SHLE:CC - Source Energy Services Reports Q2 2022 Results

(TheNewswire)

Calgary, Alberta – TheNewswire – July 27m 2022 -Source Energy Services Ltd. (“Source” or the “Company”)(TSX:SHLE), (OTC:SCEYF) is pleased to announce its financial resultsfor the three and six months ended June 30, 2022.

SECOND QUARTER 2022 HIGHLIGHTS

• Key achievements for the three months ended June 30,2022, included the following:

• realized sand sales volumes of 800,136 MT, a 44%increase from the second quarter of 2021, and realized sand revenue of$93.5 million, a 61% increase from the second quarter of 2021;

• distributed 772,940 MT of proppants and chemicalsthrough Source’s Western Canadian Sedimentary Basin (“WCSB”)terminal network;

• achieved an 18% increase in the average realized sandprice, excluding revenue from mine gate sales volumes;

• closed a transaction with Canadian Silica Industries(“CSI”) to assume operations of CSI’s Peace River frac sandfacility, complementing Source’s Northern White proppantresources;

• achieved utilization for the Sahara fleet of 69% andadded a new global exploration and production (“E”) Saharacustomer;

• realized gross margin of $16.5 million, and AdjustedGross Margin(1) of $21.7 million;

• reported net income of $4.2 million; and

• realized Adjusted EBITDA(1) of $14.8 million, a 43%increase from the second quarter of 2021 when excluding proceedsreceived from the Paycheck Protection Program of US$2.1 millionrecognized last year.

Note :
(1)    Adjusted Gross Margin (including on aper MT basis) and Adjusted EBITDA are not defined under IFRS, 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 1.102short tons.
(2)    The average Canadian to United States (“US”) dollarexchange rate for the three and six months ended June 30, 2022, was$0.7832 and 0.7865, respectively (2021 - $0.8142 and 0.8019,respectively).
(3)    Adjusted EBITDA and Adjusted Gross Margin (including on a perMT basis) 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.

Q2 2022 RESULTS

Source generated $93.5 million of sand revenue duringthe second quarter, an increase of 61% over the same period in 2021and an increase of 16% over the first quarter of 2022. This is thefirst time since 2018 where second quarter activity levels exceededthose realized during the first quarter of the year, despite theimpact of spring break-up. These results highlight the strength ofactivity levels that continue to prevail in the WCSB, driven by highcommodity prices for oil and natural gas. The increase in sand salesrevenue generated was also attributed to an 18% increase in averagerealized sand price, or $18.91 per MT, excluding the impact of minegate sand sales volumes, compared to the second quarter last year, assand supply tightens in the WCSB and sand sale prices trend higher.

During the second quarter, cost of sales, excludingdepreciation, was impacted by higher costs for transportation andfreight, due to increased prices for fuel and a continued constrainedtrucking market, compared to the same period last year. Cost of sales,excluding depreciation, was also impacted by increased costs for thirdparty sand purchases, procured to ensure no customer supplyinterruptions as demand continues to increase. Through the secondquarter, Source successfully maintained efficient production at itsWisconsin facilities, maintaining average costs while producing atanticipated levels despite continued cost pricing pressure through thequarter. Cost of sales was impacted by a weakening Canadian dollar onUS denominated costs relative to the second quarter of 2021.

Excluding gross margin from mine gate volumes, AdjustedGross Margin for the second quarter was $28.84 per MT, favorablyimpacted by improved spot market pricing and higher sand salesvolumes. Compared to the same quarter last year, Adjusted Gross Marginper MT increased by 14% after adjusting for the impact of theweakening Canadian dollar and the benefit of proceeds from the CanadaEmergency Wage Subsidy (“CEWS”) program, as well as certainproduction credits recorded last year. Gross margin was unfavorablyimpacted by higher cost of sales - depreciation realized, attributedto higher rates of inventory depreciation per MT relative to thesecond quarter last year.

Higher selling costs, the result of increased royaltyexpense resulting from increased activity levels, and higher repairsand maintenance costs for rail cars drove higher operating expense forthe second quarter of 2022, compared to the same period last year.General and administrative expense was higher on aquarter-over-quarter basis, primarily attributed to the reversal of abad debt provision that occurred in the second quarter of 2021.Adjusted EBITDA was $14.8 million for the second quarter, a reflectionof the strong sand sales volumes and sand sales pricing realized,partially offset by the unfavorable impact of higher costs incurredfor fuel and freight, and the weakening of the Canadian dollar duringthe quarter.

Peace River Transaction

In April 2022, Source entered into a transaction withCSI to assume operation of its Peace River frac sand facility, whichadds approximately 400,000 MT of annual production capability toSource’s existing production capabilities. The transactionconsolidates Source’s adjacent mineral resource exploration rightswith the production facility and complements Source’s existingproduct and service offerings. The facility was not fully operationalduring the quarter, as Source focused on operational reviews andmaintenance to ensure the facilities will operate at a standardconsistent with the Company’s Wisconsin processing facilities. Thebenefits from the Peace River expenditures will be realized in futurequarters when the facility is fully operational.

Liquidity and CapitalResources

The Company has a banking operating facility, comprisedof an asset backed loan facility (“ABL”), a standby letter ofCredit Facility and a senior secured term loan (collectively, the“Credit Facility”). As of June 30, 2022, Source had $28.9 milliondrawn under its ABL facility. The Credit Facility was also being usedto support $10.1 million of letters of credit, leaving $11.8 millionof available liquidity. Source is subject to externally imposedcapital requirements for its Credit Facility and as of June 30, 2022,Source and its subsidiaries were compliant with all covenants. Sourceremains focused on reducing its debt levels in 2022.

Over the last several quarters, the Company hasexperienced a rapid increase in demand and achieved levels of activitythat exceed pre-pandemic operating levels. The Company’s existingCredit Facility (as defined above) predates this period of high demandand was negotiated during a period of extreme uncertainty in the oiland gas industry. While Source has more than adequate liquidityavailable on its ABL facility, the current Credit Facility structurecontains restrictive covenants which limit Source’s flexibility andability to appropriately operate at the high levels demanded by activity in the WCSB. To address this,Source decided to seek alternative financing and replace the currentCredit Facility. To that end, the Company has executed a non-bindingterm sheet with a new financial institution, and is working with itsexisting lenders and the new institution, in order to complete therefinancing in an expedited manner. Due to the timing of the expectedclosing of the refinancing, Source is seeking, and expects to receive,consent from its current lenders which will be required to completethe closing in an orderly manner.

Source’s capital expenditures for the second quarterof 2022 were $4.1 million, an increase of $2.8 million compared to thesecond quarter last year. The increase in capital expenditures for theperiod was primarily due to maintenance and sustaining capital,related to a $0.6 million increase in costs associated with overburdenremoval for mining operations and the Peace River facilitymaintenance, as noted above. Growth capital expenditures were lower,on a quarter over quarter basis, due to the Sahara unloading capacityenhancements completed in the second quarter of last year. Sourcedisposed of excess production equipment during the second quarter,realizing proceeds of $1.2 million.

ESG UPDATE

Source has completed its annual environment, social andgovernance (“ESG”) performance assessment, which benchmarksSource’s 2021 ESG performance relative to the SustainabilityAccounting Standards Board framework and the recommendations of theTask Force on Climate-related Financial Disclosures. Source’s 2022ESG report has been released and is available at www.sourceenergyservices.com .

Source is committed to operating in a sustainablemanner and works closely with its stakeholders to go above and beyondcurrent regulatory 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. Thus far in 2022, Source has reclaimed eightacres of land adjacent to its Wisconsin processing facilities, part ofSource’s continued effort to return the land to a thrivingvegetative state. 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.

BUSINESS OUTLOOK

With increased industry activity levels across NorthAmerica, frac sand supply and demand fundamentals have improved andare expected to remain tight for 2022. These fundamentals, coupledwith Source’s leading service offerings and logistics capabilities,have translated into meaningful pricing gains in 2022, a trend that isexpected to continue for the balance of the year and into 2023. Thesepricing increases have led to improved gross margins in the spotmarket over 2021 levels which are expected to continue into 2023.While contracted customer margins have dragged down overall grossmargin, it is expected there will be significant growth in thesemargins as current contracts expire over the next few quarters. Aftera somewhat slower than expected first quarter, the second quarter wasvery strong, especially considering this is the traditional springbreak-up quarter. Looking ahead, it is anticipated that the thirdquarter will have higher than usual activity levels during what ishistorically a very busy quarter in the industry. Source expects theexpansion of capital programs will increase through the balance of theyear, as Source customers signal increasing activity levels andgrowing confidence related to ongoing permitting issues in thenortheastern British Columbia region, as well as continued strength incommodity pricing.

In the longer-term, Source believes the increaseddemand for natural gas, driven by the conversion of coal-fired powergeneration facilities, increased natural gas pipeline exportcapabilities and liquefied natural gas exports will drive incrementaldemand for Source’s services in the WCSB. Source continues to seeincreased demand from customers that are primarily focused on thedevelopment of natural gas properties in the Montney, Duvernay andDeep Basin. This trend is consistent with Source’s view that naturalgas will be an important transitional fuel that’s critical for thesuccessful movement to a less carbon intensive world.

In support of the move to a less carbon intensiveworld, Source has begun focusing on developing economic growthopportunities which transition from traditional fossil fuels to lesscarbon intense energy solutions. As a pathway to diversifyingSource’s business, and to participate in the decarbonization of theeconomy, Source is advancing opportunities in its own operations aswell as at the well site and at its terminals. Source also continuesto focus on increasing its involvement in the provision of logisticsservices for other items needed at the wellsite in response tocustomer requests to expand its service offerings and to furtherutilize its existing Western Canadian terminals to provide additionalservices. Over the longer-term, it is anticipated that theseopportunities will be a meaningful part of Source’s business.

SECOND QUARTER CONFERENCE CALL

A conference call to discuss Source’s second quarterfinancial results has been scheduled for 7:30 am MST (9:30 am ET) onThursday, July 28, 2022.

Interested analysts, investors and mediarepresentatives are invited to register to participate in the call.Once you are registered, a dial-in number and passcode will beprovided to you via email. The link to register for the call is on the Upcoming Events page of our website and asfollows:

Click Below to Register for theResults Conference Call:

Source Energy Services Q2’22 ResultsCall

Results Conference Call PlaybackAccess:

The call will be recorded and available for playbackapproximately 2 hours after the meeting end time, until August 28,2022. Below are the details to access the call playback:

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

Playback Passcode:
9152

ABOUT SOURCE ENERGY SERVICES

Source is a company that focuses on the integratedproduction and distribution of high quality frac sand, as well as thedistribution of other bulk completion materials not produced bySource. Source provides its customers with an end-to-end solution forfrac sand supported by its Wisconsin and Peace River mines andprocessing facilities, its Western Canadian terminal network, its“last mile” logistics capabilities and Sahara, a proprietarywellsite mobile sand storage and handling system.

Source’s full-service approach allows customers torely on its logistics platform to increase reliability of supply andto ensure the timely delivery of frac sand and other bulk completionmaterials at the wellsite.

IMPORTANT INFORMATION

These results should be read in conjunction with eachof Source’s audited consolidated financial statements for the threeand six months ended June 30, 2022 and 2021, together with theaccompanying notes (the “Financial Statements”) and itscorresponding MD&A for such periods. The Financial Statements andMD&A and other information relating to Source, including theAnnual Information Form (“AIF”), are available under theCompany’s SEDAR profile at www.sedar.com . The Financial Statements and comparative statements havebeen prepared in accordance with International Financial ReportingStandards (“IFRS”) as issued by the International AccountingStandards Board. Unless otherwise stated, all amounts are expressed inCanadian dollars.

NON-IFRS MEASURES

In this press release Source has used the termsAdjusted 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 toNet Income (Loss)

Note :
(1)    Includes expenses related to theincident at the Fox Creek terminal facility and one-time retirementpayments.

Reconciliation of Gross Margin toAdjusted Gross Margin

For additional information regarding non-IFRS measures,including their 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 available online at www.sedar.com and through Source’s website at www.sourceenergyservices.com .

FORWARD-LOOKING STATEMENTS

Certain statements contained in this press releaseconstitute forward-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”, “intends”, “anticipates”,“believes”, “continues”, “plans”, “projects”,“focus”, “trends” or variations of such words and phrases, orstate that certain actions, events or results “may” or “will”be taken, occur or be achieved. Such forward-looking statementsreflect Source’s beliefs, estimates and opinions regarding itsfuture growth, results of operations, future performance (bothoperational and financial), and business prospects and opportunitiesat the time such statements are made, and Source undertakes noobligation to update forward-looking statements if these beliefs,estimates and opinions or circumstances should change unless requiredby applicable law. Forward-looking statements are necessarily basedupon a number of estimates and assumptions made by Source that areinherently subject to significant business, economic, competitive,political and social uncertainties and contingencies. Forward-lookingstatements are not guarantees of future performance. In particular,this press release contains forward-looking statements pertaining, butnot limited, to: the strength of activity levels continuing to prevailin the WCSB; tightening of sand supply in the WCSB and trends of sandsales prices; our focus on reducing debt levels in 2022; ourexpectation that benefits from the Peace River expenditures will berealized in future quarters; Source’s expectation that it willreceive the consent required from its current lenders to close therefinancing of its existing Credit Facility; Source’s efforts toreturn the land of a thriving vegetative state; our search forefficiencies to implement in order to lessen the impact of Source’sactivities on the environment; our expectation that frac sand supplyand demand fundamentals will remain tight for 2022; our expectationthat pricing gains will continue for the remainder of 2022 and into2023; our belief that gross margins in the spot market, currently over2021 levels, will continue into 2023; our expectation that there willbe significant growth in customer margins over the next few quarters;our expectation that the third quarter will have higher than usualactivity levels and the expansion of capital programs will increasethrough the balance of 2022; consumers’ increasing activity levelsand confidence in connection with permitting issues in northeasternBritish Columbia; increased demand for natural gas, increased naturalgas pipeline export capabilities and liquefied natural gas exportswill drive incremental demand for Source’s services in the WCSB;continued increase in demand from customers primarily focused on thedevelopment of natural gas properties in Montney, Duvernay and DeepBasin; the Company’s view that natural gas is an importanttransitional fuel for the successful movement to a less carbonintensive world; our focus on exploring and developing, andadvancement of economic growth opportunities related to the transition to less carbon intense energy solutions; ourfocus on and expectations regarding increasing Source’s involvementin the provision of logistics services for other wellsite items;outlook for commodity prices and sales volumes; expectationsrespecting future conditions; and revenue and profitability.

By their nature, forward-looking statements involvenumerous current assumptions, known and unknown risks, uncertaintiesand other factors which may cause the actual results, performance orachievements of Source to differ materially from those anticipated bySource and described in the forward-looking statements.

With respect to the forward-looking statementscontained in this press release  assumptions have been maderegarding, among other things: proppant market prices; future oil,natural gas and liquefied natural gas prices; future global economicand financial conditions; future commodity prices, demand for oil andgas and the product mix of such demand; levels of activity in the oiland gas industry in the areas in which Source operates; the continuedavailability of timely and safe transportation for Source’sproducts, including without limitation, Source’s rail car fleet andthe accessibility of additional transportation by rail and truck; themaintenance of Source’s key customers and the financial strength ofits key customers; the maintenance of Source’s significant contractsor their replacement with new contracts on substantially similar termsand that contractual counterparties will comply with currentcontractual terms; operating costs; that the regulatory environment inwhich Source operates will be maintained in the manner currentlyanticipated by Source; future exchange and interest rates; geologicaland engineering estimates in respect of Source’s resources; therecoverability of Source’s resources; the accuracy and veracity ofinformation and projections sourced from third parties respecting,among other things, future industry conditions and product demand;demand for horizontal drilling and hydraulic fracturing and themaintenance of current techniques and procedures, particularly withrespect to the use of proppants; Source’s ability to obtainqualified staff and equipment in a timely and cost-efficient manner;the regulatory framework governing royalties, taxes and environmentalmatters in the jurisdictions in which Source conducts its business andany other jurisdictions in which Source may conduct its business inthe future; future capital expenditures to be made by Source; futuresources of funding for Source’s capital program; Source’s futuredebt levels; the impact of competition on Source; and Source’sability to obtain financing on acceptable terms.

A number of factors, risks and uncertainties couldcause results to differ materially from those anticipated anddescribed herein including, among others: the effects of competitionand pricing pressures; risks inherent in key customer dependence;effects of fluctuations in the price of proppants; risks related toindebtedness and liquidity, including Source’s leverage, restrictivecovenants in Source’s debt instruments and Source’s capitalrequirements; risks related to interest rate fluctuations and foreignexchange rate fluctuations; changes in general economic, financial,market and business conditions in the markets in which Sourceoperates; changes in the technologies used to drill for and produceoil and natural gas; Source’s ability to obtain, maintain and renewrequired permits, licenses and approvals from regulatory authorities;the stringent requirements of and potential changes to applicablelegislation, regulations and standards; the ability of Source tocomply with unexpected costs of government regulations; liabilitiesresulting from Source’s operations; the results of litigation orregulatory proceedings that may be brought against Source; the abilityof Source 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 climate change risk; the ability of Source to retain andattract qualified management and staff in the markets in which Sourceoperates; labor 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; and risks anduncertainties related to COVID-19 or its variants, including changesin energy demand.

Although Source has attempted to identify importantfactors that could cause actual actions, events or results to differmaterially from those described in the forward-looking statements,there may be other factors that cause actions, events or results notto be as anticipated, estimated or intended. There can be no assurancethat forward-looking statements will materialize or prove to beaccurate, as actual results and future events could differ materiallyfrom those anticipated in such statements. The forward-lookingstatements contained in this press release are expressly qualified bythis cautionary 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 financialinformation contained in this press release regarding prospectivefinancial performance, financial position or cash flows is based onassumptions about future events, including economic conditions andproposed courses of action based on management’s assessment of therelevant information that is currently available. Projectedoperational information contains forward-looking information and isbased on a number of material assumptions and factors, as are set outabove. These projections may also be considered to contain futureoriented financial information or a financial outlook. The actualresults of Source’s operations for any period will likely vary fromthe amounts set forth in these projections and such variations may bematerial. Actual results will vary from projected results. Readers arecautioned that any such financial outlook and future-orientedfinancial information contained herein should not be used for purposesother than 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 PLEASECONTACT:

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

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