Source Energy Services Reports Q4 2021 and Year End Results

Calgary, Alberta (March 9, 2022) TSX: SHLE

Source Energy Services Ltd. (“Source” or the “Company”) is pleased to announce its financial results for the three and twelve months ended December 31, 2021.

2021 PERFORMANCE HIGHLIGHTS

Economic recovery in 2021 led to a rebound in the demand for crude oil and natural gas, driving strong commodity prices and increasing industry activity levels. As a result, Source approached record levels of activity for the year, nearly achieving its historical high for total sand sales volumes. Key achievements for the year ended December 31, 2021 included the following:

• realized sand sales volumes of 2,483,362 MT and sand revenue of $258.5 million;
• distributed 2,578,444 MT of proppants and chemicals through Source’s Western Canadian Sedimentary Basin (“WCSB”) terminal network;
• executed three new customer contracts and secured contract extensions with two major Montney exploration and production (“E&P”) companies;
• achieved multiple records including new service records that saw the largest daily and the largest monthly sand sales volume in Source’s history;
• increased utilization of the Sahara fleet by 25%, resulting in overall utilization for the year of 65%, including the deployment of a Sahara unit in the US through the entire fourth quarter of the year;
• realized gross margin of $39.3 million and Adjusted Gross Margin⁽¹⁾ of $60.4 million;
• reported net loss of $24.4 million, an improvement of $161.1 million from the same period last year; and
• realized Adjusted EBITDA⁽¹⁾ of $38.6 million.

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 additional information and reconciliations to measures recognized by IFRS, please refer to Source’s MD&A available online at www.sedar.com.

On the backdrop of an improved commodity price environment, there were clear indications that larger volumes of frac sand would again be sold with higher margins. This shift in our business environment has been a long time coming, and Source is optimistic that this trend will produce strong results in the near term.

RESULTS OVERVIEW

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 twelve months ended December 31, 2021 was $0.7935 and $0.7978, respectively (2020 - $0.7675 and $0.7454, respectively).
3. Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’ For additional information and reconciliations to measures recognized by IFRS, please refer to Source’s MD&A available online at www.sedar.com.

2021 RESULTS

Despite ongoing challenges created by the COVID-19 pandemic that continued through much of 2021, oil and natural gas prices strengthened through the year with benchmark oil prices hitting the highest levels since 2014. This resulted in improved activity levels in the WCSB, allowing Source to set new daily and monthly sales records, add new customers and realize a 26% increase in sales volumes over 2020, generating $258.5 million of sand revenue. Total revenue from wellsite solutions and terminal services grew 54% over last year, as the demand for greater volumes of frac sand over shorter periods of time highlighted Source’s logistics capabilities and the importance of Sahara units in customer frac programs.

Cost of sales, excluding depreciation, benefited from the continuation of certain operational cost reduction initiatives implemented by Source last year, as well as a focus on maintaining lower costs and improving production efficiencies. However, Source’s results for the year were impacted by lower proceeds from the CEWS program of $0.7 million, the impact of sales mix changes and higher costs for transportation and freight, due to increased prices for fuel and a tighter trucking market. These costs were partially offset by the impact of a stronger Canadian dollar on US dollar denominated costs.

Gross margin was favorably impacted by lower cost of sales - depreciation realized, attributed to a lower asset base resulting from the impairment recognized early last year and the benefit realized from the renegotiation of certain lease contracts in 2020, while Adjusted Gross Margin on a per MT was impacted by higher cost of sales, as discussed above. The majority of Source’s sales continue to be under long-term contracts; however, strong activity levels also drove higher spot sale activities for the year which benefited average sand price realized, partially offsetting the impact of a stronger Canadian dollar on revenue denominated in US dollars.

An increase in employee compensation expense, the direct result of improved activity levels leading to higher incentive compensation, combined with lower proceeds from the CEWS program, drove higher operating expense for 2021 compared to last year, while general and administrative expense remained relatively flat to 2020. Adjusted EBITDA was $38.6 million for 2021, a reflection of the strong sand sales volumes realized; however, Adjusted EBITDA was unfavorably impacted by the higher costs incurred for diesel and freight, particularly in the latter half of the year.

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 December 31, 2021, Source had $18.4 million drawn under its ABL facility. The Credit Facility was also being used to support $10.0 million of letters of credit, leaving $12.5 million of available liquidity. Source is subject to externally imposed capital requirements for its  Credit Facility and as of December 31, 2021, Source and its subsidiaries were compliant with all covenants of its Credit Facility. Source is focused on reducing its debt levels in 2022.

Capital expenditures for the fourth quarter of 2021 were $2.0 million, an increase from the same period last year driven by an increase in overburden removal for mining operations, resulting from increased sand sales volume. For the year ended December 31, 2021, capital expenditures increased by $2.8 million compared to the prior year, due to the higher overburden removal and expenditures for Sahara enhancements, providing increased unloading capacity. In 2021, Source also invested in production equipment that will generate increased yields in Source’s sand processing activities.

Source believes its previous investment in processing assets and logistics infrastructure will allow for modest capital expenditures through 2022 and beyond.

Q4 2021 RESULTS

Source sold sand volumes of 528,977 MT for the three months ended December 31, 2021, generating sand revenue of $55.0 million. Sand revenue was favorably impacted by higher sand volumes realized with other non-contracted E&P and pressure pumping customers, in addition to increased sand volumes resulting from new customer contracts, including the execution of a new contract in the fourth quarter of 2021. Average realized sand price, excluding mine gate sales and the impact of the strengthening Canadian dollar on US dollar denominated revenue, increased by $1.67 per MT for the fourth quarter compared to the same period last year.

Wellsite solutions revenue was $11.9 million for the fourth quarter of 2021, an increase of 24% or $2.3 million compared to the fourth quarter of 2020. The increase in wellsite solutions revenue was due to a 6% increase in sand volumes trucked to wellsite. Sahara-related revenue benefited from a 58% improvement in days utilized across the eight-unit fleet compared to the fourth quarter of 2020, including a fully utilized Sahara unit in the US.

Cost of sales, excluding depreciation, increased by $16.6 million for the three months ended December 31, 2021, compared to the same period last year, primarily driven by higher sand volumes realized. Cost of sales, excluding depreciation, was impacted by an increase in transportation and freight costs during the quarter, driven by higher volumes and increasing fuel costs, as noted above. Higher production costs were recorded during the fourth quarter of 2021, attributed to several factors including the impact of one-time repair costs and mine yield changes experienced during the year, as well as extreme weather during December which resulted in a slowdown in rail service, driving higher logistics costs and less operating time at production facilities, compared to the same period last year. A strengthening of the Canadian dollar on US dollar denominated components of cost of sales favorably impacted cost of sales for the quarter, partially offsetting the increases noted above. Lower proceeds received from the CEWS program of $0.3 million also increased cost of sales for the period, compared to the same period last year. The fourth quarter of 2020 benefited from warmer weather realized, resulting in increased efficiencies and lower energy costs for the period.

For the fourth quarter of 2021, total operating and general and administrative expense was $6.1 million, an increase of $1.7 million, or 39%, from the fourth quarter of 2020. Operating and general and administrative expense increased due to higher compensation resulting from increased activity levels and lower proceeds from the CEWS program. Selling costs increased due to higher royalty costs incurred driven by higher sand volumes sold compared to the fourth quarter of last year.

ESG OVERVIEW

Source is committed to operating in a sustainable manner, continually looking to implement efficiencies to lessen the impact of Source’s activities on the environment and specifically to reduce greenhouse gas emissions. Source 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.

Source has formally adopted the Sustainability Accounting Standards Board (“SASB”) framework that provides sector-specific guidelines against which Source will benchmark itself in environment, social and governance (“ESG”) categories. Late last year, Source completed its benchmarking and materiality assessment which will align the Company’s upcoming annual ESG performance report, expected to be released in spring of 2022, with the relevant SASB performance indicators.

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

BUSINESS OUTLOOK

The growing demand for oil and natural gas globally, coupled with the under investment in supply over the past few years, resulted in higher crude oil and natural gas prices in 2021 and into 2022. This operating environment allowed Source’s customers to generate strong 2021 cash flows which in turn is expected to result in expanded drilling and completion programs in 2022. With the increased activity levels across North America the frac sand supply and demand fundamentals have been, 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 early in 2022, a trend that is expected to continue for the balance of the 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 (“LNG”) 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 our 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 exploring and developing economic growth opportunities which transition from traditional fossil fuels to less carbon intense energy solutions. As a pathway to diversifying our business, and to participate in the decarbonization of the economy, Source is advancing opportunities in our own operations as well as at the well site and at our terminals. Source also 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 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.

UPDATED NI 43-101 TECHNICAL REPORTS FOR THE MINERAL PROJECTS IN WISCONSIN, UNITED STATES

Source is pleased to announce that it has filed with the applicable Canadian securities regulatory authorities updated National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) technical reports for each of its three mineral projects in Wisconsin, United States (collectively, the “Technical Reports”).

The Technical Reports have each been prepared with an effective date of December 31, 2021 and were updated as part of an annual assessment that accounts for conventional mining depletion of the mineral resources and include updated production records. The updated resources do not represent a 100% or greater change in the total mineral resources.

Mineral resources are not mineral reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the mineral resource will be converted into a mineral reserve. Source has not based its production decisions and ongoing mine production on mineral reserve estimates, preliminary economic assessments, prefeasibility studies or feasibility studies. As a result, there may be an increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery and historically projects without any mineral reserves have increased uncertainty and risk of failure.

Further details with respect to the scientific and technical information contained in this press release are available in the Technical Reports, which are available under the Company’s SEDAR profile at www.sedar.com.

FOURTH QUARTER CONFERENCE CALL

A conference call to discuss Source’s fourth quarter financial results has been scheduled for 7:30 am MST (9:30 am ET) on Thursday, March 10, 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:

Registering for the Results Conference Call

Source Energy Services Q4 2021 Results Call

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until April 10, 2022, using the following dial-in:

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

Playback Passcode: 8401

ABOUT SOURCE ENERGY SERVICES

Source is a company that focuses on the integrated 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 audited consolidated financial statements for the years ended December 31, 2021 and 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) and gross margin, respectively, which represent the most directly comparable 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 ‘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”, “estimates”, “anticipates”, “believes”, “continues”, “focus” 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 optimism that the trend of large volumes of frac sand being sold with higher margins will continue; our focus on reducing debt levels in 2022; investments in production equipment generating increased yields in Source's sand processing activities; our belief that will have modest capital expenditures in 2022 and beyond; Source’s search for efficiencies to implement in order to lessen the impact of Source’s activities on the environment; expectations regarding our 2022 annual ESG performance report; our expectation that strong cash flows among Source’s customers in 2021 will result in expanded drilling and completion programs in 2022; our expectation that frac sand supply and demand will remain tight for 2022; increased demand for natural gas, increased natural gas pipeline export capabilities and LNG exports will drive incremental demand for Source’s services in the WCSB; industry activity levels, including the 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; revenue and profitability; expectations regarding funding for capital expenditures; and the availability of any additional future funding.

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.