SHLE Source Energy Services Ltd

Source Energy Services Ltd. (TSX: SHLE) (“Source” or the “Company”) is pleased to announce its financial results for the three months ended March 31, 2024.

Q1 2024 PERFORMANCE HIGHLIGHTS

Key achievements for the quarter ended March 31, 2024 include the following:

• realized sand sales volumes of 874,849 metric tonnes (“MT”) and sand revenue of $133.0 million, an increase of $1.2 million from the first quarter of 2023;
• generated total revenue of $169.6 million, a $5.8 million increase from the same period last year;
• realized gross margin of $35.6 million and Adjusted Gross Margin(1) of $43.2 million, increases of 12% and 14%, respectively, when compared to the first quarter of 2023;
• reported net income of $1.9 million;
• realized Adjusted EBITDA(1) of $32.0 million, a $4.4 million improvement from the same period of 2023;
• repurchased $6.8 million aggregate principal value of senior secured notes during the quarter;
• completed the acquisition of a fleet of sand trucking assets, further strengthening Source’s well site solutions platform;
• achieved record sand throughput across the Sahara fleet, driving utilization of 98% across the nine-unit Sahara fleet, compared to 89% utilization for the first quarter of 2023; and
• began the expansion of the Chetwynd terminal facility to a full unit train facility, in support of growing activity in northeastern British Columbia.

Note:(1) Adjusted Gross Margin (including on a per MT basis) and Adjusted EBITDA are not defined under IFRS and might not be comparable to similar financial measures disclosed by other issuers, refer to ‘Non-IFRS Measures’ below for reconciliations to measures recognized by IFRS. For additional information, please refer to Source’s Management’s Discussion and Analysis (“MD&A”), dated May 9, 2024, available online at www.sedarplus.ca.

RESULTS OVERVIEW

	Three months ended March 31,
($000’s, except MT and per unit amounts)	2024			2023
Sand volumes (MT)(1)	874,849			907,483
Sand revenue	132,994			131,755
Well site solutions	35,720			30,627
Terminal services	854			1,342
Sales	169,568			163,724
Cost of sales	126,382			125,927
Cost of sales – depreciation	7,549			6,045
Cost of sales	133,931			131,972
Gross margin	35,637			31,752
Operating expense	6,042			5,884
General & administrative expense	5,350			4,229
Depreciation	4,210			3,091
Income from operations	20,035			18,548
Total other expense (income)	16,384			10,669
Income before income taxes	3,651			7,879
Current tax expense	1,909			—
Deferred tax recovery	(151	)		—
Net income (loss)(2)	1,893			7,879
Net earnings (loss) per share ($/share)	0.14			0.58
Diluted net earnings (loss) per share ($/share)	0.14			0.58
Adjusted EBITDA(3)	32,021			27,618
Sand revenue sales/MT	152.02			145.19
Gross margin/MT	40.74			34.99
Adjusted Gross Margin(3)	43,186			37,797
Adjusted Gross Margin/MT(3)	49.36			41.65

	December 31, 2023			December 31, 2022
Total assets	520,600			482,830
Current portion of long-term debt and non-current financial liabilities	245,345			213,715

Notes:(1) One MT is approximately equal to 1.102 short tons. (2) The average Canadian to United States (“US”) dollar exchange rate for the three months ended March 31, 2024, was $0.7414 (2023 - $0.7394).(3) Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’ below for reconciliations to measures recognized by IFRS. For additional information, please refer to Source’s MD&A available online at www.sedarplus.ca.

FIRST QUARTER 2024 RESULTS

Source recorded a $5.8 million increase in total revenue for the three months ended March 31, 2024, compared to the first quarter last year. Total sand sales volumes was impacted by an extreme cold weather snap realized in the Western Canadian Sedimentary Basin (“WCSB”) in mid-January, resulting in a 4% reduction in sand sales volumes compared to the first quarter of 2023. Notwithstanding the slower start to the quarter, margin performance remained strong. Customer activity levels led to record volumes for “last mile” logistics volumes during the period, and the Sahara fleet set a new Source record for the highest quarterly throughput to date.

Cost of sales, excluding depreciation, was $126.4 million compared to $125.9 million for the first quarter of 2023. The quarter-over-quarter increase of $0.5 million is primarily attributed to higher transportation costs, resulting from the record volumes hauled by “last mile” logistics. This increase was partly offset by a $1.23 per MT reduction in northern white sand cost, reflecting lower transportation fuel surcharges, and a shift in terminal mix, despite a weakened Canadian dollar relative to the same period last year.

For the three months ended March 31, 2024, gross margin increased by $3.9 million, or 12% compared to the same period in 2023. Excluding gross margin from mine gate volumes, Adjusted Gross Margin was $50.93 per MT compared to $44.81 per MT for the first quarter of last year. Adjusted Gross Margin benefited from continued strength in sand pricing, increased sand volumes trucked and cost savings generated by the new trucking assets acquired during the quarter, compared to the first quarter of 2023. The weakening of the Canadian dollar relative to the first quarter of 2023, which negatively impacted cost of sales for US dollar denominated expenses, was fully offset by an increase in revenue denominated in US dollars for the quarter.

Operating expenses increased by $0.2 million for the first quarter of 2024, compared to the same period last year. Higher people costs, reflecting increased compensation costs attributed to increased activity levels, and higher selling costs related to higher royalty costs were offset by a reduction in repairs and maintenance expenses compared to the first quarter of 2023. General and administrative expense increased by $1.1 million for the first quarter of the year, largely the result of higher salaries and variable incentive compensation expense, and increased professional fees compared to the same period last year.

Adjusted EBITDA increased by 16%, or $4.4 million, to $32.0 million for the three months ended March 31, 2024, attributed to strong sand sales volumes and prices, record well site solutions performance and incremental benefit from the acquisition completed in the period, as outlined below. The weakening of the Canadian dollar unfavorably impacted Adjusted EBITDA by $0.2 million for the first quarter, attributed to the movement in exchange rates on the settlement of working capital.

Acquisition of Sand Trucking Assets

On March 13, 2024, Source completed the acquisition of the sand trucking assets of RWR Trucking Inc. (the “Acquisition”), for an aggregate purchase price of $8.1 million, comprised of cash, a promissory note and the assumption of lease obligations related to certain of the sand trucking assets purchased. The asset acquisition enables Source to enhance its logistics service offerings and strengthen its mine to well site offering in the WCSB.

Liquidity and Capital Resources

Free Cash Flow	Three months ended March 31,
($000’s)	2024			2023
Adjusted EBITDA(1)	32,021			27,618
Financing expense paid	(6,812	)		(7,539	)
Capital expenditures, net of proceeds on disposal of property, plant and equipment and reimbursement of capital costs	(4,595	)		(2,146	)
Payment of lease obligations	(5,119	)		(5,047	)
Free Cash Flow(1)	15,495			12,886

Note:(1) Adjusted EBITDA and Free Cash Flow are not defined under IFRS and might not be comparable to similar financial measures disclosed by other issuers, refer to ‘Non-IFRS Measures’ below. The reconciliation to the comparable IFRS measure can be found in the table below.

Source realized an increase in Free Cash Flow of $2.6 million for the first three months of 2024, compared to the first quarter of 2023. The improvement is due to the increase in Adjusted EBITDA and lower financing expense paid, including a $0.4 million reduction in interest for the ABL facility due to lower draws outstanding. Higher payments for lease obligations, attributed to additional equipment and leases for the newly acquired trucking operations, as well as an increase in net expenditures for capital assets, as outlined below, partially offset the increase in Free Cash Flow for the first quarter.

For the first quarter of 2024 total capital expenditures, net of proceeds on disposals and reimbursements, were $4.6 million, an increase of $2.4 million compared to the first quarter last year. The increase was largely attributed to the acquisition of the sand trucking assets, as discussed above, and an increase in costs associated with overburden removal for mining operations. Costs to rebuild the piece of equipment which malfunctioned last year, as well as construction costs associated with building Source’s tenth and eleventh Sahara units, continued through the first quarter; however, all of these expenditures were recovered during the quarter. During the three months ended March 31, 2024, Source commenced a rail expansion project at the Chetwynd terminal facility. The expansion project will enable the terminal to be unit-train capable and is expected to be completed by the end of the second quarter.

ESG

Source’s annual ESG report was released with first quarter results and details the Company’s 2023 ESG performance. For more information, refer to Source’s ESG report which is available at www.sourceenergyservices.com.

BUSINESS OUTLOOK

WCSB activity levels are expected to remain strong through the balance of the year, with modest growth in completion activities throughout the Montney, but particularly in northeastern British Columbia as preparation for LNG Canada coming online continues. The rail expansion project at Source’s Chetwynd terminal facility, which commenced during the first quarter, will support increased demand by Source’s exploration and production (“E&P”) customers in this area.

Increased demand for mine to well site services in the Attachie area, combined with the Chetwynd rail expansion 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 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 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.

FIRST QUARTER CONFERENCE CALL

A conference call to discuss Source’s first quarter financial results has been scheduled for 7:30 am MST (9:30 am ET) on Friday, May 10, 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 Q1 2024 Results Call

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until June 10, 2024, using the following dial-in:

Toll-Free Playback Number: 1-855-669-9656

Playback Passcode: 0814

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.

IMPORTANT INFORMATION

These results should be read in conjunction with Source’s unaudited interim condensed consolidated financial statements for the three months ended March 31, 2024 and 2023 and the audited consolidated financial statements for the years ended December 31, 2023 and 2022, together with the accompanying notes (the “Financial Statements”) 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 at www.sedarplus.ca. 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. Unless otherwise stated, all amounts are expressed in Canadian dollars.

NON-IFRS MEASURES

In this press release Source has used the terms Free Cash Flow, 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) and gross margin, respectively, which represent the most directly comparable measures of financial performance as determined in accordance with IFRS.

Reconciliation of Adjusted EBITDA and Free Cash Flow to Net Income (Loss)

	Three months ended March 31,
($000’s)	2024			2023
Net income	1,893			7,879
Add:
Income taxes	1,758			—
Interest expense	6,283			7,129
Cost of sales – depreciation	7,549			6,045
Depreciation	4,210			3,091
Loss on debt extinguishment	115			—
Finance expense (excluding interest expense)	2,433			2,159
Share-based compensation expense	9,341			1,537
Gain on asset disposal	(1,931	)		(451	)
Loss on sublease	—			3
Other expense(1)	370			226
Adjusted EBITDA	32,021			27,618
Financing expense paid	(6,812	)		(7,539	)
Capital expenditures, net of proceeds on disposal of property, plant and equipment and reimbursement of capital costs	(4,595	)		(2,146	)
Payment of lease obligations	(5,119	)		(5,047	)
Free Cash Flow	15,495			12,886

Note: (1)   Includes expenses related to the incident at the Fox Creek terminal facility, costs and reimbursements under insurance claims and other one-time expenses.

Reconciliation of Gross Margin to Adjusted Gross Margin

	Three months ended March 31,
($000’s)	2024			2023
Gross margin	35,637			31,752
Cost of sales – depreciation	7,549			6,045
Adjusted Gross Margin	43,186			37,797

For additional information regarding non-IFRS measures, including their use to management and investors, their composition and 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. Source’s MD&A is available online at www.sedarplus.ca 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”, “believes”, “continues”, “focus”, “trend”, 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 Source undertakes no obligation to update forward-looking statements if these beliefs, estimates and opinions or circumstances should change unless required by applicable law. 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: expectations that WCSB activity levels will remain strong through the balance of the year, particularly in northeastern British Columbia with the expectation that LNG Canada will come online; expectations that the Chetwynd terminal facility rail expansion project will enable its terminal to be unit-train capable, be completed by the end of the second quarter and support increased demand by Source’s E&P customers; management’s continued assessment respecting Source’s equipment and other assets required to service Source’s operations; additional growth opportunities in 2024 in connection with mine to wellsite services in the Attachie area; improvement of Source’s production efficiencies; strong operational performance for 2024 through the strengthening of Source’s leading service offerings and logistic capabilities; expectations that increased demand for natural gas, increased natural gas pipeline export capabilities and liquefied natural gas exports will drive incremental demand for Source’s services in the WCSB; continued increase in demand from customers primarily focused on the development of natural gas properties in Montney, Duvernay and Deep Basin; views that natural gas is an important transitional fuel for the successful movement to a less carbon-intensive world; Source’s focus on and expectations regarding increasing its involvement in the provision of logistics services for other wellsite items; expectations respecting future conditions; and profitability.

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 liquefied natural gas 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, Source’s rail car fleet and the accessibility of additional transportation by rail and truck; 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 by or 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; the geographic and customer concentration of Source; the impact of extreme weather patterns and natural disasters; the impact of climate change risk; 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, unfavorable, or a lack of access to capital markets; uncertainties inherent in estimating quantities of mineral resources; sand processing problems; implementation of recently issued accounting standards; the use and suitability of Source’s accounting estimates and judgments; the impact of information systems and cyber security breaches; the impact of inflation on capital expenditures; and risks and uncertainties related to pandemics such as COVID-19, including changes in energy demand.

Although Source has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors 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.

Any financial outlook and future-oriented financial information contained in this press release regarding prospective financial performance, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action based on management’s assessment of the relevant information that is currently available. Projected operational information contains forward-looking information and is based on a number of material assumptions and factors, as are set out above. These projections may also be considered to contain future oriented financial information or a financial outlook. The actual results of Source’s operations for any period will likely vary from the amounts set forth in these projections and such variations may be material. Actual results will vary from projected results. Readers are cautioned that any such financial outlook and future-oriented financial information contained herein should not be used for purposes other than those for which it is disclosed herein. The forward-looking information and statements contained in this document speak only as of the date hereof and have been approved by the Company’s management as at the date hereof. The Company does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

FOR FURTHER INFORMATION PLEASE CONTACT:

Scott MelbournChief Executive Officer(403) 262-1312 investorrelations@sourceenergyservices.com

Derren NewellChief Financial Officer(403) 262-1312 investorrelations@sourceenergyservices.com