Source Energy Services Ltd
TSX:SHLE
Source Energy Services Ltd
Source Energy Services Ltd. engages in the production, supply, and distribution of northern white frac sand. The company is headquartered in Calgary, Alberta and currently employs 351 full-time employees. The company went IPO on 2017-04-13. The firm's services include Proppants, Logistics, Terminals, Chemicals and Field Solutions. The company offers a range of proppant sizes of 20/40, 30/50, 40/70 and 100 mesh for specific well requirements. The company offers last mile logistic solutions, including trucking delivery directly to the wellsite and Sahara proppant storage units. The company owns and operates in-basin terminals in the WCSB. Its terminals are unit-train capable that can hold up to 100 cars on the track. The company also provides storage and logistics services for other bulk oil and gas well completion materials and has developed Sahara, a wellsite mobile sand storage and handling system. Its terminals in Red Deer and Grande Prairie, Alberta are equipped with chemical storage. The firm provides its customers with an end-to-end solution for frac sand.
Earnings Calls
In the first quarter of 2025, Source Energy achieved record sand sales of 1.041 million tonnes, resulting in $162.9 million in revenue—an increase of 22%. Overall revenue grew to $208.6 million, up $39 million from last year. The company realized an adjusted gross margin of $45 per tonne, reflecting a robust demand and strategic enhancements in logistics, particularly with new facilities in Peace River and Taylor, BC. They anticipate a market growth of 5% to 10% for the year, supported by the increasing demand for natural gas tied to LNG exports, while free cash flow reported at $11.9 million is slightly down year-over-year.
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Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services First Quarter 2025 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Scott Melbourn, CEO. Mr. Melbourne. Please proceed.
Thank you, operator. Good morning, and welcome to Source Energy Services' First Quarter 2025 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 be immediately 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.
During the quarter, we completed the initial phases of 2 strategic important projects. The first is the installation of the new dryer at our Peace River facility. The second phase of the Peace River expansion will be adding new washing capacity that is expected to be completed in early Q3. This expansion, which was partially funded by our customers, will see our production capability increase to over 1 million tonnes.
Secondly, and of equal strategic importance, the first operations commenced at our new Taylor BC terminal. We expect the full facility will be operational in early Q3. Underpinning these strategic initiatives is our belief that the continued development in the Montney will be a key driver for activity in the industry. In response to this growth, sources focused on enhancing its logistics capabilities in Northeast BC with the expansion of the Chetwynd terminal, the development of the Taylor terminal and the acquisition of the trucking assets.
When these logistics capabilities are combined with the Peace River facility, Source can provide an unparalleled mine to wellsite offering for both Northern White sand and domestic. Ultimately, by using our Northern White domestic sand offerings, we are able to offer the lowest landed cost in the region.
For the first quarter of 2025, completion activity levels in the Western Canadian Sedimentary Basin were very strong, which led to record Sand sales volumes of just over 1 million tonnes in the quarter. Record last mile volumes to our customers' wellsites and the 11 units Sahara fleet was 88% utilized in the quarter. Record sand revenue, which increased by $29.9 million or 22% for the first quarter of 2024 to reach $162.9 million. We generated total revenue of $208.6 million, a $39 million increase from the first quarter of last year.
We realized gross margin for the quarter was $36.8 million, while adjusted gross margin was $46.2 million. Excluding gross margin from mine gate volumes, adjusted gross margin per tonne was $45, which was impacted by record 100 mesh sales in the quarter. Net income for the quarter was $23.6 million, an increase of $21.7 million over the first quarter of 2024. Adjusted EBITDA for the quarter was $33.8 million, a $1.7 million improvement from the first quarter of 2024. We generated $11.9 million of free cash flow in the quarter, a decrease of $3.6 million compared to the prior year due to the impact of cash taxes, higher capital expenditures and higher lease payments.
We settled outstanding litigation in the quarter, and we recognized a recovery of $12.5 million. The Board of Directors has approved the initiation of a normal course issuer bid, which we released the details on earlier this morning. We continue to monitor the impact of the trade wars on the global economy, specifically on commodity prices and the potential impact that it may have on our customers' capital programs. While we believe in the short term, it will not likely have a material impact on activity levels in the basin, in the longer term, a prolonged lower commodity price may impact activity levels. The additional export capability via LNG Canada will help provide some stability in a lower commodity price environment. To date, we have seen resiliency in our customers' capital programs and we have not changed our outlook for the year.
With that, I will turn it over to Derren to provide a brief overview of our financial results for the quarter.
Thanks, Scott. As Scott mentioned, Source sold 1.041 million metric tonnes of sand in Q1 '25 from which we generated $162.9 million in sand revenue. Sand volumes were 19% higher than 2024, while sand revenue increased by $29.9 million. Source's ability to service the large completion jobs has allowed us to continue to capture key customers, particularly in Northeast BC. A shift in product mix to more 100 mesh sales lowered our average sand sales price during the quarter.
Mine gate sales also impacted the average realized sand price by $0.69 per metric tonnes in the quarter. The broad spectrum of mining production sold through more 100 mesh and mine gate sales has a favorable impact on production cost by creating sand processing efficiencies throughout the year. Wellsite solutions revenue for Q1 '25 was $44.4 million, an increase of $8.7 million or 24% compared to Q1 '24. Higher sand sales volumes impacted volumes hauled to the wellsite, resulting in higher trucking revenue for the quarter. The U.S. Sahara fleet was 100% utilized while the Canadian fleet was 84% utilized for the quarter.
Terminal Services revenue was $1.2 million, an increase of $0.4 million compared to first quarter '24 due to higher revenue from chemical elevation volumes. Cost of sales, excluding depreciation, increased by $36 million for the quarter compared to the same period in '24 due to the increased sand volumes sold, higher truck volumes, increased rail transportation rates were partly offset by a shift in terminal mix compared to Q1 '24.
People costs and repairs and maintenance expenses were higher due to the impact of the sand trucking assets purchased last year. While a weaker Canadian dollar contributed to an increase of $6.78 per metric tonne on U.S. dollar-denominated components of cost of sales compared to the same period last year. This currency impact was largely offset by U.S. dollar-denominated revenue for the quarter.
Adjusted gross margin benefited from higher sales volumes, volumes to the trucked wellsite and incremental gross margin generated from the sand trucking assets acquired last year. Excluding gross margin from mine gate volumes, adjusted gross margins were $45 per metric tonne compared to $5.93 per metric tonne last year. Adjusted gross margin was impacted by the change in product mix, which resulted in a reduction of approximately $3.20 per metric tonne due to the 23% increase in sales of 100 mesh. Compared to the first quarter of '24, challenging road conditions impacted access to well sites resulted in additional costs incurred in the quarter.
And finally, the weakening Canadian dollar impacted the adjusted gross margin by $0.70 per metric tonne for the quarter. Total operating and general and admin expenses increased by $1.4 million compared to Q1 of '24. Operating expenses in Q1 of '25 increased by $1.9 million due to higher people costs attributed to higher activity levels. Higher selling and admin costs related to increased royalties on shipments from mines with royalties and increased professional fees.
Repairs and maintenance costs were also higher for services railcar fleet, and there were incremental costs related to trucking and the ramp-up of the Taylor facility. General and administrative expenses decreased by $0.4 million during the quarter, primarily due to lower variable incentive compensation costs partly offset by increased IT expenses related to the amortization of our implementation costs for the new GL system put in last year.
Finance expense was $6.9 million for Q1 '25, a decrease of $1.9 million compared to last year. The reduction was driven by lower expense due to no draws outstanding on the ABL facility during the quarter as well as lower accretion expense. Source did recognize interest income on the commencement of the subleases for the Sahara units deployed to Alaska and cash balances on hand. These reductions were partly offset by higher interest incurred for outstanding lease obligations driven by the timing of replacement of heavy equipment leases in the latter half of '24.
At quarter end, Source had available liquidity of $72.3 million. Capital expenditures for Q1net proceeds on disposals and excluding expenditures related to the Taylor facility were $7.1 million, an increase of $2.5 million compared to the first quarter of last year. Growth capital expenditures were relatively flat compared to last year, excluding the construction of the Taylor facility.
Maintenance capital expenditures increased largely due to the improvements at Peace River and higher amounts for overburden removal driven by increased volumes and amounts related to Source's trucking operations. Lease obligations increased from the prior year quarter, largely due to the timing of addition of heavy equipment for Peace River, which is done in the latter half of '24 as well as the replacement of yellow iron leases for the Wisconsin mine operations that were also done late in '24 at higher rates.
Lease payments for railcars and yellow iron in Wisconsin [indiscernible] impacted by the weakening of the Canadian dollar compared to the first quarter of '24. I would point out, Source is now cash taxable in the U.S. and expects to be cash taxable in its Canadian operations next year. I will also mention from a net income perspective that we settled the outstanding Fox Creek litigation in the quarter. And because of that, we recognized a recovery of 12.5 million unit other expenses where we have been reporting all of the costs related to this event.
With that, I'll turn it back to you, Scott.
Thanks, Derren. As we look ahead, we recognize that uncertainty and volatility continues to dominate the macroeconomic picture. With this uncertain outlook, we have and will continue to build flexibility into all areas of the business in order to react to rapidly changing environments. Despite the lack of visibility, we continue to believe that the Canadian industry activity levels will remain resilient and will favorably impact sand supply and demand fundamentals.
Over the long term, we continue to believe the increased demand for natural gas driven by LNG exports, increased natural gas pipeline export capability and power generation will drive incremental demand for Source's Services. See the completion of LNG Canada later this year and the accelerated permitting on additional LNG export capability as 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. In addition to growth in our core markets, we continue to explore opportunities to diversify and expand our service offering and further utilize our Western Canadian terminals.
Thank you for your time this morning. That concludes the formal portion of the call. We'll now ask the operator to open the lines for questions.
[Operator Instructions] The first question comes from Nick Corcoran with Acumen Capital.
Congrats on the record sand volumes in the quarter. Just a question for me. Obviously, strong sand volumes for the quarter, just looking at the order book going out. Maybe can we give some commentary on what we should expect for the balance of the year in terms of overall volumes and potentially volume growth year-over-year?
Yes. Nick, I think as I mentioned in our prepared remarks, our outlook hasn't changed on the year. And so we continue to expect somewhere in the range of between 5% to 10% growth in the overall market in our overall volumes for the year. So nothing has changed on that aspect. We're in the throes of a very busy Q2 and we expect Q3 to be just as busy. And so I think maybe a little bit of a wild card will be Q4, which it always is for us, and it just depends on where we're at in commodity prices and where our customers are at in their capital program. So all in all, the outlook hasn't changed and we do still expect some fairly robust growth this year.
That's helpful. And then with tariffs being put on frac sand, how have your discussions with the federal government being to potentially have these removed?
Yes. I don't know that discussion is the right term for it. We have followed the process, and we have been engaged with the with the federal government to get the tariffs removed. And I don't want to just say it's us, I would say, most industry participants in frac sand or consumers of frac sand have been engaged with the federal government on this topic. And so I do -- we are well aware that they understand our concerns and they're working on the file, but I don't have any update beyond that.
That's helpful. And maybe one last question for me. Just adjusted gross profit per metric tonne was around $45 in the quarter. Is that a level we should expect for the balance of the year?
Yes. I think what we've seen over the last several quarters is we've sort of been in that $45 range. It's going to move up a little bit related to wellsite servicing and/or the types of mesh sizes that we're selling of sand. But we're going to probably hover in that $45, $46 range this year.
[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Scott Melbourn for any closing remarks.
Thank you, everyone, for your time today, and thank you, everyone, for your interest in the business. If you have any follow-on questions, please feel free to reach out to myself or Derren.
This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.