Mr. Scott Melbourn reports

SOURCE ENERGY SERVICES REPORTS Q2 2023 RESULTS

Source Energy Services Ltd. has released its financial results for the three and six months ended June 30, 2023.

Q2 2023 performance highlights

Despite 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 metric tonnes (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-per-cent 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 24 hours and set a new daily record for sand volume throughput at Source's Wembley terminal facility;
• Recorded utilization of 82 per cent for the Canadian Sahara fleet;
• Executed a contract to build and operate Source's 10th 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 per cent and 39 per cent, respectively, when compared with 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;
• Realized adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (1) of $20.4-million, a 38-per-cent increase from the second quarter of 2022.

(1) Adjusted gross margin (including on a per-metric-tonne basis) and adjusted EBITDA are not defined under IFRS (international financial reporting standards) and might not be comparable with similar financial measures disclosed by other issuers, refer to non-IFRS measures for reconciliations to measures recognized by IFRS. For additional information, please refer to Source's management's discussion and analysis (MD&A), dated Aug. 2, 2023, available on-line on SEDAR.

Second quarter 2023 performance

Source 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 per cent compared with 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 per cent compared with the second quarter of 2022, due to higher average realized sand pricing. Wellsite solutions revenue remained strong through the second quarter, achieving a 46-per-cent increase in revenue compared with 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 with 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 U.S.-dollar-denominated costs relative to the second quarter last year; however, this impact was offset by an increase in U.S.-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 with the second quarter of 2022. Excluding gross margin from mine gate volumes, adjusted gross margin was $46.73 per metric tonne, compared with $29.07 per metric tonne in the second quarter of 2022, favourably 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-per-cent increase in sand volumes trucked and strong Sahara fleet utilization during the quarter, driving a 40-per-cent increase in Sahara-related revenue, compared with 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 with 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 per cent compared with 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 $400,000, attributed to the movement in exchange rates on working capital during the quarter. An increase in revenue denominated in U.S. dollars mitigated the impact of fluctuations in foreign exchange rates and the impact on U.S.-dollar denominated expenses for the quarter.

Source generated free cash flow of $7.8-million for the three months ended June 30, 2023, an increase of $6.3-million compared with the second quarter of 2022. The increase is mainly attributed to a $5.6-million improvement in adjusted EBITDA, reflecting increased gross margin compared with 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 U.S.-dollar-denominated leases.

Source's capital expenditures for the second quarter of 2023 were $6.2-million, an increase of $2.1-million compared with the same period last year. Net capital expenditures were $600,000 for the second quarter of 2023, compared with $2.9-million for the second quarter of 2022. Expenditures for maintenance and sustaining capital increased by $200,000 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 with 2022. Growth capital expenditures increased, on a quarter-over-quarter basis, as a result of the commencement of a contract to construct Source's 10th Sahara unit on behalf of a customer that 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 $500,000 and, in June of 2023, Source sold its previously closed terminal facility located in Berthold, N.D. Management continues to assess equipment and other assets required to service Source's operations to ensure optimal levels are maintained on a continuing basis.

Business outlook

Source 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 continuing 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 successful movement to a less carbon-intensive world.

Source 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.

Second quarter conference call

A conference call to discuss Source's second quarter financial results has been scheduled for 7:30 a.m. MST (9:30 a.m. ET) on Thursday, Aug. 3, 2023.

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 e-mail. The link to register for the call is on the upcoming events page of the company's website.

The call will be recorded and available for playback approximately two hours after the meeting end time, until Sept. 3, 2023, using the following dial-in number.

Toll-free playback number:  1-800-319-6413

Playback passcode:  9673

About Source Energy Services Ltd.

Source is a company that focuses on the integrated production and distribution of 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.

Important information

These results should be read in conjunction with each of Source's interim condensed consolidated financial statements for the three and six months ended June 30, 2023, and June 30, 2022, and Source's audited consolidated financial statements for the year ended Dec. 31, 2022, together with the accompanying notes and the corresponding MD&A (management's discussion and analysis) for such periods. The financial statements and MD&A, and other information relating to Source, including the annual information form, are available under the company's SEDAR+ profile. 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.

Non-IFRS measures

In this news release, Source has used the terms free cash flow, adjusted gross margin and adjusted EBITDA, including per metric tonne, which do not have standardized meanings prescribed by IFRS. Source's method of calculating these measures may differ from the method used by other entities and, accordingly, they may not be comparable with 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.

We seek Safe Harbor.