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 Second Quarter 2024 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.

Good morning, and welcome to Source Energy Services Second Quarter 2024 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 immediately be followed by a question-and-answer period. Before I get started, I'd 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 tonnes 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. Continued strong business performance in the second quarter resulted in the second consecutive quarter of record sand volumes and record total revenues. The business performed well in all areas, including the last mile logistics group, where we again recorded record last mile volumes. Source repurchased and redeemed additional senior secured notes, bringing our outstanding balance down to $140.5 million, while our ABL balance was reduced by $23.8 million during the second quarter. We exited the quarter with $153.9 million of debt and a working capital surplus of $42.5 million, bringing our net debt down to $111.4 million. So the ABL facility and senior secured notes are shown as current liabilities as the maturities are both within a year. We are currently evaluating a number of options to refinance the balance sheet which we expect will be completed in the coming months. Subsequent to the quarter, we announced a partnership with Trican to develop a new terminal located in Taylor, British Columbia. The terminal, when completed, will be Source's third unit train terminal capable of supporting LNG-driven growth in Northeast BC. The partnership with Trican provides Source an effective mechanism to develop the much-needed infrastructure without impacting our balance sheet goals and provides our partner with dedicated access to Source sand. The terminal will become a key piece of infrastructure to service a growing portion of the Montney and enhance the sand logistics in the region. Ultimately, Source believes that by utilizing its Northern White and domestic sand offerings that it will be able to provide the lowest landed cost of sand in the region. Over the longer term, the Montney will continue to be the resource play at [ it feeds ] LNG Canada, Cedar LNG as well as the other projects proceeding towards FID. The combination of Source's infrastructure in Wembley, Chetwynd, Taylor and Peace River provides Source with an unparalleled offering to support growth in the region. The highlights from the second quarter include sand volumes of 921,000 metric tonnes and sand revenue of $141.1 million. These are new records for Source and represent an increase of $38.1 million in sand revenue from the second quarter of 2023. Total revenue was $176.4 million, a $49.4 million increase from Q2 of last year. Gross margin was $32.6 million, while adjusted gross margin was $42.1 million, increases of 31% and 40%, respectively, when compared to Q2 of 2023. Net income was $4.7 million, while adjusted EBITDA was $30.8 million a $10.4 million improvement from the same period of 2023. The last mile logistics group delivered record sand volumes to our customers' well sites during the quarter, while our 9-unit Sahara fleet achieved 80% utilization. Sahara 10 was completed and shipped to Alaska, where it will work for a large E&P customer for the next 3 years. Free cash flow for the second quarter was $13.5 million, an increase of $5.7 million compared to last year. Improved operating results and lower financing expense were the principal reasons for the improvement. Capital expenditures were higher due to lower sales proceeds on excess equipment as the Berthold terminal was sold in Q2 of 2023 and due to expenditures on the Chetwynd terminal expansion and upgrades at the Peace River facility. Year-to-date free cash flow has reached $29 million and is $8.3 million ahead of the first half of 2023. With that, I'll now turn it over to Derren to provide a brief overview of our financial results for the quarter.

Thanks, Scott. As Scott mentioned, sand revenues for the second quarter of '24 increased by $38.1 million over the second quarter of '23. The increase was due to a 219,000 metric tonne or a 31% increase in sand volumes and a $6.84 per metric tonne or 5% increase in the average realized sand price. Sand volumes were impacted by continued strong activity levels from our customers and the addition of 2 new customers since the start of the year. Sand revenues were also impacted by an improved performance from the Peace River facility. While sand revenue realized from mine gate sales lowered the average realized sand price in the quarter by $7.14 per metric tonne, it did have a favorable impact on cost of sales and gross margins by improving our production efficiencies and yields. Wellsite revenues for the second quarter of '24 was $35.4 million, an increase of $11.4 million or 47% compared to the second quarter of last year. Last mile solutions trucking volumes increased 26% compared to Q2 '23. And as Scott mentioned, this is the highest volumes handled by that team. Sahara revenue was flat compared to Q2 '23, as a 28% increase in Canadian Sahara revenue was offset by limited activity for the U.S. Sahara Unit. Terminal services revenue for Q2 of '24 was $0.9 million, an increase of $0.1 million compared to Q2 '23. The reduction is due to lower storage and sand elevation revenue, less transloading from other products and loss of rental income from the sale of the Berthold facility in Q2 of '23. Offsetting these decreases was improved chemical elevation revenues. Cost of sales, excluding depreciation, increased by $37.5 million compared to the second quarter of '23. This increase was due to higher sales volumes, higher last mile logistics volumes and higher rail costs. Sahara-related costs were also higher due to the improved Canadian activity levels and higher equipment repairs in the quarter. The weaker Canadian dollar on our U.S.-denominated costs increased cost by $1.97 compared to the same period last year. Gross margins increased by $7.7 million compared to the second quarter of '23. The increase in gross margins rose from higher sand volumes and improved performance from last mile logistics group in the quarter. Excluding gross margins from mine gate adjusted gross margin per metric tonne was $46.16 compared to $46.36 per metric tonne last year. Despite a weaker Canadian dollar during the second quarter, adjusted gross margin was improved by $0.16 per metric ton as the foreign exchange impact on U.S.-denominated cost of sales was less than the positive impact on U.S.-denominated revenue realized in the quarter. We target to remain in a naturally balanced FX position and will continue to monitor exposure and actively manage as required in future. Total operating general expenses in the quarter increased by $2.3 million. Operating expenses increased by $0.3 million from the second quarter of '23 primarily due to higher royalty costs related to shipping more sand from mines with royalties and higher insurance costs. These increases were partially offset by lower repairs and maintenance at the Peace River facility this year. General and administrative expenses increased $1.9 million in the second quarter compared to the same period in '23, primarily due to higher incentive compensation expense, higher professional fees and a bad debt allowance that was recorded. Finance expense was $8.6 million for the second quarter, a decrease of $0.6 million from the same period last year. The decrease was due to lower interest incurred on senior secured notes due to the repurchase that have occurred over the last year and lower other interest charges. Interest incurred on the ABL facility was higher than the prior year due to higher average draws outstanding on that facility during the quarter to support the higher activity levels. On June 30, the principal balance outstanding on our notes was $140.5 million and Source had drawn $13.4 million under its ABL facility, leaving $42.7 million of available liquidity. Source remains focused on lowering its leverage over the coming quarters as it works towards achieving its step target and refinancing of balance sheet. With that, I'll turn it back to you, Scott.

Thanks Derren. As we look ahead, we continue to believe industry activity levels will favorably impact sand supply and demand fundamentals in the WCSB. These strong Canadian industry fundamentals driven by growth in Northeast BC, coupled with Source's capabilities will continue to support market share gains and strong financial results for 2024 and beyond. In the longer term, we believe the increased demands for natural gas driven by LNG exports, increased natural gas pipeline export capabilities and power generation facilities will drive incremental demand for source of services. We see the completion of LNG Canada later this year, the FID on the Cedar LNG facility and work on other proposed LNG projects such as wood fiber and KSI, positive developments for the basin and for our business. 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 without impacting our balance sheet goals. In addition the growth in our core markets, we continue to explore opportunities to diversify and expand our service offerings and to further utilize our existing Canadian -- Western Canadian terminals. Thank you for your time this morning. That concludes the formal portion of our call. We'll now ask the operator to open the lines for questions.

[Operator Instructions] First question comes from Nick Corcoran with Acumen Capital.

Congrats on a strong quarter. A couple of questions from me. First, on margins. I know it was a record quarter with last mile logistics. Can you maybe help us understand how the last mile logistics part of your business impacts your overall margins?

Yes. I think the last mile logistics piece of our business which encompasses really any portion that comes from our terminals all the way to the wellsite and in our wellsite services, it, obviously, will have a positive impact on the margins, depending on the activity level and depending on the distance from our terminal out to the wellsite. I think we saw, as you look at Q1, we saw a bigger impact from our wellsite -- our last mile services just given that some of the pads were a longer distance and the Sahara fleet was a little more utilized in Q1. And so had a more positive impact to the tune of maybe $1 or $2 on overall gross margin. And so -- but as you looked in this quarter, there was a slightly lower impact. As we look forward, it's an important piece of our business. Obviously, we think it gives us a distinct competitive advantage and will continue to have a positive impact on our overall gross margin.

Great. And then with LNG Canada coming closer to deferred shipments, have you seen any prices in -- or change in pricing for frac sand in general?

Yes. So I think the market for -- in terms of pricing has been fairly stable and has been fairly stable over the last call it, 12 months. And as we cycle closer and closer to LNG Canada, I expect that we'll continue to have some stability in the pricing market. However, I do think we'll have pockets in time where there is excess demand or there is potentially logistic shortages, which will drive some higher spot prices. So I think overall, how we see pricing playing out in Western Canada is we expect it to be fairly stable going into the beginning of LNG Canada in Q1 with some pockets and some potential upticks as we cycle into periods of higher demand.

That's helpful. And there's been rumblings of at least one competitor in Northeast D.C. opening a terminal. What are you seeing in terms of the competitive landscape? And how do you see yourself being able to react to us?

Yes. I think in terms of the competitive landscape, obviously, others see Northeast BC is a growth area. And so I'm not surprised of rumblings of others. We really like our competitive position in Northeast BC. And we really like our competitive position for LNG infrastructure because it's not just one spot and it's not just one component. And so others may have one component, whether it's a terminal or whether it's another piece of the logistics chain. But really, what Source brings is the entire logistics chain from the sand production all the way through to the wellsite, which gives us a distinct advantage. We also bring a robust LNG infrastructure, which includes Wembley, which includes unit train capability at Chetwynd, which will include unit train capability in Northeast B.C. which is important for the logistics of the area to have that redundancy and to have not just one single location. And then I think our Peace River asset and our ability to bring in a domestic portion into the basin at the lowest landed cost. I think is another important piece of the overall LNG infrastructure. And so I think there'll continue to be rumblings of competitors in the region. But I think it will be very difficult to compete against Source and our footprint and what we can offer in the region.

The next question comes from Paul [indiscernible] Bank. Mr. Paul, we can't hear you. Please go ahead. This concludes the question-and-answer session. I would like to turn the conference back over to Scott Melbourn for any closing remarks. Please go ahead.

Thank you, everyone, for joining today, and thank you for your interest. As always, myself or Derren are available for any follow-up questions you may have. Thanks, and have a great day.

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