Mr. Scott Melbourn reports

SOURCE ENERGY SERVICES REPORTS Q4 2023 AND YEAR END RESULTS

Source Energy Services Ltd. has released its financial results for the three and 12 months ended Dec. 31, 2023.

2023 performance highlights

Highlights for the year ended Dec. 31, 2023, include the following:

• Realized sand sales volumes of 3,138,501 metric tonnes (MT) and sand revenue of $460.2-million, an increase of $118.5-million or 35 per cent from 2022;
• Generated total revenue of $569.7-million, a $153.8-million or 37-per-cent increase from 2022;
• Realized gross margin of $109.4-million and adjusted gross margin (1) of $135.2-million, increases of 88 per cent and 71 per cent, respectively, when compared with last year;
• Reported net income of $167.3-million, a $47.6-million improvement from 2022 when excluding the reversal of impairment charges described below;
• Realized record adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (1) of $99.1-million, a $37.6-million improvement from 2022;
• Reversed $128.6-million of impairment charges previously recognized on property, plant and equipment in 2019 and 2020;
• Reduced the principal value of total debt outstanding by $26.7-million from the end of 2022, including the repurchase of $15.4-million aggregate principal value of senior secured notes, and an additional $2.0-million repurchased after the end of the year;
• Realized a $10.3-million increase in net working capital excluding the current portion of long-term debt;
• Executed a new customer contract with a major Montney exploration and production (E&P) company;
• Achieved utilization of 80 per cent across the nine-unit Sahara fleet, compared with 75-per-cent utilization for 2022, as well as executed two contracts to build and operate Source's 10th and 11th Sahara units, to be located in the state of Alaska, with construction costs to be fully reimbursed by the customers.

(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 the non-IFRS measures section for reconciliations to measures recognized by IFRS. For additional information, please refer to Source's management's discussion and analysis (MD&A), dated March 6, 2024, available on SEDAR+.

2023 results

Total revenue for the year ended Dec. 31, 2023, was $569.7-million, Source's highest annual revenue reported to date and an increase of $153.8-million compared with last year, as activity levels in the Western Canadian sedimentary basin (WCSB) remained strong throughout 2023. Despite a challenging operating environment experienced earlier in the year, due to wildfires and flooding, and an overall weakening of commodity prices, Source realized higher sand sales volumes, strong average realized sand pricing, record-high trucked volumes and a 235-day increase in Sahara days utilized, which drove the increase in total revenue for the year.

Cost of sales, excluding depreciation, increased for the year ended 2023, compared with 2022, due to higher sand sales volumes realized, the impact of a weaker Canadian dollar, increased last-mile logistics trucked volumes, higher rail transportation costs and the impact of changes in terminal mix. Over all, cost of sales, excluding depreciation, benefited from lower production costs at the processing facilities compared with last year, a reduction in transportation fuel surcharges and lower costs incurred for third party sand purchases.

For the year ended Dec. 31, 2023, gross margin increased by $51.3-million or 88 per cent compared with 2022. Excluding gross margin from mine gate volumes, adjusted gross margin was $46.07 per metric tonne, compared with $29.80 per metric tonne in 2022, favourably impacted by lower production costs, strong sand spot market pricing and contract renewals, despite the impact of terminal sales mix and higher rail transportation costs. Increased sand volumes trucked and lower transportation fuel charges also contributed to the improvement in gross margin and adjusted gross margin compared with last year. The weakening of the Canadian dollar relative to 2022, which negatively impacted cost of sales for U.S.-dollar-denominated expenses, was fully offset by an increase in revenue denominated in U.S. dollars for the year.

Operating expenses increased by $2.8-million on a year-over-year basis, primarily due to higher selling costs related to higher royalty costs and higher people costs, including increased variable incentive compensation costs. These increases were offset by a reduction in repairs and maintenance costs compared with 2022. General and administrative expense increased by $3.9-million during 2023, due primarily to higher salaries and variable incentive compensation expense compared with last year.

At Dec. 31, 2023, as a result of continued strong industry activity levels, significant improvement in the financial performance of the company and an improved business outlook, Source carried out an assessment of the recoverable value of its operations. The assessment resulted in the reversal of $128.6-million of impairment losses, previously realized on property, plant and equipment in 2019 and 2020. Refer to note No. 7 of the company's audited consolidated financial statements for the year ended Dec. 31, 2023, for additional information related to this impairment reversal.

Liquidity and capital resources

During the fourth quarter of 2023, Source realized an increase in free cash flow of $27.8-million compared with the fourth quarter of 2022. The improvement is primarily due to the increase in adjusted EBITDA, driven by increased gross margin compared with 2022, and a reduction in financing expense paid. Finance expense paid was lower due to the timing of the August, 2022, interest payment for the notes, which was not completed until after the closing of the new ABL (asset-based loan) facility in the fourth quarter of 2022, and incremental costs incurred in 2022 for the closing of the new ABL facility. The increase in free cash flow was partly offset by higher net expenditures for capital assets during the fourth quarter of this year, as outlined below.

Source generated free cash flow of $37.3-million for the year ended Dec. 31, 2023, an increase of $33.5-million compared with the prior year. The increase is mainly attributed to the improvement in adjusted EBITDA, as noted above, partly offset by an increase in payments for lease obligations. An increase in renewal rates on previously contracted rail cars, a full year of lease payments for the Peace River mining facility, which commenced in the second quarter of 2022, and the impact of a weaker Canadian dollar on U.S.-dollar-denominated leases contributed to the increase in lease obligations.

Source's capital expenditures for the fourth quarter of 2023 were $9.7-million, an increase of $5.5-million compared with the fourth quarter last year. The increase was largely attributed to terminal expansion activities and costs to rebuild a piece of equipment at a terminal facility that malfunctioned earlier in the year. The costs incurred to rebuild the equipment were recovered by insurance proceeds received during the fourth quarter. Higher costs associated with overburden removal for mining operations also contributed to the increase in capital expenditures for the fourth quarter, compared with the same period last year.

For the year ended Dec. 31, 2023, total capital expenditures, net of proceeds on disposals and reimbursements, decreased by $200,000 compared with 2022. Higher capital expenditures for existing terminal expansion activities, as noted above, as well as higher costs associated with overburden removal for mining operations, attributed to higher sales volumes when compared with 2022, were incurred. These increases were more than offset by lower expenditures for the Peace River facility, now fully on-line and operational, and proceeds from the sale of excess property, plant and equipment, including proceeds from the sale of the previously closed terminal facility located in Berthold, N.D., earlier this year. Capital expenditures incurred for the rebuild of equipment that malfunctioned and construction costs associated with building Source's 10th and 11th Sahara units were fully recovered during the year.

Q4 2023 results

Source sold sand volumes of 819,113 metric tonnes for the three months ended Dec. 31, 2023, the highest fourth quarter sand volume sales in Source's history, generating sand revenue of $124.3-million, an increase of $54.0-million or 77 per cent from the fourth quarter of 2022. Higher sand revenue was due to an increase in quarter-over-quarter sand sales volumes, including a 134-per-cent increase in sand volumes from the Peace River facility, as well as a 22-per-cent increase in average realized sand price. During the fourth quarter, revenue from mine gate sales lowered the average realized sand price by $13.02 per metric tonne; however, the impact of mine gate sales on average realized sand pricing was more than offset by strong pricing realized for spot and contract customers. The sale of lower-value mine gate sales has a favourable impact on production costs by creating efficiencies.

For the three months ended Dec. 31, 2023, wellsite solutions revenue was $29.4-million, an increase of $13.2-million or 82 per cent compared with the same period last year. During the quarter, last-mile logistics trucked volumes were 115 per cent higher compared with the fourth quarter of 2022, which was negatively impacted by delays in certain customer jobs and permitting delays. Sahara-related revenue increased 27 per cent on a quarter-over-quarter basis, due primarily to an 11-per-cent increase in days utilized across the seven-unit Canadian fleet. Sahara units operating in the United States achieved a 17-per-cent increase in revenue generated compared with the same period last year, attributed to strong utilization of units operating in Wyoming and Utah during the fourth quarter. For the fourth quarter of 2023, terminal services revenue was $800,000, a decrease of $200,000 compared with the fourth quarter of 2022. The reduction was due to lower rental revenue, attributed to the sale of the Berthold terminal facility earlier this year, and lower storage revenue.

Cost of sales, excluding depreciation, increased by $46.3-million for the fourth quarter of 2023 compared with the same period in 2022, driven by higher sand sales volumes realized and costs associated with increased trucked volumes for the period. An increase in costs for rail transportation, as well as the impact of terminal sales mix, also contributed to the quarter-over-quarter increase. These increases were partly offset by lower amounts of third party sand purchases for the fourth quarter of 2023, compared with the same period last year, and a reduction in production costs experienced at the Wisconsin manufacturing facilities. During the fourth quarter of 2023, a weakening of the Canadian dollar on U.S.-dollar-denominated components of cost of sales contributed an increase of 68 cents per metric tonne to cost of sales, compared with the same period last year. These increases were fully offset by an increase in U.S.-dollar-denominated revenue for the quarter.

Gross margin increased by $17.1-million for the fourth quarter of 2023 and, excluding gross margin from mine gate volumes, adjusted gross margin was $47.45 per metric tonne, compared with $30.15 per metric tonne for the same period in 2022. These margin improvements resulted from continued strength in pricing and production efficiencies, as well as gross margin generated from last-mile logistics trucking, which increased by 154 per cent on a quarter-over-quarter basis, driven by a 115-per-cent increase in volumes trucked, as well as lower transportation fuel costs, compared with the fourth quarter of 2022.

For the fourth quarter of 2023, total operating and general and administrative expense decreased $600,000 compared with the same period in 2022. During the three months ended Dec. 31, 2023, operating expense decreased by $700,000 from the same period last year, primarily due to lower repairs and maintenance costs incurred. Last year, incremental repairs and maintenance costs were incurred for required improvements at the Peace River facility. Lower compensation costs, attributed to the timing of the recognition of variable compensation expense in 2022, also contributed to the reduction in operating expense compared with the same period last year. This reduction was partly offset by an increase in selling costs, including higher royalty costs incurred as a result of higher sand shipments from mines that require royalty payments and increased insurance expense, compared with the fourth quarter of 2022. General and administrative expense increased $100,000 in the fourth quarter of 2023 compared with the same period in 2022, the result of slight increases for IT (information technology) related expenses and other supplies, as well as higher variable incentive compensation costs, partly offset by lower professional fees incurred.

ESG (environmental, social and governance)

Source's third annual ESG report was released in November, 2023, and details the company's 2022 ESG performance. For more information, Source's most recent ESG report is available on the company's website.

Business outlook

The fourth quarter, a historically slower quarter where E&P companies exhaust budgets as they approach the end of the year, did not follow this trend for 2023, where total sand sales volumes were the highest fourth quarter volumes ever achieved by Source and second only to the first quarter of this year. WCSB activity levels are expected to remain strong in 2024, with modest growth in completion activities throughout the Montney, but particularly in northeastern British Columbia as LNG Canada comes on line. Increased demand by Source's E&P customers for mine to wellsite services in the Attachie area will create additional opportunities for Source to continue to grow its business in 2024.

Source 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, Source's existing terminal network footprint will continue to support strong operational performance for 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 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.

Updated National Instrument 43-101 technical reports for the mineral projects in Wisconsin

Source is pleased to announce that it has filed with the applicable Canadian securities regulatory authorities updated NI 43-101, Standards of Disclosure for Mineral Projects, technical reports for each of its three mineral projects in Wisconsin.

The technical reports have each been prepared with an effective date of Dec. 31, 2023, and were updated as part of an annual assessment that accounts for conventional mining depletion of the mineral resources and include updated production records. The updated resources do not represent a 100-per-cent-or-greater change in the total mineral resources.

Mineral resources are not mineral reserves and do not have demonstrated economic viability. There is no guarantee that all or any part of the mineral resource will be converted into a mineral reserve. Source has not based its production decisions and continuing mine production on mineral reserve estimates, preliminary economic assessments, prefeasibility studies or feasibility studies. As a result, there may be an increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery and historically projects without any mineral reserves have increased uncertainty and risk of failure.

Further details with respect to the scientific and technical information contained in this news release are available in the technical reports, which are available under the company's SEDAR+ profile.

Fourth quarter conference call

A conference call to discuss Source's fourth quarter financial results has been scheduled for 7:30 a.m. MST (9:30 a.m. ET) on Thursday, March 7, 2024.

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 April 7, 2024, using the following dial-in number.

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

Playback passcode:  0671

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 Source's audited consolidated financial statements for the years ended Dec. 31, 2023, and Dec. 31, 2022, together with the accompanying notes, 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, are available under the company's SEDAR+ profile. The financial statements and comparative statements have been prepared in accordance with 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, and Source's method of calculating these measures may differ from the method used by other entities and, accordingly, the measures 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.

For additional information regarding non-IFRS measures, including their use to management and investors, their composition, and a 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 incorporated herein by reference.

We seek Safe Harbor.