(TheNewswire)
Calgary, Alberta - TheNewswire - October29, 2020 - ( TSX:SHLE )
Source Energy Services Ltd. ("Source" or the"Company") is pleased to announce its 2020 third quarterfinancial results.
SUMMARY
Against a backdrop of continued volatility anduncertainty resulting from the ongoing coronavirus pandemic("COVID-19"), Source achieved the following results for thethree months ended September 30, 2020:
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- realized sand sales volumes of 609,469 metric tonnes("MT"), an 11% increase over the third quarter of 2019, andsand revenue of $65.2 million;
- distributed total volumes through Source's WesternCanadian Sedimentary Basin ("WCSB") terminal network of625,868 MT;
- even with higher activity levels seen in the thirdquarter, Source maintained cost control measures, resulting in areduction of 30% for operating and general and administrative expensecompared to the third quarter of 2019;
- successfully completed the renegotiation of certainrail car lease contracts, effective September 2020, resulting insignificant savings for monthly lease payments and a reduction toSource's total lease obligations outstanding;
- realized gross margin of $7.0 million and AdjustedGross Margin (1) of $17.3 million;
- realized Adjusted EBITDA (1) of $13.0million;
- reduced net loss for the three months ended September30, 2020 to $7.9 million, or $(0.13) per share; and
- announced a proposed Recapitalization Transaction (asdefined below) subsequent to quarter end, which will provide astronger long-term capital structure for Source. This capitalstructure will enhance liquidity and increase financial flexibility,allowing Source to withstand industry volatility while still buildingon its position as the largest frac sand provider in the WCSB.
Note:
(1) Adjusted EBITDA and Adjusted Gross Margin(including on a per MT basis) are not defined under IFRS, refer to'Non-IFRS Measures' below.
RESULTS OVERVIEW
-------------------------------------------------------------------------------- | |Three |Nine | | |months |months | | |ended |ended | | |September |September | | |30, |30, | |------------------------------------------------------------------------------| |($000’s, except MT and per unit amounts) |2020 |2019 |2020 |2019 | |------------------------------------------------------------------------------| |Sand volumes (MT)(1) |609,469|550,762|1,494,166|1,754,018| |------------------------------------------------------------------------------| | | | | | | |------------------------------------------------------------------------------| |Sand revenue |65,240 |67,639 |161,085 |223,465 | |------------------------------------------------------------------------------| |Wellsite solutions |12,636 |10,999 |27,062 |36,973 | |------------------------------------------------------------------------------| |Terminal services |669 |1,200 |2,762 |3,874 | |------------------------------------------------------------------------------| |Sales |78,545 |79,838 |190,909 |264,312 | |------------------------------------------------------------------------------| |Cost of sales |61,242 |61,158 |150,383 |201,633 | |------------------------------------------------------------------------------| |Cost of sales– depreciation and depletion|10,264 |10,936 |26,935 |35,692 | |------------------------------------------------------------------------------| |Cost of sales |71,506 |72,094 |177,318 |237,325 | |------------------------------------------------------------------------------| |Gross margin |7,039 |7,744 |13,591 |26,987 | |------------------------------------------------------------------------------| |Operating expense |2,753 |4,753 |9,287 |15,287 | |------------------------------------------------------------------------------| |General&administrative expense |2,220 |2,398 |8,176 |9,535 | |------------------------------------------------------------------------------| |Depreciation |3,158 |3,875 |11,213 |12,192 | |------------------------------------------------------------------------------| |Loss from operations |(1,092)|(3,282) |(15,085)|(10,027) | |------------------------------------------------------------------------------| |Total other expense(2) |6,851 |75,725 |163,046 |101,666 | |------------------------------------------------------------------------------| |Loss before income taxes |(7,943)|(79,007)|(178,131)|(111,693)| |------------------------------------------------------------------------------| |Deferred income tax expense (recovery) |— |(18,020)|31,350 |(24,357) | |------------------------------------------------------------------------------| |Net loss |(7,943)|(60,987)|(209,481)|(87,336) | |------------------------------------------------------------------------------| |Net loss per share ($/share) |(0.13) |(1.01) |(3.47) |(1.42) | |------------------------------------------------------------------------------| |Diluted net loss per share ($/share) |(0.13) |(1.01) |(3.47) |(1.42) | |------------------------------------------------------------------------------| |Adjusted EBITDA(3) |13,019 |12,047 |25,560 |39,440 | |------------------------------------------------------------------------------| |Sand revenue sales/MT |107.04 |122.81 |107.81 |127.40 | |------------------------------------------------------------------------------| |Gross margin/MT |11.55 |14.06 |9.10 |15.39 | |------------------------------------------------------------------------------| |Adjusted Gross Margin(3) |17,303 |18,680 |40,526 |62,679 | |------------------------------------------------------------------------------| |Adjusted Gross Margin/MT(3) |28.39 |33.92 |27.12 |35.73 | |------------------------------------------------------------------------------| |Percentage of mine gate sand volumes |2% |—% |1% |—% | |------------------------------------------------------------------------------| |Percentage of sand |98% |100% |99% |100% | |volumes sold in the | | | | | |WCSB | | | | | |------------------------------------------------------------------------------| |Sales mix impact of mine gate sales/MT |0.19 |— |0.03 |— | --------------------------------------------------------------------------------Notes :
(1) One MT is approximately equal to 1.102 shorttons.
(2) The average Canadian to US dollar exchangerate for the three and nine months ended September 30, 2020 was$0.7507 and $0.7385, respectively (2019 - $0.7573 and $0.7523,respectively).
(3) Adjusted EBITDA and Adjusted Gross Margin(including on a per MT basis) are not defined under IFRS, refer to'Non-IFRS Measures' below.
Q3 2020 RESULTS
Results for the third quarter of 2020 reflect a reboundin activity levels in the WCSB, favorably impacting sand sales volumeswhich increased by 11% compared to the third quarter of 2019. Whilehigher volumes were achieved, sand revenue and total sales revenuewere lower by $2.4 million and $1.3 million, respectively, for thethird quarter of 2020 compared to the same period last year, due tolower realized sand prices. Wellsite solutions revenue for the thirdquarter of 2020 was also favorably impacted by the increase inactivity levels, with higher trucking revenue and higherSahara-related revenue compared to the third quarter of 2019.
Cost of sales, excluding depreciation and depletion,continues to be favorably impacted by previously implemented costsavings initiatives and production efficiencies. Reductions in cost ofsales have been further impacted by ongoing optimization effortsrelated to logistics costs.
With the onset of COVID-19, in the second quarter of2020 Source took immediate steps to ensure the safety of its employeesand customers, and implemented a COVID-19 program to protect thehealth and well-being of employees. In order to further mitigate theimpact of the operating environment, Source implemented operationalcost reductions and other measures which continued into the thirdquarter and will continue for the balance of 2020, including thefollowing:
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- reduced staff levels and hours of operations;
- reduced board of directors, executive and salariedemployee compensation and benefits;
- eliminated all discretionary expenditures;
- reduced capital expenditures;
- negotiated deferral of interest payment obligation onthe Notes (as defined below);
- received proceeds from the US Small BusinessAdministration's Paycheck Protection Program (the "US PPPLoan"); and
- received proceeds from the Canadian Emergency WageSubsidy ("CEWS") program.
In addition to the initiatives noted above, Source alsoworked closely with certain rail car lease vendors to negotiate morefavorable long-term contracts. Source has finalized thesenegotiations, effective September 2020, resulting in the execution ofamended rail car lease contracts which significantly reduce ongoingmonthly lease payments and lowered Source's long-term obligations forthese leases.
Gross margin and Adjusted Gross Margin decreased by$0.7 million and $1.4 million, respectively, compared to the thirdquarter of 2019. The reductions were attributed to lower pricingrealized, partially offset by the aggressive cost reductioninitiatives implemented, as discussed above, as well as logisticsefficiencies achieved.
Compared to the prior year's third quarter, operatingand general and administrative expenses for the three months endedSeptember 30, 2020 were lower by $2.2 million, or 30%. Workforceoptimization efforts implemented in 2019 as well as cost controlmeasures undertaken in response to COVID-19, as discussed below, drovefurther reductions in people costs. Operating and general andadministrative expenses were also favorably impacted by the receipt ofproceeds from the CEWS program of $0.5 million in the quarter.
For the three months ended September 30, 2020, AdjustedEBITDA was $13.0 million, $1.0 million higher than the $12.0 millionof Adjusted EBITDA generated in the three months ended September 30,2019.
PROPOSED RECAPITALIZATIONTRANSACTION
On October 7, 2020, the Company announced a proposedrecapitalization transaction (the "RecapitalizationTransaction") in a news release (the "TransactionAnnouncement"), designed to provide the Company with a stronger,long-term capital structure and provide enhanced liquidity andfinancial flexibility. For additional details and key terms related tothe Recapitalization Transaction, please refer to the TransactionAnnouncement, the interim order news release dated October 26, 2020and Source's Management's Discussion and Analysis dated October 29,2020.
COVID-19 AND FUTURE OPERATIONS
In March 2020, COVID-19 was declared a global pandemicby the World Health Organization. Measures enacted to prevent thespread of the virus have resulted in global business disruption withsignificant economic repercussions. At the end of the first quarter of2020, as a result of the weakening economic climate and demand forcrude oil, the Company carried out an assessment of the recoverablevalue of its operations, resulting in an impairment loss recognized inthe first quarter of 2020. For the three months ended September 30,2020, the Company determined that no additional indicators ofimpairment were present and concluded no further impairment analysiswas required.
In May 2020, as a result of the weakened operatingclimate, the Company obtained covenant relief from its bankingsyndicate, including the waiver of the application of the fixed chargecoverage ratio from May 31, 2020 and subsequently through October 30,2020. In June 2020, Source entered into a Support and InterestDeferral Agreement (as amended, the "Deferral Agreement")with noteholders holding approximately 72% of Source's Notes. Underthe Deferral Agreement, the June 15, 2020 interest payment on theNotes has been deferred until October 31, 2020. The Company recentlyannounced the proposed Recapitalization Transaction and the interimorder, as referenced above. However, there can be no assurance thatthe Recapitalization Transaction will be completed, and thereforethere is material uncertainty that may cast doubt on the Company'sability to continue as a going concern.
Source's condensed consolidated interim financialstatements have been prepared on a going concern basis and do notreflect adjustments and classifications of assets, liabilities,revenues and expenses which would be necessary if the Company wereunable to continue as a going concern. Such adjustments could bematerial.
LIQUIDITY AND CAPITALRESOURCES
The Company has a banking operating facility, comprisedof an asset backed loan facility ("ABL") and a standbyletter of credit facility (collectively, with the ABL, the"Credit Facility"). As of September 30, 2020, Source had$25.7 million drawn under its ABL. The Credit Facility was also beingused to support $16.0 million of letters of credit leaving $21.0million of available liquidity. Source is subject to externallyimposed capital requirements for the Credit Facility, requiring SourceEnergy Services Canada LP to maintain a springing fixed charge ratioof 1.25:1 to be measured when Source's excess availability is lessthan 20% of the lesser of the borrowing base and the operatingfacility. In February 2020 an amendment to the ABL was completed,effective January 1, 2020, which included a reduction of the springingfixed charge ratio from 1.25:1 to 1.10:1 for all periods ending on orbefore December 31, 2020. In May 2020, as a result of the weakenedoperating environment, as noted above, Source obtained covenant relieffrom its banking syndicate, including the waiver of the application ofthe fixed charge coverage ratio from May 31, 2020 through October 30,2020.
----------------------------------------------------------- |Capital |Three |Nine | |expenditures |months |months | | |ended |ended | | |September |September | | |30, |30, | |---------------------------------------------------------| |($000’s) |2020 |2019 |2020 |2019 | |---------------------------------------------------------| |Terminal expansion|— | |143 | |43 | |10,063 | | |---------------------------------------------------------| |Wellsite solutions|249 | |26 | |670 | |4,733 | | |---------------------------------------------------------| |Production |17 | |1,047 | |525 | |6,021 | | |expansion | | | | | | | | | |---------------------------------------------------------| |Overburden removal|119 | |569 | |1,203 | |2,888 | | |---------------------------------------------------------| |Other |1 | |— | |104 | |— | | |---------------------------------------------------------| |Capital |386 | |1,785 | |2,545 | |23,705 | | |expenditures | | | | | | | | | -----------------------------------------------------------In the third quarter of 2020, capital expenditures were$0.4 million, $1.4 million lower than the same period last year.Source previously announced that capital spending for 2020 wasexpected to be limited to $5.6 million. Previous investment inprocessing assets and logistics infrastructure will allow for modestcapital expenditures through 2020 and beyond even as industry activityreturns to more normalized levels.
BUSINESS OUTLOOK
While Source's results for the third quarter wereencouraging, the rebound in economic activity remains uncertain asrecent surges in the number of active COVID-19 cases raises thequestion of a potential second wave of the virus, further emphasizinga slow and gradual recovery. The Company expects lower revenue andprofitability for the remainder of 2020 and the potential forcontinued volatility in industry activity into 2021.
Source cannot predict the extent of the impact COVID-19may have on energy demand, or how the Organization of the PetroleumExporting Countries will react to those changes in demand and howthose events could impact the Company's operations. Source cannotreasonably estimate the period of time that adverse businessconditions will persist, the impact they will have on the Company'sbusiness, liquidity, consolidated results of operations andconsolidated financial condition, or the pace of any subsequentrecovery.
Beyond 2020, we continue to remain optimistic about thelonger-term industry prospects, including increased demand for WCSBnatural gas driven by LNG, coal to natural gas conversions andincreased gas pipeline capacity. In addition, analysis of oil pipelineegress capacity and the potential for additional hydrocarbon shipmentsby rail continue to support the Company's expectation that activitylevels should substantially increase in the coming years.
Source has seen exploration and production("E&P") companies drive additional efficiencies in theircompletion programs by completing fracs over much shorter periods oftime, requiring larger volumes of frac sand. Source's terminal networkand logistics capabilities have become a key component in the successof these accelerated frac programs, further enhanced by the deliverycapability of the Sahara units. Source is ideally positioned to servethe increase in demand for frac sand and logistics services asactivity levels rebound.
Source continues to focus on improving logistics forother items needed at the wellsite, in response to customer requeststo expand its service offerings, and continues to developopportunities to further utilize its existing Western Canadian terminals to provide additional diversification ofits business. Over the longer-term, Source anticipates that these newterminal services will be a meaningful part of its business.
ABOUT SOURCE ENERGY SERVICES
Source is a logistics company that focuses on theproduction and distribution of high quality Northern White frac sand,as well as the distribution of other bulk completion materials notproduced by Source. Source provides its customers with an end-to-endsolution for frac sand supported by its Wisconsin mines and processingfacilities, its Western Canadian terminal network and its "lastmile" logistics capabilities. Source also provides storage andlogistics services for other bulk oil and gas well completionmaterials and has developed Sahara, a proprietary wellsite mobile sandstorage and handling system.
Source's full-service approach allows customers to relyon its logistics platform to increase reliability of supply and toensure the timely delivery of their requirements for frac sand andother bulk completion materials at the wellsite.
IMPORTANT INFORMATION
These results should be read in conjunction with eachof Source's unaudited condensed consolidated interim financialstatements for the three and nine months ended September 30, 2020 and2019, and Source's audited consolidated financial statements for theyear ended December 31, 2019, together with the accompanying notes(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 . TheFinancial Statements and comparative statements have been prepared inaccordance with International Financial Reporting Standards("IFRS") as issued by the International Accounting StandardsBoard. Unless otherwise stated, all amounts are expressed in Canadiandollars.
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's methodof calculating these measures may differ from the method used by otherentities and, accordingly, they may not be comparable to similarmeasures presented by other companies. These financial measures shouldnot be considered as an alternative to, or more meaningful than, netincome (loss), gross margin and other measures of financialperformance as determined in accordance with IFRS. For additionalinformation regarding non-IFRS measures, including their use tomanagement and investors and reconciliations to measures recognized byIFRS, please refer to the MD&A, which is available online at www.sedar.com and through Source'swebsite 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", "estimates","forecasts", "intends", "anticipates","believes", "plans", "seeks","projects" or variations of such words and phrases, or statethat certain actions, events or results "may" or"will" be taken, occur or be achieved. Such forward-lookingstatements reflect Source's beliefs, estimates and opinions regardingits future 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. 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: theRecapitalization Transaction and the capital structure of Source aftersuch Recapitalization Transaction is completed; our continued optimismfor longer term industry prospects and increased demand for LNG onWCSB activity levels; anticipated improvements in pipeline egress andtransportation capacity, coal to natural gas power generationconversions and the potential for additional hydrocarbon shipments byrail; outlook for operations and sales volumes; expectationsrespecting future conditions; revenue and profitability; industryactivity levels; the unknown impact of COVID-19 on the global economyand the effect it may continue to have on the Company's business,liquidity, operations and financial condition and the pace of anysubsequent recovery; expectations regarding market share; industryconditions pertaining to the frac sand industry; the benefits thatSource's "last mile" services provide to customers;expectations regarding customer relationships and counterparty risk;the anticipated effect of terminal services on Source's business;expectations regarding funding for future working capital and capitalexpenditures; Source's planned cash outflows relating to leasecommitments and financial liabilities; the ability to secure futurefunding; expectations on Source's ability to meet their capital needs;uncertainty regarding Source's ability to continue as a going concernif the Recapitalization Transaction is not completed; expectationsregarding fluctuations in foreign currency; expectations regarding theseverity and outcome of legal claims and proceedings; expectationsregarding the impact of climate change; risks associated withinformation systems and cyber security; and operational risks.
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 made regarding,among other things: our ability to complete the RecapitalizationTransaction, the ability to obtain the third party consents requiredto complete same and the timeframe in which such consents will beobtained; proppant market prices; future oil, natural gas and naturalgas liquids prices; future global economic and financial conditions;future commodity prices, demand for oil and gas and the product mix ofsuch demand; levels of activity in the oil and gas industry in theareas in which Source operates; the continued availability of timelyand safe transportation for Source's products, including withoutlimitation, Source's rail car fleet and the accessibility ofadditional transportation by rail and truck; the maintenance ofSource's key customers and the financial strength of its keycustomers; the maintenance of Source's significant contracts or theirreplacement with new contracts on substantially similar terms and thatcontractual counterparties will comply with current contractual terms;operating costs; that the regulatory environment in which Sourceoperates will be maintained in the manner currently anticipated bySource; future exchange and interest rates; geological and engineeringestimates in respect of Source's resources; the recoverability ofSource's resources; the accuracy and veracity of information andprojections sourced from third parties respecting, among other things,future industry conditions and product demand; demand for horizontaldrilling and hydraulic fracturing and the maintenance of currenttechniques and procedures, particularly with respect to the use ofproppants; Source's ability to obtain qualified staff and equipment ina timely and 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 impact ofcompetition on Source; and Source's ability to obtain financing onacceptable terms.
A number of factors, risks and uncertainties couldcause results to differ materially from those anticipated anddescribed herein including, among others: the inability to obtain theconsents required to complete the Recapitalization Transaction, and,thus, our inability to complete the Recapitalization Transaction; theeffects of competition and pricing pressures; risks inherent in keycustomer dependence; effects of fluctuations in the price ofproppants; risks related to indebtedness and liquidity, includingSource's leverage, restrictive covenants in Source's debt instrumentsand Source's capital requirements; risks related to interest ratefluctuations and foreign exchange rate fluctuations; changes ingeneral economic, financial, market and business conditions in themarkets in which Source operates; changes in the technologies used todrill for and produce oil and natural gas; Source's ability to obtain,maintain and renew required permits, licenses and approvals fromregulatory authorities; the stringent requirements of and potentialchanges to applicable legislation, regulations and standards; theability of Source to comply with unexpected costs of governmentregulations; liabilities resulting from Source's operations; theresults of litigation or regulatory proceedings that may be broughtagainst Source; the ability of Source to successfully bid on newcontracts and the loss of significant contracts; uninsured andunderinsured losses; risks related to the transportation of Source'sproducts, including potential rail line interruptions or a reductionin rail car availability; the geographic and customer concentration ofSource; the impact of climate change risk; the ability of Source toretain and attract qualified management and staff in the markets inwhich Source operates; labour disputes and work stoppages and risksrelated to employee health and safety; general risks associated withthe oil and natural gas industry, loss ofmarkets, consumer and business spending and borrowing trends; limited,unfavourable, or a lack of access to capital markets; uncertaintiesinherent in estimating quantities of mineral resources; sandprocessing problems; implementation of recently issued accountingstandards; the use and suitability of Source's accounting estimatesand judgments; and the impact of information systems and cybersecurity breaches.
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.
FOR FURTHER INFORMATION PLEASECONTACT:
------------------------------------------------------------------------------------ |Media inquiries: |Investor relationsinquiries: | |----------------------------------------------------------------------------------| |Meghan Somers |Brad Thomson | |----------------------------------------------------------------------------------| |Communications Advisor |Chief Executive Officer | |----------------------------------------------------------------------------------| |(403) 262-1312 (ext. 295) |(403) 262-1312 (ext. 225) | |----------------------------------------------------------------------------------| |communications@sourceenergyservices.com|investorrelations@sourceenergyservices.com| ------------------------------------------------------------------------------------Copyright (c) 2020 TheNewswire - All rights reserved.