Source Energy Services Ltd. reported its 2017 annual and fourth quarter results. The company increased sand volumes by 128 percent and sales by 102 percent year-over-year.
In the fourth quarter of 2017, Source’s sand revenue increased by $28.1 million, or 79 percent, compared to the fourth quarter of 2016, due to a 98 percent (275,891 metric tonne) increase in sand volumes partially offset by a 10 percent decrease ($12.53 per metric tonne) in average sales price. The average sales price in the fourth quarter of 2017 was impacted by a 165,544 metric tonne increase in coarse and finer grade sales at lower mine gate pricing which effectively lowered the average price by approximately $22.50 per metric tonne.
The increased mine gate sales were undertaken to minimize the impact of the year-end slowdown in oilfield activity in the WCSB in December 2017. In the fourth quarter of 2017, Source’s sand revenue increased by $1.8 million, or 2.8 percent, compared to the third quarter of 2017, primarily due to a 9.2 percent increase in sand volumes (46,917 metric tonne) partially offset by a 5.8 percent decrease ($7.12 per metric tonne) in the average sales price. The decrease in the average sales price was due to the increase in mine gate sales in the fourth quarter of 2017.
Brad Thomson, president and CEO said, “I’m proud of the 2017 accomplishments of the Source Team. Our 2017 growth positions us to meet the increased demand for frac sand that we’re continuing to witness in the Western Canadian Sedimentary Basin (WCSB). Operators continue to move to direct sourcing of frac sand as they transition from the development phase to the ‘manufacturing’ phase of their programs. These companies look to Source for a reliable supply of frac sand as their activity levels increase.”
Compared to last year, Source began 2018 with 115 percent more annual production capacity, 200 percent more storage capacity at unit-train-capable receiving terminals, and double the number of Sahara units. This growth was achieved through the combination of organic growth and acquisition activities.
The benefit of 2017’s strategic acquisitions and successful organic growth projects are already being realized in 2018, the company said. In January, Source set new monthly records for highest volumes of customer orders and highest volumes of delivered sales. These records were set in spite of significant winter weather that affected rail operations from mid-December 2017 to mid-February 2018. Month-to-date in March 2018 the company is on pace to surpass the monthly sales records set in January of this year.
“Our outlook for 2018 remains strong,” the company said. “In 2017, we saw WCSB proppant demand more than double when compared to the prior year’s demand, driven primarily by increases in Montney and Duvernay well counts and increases in well proppant intensity. Today, we continue to see the liquids rich portions of the Montney and Duvernay drive WCSB proppant demand with our leading customers continuing to increase sand intensity. The trend toward larger completions is expected to continue throughout the year, despite the uncertainty of AECO gas prices.
“In the Montney and the Duvernay, we continue to see more companies move into ‘manufacturing mode. These well-capitalized operators regularly enter into pipeline and processing commitments and are now entering into contracts that provide them with certainty of frac sand supply. Source now has the majority of its sales secured under long-term contracts, and it’s our view that these contracts will continue to underpin our business as more of our customers move into manufacturing mode,” the company said.
In addition to the previously announced Duvernay contract in March 2018, Source entered into an agreement with a large customer to extend the term of the existing contract between the companies. This agreement includes a prepayment from the customer along with a long-term commitment to acquire a substantial percentage of its Northern White frac sand from Source. The agreement is an example of how the industry has evolved as it ensures the customer has a reliable supply of frac sand to support its growing proppant needs.
“We’re pleased to renew and expand our supply partnership with this leading Canadian company,” Thomson said. “Our teams have enjoyed a long relationship, and with this agreement we’ll see Source’s expanded frac sand production and distribution capabilities used to enhance the service model offered by our counter-party. This is a win-win arrangement. As proppant demand in the WCSB continues to rise, every company involved in the supply chain is being pressured to improve its service offering. We’re proud to roll up our sleeves and collaborate with this company. Together we’ll ensure that the end customer receives the affordable, reliable supply of frac sand that it’s looking for.”
With an increase in frac sand demand, Source has started to consider how it will increase production capacity to meet this demand. Source has two low cost expansion opportunities at its Preston and Blair facilities, and a domestic sand mine opportunity on land covered by its Peace River, Alberta, Canada, exploration permit. Pending the completion of the appropriate contractual agreements, Source views these expansion opportunities much the same way a midstream company may view the risk of constructing new pipelines or gas processing infrastructure.