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Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services Fourth Quarter 2022 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the call over to Scott Melbourn, CEO. Mr. Melbourn, please proceed.
Thank you, operator. Good morning, and welcome to Source Energy Services Fourth Quarter 2022 Conference Call. My name is Scott Melbourn, I'm the CEO of Source. I'm joined today by Derren Newell, our CFO. Today, I'll cover the formal part of the call, and Derren and I will be available to answer any questions you may have. Before I get started, I would 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 tons and we will refer to adjusted gross margin and adjusted EBITDA, 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. 2022 was a year where improved commodity prices drove higher activity levels in the WCSB, which tightened up the supply-demand balance for all our oilfield services providers. This allows Source to achieve some significant improvements in its financial performance from 2021 and position itself for continued growth in 2023. Source realized adjusted EBITDA of $61.5 million, a 59% increase from 2021 and a $15.6 million improvement in its net loss, which was $8.8 million for 2022. These increases were driven by improvements in gross margins. In 2022, we reported gross margins of $58.1 million and adjusted gross margin of $79 million, which are increases of 48% and 31% from 2021. The gross margin improvements are a result of spot market pricing improvements and an increase of 15% in sand sales volume over 2021. Gross margin also benefited from strong utilization of the Sahara fleet during the year where the Canadian fleet was 75% utilized and the U.S. fleet was 74% utilized. Excluding gross margin from mine gate volumes, adjusted gross margin was $29.80 per ton, compared to $24.33 per tonne in 2021. While gross margin improvements for 2022 were somewhat tempered by customers under long-term contracts, we have now renegotiated all contracts to reflect the current environment. This positions us to see incremental improvements in gross margin in all lines of business in 2023. Operating expenses increased on a year-over-year basis, primarily due to increased repairs and maintenance costs. Including expenditures required to bring the new Peace river server facility online and an increase in royalty payments directly related to higher activity levels. General and administrative costs were higher as 2022 did not benefit from the Canadian emergency wage subsidy program, or cews and the reversal of a provision for bad debt expense that was recorded in 2021. As previously announced, we closed the transaction with Canadian Silica Industries to assume the operation of their Peace River frac sand facility in Q2 of 2022. The addition of a domestic sand complement sources existing Northern White [outcome]. In addition to the CSI transaction, we closed a new $75 million credit facility in Q4, reducing our borrowing costs and providing us additional financial flexibility. Source generated free cash flow of $3.9 million for the year ending December 31, 2022, compared to $11 million generated for 2021. This decrease is attributed to a higher financing expense paid as interest incurred for the notes in 2021 was paid in time compared to $12.9 million in cash interest payments on the notes in 2022. Higher interesting expense incurred for the ABL facility, reflecting higher average draws outstanding and an increase in the variable interest rate for the facility as well as incremental costs incurred for the closing of the ABL facility. And an increase in maintenance capital expenditures for the year related to the Peace River facility. The increase in cash outflows were partially offset by a $22.9 million improvement in adjusted EBITDA, reflecting strong volumes and increased average sand prices compared to the prior year. Net capital expenditures for 2022 was $13.3 million, an increase of $6.8 million compared to 2020, driven by expenditures with the PSR facility and increased overhead renewable. During 2022, Source sold excess production equipment generating proceeds of $1.5 million. Turning to the fourth quarter of 2022. We reported 566,000 tons of sand sales were just slightly lower than anticipated due to the seasonal slowdown in the fourth quarter and delayed completion programs in Northeast BC as ongoing permitting issues were not fully resolved in the quarter. Total volumes for the quarter were 7% higher than the fourth quarter of 2021. Compared to the fourth quarter of 2021, Sand revenues increased by 28% due to improved pricing and sales growth. Sales of in-basin Northern White were lower in the fourth quarter of '21, but this was offset by 129,000 tons of mined sand. In the fourth quarter of 2022, we realized adjusted EBITDA of $6.5 million, normalized for the $3.3 million of foreign currency gains related to the fourth -- Related to the fourth quarter of 2022 that were settled in the third quarter of 2022, we achieved an adjusted EBITDA for the quarter of $9.8 million, which is an improvement of 490% from the fourth quarter of 2021. We reported a net loss of $12.2 million for the fourth quarter of 2022. For 2023, we are a naturally balanced FX position as we've been able to convert some of our contracted customers to U.S. dollar-denominated contracts. We will continue to monitor our FX exposure and actively manage if required in the future. Sand revenues in the quarter were $70.3 million, an increase of 28% over the fourth quarter of 2021. Compared to the fourth quarter of last year, the increase in sand revenue was due to a 33% increase in the average realized sand price, excluding the impact of mine gate sales. Strong activity levels for non-contracted customers during the quarter as well as pricing improvements with contracted customers created the improved pricing and gross margin realized during the quarter. Wellsite Solutions revenue was $16.2 million for the quarter, an increase of 36% or $4.3 million compared to the fourth quarter of 2021. Despite lower volumes, wellsite growth -- Wellsite solutions revenue was higher due to the impact of longer wells from the terminals to the Wellsite and improved pricing. Total trucked volumes during the quarter were impacted by customer delays and permitting issues in D.C. Compared to the same period last year, Sahara-related revenue increased 44% on a quarter-over-quarter basis due to a 35% increase in days utilized across the 9 unit fleet. We continue to see strong interest in sahara units from both Canada and the U.S. Cost of sales in the fourth quarter were impacted by higher cost for transportation and freight due to increased fuel prices, a tight trucking market and the increased costs of third-party sand purchases. These costs, along with higher labor costs and no Cews receipts were partially offset by Source's continued focus on streamlining production. The weaker Canadian dollar on our U.S. denominated costs increased our cost by $6.38 per tonne compared to the same period last year. Offsetting this increase at the adjusted EBITDA line on a year-to-date basis were the gains realized on the foreign exchange contracts that were settled in the third quarter of 2022. Excluding gross margin from mine gate sales, adjusted gross margin per ton was $30.15, which was favorably impacted by improved pricing. Compared to the fourth quarter last year, the adjusted gross margin for the fourth quarter of 2022 did not benefit from a stronger Canadian dollar or proceeds from the Cews program. Excluding these items, the fourth quarter of 2022, adjusted gross margin per ton has increased by 94%. For the fourth quarter of 2022, total operating, general and administrative expenses increased by $2.9 million compared to the same period last year. Operating expense had increased royalty costs as well as higher repairs and maintenance expense and higher variable incentive compensation expense compared to the same period last year. For the third quarter of this year, G&A expense increased by $700,000 from the prior year due to the higher variable compensation costs and higher professional fees compared to the prior year. As discussed, in the third quarter, we closed a new revolving asset-backed senior credit facility with a syndicate comprised of FGI worldwide and CIT Northbridge Credit. This facility provides access to funding of USD 55 million or approximately CAD 75 million and provides a source with the lower cost of borrowing and less restrictive covenants. The details of the new facility are outlined in our MD&A. On December 31, 2020, the principal balance outstanding on our notes was $165.1 million. Source had $26.6 million drawn under the ABL facility, leaving $8.4 million of available liquidity. Net tax was $191.7 million, a reduction of $3.2 million. As business performance improves in 2023 with the rollover of long-term contracts, we will continue to focus on reducing debt levels and ensuring we have a capital structure that can withstand the peaks and values of our industry. Source's capital expenditures for the fourth quarter were $4.2 million, an increase of $2.2 million compared to the same period last year. The increased expenditures were primarily related to costs associated with maintenance activities at the Peace River facility and $1.9 million increase for overburden the removal from mining operations. Growth capital expenditures for the quarter were lower, Source completed the 9th Sahara unit in the fourth quarter of 2021. Now as we look ahead we anticipate the demand for oil and gas -- oil and natural gas globally will remain strong, which will support higher commodity prices. This operating environment is expected to result in drilling and completion programs in 2023 and beyond to remain robust. With the increased activity levels across North America approximate supply and demand fundamentals have been and are expected to remain tight for the foreseeable future. These fundamentals, coupled with a source of leading service offering and logistics capabilities have translated into pricing gains in 2022, a trend that is expected to continue into next year. With the resolution of the permitting issues in DC, we expect that activity that has been postponed in the area will proceed. When the backlog of activity is coupled with an already strong industry fundamentals, there is an expectation of improved business performance for Source into 2023. Source also continues to focus on increasing involvement in its involvement in logistics services for additional oilfield services and other industries to diversify our revenue stream and further utilize the Western Canadian terminals. Thank you for your time this morning. That concludes the formal portion of our call. We'll now ask the operator to open the lines for questions.
[Operator Instructions] The first question comes from Nick Corcoran from Acumen Capital Markets.
Just a couple of questions for me. So you mentioned in your prepared remarks that you've renegotiated all the major customer contracts. Can you give an indication of the split between contract and spot customers?
Yes. Our contract with customers usually make up about 60% to 70% of our total sales. and our spot customers are usually the balance of the sales for the year. That will depend a little bit on activity levels and where volumes go. Our contracts with customers are busier and of course, means it's a higher proportion of sales to contracted customers and vice versa. So we do expect for the year about 70% to 75% will be on sales will be under contract.
Great. And then what have you seen in terms of the spot market?
Yes, we've seen -- and I think as expected, we saw a quite bit of growth in spot market pricing. The pace of that growth in spot market pricing has slowed, which is to be expected and prices are starting to level out. Although we still see a little bit of room available in spot market pricing. We expect spot market pricing to kind of remain at the current level for the balance of 2023 and probably into 2024.
And do you see any risk in the spot market if activity levels reduce at all?
I think in any oilfield services business there is risk if activity levels decrease that spot market pricing can come down. As we see 2023 playing out, we don't really see that as a scenario that's going to happen. And or have any material impact on Source's financial results, but it is always the risk that we see in oilfield services.
And just one last question for me. With the recent announcement in [indiscernible], have you seen an uptick in activity in that area?
Yes, an excellent question. Yes, we have in Q1, we have certainly seen an uptick. We're also seeing an uptick in that region for planning for the balance of the year. So I think as I mentioned in the prepared remarks and as we talked about before, the backlog or activity that we expect to happen is starting to happen in Q1, and we expect that through the balance of the year, the activity in that region will continue to remain robust.
The next question comes from Josef Schachter from SER.
Scott, Derren. When I talk to some of the E&P companies, they talked about a bit of tight supply. Companies are all talking -- some of them we talked in about are already starting to plan to spend money in Northwest or the Northeast BC for LNG Canada. How do you see the progress of pricing going as all that new activity comes in? And guys like Tri-Chem and Scott was talking about adding more D4 frac units, potentially won by Tri-Chem this year is in early next year, probably by step. That, of course, is going to require more sand. How do you see that reacting to your book of business and impact on site?
Yes. I think -- and thanks for your question, Josef. I think as we look at 2023, we still see -- we've seen quite a growth in spot prices, and we see that growth kind of leveling out and remaining flat for the year with some potential for some increased upside in the pricing, but not at the growth that we saw in 2022. For Source, really, for 2023, it is getting on contracted customers onto the new pricing and rolling over and renegotiating some of those contracts. And so now that we have those customers on sort of the more current pricing [indiscernible], this is where we can get a step change in Source's financial results. In terms of beyond '23, when potentially we see the impact of additional frac cews in the region, we again think that frac sand supply is going to be tight, and we may see a pricing reaction beyond '23 into '24. And we're obviously very excited about the region. We have a -- I think absolute logistics capability within the region. We have an excellent market share within the region of Northeast B.C., Northwest Alberta, and I think we'll continue to take additional market share in that region. So we're excited about the activity levels that are forecast and are coming in the region.
Rail costs and all the problems in the states of rails and problems there. Do you have any problems with rail deliveries and have the extra charges for diesel and come off now with the price of oil back from where it was in Q1. What's going on there in terms of rail costs for you?
Yes. And so to answer your first question, historically, the most difficult time of the year is Q1 for rail outages and it's just related to weather. And so this Q1, we haven't really seen any interruptions in rail service. We also -- in preparation for Q1 forward place a large amount of inventory in the basin to make sure that we can withstand any short-term outages. So for this -- for Q1, we've seen excellent rail service and coupled with our in-basin inventory, we really haven't seen any [interruptions] in the market. In terms of the fuel surcharge, fuel surcharge kind of varies with the commodity pricing. So we have seen -- we did see a big uptick last year. We've started seeing that downtick a bit early -- in the early parts of this year. And so yes, we have seen a flow and there has been a downtick in fuel surcharge in both rail and in truck.
I think just to add to that, Josef, in all pieces, though, in our contracts, those are flow-through costs to our customers, so.
Next question for me, I got 2 more. With the RBL finance -- or the ABL financing, and the charges related to the pitcher finance expense pretty big in the fourth quarter. Given that, that's going to be behind you as a onetime charge, do you see net income because of the pricing increases you've been able to set through, given the book of business you see right now in terms of getting net income in 2023 for the company?
Yes. We absolutely anticipate our net loss flipping over to be a net income for all the factors you just listed out. I will also reiterate that we're very focused on paying down our low balance during this year. And ultimately, that will also help us improve our net income over the course of the year.
One last thing. You mentioned there about using your terminal system to distribute other products when I met with you a number of months ago, you guys were working on that. Has anything moved forward? And is anything close to fruition where you could have a new business line that helps you with the margin?
Yes. Just we -- from time to time, we move different products through our terminal network. And currently, we're -- we are moving some commentate to our GP terminal. We're moving some additional chemicals through our Canadian terminal. All of these products will just drop to the bottom line for Source. And so it's been positive on that front. It's not a massive book of business, but any little bit of additional volume and additional products through terminals help the bottom line. So we have made some progress on that front, and we expect to continue to make some additional progress in through the balance of 2023.
The next question comes from Milo [indiscernible] from FacSet. The next question comes from John Gibson from BMO Capital Markets.
First, can you touch on bracing under the new contracts? I know you probably don't want to go into specifics like could you maybe just describe your overall sand pricing now versus, say, this time last year?
Yes. Yes. And you're correct, John. I won't get into any specifics on pricing. What we will say is as we -- as the new contracts came due and we've renegotiated the contracts, we have moved everyone to a closer to where spot prices were and closer to current environment pricing, which will be a nice uptick on overall pricing and overall gross margin as we move into 2023.
Great. Last one for me, just on any potential plans to delever this year. How are you doing the repurchase of that I guess, if all things go according to plan or would you repurchase them in the markets or in the [indiscernible] and then maybe some timing around line start to [indiscernible].
I think, John, we will look at all options available to us if we're able to repurchase them in market. We'll definitely consider that at the time when we're doing that. And if that option is not available, we will obviously redeem on the par. We do have the cash sweep mechanism that's in the noted ventures that will also cause us to take on both part of this year.
The next question comes from Michael Rapps from Cangarium Capital Inc.
Scott and Derren, thanks for the good news this morning on EBITDA and some of the progress. I had 2 questions or 3 questions for you. The first was, it looked like there was something funny happening with the LC that you posted in Wisconsin, and that was consuming cash that it wasn't before. Can you talk about that?
Yes. So under our prior ABL facility with the community [links], we had a portion about was an ABL facility under our new facility, the provider does not provide an ABL facility as part of the credit facility. So in order to keep the reclamation deposits that we need to with the various counties in the U.S. We had to put up cash equivalents to do that, Michael.
And is there a way for you to transfer that into some sort of a surety to free up the cash?
We continue to keep explaining that alternative. I think helping with our improved results in '23, we'll keep exploiting.
The second question is given the significant pricing increase under some of the legacy contracts that have rolled over, do you have any guidance that you can provide for EBITDA in 2023?
Yes. I think in 2023, we should be in around the $90 million to $100 million of EBITDA, which will generate for us around $40 million to $50 million of free cash flow, which will be used to delever. So that's kind of how we see the business transpiring as we have our corporate business today. Now of course, there is a potential for upside given the volume and how the market transpires over the balance of the year. And as always, there is a potential for downside to that number, if something should go off the rails with commodity prices or the market. But as we look today, our book of business would tell us we should be in the $90 million to $100 million.
That is fantastic and is really quite a turnaround. And then the last question, for me is I heard on the -- or read in the Smart Sand press release last week that they're planning to enter the Canadian market. And I just was wondering if you have any thoughts on their ability to succeed in the market.
Yes. Excellent question, Michael. So I think their reactivation of their [indiscernible] mine, which is CN located is -- and their plan to ship some into the Canadian market. It's a little more of the reshuffling of the debt shares of CN providers into the Canadian market rather than incremental sand coming into the Canadian market. And so if we look over the last 12 months, what we've seen is one of the other mines located on this year, has withdrawn from the Canadian market to focus on serving their contracts in the Northeast or in other areas of the U.S. And so left a little bit of a void for those mine gate buyers in the -- for the CN. And from what we can tell right now, we think that Smart Sand reactivation of their facility is going to build that fully for the mine, for that mine gate or those mine gate buyers. Now in terms of longer term, we'll keep a close eye on what they're planning for the Canadian market. But as you know and as everyone knows, selling Sand at the mine gate versus selling sand in basin or selling sand in the heart of the Montney and the Duvernay is quite a different thing. And so because we are not a mine gate seller into the Canadian basin, we don't really view it impacting our book of business in the short term. And of course, we'll keep a close eye on how it transpires in the longer term. But we feel like we're still in an excellent position in terms of the competitive landscape. And we really don't see it impacting the competitive landscape that much.
[Operator Instructions] This concludes the question-and-answer session. I would now like to turn the conference back over to Scott Melbourn for any closing remarks.
Thank you, everyone, for joining the Source Energy Services Fourth Quarter 2022 Conference Call. As always, if you have any additional questions, please feel free to reach out to myself or Derren. Thanks, and have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.