Source Energy Services Ltd. (“Source” or the “Company”) is pleased to announce its financial results for the three and six months ended June 30, 2024.
Q2 2024 PERFORMANCE HIGHLIGHTS
Key achievements for the quarter ended June 30, 2024 include the following:
realized sand sales volumes of 921,148 metric tonnes (“MT”) and sand revenue of $140.1 million, the highest quarterly sand volumes and revenue achieved by Source to date, reflecting an increase of $38.1 million in sand revenue from the second quarter of 2023;
generated total revenue of $176.4 million, a $49.4 million increase from the same period last year;
realized gross margin of $32.6 million and Adjusted Gross Margin(1) of $42.1 million, increases of 31% and 40%, respectively, when compared to the second quarter of 2023;
reported net income of $4.7 million;
realized Adjusted EBITDA(1) of $30.8 million, a $10.4 million improvement from the same period of 2023;
reduced total debt outstanding by $26.4 million from the end of the first quarter;
delivered record sand volumes to our customer well sites during the quarter through last mile logistics, and achieved utilization of 80% across the nine-unit Sahara fleet, compared to 79% utilization for the second quarter of 2023;
shipped Source’s tenth Sahara unit for deployment in Alaska with a large exploration and production (“E&P”) customer; and
announced a partnership with Trican Well Service Ltd. to develop a new terminal located in Taylor, British Columbia subsequent to the end of the quarter.
SECOND QUARTER 2024 RESULTS
Source reported record total revenue for the three months ended June 30, 2024, a $49.4 million or 39% increase compared to the second quarter last year. Increased sand sales volumes reflected strong customer activity levels in the Western Canadian Sedimentary Basin (“WCSB”), as well as the addition of a new large E&P customer in the latter part of the quarter. Strong customer activity levels also led to a second consecutive quarter of record volumes delivered for “last mile” logistics during the period, and the Sahara fleet operating in Canada achieved 88% utilization for the second quarter.
Cost of sales, excluding depreciation, was $134.2 million compared to $96.8 million for the second quarter of 2023. The quarter-over-quarter increase of $37.5 million is primarily attributed to the higher sand sales volumes, as well as increased transportation costs resulting from the record volumes hauled by “last mile” logistics. Cost of sales, excluding depreciation, was negatively impacted by a slight increase in rail transportation costs and a shift in product mix. A weakening of the Canadian dollar increased cost of sales denominated in US dollars by $1.97 per MT, compared to the second quarter of 2023; however, this was more than offset by the movement in exchange rates on revenue denominated in US dollars for the quarter.
For the three months ended June 30, 2024, gross margin increased by $7.7 million, or 31% compared to the same period in 2023. Excluding gross margin from mine gate volumes, Adjusted Gross Margin was $46.16 per MT compared to $46.36 per MT for the second quarter of last year. Adjusted Gross Margin benefited from increased sand volumes trucked and cost savings generated by the new trucking assets acquired during the first quarter of this year, compared to the second quarter of 2023. These improvements were offset by the impact of terminal and product mix. The weakening of the Canadian dollar relative to the second quarter of 2023, which negatively impacted cost of sales for US dollar denominated expenses, was more than offset by an increase in US dollar denominated revenue, as noted above.
Operating expenses increased by $0.3 million for the second quarter of 2024, due primarily to increased royalty costs attributed to the higher sand sales volumes. General and administrative expense increased by $1.9 million for the second quarter of the year, largely the result of higher salaries and incentive compensation expense incurred, compared to the same period last year.
Adjusted EBITDA increased by 51%, or $10.4 million, to $30.8 million for the three months ended June 30, 2024, attributed to record sand sales volumes and well site solutions performance, and incremental benefit from the trucking asset acquisition completed during the first quarter. The weakening of the Canadian dollar favorably impacted Adjusted EBITDA by $0.7 million for the second quarter, attributed to the movement in exchange rates on the settlement of working capital.
On July 25, 2024, Source announced the execution of a partnership arrangement with Trican Well Service Ltd. to construct a new terminal facility located in Taylor, British Columbia. Construction of the facility will commence immediately, and will result in a unit train capable terminal which will accommodate approximately 55,000 MT of sand storage and more than 12,000 MT of daily sand throughput capacity (the “Facility”). The first phase of the project is expected to be operational late this year, with completion of the Facility expected in early 2025.
Liquidity and Capital Resources
Source realized an increase in Free Cash Flow of $5.7 million for the three months ended June 30, 2024 compared to the second quarter of 2023. The improvement is due to the increase in Adjusted EBITDA and lower financing expense paid, including a $0.6 million reduction in interest for the senior secured notes and lower other interest charges. An increase in net expenditures for capital assets, as outlined below, and higher payments for lease obligations, attributed to additional equipment and leases for the newly acquired trucking operations, partially reduced the benefit of the increase in Adjusted EBITDA for the second quarter. On a year-to-date basis, the $8.3 million increase in Free Cash Flow is attributed to higher Adjusted EBITDA and lower financing expense, partly offset by increased net capital expenditures and payments for lease obligations.
Source’s capital expenditures, net of proceeds on disposals and reimbursements, totaled $5.7 million for the second quarter of 2024, an increase of $5.0 million compared to the second quarter last year. During the second quarter of 2023, Source sold its previously closed Berthold terminal facility, as well as excess production equipment, and received reimbursements for the costs of construction incurred during the period for Source’s tenth Sahara unit. During the second quarter of 2024, Source incurred costs attributed to the rail expansion project at its Chetwynd terminal facility, as well as facility improvements at its Peace River operations. These capital expenditures were partly offset by a reduction in costs associated with overburden removal for mining operations. During the second quarter, construction on Source’s tenth Sahara unit was completed, and the unit was shipped to Alaska for mobilization in the field. Construction costs associated with building Source’s eleventh Sahara units continued, with all expenditures incurred recovered during the quarter. For the first half of 2024, net capital expenditures increased by $7.5 million, primarily attributed to the project underway at the Chetwynd terminal facility, maintenance and upgrades at the Peace River facility, the trucking asset acquisition and increased overburden removal.
BUSINESS OUTLOOK
WCSB activity levels are expected to remain strong through the third quarter of 2024, particularly in northeastern British Columbia as preparation for LNG Canada coming online continues. Increased demand for mine to well site services in the Attachie area, combined with the Chetwynd rail expansion project and the recent acquisition of sand trucking assets, in combination with its existing terminal network footprint, will create additional opportunities for Source to continue to grow its business through the balance of the year.
In the longer-term, Source believes the increased demand for natural gas, driven by liquefied natural gas exports, increased natural gas pipeline export capabilities and power generation facilities, 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 well site 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 am MST (9:30 am ET) on Friday, August 2, 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 email. The link to register for the call is on the Upcoming Events page of our website and as follows:
Source Energy Services Q2 2024 Results Call
The call will be recorded and available for playback approximately 2 hours after the meeting end time, until September 2, 2024, using the following dial-in:
Toll-Free Playback Number: 1-855-669-9658
Playback Passcode: 2667797
ABOUT SOURCE ENERGY SERVICES
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 and its “last mile” logistics capabilities, including its trucking operations, 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.
