SHLE:CC - Source Energy Services Reports Q1 2023 Results

(TheNewswire)

Calgary, AB - TheNewswire - May 4, 2023 - SourceEnergy Services Ltd. (“ Source ” or the“ Company ”) (TSX:SHLE) is pleased to announce its financial results for the three monthsended March 31, 2023.

Q1 2023 PERFORMANCE HIGHLIGHTS

Source achieved the following results for the first quarter of 2023:

• realized record sand sales volumes of 907,483 MT, thehighest quarterly sand sales volumes in Source’s history, and a 25%increase from the first quarter of 2022;

• achieved total revenue of $163.7 million, a 69%increase from the first quarter of 2022, and the highest quarterlyrevenue generated since the inception of Source;

• recorded utilization of 94% for the Canadian Saharafleet and 73% for the US Sahara fleet, and achieved a record for thehighest trucked volumes in Source history;

• realized gross margin of $31.8 million and AdjustedGross Margin (1) of $37.8million, increases of 118% and 86%, respectively, when compared to thesame period in 2022;

• reported net income of $7.9 million, a $14.5 millionimprovement from the $6.6 million net loss recognized in the firstquarter of 2022; and

• realized Adjusted EBITDA (1) of $27.6 million, a 94% increasefrom the first quarter of 2022.

Note :

1. Adjusted Gross Margin (including on a per MT basis) and AdjustedEBITDA are not defined under IFRS and might not be comparable tosimilar financial measures disclosed by other issuers, refer to‘Non-IFRS Measures’ below for reconciliations to measuresrecognized by IFRS. For additional information, please refer toSource’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 ratefor the three months ended March 31, 2023, was $0.7394 (2022 -$0.7898).

3. Adjusted EBITDA and Adjusted Gross Margin (including on a per MTbasis) are not defined under IFRS, refer to ‘Non-IFRS Measures’below for reconciliations to measures recognized by IFRS. Foradditional information, please refer to Source’s MD&A availableonline at www.sedar.com.

First Quarter 2023 Performance

Source recorded total revenue of $163.7 million, an increase of $66.8million or 69% compared to the first quarter of 2022, driven by strongsand sales volumes and higher average realized sand pricing. StrongWestern Canadian Sedimentary Basin (“WCSB”) completion activitylevels throughout the first quarter of the year drove records in sandsales volumes, trucked sand volumes and utilization days for theCanadian Sahara fleet. Pricing improved for all lines of business, asrenewed contract pricing became effective and spot pricing remainedstrong. The renewal of a major customer contract in the quarterpositions the Company for strong pricing performance for the nearterm.

Cost of sales, excluding depreciation, increased during the firstquarter of 2023, due to the 25% increase in sand sales volumes andhigher costs for transportation, compared to the three months endedMarch 31, 2022. During the first quarter, Source incurred costs forthird party sand purchases, procured to complement production from theWisconsin facilities and to ensure no supply interruptions due to thesignificant increase in customer demand for certain mesh sizes. Duringthe first quarter of 2022, no third party sand purchases werecompleted. These cost increases were partly mitigated by improvedsales distribution across mesh sizes resulting in improved yields.Cost of sales was also impacted by a weakening Canadian dollar on USdenominated costs relative to the first quarter last year.

For the three months ended March 31, 2023, gross margin increased by$17.2 million, attributed to higher sand sales volumes and improvedpricing. Excluding gross margin from mine gate volumes, Adjusted GrossMargin was $44.87 per MT, compared to $28.54 per MT in the firstquarter of 2022, favorably impacted by improved contract customer andspot market pricing, despite higher costs for transportation. Grossmargin and Adjusted Gross Margin also benefited from the 51% increasein sand volumes trucked and strong Sahara fleet utilization for thefirst quarter, driving a 61% increase in Sahara-related revenue,compared to the same period last year.

Operating expenses increased on a quarter-over-quarter basis, largelyattributed to the increased activity realized during the period, ashigher sand shipments drove increased royalty costs, higher repairsand maintenance costs and higher variable incentive compensation cost.General and administrative expense also increased relative to thefirst quarter of 2022, primarily driven by higher people costsresulting from increased variable incentive compensation expense.

Adjusted EBITDA was $27.6 million for the first quarter, an increaseof $13.4 million or 94% compared to the three months ended March 31,2022, the result of record activity levels and strong sales pricingrealized. The weakening of the Canadian dollar negatively impactedAdjusted EBITDA by $0.6 million for the first quarter; however, therenegotiation of certain customer contracts which are now denominatedin US dollars will assist with mitigating the impact of fluctuationsin foreign exchange rates for the balance of the year.

Liquidity and Capital Resources

Note :

1. Adjusted EBITDA and Free Cash Flow are not defined under IFRS, referto ‘Non-IFRS Measures’ below. The reconciliation to the comparableIFRS measure can be found in the table below.

Source generated Free Cash Flow of $12.9 million for the three monthsended March 31, 2023, compared to $6.3 million generated for the firstquarter of 2022. The increase is attributed to a $13.4 millionimprovement in Adjusted EBITDA, reflecting strong activity levels andincreased prices compared to the prior year. This was partially offsetby higher financing expense paid, as $4.4 million of interest on thesenior secured first lien notes (the “Notes”) was paid in cashduring the quarter, compared to 2022 where interest incurred for theNotes during the first quarter was paid in kind. An increase inpayments for lease obligations, including interest expense for theselease obligations, was attributed to lease payments for the PeaceRiver facility which did not commence until April of 2022.

Source’s capital expenditures for the first quarter of 2023 were$2.6 million, an increase of $0.6 million compared to the same periodlast year. The increase in expenditures for maintenance and sustainingcapital was primarily related to maintenance completed for the PeaceRiver facility, and an increase in costs associated with overburdenremoval for mining operations of $0.4 million, driven by higher sandsales volumes. Growth capital expenditures were lower, on aquarter-over-quarter basis, due to the completion of assessments forthe drilling program at the Peace River mine, and the completion ofSource’s ninth Sahara unit mid-last year. During the first quarterof 2023, Source sold excess equipment, generating proceeds of $0.5million. Management continues to assess equipment and other assetsrequired to service Source’s operations to ensure optimal levels aremaintained on an on-going basis.

ESG UPDATE

Source is committed to operating in a sustainable manner and worksclosely with its stakeholders to go above and beyond currentregulatory requirements through various ongoing initiatives.Source’s third annual ESG report will be released later this yearand will detail the Company’s 2022 ESG performance, including recentdevelopments related to greenhouse gas emissions reductions, itsproduction water recycling program and community involvement.

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

BUSINESS OUTLOOK

Strong industry activity continued to favorably impact frac sandsupply and demand fundamentals in the WCSB which are expected toremain strong through 2023. Previous well permitting issues in thenortheastern British Columbia region, which caused customer delaysthrough 2022, have now been resolved and customers are expected tobring increased activity to the region again as exploration andproduction (“E&P”) companies catch up on their developmentplans. Source has renewed customer contracts with terms and conditionsreflective of the current operating environment and continues toimprove production efficiencies through an expansion of mesh sizes andongoing operating cost management. Source believes these fundamentals,coupled with Source’s leading service offerings and logisticscapabilities required for larger volumes of sand per well, as well asSource’s terminal network footprint, will continue to support stronggross margins for the remainder of 2023.

In the longer-term, Source believes the increased demand for naturalgas, driven by power generation facilities, increased natural gaspipeline export capabilities and liquefied natural gas exports willdrive incremental demand for Source’s services in the WCSB. Sourcecontinues to see increased demand from customers that are primarilyfocused on the development of natural gas properties in the Montney,Duvernay and Deep Basin. This trend is consistent with Source’s viewthat natural gas will be an important transitional fuel that iscritical for the successful movement to a less carbon intensive world.

Source continues to focus on increasing its involvement in theprovision of logistics services for other items needed at the wellsitein response to customer requests to expand its service offerings andto further utilize its existing Western Canadian terminals to provideadditional services.

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, May5, 2023.

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 ourwebsite and as follows:

Source Energy Services Q1 2023 Results Call

The call will be recorded and available for playback approximately 2hours after the meeting end time, until June 5, 2023, using thefollowing dial-in:

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

Playback Passcode: 9672

2023 ANNUAL MEETING OF SHAREHOLDERS

Source’s 2023 Annual Meeting of Shareholders (the “AGM”) will beheld on Friday, May 5, 2023 at 10:00 a.m. MST (12:00 pm ET) in avirtual, audio only, webcast format. Shareholder engagement isextremely important to Source and all shareholders will have equalopportunity to ask questions. Below are the details to attend thevirtual-only AGM:

Log in: https://web.lumiagm.com/#/246590899 Password: source2023

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

1-888-290-1175 (toll-free in Canada and the United States)

1-587-885-0960 (long distance charges may apply)

ABOUT SOURCE ENERGY SERVICES

Source is a company that focuses on the integrated production anddistribution of frac sand, as well as the distribution of other bulkcompletion materials not produced by Source. Source provides itscustomers with an end-to-end solution for frac sand supported by itsWisconsin and Peace River mines and processing facilities, its WesternCanadian terminal network, its “last mile” logistics capabilitiesand Sahara, a proprietary wellsite mobile sand storage and handlingsystem.

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’sinterim condensed consolidated financial statements for the threemonths ended March 31, 2023 and 2022, together with the accompanyingnotes (the “Financial Statements”) and its corresponding MD&Afor such periods. The Financial Statements and MD&A and otherinformation relating to Source, including the Annual Information Form(“AIF”), are available under the Company’s SEDAR profile at www.sedar.com . The FinancialStatements and comparative statements have been prepared in accordancewith International Financial Reporting Standards (“IFRS”) asissued by the International Accounting Standards Board. Unlessotherwise 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 donot have standardized meanings prescribed by IFRS and Source’smethod of calculating these measures may differ from the method usedby other entities and, accordingly, they may not be comparable tosimilar measures presented by other companies. These financialmeasures should not be considered as an alternative to, or moremeaningful than, net income (loss) and gross margin, respectively,which represent the most directly comparable measures of financialperformance as determined in accordance with IFRS.

Reconciliation of Adjusted EBITDA andFree Cash Flow to Net Income (Loss)

For additional information regarding non-IFRS measures, includingtheir use to management and investors, their composition anddiscussion of changes to either their composition or label, if any,please refer to the ‘Non-IFRS Measures’ section of the MD&A,which is incorporated herein by reference. Source’s MD&A isavailable online at www.sedar.com and throughSource’s website at www.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”, “believes”, “continues”,“focus”, “trends”, “anticipates”, “positions” 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-lookingstatements are necessarily based upon a number of estimates andassumptions made by Source that are inherently subject to significantbusiness, economic, competitive, political and social uncertaintiesand contingencies. Forward-looking statements are not guarantees offuture performance. In particular, this press release containsforward-looking statements pertaining, but not limited, to:expectations that the renewal of a major customer contract willposition the Company for strong pricing performance; plans torenegotiate certain customer contracts denominated in US dollars andexpectations that this renegotiation will mitigate the impact offluctuations in foreign exchange rates; ESG initiatives and goals,including but not limited to those related to greenhouse gas emissionsreduction, production water recycling, health and safety, andcontributions to charitable initiatives; expectations that frac sandsupply and demand fundamentals will remain strong through 2023;expectations that the resolution of permitting issues in northeasternBritish Columbia will bring increased activity to the region; beliefsrespecting strong gross margins in 2023; expectations that increaseddemand for natural gas, increased natural gas pipeline exportcapabilities and liquefied natural gas exports will drive incrementaldemand for

Source’s services in the WCSB; continued increase in demand fromcustomers primarily focused on the development of natural gasproperties in Montney, Duvernay and Deep Basin; views that natural gasis an important transitional fuel for the successful movement to aless carbon intensive world; Source’s focus on and expectationsregarding increasing Source’s involvement in the provision oflogistics services for other wellsite items; expectations respectingfuture conditions; and profitability.

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 by or against Source; the ability ofSource to successfully bid on new contracts and the loss ofsignificant contracts; uninsured and underinsured losses; risksrelated to the transportation of Source’s products, includingpotential rail line interruptions or a reduction in rail caravailability; the geographic and customer concentration of Source; theimpact of extreme weather patterns and natural disasters; the impactof climate change risk; the ability of Source to retain and attractqualified management and staff in the markets in which Sourceoperates; labour disputes and work stoppages and risks related toemployee health and safety; general risks associated with the oil andnatural gas industry, loss of markets, consumer and business spendingand borrowing trends; limited, unfavorable, or a lack of access tocapital markets; uncertainties inherent in estimating quantities ofmineral resources; sand processing problems; implementation ofrecently issued accounting standards; the use and suitability ofSource’s accounting estimates and judgments; the impact ofinformation systems and cyber security breaches; the impact ofinflation on capital expenditures; and risks and uncertainties relatedto pandemics such as COVID-19, 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, Sourceexpressly disclaims any intention or obligation to revise or updateany forward-looking statements or information whether as a result ofnew information, future events or otherwise.

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.

FOR FURTHER INFORMATION PLEASE CONTACT:

Scott Melbourn

Chief Executive Officer

(403) 262-1312

investorrelations@sourceenergyservices.com

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

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