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

Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services First Quarter Results Conference Call. [Operator Instructions] Conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Brad Thomson. Mr. Thomson, please go ahead.

Thank you, operator. Good morning, and welcome to Source Energy Services First Quarter 2021 Conference Call. My name is Brad Thomson, I'm the CEO of Source. I'm joined today by Derren Newell, our CFO; and Scott Melbourn, our COO. Today, I'll start the call with a few comments, and then we'll jump right to opening up the phone lines for questions that will be answered by the Source team. Before I get into reviewing the operational and financial highlights for the quarter, I'd like to refer everybody 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, metric tonnes and will refer to adjusted gross margin, EBITDA and adjusted EBITDA, which are all non-IFRS measures as described in our MD&A. Except for the items just mentioned, our financial information is all prepared in accordance with IFRS. I also want to point out that last night, Source released its first ESG report. We understand that it is important for many of our investors, and Source is pleased to provide this report because the concepts behind the ESG movement have always been important and is an important part of the culture at Source. Over the last decade, the Source management team has constantly looked for new ways to improve our operations and make them more sustainable. We are one of the first adopters in our industry of technologies that allow us to reuse our process water and one of the first to eliminate the use of settling ponds in our operations. We have always been focused on creating a work environment where safety is at the forefront. If you're interested in our ESG story, please refer to the ESG report that's been posted to our website. Turning to our recent results. The first quarter of 2021 follows an unprecedented year in the energy industry with a series of events that impacted all of our businesses. In response to these events, last year, Source made changes to its balance sheet and to its cost structure that were intended to put us in a strong position as completion activities resumed in the WCSB. Over the last 3 quarters, Source has seen its customers cautiously resume completions activities and Q1 saw continued growth in activity levels from what we'd seen in previous quarters. We also saw many of our customers become more focused on frac efficiencies, which is something that I'll talk about more in a few minutes. With this improving business environment, Source achieved the following results in the first quarter of 2021. We realized sand volumes of 645,566 metric tonnes. These were strong first quarter sales that saw Source continue to grow market share and increase the percentage of sales made directly to operating companies. We achieved a utilization rate for our Canadian Sahara fleet of 81% for the quarter. And as we exited the quarter, we achieved a new service record in March with all 7 of our Canadian-based Sahara units fully utilized for the month. We achieved a 25% increase in the amount of sand trucked to the wellsite, as our customers continue to rely on the combination of Source's dispatch services and the use of Sahara to shorten their completion time lines to that end. And to that end, after the quarter, Source set another record by delivering over 8,450 metric tonnes of frac sand to the blenders on a single, dual completion frac program in 1 day. This serves to highlight the benefits of our logistics network that extends from the mine to the wellsite. We also realized adjusted gross margin in the quarter of $28.30 per metric tonne, which was supported by gradual improvement in activity levels in the quarter and a decrease in our operating costs and G&A when compared to the first quarter of 2020. And finally, we recorded adjusted EBITDA for the quarter of $12.7 million, which was consistent with the results we've seen in the previous 2 quarters. Overall, this is a strong quarter for Source, particularly when you consider the backdrop of the pandemic and the interruptions in oilfield services and activities that occurred in February caused by extreme weather. As I previously mentioned, during the quarter, we continued to see our customers focused on the execution of the completions programs as quickly as possible. Today, many frac jobs are being completed in less than half the amount of time they were completed just a couple of years ago. This new practice of pushing for greater frac efficiency provides the operators with further opportunity to reduce their costs and also allows them to start generating cash flow from their oil and gas properties sooner. In order to achieve these new levels of frac efficiency, operators are moving to new techniques like dual frac or simul-frac, and they're also laser-focused on the logistics that can make or break their frac program. With this trend, Source has seen increases in our market share and that we're uniquely set up to handle the delivery of high volumes of sand in short periods of time. From our production facilities to our in-basin storage facilities and our logistics operations, our past investments in our unique storage and distribution infrastructure are paying dividends as we serve our customers. That buildout of our asset base that was completed in prior years also will allow Source to minimize the amount of capital spend to be required in 2021 and beyond. Source's capital spending in the first quarter of 2021 was only $1.3 million with a total capital budget for 2021 of $6.6 million. Source has a very scalable business that can deal with the peaks and valleys of the energy industry while still having capacity to provide service to more diversified customers at our terminals. Before I talk about our outlook for the rest of the year, I'll take a couple of minutes to discuss the balance sheet and our liquidity. As you're aware, last year, we completed a substantial restructuring which positioned Source to better deal with the cycles in the industry. That restructuring saw us push the maturity of our notes to March 15, 2025, and the maturity of our ABL facility to September 30, 2023. We also added new term loan facility, which has a September 30, 2023, maturity. March 31, 2021, the principal balance outstanding on our notes was $144.5 million, and the balance outstanding on our term loan was $18 million. However, our ABL facility only had $7.5 million drawn, leaving available liquidity of $26.5 million with that facility. With the revision of our debt facilities, Source now has the liquidity required to operate effectively. And Source will also be in a position to focus on paying down its debt as activity levels resume in the WCSB. Now turning to our outlook. Source's customers continue to be focused on strengthening their balance sheets. However, Source believes that higher commodity prices and generation of stronger cash flows by our customers will likely result in continued increases in completion activity in the last half of this year and possibly into 2022. 2022 and beyond, we continue to be optimistic about the longer-term industry prospects that are driven by increased demand for natural gas for LNG exports, coal to natural gas power generation conversions and the development of industrial facilities that will use natural gas to produce clean transportation fuels and petrochemicals. In addition, the planned expansion of [ oil export -- pipeline export capacity ] and the potential for additional hydrocarbon and shipments by rail continue to support the company's expectation that activity levels should steadily increase in the coming years. While Source is well positioned to continue to expand our base frac sand business without the expenditure of significant capital, we continue to expand our logistics service offering to encompass other items that are consumed at the wellsite. We also continue to develop new opportunities where we'll use our Western Canadian terminals as a platform for diversification of our business. Over the longer term, Source anticipates that these new terminal services will be a meaningful part of our business. That concludes my comments. So thank you for your time this morning. We'll now ask the operator to open up the line for questions.

[Operator Instructions] The first question comes from Jason Modine with Arosa Capital Management.

[ A good quarter ], nice execution. Question for you with regards to second quarter. Yes, I know that activity-wise, you guys had alluded to the fact that maybe potentially volumes would be somewhat -- or at least a little bit more consistency with customer demand. And is there any color or anything you can share on this call that would -- that supports that? Or is that still a work in progress?

Thanks, Jason. As you're aware, Q2 is normally a breakup quarter. But I'll turn it over to Scott and he'll give you a little bit more color as to what we're seeing these days as far as activity levels.

Yes, Jason, it's -- as Brad mentioned, it's always a little hard to predict Q2 just given the nature of the weather in Western Canada. But we're pleasantly surprised as we get out of the gate and so we've had a strong start to Q2. We remain cautiously optimistic that, that momentum will continue into the remaining portion of Q2, but we're happy with the start we've had.

Jason, I'm just going to jump in on that just a little bit and elaborate a little bit. One of the things we are seeing at Source is we're seeing our big customers and other parties that are really interested in this frac efficiency concept because they can really save a lot of money if they improve their frac efficiencies come to us because we really are the only service offering that provides the level of reliability that they need for their programs. So that's playing into our hands. And if you take a look at our presentation that was posted last night, you'll see that this year, we're selling directly -- more than 90% of our sand directly to the operating companies. So it's a good endorsement of our business model.

And any pricing pressures you're seeing on Northern White? Or is it still kind of unchanged?

Yes. I guess we're -- we -- we've certainly seen some pockets of improving pricing in Q1. But I think, overall, what -- general comment is it remains unchanged. And I think we're going to need to see a little bit more activity, and we fully expect that activity to be coming latter half of this year or early next year to really see some widespread pricing changes in the industry. We still have a number of players who are underutilized. So I wouldn't say we're experiencing any additional pricing pressure. But I would say the pricing isn't -- hasn't changed dramatically kind of year-over-year. I think where we have been able to make some inroads on margin has more been on our operating practices and being able to drive some dollars and some synergies out of the operations and drive some contributions to margin on that front.

The next question comes from Kyle Rookes with Raymond James.

Kyle? It appears Kyle dropped off.

We'll move on to the next question, which comes from John Gibson with BMO Capital Markets.

Congrats on the solid quarter. I just had 2 sort of quick ones here. Just first, I know it's really early, but I'm just wondering if you had any sort of early customer conversations around LNG Canada and what sort of potential that could bring to Source?

John, of course, all our customers are focused on where their business are going to. But Scott can maybe fill you in a little bit more on some of the significant customers that have an LNG Canada focus.

Yes, John, to answer your question directly, we absolutely have had sort of those preliminary discussions and what it looks like going forward and what it looks like as we get closer to the LNG Canada completion date. I would term those conversations as exactly how you said, very early, and so to put any context or any numbers around it is probably a little preliminary right now. But I think it's safe to say all of the -- directionally, it's very positive for us, and we feel like it is going to be a great thing for the Western Canadian Sedimentary Basin and also is going to be a great thing for sourcing the activity level that we'll see in the future.

And at Source -- Scott was referring to the conversations we have with our existing customers, but we're also seeing some customers or potential customers like PETRONAS and companies like that, getting prepared for increased drilling activity in the future. Again, well, the timing is the big question mark, but certainly, the preparatory work is being done by companies.

Okay. Great. Second one for me. Obviously, your infrastructure is very valuable to your service offering, but I'm just wondering if there are any potential asset dispositions you can look at here sort of in the medium term.

John, sorry, I'll jump in and then I'll let Brad kind of play in. I think we'll always sort of look at our asset base, and we'll look at the utilization at the various different levels and including all different levels, and we'll continually evaluate whether there is an opportunity to divest or change that asset base up a little bit. So I would say our North Dakota terminal, that is one that hasn't been core to Source for a while now, and we continue to look at opportunities to see whether we can divest of that terminal or whether there is an opportunity to pivot at that terminal to create some revenue. But overall, I don't know that there is a wide group of our assets that we would consider divesting at this point. So Brad, I don't know if you want to jump in.

Well, divesting of the assets is always possible, John, because you've hit on the point that when you've got terminals in the basin, they're tough to replace and they can be used for a number of different things. Our approach has been to go down the path of diversification. And what you'll see from Source over the next little while is we're currently working with agricultural companies. We're currently working with companies that are interested in using our locations and our facilities for midstream activities jointly with us. And we're also looking at companies -- or talking to companies that want to cite clean energy projects at our locations. So lots of opportunity for these hubs, in our view would be -- of course, we got a great frac sand business that uses the terminals, but we're going to diversify and we're going to add on other service offerings at those particular locations, and you'll see us participate in other lines of business that are supported by the terminals.

Okay. Great. Last one for me. Obviously, volumes jumped up here in Q1. I'm just wondering, could you provide maybe just a rough breakdown as to how many volumes sort of came from outside of your core sort of 4 to 5 customers this quarter?

Well, you -- so John, if you look at our presentation that Brad talked about posting, you'll see that just under 10% were direct E&P customers that would have been sort of, I would say, nonnormal customers. And the balance would have been the pumpers and/or our sort of traditional customer base. So we are seeing some growth there. I would say there's a couple of customers that have started to get into the repeat category, but as of this point shows of not tying into a longer-term contract.

[Operator Instructions] There are currently no more questions from the phone lines. And this concludes the question-and-answer session. I would like to turn the conference back over to Source Energy management for any closing remarks.

Okay. Thank you, operator. Thanks to everybody on the line for joining us for the Q1 conference call. As always, we're available for private calls, if you'd like to phone either Derren, myself or Scott. And just give us a call and we'll be glad to provide you any information that you require as you go forward. Thanks, and be safe out there.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.