Source Energy Services reported results for the third quarter of 2020 that reflect a rebound in activity levels in the WCSB, favorably impacting sand sales volumes which increased by 11% compared to the third quarter of 2019. While higher volumes were achieved, sand revenue and total sales revenue were lower by $2.4 million and $1.3 million, respectively, for the third quarter of 2020 compared to the same period last year, due to lower realized sand prices.
Wellsite solutions revenue for the third quarter of 2020 was also favorably impacted by the increase in activity levels, with higher trucking revenue and higher Sahara-related revenue compared to the third quarter of 2019.
Cost of sales, excluding depreciation and depletion, continues to be favorably impacted by previously implemented cost savings initiatives and production efficiencies. Reductions in cost of sales have been further impacted by ongoing optimization efforts related to logistics costs.
With the onset of COVID-19, in the second quarter of 2020 Source took immediate steps to ensure the safety of its employees and customers, and implemented a COVID-19 program to protect the health and well-being of employees. In order to further mitigate the impact of the operating environment, Source implemented operational cost reductions and other measures which continued into the third quarter and will continue for the balance of 2020.
Source also worked closely with certain rail car lease vendors to negotiate more favorable long-term contracts. Source has finalized these negotiations, effective September 2020, resulting in the execution of amended rail car lease contracts which significantly reduce ongoing monthly lease payments and lowered Source’s long-term obligations for these leases.
Gross margin and Adjusted Gross Margin decreased by $0.7 million and $1.4 million, respectively, compared to the third quarter of 2019. The reductions were attributed to lower pricing realized, partially offset by the aggressive cost reduction initiatives implemented, as discussed above, as well as logistics efficiencies achieved.
Compared to the prior year’s third quarter, operating and general and administrative expenses for the three months ended Sept. 30, were lower by $2.2 million, or 30%. Workforce optimization efforts implemented in 2019 as well as cost control measures undertaken in response to COVID-19, as discussed below, drove further reductions in people costs. Operating and general and administrative expenses were also favorably impacted by the receipt of proceeds from the CEWS program of $0.5 million in the quarter.
While Source’s results for the third quarter were encouraging, the rebound in economic activity remains uncertain as recent surges in the number of active COVID-19 cases raises the question of a potential second wave of the virus, further emphasizing a slow and gradual recovery. The company expects lower revenue and profitability for the remainder of 2020 and the potential for continued volatility in industry activity into 2021.
Source said it cannot predict the extent of the impact COVID-19 may have on energy demand, or how the Organization of the Petroleum Exporting Countries will react to those changes in demand and how those events could impact the company’s operations. Source also said it cannot reasonably estimate the period of time that adverse business conditions will persist, the impact they will have on the company’s business, liquidity, consolidated results of operations and consolidated financial condition, or the pace of any subsequent recovery.
Beyond 2020, Source continues to remain optimistic about the longer-term industry prospects, including increased demand for WCSB natural gas driven by LNG, coal to natural gas conversions and increased gas pipeline capacity. In addition, analysis of oil pipeline egress capacity and the potential for additional hydrocarbon shipments by rail continue to support the company’s expectation that activity levels should substantially increase in the coming years.