Source Sand Revenue Explodes

Source Energy Services said it generated $93.5 million of sand revenue during the second quarter, an increase of 61% over the same period in 2021 and an increase of 16% over the first quarter of 2022.

This is the first time since 2018 where second quarter activity levels exceeded those realized during the first quarter of the year, despite the impact of spring break-up. These results highlight the strength of activity levels that continue to prevail in the Western Canadian Sedimentary Basin (WCSB), driven by high commodity prices for oil and natural gas.

The increase in sand sales revenue generated was also attributed to an 18% increase in average realized sand price, or $18.91 per metric ton (mt), excluding the impact of mine gate sand sales volumes, compared to the second quarter last year, as sand supply tightens in the WCSB and sand sale prices trend higher.

During the second quarter, cost of sales, excluding depreciation, was impacted by higher costs for transportation and freight, due to increased prices for fuel and a continued constrained trucking market, compared to the same period last year. Cost of sales, excluding depreciation, was also impacted by increased costs for third-party sand purchases, procured to ensure no customer supply interruptions as demand continues to increase.

Through the second quarter, Source successfully maintained efficient production at its Wisconsin facilities, maintaining average costs while producing at anticipated levels despite continued cost pricing pressure through the quarter. Cost of sales was impacted by a weakening Canadian dollar on U.S. denominated costs relative to the second quarter of 2021.

Higher selling costs, the result of increased royalty expense resulting from increased activity levels, and higher repairs and maintenance costs for rail cars drove higher operating expense for the second quarter of 2022, compared to the same period last year. General and administrative expense was higher on a quarter-over-quarter basis, primarily attributed to the reversal of a bad debt provision that occurred in the second quarter of 2021.

In April 2022, Source entered into a transaction with CSI to assume operation of its Peace River frac sand facility, which adds approximately 400,000 mt of annual production capability to Source’s existing production capabilities. The transaction consolidates Source’s adjacent mineral resource exploration rights with the production facility and complements Source’s existing product and service offerings.

The facility was not fully operational during the quarter, as Source focused on operational reviews and maintenance to ensure the facilities will operate at a standard consistent with the company’s Wisconsin processing facilities. The benefits from the Peace River expenditures will be realized in future quarters when the facility is fully operational.

Over the last several quarters, the company has experienced a rapid increase in demand and achieved levels of activity that exceed pre-pandemic operating levels.

Source’s capital expenditures for the second quarter of 2022 were $4.1 million, an increase of $2.8 million compared to the second quarter last year. The increase in capital expenditures for the period was primarily due to maintenance and sustaining capital, related to a $0.6 million increase in costs associated with overburden removal for mining operations and the Peace River facility maintenance, as noted above.

Growth capital expenditures were lower, on a quarter over quarter basis, due to the Sahara unloading capacity enhancements completed in the second quarter of last year. Source disposed of excess production equipment during the second quarter, realizing proceeds of $1.2 million.

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 2022, a trend that is expected to continue for the balance of the year and into 2023.

These pricing increases have led to improved gross margins in the spot market over 2021 levels which are expected to continue into 2023. While contracted customer margins have dragged down overall gross margin, it is expected there will be significant growth in these margins as current contracts expire over the next few quarters.

After a somewhat slower than expected first quarter, the second quarter was very strong, especially considering this is the traditional spring break-up quarter. Looking ahead, it is anticipated that the third quarter will have higher than usual activity levels during what is historically a very busy quarter in the industry. 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.

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