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Source Energy Services Reports Record Q2 Results, Despite Spring Break-Up

Canada Newswire - Tue Jul 31, 8:48PM CDT

TSX: SHLE

CALGARY, July 31, 2018 /CNW/ - Source Energy Services Ltd. ("Source" or the "Company") is pleased to announce its 2018 second quarter results.

HIGHLIGHTS

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

- Record sand sales volumes of 813,995 MT, up 96% compared to the same period in 2017;

- Record Net Income of $9.2 million or $0.15 per share;

- Gross Margin of $24.3 million and Adjusted Gross Margin(1) of $32.0 million;

- Record Adjusted EBITDA(1) of $24.7 million;

- Adjusted Gross Margin(1) per MT of $39.32, which includes a mine gate sales impact of $2.65 per MT;

- Delivered 87% of sand sales volumes into the Western Canadian Sedimentary Basin (the "WCSB");

- Deployed a fourth Sahara unit in April 2018; and

- Successfully increased liquidity through the issuance of an additional $50.0 million of 10.5% senior secured first lien notes due December 15, 2021 (the "Notes") combined with an increase of the Credit Facilities from $70.0 million to $88.0 million.

Notes:

(1)

Adjusted EBITDA and 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 second quarter of 2018 proved to be a very good quarter for us despite the general slow down in activity in the WCSB caused by seasonal spring break-up. While the second quarter normally sees a decline in oilfield activities in the WCSB, the increase in proppant intensity and completions activities by Source's customers allowed us to show substantial growth in sales in the second quarter of 2018."

Mr. Thomson is also pleased to announce Source's intent to implement a normal course issuer bid ("NCIB") to purchase approximately 1% of the public float of Source's outstanding common shares for cancellation through the Toronto Stock Exchange (the "TSX") and other alternative Canadian securities trading platforms. The implementation of the NCIB, the date on which it will commence and the number of shares that Source will be permitted to purchase for cancellation under the NCIB remains subject to TSX review and approval. Source will announce the precise details of the NCIB upon approval from the TSX.

BUSINESS OUTLOOK

As Source's first quarter of 2018 was significantly impacted by supply chain interruptions caused by prolonged severe winter weather, and the second quarter of 2018 was the WCSB's seasonal spring break-up, Source is confident in seasonal growth in activity levels in the WCSB for the remainder of this year.

Commodity prices currently drive favorable economics for operators in the liquids rich Montney and Duvernay areas of the WCSB. As these wells have the highest amount of proppant placed per meter of completed lateral ('proppant intensity') in the WCSB, strong activity in these areas should drive demand for proppant in Canada. In addition to this Source continues to see an increase in the average proppant intensity across the WCSB.

With the addition of new customer contracts in the first half of the year, Source has a strong order book for the remainder of 2018 and will have additional opportunities to pursue spot sales.

OVERVIEW OF RESULTS

Three months ended June 30   Six months ended June 30
($000's, except MT and per unit amounts)          2018          2017           2018         2017
Sand Volumes (MT)(1)                              813,995       414,286        1,456,767    834,297
Sand Revenue                                      110,281       50,555         197,165      102,185
Wellsite Solutions                                20,758        16,629         38,028       27,164
Terminal Services                                 1,174         1,475          2,396        3,743
Sales                                             132,213       68,659         237,589      133,092
Cost of Sales                                     100,206       55,420         179,111      108,575
Cost of Sales - Depreciation and Depletion        7,694         2,810          9,710        5,368
Cost of Sales                                     107,900       58,230         188,821      113,943
Gross Margin                                      24,313        10,429         48,768       19,149
Operating and General and Administrative Expenses 7,641         5,718          15,648       9,602
Depreciation                                      2,951         1,540          5,570        2,807
Income from operations                            13,721        3,171          27,550       6,740
Other expense(income):
Loss (gain) on asset disposal                     (8)           (3)            2,388        (3)
Finance expense                                   4,928         9,409          9,807        18,888
Gain on derivative liability                      (1,787)       (31)           (1,411)      (4,165)
Share based compensation expense                  1,304         3,870          2,209        3,870
Other income                                      (49)          (432)          (248)        (964)
Management fees                                   —       —        —      417
Foreign exchange loss (gain)(2)                   (332)         (157)          (330)        524
Total other expense                               4,056         12,656         12,415       18,567
Income (loss) before income taxes                 9,665         (9,485)        15,135       (11,827)
Current income tax expense (recovery)             (932)         1,691          —      1,691
Deferred income tax expense (recovery)            1,398         (2,340)        2,222        (2,680)
Net Income (Loss)                                 9,199         (8,836)        12,913       (10,838)
Net Income (Loss) per share ($/share)             0.15          (0.24)         0.20         (0.30)
Diluted Net Income (Loss) per share ($/share)     0.15          (0.24)         0.20         (0.30)
Adjusted EBITDA(3)                                24,747        8,959          45,292       16,204
Sand Revenue Sales/MT                             135.48        122.03         135.34       122.48
Gross Margin/MT                                   29.87         25.17          33.48        22.95
Adjusted Gross Margin(3)                          32,007        13,239         58,478       24,517
Adjusted Gross Margin/MT(3)                       39.32         31.96          40.14        29.39
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 six months ended June 30, 2018 was $0.7745 and $0.7824, respectively, (2017 - $0.7435 and $0.7495, respectively).
(3) Adjusted EBITDA and Adjusted Gross Margin, including per MT, are not defined under IFRS. See "Non-IFRS Measures" below.

For the second quarter of 2018, Adjusted EBITDA was $24.7 million, which was $15.8 million higher than the $9.0 million of Adjusted EBITDA in the same period in 2017 and Net Income was $9.2 million, which was $18.0 million higher than the $8.8 million Net Loss in the same period in 2017.

Sand volumes in the second quarter of 2018 increased by 399,709 MT, or 96%, compared to the volume of sand sold in the same period in 2017. Source's sand revenue increased in the second quarter of 2018 by $59.7 million, or 118%, compared to the second quarter of 2017. This increase in revenue was attributable to the increase in sand sales volumes as well as an 11% increase ($13.45 per MT) in average realized sand price. In the second quarter of 2018, Source's sand revenue increased by $23.4 million, or 27%, when compared to the first quarter of 2018, primarily due to a 27% increase in sand volumes (171,222 MT) and a minimal increase ($0.31 per MT) in the average sales price. The increase in the average price was primarily due to the positive impact of a weaker Canadian dollar on US dollar denominated sales largely offset by an increase in the number of mine gate sales in the second quarter of 2018.

During the second quarter of 2018, revenue from wellsite solutions increased by $4.1 million, compared with the second quarter of 2017 primarily due to increased trucking activity associated with the increased sand sales volumes. Wellsite solutions revenue also increased by $3.5 million in the second quarter of 2018, compared with the first quarter of 2018, primarily due to increased trucking activity associated with Source's increased sand sales volumes, as well as the deployment of the fourth Sahara unit in April 2018.

In the second quarter of 2018, Gross Margin and Adjusted Gross Margin increased by $13.9 million and $18.8 million, or $4.70 per MT and $7.36 per MT, respectively, when compared to the second quarter of 2017 due to improved sand volumes and an increase in average realized sand prices. Adjusted Gross Margin was $39.32 per MT in the second quarter of 2018 including a $2.65 per MT impact from mine gate sales. Gross Margin in the second quarter of 2018 was relatively unchanged from the first quarter of 2018 and Adjusted Gross Margin increased in the second quarter of 2018 from the first quarter of 2018 by $5.5 million, primarily due to increased sand volumes.

Three months ended June 30   Six months ended June 30
($000's, except MT and per unit amounts)                            2018          2017           2018         2017
Gross Margin                                                        $24,313       $10,429        $48,768      $19,149
Cost of Sales - depreciation and depletion                          7,694         2,810          9,710        5,368
Adjusted Gross Margin(1)                                            32,007        13,239         58,478       24,517
Gross Margin/MT                                                     $29.87        $25.17         $33.48       $22.95
Adjusted Gross Margin/MT(1)                                         $39.32        $31.96         $40.14       $29.39
Percentage of Mine Gate Sand Volumes                                13%           9%             11%          7%
Percentage of Sand Volumes Sold in the WCSB                         87%           91%            89%          93%
Sales Mix Impact of Mine Gate Sales/MT                              $2.65         $1.05          $2.30        $0.95
Impact of Preferred Acquisition Inventory Acquired at Fair Value/MT $—      $—       $1.30        $—
Notes:
(1)    Adjusted Gross Margin (including on a per MT basis) is not defined under IFRS, see "Non-IFRS Measures" below.

SECOND QUARTER CONFERENCE CALL

A conference call to discuss Source's second quarter financial results has been scheduled for 7:30 am MT (9:30 am ET) on August 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                                       8777288
International:                                       1-647-427-7450                                       8777288
The call will be recorded and available for playback approximately 2 hours after the meeting end time, until September 1, 2018, using the following dial-in:
Playback Number                                                                                           Passcode
Toll-Free                                            1-855-859-2056                                       8777288

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 and six months ended June 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); 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 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

View original content with multimedia: http://www.newswire.ca/en/releases/archive/July2018/31/c6300.html

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

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