Source Energy Services Reports Record Q1 Results, Despite Railroad Issues

TSX: SHLE

CALGARY, May 2, 2018 /CNW/ - Source Energy Services Ltd. ("Source" or the "Company") is pleased to announce its 2018 first quarter results.

HIGHLIGHTS

Source achieved the following first quarter 2018 results:

  • Net Income of $3.7 million or $0.06 per share;
  • Record Adjusted EBITDA(1) of $20.5 million;
  • Gross Margin of $24.3 million and Adjusted Gross Margin(1) of $26.5 million;
  • Normalized Adjusted Gross Margin(1) per MT of $45.98;
  • Record sand sales volumes of 642,773 MT; and
  • Delivered 91% of sand sales volumes into the Western Canadian Sedimentary Basin (the "WCSB").

Notes:


(1)

Adjusted EBITDA, Adjusted Gross Margin and Normalized Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, see "Non-IFRS Measures" below.

 

Brad Thomson, Source's President and CEO said, "The first quarter of 2018 proved to be a very challenging operating environment given the unprecedented rail interruptions and the extreme weather. Despite these challenges, I'm proud that the Source team delivered record financial and operational results."

Mr. Thomson went on to say, "In order to avoid the disruptions we saw over the last quarter, Source has been working closely with its supply chain partners as well as pushing to complete expansions of key distribution assets. With improved levels of rail service, additional throughput capacity from both our new Fox Creek terminal and our recently expanded Wembley terminal, and with our growing Sahara fleet, we're better positioned than ever before to provide the most reliable northern white proppant supply to the WCSB in any weather conditions."

BUSINESS OUTLOOK

With activity levels in the liquids rich Montney and Duvernay areas of the WCSB remaining strong, Source expects well completion activities and frac sand demand in 2018 to continue to be robust. With tail winds provided by strong commodity prices, we're seeing a number of exploration and production ("E&P") companies move into manufacturing mode in 2018. As a part of this shift in focus, these companies are looking to increase their direct purchases of frac sand and related completion services. As a result, Source expects to see continued growth in 2018.

OVERVIEW OF RESULTS


Three Months Ended March 31

($000's, except MT and per unit amounts)

2018

2017

Sand Volumes (MT)(1)

642,773

420,011

Sand Revenue

86,884

51,630

Wellsite Solutions

17,270

10,535

Terminal Services

1,221

2,267

Sales

105,375

64,432

Cost of Sales

78,905

53,155

Cost of Sales – Depreciation and Depletion

2,138

2,558

Cost of Sales

81,043

55,713

Gross Margin

24,332

8,719

Operating and General and Administrative Expenses

8,007

3,884

Depreciation

2,619

1,267

Income from operations

13,706

3,568

Other expense(income):



Loss on asset disposal

2,396

-

Finance expense

4,757

9,479

Loss (gain) on derivative liability

376

(4,133)

Stock based compensation expense

905

-

Other income

(199)

(532)

Management Fees

-

417

Foreign exchange loss(2)

2

681

Total other expense

8,237

5,912

Income (loss) before income taxes

5,469

(2,344)

Current income tax expense (recovery)

932

-

Deferred income tax expense (recovery)

824

(339)

Net Income (Loss)

3,713

(2,005)

Net Income (Loss) per share ($/share)

0.06

(0.08)

Diluted Net Income (Loss) per share ($/share)

0.06

(0.08)

Adjusted EBITDA(3)

20,544

7,244

Sand Revenue Sales/MT

135.17

122.93

Gross Margin/MT

37.85

20.76

Adjusted Gross Margin(3)

26,470

11,277

Adjusted Gross Margin/MT(3)

41.18

26.85

Normalized Adjusted Gross Margin/MT(3)

45.98

27.85

Notes:


(1)

One metric tonne ("MT") is approximately equal to 1.102 short tons.

(2)

The average Canadian to US dollar exchange rate for the three months ended March 31, 2018 was $0.7907 (2017 - $0.7554).

(3)

Adjusted EBITDA, Adjusted Gross Margin and Normalized Adjusted Gross Margin, including per MT, are not defined under IFRS. See "Non-IFRS Measures" below.

 

During the first quarter of 2018, Source, and the rest of the industry, experienced a significant slowdown in Canadian National Railway Company ("CN") rail service which affected Source's ability to meet strong customer demand. Despite the rail service slowdown, Source had record sand volumes and financial performance in the first quarter of 2018.

For the first quarter of 2018, Adjusted EBITDA was $20.5 million, which was $13.3 million higher than the $7.2 million of Adjusted EBITDA in the same period in 2017 and Net Income was $3.7 million, which was $5.7 million higher than the $2.0 million Loss in the same period in 2017.

Sand volumes in the first quarter of 2018 increased by 222,762 MT, or 53%, compared to the volume of sand sold in the same period in 2017. Source's sand revenue increased in the first quarter of 2018 by $35.3 million, or 68%, compared to the first quarter of 2017. This increase in revenue was attributable to the increase in sand sales volumes as well as a 10% increase ($12.24 per MT) in average sand price. In the first quarter of 2018, Source's sand revenue increased by $22.9 million, or 36%, when compared to the fourth quarter of 2017, primarily due to a 15% increase in sand volumes (85,410 MT) and an 18% increase ($20.37 per MT) in the average sales price. The increase in the average price was primarily due to an improved sales mix, as well as a decrease in the number of mine gate sales in the first quarter of 2018.

During the first quarter of 2018, revenue from wellsite solutions increased by $6.7 million, compared with the first quarter of 2017. Wellsite solutions revenue also increased by $7.0 million in the first quarter of 2018, compared with the fourth quarter of 2017. These increases in revenue were due to the higher utilization of an increased number of Sahara units as well as increased trucking levels associated with Source's increased sand sales volumes.

In the first quarter of 2018, Gross Margin and Adjusted Gross Margin increased by $15.6 million and $15.2 million, or $17.10 per MT and $14.33 per MT, respectively, when compared to the first quarter of 2017 due to improved sand volumes and an increase in average sand prices. As shown in the table below, the Normalized Adjusted Gross Margin in the first quarter of 2018 reached $45.98 per MT. Gross Margin and Adjusted Gross Margin also increased in the first quarter of 2018 sequentially from the fourth quarter of 2017 by $10.7 million and $8.9 million, or $13.42 per MT and $9.57 per MT, respectively, due to a combination of increased sand volumes and an improved sales mix from decreased mine gate sales.


Three Months Ended March 31

($000's, except MT and per unit amounts)

2018

2017

Gross Margin

$24,332

$8,719

Cost of Sales – depreciation and depletion

2,138

2,558

Adjusted Gross Margin(1)

26,470

11,277

Gross Margin/MT

$37.85

$20.76

Adjusted Gross Margin/MT(1)

$41.18

$26.85

Sales Mix Impact of Mine Gate Sales/MT

$1.90

$1.00

Impact of Preferred Acquisition Inventory Acquired at Fair Value/MT

$2.90

-

Normalized Adjusted Gross Margin/MT(1)

$45.98

$27.85

Percentage of Mine Gate Sand Volumes

9%

7%

Percentage of Terminal and Wellsite Sand Volumes

91%

93%

Notes:


(1)

Adjusted Gross Margin and Normalized Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, see "Non-IFRS Measures" below.

 

FIRST QUARTER CONFERENCE CALL

A conference call to discuss Source's first quarter financial results has been scheduled for 7:30 am MT (9:30 am ET) on May 3, 2018, for interested analysts, investors and media representatives.

The conference call dial-in details are:                                              

Dial-In Numbers   


Participant Passcode

Toll-Free:

1-888-231-8191


6495503

International:

1-647-427-7450


6495503

 

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until June 3, 2018, using the following dial-in:                                             

Playback Number


Passcode

Toll-Free

1-855-859-2056


6495503

 

ABOUT SOURCE ENERGY SERVICES

Source is a fully integrated producer, supplier and distributer of high quality Northern White frac sand. Source provides its customers with a full end-to-end solution supported by its Wisconsin mines and processing facilities, its unit train capable rail assets, its Western Canadian terminal network and its "last mile" logistics capabilities. In addition to its industry leading frac sand transload terminal network and in-basin frac sand storage capabilities, Source also provides storage and logistics services for other bulk oil and gas well completion materials that aren't produced by Source.

Source's full-service approach allows customers to rely on its logistics capabilities to increase reliability of supply and to ensure the timely delivery of their growing requirements for frac sand and other bulk completion materials.

IMPORTANT INFORMATION

These results should be read in conjunction with each of Source's unaudited condensed interim financial statements for the three months ended March 31, 2018, and Source's audited consolidated financial statements for the year ended December 31, 2017, together with the accompanying notes (the "Financial Statements") and its corresponding management's discussion and analysis for such period (the "MD&A"). The Financial Statements and MD&A and other information relating to Source, including the Annual Information Form ("AIF"), is available under the Company's SEDAR profile at www.sedar.com. 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 ("IASB"). Unless otherwise stated, all amounts are expressed in Canadian dollars.

NON-IFRS MEASURES

In this press release Source has used the terms Adjusted Gross Margin, Normalized Adjusted Gross Margin and Adjusted EBITDA, including per MT, 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, they may not be comparable to similar measures presented by other companies. These financial measures should not be considered as an alternative to, or more meaningful than, net income (loss), Gross Margin and other measures of financial performance as determined in accordance with IFRS. For additional information regarding Non-IFRS measures, including their use to management and investors and reconciliations to measures recognized by IFRS, please refer to the MD&A, which is available online at www.sedar.com and through Source's website at www.sourceenergyservices.com.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this press release constitute forward-looking statements relating to, without limitation, expectations, intentions, plans and beliefs, including information as to the future events, results of operations and Source's future performance (both operational and financial) and business prospects. In certain cases, forward-looking statements can be identified by the use of words such as "expects", "estimates", "forecasts", "intends", "anticipates", "believes", "plans", "seeks", "projects" or variations of such words and phrases, or state that certain actions, events or results "may" or "will" be taken, occur or be achieved. Such forward-looking statements reflect Source's beliefs, estimates and opinions regarding its future growth, results of operations, future performance (both operational and financial), and business prospects and opportunities at the time such statements are made, and, except as may be required by law, Source undertakes no obligation to update forward-looking statements if these beliefs, estimates and opinions or circumstances should change. Forward-looking statements are necessarily based upon a number of estimates and assumptions made by Source that are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Forward-looking statements are not guarantees of future performance. In particular, this press release contains forward-looking statements pertaining, but not limited, to: outlook for operations and sales volumes; industry activity levels; rail service; the impact of weather; expectations regarding increased demand for and sales volumes of sand in 2018; the continued increase of sand sales volumes and sand spot pricing in 2018; and increased sand intensities for Canadian well completions.

By their nature, forward-looking statements involve numerous current assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Source to differ materially from those anticipated by Source and described in the forward-looking statements

With respect to the forward-looking statements contained in this press release, assumptions have been made regarding, among other things: proppant market prices; future oil, natural gas and natural gas liquids prices; future global economic and financial conditions; future commodity prices, demand for oil and gas and the product mix of such demand; levels of activity in the oil and gas industry in the areas in which Source operates; the continued availability of timely and safe transportation for Source's products, including without limitation, rail accessibility; the maintenance of Source's key customers and the financial strength of its key customers; the maintenance of Source's significant contracts or their replacement with new contracts on substantially similar terms and that contractual counterparties will comply with current contractual terms; operating costs; that the regulatory environment in which Source operates will be maintained in the manner currently anticipated by Source; future exchange and interest rates; geological and engineering estimates in respect of Source's resources; the recoverability of Source's resources; the accuracy and veracity of information and projections sourced from third parties respecting, among other things, future industry conditions and product demand; demand for horizontal drilling and hydraulic fracturing and the maintenance of current techniques and procedures, particularly with respect to the use of proppants; Source's ability to obtain qualified staff and equipment in a timely and cost-efficient manner; the regulatory framework governing royalties, taxes and environmental matters in the jurisdictions in which Source conducts its business and any other jurisdictions in which Source may conduct its business in the future; future capital expenditures to be made by Source; future sources of funding for Source's capital program; Source's future debt levels; the impact of competition on Source; and Source's ability to obtain financing on acceptable terms.

A number of factors, risks and uncertainties could cause results to differ materially from those anticipated and described herein including, among others: the effects of competition and pricing pressures; risks inherent in key customer dependence; effects of fluctuations in the price of proppants; risks related to indebtedness and liquidity, including Source's leverage, restrictive covenants in Source's debt instruments and Source's capital requirements; risks related to interest rate fluctuations and foreign exchange rate fluctuations; changes in general economic, financial, market and business conditions in the markets in which Source operates; changes in the technologies used to drill for and produce oil and natural gas; Source's ability to obtain, maintain and renew required permits, licenses and approvals from regulatory authorities; the stringent requirements of and potential changes to applicable legislation, regulations and standards; the ability of Source to comply with unexpected costs of government regulations; liabilities resulting from Source's operations; the results of litigation or regulatory proceedings that may be brought against Source; the ability of Source to successfully bid on new contracts and the loss of significant contracts; uninsured and underinsured losses; risks related to the transportation of Source's products, including potential rail line interruptions or a reduction in rail car availability or the impact of weather; the geographic and customer concentration of Source; the ability of Source to retain and attract qualified management and staff in the markets in which Source operates; labour disputes and work stoppages and risks related to employee health and safety; general risks associated with the oil and natural gas industry, loss of markets, consumer and business spending and borrowing trends; limited, unfavourable, or a lack of access to capital markets; uncertainties inherent in estimating quantities of mineral resources; sand processing problems; and the use and suitability of Source's accounting estimates and judgments.

Although Source has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in its forward-looking statements, there may be other factors, including those described under the heading "Risk Factors" in the AIF, that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will materialize or prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement. Readers should not place undue reliance on forward-looking statements. These statements speak only as of the date of this press release. Except as may be required by law, Source expressly disclaims any intention or obligation to revise or update any forward-looking statements or information whether as a result of new information, future events or otherwise.

SOURCE Source Energy Services

For further information: Source Energy Services Ltd., Brad Thomson, Chief Executive Officer, (403) 262-1312 (ext. 225); Derren Newell, Chief Financial Officer, (403) 262-1312 (ext. 233)