Source Energy Services Reports Q2 2021 Results

Calgary, Alberta (July 28, 2021) TSX: SHLE

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

SECOND QUARTER 2021 HIGHLIGHTS

For the three months ended June 30, 2021, Source achieved the following:

• grew market share in the Western Canadian Sedimentary Basin (“WCSB”), realizing sand sales volumes of 557,208 metric tonnes (“MT”) and sand revenue of $58.1 million;
• executed a new customer contract for proppant, Sahara and logistics services with a key exploration and production (“E&P”) company and secured contract extensions with two major E&P companies, all operating in the Montney;
• achieved utilization of 76% for the Sahara fleet currently operating in Canada;
• realized gross margin of $11.7 million and Adjusted Gross Margin⁽¹⁾ of $16.2 million;
• realized Adjusted EBITDA⁽¹⁾ of $12.9 million and a net loss of $0.9 million;
• achieved a strong liquidity position, with $3.0 million of cash on hand and no draws on the asset backed loan (“ABL”) facility at the end of the quarter; and
• obtained full forgiveness for US$2.1 million of outstanding obligations related to proceeds received in 2020 from the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the “PPP Loan”).

Note:

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

Notes:

1. One MT is approximately equal to 1.102 short
2. The average Canadian to United States (“US”) dollar exchange rate for the three and six months ended June 30, 2021 was $0.8142 and $0.8019, respectively (2020 - $0.7219 and $0.7325, respectively).
3. Prior year amounts have been restated to reflect the 12:1 share consolidation completed in
4. Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’

Q2 2021 RESULTS

Customers continued to focus on improving frac efficiencies with higher volumes being required over shorter periods of time. Brad Thomson, CEO, commented,

“Frac efficiency has become a common theme for the leading operators in the WCSB. These companies have come to appreciate that optimal frac efficiency requires a combination of reliable frac sand supply, specialized logistics capabilities and operational precision at the wellsite. This plays to Source’s strength in that we have the unique ability to enable our customers to achieve these requirements in the most active portions of the Montney and the Duvernay. In July, we set new operating records that saw the largest daily sand sales volume in the history of Source, and also set daily sand throughput records at two of our terminal facilities.”

Rebounding global economies and energy demand drove a third consecutive quarter of higher oil prices and stronger natural gas pricing, favorably impacting activity levels in the WCSB during the second quarter. Source realized strong sand sales volumes for the period, generating $58.1 million of sand revenue.

Wellsite solutions revenue was $14.0 million for the second quarter. As activity levels are improving in the WCSB, customers are demanding greater volumes of frac sand over shorter periods of time. Source’s ability to consistently meet this challenge with its logistics capabilities was highlighted in the quarter, as dispatch services continued to execute innovative solutions to meet increased customer demand. The Sahara units remain a key component in the frac programs of many of Source’s customers resulting in the seven Sahara units located in Canada achieving 76% utilization for the quarter, with Sahara demand remaining strong for the balance of this year.

Gross margin was favorably impacted by Source’s focus on maintaining lower costs and improving production efficiencies. Adjusted Gross Margin benefited from strong volumes realized in the quarter and, on a per MT basis, improved by 3% compared to the first quarter of the year. While substantially all of Source’s sales in the quarter were under long-term contracts, the increase in activity levels in the quarter also resulted in higher spot sales. This increased the average sand price realized in the quarter relative to the first quarter of the year.

Adjusted EBITDA was $12.9 million for the quarter, reflecting strong sand sales volumes and a continued focus on maintaining lower operating costs. Adjusted EBITDA also benefited from forgiveness for the US$2.1 million outstanding on the PPP Loan, received in the second quarter of 2020, as well as total proceeds of $0.3 million received from the Canada Emergency Wage Subsidy program during the period.

Liquidity and Capital Resources

As of June 30, 2021, Source had cash on hand of $3.0 million and $nil drawn under its ABL facility. Source’s credit facility was being used to support $9.6 million of letters of credit, leaving $28.8 million of available liquidity. Source is subject to externally imposed capital requirements for its credit facility and as of June 30, 2021, Source and its subsidiaries were compliant with all of the covenants of its credit facility.

Previous investment in Source’s processing and logistics infrastructure allowed modest capital expenditures in the second quarter. Capital expenditures were $1.3 million for the period, comprised primarily of overburden removal for mining operations. Additional expenditures were incurred for Sahara enhancements, providing increased unloading capacity, and an investment in production equipment that will generate increased yields in Source’s sand processing activities.

ESG OVERVIEW

Earlier this year, Source published its 2021 ESG report. Source is committed to operating in a sustainable manner, continually looking to implement efficiencies which will lessen the impact of Source’s activities on the environment and specifically to reduce greenhouse gas emissions. Source’s objective to go above and beyond current regulatory requirements is demonstrated by Source’s voluntary enrollment with the Department of Natural Resources Sustainable Growth Program and Managed Forest Program, Source’s recycling of production water and Source’s participation in the Wetlands Hydrology Program. Source has formally adopted a framework from the Sustainability Accounting Standards Board that provides sector-specific guidelines against which Source will benchmark itself in the relevant areas.

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

BUSINESS OUTLOOK

The strength in crude oil and natural gas prices have allowed Source’s customers to generate strong cash flows and the Company believes, given the current commodity price outlook, that customers will increase capital expenditures in the latter half of 2021, as well as expand drilling and completion programs in 2022.

Source also continues to be optimistic about industry prospects and in particular, prospects for natural gas development. This growth in natural gas development will be fueled by the increased demand for WCSB natural gas driven by liquefied natural gas (“LNG”) export projects that are currently under construction, the conversion of coal- fired power generation facilities to natural gas and increased gas pipeline capacity. Source also sees natural gas as an important transitional fuel that is readily available to support the movement to a less carbon intensive world.

Second quarter results, coupled with its new and extended contracts, affirmed Source’s terminal network and logistics capabilities are a key factor in the success of accelerated frac programs in the Montney and the Duvernay. In July 2021, Source achieved a new record that saw the largest daily sand sales volume in Source’s history, as well as daily sand sales records at two of Source’s terminal facilities. Source is ideally positioned to serve the increase in demand for frac sand and logistics services as activity levels continue to strengthen.

Source continues to focus on increasing its involvement of the provision of logistics services 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, it is anticipated that these new terminal activities will be a meaningful part of Source’s business.

SECOND QUARTER CONFERENCE CALL

A conference call to discuss Source’s second quarter financial results has been scheduled for 7:30 am MST (9:30 am ET) on Thursday, July 29, 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 Q2 2021 Results Call

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until August 29, 2021, using the following dial-in:

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

Playback Passcode: 7288

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, 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 unaudited condensed consolidated interim financial statements for the three and six months ended June 30, 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”, “continues”, “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 WCSB natural gas driven by LNG export projects; anticipated improvements in pipeline transportation capacity, and the conversion of coal fired power generation facilities to natural gas; the Company’s view that natural gas is an important transitional fuel for the movement to a less carbon intensive world; outlook for operations and sales volumes; expectations respecting future conditions; revenue and profitability; industry activity levels; the impact of COVID-19 or its variants 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 availability of any additional 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 LNG 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.