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS. See "Non-IFRS Measures" below.
2. (4)Includes costs associated with the Fox Creek Incident. See "Q2 2019 Activities" below.
3. (5)Prior year operating expenses and general and administrative expenses have been reclassified to conform to current year presentation.

Q2 2019 ACTIVITIES

The second quarter of 2019 was a traditional spring break-up quarter, particularly when compared to the second quarter of 2018, which was Source's busiest quarter of 2018. The second quarter of 2019 had slower activity levels in April and May and was also impacted by the Fox Creek Incident (see below). Activity levels picked up dramatically in June, driven by contracted customers who were focused on increasing their completion program efficiencies which required delivery of greater volumes of completion materials over shorter periods of time. This led to near record daily delivery levels during the latter part of the month. Gross margins and adjusted gross margins improved from the first quarter of 2019, due to the benefits of ongoing cost reduction initiatives across the operations.

On May 7, 2019, an incident occurred with our construction contractors while on site during the construction of storage expansion assets at Source's Fox Creek site (the "Fox Creek Incident"). The Fox Creek Incident resulted in the fatalities of two site contract workers and our deepest sympathies, thoughts and prayers remain with the families and coworkers impacted by this tragedy. An investigation into the cause of the event is ongoing and is expected to continue for the near term. Source has filed an insurance claim for all losses related to the Fox Creek Incident.

The Fox Creek Incident led to the shutdown of the Fox Creek terminal until mid-June, at which time the original phase of the terminal was reopened, and full operations resumed. During the shutdown, Source estimates it incurred approximately 77,000 MT of lost sales and incremental costs related to the rescue and recovery operation and other operational issues totaling approximately $3.8 million. For safety reasons, Source dismantled all of the remaining expansion storage equipment which also resulted in the write-off of $10.1 million of fixed assets in the quarter. Since resuming operations, the Fox Creek terminal has been setting daily through-put records.

BUSINESS OUTLOOK

Source is expecting activity levels in the Western Canadian Sedimentary Basin ("WCSB") for the balance of 2019 to continue to be lower than 2018 reflecting continued spending conservatism by customers. Customer capital programs and demand for frac sand may also be impacted by factors over the balance of 2019, including commodity price fluctuations and condensate demand.

Exploration and production ("E&P") companies are now operating in manufacturing mode and they continue to buy frac sand directly. Source is fortunate to be supplying five significant E&P customers under these types of contractual arrangements. These contracted sales are in addition to sales to other E&P companies that wish to direct-source sand on a non-contract basis, as well as traditional sales to pressure pumping customers. While Source's total sales volumes will likely decrease from 2018, direct sales contracts are expected to help Source grow its market share through the balance of 2019.

In addition to the continued move towards direct-source contracts, Source has also seen E&P companies attempt to complete fracs over much shorter periods of time. In some cases, we are seeing the timelines for frac programs reduced by as much as 50%. In order to be successful executing on these accelerated programs, larger volumes of frac sand need to be available over shorter periods of time. The Source terminal network and Source's logistics capabilities have become a key component in the success of accelerated frac programs.

Beyond 2019, we're optimistic about the longer-term industry prospects with anticipated improved pipeline and other transportation capacity and the longer-term impacts of increased demand for liquefied natural gas ("LNG") on WCSB activity levels. Source is ideally positioned to serve the increase in demand for frac sand and logistics services as activity levels rebound. Source also 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 terminal services will be a meaningful part of its business.

SECOND QUARTER CONFERENCE CALL

A conference call to discuss Source's second quarter financial results has been scheduled for 7:30 am MT (9:30 am ET) on Friday, August 2, 2019.

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

Source Energy Services Q2 2019 Results Call Registration

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until September 2, 2019, using the following dial-in:

Playback NumberPlayback PasscodeToll-Free: 1-800-319-64133358

ABOUT SOURCE ENERGY SERVICES

Source is a logistics 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 interim financial statements for the three and six months ended June 30, 2019, and Source's audited consolidated financial statements for the year ended December 31, 2018, together with the accompanying notes (the "Financial Statements") and its corresponding management's discussion and analysis for such period (the "MD&A"). The Financial Statements and MD&A and other information relating to Source, including the Annual Information Form ("AIF"), is 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 ("IASB"). 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", "forecasts", "intends", "anticipates", "believes", "plans", "seeks", "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. 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: expectations regarding increased demand for and sales volumes of sand in 2019, expectations regarding improved egress and associated increased demand for LNG; expectations regarding the price of proppants and sensitivity to changes in such prices; outlook for operations and sales volumes; expectations respecting future competitive conditions; industry activity levels; industry conditions pertaining to the frac sand industry; drilling and well completion activity in 2019; sand sales volumes and sand spot pricing in 2019; and increased sand intensities for Canadian well completions.

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 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; and the use and suitability of Source's accounting estimates and judgments.

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.