Mr. Scott Melbourn reports

SOURCE ENERGY SERVICES REPORTS Q3 2023 RESULTS

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

Q3 2023 performance highlights

Source achieved the following key highlights during the third quarter of 2023:

• Realized sand sales volumes of 709,826 per metric tonne (MT) and sand revenue of $102.2-million, a $5.0-million increase from the third quarter of 2022;
• Generated total revenue of $124.7-million, a $4.8-million increase from the third quarter of 2022;
• Realized gross margin of $25.0-million and adjusted gross margin of $30.8-million, increases of 53 per cent and 46 per cent, respectively, when compared with the same period in 2022;
• Reduced the principal value of total debt outstanding by $17.1-million from the end of 2022, and repurchased an additional $7.1-million aggregate principal value of senior secured notes after the end of the quarter;
• Achieved new records for the highest monthly revenue realized in the history of Source from the Sahara fleets in both Canada and the United States;
• Reported net income of $3.7-million, a $7.6-million improvement from the third quarter of 2022 when excluding the foreign exchange gain on the settlement of forward contracts recognized last year;
• Realized adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $22.7-million, a $6.4-million improvement from the third quarter of 2022 when excluding the foreign exchange gain on the settlement of forward contracts recognized last year.

Third quarter 2023 performance

Source realized continued gross margin improvement for the third quarter, driven by strong average realized sand pricing. This resulted in adjusted EBITDA of $22.7-million for the quarter, an increase of 40 per cent compared with the third quarter of 2022, excluding the gain on settlement of outstanding future forward exchange contracts settled last year. Over all sand sales volumes for the quarter were lower than anticipated due to customer operational delays and schedule changes that resulted in a shift of planned activity into the fourth quarter.

Source recorded total revenue of $124.7-million, an increase of $4.8-million or 4 per cent compared with the third quarter of 2022, due to higher average realized sand pricing. Wellsite solutions revenue was relatively flat, on a quarter-over-quarter basis, also impacted by the customer delays noted herein. During the third quarter, Source achieved records for the highest monthly revenue ever generated by the Sahara fleets for units working in both Canada and the United States. Continued strength in spot pricing and pricing across all lines of business mitigated the impact of delayed sand sales volumes for the quarter.

Cost of sales, excluding depreciation, decreased for the third quarter of 2023, compared with the same period last year, primarily due to the lower sand sales volumes realized during the period as well as a reduction in cost for transportation fuel surcharges. These reductions were partially offset by a shift in terminal sales mix for the quarter. Cost of sales was impacted by a weakening Canadian dollar on U.S.-denominated costs relative to the third quarter last year; however, this impact was completely offset by an increase in U.S.-dollar-denominated revenue realized during the quarter.

For the three months ended Sept. 30, 2023, gross margin increased by $8.6-million, attributed to improved pricing and operational efficiencies achieved, compared with the third quarter of 2022. Excluding gross margin from mine gate volumes, adjusted gross margin was $48.89 per MT, compared with $31.38 per MT in the third quarter of 2022, favourably impacted by improved pricing and lower transportation fuel charges, as noted herein, despite the impact of terminal sales mix. Customer job delays, as discussed herein, resulted in lower total sand volumes trucked compared with the same period last year, and also impacted gross margin and adjusted gross margin for the third quarter.

Operating expenses increased by $700,000 on a quarter-over-quarter basis, primarily due to higher royalty costs resulting from increased shipments compared with prior year, and higher people costs and variable incentive compensation cost incurred in the quarter. General and administrative expense increased by $900,000 during the period, due primarily to higher salaries and variable incentive compensation expense compared with the third quarter last year.

As discussed herein, adjusted EBITDA was $22.7-million for the third quarter, an increase of $6.4-million or 40 per cent when excluding the foreign exchange gain realized last year when Source wound up its outstanding foreign exchange forward contracts prior to the closing of the new revolving asset-backed senior credit facility (the ABL). Improved pricing and a reduction to certain transportation and operational costs, as well as production efficiencies, offset the volume reduction attributed to the shift in customer jobs. The weakening of the Canadian dollar negatively impacted cost of sales during the quarter; however, this was offset by an increase in revenue denominated in U.S. dollars, which mitigated the impact of fluctuations in foreign exchange rates on U.S.-dollar-denominated expenses for the quarter.

Adjusted EBITDA was favourably impacted by $300,000 during the quarter, attributed to the movement in exchange rates on working capital.

Source generated free cash flow of $7.4-million for the three months ended Sept. 30, 2023, a decrease of $7.2-million compared with the third quarter of 2022. Excluding the $9.7-million gain realized on the settlement of foreign exchange contracts recognized in the third quarter last year, Source realized an increase in free cash flow of $2.5-million. The increase is mainly attributed to the improvement in adjusted EBITDA, driven by increased gross margin compared with the same period last year, as well as lower net expenditures for capital assets during the third quarter of this year, as outlined herein. Finance expense paid was higher compared with the third quarter last year, due to the timing of the August, 2022, interest payment for the senior secured notes which was not completed until after the closing of the new ABL facility in the fourth quarter of 2022. Payments for lease obligations for the third quarter of 2023 were higher than the prior year due to the replacement of short-term rentals with lower cost, longer-term leases for certain mine processing equipment and the impacts of a weaker Canadian dollar on U.S.-dollar-denominated leases.

Source's capital expenditures for the third quarter of 2023 were $3.6-million, a decrease of $800,000 compared with the same period last year. Expenditures for maintenance and sustaining capital decreased by $900,000 for the three months ended Sept. 30, 2023. The change was primarily driven by a reduction in expenditures for the Peace River facility, now fully on line and operational, partially offset by higher costs associated with overburden removal for mining operations, attributed to higher year-to-date sand sales volumes when compared with 2022. Capital expenditures were also impacted by the cost to rebuild a piece of equipment at a terminal facility which malfunctioned during the quarter; however, costs incurred will be recovered by insurance proceeds received in the fourth quarter. 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

Third quarter volumes were impacted by operational delays experienced by a number of Source customers. These delays pushed activity into the fourth quarter, a historically slower quarter where exploration and production (E&P) companies exhaust budgets as they approach the end of the year. Activity levels into the fourth quarter were strong in October and are expected to remain that way until the industry's holiday slowdown, which begins in mid-December. 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'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 2024. Source anticipates increases in activity levels in 2024, particularly in northeastern British Columbia with the expectation that LNG Canada will be on line in 2025.

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.

Third quarter conference call

A conference call to discuss Source's third quarter financial results has been scheduled for 7:30 a.m. MT (9:30 a.m. ET) on Thursday, Nov. 9, 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 pass code 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 Dec. 9, 2023, using the dial-in:

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

Playback pass code:  9674

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 well-site 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 well site.

We seek Safe Harbor.