Source Energy Services Reports Q3 2019 Results

TSX: SHLE

Calgary, Alberta - November 7, 2019 - (TSX:SHLE) Source Energy Services Ltd. ("Source") is pleased to announce its 2019 third quarter financial results.

HIGHLIGHTS

Despite the challenging operating environment, Source continued to address the competitive market and manage margins. Source also continues to focus on diversification opportunities as it continues to review and implement operating cost efficiencies.

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

- realized sand sales volumes of 550,762 metric tonnes ("MT") and sand revenue of $67.6 million;

- realized Adjusted EBITDA(1) of $12.0 million;

- distributed total volumes through Source's WCSB terminal network of 570,523 MT, including third party sand and other products;

- launched diversification initiatives including completion of a successful trial with a multinational operating company that will see Source deliver additional completion and production materials from our In Basin terminals;

- reduced operating and general and administrative costs by 4% due to cost reduction initiatives implemented in the third quarter of 2019;

- received $2.61 million in interim insurance proceeds related to the incident at Fox Creek subsequent to quarter end;

- realized gross margin of $7.7 million and Adjusted Gross Margin(1) of $18.7 million; and

- realized a net loss of $61.0 million or $(1.01) per share including non-cash pre-tax charges for impairments and asset write-down of $71.1 million.

Note:
(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) One MT is approximately equal to 1.102 short tons.
(2) The average Canadian to US dollar exchange rate for the three and nine months ended September 30, 2019 was $0.7573 and $0.7523, respectively (2018 - $0.7651 and $0.7766, respectively).
(3) Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS. See "Non-IFRS Measures" below.
(4) Reflects write-down of unutilized assets and a pre-tax impairment charge partially offset by a partial recovery of costs associated with the incident at Fox Creek. See "Q3 2019 Activities" below.
(5) Prior year operating expenses and general and administrative expenses have been reclassified to conform to current year presentation.

Q3 2019 ACTIVITIES

Sand volumes for the three months ended September 30, 2019 decreased by 25% compared to the third quarter of 2018 as Source continues to navigate a challenging operating environment and the continued slowdown in activity levels in the Western Canadian Sedimentary Basin ("WCSB"). Sand revenue decreased by 32% and total sales revenue decreased 35% compared to the three months ended September 30, 2018. The decrease was due to lower sand sales volumes combined with pricing pressure driven by the slowdown in activity levels. In the third quarter of 2019, there was a 10% decline in sand pricing, compared to the same quarter in 2018.

Wellsite solutions revenue decreased by $10.9 million, or 50%, for the three months ended September 30, 2019 compared to the third quarter of 2018, primarily due to decreased activity levels in the WCSB and a decrease in the distance traveled from terminals to wellsites for jobs trucked during the quarter. Sahara revenue also decreased, as the available fleet of eight units were 47% utilized for the three months ended September 30, 2019 compared to the 71% utilization rate of a five-unit Sahara fleet for the three months ended September 30, 2018, due to lower quarter-over-quarter completion activity levels.

Cost of sales decreased 39% in the quarter, primarily due to lower sales volumes and a reduction in production costs, offset in part by the impact of a weakening Canadian dollar on US denominated costs relative to the third quarter of 2018. Cost of sales was also favorably impacted by lower logistics costs due to efficiencies and optimization efforts realized.

Gross margin and Adjusted Gross Margin decreased by $8.9 million and $5.2 million, respectively, compared to the third quarter of 2018, with a 25% decline in sales volumes and a $13.74/MT reduction in sand sales price contributing to the decrease. These declines were partially offset by the impact of the IFRS accounting changes. No mine gate sales occurred in the third quarter of 2019, compared to an impact to gross margins of $2.30 per MT from these sales in the third quarter of 2018.

On a quarter-over-quarter basis, operating and general and administrative expenses for the three months ended September 30, 2019 were lower by 4% after normalizing for the treatment of selling costs absorbed in cost of sales for the same period in 2018. The reduction in costs is attributed to workforce optimization efforts implemented in the third quarter of 2019, offset in part by $0.1 million of severance costs associated with the changes.

For the three months ended September 30, 2019, Adjusted EBITDA was $12.0 million which was $4.9 million, or 29%, lower than the $16.9 million of Adjusted EBITDA generated in the three months ended September 30, 2018.

During the third quarter of 2019, Source completed a review of its assets and determined that its previously closed terminal facility located near Berthold, North Dakota no longer aligned with its strategic focus on its terminal network in the WCSB. The facility was written down to its residual land value and an expense of $9.7 million was recorded in other expense.

For the period ended September 30, 2019, Source also carried out an assessment of the recoverable value of its operations as a result of a challenging operating industry driven by continued weakened activity levels across the WCSB, capital markets that have abandoned the energy industry and an uncertain political and regulatory environment. A discounted cash flow analysis was completed using an updated weighted average cost of capital ("WACC"), with projections based on cash flow forecasts, trailing twelve-month earnings, historical experience and industry trends and forecasts. The analysis resulted in an impairment loss of $61.2 million recognized in the period. Despite the impairment, based on an updated WACC, Source believes the long-term opportunities for the Company in the WCSB, with improved egress and liquefied natural gas ("LNG") related activity, remain intact. Source believes its asset base is appropriately sized to support forecasted earnings into the future. Third quarter's increase in net loss of $61.0 million, compared to net loss of $1.0 million for the same period in the prior year, is primarily attributed to the write-down of assets and the impairment loss realized, as noted above.

In May 2019, an incident occurred during the construction of assets to provide additional storage capacity at the Company's Fox Creek terminal facility (the "Fox Creek Incident"). The Fox Creek Incident resulted in the dismantlement of all assets related to the additional storage units, as well as incremental costs associated with the recovery and cleanup related to the incident. 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. On October 28, 2019, the Company received $2.6 million in interim insurance proceeds relating to cleanup and recovery costs incurred, and it is expecting receipt of additional proceeds in late 2019 or early 2020.

On January 1, 2019, Source applied the new IFRS leasing standard, IFRS 16, using the modified retrospective approach under which comparative information was not restated. As a result, the Company's 2019 Adjusted Gross Margin and Adjusted EBITDA are not comparable to periods prior to January 1, 2019. Please refer to Note 2 of the condensed consolidated interim financial statements for the three and nine months ended September 30, 2019 for additional information on the impact to the Company's financial information.

BUSINESS OUTLOOK

As expected, Source continues to be impacted by the overall weakened activity levels across the WCSB, driven by uncertain economic and regulatory environments, fluctuating commodity pricing and condensate demand and constrained capital programs, as customers manage capital expenditure to closely align with available cash flow. Given the challenging operating environment, Source is expecting its fourth quarter activity to be similar to activity levels realized in the fourth quarter of 2018.

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 have decreased from 2018, direct sales contracts are expected to help Source maintain volume levels while continuing to grow its market share into 2020.

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. Source's terminal network and logistics capabilities have become a key component in the success of accelerated frac programs.

Beyond 2019, we remain optimistic about the longer-term industry prospects with anticipated improved pipeline and other transportation capacity and the longer-term impacts of increased demand for LNG on WCSB activity levels. Analysis of pipeline egress capacity, coal to natural gas power generation conversions and the potential for additional hydrocarbon shipments by rail support the Company's position that activity levels should substantially increase in the coming years. Source believes its direct sales contracts and proven service levels will enable Source to navigate a challenging operating environment until activity levels increase as a result of these projects. 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.

THIRD QUARTER CONFERENCE CALL

A conference call to discuss Source's third quarter financial results has been scheduled for 7:30 am MT (9:30 am ET) on Friday, November 8, 2019.

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 on Link for Registration:

Source Energy Services Q3 2019 Results Call Registration

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until December 8, 2019, using the following dial-in:

Playback NumberPlayback Passcode Toll-Free:1-800-319-64133745 

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 nine months ended September 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 beyond 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; expectations regarding the impact of direct-source contracts; and sand sales volumes and sand spot pricing in 2019.

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.