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Source Energy Services First Quarter 2022 Results

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   |    Thursday,May 05,2022

Source Energy Services Ltd. reported its financial results for the three months ended March 31, 2022.

Q1 2022 Highlights:

• realized sand sales volumes of 726,101 MT, a 12% increase from the first quarter of 2021, and sand revenue of $80.7 million, a 22% increase from the first quarter of 2021;
• distributed 692,338 MT of proppants and chemicals through Source’s Western Canadian Sedimentary Basin (“WCSB”) terminal network

• realized a 13% increase in average realized sand price, excluding revenue from mine gate sales volumes

• deployed Source’s first ever high-capacity drive over Sahara unit, and deployed Source’s ninth Sahara unit in the US for a contract with a large exploration and production customer commencing in the second quarter

• achieved utilization for the Sahara fleet of 72%, and added one new Sahara customer during the quarter

• repaid $7.5 million on the senior secured term loan

• realized gross margin of $14.6 million and Adjusted Gross Margin⁽¹⁾ of $20.4 million

• reported net loss of $6.6 million

•  realized Adjusted EBITDA⁽¹⁾ of $14.2 million, a 12% increase from the first quarter of 2021

• subsequent to quarter end, closed a transaction with Canadian Silica Industries (“CSI”) to assume operations of CSI’s Peace River frac sand facility which will complement Source’s Northern White proppant resources.

Q1 2022 Results

Sustained strength in oil and gas commodity prices continued to buoy strong activity levels in the WCSB, generating $80.7 million of sand revenue, an increase of 22%, over the first quarter of 2021. Higher sand revenue generated was attributable to a 12% increase in sand sales volumes and a 13% increase in average realized sand price, or $13.66 per MT, excluding the impact of mine gate sand sales volumes, compared to the first quarter last year. Strong industry activity levels for the quarter drove a 141% increase in spot sales volumes on a quarter-over quarter basis, which benefited the average sand price realized, as spot sales prices improved significantly.

During the first quarter, cost of sales, excluding depreciation, was impacted by higher costs for transportation and freight, due to increased prices for fuel and a tighter trucking market, as well as terminal mix changes, compared to the same period last year. These costs were partially offset by Source’s continued focus on streamlining production, as improved production efficiencies mitigated cost pricing pressure realized during the quarter.

Excluding gross margin from mine gate volumes, Adjusted Gross Margin was $28.54 per MT, favorably impacted by improved spot market pricing and continued production efficiencies. Compared to the first quarter last year, Adjusted Gross Margin for the first quarter of 2022 did not benefit from proceeds from the Canada Emergency Wage Subsidy (“CEWS”) program, a favorable property tax adjustment or higher deferred terminal revenue. Excluding these items in the first quarter of 2021, the first quarter 2022 Adjusted Gross Margin per MT increased by 6.5% when compared to 2021. For the three months ended March 31, 2022, Adjusted Gross Margin per MT increased by 80% compared to the fourth quarter of 2021. Gross margin was favorably impacted by lower cost of sales - depreciation realized, attributed to lower rates of inventory depreciation per MT relative to the first quarter last year.

Higher selling costs, attributed to increased royalty expense, combined with no proceeds from the CEWS program (compared to $0.1 million for 2021), drove higher operating expense for the first three months of 2022, compared to the same period last year, while general and administrative expense was slightly lower on a quarter-over-quarter basis. Adjusted EBITDA was $ 14.2 million for the first quarter of the year, a reflection of the strong sand sales volumes and sand sales pricing realized, partially offset by the unfavorable impact of higher costs incurred for diesel and freight 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. The frac sand facility adds approximately 400,000 MT of annual production capability to Source’s existing production capabilities, and consolidates Source’s adjacent mineral resource exploration rights with the production facility. The transaction complements Source’s existing product and service offerings.

Liquidity and Capital Resources

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 March 31, 2022, Source had $24.0 million drawn under its ABL facility. The Credit Facility was also being used to support $9.8 million of letters of credit, leaving $16.2 million of available liquidity. Source is subject to externally imposed capital requirements for its Credit Facility and as of March 31, 2022, Source and its subsidiaries were compliant with all covenants of its credit facility. Source is focused on reducing its debt levels in 2022.

Source’s capital expenditures for the first quarter of 2022 were $2.0 million, an increase of $0.7 million compared to the same period last year. The increase in expenditures for maintenance and sustaining capital was primarily related to higher expenditures associated with overburden removal for mining operations and the Sahara unit configuration. Growth capital expenditures for the quarter included costs related to assessments and the drilling program at the Peace River mine, as well as the completion of Source’s ninth Sahara unit, compared to the first quarter last year.

ESG Update

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. 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.

Source is currently finalizing the results of its annual environment, social and governance (“ESG”) performance, which will benchmark Source’s 2022 ESG performance relative to the Sustainability Accounting Standards Board framework. Source’s 2022 ESG report is expected to be released in the second quarter of 2022.

Business Outlook

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 the spot market in 2022, a trend that is expected to continue for the balance of the year. Despite increased activity levels as industry demand outpaces supply growth, Source’s sand sales volumes through the first quarter were somewhat slower than anticipated as customer programs were pushed out due to delays in having pads ready to complete and the impacts of cold weather. 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.