Source Energy Services Ltd. announced its financial results for the three months ended March 3. Sustained strength in oil and gas commodity prices continued to buoy strong activity levels in the Western Canadian Sedimentary Basin (WCSB), generating $80.7 million of sand revenue, an increase of 22%, over the first quarter of 2021.
Higher sand revenue generated was attributable to a 12% increase in sand sales volumes and a 13% increase in average realized sand price, or $13.66 per metric tons (Mt), excluding the impact of mine gate sand sales volumes, compared to the first quarter last year.
Strong industry activity levels for the quarter drove a 141% increase in spot sales volumes on a quarter-over-quarter basis, which benefited the average sand price realized, as spot sales prices improved significantly.
During the first quarter, cost of sales, excluding depreciation, was impacted by higher costs for transportation and freight, due to increased prices for fuel and a tighter trucking market, as well as terminal mix changes, compared to the same period last year. These costs were partially offset by Source’s continued focus on streamlining production, as improved production efficiencies mitigated cost pricing pressure realized during the quarter.
In April 2022, Source entered into a transaction with CSI to assume operation of its Peace River frac sand facility. The frac sand facility adds approximately 400,000 Mt of annual production capability to Source’s existing production capabilities and consolidates Source’s adjacent mineral resource exploration rights with the production facility. The transaction complements Source’s existing product and service offerings.
Looking ahead, with increased industry activity levels across North America, frac sand supply and demand fundamentals have improved and are expected to remain tight for 2022. These fundamentals, coupled with Source’s leading service offerings and logistics capabilities, have translated into meaningful pricing gains in the spot market in 2022, a trend that is expected to continue for the balance of the year.
Despite increased activity levels as industry demand outpaces supply growth, Source’s sand sales volumes through the first quarter were somewhat slower than anticipated as customer programs were pushed out due to delays in having pads ready to complete and the impacts of cold weather.
Source expects the expansion of capital programs will increase through the balance of the year, as Source customers signal increasing activity levels and growing confidence related to ongoing permitting issues in the northeastern British Columbia region, as well as continued strength in commodity pricing. In the longer-term, Source believes the increased demand for natural gas, driven by the conversion of coal-fired power generation facilities, increased natural gas pipeline export capabilities and liquefied natural gas exports will drive incremental demand for Source’s services in the WCSB.
Source continues to see increased demand from customers that are primarily focused on the development of natural gas properties in the Montney, Duvernay and Deep Basin. This trend is consistent with Source’s view that natural gas will be an important transitional fuel that’s critical for the successful movement to a less carbon intensive world.
In support of the move to a less carbon intensive world, Source has begun focusing on developing economic growth opportunities which transition from traditional fossil fuels to less carbon intense energy solutions. As a pathway to diversifying Source’s business, and to participate in the decarbonization of the economy, Source is advancing opportunities in its own operations as well as at the well site and at its terminals.
Source also continues to focus on increasing its involvement in the provision of logistics services for other items needed at the wellsite in response to customer requests to expand its service offerings and to further utilize its existing Western Canadian terminals to provide additional services. Over the longer-term, it is anticipated that these opportunities will be a meaningful part of Source’s business.