SHLE:CC - Source Energy Services Reports Q1 2022 Results and Other Matters

(TheNewswire)

Calgary, Alberta – TheNewswire - (May 5,2022) ( TSX:SHLE )

Source Energy Services Ltd. (“ Source ” or the “ Company ”) is pleased to announce its financial results forthe three months ended March 31, 2022.

Q1 2022 PERFORMANCE HIGHLIGHTS

Key achievements for the three months ended March 31, 2022 includedthe following:

-      realized sand sales volumes of 726,101 MT, a 12% increase fromthe first quarter of 2021, and sand revenue of $80.7 million, a 22%increase from the first quarter of 2021;

-      distributed 692,338 MT of proppants andchemicals through Source’s Western Canadian Sedimentary Basin(“WCSB”) terminal network;

-      realized a 13% increase in average realizedsand price, excluding revenue from mine gate sales volumes;

-      deployed Source’s first ever high-capacitydrive over Sahara unit, and deployed Source’s ninth Sahara unitin the US for a contract with a large exploration and production customer commencing in the second quarter;

-      achieved utilization for the Sahara fleet of72%, and added one new Sahara customer during the quarter;

-      repaid $7.5 million on the senior securedterm loan;

-      realized gross margin of $14.6 million andAdjusted Gross Margin (1) of $20.4 million;

-      reported net loss of $6.6 million;

-      realized Adjusted EBITDA (1) of $14.2million, a 12% increase from the first quarter of 2021; and

-      subsequent to quarter end, closed a transaction withCanadian Silica Industries (“CSI”) to assume operations of CSI’sPeace River frac sand facility which will complement Source’sNorthern White proppant resources.

Note :

(1) Adjusted Gross Margin (including on a per MT basis) andAdjusted EBITDA are not defined under IFRS, refer to ‘Non-IFRSMeasures’ below. Fo r additional information and reconciliations to measuresrecognized by IFRS, please refer to Source’s MD&A availableonline a t www.sedar.com.

RESULTS OVERVIEW

(1) One MT is approximatelyequal to 1.102 short tons.

(2) The average Canadian to United States (“US”) dollar exchange rate for the three months ended March 31, 2022 was $0.7898 (2021 - $0.7899).

(3) Adjusted EBITDA andAdjusted Gross Margin (including on a per MT basis) are not definedunder IFRS, refer to ‘Non-IFRS Measures’ below. For additional information andreconciliations to measures recognized by IFRS, please refer toSource’s MD&A available online at www.sedar.com.

Q1 2022 RESULTS

Sustained strength in oil and gas commodity prices continued to buoystrong activity levels in the WCSB, generating $80.7 million of sandrevenue, an increase of 22%, over the first quarter of 2021. Highersand revenue generated was attributable to a 12% increase in sandsales volumes and a 13% increase in average realized sand price, or$13.66 per MT, excluding the impact of mine gatesand sales volumes, compared to the first quarter last year. Strong industry activity levels for the quarterdrove a 141% increase in spot sales volumes on a quarter-over quarterbasis, which benefited the average sand price realized, as spot salesprices improved significantly.

During the first quarter, cost of sales, excluding depreciation, wasimpacted by higher costs for transportation and freight, due toincreased prices for fuel and a tighter trucking market, as well asterminal mix changes, compared to the same period last year. Thesecosts were partially offset by Source’s continued focus onstreamlining production, as improved production efficiencies mitigatedcost pricing pressure realized during the quarter.

Excluding gross margin from mine gate volumes, Adjusted Gross Marginwas $28.54 per MT, favorably impacted byimproved spot market pricing and continued production efficiencies.Compared to the first quarter last year, Adjusted Gross Margin for the first quarter of 2022 did notbenefit from proceeds from the Canada Emergency Wage Subsidy (“CEWS”) program, a favorable property taxadjustment or higher deferred terminal revenue. Excluding these itemsin the first quarter of 2021, the first quarter 2022 Adjusted GrossMargin per MT increased by 6.5% when compared to 2021. For the threemonths ended March 31, 2022, Adjusted Gross Margin per MT increased by80% compared to the fourth quarter of 2021. Gross margin was favorablyimpacted by lower cost of sales - depreciation realized, attributed tolower rates of inventory depreciation per MT relative to the firstquarter last year.

Higher selling costs, attributed to increased royalty expense,combined with no proceeds from the CEWS program (compared to $0.1million for 2021), drove higher operating expense for the first threemonths of 2022, compared to the same period last year, while general and administrative expense was slightly lower ona quarter-over-quarter basis. Adjusted EBITDA was $14.2 million forthe first quarter of the year, a reflection ofthe strong sand sales volumes and sand sales pricing realized,partially offset by the unfavorable impact of higher costs incurredfor diesel and freight during the quarter.

Peace River Transaction

In April 2022, Source entered into a transaction with CSI to assumeoperation of its Peace River frac sand facility. The frac sandfacility adds approximately 400,000 MT of annual production capabilityto Source’s existing production capabilities, and consolidatesSource’s adjacent mineral resource exploration rights with theproduction facility. The transaction complements Source’s existingproduct and service offerings.

Liquidity and Capital Resources

The Company has a banking operating facility, comprised of an assetbacked loan facility (“ABL”), a standby letter of Credit Facilityand a senior secured term loan (collectively, the “CreditFacility”). As of March 31, 2022, Source had $24.0 million drawnunder its ABL facility. The Credit Facility was also being used tosupport $9.8 million of letters of credit, leaving $16.2 million ofavailable liquidity. Source is subject to externally imposed capitalrequirements for its Credit Facility and as of March 31, 2022, Sourceand its subsidiaries were compliant with all covenants of its creditfacility. Source is focused on reducing its debt levels in 2022.

Source’s capital expenditures for the first quarter of 2022 were$2.0 million, an increase of $0.7 million compared to the same periodlast year. The increase in expenditures for maintenance and sustainingcapital was primarily related to higher expenditures associated withoverburden removal for mining operations and the Sahara unitconfiguration. Growth capital expenditures for the quarter includedcosts related to assessments and the drilling program at the PeaceRiver mine, as well as the completion of Source’s ninth Sahara unit,compared to the first quarter last year.

ESG UPDATE

Source is committed to operating in a sustainable manner and worksclosely with its stakeholders to go above and beyond currentregulatory requirements through initiatives such as voluntaryenrollment with the Department of Natural Resources Sustainable GrowthProgram and Managed Forest Program, as well as Source’s productionwater recycling process. Source is continually looking to implementefficiencies to lessen the impact of Source’s activities on theenvironment and specifically to reduce greenhouse gas emissions, andhas several additional initiatives currently underway at itsprocessing and terminal facilities to further reduce Source’soperational emissions.

Source is currently finalizing the results of its annual environment,social and governance (“ESG”) performance, which will benchmarkSource’s 2022 ESG performance relative to the SustainabilityAccounting Standards Board framework. Source’s 2022 ESG report isexpected to be released in the second quarter of 2022.

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

BUSINESS OUTLOOK

With increased industry activity levels across North America, fracsand supply and demand fundamentals have improved and are expected toremain tight for 2022. These fundamentals, coupled with Source’sleading service offerings and logistics capabilities, have translatedinto meaningful pricing gains in the spot market in 2022, a trend thatis expected to continue for the balance of the year. Despite increased activity levels as industry demand outpacessupply growth, Source’s sand sales volumes through the first quarterwere somewhat slower than anticipated as customer programs were pushedout due to delays in having pads ready to complete and the impacts ofcold weather. Source expects the expansion of capital programs willincrease through the balance of the year, asSource customers signal increasing activity levels and growingconfidence related to ongoing permitting issues in the northeasternBritish Columbia region, as well as continued strength in commoditypricing.

In the longer-term, Source believes the increased demand for naturalgas, driven by the conversion of coal-fired power generationfacilities, increased natural gas pipeline export capabilities andliquefied natural gas exports will drive incremental demand forSource’s services in the WCSB. Source continues to see increaseddemand from customers that are primarily focused on the development ofnatural gas properties in the Montney, Duvernayand Deep Basin. This trend is consistent with Source’s view thatnatural gas will be an important transitional fuel that’s criticalfor the successful movement to a less carbon intensive world.

In support of the move to a less carbon intensive world, Source hasbegun focusing on developing economic growth opportunities whichtransition from traditional fossil fuels to less carbon intense energysolutions. As a pathway to diversifying Source’s business, and toparticipate in the decarbonization of the economy, Source is advancingopportunities in its own operations as well as at the well site and atits terminals. Source also continues to focus on increasing itsinvolvement in the provision of logistics services for other itemsneeded at the wellsite in response to customer requests to expand itsservice offerings and to further utilize its existing Western Canadianterminals to provide additional services. Over the longer-term, it isanticipated that these opportunities will be a meaningful part ofSource’s business.

FIRST QUARTER CONFERENCE CALL

A conference call to discuss Source’s first quarter financialresults has been scheduled for 7:30 am MST (9:30 am ET) on Friday, May 6, 2022.

Interested analysts, investors and media representatives are invitedto register to participate in the call. Once you are registered, adial-in number and passcode will be provided to you via email. Thelink to register for the call is on the Upcoming Events page of our website and as follows:

Source Energy Services Q1 2022 Results Call

The call will be recorded and available for playback approximately 2hours after the meeting end time, until June 6, 2022, using thefollowing dial-in:

Playback Number

Toll-Free: 1-800-319-6413

Playback Passcode
8749

2022 ANNUAL MEETING OF SHAREHOLDERS

Source’s 2022 Annual Meeting of Shareholders (the “AGM”) will beheld on Friday, May 6, 2022 at 10:00 a.m. MST(12:00 pm ET) in a virtual, audio only, webcastformat. Shareholder engagement is extremely important to Source andall shareholders will have equal opportunity to ask questions. Beloware the details to attend the virtual-only AGM:

Log in: https://meetnow.global/MF4MCAX

If you experience technical or logistical issues related to accessingthe virtual AGM, technical support is available:

1-800-564-6253 (toll-free in Canada and the United States)

514-982-7555 (long distance charges may apply)

ABOUT SOURCE ENERGY SERVICES

Source is a company that focuses on the integrated production anddistribution of high quality frac sand, as well as the distribution ofother bulk completion materials not produced by Source. Sourceprovides its customers with an end-to-end solution for frac sandsupported by its Wisconsin and Peace River mines and processingfacilities, its Western Canadian terminal network, its “last mile”logistics capabilities and Sahara, a proprietary wellsite mobile sandstorage and handling system.

Source’s full-service approach allows customers to rely on itslogistics platform to increase reliability of supply and to ensure thetimely delivery of frac sand and other bulk completion materials atthe wellsite.

IMPORTANT INFORMATION

These results should be read in conjunction with each of Source’saudited consolidated financial statements for the three months endedMarch 31, 2022 and 2021, together with the accompanying notes (the“Financial Statements”) and its corresponding MD&A for suchperiods. The Financial Statements and MD&A and other informationrelating to Source, including the Annual Information Form (“AIF”),are available under the Company’s SEDAR profile at www.sedar.com . The Financial Statements and comparativestatements have been prepared in accordance with InternationalFinancial Reporting Standards (“IFRS”) as issued by theInternational Accounting Standards Board. Unless otherwise stated, allamounts are expressed in Canadian dollars.

NON-IFRS MEASURES

In this press release Source has used the terms Adjusted Gross Marginand Adjusted EBITDA, including per MT, which do not have standardizedmeanings prescribed by IFRS and Source’s method of calculating thesemeasures may differ from the method used by other entities and,accordingly, they may not be comparable to similar measures presentedby other companies. These financial measures should not be consideredas an alternative to, or more meaningful than, net income (loss) andgross margin, respectively, which represent the most directlycomparable measures of financial performance as determined inaccordance with IFRS. For additional information regarding non- IFRSmeasures, including their use to management and investors andreconciliations to measures recognized by IFRS, please refer to the‘Non-IFRS Measures’ section of the MD&A, which is availableonline at www.sedar.com and through Source’s website at www.sourceenergyservices.com .

FOR FURTHER INFORMATION PLEASE CONTACT:

Scott Melbourn
Chief Executive Officer
(403) 262-1312 (ext. 222)
investorrelations@sourceenergyservices.com

Derren Newell
Chief Financial Officer
(403) 262-1312 (ext. 233)
investorrelations@sourceenergyservices.com

FORWARD-LOOKING STATEMENTS

Certain statements contained in this press release constituteforward-looking statements relating to, without limitation,expectations, intentions, plans and beliefs, including information asto the future events, results of operations and Source’s futureperformance (both operational and financial) and business prospects.In certain cases, forward- looking statements can be identified by theuse of words such as “expects”, “estimates”,“anticipates”, “believes”, “continues”, “focus” orvariations of such words and phrases, or state that certain actions,events or results “may” or “will” be taken, occur or beachieved. Such forward-looking statements reflect Source’s beliefs,estimates and opinions regarding its future growth, results ofoperations, future performance (both operational and financial), andbusiness prospects and opportunities at the time such statements aremade, and Source undertakes no obligation to update forward-lookingstatements if these beliefs, estimates and opinions or circumstancesshould change unless required by applicable law. Forward-looking statements are necessarily based upon a numberof estimates and assumptions made by Source that are inherentlysubject to significant business, economic, competitive, political andsocial uncertainties and contingencies. Forward-looking statements arenot guarantees of future performance. In particular, this pressrelease contains forward-looking statements pertaining, but notlimited, to: our belief that the transaction with CSI complementsSource’s existing product and service offerings; Source's optimismthat the trend of large volumes of frac sand being sold with highermargins will continue; our focus on reducing debt levels in 2022;investments in production equipment generating increased yields inSource's sand processing activities; our belief that will have modestcapital expenditures in 2022 and beyond; Source’s search forefficiencies to implement in order to lessen the impact of Source’sactivities on the environment; expectations regarding our 2022 annualESG performance report; our expectation that frac sand supply anddemand will remain tight for 2022; our expectation that pricing gainsin the spot market will continue for the remainder of 2022; ourexpectation that the expansion of capital programs will increasethrough the balance of 2022; increased demand for natural gas,increased natural gas pipeline export capabilities and liquefiednatural gas exports will drive incremental demand for Source’sservices in the WCSB; industry activity levels, including thecontinued increase in demand from customers primarily focused on thedevelopment of natural gas properties in Montney, Duvernay and Deep Basin; the Company’s view that natural gasis an important transitional fuel for the successful movement to aless carbon intensive world; our focus on exploring and developing,and advancement of economic growth opportunities related to thetransition to less carbon intense energy solutions; our focus on andexpectations regarding increasing Source’s involvement in theprovision of logistics services for other wellsite items; outlook forcommodity prices and sales volumes; expectations respecting futureconditions; revenue and profitability; expectations regarding fundingfor capital expenditures; and the availability of any additionalfuture funding.

By their nature, forward-looking statements involve numerous currentassumptions, known and unknown risks, uncertainties and other factorswhich may cause the actual results, performance or achievements ofSource to differ materially from those anticipated by Source anddescribed in the forward-looking statements.

With respect to the forward-looking statements contained in this pressrelease assumptions have been made regarding, among other things:proppant market prices; future oil, natural gas and liquefied naturalgas prices; future global economic and financial conditions; futurecommodity prices, demand for oil and gas and the product mix of suchdemand; levels of activity in the oil and gas industry in the areas inwhich Source operates; the continued availability of timely and safetransportation for Source’s products, including without limitation,Source’s rail car fleet and the accessibility of additionaltransportation by rail and truck; the maintenance of Source’s keycustomers and the financial strength of its key customers; themaintenance of Source’s significant contracts or their replacementwith new contracts on substantially similar terms and that contractualcounterparties will comply with current contractual terms; operatingcosts; that the regulatory environment in which Source operates willbe maintained in the manner currently anticipated by Source; futureexchange and interest rates; geological and engineering estimates inrespect of Source’s resources; the recoverability of Source’sresources; the accuracy and veracity of information and projectionssourced from third parties respecting, among other things, futureindustry conditions and product demand; demand for horizontal drillingand hydraulic fracturing and the maintenance of current techniques andprocedures, particularly with respect to the use of proppants;Source’s ability to obtain qualified staff and equipment in a timelyand cost-efficient manner; the regulatory framework governingroyalties, taxes and environmental matters in the jurisdictions inwhich Source conducts its business and any other jurisdictions inwhich Source may conduct its business in the future; future capitalexpenditures to be made by Source; future sources of funding forSource’s capital program; Source’s future debt levels; the impactof competition on Source; and Source’s ability to obtain financingon acceptable terms.

A number of factors, risks and uncertainties could cause results todiffer materially from those anticipated and described hereinincluding, among others: the effects of competition and pricingpressures; risks inherent in key customer dependence; effects offluctuations in the price of proppants; risks related to indebtednessand liquidity, including Source’s leverage, restrictive covenants inSource’s debt instruments and Source’s capital requirements; risksrelated to interest rate fluctuations and foreign exchange ratefluctuations; changes in general economic, financial, market andbusiness conditions in the markets in which Source operates; changesin 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 stringentrequirements of and potential changes to applicable legislation,regulations and standards; the ability of Source to comply withunexpected costs of government regulations; liabilities resulting fromSource’s operations; the results of litigation or regulatoryproceedings that may be brought against Source; the ability of Sourceto successfully bid on new contracts and the loss of significantcontracts; uninsured and underinsured losses; risks related to thetransportation of Source’s products, including potential rail lineinterruptions or a reduction in rail car availability; the geographicand customer concentration of Source; the impact of climate changerisk; the ability of Source to retain and attract qualified managementand staff in the markets in which Source operates; labor disputes andwork stoppages and risks related to employee health and safety;general risks associated with the oil and natural gas industry, lossof 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 accountingstandards; the use and suitability of Source’s accounting estimatesand judgments; the impact of information systems and cyber securitybreaches; and risks and uncertainties related to COVID-19 or itsvariants, including changes in energy demand.

Although Source has attempted to identify important factors that couldcause actual actions, events or results to differ materially fromthose described in the forward-looking statements, there may be otherfactors that cause actions, events or results not to be asanticipated, estimated or intended. There can be no assurance thatforward-looking statements will materialize or prove to be accurate,as actual results and future events could differ materially from thoseanticipated in such statements. The forward-looking statementscontained in this press release are expressly qualified by thiscautionary statement. Readers should not place undue reliance onforward-looking statements. These statements speak only as of the dateof this press release. Except as may be required by law, Source expressly disclaims any intention orobligation to revise or update any forward-looking statements orinformation whether as a result of new information, future events orotherwise.

Any financial outlook and future-oriented financial informationcontained in this press release regarding prospective financialperformance, financial position or cash flows is based on assumptionsabout future events, including economic conditions and proposedcourses of action based on management’s assessment of the relevantinformation that is currently available. Projected operationalinformation contains forward-looking information and is based on anumber of material assumptions and factors, as are set out above.These projections may also be considered to contain future orientedfinancial information or a financial outlook. The actual results ofSource’s operations for any period will likely vary from the amountsset forth in these projections and such variations may be material.Actual results will vary from projected results. Readers are cautionedthat any such financial outlook and future-oriented financialinformation contained herein should not be used for purposes otherthan those for which it is disclosed herein. The forward-lookinginformation and statements contained in this document speak only as ofthe date hereof and have been approved by the Company’s managementas at the date hereof. The Company does not assume any obligation topublicly update or revise them to reflect new events or circumstances,except as may be required pursuant to applicable laws.

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