Source Energy Services Ltd. press release
Source Energy Services Reports Q4 2022 and Year End Results
TSX - Toronto Stock Exchange · Silicon · Canada
(TheNewswire)
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Calgary, AB - TheNewswire - March 8, 2023 - Source Energy Services Ltd. (TSX:SHLE) (“ Source ” or the “ Company ”) is pleased to announce its financial results for the three and twelve months ended December 31, 2022 .
2022 PERFORMANCE HIGHLIGHTS
Key highlights for the year ended December 31, 2022 , included the following:
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realized Adjusted EBITDA (1) of $61.5 million , a 59% increase from 2021;
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reported a net loss of $8.8 million , a $15.6 million improvement from 2021;
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realized sand sales volumes of 2,845,600 MT and total revenue of $415.9 million , a 15% and 30% increase, respectively, from 2021;
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recorded utilization of 75% for the Canadian Sahara fleet and 74% for the US Sahara fleet for the year;
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closed a transaction with Canadian Silica Industries (“CSI”) to assume operation of CSI’s Peace River frac sand facility, complementing Source’s Northern White proppant resources;
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closed a transaction for a new $75.4 million (US$55.0 million) credit facility;
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lowered borrowing costs by 200 basis points by commencing cash interest payments for the senior secured notes and further improved borrowing costs due to lower effective interest rates on the new credit facility;
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reduced amounts outstanding for the credit facilities by $9.8 million at December 31, 2022 compared to prior year;
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renewed one major customer contract at the end of the year and a second major contract in early 2023; and
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realized gross margin of $58.1 million and Adjusted Gross Margin (1) of $79.0 million , increases of 48% and 31% , respectively, when compared to 2021.
Note :
1.
Adjusted Gross Margin (including on a per MT basis) and Adjusted EBITDA 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 MDA available online at www.sedar.com.
RESULTS OVERVIEW
| | Three months ended December 31, | Year ended December 31, | | | | ($000’s, except MT and per unit amounts) | 2022 | 2021 | 2022 | 2021 | | Sand volumes (MT) (1) | 566,130 | 528,977 | 2,845,600 | 2,483,362 | | | | | | | | Sand revenue | 70,291 | 54,989 | 341,671 | 258,545 | | Wellsite solutions | 16,170 | 11,913 | 69,790 | 57,621 | | Terminal services | 990 | 648 | 4,451 | 3,695 | | Sales | 87,451 | 67,550 | 415,912 | 319,861 | | Cost of sales | 71,696 | 59,290 | 336,940 | 259,429 | | Cost of sales – depreciation | 5,125 | 4,071 | 20,827 | 21,102 | | Cost of sales | 76,821 | 63,361 | 357,767 | 280,531 | | Gross margin | 10,630 | 4,189 | 58,145 | 39,330 | | Operating expense | 6,374 | 4,142 | 20,075 | 16,514 | | General & administrative expense | 2,642 | 1,990 | 10,034 | 9,283 | | Depreciation | 2,361 | 2,426 | 10,555 | 9,873 | | Income (loss) from operations | (747) | (4,369) | 17,481 | 3,660 | | Total other expense | 11,462 | 10,197 | 26,251 | 28,063 | | Net loss (2) | (12,209) | (14,566) | (8,770) | (24,403) | | Net loss per share ($/share) | (0.90) | (1.08) | (0.65) | (1.80) | | Diluted net loss per share ($/share) | (0.90) | (1.08) | (0.65) | (1.80) | | Adjusted EBITDA (3) | 6,454 | 1,656 | 61,501 | 38,587 | | Sand revenue sales/MT | 124.16 | 103.95 | 120.07 | 104.11 | | Gross margin/MT | 18.78 | 7.92 | 20.43 | 15.84 | | Adjusted Gross Margin (3) | 15,755 | 8,260 | 78,972 | 60,432 | | Adjusted Gross Margin/MT (3) | 27.83 | 15.62 | 27.75 | 24.33 |
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 and twelve months ended December 31, 2022, was $0.7365 and 0.7686, respectively (2021 - $0.7935 and 0.7978, respectively).
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 MDA available online at www.sedar.com.
2022 RESULTS
Western Canadian Sedimentary Basin (“WCSB”) completion activity levels remained strong throughout the year which drove improved sand sales volumes and increased pricing in the spot market for sand, as supply and demand dynamics rebalanced during the year. Source achieved a $96.1 million or 30% increase in total revenue compared to 2021, driven by higher sand sales volumes, higher average realized sand pricing and improved wellsite solutions revenue.
Cost of sales, excluding depreciation, increased for the year due to higher sand sales volumes and higher costs for transportation and freight, due to increased prices for fuel, compared to last year. Source incurred additional costs for third party sand purchases, procured to ensure no customer supply interruptions resulting from increased customer demand, relative to 2021. These cost increases were partly mitigated by improved sales distribution across mesh sizes resulting in improved yields. Cost of sales was also impacted by a weakening Canadian dollar on US denominated costs relative to last year; however, this was offset by gains realized on foreign currency forward contracts settled during the year.
For the year ended December 31, 2022 , gross margin increased by $18.8 million , attributed to higher sand sales volumes and improved pricing. Excluding gross margin from mine gate volumes, Adjusted Gross Margin was $29.80 per MT, compared to $24.33 per MT in 2021, favorably impacted by improved customer and spot market pricing, despite higher costs for transportation and freight due to increased fuel costs compared to last year. Higher volumes of mine gate sales, relative to last year, contributed further reductions to cost of sales and further benefited gross margin for 2022. The weakening of the Canadian dollar negatively impacted Adjusted Gross Margin; however, this impact was largely offset by the settlement of foreign currency forward contracts in the third quarter.
Operating expenses increased on a year-over-year basis, primarily attributed to increased repairs and maintenance costs, including expenditures required to bring the new Peace River facility online, and an increase in royalty payments, directly related to higher activity levels. In 2021, general and administrative expense benefited from proceeds of the Canada Emergency Wage Subsidy (“CEWS”) program and the reversal of a provision for bad debt expense. Adjusted EBITDA was $61.5 million for 2022, a reflection of the strong sand sales volumes and sand sales pricing realized.
New Senior Credit Facility
On October 14, 2022, the Company closed a new revolving asset backed senior credit facility (the “ABL”) with a syndicate comprised of FGI Worldwide LLC and CIT Northbridge Credit, as advised by CIT Asset Management LLC, providing access to funding of approximately $75.4 million (US$55.0 million). The ABL provides Source with a lower cost of borrowing and less restrictive covenants.
Upon closing of the ABL, Source repaid all outstanding draws on the former ABL facility and senior secured term loan (collectively, the “Credit Facility”). The Company also entered into a supplemental indenture that governs the Notes which permitted Source to execute the ABL facility in exchange for a one percent consent fee to the noteholders which was paid in kind on closing. For additional information, including the financial covenants of the ABL facility, refer to ‘Long-term Debt’ within Source’s MD&A, available online at www.sedar.com .
Liquidity and Capital Resources
| Free Cash Flow | Three months ended December 31, | Year ended December 31, | | | | ($000’s) | 2022 | 2021 | 2022 | 2021 | | Adjusted EBITDA (1) | 6,454 | 1,656 | 61,501 | 38,587 | | Financing expense paid | (16,311) | (1,888) | (28,599) | (7,897) | | Capital expenditures, net of proceeds on disposal of property, plant and equipment | (3,940) | (2,000) | (13,288) | (6,442) | | Payment of lease obligations | (4,746) | (3,586) | (15,751) | (13,224) | | Free Cash Flow (1) | (18,543) | (5,818) | 3,863 | 11,024 |
Note :
(1) Adjusted EBITDA and Free Cash Flow are not defined under IFRS, refer to ‘Non-IFRS Measures’ below. The reconciliation to the comparable IFRS measure can be found in the table below.
Source generated Free Cash Flow of $3.9 million for the year ended December 31, 2022, compared to $11.0 million generated for 2021. The decrease is attributed to higher financing expense paid, as interest incurred for the Notes in 2021 was paid in kind, compared to $12.9 million of cash interest payments recognized for the Notes through 2022. Higher interest expense incurred for the ABL facility, reflecting higher average draws outstanding and an increase in the variable interest rates for the facility, as well as incremental costs incurred for the closing of the ABL facility, also contributed to the reduction in Free Cash Flow. An increase in capital expenditures for the year, largely due to maintenance work performed at the Peace River facility and increased overburden removal costs, as well as $1.5 million in incremental interest expense for lease obligations, largely due to lease payments related to the Peace River facility, further contributed to the reduction. The increase in cash outflows were partially offset by a $22.9 million improvement in Adjusted EBITDA, reflecting strong volumes and increased average sand prices, compared to the prior year.
During the fourth quarter of 2022, Free Cash Flow was impacted by an increase in financing expense paid, attributed to the payment of two quarterly interest payments during the period, for a total of $8.7 million, compared to the same period last year when interest incurred for the Notes was paid in kind. Source was not permitted to make the August 15, 2022 quarterly interest payment for the Notes until after the closing of the ABL facility, which occurred in October, 2022. Source realized an increase in capital expenditures and interest expense for lease payments during the quarter, as noted above, compared to the fourth quarter of 2021.
Source’s capital expenditures for the fourth quarter of 2022 were $4.2 million , an increase of $2.2 million compared to the same period last year. The increase in expenditures for maintenance and sustaining capital was primarily related to the Peace River facility maintenance, and a $1.9 million increase in costs associated with overburden removal for mining operations, as continued strong sand sales volumes are expected. Growth capital expenditures were lower, on a quarter-over-quarter basis, due to the completion of Source’s ninth Sahara unit in the fourth quarter of last year.
For the year ended December 31, 2022, capital expenditures increased by $8.3 million compared to 2021, driven by expenditures for the Peace River facility and increased overburden removal, as noted above. During 2022, Source sold excess production equipment, generating proceeds of $1.5 million . Management continues to assess equipment and other assets required to service Source’s operations to ensure optimal levels are maintained on an on-going basis.
Q4 2022 RESULTS
Source sold sand volumes of 566,130 MT for the three months ended December 31, 2022 , generating sand revenue of $70.3 million , an increase of $15.3 million or 28% from the fourth quarter of 2021 . The increase was primarily due to a 33% increase in average realized sand price ( $35.08 per MT, excluding mine gate sales). During the fourth quarter, revenue from mine gate sales lowered the average realized sand price by $14.87 per MT; however, the impact of mine gate sales on average realized sand pricing was more than offset by the pricing increases for spot and contract customers. The sale of lower-value mine gate sales has a favorable impact on production costs, creating efficiencies which result in increased production yields. The increased sand revenue reflects meaningful pricing gains realized for both spot customers and contracted customers, relative to the fourth quarter of last year, as certain contracts reflect pricing increases implemented late in 2022.
For the three months ended December 31, 2022 , wellsite solutions revenue was $16.2 million , an increase of $4.3 million or 36% compared to the same period in 2021. During the quarter, trucking volumes were lower compared to the fourth quarter of 2021, impacted by certain customer job and permitting delays. Despite the lower volumes, last mile trucking solutions generated a 32% increase in revenue over the same quarter last year, favorably impacted by longer trips from terminal to the wellsite and increased pricing realized. Sahara-related revenue increased 44% on a quarter-over-quarter basis, due to a 35% increase in days utilized across the nine-unit fleet. Sahara units operating in the US achieved utilization of 85%, with recently added customers operating in New Mexico and Montana.
For the fourth quarter of 2022, terminal services revenue was $1.0 million , an increase of $0.3 million compared to last year. The increase during the fourth quarter was primarily due to higher chemical elevation volumes, as well as revenue generated from the transloading of other non-sand materials, reflecting the commencement of an agreement to transload condensate rail cars through the first quarter of 2023. A reduction in sand elevation volumes for the quarter, compared to the same period last year, partially offset these increases.
Cost of sales, excluding depreciation, increased by $12.4 million for the fourth quarter of 2022 compared to the same period in 2021 . Higher sand sales volumes realized impacted cost of sales, as well as of higher costs for transportation and freight. In the fourth quarter of 2022, increased amounts of third party sand were purchased, and incremental fuel surcharges were incurred on these purchases, unfavorably impacting cost of sales, excluding depreciation. These increases were partially offset by a reduction in production costs, attributed to warmer weather experienced during the fourth quarter, which contributed to increased production efficiencies. Last year, cost of sales was favorably impacted by proceeds received from the CEWS program totaling $0.1 million for the fourth quarter of 2021. Significant components of cost of sales are denominated in US dollars, including sand processing and rail freight, and are therefore subject to exchange rate fluctuations. During the fourth quarter of 2022 , a weakening of the Canadian dollar on US dollar denominated components of cost of sales contributed an increase of $6.38 per MT to cost of sales, compared to the same period last year.
Gross margin increased by $6.4 million for the quarter. Excluding gross margin from mine gate volumes, Adjusted Gross Margin for the fourth quarter was $30.15 per MT, favorably impacted by improved customer and spot market pricing, as well as certain production adjustments to offset increasing costs for fuel. These improvements more than offset higher costs for transportation and freight due to higher fuel costs, compared to the fourth quarter of 2021 . Excluding the impact of the weakening Canadian dollar during the three months ended December 31, 2022 , and the benefit of proceeds from the CEWS program during the fourth quarter of 2021 , Adjusted Gross Margin (excluding margin from mine gate volumes) increased by $14.65, or 94%, compared to the same period last year. The weakening of the Canadian dollar negatively impacted Adjusted Gross Margin by approximately $3.29 per MT.
For the fourth quarter of 2022 , total operating and general and administrative expense increased $2.9 million , compared to the same period in 2021 . During the three months ended December 31, 2022 , operating expense increased by $2.2 million from the same period last year. The increase is primarily due to increased people costs as a result of higher compensation expense, including variable incentive compensation, as well as higher repairs and maintenance for Source’s rail car fleet which resulted in increased equipment costs compared to prior year. Royalty costs incurred grew as a result of higher sand shipments from mines that require royalty payments and, combined with increased insurance expense, led to increased selling and administrative costs compared to the same period last year. General and administrative expense increased $0.7 million in the fourth quarter of 2022 compared to the same quarter in 2021 , primarily due to increased people costs as a result of higher compensation expense, including higher variable incentive compensation in the current quarter. Higher selling and administrative costs were incurred during the quarter as a result of increased professional fees compared to last year.
ESG UPDATE
Source is committed to operating in a sustainable manner and works closely with its stakeholders to go above and beyond current regulatory requirements through initiatives such as voluntary greenhouse gas emissions reduction programs, as well as Source’s production water recycling program. During 2022, Source reduced its greenhouse gas emissions rate by 2.4% compared to the previous year, and 23.4% compared to the base year. Source’s water recycling program reduces the reliance on local well water and in 2022 Source recycled over four hundred million litres of water, ensuring Source remained far below its permitted well water allowance. Source has reclaimed just under fourteen acres of land adjacent to its Wisconsin processing facilities, part of Source’s continued effort to return the land to a thriving vegetative state. In 2022, Source purchased wetland credits to ensure any wetlands impacted by future mine expansion initiatives would be protected.
As an active member of its community, Source supports initiatives that align with its corporate values, support the charitable efforts of our employees and are located close to its operations. Source supports community needs in the areas of Arts and Culture, Education, Environment, Health and Wellness and Sports and Recreation through financial donations and employee volunteer hours.
For more information, Source’s most recent ESG report is available at www.sourceenergyservices.com .
BUSINESS OUTLOOK
Strong industry activity continues to favorably impact frac sand supply and demand fundamentals which are expected to remain strong through 2023. Previous well permitting issues in the northeastern British Columbia region, which caused customer delays in late 2021 and through 2022, have now been resolved and are expected to bring increased activity to the region again as exploration and production (“E&P”) companies catch up on their development plans. Source has renewed customer contracts with terms and conditions reflective of the current operating environment. Source believes these fundamentals, coupled with Source’s leading service offerings and logistics capabilities required for larger volumes of sand per well, as well as Source’s terminal network footprint, would support further improved gross margins in 2023.
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.
UPDATED NI 43-101 TECHNICAL REPORTS FOR THE MINERAL PROJECTS IN WISCONSIN, UNITED STATES
Source is pleased to announce that it has filed with the applicable Canadian securities regulatory authorities updated National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) technical reports for each of its three mineral projects in Wisconsin, United States (collectively, the “Technical Reports”).