SHLE:CC - Source Energy Services Reports Q2 2023 Results
(TheNewswire)
Calgary, Alberta - TheNewswire - August 2, 2023 - Source Energy Services Ltd. ( TSX:SHLE ) (“ Source ” or the “ Company ”) ispleased to announce its financial results for the three and six months ended June 30, 2023 .
Q2 2023 PERFORMANCE HIGHLIGHTS
Despite a challenging operating environment impacted bywildfires, floods and rail outages, Source recorded a strong quarterand achieved the following key highlights during the second quarter of2023:
-
realized sand sales volumes of 702,079 MT and sand revenue of $102.0million, an $8.4 million increase from the second quarter of 2022;
-
achieved total revenue of $126.9 million, a 14% increase from thesecond quarter of 2022, and the third highest quarterly revenuegenerated since the inception of Source;
-
achieved a new record for the largest daily sand volume fed into ablender in twenty-four hours and set a new daily record for sandvolume throughput at Source’s Wembley terminal facility;
-
recorded utilization of 82% for the Canadian Sahara fleet;
-
executed a contract to build and operate Source’s tenth Sahara unit,to be located in the state of Alaska, the cost of which is fullyreimbursed by the customer through progress payments received duringconstruction;
-
realized gross margin of $24.9 million and Adjusted Gross Margin(1) of$30.2 million, increases of 51% and 39%, respectively, when comparedto the same period in 2022;
-
reported net income of $2.7 million, a $2.6 million improvement fromthe second quarter of 2022 when excluding the unrealized gain onderivative instruments recognized last year; and
-
realized Adjusted EBITDA(1) of $20.4 million, a 38% increase from thesecond quarter of 2022.
Note :
(1) Adjusted Gross Margin(including on a per MT basis) and Adjusted EBITDA are not definedunder IFRS and might not be comparable to similar financial measuresdisclosed by other issuers, refer to ‘Non-IFRS Measures’ below forreconciliations to measures recognized by IFRS. For additionalinformation, please refer to Source’s Management’s Discussion andAnalysis (“MD&A”), dated August 2,2023 , available online atwww.sedarplus.ca.
RESULTS OVERVIEW
Notes :
(1) One MT is approximately equalto 1.102 short tons.
(2) The average Canadian toUnited States (“US”) dollar exchange rate for the three and sixmonths ended June 30, 2023, was $0.7447 and 0.7421, respectively (2022- $0.7832 and 0.7865, respectively).
(3) Adjusted EBITDA and AdjustedGross Margin (including on a per MT basis) 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.sedarplus.ca.
Second Quarter 2023Performance
Source had strong second quarter results, due tocontinued gross margin performance and logistics operations thatachieved several daily records. This resulted in EBITDA of $20.4 million for thequarter, an increase of 38% compared to the same period last year, despite theunprecedented Alberta wildfires, floods and rail outages whichnegatively impacted sand sales volumes during the period. Sourcerecorded total revenue of $126.9million , an increase of $15.3million or 14% compared to the secondquarter of 2022 due to higher average realizedsand pricing. Wellsite solutions revenue remained strong through thesecond quarter, achieving a 46% increase in revenue compared to thesame period last year. During the month of April, Source realized thesecond highest monthly volumes trucked in Source history and achieveda new daily record for throughput at the Wembley terminal facility.Pricing improvements across all lines of business were achieved, andspot sand prices remained strong for the second quarter.
Cost of sales, excluding depreciation, increased for the second quarter of 2023, compared to thesame period last year, due primarily to higher costs fortransportation and a shift in terminal sales mix during the quarter.These increases were partially offset by production efficienciesachieved, attributed in part to the introduction of an additional meshsize early this year. Cost of sales was impacted by a weakeningCanadian dollar on US denominated costs relative to the second quarterlast year; however, this impact was offset by an increase in US dollardenominated revenue realized during the quarter.
For the three months ended June30, 2023 , gross margin increased by $8.4 million , attributed to improvedpricing and operational efficiencies achieved, compared to the second quarter of 2022 . Excluding grossmargin from mine gate volumes, Adjusted Gross Margin was $46.73 per MT, compared to $29.07 per MT in the second quarter of 2022 , favorably impacted by improvedpricing, as noted above, despite higher costs for transportation andthe impact of terminal sales mix. Gross margin and Adjusted GrossMargin also benefited from the 28% increase in sand volumes trucked and strong Sahara fleetutilization during the quarter, driving a 40% increase in Sahara-related revenue,compared to the same period last year.
Operating expenses increased by $1.2 million on a quarter-over-quarterbasis, attributed to an executive severance payment, higher repairsand maintenance costs for the Peace River facility and higher variableincentive compensation cost incurred in the quarter. General andadministrative expense increased by $1.2million during the period, due primarily to thetiming of recognition of variable incentive compensation expensecompared to the same period in 2022. This timing difference will belargely eliminated by the end of the year.
Adjusted EBITDA was $20.4million for the secondquarter , an increase of $5.6 million or 38% compared to the three months ended June 30, 2022 . Asnoted above, improved pricing and operational efficiencies offset thevolume reduction attributed to the wildfires and floods, and increasedcosts related to transportation costs and terminal sales mix. Theweakening of the Canadian dollar negatively impacted Adjusted EBITDAby $0.4 million ,attributed to the movement in exchange rates on working capital duringthe quarter. An increase in revenue denominated in US dollarsmitigated the impact of fluctuations in foreign exchange rates and theimpact on US dollar denominated expenses for the quarter.
Liquidity and CapitalResources
Note :
(1) Adjusted EBITDA andFree Cash Flow are not defined under IFRS, refer to ‘Non-IFRSMeasures’ below. The reconciliation to the comparable IFRS measurecan be found in the table below.
Source generated Free Cash Flow of $7.8 million for the three months ended June 30, 2023 , anincrease of $6.3 million compared to the second quarter of 2022 . Theincrease is mainly attributed to a $5.6million improvement in Adjusted EBITDA,reflecting increased gross margin compared to the same period lastyear, as well as lower net expenditures for capital assets during thesecond quarter of this year, as outlined below. Lease obligations werehigher than the prior year due to an increase in renewal rates onpreviously contracted rail cars and the impacts of a weaker Canadiandollar on US dollar denominated leases.
Source’s capital expenditures for the second quarter of 2023 were $6.2 million , an increaseof $2.1 million comparedto the same period last year. Net capital expenditures were $0.6 million for thesecond quarter of 2023, compared to $2.9million for the second quarter of 2022.Expenditures for maintenance and sustaining capital increased by $0.2 million for the three months ended June 30, 2023 , resulting from costs associated with overburden removal formining operations attributed to higher year-to-date sand sales volumeswhen compared to 2022 .Growth capital expenditures increased, on a quarter-over-quarterbasis, as a result of the commencement of a contract to constructSource’s tenth Sahara unit on behalf of a customer who will fullyreimburse Source for these construction costs during the constructionphase. During the second quarter of 2023, Source sold excess equipment, generating proceedsof $0.5 million and, in June of 2023, Source sold its previouslyclosed terminal facility located in Berthold, North Dakota. Managementcontinues to assess equipment and other assets required to serviceSource’s operations to ensure optimal levels are maintained on anon-going basis.
BUSINESS OUTLOOK
Source expects strong industry activity levels tocontinue through the third quarter of 2023, as delays resulting fromthe wildfires in Alberta shifted activity into the third quarter.While contracted customer orders are strong through the third quarter,commodity uncertainty and capital program deployment, as explorationand production companies exhaust budgets as they approach the end ofthe year, could impact activity levels during the fourth quarter.Source renewed customer contracts with terms and conditions reflectiveof the current operating environment earlier in the year, andcontinues to improve production efficiencies through an expansion ofmesh sizes and ongoing operating cost management. Source believesthese fundamentals, coupled with Source’s leading service offeringsand logistics capabilities required for larger volumes of sand perwell, as well as Source’s terminal network footprint, will continueto support strong gross margins for the remainder of 2023 and 2024.
In the longer-term, Source believes the increaseddemand for natural gas, driven by power generation facilities,increased natural gas pipeline export capabilities and liquefiednatural gas exports will drive incremental demand for Source’sservices in the Western Canadian Sedimentary Basin (“WCSB”).Source continues to see increased demand from customers that areprimarily focused on the development of natural gas properties in theMontney, Duvernay and Deep Basin. This trend is consistent withSource’s view that natural gas will be an important transitionalfuel that is critical for the successful movement to a lesscarbon-intensive world.
Source continues to focus on increasing its involvementin the provision of logistics services for other items needed at thewellsite in response to customer requests to expand its serviceofferings and to further utilize its existing Western Canadianterminals to provide additional services.
SECOND QUARTER CONFERENCE CALL
A conference call to discuss Source’s second quarter financial results hasbeen scheduled for 7:30 am MST (9:30 am ET) on Thursday, August 3,2023.
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:
Source EnergyServices Q 2 2023 Results Call
The call will be recorded and available for playbackapproximately 2 hours after the meeting end time, until September 3,2023, using the following dial-in:
Toll-Free Playback Number: 1-800-319-6413
Playback Passcode: 9673
ABOUT SOURCE ENERGY SERVICES
Source is a company that focuses on the integratedproduction and distribution of frac sand, as well as the distributionof other 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 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 interim condensed consolidated financial statements forthe three and six months ended June 30, 2023 and2022 , and Source’s audited consolidatedfinancial statements for the year ended December 31, 2022, togetherwith the accompanying 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, are available under the Company’s SEDAR+profile at www.sedar plus .c a . The Financial Statements andcomparative statements have been prepared in accordance withInternational Financial Reporting Standards (“IFRS”) as issued bythe 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 FreeCash Flow, Adjusted Gross Margin and Adjusted EBITDA, including perMT, which do not have standardized meanings prescribed by IFRS andSource’s method of calculating these measures may differ from themethod used by other entities and, accordingly, they may not becomparable to similar measures presented by other companies. Thesefinancial measures should not be considered as an alternative to, ormore meaningful than, net income (loss) and gross margin,respectively, which represent the most directly comparable measures offinancial performance as determined in accordance with IFRS.
Reconciliation of Adjusted EBITDA andFree Cash Flow to Net Income (Loss)
Note :
(1) Includes expenses related tothe incident at the Fox Creek terminal facility and one-timeretirement payments.
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 incorporated herein by reference.
Source’s MD&A is available online at
and through Source’s website at
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”, “believes”, “continues”,“focus”, “could”, “trend”, or variations of such wordsand phrases, or state that certain actions, events or results“may” or “will” be taken, occur or be achieved. Suchforward-looking statements reflect Source’s beliefs, estimates andopinions regarding its future growth, results of operations, futureperformance (both operational and financial), and business prospectsand opportunities at the time such statements are made, and Sourceundertakes no obligation to update forward-looking statements if thesebeliefs, estimates and opinions or circumstances should change unlessrequired by applicable law. Forward-looking statements are necessarilybased upon a number of estimates and assumptions made by Source thatare inherently 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 anticipated elimination of a timing differencecausing an increase to general and administrative expense;expectations that industry activity levels will remain strong through2023; expectations that lowered sand sales volumes and industryactivity levels caused by wildfires, floods and rail outages willimprove in the third and fourth quarters of 2023; beliefs respectingstrong gross margins for the remainder of 2023 and 2024; expectationsthat increased demand for natural gas, increased natural gas pipelineexport capabilities and liquefied natural gas exports will driveincremental demand for Source’s services in the WCSB; continuedincrease in demand from customers primarily focused on the developmentof natural gas properties in Montney, Duvernayand Deep Basin; views that natural gas is an important transitionalfuel for the successful movement to a less carbon-intensive world;Source’s focus on and expectations regarding increasing itsinvolvement in the provision of logistics services for other wellsiteitems; expectations with respect to improved production efficienciesthrough expanding mesh sizes and operating cost management;expectations respecting future conditions; 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 by or against Source; theability of 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 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 energydemand.
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. Theforward-looking statements contained 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 disclaimsany intention or obligation to revise or update any forward-lookingstatements or information whether as a result of new information,future events or otherwise.
Any financial outlook and future-oriented financialinformation contained in this press release regarding prospective financial performance,financial position or cash flows is based on assumptions about futureevents, including economic conditions and proposed courses of actionbased on management’s assessment of the relevant information that iscurrently available. Projected operational information containsforward-looking information and is based on a number of materialassumptions and factors, as are set out above. These projections mayalso be considered to contain future oriented financial information ora financial outlook. The actual results of Source’s operations forany period will likely vary from the amounts set forth in theseprojections and such variations may be material. Actual results willvary from projected results. Readers are cautioned that any suchfinancial outlook and future-oriented financial information containedherein should not be used for purposes other than those for which itis disclosed herein. The forward-looking information and statementscontained in this document speak only as of the date hereof and havebeen approved by the Company’s management as at the date hereof. TheCompany does not assume any obligation to publicly update or revisethem to reflect new events or circumstances, except as may be requiredpursuant to applicable laws.
FOR FURTHER INFORMATION PLEASECONTACT:
Scott Melbourn
Chief Executive Officer
(403) 262-1312
investorrelations@sourceenergyservices.com
Derren Newell
Chief Financial Officer
(403) 262-1312
investorrelations@sourceenergyservices.com
Copyright (c) 2023 TheNewswire - All rights reserved.