Source Energy Services Ltd

TSX:SHLE

Earnings Call Transcript

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services Second Quarter Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Brad Thomson. Mr. Thompson, please go ahead.

[Bradley J. Thomson, CEO, President & Director]

Thank you, operator. Good morning, and welcome to the Source Energy Services Second Quarter 2021 Conference Call. My name is Brad Thomson, and I'm the CEO of Source. I'm joined today by Derren Newell, our CFO; and Scott Melbourn, our COO. Today, I'll cover off the formal part of the call, and Scott and Derren will be available to answer any questions you may have. Before we get started, I'd like to refer everybody 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 our forward-looking information found in our MD&A and press release. On this call, Source's numbers are in Canadian dollars, metric tonnes and will refer to adjusted gross margin, EBITDA and adjusted EBITDA, which are all non-IFRS measures as described in our MD&A. Except for the items just mentioned, our financial statements are prepared in accordance with IFRS. The second quarter of 2021 marks a year since the peak impact of COVID-19 and the OPEC commodity price war drove activities levels in the WCSB to a standstill. Since that point, we've seen customers who cautiously resumed activity in the later part of 2020 build significant strength in their balance sheets as commodity prices have escalated. With stronger-than-expected commodity prices, many of our customers have now resumed their development activities, acquired new development acreage or accelerated the pace of the development programs. We also see our customers focus on their frac efficiencies. Frac jobs are now being completed today in less than half the amount of time that they were completed just a couple of years ago. This new practice provides operators further opportunity to reduce their costs and also allows them to start generating cash flows from their oil and gas wells sooner. In order to achieve these new levels of frac efficiencies, operators are moving to new techniques like dual fracs and simul-fracs, and they're also laser-focused on logistics and wellsite operations, be in the activities that can make or break their frac programs. With the increase in activity levels in the WCSB and the increased attention on frac efficiencies, Source has enjoyed an increase in our market share and that we're uniquely set up to handle the delivery of high volumes of sand in short periods of times in the WCSB. From our production facilities through to our in-basin and storage facilities, in our logistics operations, our past investments in our unique storage and distribution infrastructure have paid dividends as we serve our customers. As validation of these abilities and the value we bring to our customers, we've had 3 customers renew or entered into new contracts recently. The 2 we announced on July 7, and we've had another customer renew with us since then. In Q2, we also made over 90% of our sales under contracts with significant operators that are active in the Montney and the Duvernay. Source has further demonstrated this service offering and its capabilities at performance at the start of the third quarter. After the end of the second quarter, Source set a number of performance records for the amount of sand sold and the amount of sand delivered to the wellsite. These records topped out at 19,554 metric tonnes of sand delivered in a 1 day. This unique ability to serve the WCSB on a sustained basis is what's allowing Source to continue to grow its market share. Moving to our results for the second quarter of 2021. Source achieved the following accomplishments in the quarter. We realized sand sales volumes of 557,208 metric tonnes. These were strong second quarter sales that saw Source continue to grow its market share. Second quarter sales volumes were well ahead of last year, and they also exceeded our 2019 second quarter sales volumes by 10%. We achieved a utilization rate on our Canadian Sahara fleet of 7 units, up 76% for the quarter, and we continue to see strong demand for our Sahara fleet as our customers are searching for ways to improve their frac efficiencies. We realized adjusted gross margin in the quarter of $29.09 per metric tonne, and we ended the quarter with -- in a strong liquidity position with $3 million of cash on the balance sheet and nothing drawn on our ABL facility. During the quarter, we recognized the forgiveness of our U.S. small business administrative Paycheck Protection Plan, a loan rather, or PPP, that in the second quarter. This is the U.S. government's form of the Canadian wage subsidy loan for small businesses. This forgiveness of USD 2.1 million was recognized into other income. Source also received Qs payments from the Canadian government about $337,000 in the quarter versus $1.1 million that we'd received in 2020. And finally, we recorded adjusted EBITDA for the quarter of $12.9 million, which was consistent with the results we've seen in the prior 3 quarters. Overall, this was a solid quarter for Source, particularly when you consider Q2 is the traditional breakup quarter that normally has lower activity levels in the WCSB. The strong results that we saw in the second quarter as well as our ability to meet the demands of our customers can be attributed to the capabilities of our teams, but can also be attributed to the asset base that Source has developed over the last 20 years. Build-out of Source's asset base that was completed in prior years allows Source to continue its operations with minimal capital spend in 2021 and well beyond. Source's capital spending program in the second quarter of 2021 was only $1.3 million. And to date, Source has only spent $2.6 million against our capital budget for the year of $6.6 million. Source has a very scalable business that can deal with peaks and valleys of the energy industry while still having the capacity to provide service to a more diversified customer base at our terminals. Now before I talk about our outlook for the rest of the year, I'll take a couple of minutes and discuss the balance sheet. On June 30, 2021, the principal balance outstanding on our notes was $151.3 million, and the balance outstanding on our term loan was $18 million. We had cash on hand of $3 million, and our ABL facility was not -- was had nothing drawn on it. Other than the letters of credit, it supports leaving availability of $28.8 million under that facility. With our steadily improving financial positions, Source has the liquidity it needs to operate effectively, and Source can now focus on paying down its debt facilities as activity levels continue to ramp up the WCSB. Now turning to our outlook. The combined strength of both crude oil prices and natural gas prices have strengthened our customers' balance sheets and have given us confidence that the capital programs may be expanded in the latter half of 2021 but more importantly, we're also setting the stage for improved activity in 2022. On the natural gas side of the industry, there's an interesting dynamic unfolding with significant draws on North American natural gas storage during the first part of 2021. LNG Canada continues to progress to completion, and Alberta has continued its coal to gas power generation transition. Natural gas will also play a key role as a transitional fuel in supporting the move to a less carbon-intensive world. The combination of these items should lead to active development in the WCSB of natural gas assets over the medium to long term. Given Source's terminal network, we're well positioned to support our customers' development of crude oil and natural gas assets in the WCSB, but especially in the Montney and Duvernay. While Source is well positioned to continue to expand our base frac sand business without the expenditures of its significant capital, we continue to expand our logistics service offering to encompass other items that are consumed at the wellsite. We also continue to develop opportunities to utilize our Western Canadian terminals as platforms for diversification of our business. At this time, I'd like to thank you for listening to the conference call. That concludes the formal part of our presentation, and we'd now like the operator to open the lines for any questions you may have.

[Operator]

[Operator Instructions] There are currently no questions on the phone lines, and this concludes the question-and-answer session. I would like to turn the conference back over to Source Energy Services for any closing remarks.

[Bradley J. Thomson, CEO, President & Director]

Thank you, operator, and thank you to everybody for joining our call today. As always, we're always available during the day to answer any questions you may have. Please don't hesitate to give myself, Scott or Derren a call if you have any additional questions you'd like to ask. Thank you for joining again today, and have a good weekend.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.