Source Energy Services Ltd. (SHLE.TO) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services Second Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Scott Melbourn, CEO. Mr. Melbourn, please proceed.

Thank you, operator. Good morning, and welcome to Source Energy Services Second Quarter 2025 Conference Call. My name is Scott Melbourn. I'm the CEO of Source. I'm joined today by Derren Newell, our CFO. This morning, we will provide a brief overview of the quarter, which will be immediately followed by a question-and-answer period. Before I get started, I would like to refer everyone to the financial statements and the MD&A that were posted to SEDAR and the company's website last night and remind you of the advisory on forward-looking information found in our MD&A and press release. On this call, Source's numbers are in Canadian dollars and metric tons, and we will refer to adjusted gross margin, adjusted EBITDA and free cash flow, which are non-IFRS measures as described in our MD&A. Except for the items just mentioned, our financial information is prepared in accordance with IFRS. During this quarter, work progressed on 2 strategically important capital projects. First project is the expansion of the Peace River facility, where new washing capacity has been added to support the dryer installed in the first quarter. Additional processing equipment will be installed in the third quarter, which will be the final step to increase the facility's production capability to over 1 million tonnes. Construction also continued on the new Taylor terminal. We expect the full facility will be operational within the next 30 days. Underpinning these strategic projects is our belief that the continued development of the Montney will be a key driver for activity in the industry. In response to this growth, Source is focused on enhancing its logistics capability in Northeast BC with the expansion of the Chetwynd terminal, development of the Taylor terminal, the acquisition of the trucking assets. When these logistics capabilities are combined with the Peace River facility, Source can provide an unparalleled mine to well site offering for both Northern White and domestic sand. Ultimately, by utilizing our Northern White and domestic sand offerings, we're able to offer the lowest landed cost in the region. Completion activity remained very strong for the second quarter of 2025, which led to numerous highlights for the quarter, including a new record for sales volumes of 1.1 million metric tonnes, breaking the previous record set in Q1 of 2025. Record last mile volumes delivered to our customers' well sites and 83% utilization of the 11 unit Sahara fleet. Sand revenue of $161.5 million, while total revenue was $201.9 million, a $25.5 million increase from the same period last year. Gross margins reached $36.7 million, while adjusted gross margin was $48.6 million, reflecting increases of 13% and 15% over the prior year. Adjusted EBITDA was $35.2 million, a $4.4 million improvement from the second quarter of 2024. The normal course issuer bid that we implemented earlier this year repurchased and canceled 225,000 shares during the quarter. We commenced transloading of hydrochloric acid at our Chetwynd terminal -- and on June 30, we received a remission order from the Canadian government, which reverses and refund all tariffs imposed earlier this year on frac sand imported from the U.S. It's good news for the industry and for all of our customers. Before Derren reviews our quarterly financial results, I want to highlight that our efforts to strengthen performance and reduce debt are yielding results. As of quarter end, our net debt-to-EBITDA ratio is slightly over our 1x target, and our focus remains on continuing to build a resilient business across all economic conditions. With that, I'll turn it over to Derren.

Thanks, Scott. As Scott mentioned, Source sold 1,094,000 metric tonnes of sand in Q2 '25, from which we generated $161.5 million in sand revenue. Sand volumes were 19% higher than in 2024, while sand revenue increased $21.4 million. Source's ability to reliably service the large completions jobs has allowed us to continue to capture key customers, particularly in Northeast BC. It has also allowed us to set another record for the largest daily sand volume fed into the blender in 24 hours. A 17% increase in sales of 100 mesh lowered the average sand sales price during the quarter. There were minimal mine gate sales in the quarter. The broad spectrum of mine production sold through more 100 mesh and mine gate sales has a favorable impact on production costs by creating sand processing efficiencies throughout the year. Wellsite Solutions revenue for Q2 '25 was $39.2 million, an increase of $3.9 million or 11% compared to Q2 '24. Higher sand sales volumes impacted volumes hauled to the well site, resulting in higher trucking revenue for the quarter. U.S. Sahara fleet was 100% utilized, while the Canadian fleet was 77% utilized in the quarter. Terminal services revenue was $1.2 million, an increase of $0.3 million compared to the second quarter of '24 due to higher revenue from chemical elevation volumes realized in the period, including the impact of the addition of hydrochloric transloading at the Chetwynd terminal. Cost of sales, excluding depreciation, increased by $19.1 million for the quarter compared to the same period in '24 due to increased sand sales volumes sold and higher truck volumes. On a per ton basis, cost of sales was lower due to lower production costs and a shift in terminal mix compared to the second quarter of '24 despite the impact of a weaker Canadian dollar. People costs and repairs and maintenance expenses were higher due to the impact of the sand trucking assets purchased last year. The weaker Canadian dollar contributed to an increase of $1.49 per metric ton on U.S. dollar-denominated components of cost of sales compared to the same period last year. The currency impact was largely offset by the currency impact on the U.S. dollar-denominated revenue for the quarter. Adjusted gross margins benefited from higher sales volumes, higher volumes trucked to the well site and the incremental gross margin generated from the sand trucking assets acquired last year. Excluding gross margin from mine gate volumes, adjusted gross margin was $44.49 per metric ton compared to $46.16 per metric ton in Q2 '24. The 17% increase in sales of 100 mesh compared to the second quarter of '24 reduced adjusted gross margin by $0.65 per metric ton. We also saw higher terminal costs in the quarter due to the commencement of operations at Taylor and higher costs associated with the expanded operations at Chetwynd. The weaker Canadian dollar negatively impacted adjusted gross margin by $0.31 for the quarter. Total operating and G&A expenses increased by $1 million compared to Q2 of '24. Operating expenses in Q2 '25 increased by $2.1 million due to higher people costs attributed to the higher activity levels, higher selling and administrative costs related to increased royalties on shipments from mines with royalties and higher insurance costs. Repairs and maintenance were higher for Source's railcar fleet, and there were incremental costs related to the trucking and the ramp-up of the Taylor facility. General and admin expenses decreased $1 million in the quarter compared to Q2 '24, primarily due to lower variable incentive costs, partly offset by increased IT expense as we amortize the implementation of the cost for the new GL system put in last year. Finance expenses were $7.2 million for Q2 '25, a decrease of $1.5 million compared to last year. The reduction was driven by lower accretion expense as well as lower interest expense incurred on long-term debt. Source recognized interest income on the commencement of the subleases for the Sahara units deployed into Alaska and cash balances on hand. These reductions were partially offset by higher interest incurred for the outstanding lease obligations driven by the timing of the addition and replacement of heavy equipment leases in the latter half of '24. At quarter end, Source had liquidity of $80.6 million. Our capital expenditures for Q2 net of proceeds on disposal, excluding expenditures related to Taylor were $7.6 million, an increase of $2 million compared to the second quarter of last year. Growth capital expenditures, excluding the construction of Taylor were $1 million higher than last year due to expenditures on the Peace River expansion. Maintenance capital expenditures increased for the quarter, largely due to improvements on the Sahara's fleet, mine development activities in Wisconsin and higher expenditures on overburden removal driven by increased sales volumes as well as expenditures related to Source's trucking obligations operations. Lease obligations increased from the prior year quarter, largely due to the timing on the heavy equipment for Peace River done in the latter half of '24 and yellow iron leases for the Wisconsin mining operations, which were replaced in later '24. Lease payments for railcars and yellow iron used in Wisconsin have also been impacted by the weakening of the Canadian dollar compared to the first quarter of '24. Source is now cash taxable in the U.S. and expects to be cash taxable in Canada next year. And with that, I'll turn it back to you, Scott.

Thanks, Derren. As we look forward to the second half of the year, we expect completion activity in the Western Canadian Sedimentary Basin to slow slightly. We are forecasting sales volumes in Q3 to moderately decrease from levels that we saw in the first half of the year. And as we experienced in most years, we expect the fourth quarter to be impacted by budget exhaustion. Looking beyond the second half of this year, we expect 2026 to be a strong year for WCSB completion activity driven by additional export capability via LNG Canada as it ramps up its production. Over the long term, we continue to believe the increased demand for natural gas driven by LNG exports, increased natural gas pipeline export capabilities and power generation will drive incremental demand for Source's services. We are pleased to not positive developments on all West Coast proposed LNG projects during the quarter, which when completed, will have a material impact on the frac sand consumed in the basin. Source continues to focus on enhancing our industry-leading frac sand logistics chain. And we have and will continue to execute on a number of opportunities to grow the company and further our competitive advantage. In addition to growth in our core markets, we continue to explore opportunities to diversify and expand our service offerings and to further utilize our existing Western Canadian terminal network. Thank you for your time this morning. That concludes our formal portion of the call. We'll now ask the operator to open the lines for questions.

[Operator Instructions] The first question comes from Nick Corcoran from Acumen Capital Partners.

Congrats on the record quarter. Just my first question on sand volumes, record volumes in the quarter. Have you seen a change in seasonality in the business where completion activity in Q2 isn't impacted by a spring breakup?

Yes, a really good question. And we have, over the last few years, seen a move in our seasonality in the business away from a slowdown in Q2 to more of a slowdown in Q4. And I think just the E&P companies have done a better job about planning their work around spring breakup and tough roads. And I also do believe that the movement to much larger pads just allows for more work during Q2. So we definitely have seen our seasonality move out of Q2 and more into a seasonal slowdown in Q4.

That's good color. And maybe just a question on the outlook. I'm looking at Source about 1.7 million metric tons in the back half of I realize it's early days, but based on what you're seeing now, what do you expect for volumes in the back half of '25? I'm just wondering if you're expecting in line or potentially down.