Source Energy Services Reports Q3 Results and Amendment to Normal Course Issuer Bid

TSX: SHLE

CALGARY, Oct. 31, 2018 /CNW/ - Source Energy Services Ltd. ("Source") is pleased to announce its 2018 third quarter results.

Source Energy Services (CNW Group/Source Energy Services)

HIGHLIGHTS

Source achieved the following results in the third quarter of 2018:

  • Sand sales volumes of 730,915 MT, up 43% compared to the same period in 2017;
  • Net Loss of $1.0 million or $(0.02) per share;
  • Gross Margin of $16.7 million and Adjusted Gross Margin(1) of $23.9 million;
  • Adjusted EBITDA(1) of $16.9 million;
  • Adjusted Gross Margin(1) per MT of $32.64 which includes a mine gate sales impact of $2.30 per MT;
  • Delivered 94% of sand sales volumes into the Western Canadian Sedimentary Basin (the "WCSB");
  • Entered into a three-year agreement with Shell Canada Energy to provide Northern White proppant for Shell's Duvernay wells;
  • Entered into a three-year agreement with Strath Resources Ltd. to provide Northern White proppant for Strath's Montney wells; and
  • Deployed a fifth Sahara unit in August 2018.

Notes:

(1)

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

BUSINESS OUTLOOK

While commodity prices remain favorable, WCSB exploration and production ("E&P") companies have been impacted by very wide differentials and an unpredictable operating environment. These factors have led to a significant slowdown in completion activity in the fourth quarter of 2018.

Source also expects that E&P companies will conservatively manage their remaining 2018 capital spending programs given these conditions. This has led Source to lower its fourth quarter sales volume expectations.

For 2019, Source has confidence that its 2019 sales volumes should improve from those seen in 2018 due to the addition of Montney and Duvernay customer contracts, as previously announced, that help provide a broader customer base and more balanced sales portfolio, refreshed capital budgets from E&P companies and continued positive economics for Montney and Duvernay production.

RESULTS OVERVIEW


Three months ended September 30


Nine months ended September 30

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

2018


2017


2018


2017

Sand Volumes (MT)(1)

730,915


510,446


2,187,683


1,344,743

Sand Revenue

99,804


62,232


296,970


164,417

Wellsite Solutions

21,937


17,439


59,965


44,603

Terminal Services

1,633


1,547


4,028


5,289

Sales

123,374


81,218


360,963


214,309

Cost of Sales

99,518


59,779


278,629


168,354

Cost of Sales – Depreciation and Depletion

7,189


2,582


16,899


7,950

Cost of Sales

106,707


62,361


295,528


176,304

Gross Margin

16,667


18,857


65,435


38,005

Operating and General and Administrative Expenses

7,219


6,680


22,868


16,282

Depreciation

3,356


1,671


8,927


4,479

Income from operations

6,092


10,506


33,640


17,244

Other expense(income):








Loss (gain) on asset disposal

2,598



4,986


(3)

Finance expense

5,320


3,879


15,127


22,767

Loss (gain) on derivative liability

(460)


1,267


(1,871)


(2,897)

Share based compensation expense

567


984


2,775


4,854

Other income

(142)


(158)


(390)


(1,122)

Management fees




417

Foreign exchange loss (gain)(2)

(134)


583


(464)


1,107

Total other expense

7,749


6,555


20,163


25,123

Income (loss) before income taxes

(1,657)


3,951


13,477


(7,879)

Current income tax expense (recovery)


3,578



5,268

Deferred income tax expense (recovery)

(687)


(2,636)


1,535


(5,315)

Net Income (Loss)

(970)


3,009


11,942


(7,832)

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

(0.02)


0.08


0.19


(0.18)

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

(0.02)


0.06


0.18


(0.18)

Adjusted EBITDA(3)

16,913


14,334


62,204


30,537

Sand Revenue Sales/MT

136.55


121.92


135.75


122.27

Gross Margin/MT

22.80


36.94


29.91


28.26

Adjusted Gross Margin(3)

23,856


21,439


82,334


45,955

Adjusted Gross Margin/MT(3)

32.64


42.00


37.64


34.17

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 and nine months ended September 30, 2018 was $0.7651 and $0.7766, respectively, (2017 - $0.7982 and $0.7652, respectively).

(3)

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

For the third quarter of 2018, Adjusted EBITDA was $16.9 million, which was $2.6 million higher than the $14.3 million of Adjusted EBITDA generated in the same period in 2017. The Net Loss for the third quarter of 2018 was $1.0 million, which was $4.0 million lower than the $3.0 million of Net Income earned in the same period in 2017.

Sand volumes in the third quarter of 2018 increased by 220,469 MT, or 43%, compared to the volume of sand sold in the third quarter of 2017. Source's sand revenue increased in the third quarter of 2018 by $37.6 million, or 60%, compared to the third quarter of 2017. This increase in revenue was attributable to the increase in sand sales volumes as well as a 12% increase ($14.63 per MT) in average realized sand price. In the third quarter of 2018, Source's sand revenue decreased by $10.5 million, or 10%, when compared to the second quarter of 2018, primarily due to a 10% decrease in sand volumes (83,080 MT), partially offset by an increase ($1.07 per MT) in the average sales price. The increase in the average price and decrease in sales volumes were primarily due to the decrease in the quantity of mine gate sales in the third quarter of 2018. Sales volumes were also negatively impacted by lower than anticipated activity levels in the WCSB in the third quarter of 2018

During the third quarter of 2018, revenue from wellsite solutions increased by $4.5 million, compared with the third quarter of 2017 primarily due to increased trucking activity associated with the increased sand sales volumes. Wellsite solutions revenue also increased by $1.2 million in the third quarter of 2018, compared with the second quarter of 2018, primarily due to the deployment of the fourth Sahara unit in April 2018 and the fifth Sahara unit in August 2018 while trucking revenue was virtually unchanged despite the decrease in sand sales volumes.

In the third quarter of 2018, Gross Margin decreased by $2.2 million and Adjusted Gross Margin increased by $2.4 million, when compared to the third quarter of 2017. However, during the same period, Gross Margin per MT decreased by $14.14 per MT and Adjusted Gross Margin per MT decreased by $9.36 per MT, primarily due to increased production costs per MT associated with targeted production of sales of specific mesh sizes needed to meet required product sales mix during the quarter. In the third quarter of 2018, sand sales volumes of 40/70 mesh sand increased 4%, or over 148,000 MT, as compared to the third quarter of 2017 which led to higher production costs. Adjusted Gross Margin was $32.64 per MT in the third quarter of 2018 including a $2.30 per MT impact from mine gate sales.

In the nine months ended September 30, 2018 Gross Margin and Adjusted Gross Margin increased by $27.4 million and $36.4 million, or $1.65 per MT and $3.47 per MT, respectively, when compared to the nine months ended September 30, 2017 primarily due to a 63% increase in sand volumes and a $13.48 per MT increase in average realized sand prices which more than offset increased production costs. Adjusted Gross Margin was $37.64 per MT for nine months ended September 30, 2018 which includes a $2.07 per MT impact from mine gate sales and a $0.87 per MT impact from the purchase of inventory in the Preferred Acquisition that was acquired at fair value. Adjusted Gross Margin decreased in the third quarter of 2018 from the second quarter of 2018 by $8.2 million, primarily due to the impact of fixed rail car lease costs and increased costs of production combined with a 10% decrease in sand volumes sold.


Three months ended September 30


Nine months ended September 30

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

2018


2017


2018


2017

Gross Margin

$16,667


$18,857


$65,435


$38,005

Cost of Sales – depreciation and depletion

7,189


2,582


16,899


7,950

Adjusted Gross Margin(1)

23,856


21,439


82,334


45,955

Gross Margin/MT

$22.80


$36.94


$29.91


$28.26

Adjusted Gross Margin/MT(1)

$32.64


$42.00


$37.64


$34.17

Percentage of Mine Gate Sand Volumes

6%


10%


9%


8%

Percentage of Sand Volumes Sold in the WCSB

94%


90%


91%


92%

Sales Mix Impact of Mine Gate Sales/MT

$2.30


$0.53


$2.07


$1.36

Impact of Preferred Acquisition Inventory Acquired at Fair Value/MT

$—


$—


$0.87


$—

Notes:

(1)

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

AMENDMENT TO NORMAL COURSE ISSUER BID

Source has applied to the Toronto Stock Exchange (the "TSX") to amend its previously approved normal issuer bid ("NCIB") to purchase approximately 1% of its outstanding common shares for cancellation through the facilities of the TSX. Previously, Source was approved to purchase approximately 315,000 common shares; Source has applied to the TSX to have the NCIB amended to permit Source to purchase up to $1.6 million worth of its common shares, which, based on current market prices, would represent a purchase of an aggregate of approximately 615,000 common shares including the 315,000 previously approved. The amendment of the NCIB, the date on which the amended NCIB will commence and the number of common shares that Source will be permitted to purchase for cancellation under the amended NCIB remains subject to TSX review and approval.

THIRD QUARTER CONFERENCE CALL

A conference call to discuss Source's third quarter financial results has been scheduled for 7:30 am MT (9:30 am ET) on November 1, 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                

7684349

International:

1-647-427-7450                

7684349

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until December 1, 2018, using the following dial-in:

Playback Number

Passcode


Toll-Free

1-855-859-2056                

7684349

ABOUT SOURCE ENERGY SERVICES

Source is a fully integrated producer, supplier and distributer of high quality Northern White frac sand primarily to the WCSB. Source provides its customers with a full end-to-end solution through its mines, processing facilities, rail assets, strategically located terminal network and "last mile" logistics operations. In addition, Source provides storage and logistics services for other bulk oil and gas well completion materials that are not 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 and nine months ended September 30, 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 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", "should" 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 (including relating to orders and spot sales); industry activity levels (including in the WCSB and particularly with respect to the Montney and Duvernay); rail service; the impact of weather; expectations regarding increased demand for sales volumes of sand in 2018; the continued increase of sand sales volumes and sand spot pricing in 2018; increased sand intensities for Canadian well completions; and the amendment to Source's NCIB.

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 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: Media inquiries: Annie Dormuth, Communications Advisor, (403) 262-1312 (ext. 295), adormuth@sourceenergyservices.com; Investor relations inquiries: Brad Thomson, Chief Executive Officer, (403) 262-1312 (ext. 225)