Source Energy Services Reports Q2 2022 Results

Source Energy Services Ltd


Source Energy Services Ltd.

linkedIn Source Energy Services Reports Q2 2022 Results


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


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

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

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

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

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

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

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

  • reported net income of $4.2 million; and

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



(1)    Adjusted Gross Margin (including on a
per MT basis) and Adjusted EBITDA are not defined under IFRS, refer to
‘Non-IFRS Measures’ below for reconciliations to measures
recognized by IFRS. For additional information, please refer to
Source’s MD&A available online at


484a5379455a7c6c9220aee3ee3ae270 Source Energy Services Reports Q2 2022 Results



(1)    One MT is approximately equal to 1.102
short tons.

(2)    The average Canadian to United States (“US”) dollar
exchange rate for the three and six months ended June 30, 2022, was
$0.7832 and 0.7865, respectively (2021 – $0.8142 and 0.8019,

(3)    Adjusted EBITDA and Adjusted Gross Margin (including on a per
MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’
below for reconciliations to measures recognized by IFRS. For
additional information, please refer to Source’s MD&A available
online at


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

During the second quarter, cost of sales, excluding
depreciation, was impacted by higher costs for transportation and
freight, due to increased prices for fuel and a continued constrained
trucking market, compared to the same period last year. Cost of sales,
excluding depreciation, was also impacted by increased costs for third
party sand purchases, procured to ensure no customer supply
interruptions as demand continues to increase. Through the second
quarter, Source successfully maintained efficient production at its
Wisconsin facilities, maintaining average costs while producing at
anticipated levels despite continued cost pricing pressure through the
quarter. Cost of sales was impacted by a weakening Canadian dollar on
US denominated costs relative to the second quarter of 2021.

Excluding gross margin from mine gate volumes, Adjusted
Gross Margin for the second quarter was $28.84 per MT, favorably
impacted by improved spot market pricing and higher sand sales
volumes. Compared to the same quarter last year, Adjusted Gross Margin
per MT increased by 14% after adjusting for the impact of the
weakening Canadian dollar and the benefit of proceeds from the Canada
Emergency Wage Subsidy (“CEWS”) program, as well as certain
production credits recorded last year. Gross margin was unfavorably
impacted by higher cost of sales – depreciation realized, attributed
to higher rates of inventory depreciation per MT relative to the
second quarter last year.

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

Peace River Transaction

In April 2022, Source entered into a transaction with
CSI to assume operation of its Peace River frac sand facility, which
adds approximately 400,000 MT of annual production capability to
Source’s existing production capabilities. The transaction
consolidates Source’s adjacent mineral resource exploration rights
with the production facility and complements Source’s existing
product and service offerings. The facility was not fully operational
during the quarter, as Source focused on operational reviews and
maintenance to ensure the facilities will operate at a standard
consistent with the Company’s Wisconsin processing facilities. The
benefits from the Peace River expenditures will be realized in future
quarters when the facility is fully operational.

Liquidity and Capital

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

Over the last several quarters, the Company has
experienced a rapid increase in demand and achieved levels of activity
that exceed pre-pandemic operating levels. The Company’s existing
Credit Facility (as defined above) predates this period of high demand
and was negotiated during a period of extreme uncertainty in the oil
and gas industry. While Source has more than adequate liquidity
available on its ABL facility, the current Credit Facility structure
contains restrictive covenants which limit Source’s flexibility and
ability to appropriately operate at the high

levels demanded by activity in the WCSB. To address this,
Source decided to seek alternative financing and replace the current
Credit Facility. To that end, the Company has executed a non-binding
term sheet with a new financial institution, and is working with its
existing lenders and the new institution, in order to complete the
refinancing in an expedited manner. Due to the timing of the expected
closing of the refinancing, Source is seeking, and expects to receive,
consent from its current lenders which will be required to complete
the closing in an orderly manner.

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


Source has completed its annual environment, social and
governance (“ESG”) performance assessment, which benchmarks
Source’s 2021 ESG performance relative to the Sustainability
Accounting Standards Board framework and the recommendations of the
Task Force on Climate-related Financial Disclosures. Source’s 2022
ESG report has been released and is available at


Source is committed to operating in a sustainable
manner and works closely with its stakeholders to go above and beyond
current regulatory requirements through initiatives such as voluntary
enrollment with the Department of Natural Resources Sustainable Growth
Program and Managed Forest Program, as well as Source’s production
water recycling process. Thus far in 2022, Source has reclaimed eight
acres of land adjacent to its Wisconsin processing facilities, part of
Source’s continued effort to return the land to a thriving
vegetative state. Source is continually looking to implement
efficiencies to lessen the impact of Source’s activities on the
environment and specifically to reduce greenhouse gas emissions, and
has several additional initiatives currently underway at its
processing and terminal facilities to further reduce Source’s
operational emissions.


With increased industry activity levels across North
America, frac sand supply and demand fundamentals have improved and
are expected to remain tight for 2022. These fundamentals, coupled
with Source’s leading service offerings and logistics capabilities,
have translated into meaningful pricing gains in 2022, a trend that is
expected to continue for the balance of the year and into 2023. These
pricing increases have led to improved gross margins in the spot
market over 2021 levels which are expected to continue into 2023.
While contracted customer margins have dragged down overall gross
margin, it is expected there will be significant growth in these
margins as current contracts expire over the next few quarters. After
a somewhat slower than expected first quarter, the second quarter was
very strong, especially considering this is the traditional spring
break-up quarter. Looking ahead, it is anticipated that the third
quarter will have higher than usual activity levels during what is
historically a very busy quarter in the industry. Source expects the
expansion of capital programs will increase through the balance of the
year, as Source customers signal increasing activity levels and
growing confidence related to ongoing permitting issues in the
northeastern British Columbia region, as well as continued strength in
commodity pricing.

In the longer-term, Source believes the increased
demand for natural gas, driven by the conversion of coal-fired power
generation facilities, increased natural gas pipeline export
capabilities and liquefied natural gas exports will drive incremental
demand for Source’s services in the WCSB. Source continues to see
increased demand from customers that are primarily focused on the
development of natural gas properties in the Montney, Duvernay and
Deep Basin. This trend is consistent with Source’s view that natural
gas will be an important transitional fuel that’s critical for the
successful movement to a less carbon intensive world.

In support of the move to a less carbon intensive
world, Source has begun focusing on developing economic growth
opportunities which transition from traditional fossil fuels to less
carbon intense energy solutions. As a pathway to diversifying
Source’s business, and to participate in the decarbonization of the
economy, Source is advancing opportunities in its own operations as
well as at the well site and at its terminals. Source also continues
to focus on increasing its involvement in the provision of logistics
services for other items needed at the wellsite in response to
customer requests to expand its service offerings and to further
utilize its existing Western Canadian terminals to provide additional
services. Over the longer-term, it is anticipated that these
opportunities will be a meaningful part of Source’s business.


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

Interested analysts, investors and media
representatives are invited to register to participate in the call.
Once you are registered, a dial-in number and passcode will be
provided to you via email. The link to register for the call is on the

Upcoming Events

page of our website and as

Click Below to Register for the
Results Conference Call:

Source Energy Services Q2’22 Results

Results Conference Call Playback

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

Playback Number:



Playback Passcode:



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

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


These results should be read in conjunction with each
of Source’s audited consolidated financial statements for the three
and six months ended June 30, 2022 and 2021, together with the
accompanying notes (the “Financial Statements”) and its
corresponding MD&A for such periods. The Financial Statements and
MD&A and other information relating to Source, including the
Annual Information Form (“AIF”), are available under the
Company’s SEDAR profile at

. The Financial Statements and comparative statements have
been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting
Standards Board. Unless otherwise stated, all amounts are expressed in
Canadian dollars.


In this press release Source has used the terms
Adjusted Gross Margin and Adjusted EBITDA, including per MT, which do
not have standardized meanings prescribed by IFRS and Source’s
method of calculating these measures may differ from the method used
by other entities and, accordingly, they may not be comparable to
similar measures presented by other companies. These financial
measures should not be considered as an alternative to, or more
meaningful than, net income (loss) and gross margin, respectively,
which represent the most directly comparable measures of financial
performance as determined in accordance with IFRS.

Reconciliation of Adjusted EBITDA to
Net Income (Loss)

4a453bdb7e08633da4e5121648ba2a0f Source Energy Services Reports Q2 2022 Results



(1)    Includes expenses related to the
incident at the Fox Creek terminal facility and one-time retirement

Reconciliation of Gross Margin to
Adjusted Gross Margin

3683d0b8bdd49b96a74b5f584c2f559a Source Energy Services Reports Q2 2022 Results

For additional information regarding non-IFRS measures,
including their use to management and investors, their composition and
discussion 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



Certain statements contained in this press release
constitute forward-looking statements relating to, without limitation,
expectations, intentions, plans and beliefs, including information as
to the future events, results of operations and Source’s future
performance (both operational and financial) and business prospects.
In certain cases, forward-looking statements can be identified by the
use of words such as “expects”, “intends”, “anticipates”,
“believes”, “continues”, “plans”, “projects”,
“focus”, “trends” or variations of such words and phrases, or
state that certain actions, events or results “may” or “will”
be taken, occur or be achieved. Such forward-looking statements
reflect Source’s beliefs, estimates and opinions regarding its
future growth, results of operations, future performance (both
operational and financial), and business prospects and opportunities
at the time such statements are made, and Source undertakes no
obligation to update forward-looking statements if these beliefs,
estimates and opinions or circumstances should change unless required
by applicable law. Forward-looking statements are necessarily based
upon a number of estimates and assumptions made by Source that are
inherently subject to significant business, economic, competitive,
political and social uncertainties and contingencies. Forward-looking
statements are not guarantees of future performance. In particular,
this press release contains forward-looking statements pertaining, but
not limited, to: the strength of activity levels continuing to prevail
in the WCSB; tightening of sand supply in the WCSB and trends of sand
sales prices; our focus on reducing debt levels in 2022; our
expectation that benefits from the Peace River expenditures will be
realized in future quarters; Source’s expectation that it will
receive the consent required from its current lenders to close the
refinancing of its existing Credit Facility; Source’s efforts to
return the land of a thriving vegetative state; our search for
efficiencies to implement in order to lessen the impact of Source’s
activities on the environment; our expectation that frac sand supply
and demand fundamentals will remain tight for 2022; our expectation
that pricing gains will continue for the remainder of 2022 and into
2023; our belief that gross margins in the spot market, currently over
2021 levels, will continue into 2023; our expectation that there will
be significant growth in customer margins over the next few quarters;
our expectation that the third quarter will have higher than usual
activity levels and the expansion of capital programs will increase
through the balance of 2022; consumers’ increasing activity levels
and confidence in connection with permitting issues in northeastern
British Columbia; increased demand for natural gas, increased natural
gas pipeline export capabilities and liquefied natural gas exports
will drive incremental demand for Source’s services in the WCSB;
continued increase in demand from customers primarily focused on the
development of natural gas properties in Montney, Duvernay and Deep
Basin; the Company’s view that natural gas is an important
transitional fuel for the successful movement to a less carbon
intensive world; our focus on exploring and developing, and
advancement of economic growth opportunities related to

the transition to less carbon intense energy solutions; our
focus on and expectations regarding increasing Source’s involvement
in the provision of logistics services for other wellsite items;
outlook for commodity prices and sales volumes; expectations
respecting future conditions; and revenue and profitability.

By their nature, forward-looking statements involve
numerous current assumptions, known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of Source to differ materially from those anticipated by
Source and described in the forward-looking statements.

With respect to the forward-looking statements
contained in this press release  assumptions have been made
regarding, among other things: proppant market prices; future oil,
natural gas and liquefied natural gas prices; future global economic
and financial conditions; future commodity prices, demand for oil and
gas and the product mix of such demand; levels of activity in the oil
and gas industry in the areas in which Source operates; the continued
availability of timely and safe transportation for Source’s
products, including without limitation, Source’s rail car fleet and
the accessibility of additional transportation by rail and truck; the
maintenance of Source’s key customers and the financial strength of
its key customers; the maintenance of Source’s significant contracts
or their replacement with new contracts on substantially similar terms
and that contractual counterparties will comply with current
contractual terms; operating costs; that the regulatory environment in
which Source operates will be maintained in the manner currently
anticipated by Source; future exchange and interest rates; geological
and engineering estimates in respect of Source’s resources; the
recoverability of Source’s resources; the accuracy and veracity of
information and projections sourced from third parties respecting,
among other things, future industry conditions and product demand;
demand for horizontal drilling and hydraulic fracturing and the
maintenance of current techniques and procedures, particularly with
respect to the use of proppants; Source’s ability to obtain
qualified staff and equipment in a timely and cost-efficient manner;
the regulatory framework governing royalties, taxes and environmental
matters in the jurisdictions in which Source conducts its business and
any other jurisdictions in which Source may conduct its business in
the future; future capital expenditures to be made by Source; future
sources of funding for Source’s capital program; Source’s future
debt levels; the impact of competition on Source; and Source’s
ability to obtain financing on acceptable terms.

A number of factors, risks and uncertainties could
cause results to differ materially from those anticipated and
described herein including, among others: the effects of competition
and pricing pressures; risks inherent in key customer dependence;
effects of fluctuations in the price of proppants; risks related to
indebtedness and liquidity, including Source’s leverage, restrictive
covenants in Source’s debt instruments and Source’s capital
requirements; risks related to interest rate fluctuations and foreign
exchange rate fluctuations; changes in general economic, financial,
market and business conditions in the markets in which Source
operates; changes in 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 stringent requirements of and potential changes to applicable
legislation, regulations and standards; the ability of Source to
comply with unexpected costs of government regulations; liabilities
resulting from Source’s operations; the results of litigation or
regulatory proceedings that may be brought against Source; the ability
of Source to successfully bid on new contracts and the loss of
significant contracts; uninsured and underinsured losses; risks
related to the transportation of Source’s products, including
potential rail line interruptions or a reduction in rail car
availability; the geographic and customer concentration of Source; the
impact of climate change risk; the ability of Source to retain and
attract qualified management and staff in the markets in which Source
operates; labor disputes and work stoppages and risks related to
employee health and safety; general risks associated with the oil and
natural gas industry, loss of markets, consumer and business spending
and borrowing trends; limited, unfavorable, or a lack of access to
capital markets; uncertainties inherent in estimating quantities of
mineral resources; sand processing problems; implementation of
recently issued accounting standards; the use and suitability of
Source’s accounting estimates and judgments; the impact of
information systems and cyber security breaches; and risks and
uncertainties related to COVID-19 or its variants, including changes
in energy demand.

Although Source has attempted to identify important
factors that could cause actual actions, events or results to differ
materially from those described in the forward-looking statements,
there may be other factors that cause actions, events or results not
to be as anticipated, estimated or intended. There can be no assurance
that forward-looking statements will materialize or prove to be
accurate, as actual results and future events could differ materially
from those anticipated in such statements. The forward-looking
statements contained in this press release are expressly qualified by
this cautionary statement. Readers should not place undue reliance on
forward-looking statements. These statements speak only as of the date
of this press release. Except as may be required by law, Source
expressly disclaims any intention or obligation to revise or update
any forward-looking statements or information whether as a result of
new information, future events or otherwise.

Any financial outlook and future-oriented financial
information contained in this press release regarding prospective
financial performance, financial position or cash flows is based on
assumptions about future events, including economic conditions and
proposed courses of action based on management’s assessment of the
relevant information that is currently available. Projected
operational information contains forward-looking information and is
based on a number of material assumptions and factors, as are set out
above. These projections may also be considered to contain future
oriented financial information or a financial outlook. The actual
results of Source’s operations for any period will likely vary from
the amounts set forth in these projections and such variations may be
material. Actual results will vary from projected results. Readers are
cautioned that any such financial outlook and future-oriented
financial information contained herein should not be used for purposes
other than those for which it is disclosed herein. The forward-looking
information and statements contained in this document speak only as of
the date hereof and have been approved by the Company’s management
as at the date hereof. The Company does not assume any obligation to
publicly update or revise them to reflect new events or circumstances,
except as may be required pursuant to applicable laws.


Scott Melbourn

Chief Executive Officer

(403) 262-1312 (ext. 222)

[email protected]

Derren Newell

Chief Financial Officer

(403) 262-1312 (ext. 233)

[email protected]

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