Source Energy Services Ltd. press release

Source Energy Services Reports Q4 2018 and Year End Results, Amendment to Normal Course Issuer Bid and Other Matters

2019-03-15

TSX - Toronto Stock Exchange · Silicon · Canada

Canada NewsWire

CALGARY, March 14, 2019

TSX: SHLE

CALGARY, March 14, 2019 /CNW/ - Source Energy Services Ltd. ("Source") is pleased to announce its 2018 financial results and achievements.

HIGHLIGHTS

Improved year-over-year operating results and financial performance including: Completed facility expansions and facility improvements that enable Source to continue to grow its business without significant additional capital, including: Continued success in securing direct contracts with leading oil and gas companies active in the Montneyand the Duvernay, including: Improved and strengthened its balance sheet, providing the company with security against business uncertainties and the ability to pursue new growth opportunities, including:

| Note: | | | (1) | Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, see "Non-IFRS Measures" below. |

RESULTS OVERVIEW

| | Three months ended December 31 | | Year ended December 31 | | | | | | ($000's, except MT and per unit amounts) | 2018 | | 2017 | | 2018 | | 2017 | | Sand Volumes (MT)(1) | 373,171 | | 557,363 | | 2,560,855 | | 1,902,106 | | | | | | | | | | | Sand Revenue | 45,459 | | 63,986 | | 342,428 | | 228,403 | | Wellsite Solutions | 7,299 | | 10,308 | | 67,264 | | 54,911 | | Terminal Services | 1,307 | | 894 | | 5,335 | | 6,184 | | Sales | 54,065 | | 75,188 | | 415,027 | | 289,498 | | Cost of Sales | 47,109 | | 57,572 | | 325,738 | | 225,927 | | Cost of Sales – Depreciation and Depletion | 3,253 | | 3,998 | | 20,274 | | 11,948 | | Cost of Sales | 50,362 | | 61,570 | | 346,012 | | 237,875 | | Gross Margin | 3,703 | | 13,618 | | 69,015 | | 51,623 | | Operating and General and Administrative Expenses | 10,455 | | 8,227 | | 33,323 | | 24,509 | | Depreciation | 3,083 | | 2,081 | | 12,009 | | 6,560 | | Income (Loss) from operations | (9,835) | | 3,310 | | 23,683 | | 20,554 | | Other expense | 5,336 | | 6,543 | | 25,379 | | 31,668 | | Income (loss) before income taxes | (15,171) | | (3,233) | | (1,696) | | (11,114) | | Current income tax expense (recovery) | — | | (5,268) | | — | | — | | Deferred income tax expense (recovery) | (366) | | 3,137 | | 1,169 | | (2,179) | | Net Income (Loss) | (14,805) | | (1,102) | | (2,865) | | (8,935) | | Net Income (Loss) per share ($/share) | (0.22) | | (0.02) | | (0.04) | | (0.19) | | Diluted Net Income (Loss) per share ($/share) | (0.22) | | (0.02) | | (0.04) | | (0.19) | | Adjusted EBITDA(3) | (3,230) | | 13,072 | | 58,972 | | 43,608 | | Sand Revenue Sales/MT | 121.82 | | 114.80 | | 133.72 | | 120.08 | | Gross Margin/MT | 9.92 | | 24.43 | | 26.95 | | 27.14 | | Adjusted Gross Margin(3) | 6,956 | | 17,616 | | 89,289 | | 63,571 | | Adjusted Gross Margin/MT(3) | 18.64 | | 31.61 | | 34.87 | | 33.42 | | Percentage of Mine Gate Sand Volumes | 15% | | 30% | | 10% | | 14% | | Percentage of Sand Volumes Sold in the WCSB | 85% | | 70% | | 90% | | 86% | | Sales Mix Impact of Mine Gate Sales/MT | $5.33 | | $13.35 | | $2.70 | | $3.05 | | Impact of Preferred Acquisition Inventory Acquired at Fair Value/MT | $— | | $2.80 | | $0.74 | | $0.80 |

| 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 and year ended December 31, 2018 was $0.7575 and $0.7721, respectively, (2017 - $0.7866 and $0.7704, respectively). | | (3) | Adjusted EBITDA and Adjusted Gross Margin, including per MT, are not defined under IFRS. See "Non-IFRS Measures" below. |

Source delivered record performance in 2018 as the increased size and scope of operations were able to better serve the completion activity in the WCSB. In 2018 sand volumes increased by 35%, sand revenue increased by 50% and total sales revenue increased by 43%, when compared with 2017. Sand pricing improved by 11% due to contractual increases and the flow through of increased logistics costs during the year. Wellsite solutions revenue increased by $12.4 million, or 22%, in 2018 compared with 2017, primarily due to a 38% increase in trucking revenues associated with the increased sand volumes and increased Sahara rental revenue. Sahara rental revenue increased as the fleet of six units that were available at year end were utilized at 61% throughout 2018 compared to a 78% utilization of a three-unit Sahara fleet in 2017. For 2018, Adjusted EBITDA was $59.0 million, which was $15.4 million, or 35%, higher than the $43.6 millionof Adjusted EBITDA generated in 2017 and the Net Loss decreased by $6.1 million, or 68%, compared to a Net Loss of $8.9 millionin 2017.

In the year ended December 31, 2018Gross Margin and Adjusted Gross Margin increased by $17.4 millionand $25.7 million, respectively, when compared to the year ended December 31, 2017primarily due to a 35% increase in sand volumes. Gross Margin was $26.95per MT and Adjusted Gross Margin was $34.87per MT for the year ended December 31, 2018.

Sand volumes in the fourth quarter of 2018 decreased by 184,192 MT, or 33%, compared to the sand volumes sold in the fourth quarter of 2017 due to decreased activity in the WCSB resulting from an unpredictable operating environment, very wide western Canadian oil and condensate differentials and E&P companies conservatively managing their remaining 2018 capital budgets in the fourth quarter of 2018. North American wide pipeline egress issues and the growth of domestic sand supply in the Permian also led to lower mine gate sales in the US in the fourth quarter of 2018.

Source's sand revenue decreased in the fourth quarter of 2018 by $18.5 million, or 29%, compared to the fourth quarter of 2017. This decrease in revenue and the decrease in sand volumes were partially offset by a 6% increase ($7.02per MT) in average realized sand price. In the fourth quarter of 2018. Source's sand revenue decreased by $54.3 million, or 54%, when compared to the third quarter of 2018, primarily due to a 49% decrease in sand volumes (357,744 MT) and a 11% decrease ($14.73per MT) in the average realized sand price primarily due to an extreme slow down in activity levels in the WCSB. Average realized sand prices also fell due to declines in spot pricing consistent with decreased activity levels and a change in sales mix as customers under contract had largely completed their 2018 capital programs.

During the fourth quarter of 2018, revenue from wellsite solutions decreased by $3.0 million, compared with the fourth quarter of 2017, primarily due to a 51% decrease in Sahara related revenues from decreased activity in the WCSB which resulted in a 37% utilization of Sahara units and a 13% decrease in trucking activity associated with the decreased sand sales volumes. Wellsite solutions revenue also decreased by $14.6 millionin the fourth quarter of 2018, compared with the third quarter of 2018, primarily due to a 44% decrease in Sahara related revenue and a 72% decrease in trucking activity associated with the decreased WCSB activity.

In the fourth quarter of 2018, Gross Margin decreased by $9.9 millionand Adjusted Gross Margin decreased by $10.7 million, when compared to the fourth quarter of 2017. During the same period, Gross Margin per MT decreased by $14.51per MT and Adjusted Gross Margin per MT decreased by $12.97per MT, primarily due to the impact of step fixed cost elements of production and fixed rail car lease costs being spread over lower sales volumes. Adjusted Gross Margin was $18.64per MT in the fourth quarter of 2018 including a $5.33per MT impact from mine gate sales.

In the fourth quarter of 2018, Adjusted EBITDA was $(3.2) million, which was $16.3 millionlower than the $13.1 millionof Adjusted EBITDA generated in the same period in 2017. The Net Loss for the fourth quarter of 2018 was $14.8 million, which was $13.7 millionlower than the $1.1 millionof Net Loss from the same period in 2017.

Cash and Net Working Capital

As at December 31, 2018, Source had $4.6 millioncash on hand and had senior long-term debt outstanding of $148.5 million, as compared to $129.3 millionas at December 31, 2017. For the fourth quarter of 2018, Source had cash flows provided by operating activities of $26.6 millioncompared to cash flows used by operating activities of $25.5 millionfor the same period in 2017, primarily due to the $31.5 millionincrease in total current assets less total current liabilities (the "Net Working Capital"), partially offset by a $13.7 milliondecrease in net income for the quarter. Capital expenditures for the three months ended December 31, 2018 were $19.1 millioncompared to $24.5 millionin the same period in 2017. For 2018, Source had cash flows provided by operating activities of $75.8 millioncompared to cash flows provided by operating activities of $6.5 millionfor the same period in 2017, primarily due to the $16.3 milliondecrease in Net Working Capital and a $6.1 milliondecrease in net loss for the year ended December 31, 2018. Capital expenditures for 2018 were $68.0 millioncompared to $50.5 millionin 2017. Capital expenditures in both periods were funded through a combination of cash flows provided in operating activities and amounts available under the Credit Facility.

| Capital Expenditures | Three months ended December 31 | | Year ended December 31 | | | | | | ($000's, except MT and per unit amounts) | 2018 | | 2017 | | 2018 | | 2017 | | Terminal Expansion | 3,326 | | 12,773 | | 16,181 | | 17,439 | | Wellsite Solutions | 6,608 | | 1,933 | | 16,749 | | 4,877 | | Production Expansion | 7,159 | | 6,382 | | 28,314 | | 15,990 | | Overburden Removal | 1,862 | | 1,153 | | 6,331 | | 7,567 | | Other | 144 | | 2,305 | | 403 | | 4,642 | | Capital Expenditures | 19,099 | | 24,546 | | 67,978 | | 50,515 |

BUSINESS OUTLOOK

Turning to 2019 activity in the first quarter, our customers' activity levels have increased significantly from the fourth quarter of 2018. Based on booked jobs Source is expecting its first quarter 2019 activity levels to be in line with its activity levels in the first quarter of 2018. Source appreciates customer capital programs, and therefore demand for frac sand, could be impacted by several factors including timing of spring break up in the WCSB, commodity price fluctuations and condensate demand in the WCSB.

As E&P companies continue to shift into manufacturing mode the trend towards direct sourcing continues and Source is pleased to be working directly with five E&P customers under contracts. These sales are in addition to sales to other E&P companies that wish to direct source sand on a less formal basis, as well as traditional sales to pressure pumping customers.

As we enter 2019, Source's capital structure is well positioned to provide us flexibility to succeed during all stages of the cycle, and we remain committed to ensuring that our capital expenditures in 2019 are funded from cash flows provided by operating activities.

Beyond 2019, we are excited by the industry prospects with improved egress and the longer-term impacts of increased demand for liquefied natural gas ("LNG") on WCSB activity levels. In addition Source deployed its first two Sahara units to the Marcellus. These units represent an important step for Source as we diversify our revenue streams into additional basins in North America.

AMENDMENT TO NORMAL COURSE ISSUER BID

Source has applied to the Toronto Stock Exchange (the "TSX"), and the TSX has accepted, an application to amend its previously approved normal course issuer bid ("NCIB"). Previously, Source was approved to purchase approximately 615,000 common shares; the NCIB has been amended to permit Source to purchase up to an additional $1.6 millionworth of its common shares, which, based on current market prices, would represent a purchase of an aggregate of approximately 1,568,627 common shares above (or in addition to) the 615,000 previously approved. The amended NCIB will commence on March 20, 2019.

BOARD OF DIRECTORS CHANGES AND ANNUAL GENERAL MEETING

Mrs. Carrie Lonardellihas been appointed to the Board of Directors and as new Audit Committee Chair on March 14, 2019. Mr. Marshall McRaewill not be standing for re-election to the Board in 2019 and his term as a director will expire at the Annual General Meeting of Shareholders to be held on Thursday, May 2, 2019at 1:00 p.m. (Mountain Standard Time)at the BMO Centre, Second Floor - Arabian Room B, 20 Roundup Way SE, Calgary ABT2G 2W1. Mr. McRae has served as a director since Source's initial public offering in 2017 and has been an integral and esteemed member and colleague. Source thanks Mr. McRae for his invaluable contributions during his tenure. Mrs. Lonardelli is the Chief Financial Officer of Bonnetts Energy Corp. and brings a wealth of operations, governance and financial experience to Source's Board of Directors. Prior to joining Bonnetts, Mrs. Lonardelli was the owner and operator of an enterprise that provided CFO services to owner-managed businesses in Calgary. Mrs. Lonardelli is a Chartered Accountant and currently serves on the board of directors of Open to Grow, an organization providing microcredit loans to women in Guatemala.

FOURTH QUARTER CONFERENCE CALL

A conference call to discuss Source's fourth quarter financial results has been scheduled for 7:30 am MT(9:30 am ET) on March 15, 2019, for interested analysts, investors and media representatives.

The conference call dial-in details are:

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until April 15, 2019, using the following dial-in:

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 Wisconsinmines and processing facilities, 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 has also developed Sahara, a proprietary wellsite mobile sand storage and handling system.

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 requirements for frac sand and other bulk completion materials at the wellsite.

IMPORTANT INFORMATION

These results should be read in conjunction with each of Source's audited consolidated financial statements for the year ended December 31, 2018and 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"), are 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.comand 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 Montneyand Duvernay); rail service; the impact of weather; expectations regarding increased demand for sales volumes of sand in 2019; the continued increase of sand sales volumes and sand spot pricing in 2019; 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.