Source Energy Services Reports Q3 2022 Results

Calgary, Alberta (November 8, 2022) TSX: SHLE

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

THIRD QUARTER 2022 HIGHLIGHTS

Key highlights for the three months ended September 30, 2022, included the following:

• realized sand sales volumes of 753,233 MT and sand revenue of $97.2 million, a 22% increase from the third quarter of 2021;
• achieved a 28% increase in average realized sand price, excluding revenue from mine gate sales volumes;
• distributed 691,242 MT of proppants and chemicals through Source’s Western Canadian Sedimentary Basin (“WCSB”) terminal network;
• achieved a record for the highest number of days on site for the Sahara fleet in Canada;
• recorded utilization of 87% for the quarter and added two new Sahara customers;
• reported $30.5 million of available liquidity on its asset backed loan (“ABL”) facility at the end of the quarter, reflecting a reduction of total net debt outstanding of $17.2 million;
• realized gross margin of $16.4 million and Adjusted Gross Margin⁽¹⁾ of $21.1 million;
• reported net income of $5.9 million;
• realized Adjusted EBITDA⁽¹⁾ of $16.3 million, excluding the $9.7 million realized gain on the settlement of outstanding future forward exchange contracts during the quarter, a 44% increase from the third quarter of 2021; and
• subsequent to quarter end, closed a transaction for a new $75.4 million (US$55.0 million) credit facility.

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 nine months ended September 30, 2022, was $0.7659 and 0.7795, respectively (2021 – $0.7937 and 0.7992, respectively). Refer to ‘Q3 2022 Results’ for additional information.
(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.

Q3 2022 RESULTS

Source generated $97.2 million of sand revenue during the third quarter, an increase of 22% over the same period in 2021 and an increase of $3.6 million over the second quarter of 2022. This is the highest quarterly sand revenue generated since the third quarter of 2018, and reflects improved sand sales pricing primarily due to improved industry dynamics. As a result, Source realized a 28% increase in average realized sand price, or $29.64 per MT, excluding the impact of mine gate sales, compared to the third quarter last year, favorably impacting sand revenue. Commodity prices for oil and natural gas remain strong, resulting in sustained high levels of activity through the third quarter in the WCSB.

During the third quarter, cost of sales, excluding depreciation, was impacted by higher costs for transportation and freight, due to increased prices for fuel compared to the same period last year and additional costs for third party sand purchases, procured to ensure no customer supply interruptions resulting from increased customer demand. Despite continued cost pricing pressure, Source was able to mitigate certain cost increases through increased efficiencies at its Wisconsin facilities and pricing increases. Cost of sales was impacted by a weakening Canadian dollar on US denominated costs relative to the third quarter of 2021. The impact of the weaker Canadian dollar was offset in Adjusted EBITDA by gains realized on foreign currency forward contracts settled during the quarter.

Gross margin increased by $3.6 million for the quarter. Excluding gross margin from mine gate volumes, Adjusted Gross Margin for the third quarter was $30.27 per MT, favorably impacted by improved customer and spot market pricing, as well as strong sand sales volumes. Compared to the same quarter last year, Adjusted Gross Margin per MT increased by 55% 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. The weakening of the Canadian dollar negatively impacted Adjusted Gross Margin by approximately $2.07 per MT; however, this impact was offset by the settlement of foreign currency forward contracts settled during the quarter (see below).

Higher repairs and maintenance costs were offset by lower people costs realized, due to lower variable compensation expense recorded, resulting in slightly lower total operating expense for the third quarter of 2022 compared to the same period last year, despite no proceeds received from the CEWS program during the current quarter. General and administrative expense was also lower on a quarter-over-quarter basis, primarily attributed to lower selling and administrative costs driven by a lower provision for bad debt expense.

After excluding the realized gain on the settlement of foreign exchange forward contracts of $9.7 million, Adjusted EBITDA was $16.3 million for the third quarter, a reflection of the strong sand sales volumes and sand sales pricing realized despite the unfavorable impact of higher costs incurred for fuel and freight. The weakening of the Canadian dollar negatively impacted Adjusted EBITDA by $2.0 million during the quarter, which was offset by $2.1 million realized from the settlement of normal course foreign exchange contracts executed during the quarter.

In addition to the normal course foreign exchange contracts settled, as noted above, Source is renegotiating certain of its customer contracts to be denominated in US dollars which will further reduce its exposure to US dollar fluctuations. As a result of rebalancing US dollar denominated revenue, combined with the new ABL facility (see below) which is denominated in US dollars, Source wound up its outstanding foreign exchange forward contracts prior to September 30, 2022, resulting in a realized foreign exchange gain of $9.7 million during the quarter.  Approximately $3.3 million of this realized foreign exchange gain is related to foreign exchange forward contracts that were expiring in the fourth quarter of 2022, with $6.4 million of the realized gain related to contracts due to mature in 2023.

New Senior Credit Facility

On October 14, 2022, the Company closed a new revolving asset backed senior credit facility (the “new ABL”) with a syndicate comprised of FGI Worldwide LLC and CIT Northbridge Credit, as advised by CIT Asset Management LLC, providing access to funding of approximately $75.4 million (US$55.0 million). The new ABL provides Source with a lower cost of borrowing and less restrictive covenants which will allow Source to focus on the generation of free cash flow and the reduction of debt.

Upon closing of the new ABL, Source completed the August 15, 2022 cash interest payment for the Notes and repaid all outstanding draws on the ABL and senior secured term loan. For additional information, including the financial covenants of the new ABL facility, refer to ‘Long-term Debt’ within Source’s MD&A.

Liquidity and Capital Resources

Note:
(1)    Adjusted EBITDA and Free Cash Flow are not defined under IFRS, refer to ‘Non-IFRS Measures’ below. The reconciliation to the comparable IFRS measure can be found in the table below.

At September 30, 2022, Source had $30.5 million of available liquidity on its ABL facility. Source generated Free Cash Flow of $14.5 million for the three months ended September 30, 2022, compared with $4.5 million generated for the third quarter of 2021. The increase was driven primarily by a $5.0 million improvement in Adjusted EBITDA (excluding the gain realized from the settlement of outstanding future foreign exchange forward contracts of $9.7 million). This increase was partially offset by capital expenditures for the quarter, largely due to the maintenance work performed at the Peace River facility. Free Cash Flow was negatively impacted by higher interest expense incurred for the ABL facility, reflecting higher average draws outstanding prior to the end of the quarter and an increase in the variable interest rates for the facility.

Source’s capital expenditures for the third quarter of 2022 were $4.5 million, an increase of $2.6 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 $0.2 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 quarter-over-quarter basis, due to the Sahara unloading capacity enhancements and the purchase of production equipment to improve yields completed in the third quarter of 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. Thus far in 2022, Source has reclaimed eleven 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.

As an active member of its community, Source supports initiatives that align with its corporate values, support the charitable efforts of our employees and are located close to its operations. Source supports community needs in the areas of Arts and Culture, Education, Environment, Health and Wellness and Sports and Recreation through financial donations and employee volunteer hours.

For more information, Source’s most recent ESG report is available at www.sourceenergyservices.com.

BUSINESS OUTLOOK

Sustained levels of industry activity continue to favorably impact frac sand supply and demand fundamentals which are expected to remain favorable through 2023. These fundamentals, coupled with Source’s leading service offerings and logistics capabilities, have translated into meaningful pricing gains and improved gross margins in 2022, particularly in the spot sand sales market, a trend that is expected to continue through 2023. Source’s main customer contracts will expire over the next few quarters, with contract renewals creating opportunity for further growth in margins. Source customers have signaled growing confidence related to operating in the northeastern British Columbia region. Operations in this geological region require larger volumes of sand per well and, combined with Source’s terminal network footprint, would support strong activity levels for Source next year.

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 is 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.

THIRD QUARTER CONFERENCE CALL

A conference call to discuss Source’s third quarter financial results has been scheduled for 9:00 am MST (11:00 am ET) on Wednesday, November 9, 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 Q3’22 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 December 9, 2022. Below are the details to access the call playback:

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

Playback Passcode: 9547

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 nine months ended September 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 Free Cash Flow, 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 and Free Cash Flow 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”, “believes”, “continues”, “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: 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 and specifically to reduce greenhouse gas emissions; our expectation that frac sand supply and demand fundamentals will remain favorable through 2023; our expectation that meaningful pricing gains will continue through 2023; our belief that improved gross margins, particularly in the spot sand sales market, will continue through 2023; our expectation that contract renewals over the next few quarters creates opportunity for further growth in margins; consumers’ increasing activity levels and confidence in connection with operating in northeastern British Columbia, and our expectation that operations in such geological region would support strong activities for Source next year; 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 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.