(TheNewswire)
Calgary, Alberta – TheNewswire - March18, 2021 ( TSX:SHLE )
Source Energy Services Ltd. (“Source” or the “Company”) ispleased to announce its financial results for the three and twelvemonths ended December 31, 2020.
2020 was a year of unprecedented challenges, as the oil and gasindustry reeled from a significant reduction in global demand causedby the coronavirus pandemic (“COVID-19”) and the fallout from aprice war between the Organization of Petroleum Exporting Countries(“OPEC”) and other oil exporting nations. While this was achallenging business environment, Source demonstrated the strength ofits business model and its ability to adapt to the rapid swings inactivity levels seen during the year. Some ofthe key achievements realized for the year were:
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- realized sand sales volumes of 1,968,511 metrictonnes (“MT”), a decrease of 12% from 2019, and sand revenue of$210.0 million;
- distributed 2,021,335 MT of sand through Source’sWestern Canadian Sedimentary Basin (“WCSB”) terminalnetwork;
- realized gross margin of $24.7 million and AdjustedGross Margin(1) of $56.8 million;
- implemented and maintained cost control measures thatresulted in a 34% reduction of operating and general andadministrative expense when compared to 2019;
- renegotiated the majority of Source’s rail carlease contracts, resulting in a reduction in 2020 lease payments ofapproximately $9.0 million, compared to 2019, and a reduction toSource’s total outstanding lease obligations;
- incurred capital costs of $3.7 million which was an81% reduction from amounts spent in the prior year;
- realized Adjusted EBITDA(1) of $37.7 million;and
- reported net loss for the year ended December 31,2020 of $185.5 million, or $36.81 per share, which included animpairment loss of $143.7 million recognized in the year.
In the fourth quarter, completion activities in the WCSB continued togain momentum driven by an increasingly positive outlook forcommodities. As experienced in previous quarters, Source’s customerscontinue to demand larger volumes of sand in progressively shorterperiods of time. Some of Source’s fourth quarter accomplishmentsinclude:
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- completed a Recapitalization Transaction (as definedbelow), resulting in reduced debt, enhanced liquidity and increasedfinancial flexibility, enabling Source to withstand industryvolatility while continuing to build on its position as the largestfrac sand provider in the WCSB;
- realized sand sales volumes of 474,345 metric tonnes(“MT”) and sand revenue of $48.9 million;
- achieved a new service record in December for theamount of sand delivered through Sahara to the blender in a single dayof 4,436 MT;
- renewed a sales contract for an additional three-yearterm and achieved a new direct sale customer contract for aone-year term;
- forward placed 300,000 MT of inventory in the WCSB inorder to ensure service quality in the first quarter of 2021; and
- realized Adjusted EBITDA (1) of $12.2million, an increase of $3.0 million, or 32% when compared to thefourth quarter of 2019.
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.
Three months ended December 31, Year ended December 31,
($000’s, except MT and per unitamounts) | 2020 | 2019 | 2020 | 2019 |
Sand volumes (MT) (1) | 474,345 | 479,017 | 1,968,511 | 2,233,034 |
Sand revenue | 48,936 | 58,401 | 210,021 | 281,866 |
Wellsite solutions | 9,582 | 9,235 | 36,644 | 46,208 |
Terminal services | 451 | 1,006 | 3,213 | 4,882 |
Sales | 58,969 | 68,642 | 249,878 | 332,956 |
Cost of sales | 42,650 | 51,669 | 193,033 | 253,302 |
Cost of sales – depreciation | 5,253 | 6,351 | 32,188 | 42,043 |
Cost of sales | 47,903 | 58,020 | 225,221 | 295,345 |
Gross margin | 11,066 | 10,622 | 24,657 | 37,611 |
Operating expense | 3,198 | 5,423 | 12,485 | 20,710 |
General & administrative expense | 1,203 | 2,712 | 9,379 | 12,247 |
Depreciation | 2,647 | 4,020 | 13,860 | 16,212 |
Income (loss) from operations | 4,018 | (1,533) | (11,067) | (11,558) |
Total other expense (income) | (19,997) | 670 | 143,049 | 102,338 |
Income (loss) before incometaxes | 24,015 | (2,203) | (154,116) | (113,896) |
Deferred income tax expense (recovery) | — | 416 | 31,350 | (23,941) |
Net income (loss) (2) | 24,015 | (2,619) | (185,466) | (89,955) |
Net earnings (loss) per share ($/share) (3) | 4.58 | (0.58) | (36.81) | (17.68) |
Diluted net earnings (loss) per share($/share) (3) | 4.58 | (0.58) | (36.81) | (17.68) |
Adjusted EBITDA (4) | 12,161 | 9,184 | 37,721 | 48,626 |
Sand revenue sales/MT | 103.17 | 121.92 | 106.69 | 126.23 |
Gross margin/MT | 23.33 | 22.17 | 12.53 | 16.84 |
Adjusted Gross Margin (4) | 16,319 | 16,973 | 56,845 | 79,654 |
Adjusted Gross Margin/MT (4) | 34.40 | 35.43 | 28.88 | 35.67 |
Notes : |
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(1) One MT is approximately equal to 1.102 shorttons.
(2) The average Canadian to US dollar exchangerate for the three and twelve months ended December 31, 2020 was$0.7675 and $0.7454, respectively (2019 - $0.7576 and $0.7536,respectively).
(3) Prior year amounts have been restated toreflect the 12:1 share consolidation pursuant to the RecapitalizationTransaction.
(4) Adjusted EBITDA and Adjusted Gross Margin(including on a per MT basis) are not defined under IFRS, refer to‘Non-IFRS Measures’ below.
Activity levels in the WCSB partially recovered through the third andfourth quarters, a result of improved commodity prices. Customers tookadvantage of stabilized commodity pricing by deploying capital inadvance of the end of the year resulting in fourth quarter sandvolumes that were relatively consistent with 2019. Sand revenue was$48.9 million for the quarter, a decrease of $9.5 million from thefourth quarter of 2019 due to continued pricing pressure in the WCSB.
Wellsite solutions revenue was $9.6 million for the fourth quarter, anincrease of 4%, resulting from increased sand volumes trucked towellsites compared to the fourth quarter of 2019.
Cost of sales, excluding depreciation, was favorably impacted by costsavings initiatives, warmer weather and production efficienciesimplemented last year and further entrenched in 2020. Proceeds of $0.4million from the Canadian Emergency Wage Subsidy (“CEWS”) programfurther contributed to the lower cost of sales reported for thequarter.
Gross margin and Adjusted Gross Margin increased by $0.4 million anddecreased by $0.7 million, respectively, for the fourth quartercompared to 2019, as lower average realized sand prices for thequarter were mitigated by the operational efficiencies achieved. Grossmargin was favorably impacted by lower cost of sales - depreciation,due to a lower equipment asset base resulting from impairmentrecognized early in 2020 and the benefits of the rail car leasenegotiations.
Compared to 2019, operating and general and administrative expenseswere lower by $3.7 million, or 46%, for the fourth quarter. Workforceoptimization efforts implemented in 2019 as well as cost controlmeasures undertaken in 2020, as discussed below, drove furtherreductions in costs, including lower variable incentive compensation.Operating and general and administrative expenses were also favorablyimpacted by the receipt of proceeds from the CEWS program of $0.3million in the fourth quarter.
For the three months ended December 31, 2020, Adjusted EBITDA was$12.2 million, an increase of $3.0 million from 2019, as the loweraverage sales price for sand was more than offset by a continued focuson cost controls across the organization.
In light of the events of 2020, the Company, under the supervision of a committee comprised of independentmembers of its board of directors (the “Board”), undertook acomprehensive process to evaluate all reasonably availablealternatives to access additional liquidity and improve theCompany’s capital structure. On December 30, 2020 Source announcedthe completion of its recapitalization transaction (the“Recapitalization Transaction”), designed to provide the Companywith a stronger long-term capital structure and enhanced liquidity andfinancial flexibility. The transaction was undertaken through a planof arrangement under the Canada Business Corporations Act and achievedthe following:
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- addressed the maturity and obligations (including allaccrued and unpaid interest) under the $157.7 million senior securednotes due 2021 (the “Old Notes”) through an exchange of the OldNotes for a combination of new senior secured first lien notes dueMarch 15, 2025 (the “Notes”), resulting in a $32.7 milliondecrease of the principal amount and the issuance of new common sharesof Source, constituting approximately 62.5% of the common sharesoutstanding on a fully diluted basis;
- provided enhanced liquidity and financial flexibilityas a result of the terms of the Notes, which enable the Company to payinterest in kind, rather than in cash, on the Notes for all quarterlyinterest payments up to and including February 15, 2022;
- enabled Source to access new funding under a $20.0million term loan facility from the Company’s existing lendingsyndicate;
- enabled Source to obtain the support of its lendingsyndicate through an amendment to Source’s revolving Credit Facility(as defined below) providing the Company with an extended maturitydate, ongoing financial flexibility and access to liquidity under theamended Credit Facility; and
- resulted in existing shareholders retainingapproximately 37.5% of the outstanding common shares on a fullydiluted basis following completion of the RecapitalizationTransaction, thereby allowing shareholders to participate in theanticipated future growth of Source’s business as market conditionsimprove in the WCSB.
Immediately prior to the closing of the Recapitalization Transaction,the outstanding common shares of Source were consolidated on atwelve-for-one basis. The Recapitalization Transaction resulted in again on the extinguishment of debt, comprised of the differencebetween the carrying value of the Old Notes and the Notes, offset inpart by the fair value of the equity issuance and net of transactioncosts recognized. Refer to Note 13 of the audited consolidatedfinancial statements for the year ended December 31, 2020 foradditional detail related to the Recapitalization Transaction.
As activity levels began to recover in the latter half of the year, Source has continued to examine its operationalcosts while accommodating increased demand to ensure it remainsfocused on maximizing operational efficiencies. Source also workedclosely with certain rail car lease vendors to negotiate morefavorable long-term contracts, resulting in the execution of amendedrail car lease contracts which significantly reduced ongoing monthlylease payments and lowered Source’s long-term obligations for theseleases.
LIQUIDITY AND CAPITAL RESOURCES
As noted above, Source completed the Recapitalization Transaction andrenegotiated lease terms providing Source with a stronger, moreflexible, long-term capital structure. The Company now has a bankingoperating facility, comprised of an asset backed loan facility(“ABL”), a standby letter of credit facility and a senior securedterm loan (collectively, the “Credit Facility”). As of December31, 2020, Source had $3.7 million drawn under its ABL. The CreditFacility was also being used to support $14.6 million of letters ofcredit leaving $17.3 million of available liquidity. Source is subjectto externally imposed capital requirements for the Credit Facility. Asof December 31, 2020, Source Energy Services and its subsidiaries werecompliant with all covenants of the Credit Facility.
Capital expenditures | Three months ended December 31, | Year ended December 31, | ||
($000’s) | 2020 | 2019 | 2020 | 2019 |
Terminal expansion | — | (5,788) | 43 | 4,272 |
Wellsite solutions | 943 | 293 | 1,613 | 5,115 |
Production expansion | 58 | 784 | 582 | 6,561 |
Overburden removal | 137 | 779 | 1,341 | 3,672 |
Other | — | 23 | 104 | 49 |
Capital expenditures | 1,138 | (3,909) | 3,683 | 19,669 |
Capital expenditures for the fourth quarter of 2020 were $1.1 million,a change of $5.0 million from the same period last year. In the fourthquarter of 2019, Source received insurance proceeds of $5.9 millionrelated to amounts previously expended for the Fox Creek terminalexpansion project. For the year ended December 31, 2020, capitalexpenditures were $16.0 million lower than the prior year due to thecompletion of the Fox Creek terminal expansion and two Sahara units in2019.
Source believes its previous investment in processing assets andlogistics infrastructure will allow for modest capital expendituresthrough 2021 and beyond even as industry activity returns to morenormalized levels.
Source’s activity levels recovered in the latter half of 2020 andhave continued to gain momentum into the first quarter of 2021,supported by the strength of commodity prices. Commodity pricesstabilized at the end of 2020 and have demonstrated continued strengthearly in 2021, allowing exploration and production (“E&P”)companies to generate stronger cash flows. Source’s customerscontinue to be focused on strengthening their balance sheets; however,Source is starting to see more customers developing drilling andcompletion programs for the second half of 2021 and into 2022.
Source continues to remain optimistic about the longer-term industryprospects, including increased demand for WCSB natural gas driven byLNG, coal to natural gas power generation conversions and increasedgas pipeline capacity. In addition, expansion of oil pipeline egresscapacity and the potential for additional hydrocarbon shipments byrail continue to support the Company’s expectation that activitylevels should steadily increase in the coming years.
Source continues to see E&P companies drive additionalefficiencies in their completion programs by completing fracs overmuch shorter periods of time, requiring larger volumes of frac sand.Source’s terminal network and logistics capabilities have become akey component in the success of these accelerated frac programs in theMontney and the Duverney, and Source’s successin capturing a large portion of this market is further enhanced by thedelivery capability of the Sahara units. Source is ideally positionedto serve the increase in demand for frac sand and logistics servicesas activity levels rebound.
Source continues to focus on improving logistics for other itemsneeded at the wellsite, in response to customer requests to expand itsservice offerings, and continues to develop opportunities to furtherutilize its existing Western Canadian terminals to provide additionaldiversification of its business. Over the longer-term, Sourceanticipates that these new terminal services will be a meaningful partof its business.
Source cannot predict the extent of the impact COVID-19 or itsvariants may have on energy demand, or how OPEC will react to thosechanges in demand and how those events could impact the Company’soperations. Source cannot reasonably estimate the period of time thatadverse business conditions will persist, the impact they will have onthe Company’s business, liquidity, consolidated results ofoperations and consolidated financial condition, or the pace of anysubsequent recovery.
In March 2020, COVID-19 was declared a global pandemic by the WorldHealth Organization. Measures enacted to prevent the spread of thevirus resulted in global business disruption with significant economicrepercussions. With the onset of COVID-19, Source took immediate stepsto ensure the safety of its employees, contractors and customers andimplemented a COVID-19 program. Office employees were moved to awork-from-home model and special protocols were put in place tominimize COVID-19 exposure for employees and contractors in the fieldand at the production plants.
As a result of the weakening economic climate and the decline in thedemand for crude oil, Source implemented operational cost reductionsand other measures which included the following:
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- reduced staff levels and hours of operations;
- reduced Board, executive and salaried employeecompensation and benefits;
- eliminated all discretionary expenditures;
- reduced capital expenditures;
- received proceeds from the US Small BusinessAdministration’s Paycheck Protection Program;
- received proceeds from the CEWS program; and
- completed the Recapitalization Transaction (asoutlined above).
The Company also carried out an assessment of the recoverable value ofits operations as a result of the weakened economic climate. Adiscounted cash flow analysis was completed using an updated weightedaverage cost of capital and revised forecasts, resulting in animpairment loss of $143.7 million recognized in the first quarter of2020.
UPDATED NI 43-101 TECHNICAL REPORTS FORTHE MINERAL PROJECTS IN WISCONSIN, UNITED STATES
Source is pleased to announce that it has filed with the applicableCanadian securities regulatory authorities updated National Instrument43-101 – Standards of Disclosure for Mineral Projects (“NI43-101”) technical reports for each of its three mineral projects inWisconsin, United States (collectively, the “Technical Reports”).
The Technical Reports have each been prepared with an effective dateof December 31, 2020 and were updated as part of an annual assessmentthat accounts for conventional mining depletion of the mineralresources and include updated production records. The updatedresources do not represent a 100% or greater change in the totalmineral resources.
Mineral resources are not mineral reserves and do not havedemonstrated economic viability. There is no guarantee that all or anypart of the mineral resource will be converted into a mineral reserve.Source has not based its production decisions and ongoing mineproduction on mineral reserve estimates, preliminary economicassessments, prefeasibility studies or feasibility studies. As aresult, there may be an increased uncertainty of achieving anyparticular level of recovery of minerals or the cost of such recoveryand historically projects without any mineral reserves have increaseduncertainty and risk of failure.
Further details with respect to the scientific and technicalinformation contained in this press release are available in theTechnical Reports, which are available under the Company’s SEDARprofile a twww.sedar.com.
Source is a company that focuses on the production and distribution ofhigh quality Northern White frac sand, as well as the distribution ofother bulk completion materials not produced by Source. Sourceprovides its customers with an end-to-end solution for frac sandsupported by its Wisconsin mines and processing facilities, itsWestern Canadian terminal network and its “last mile” logisticscapabilities. Source also provides storage and logistics services forother bulk oil and gas well completion materials and has developedSahara, a proprietary wellsite mobile sand storage and handlingsystem.
Source’s full-service approach allows customers to rely on itslogistics platform to increase reliability of supply and to ensure thetimely delivery of their requirements for frac sand and other bulkcompletion materials at the wellsite.
These results should be read in conjunction with each of Source’saudited consolidated financial statements for the years ended December31, 2020 and 2019, together with the accompanying notes (the“Financial Statements”) and its corresponding MD&A for suchperiods. The Financial Statements and MD&A and other informationrelating 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.
In this press release Source has used the terms Adjusted Gross Marginand Adjusted EBITDA, including per MT, which do not have standardizedmeanings prescribed by IFRS and Source’s method of calculating thesemeasures may differ from the method used by other entities and,accordingly, they may not be comparable to similar measures presentedby other companies. These financial measures should not be consideredas an alternative to, or more meaningful than, net income (loss),gross margin and other measures of financial performance as determinedin accordance with IFRS. For additional information regarding non-IFRSmeasures, including their use to management and investors andreconciliations to measures recognized by IFRS, please refer to theMD&A, which is available online at www.sedar.com and through Source’s website at www.sourceenergyservices.com .
Certain statements contained in this press release constituteforward-looking statements relating to, without limitation,expectations, intentions, plans and beliefs, including information asto the future events, results of operations and Source’s futureperformance (both operational and financial) and business prospects.In certain cases, forward- looking statements can be identified by theuse of words such as “expects”, “estimates”, “forecasts”,“intends”, “anticipates”, “believes”, “plans”,“projects” or variations of such words and phrases, or state thatcertain actions, events or results “may” or “will” be taken,occur or be achieved. Such forward-looking statements reflectSource’s beliefs, estimates and opinions regarding its futuregrowth, results of operations, future performance (both operationaland financial), and business prospects and opportunities at the timesuch statements are made, and Source undertakes no obligation toupdate forward-looking statements if these beliefs, estimates andopinions or circumstances should change unless required by applicablelaw. Forward-looking statements are necessarily based upon a number ofestimates and assumptions made by Source that are inherently subjectto significant business, economic, competitive, political and socialuncertainties and contingencies. Forward-looking statements are notguarantees of future performance. In particular, this press releasecontains forward-looking statements pertaining, but not limited, to:our continued optimism for longer term industry prospects andincreased demand for LNG on WCSB activity levels; anticipatedimprovements in pipeline egress and transportation capacity, coal tonatural gas power generation conversions and the potential foradditional hydrocarbon shipments by rail; outlook for operations andsales volumes; expectations respecting future conditions; revenue andprofitability; industry activity levels; the impact of COVID-19 on theglobal economy and the effect it may continue to have on theCompany’s business, liquidity, operations and financial conditionand the pace of any subsequent recovery; industry conditionspertaining to the frac sand industry; the benefits that Source’s“last mile” services provide to customers; expectations regardingcustomer relationships and counterparty risk; the anticipated effectof terminal services on Source’s business; expectations regardingfunding for future working capital and capital expenditures;Source’s planned cash outflows relating to lease commitments andfinancial liabilities; the ability to secure future funding;expectations on Source’s ability to meet their capital needs;expectations regarding fluctuations in foreign currency; expectationsregarding the severity and outcome of legal claims and proceedings;expectations regarding the impact of climate change; risks associatedwith information systems and cyber security; and operational risks.
By their nature, forward-looking statements involve numerous currentassumptions, known and unknown risks, uncertainties and other factorswhich may cause the actual results, performance or achievements ofSource to differ materially from those anticipated by Source anddescribed in the forward-looking statements.
With respect to the forward-looking statements contained in this pressrelease assumptions have been made regarding, among other things:proppant market prices; future oil, natural gas and natural gasliquids 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 ortheir 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 could cause results todiffer materially from those anticipated and described hereinincluding, among others: the effects of competition and pricingpressures; risks inherent in key customer dependence; effects offluctuations in the price of proppants; risks related to indebtednessand liquidity, including Source’s leverage, restrictive covenants inSource’s debt instruments and Source’s capital requirements; risksrelated to interest rate fluctuations and foreign exchange ratefluctuations; changes in general economic, financial, market andbusiness conditions in the markets in which Source operates; changesin the technologies used to drill for and produce oil and natural gas;Source’s ability to obtain, maintain and renew required permits,licenses and approvals from regulatory authorities; the stringentrequirements of and potential changes to applicable legislation,regulations and standards; the ability of Source to comply withunexpected costs of government regulations; liabilities resulting fromSource’s operations; the results of litigation or regulatoryproceedings that may be brought against Source; the ability of Sourceto successfully bid on new contracts and the loss of significantcontracts; uninsured and underinsured losses; risks related to thetransportation of Source’s products, including potential rail lineinterruptions or a reduction in rail car availability; the geographicand customer concentration of Source; the impact of climate changerisk; the ability of Source to retain and attract qualified managementand staff in the markets in which Source operates; labour disputes andwork stoppages and risks related to employee health and safety;general risks associated with the oil and natural gas industry, lossof markets, consumer and business spending and borrowing trends;limited, unfavourable, or a lack of access to capital markets;uncertainties inherent in estimating quantities of mineral resources;sand processing 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 important factors that couldcause actual actions, events or results to differ materially fromthose described in the forward-looking statements, there may be otherfactors that cause actions, events or results not to be asanticipated, estimated or intended. There can be no assurance thatforward-looking statements will materialize or prove to be accurate,as actual results and future events could differ materially from thoseanticipated in such statements. The forward-looking statementscontained in this press release are expressly qualified by thiscautionary statement. Readers should not place undue reliance onforward-looking statements. These statements speak only as of the dateof this press release. Except as may be required by law, 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.
FOR FURTHER INFORMATION PLEASE CONTACT:
Media inquiries: | Investor relations inquiries: |
Meghan Somers | Brad Thomson |
Communications Advisor | Chief Executive Officer |
(403) 262-1312 (ext. 295) | (403) 262-1312 (ext. 225) |
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