Press Release: Source Energy Services : Source Energy Services Reports Q2 2023 Results

Calgary, Alberta - TheNewswire - August 2, 2023 - Source Energy Services Ltd. (TSX:SHLE) ("Source" or the "Company") is pleased to announce its financial results for the three and six months ended June 30, 2023.Q2 2023 PERFORMANCE HIGHLIGHTSDespite a challenging operating environment impacted by wildfires, floods and rail outages, Source recorded a strong quarter and achieved the following key highlights during the second quarter of 2023:realized sand sales volumes of 702,079 MT and sand revenue of $102.0 million, an $8.4 million increase from the second quarter of 2022; achieved total revenue of $126.9 million, a 14% increase from the second quarter of 2022, and the third highest quarterly revenue generated since the inception of Source; achieved a new record for the largest daily sand volume fed into a blender in twenty-four hours and set a new daily record for sand volume throughput at Source's Wembley terminal facility; recorded utilization of 82% for the Canadian Sahara fleet; executed a contract to build and operate Source's tenth Sahara unit, to be located in the state of Alaska, the cost of which is fully reimbursed by the customer through progress payments received during construction; realized gross margin of $24.9 million and Adjusted Gross Margin(1) of $30.2 million, increases of 51% and 39%, respectively, when compared to the same period in 2022; reported net income of $2.7 million, a $2.6 million improvement from the second quarter of 2022 when excluding the unrealized gain on derivative instruments recognized last year; and realized Adjusted EBITDA(1) of $20.4 million, a 38% increase from the second quarter of 2022. Note:(1) Adjusted Gross Margin (including on a per MT basis) and Adjusted EBITDA are not defined under IFRS and might not be comparable to similar financial measures disclosed by other issuers, refer to 'Non-IFRS Measures' below for reconciliations to measures recognized by IFRS. For additional information, please refer to Source's Management's Discussion and Analysis ("MD&A"), dated August 2, 2023, available online at www.sedarplus.ca.RESULTS OVERVIEWClick Image To View Full Size Notes:(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, 2023, was $0.7447 and 0.7421, respectively (2022 - $0.7832 and 0.7865, respectively).(3) Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to 'Non-IFRS Measures' below for reconciliations to measures recognized by IFRS. For additional information, please refer to Source's MD&A available online at www.sedarplus.ca. Second Quarter 2023 PerformanceSource had strong second quarter results, due to continued gross margin performance and logistics operations that achieved several daily records. This resulted in EBITDA of $20.4 million for the quarter, an increase of 38% compared to the same period last year, despite the unprecedented Alberta wildfires, floods and rail outages which negatively impacted sand sales volumes during the period. Source recorded total revenue of $126.9 million, an increase of $15.3 million or 14% compared to the second quarter of 2022 due to higher average realized sand pricing. Wellsite solutions revenue remained strong through the second quarter, achieving a 46% increase in revenue compared to the same period last year. During the month of April, Source realized the second highest monthly volumes trucked in Source history and achieved a new daily record for throughput at the Wembley terminal facility. Pricing improvements across all lines of business were achieved, and spot sand prices remained strong for the second quarter. Cost of sales, excluding depreciation, increased for the second quarter of 2023, compared to the same period last year, due primarily to higher costs for transportation and a shift in terminal sales mix during the quarter. These increases were partially offset by production efficiencies achieved, attributed in part to the introduction of an additional mesh size early this year. Cost of sales was impacted by a weakening Canadian dollar on US denominated costs relative to the second quarter last year; however, this impact was offset by an increase in US dollar denominated revenue realized during the quarter.For the three months ended June 30, 2023, gross margin increased by $8.4 million, attributed to improved pricing and operational efficiencies achieved, compared to the second quarter of 2022. Excluding gross margin from mine gate volumes, Adjusted Gross Margin was $46.73 per MT, compared to $29.07 per MT in the second quarter of 2022, favorably impacted by improved pricing, as noted above, despite higher costs for transportation and the impact of terminal sales mix. Gross margin and Adjusted Gross Margin also benefited from the 28% increase in sand volumes trucked and strong Sahara fleet utilization during the quarter, driving a 40% increase in Sahara-related revenue, compared to the same period last year. Operating expenses increased by $1.2 million on a quarter-over-quarter basis, attributed to an executive severance payment, higher repairs and maintenance costs for the Peace River facility and higher variable incentive compensation cost incurred in the quarter. General and administrative expense increased by $1.2 million during the period, due primarily to the timing of recognition of variable incentive compensation expense compared to the same period in 2022. This timing difference will be largely eliminated by the end of the year.Adjusted EBITDA was $20.4 million for the second quarter, an increase of $5.6 million or 38% compared to the three months ended June 30, 2022. As noted above, improved pricing and operational efficiencies offset the volume reduction attributed to the wildfires and floods, and increased costs related to transportation costs and terminal sales mix. The weakening of the Canadian dollar negatively impacted Adjusted EBITDA by $0.4 million, attributed to the movement in exchange rates on working capital during the quarter. An increase in revenue denominated in US dollars mitigated the impact of fluctuations in foreign exchange rates and the impact on US dollar denominated expenses for the quarter. Liquidity and Capital ResourcesClick Image To View Full Size Note:(1) Adjusted EBITDA and Free Cash Flow are not defined under IFRS, refer to 'Non-IFRS Measures' below. The reconciliation to the comparable IFRS measure can be found in the table below. Source generated Free Cash Flow of $7.8 million for the three months ended June 30, 2023, an increase of $6.3 million compared to the second quarter of 2022. The increase is mainly attributed to a $5.6 million improvement in Adjusted EBITDA, reflecting increased gross margin compared to the same period last year, as well as lower net expenditures for capital assets during the second quarter of this year, as outlined below. Lease obligations were higher than the prior year due to an increase in renewal rates on previously contracted rail cars and the impacts of a weaker Canadian dollar on US dollar denominated leases. Source's capital expenditures for the second quarter of 2023 were $6.2 million, an increase of $2.1 million compared to the same period last year. Net capital expenditures were $0.6 million for the second quarter of 2023, compared to $2.9 million for the second quarter of 2022. Expenditures for maintenance and sustaining capital increased by $0.2 million for the three months ended June 30, 2023, resulting from costs associated with overburden removal for mining operations attributed to higher year-to-date sand sales volumes when compared to 2022. Growth capital expenditures increased, on a quarter-over-quarter basis, as a result of the commencement of a contract to construct Source's tenth Sahara unit on behalf of a customer who will fully reimburse Source for these construction costs during the construction phase. During the second quarter of 2023, Source sold excess equipment, generating proceeds of $0.5 million and, in June of 2023, Source sold its previously closed terminal facility located in Berthold, North Dakota. Management continues to assess equipment and other assets required to service Source's operations to ensure optimal levels are maintained on an on-going basis.BUSINESS OUTLOOKSource expects strong industry activity levels to continue through the third quarter of 2023, as delays resulting from the wildfires in Alberta shifted activity into the third quarter. While contracted customer orders are strong through the third quarter, commodity uncertainty and capital program deployment, as exploration and production companies exhaust budgets as they approach the end of the year, could impact activity levels during the fourth quarter. Source renewed customer contracts with terms and conditions reflective of the current operating environment earlier in the year, and continues to improve production efficiencies through an expansion of mesh sizes and ongoing operating cost management. Source believes these fundamentals, coupled with Source's leading service offerings and logistics capabilities required for larger volumes of sand per well, as well as Source's terminal network footprint, will continue to support strong gross margins for the remainder of 2023 and 2024. In the longer-term, Source believes the increased demand for natural gas, driven by power generation facilities, increased natural gas pipeline export capabilities and liquefied natural gas exports will drive incremental demand for Source's services in the Western Canadian Sedimentary Basin ("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 is critical for the suc