(TheNewswire)
Calgary, Alberta – TheNewswire - November 8, 2022– ( TSX:SHLE ) Source Energy Services Ltd. (“Source” or the “Company”) is pleased to announceits financial results for the three and ninemonths ended September 30, 2022 .
THIRD QUARTER 2022 HIGHLIGHTS
Key highlights for the threemonths ended September 30, 2022 , included thefollowing:
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realized sand sales volumes of 753,233 MT and sand revenue of $97.2 million , a 22% increase from the third quarter of 2021;
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achieved a 28% increase in average realized sand price, excluding revenuefrom mine gate sales volumes;
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distributed 691,242 MT of proppants and chemicals through Source’s WesternCanadian Sedimentary Basin (“WCSB”) terminal network;
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achieved a record for the highest number of days onsite for the Sahara fleet in Canada;
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recorded utilization of 87% for the quarter and added two newSahara customers;
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reported $30.5million of available liquidity on its assetbacked loan (“ABL”) facility at the end of the quarter, reflectinga reduction of total net debt outstanding of $17.2 million;
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realized gross margin of $16.4million and Adjusted Gross Margin (1) of $21.1 million ;
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reported net income of $5.9million ;
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realized Adjusted EBITDA (1) of $16.3 million , excludingthe $9.7 million realized gain on the settlement of outstanding futureforward exchange contracts during the quarter, a 44% increase from the third quarter of 2021; and
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subsequent to quarter end, closed a transaction for anew $75.4 million (US$55.0 million) credit facility.
Note :
(1) Adjusted Gross Margin (includingon a per 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 isapproximately equal to 1.102 short tons.
(2) The average Canadian to UnitedStates (“US”) dollar exchange rate for the three and nine monthsended September 30, 2022, was $0.7659 and 0.7795, respectively(2021 - $0.7937 and 0.7992, respectively). Referto ‘Q3 2022 Results’ for additional information.
(3) Adjusted EBITDA and Adjusted Gross Margin (including ona per MT basis) are not defined under IFRS, refer to ‘Non-IFRSMeasures’ below for reconciliations to measures recognized by IFRS.For additional information, please refer to Source’s MD&Aavailable online at www.sedar.com.
Q3 2022 RESULTS
Source generated $97.2million of sand revenue during the third quarter , an increase of 22% over the same period in 2021 and an increase of $3.6 million over the second quarter of 2022.This is the highest quarterly sand revenue generated since the thirdquarter of 2018, and reflects improved sand sales pricing primarilydue to improved industry dynamics. As a result, Source realized a 28% increase in averagerealized sand price, or $29.64 per MT, excluding the impact of mine gate sales, compared tothe third quarter lastyear, favorably impacting sand revenue. Commodity prices for oil andnatural gas remain strong, resulting in sustained high levels ofactivity through the third quarter in the WCSB.
During the thirdquarter , cost of sales, excluding depreciation,was impacted by higher costs for transportation and freight, due toincreased prices for fuel compared to the same period last year andadditional costs for third party sand purchases, procured to ensure nocustomer supply interruptions resulting from increased customerdemand. Despite continued cost pricing pressure,Source was able to mitigate certain cost increases through increasedefficiencies at its Wisconsin facilities and pricing increases. Costof sales was impacted by a weakening Canadian dollar on US denominatedcosts relative to the third quarter of 2021. The impact of the weakerCanadian dollar was offset in Adjusted EBITDA by gains realized onforeign currency forward contracts settled during the quarter.
Gross margin increased by $3.6 million for the quarter.Excluding gross margin from mine gate volumes, Adjusted Gross Marginfor the third quarter was $30.27 per MT, favorablyimpacted by improved customer and spot market pricing, as well asstrong sand sales volumes. Compared to the same quarter last year,Adjusted Gross Margin per MT increased by 55% after adjusting for the impact ofthe weakening Canadian dollar and the benefit of proceeds from theCanada Emergency Wage Subsidy (“CEWS”) program, as well as certainproduction credits recorded last year. The weakening of the Canadiandollar negatively impacted Adjusted Gross Margin by approximately $2.07 per MT; however,this impact was offset by the settlement of foreign currency forwardcontracts settled during the quarter (see below).
Higher repairs and maintenance costs were offset bylower people costs realized, due to lower variable compensationexpense recorded, resulting in slightly lower total operating expensefor the third quarter of 2022 compared to the same period last year, despite no proceedsreceived from the CEWS program during the current quarter. General andadministrative expense was also lower on a quarter-over-quarter basis,primarily attributed to lower selling and administrative costs drivenby a lower provision for bad debt expense.
After excluding the realized gain on the settlement offoreign exchange forward contracts of $9.7 million, Adjusted EBITDAwas $16.3 million for the thirdquarter , a reflection of the strong sand salesvolumes and sand sales pricing realized despite the unfavorable impactof higher costs incurred for fuel and freight. The weakening of theCanadian dollar negatively impacted Adjusted EBITDA by $2.0 millionduring the quarter, which was offset by $2.1 million realized from thesettlement of normal course foreign exchange contracts executed duringthe quarter.
In addition to the normal course foreign exchangecontracts settled, as noted above, Source is renegotiating certain ofits customer contracts to be denominated in US dollars which willfurther reduce its exposure to US dollar fluctuations. As a result ofrebalancing US dollar denominated revenue, combined with the new ABLfacility (see below) which is denominated in US dollars, Source woundup its outstanding foreign exchange forward contracts prior toSeptember 30, 2022, resulting in a realized foreign exchange gain of$9.7 million during the quarter. Approximately $3.3 million of thisrealized foreign exchange gain is related to foreign exchange forwardcontracts that were expiring in the fourth quarter of 2022, with $6.4million of the realized gain related to contracts due to mature in2023.
New Senior Credit Facility
On October 14, 2022, the Company closed a new revolvingasset backed senior credit facility (the “new ABL”) with asyndicate comprised of FGI Worldwide LLC and CIT Northbridge Credit,as advised by CIT Asset Management LLC, providing access to funding ofapproximately $75.4 million (US$55.0 million). The new ABL providesSource with a lower cost of borrowing and less restrictive covenantswhich will allow Source to focus on the generation of free cash flowand the reduction of debt.
Upon closing of the new ABL, Source completed theAugust 15, 2022 cash interest payment for the Notes and repaid alloutstanding draws on the ABL and senior secured term loan. Foradditional information, including the financial covenants of the newABL facility, refer to ‘Long-term Debt’ within Source’sMD&A.
Liquidity and CapitalResources
Note :
(1) Adjusted EBITDA and Free CashFlow are not defined under IFRS, refer to ‘Non-IFRS Measures’below. The reconciliation to the comparable IFRS measure can be foundin the table below.
At September 30, 2022, Source had $30.5 million ofavailable liquidity on its ABL facility. Source generated Free CashFlow of $14.5 million forthe three months ended September 30,2022 , compared with $4.5million generated for the third quarter of 2021. The increase wasdriven primarily by a $5.0 million improvement in Adjusted EBITDA(excluding the gain realized from the settlement of outstanding futureforeign exchange forward contracts of $9.7 million). This increase waspartially offset by capital expenditures for the quarter, largely dueto the maintenance work performed at the Peace River facility. FreeCash Flow was negatively impacted by higher interest expense incurredfor the ABL facility, reflecting higher average draws outstandingprior to the end of the quarter and an increase in the variableinterest rates for the facility.
Source’s capital expenditures for the third quarter of 2022 were $4.5 million , an increase of $2.6 million compared tothe second quarter last year. The increase in capital expenditures forthe period was primarily due to maintenance and sustaining capital,related to a $0.2 million increase in costs associated with overburden removal for miningoperations and the Peace River facility maintenance, as noted above.Growth capital expenditures were lower, on quarter-over-quarter basis, due to the Sahara unloadingcapacity enhancements and the purchase of production equipment toimprove yields completed in the third quarter of last year.
ESG UPDATE
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 elevenacres 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.
As an active member of its community, Source supportsinitiatives that align with its corporate values, support thecharitable efforts of our employees and are located close to itsoperations. Source supports community needs in the areas of Arts andCulture, Education, Environment, Health and Wellness and Sports andRecreation through financial donations and employee volunteer hours.
For more information, Source’s most recent ESG reportis available at www.sourceenergyservices.com .
BUSINESS OUTLOOK
Sustained levels of industry activity continue tofavorably impact frac sand supply and demand fundamentals which areexpected to remain favorable through 2023. These fundamentals, coupledwith Source’s leading service offerings and logistics capabilities,have translated into meaningful pricing gains and improved grossmargins in 2022, particularly in the spot sand sales market, a trendthat is expected to continue through 2023. Source’s main customercontracts will expire over the next few quarters, with contractrenewals creating opportunity for further growth in margins. Sourcecustomers have signaled growing confidence related to operating in thenortheastern British Columbia region. Operations in this geologicalregion require larger volumes of sand per well and, combined withSource’s terminal network footprint, would support strong activitylevels for Source next year.
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 is 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.
THIRD QUARTER CONFERENCE CALL
A conference call to discuss Source’s third quarter financial results hasbeen scheduled for 9:00 am MST (11:00 am ET) on Wednesday, November 9,2022.
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 as follows:
Source Energy Services Q3’22 ResultsCall
Results Conference Call PlaybackAccess:
The call will be recorded and available for playbackapproximately 2 hours after the meeting end time, until December 9,2022. Below are the details to access the call playback:
Toll-Free Playback Number:
1-800-319-6413
Playback Passcode:
9547
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 three and nine months ended September 30, 2022and 2021 , together with 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 (“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 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 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
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”, “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: Source’s efforts to return the land of a thrivingvegetative state; our search for efficiencies to implement in order tolessen the impact of Source’s activities on the environment andspecifically to reduce greenhouse gas emissions; our expectation thatfrac sand supply and demand fundamentals will remain favorable through2023; our expectation that meaningful pricing gains will continuethrough 2023; our belief that improved gross margins, particularly inthe spot sand sales market, will continue through 2023; ourexpectation that contract renewals over the next few quarters createsopportunity for further growth in margins; consumers’ increasing activity levels and confidence inconnection with operating in northeastern British Columbia, and ourexpectation that operations in such geological region would supportstrong activities for Source next year; increased demand for naturalgas, increased natural gas pipeline export capabilities and liquefiednatural gas exports will drive incremental demand for Source’sservices in the WCSB; continued increase in demand from customersprimarily focused on the development of natural gas properties inMontney, Duvernay and Deep Basin; the Company’s view that naturalgas is an important transitional fuel for the successful movement to aless carbon intensive world; our focus on exploring and developing,and advancement of economic growth opportunities related to thetransition to less carbon intense energy solutions; our focus on andexpectations regarding increasing Source’s involvement in theprovision of logistics services for other wellsite items; outlook forcommodity prices and sales volumes; expectations respecting futureconditions; 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 havebeen made regarding, among other things: proppant market prices;future oil, natural gas and liquefied natural gas prices; futureglobal economic and financial conditions; future commodity prices,demand for oil and gas and the product mix of such demand; levels ofactivity in the oil and gas industry in the areas in which Sourceoperates; the continued availability of timely and safe transportationfor Source’s products, including without limitation, Source’s railcar fleet and the accessibility of additional transportation by railand truck; the maintenance of Source’s key customers and thefinancial strength of its key customers; the maintenance of Source’ssignificant contracts or their replacement with new contracts onsubstantially similar terms and that contractual counterparties willcomply with current contractual terms; operating costs; that theregulatory environment in which Source operates will be maintained inthe manner currently anticipated by Source; future exchange andinterest rates; geological and engineering estimates in respect ofSource’s resources; the recoverability of Source’s resources; theaccuracy and veracity of information and projections sourced fromthird parties respecting, among other things, future industryconditions and product demand; demand for horizontal drilling andhydraulic 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 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 by this cautionarystatement. Readers should not place undue reliance on forward-lookingstatements. These statements speak only as of the date ofthis press release. Exceptas may be required by law, Source expressly disclaims any intention orobligation to revise or update any forward-looking statements orinformation whether as a result of new information, future events orotherwise.
Any financial outlook and future-oriented 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 INFORMATIONPLEASE 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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