Source Energy Services Reports Q2 2022 Results

Calgary, Alberta (July 27, 2022) TSX: SHLE

Source Energy Services Ltd. (“Source” or the “Company”) is pleased to announce its financial results for the three and six months ended June 30, 2022.

SECOND QUARTER 2022 HIGHLIGHTS

Key achievements for the three months ended June 30, 2022, included the following:

• realized sand sales volumes of 800,136 MT, a 44% increase from the second quarter of 2021, and realized sand revenue of $93.5 million, a 61% increase from the second quarter of 2021;
• distributed 772,940 MT of proppants and chemicals through Source’s Western Canadian Sedimentary Basin (“WCSB”) terminal network;
• achieved an 18% increase in the average realized sand price, excluding revenue from mine gate sales volumes;
• closed a transaction with Canadian Silica Industries (“CSI”) to assume operations of CSI’s Peace River frac sand facility, complementing Source’s Northern White proppant resources;
• achieved utilization for the Sahara fleet of 69% and added a new global exploration and production (“E&P”) Sahara customer;
• realized gross margin of $16.5 million, and Adjusted Gross Margin⁽¹⁾ of $21.7 million;
• reported net income of $4.2 million; and
• realized Adjusted EBITDA⁽¹⁾ of $14.8 million, a 43% increase from the second quarter of 2021 when excluding proceeds received from the Paycheck Protection Program of US$2.1 million recognized last year.

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 reconciliations to measures recognized by IFRS. For additional information, 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 and six months ended June 30, 2022, was $0.7832 and 0.7865, respectively (2021 - $0.8142 and 0.8019, respectively).
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 reconciliations to measures recognized by IFRS. For additional information, please refer to Source’s MD&A available online at www.sedar.com.

Q2 2022 RESULTS

Source generated $93.5 million of sand revenue during the second quarter, an increase of 61% over the same period in 2021 and an increase of 16% over the first quarter of 2022. This is the first time since 2018 where second quarter activity levels exceeded those realized during the first quarter of the year, despite the impact of spring break-up. These results highlight the strength of activity levels that continue to prevail in the WCSB, driven by high commodity prices for oil and natural gas. The increase in sand sales revenue generated was also attributed to an 18% increase in average realized sand price, or $18.91 per MT, excluding the impact of mine gate sand sales volumes, compared to the second quarter last year, as sand supply tightens in the WCSB and sand sale prices trend higher.

During the second quarter, cost of sales, excluding depreciation, was impacted by higher costs for transportation and freight, due to increased prices for fuel and a continued constrained trucking market, compared to the same period last year. Cost of sales, excluding depreciation, was also impacted by increased costs for third party sand purchases, procured to ensure no customer supply interruptions as demand continues to increase. Through the second quarter, Source successfully maintained efficient production at its Wisconsin facilities, maintaining average costs while producing at anticipated levels despite continued cost pricing pressure through the quarter. Cost of sales was impacted by a weakening Canadian dollar on US denominated costs relative to the second quarter of 2021.

Excluding gross margin from mine gate volumes, Adjusted Gross Margin for the second quarter was $28.84 per MT, favorably impacted by improved spot market pricing and higher sand sales volumes. Compared to the same quarter last year, Adjusted Gross Margin per MT increased by 14% after adjusting for the impact of the weakening Canadian dollar and the benefit of proceeds from the Canada Emergency Wage Subsidy (“CEWS”) program, as well as certain production credits recorded last year. Gross margin was unfavorably impacted by higher cost of sales - depreciation realized, attributed to higher rates of inventory depreciation per MT relative to the second quarter last year.

Higher selling costs, the result of increased royalty expense resulting from increased activity levels, and higher repairs and maintenance costs for rail cars drove higher operating expense for the second quarter of 2022, compared to the same period last year. General and administrative expense was higher on a quarter-over-quarter basis, primarily attributed to the reversal of a bad debt provision that occurred in the second quarter of 2021. Adjusted EBITDA was $14.8 million for the second quarter, a reflection of the strong sand sales volumes and sand sales pricing realized, partially offset by the unfavorable impact of higher costs incurred for fuel and freight, and the weakening of the Canadian dollar 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, which adds approximately 400,000 MT of annual production capability to Source’s existing production capabilities. The transaction consolidates Source’s adjacent mineral resource exploration rights with the production facility and complements Source’s existing product and service offerings. The facility was not fully operational during the quarter, as Source focused on operational reviews and maintenance to ensure the facilities will operate at a standard consistent with the Company’s Wisconsin processing facilities. The benefits from the Peace River expenditures will be realized in future quarters when the facility is fully operational.

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 June 30, 2022, Source had $28.9 million drawn under its ABL facility. The Credit Facility was also being used to support $10.1 million of letters of credit, leaving $11.8 million of available liquidity. Source is subject to externally imposed capital requirements for its Credit Facility and as of June 30, 2022, Source and its subsidiaries were compliant with all covenants. Source remains focused on reducing its debt levels in 2022.

Over the last several quarters, the Company has experienced a rapid increase in demand and achieved levels of activity that exceed pre-pandemic operating levels. The Company’s existing Credit Facility (as defined above) predates this period of high demand and was negotiated during a period of extreme uncertainty in the oil and gas industry. While Source has more than adequate liquidity available on its ABL facility, the current Credit Facility structure contains restrictive covenants which limit Source’s flexibility and ability to appropriately operate at the high levels demanded by activity in the WCSB. To address this, Source decided to seek alternative financing and replace the current Credit Facility. To that end, the Company has executed a non-binding term sheet with a new financial institution, and is working with its existing lenders and the new institution, in order to complete the refinancing in an expedited manner. Due to the timing of the expected closing of the refinancing, Source is seeking, and expects to receive, consent from its current lenders which will be required to complete the closing in an orderly manner.

Source’s capital expenditures for the second quarter of 2022 were $4.1 million, an increase of $2.8 million compared to the second quarter last year. The increase in capital expenditures for the period was primarily due to maintenance and sustaining capital, related to a $0.6 million increase in costs associated with overburden removal for mining operations and the Peace River facility maintenance, as noted above. Growth capital expenditures were lower, on a quarter over quarter basis, due to the Sahara unloading capacity enhancements completed in the second quarter of last year. Source disposed of excess production equipment during the second quarter, realizing proceeds of $1.2 million.

ESG UPDATE

Source has completed its annual environment, social and governance (“ESG”) performance assessment, which benchmarks Source’s 2021 ESG performance relative to the Sustainability Accounting Standards Board framework and the recommendations of the Task Force on Climate-related Financial Disclosures. Source’s 2022 ESG report has been released and is available at www.sourceenergyservices.com.

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. Thus far in 2022, Source has reclaimed eight acres of land adjacent to its Wisconsin processing facilities, part of Source’s continued effort to return the land to a thriving vegetative state. 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.

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 2022, a trend that is expected to continue for the balance of the year and into 2023. These pricing increases have led to improved gross margins in the spot market over 2021 levels which are expected to continue into 2023. While contracted customer margins have dragged down overall gross margin, it is expected there will be significant growth in these margins as current contracts expire over the next few quarters. After a somewhat slower than expected first quarter, the second quarter was very strong, especially considering this is the traditional spring break-up quarter. Looking ahead, it is anticipated that the third quarter will have higher than usual activity levels during what is historically a very busy quarter in the industry. 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 north-eastern 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.

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 28, 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:

Click Below to Register for the Results Conference Call:

Source Energy Services Q2’22 Results Call

Results Conference Call Playback Access:

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until August 28, 2022. Below are the details to access the call playback:

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

Playback Passcode: 9152

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 and six months ended June 30, 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.

Reconciliation of Adjusted EBITDA to Net Income (Loss)

Note:

1. Includes expenses related to the incident at the Fox Creek terminal facility and one-time retirement payments.

Reconciliation of Gross Margin to Adjusted Gross Margin

For additional information regarding non-IFRS measures, including their use to management and investors, their composition and discussion of changes to either their composition or label, if any, 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”, “intends”, “anticipates”, “believes”, “continues”, “plans”, “projects”, “focus”, “trends” 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: the strength of activity levels continuing to prevail in the WCSB; tightening of sand supply in the WCSB and trends of sand sales prices; our focus on reducing debt levels in 2022; our expectation that benefits from the Peace River expenditures will be realized in future quarters; Source’s expectation that it will receive the consent required from its current lenders to close the refinancing of its existing Credit Facility; Source’s efforts to return the land of a thriving vegetative state; our search for efficiencies to implement in order to lessen the impact of Source’s activities on the environment; our expectation that frac sand supply and demand fundamentals will remain tight for 2022; our expectation that pricing gains will continue for the remainder of 2022 and into 2023; our belief that gross margins in the spot market, currently over 2021 levels, will continue into 2023; our expectation that there will be significant growth in customer margins over the next few quarters; our expectation that the third quarter will have higher than usual activity levels and the expansion of capital programs will increase through the balance of 2022; consumers’ increasing activity levels and confidence in connection with permitting issues in northeastern British Columbia; 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; 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; and revenue and profitability.

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.