SHLE Source Energy Services Ltd

Source Energy Services Ltd. (“Source” or the “Company”) is pleased to announce its financial results for the three and nine months ended September 30, 2023.

Q3 2023 PERFORMANCE HIGHLIGHTS

Source achieved the following key highlights during the third quarter of 2023:

• realized sand sales volumes of 709,826 per metric tonne (“MT”) and sand revenue of $102.2 million, a $5.0 million increase from the third quarter of 2022;

• generated total revenue of $124.7 million, a $4.8 million increase from the third quarter of 2022;
• realized gross margin of $25.0 million and Adjusted Gross Margin(1) of $30.8 million, increases of 53% and 46%, respectively, when compared to the same period in 2022;
• reduced the principal value of total debt outstanding by $17.1 million from the end of 2022, and repurchased an additional $7.1M aggregate principal value of senior secured notes after the end of the quarter;
• achieved new records for the highest monthly revenue realized in the history of Source from the Sahara fleets in both Canada and the United States (“US”);
• reported net income of $3.7 million, a $7.6 million improvement from the third quarter of 2022 when excluding the foreign exchange gain on the settlement of forward contracts recognized last year; and
• realized Adjusted EBITDA(1) of $22.7 million, a $6.4 million improvement from the third quarter of 2022 when excluding the foreign exchange gain on the settlement of forward contracts recognized last year.

Note:(1) Adjusted Gross Margin (including on a per MT basis) and Adjusted EBITDA are not defined under IFRS and might not be comparable to similar financial measures disclosed by other issuers, refer to ‘Non-IFRS Measures’ below for reconciliations to measures recognized by IFRS. For additional information, please refer to Source’s Management’s Discussion and Analysis (“MD&A”), dated November 8, 2023, available online at www.sedarplus.ca.

RESULTS OVERVIEW

	Three months ended September 30,		Nine months ended September 30,
($000’s, except MT and per unit amounts)	2023	2022	2023	2022
Sand volumes (MT)(1)	709,826	753,233	2,319,388	2,279,470
Sand revenue	102,180	97,173	335,885	271,380
Wellsite solutions	21,725	21,748	76,332	53,620
Terminal services	759	985	3,099	3,461
Sales	124,664	119,906	415,316	328,461
Cost of sales	93,876	98,772	316,567	265,244
Cost of sales – depreciation	5,746	4,732	17,040	15,702
Cost of sales	99,622	103,504	333,607	280,946
Gross margin	25,042	16,402	81,709	47,515
Operating expense	5,306	4,564	17,206	13,701
General & administrative expense	3,119	2,205	11,252	7,392
Depreciation	2,174	2,833	7,998	8,194
Income from operations	14,443	6,800	45,253	18,228
Total other expense	10,711	929	30,908	14,789
Net income(2)	3,732	5,871	14,345	3,439
Net earnings per share ($/share)	0.28	0.43	1.06	0.25
Diluted net earnings per share ($/share)	0.28	0.38	1.06	0.19
Adjusted EBITDA(3)	22,735	25,994	70,793	55,047
Sand revenue sales/MT	143.95	129.01	144.82	119.05
Gross margin/MT	35.28	21.78	35.23	20.84
Adjusted Gross Margin(3)	30,788	21,134	98,749	63,217
Adjusted Gross Margin/MT(3)	43.37	28.06	42.58	27.73
Notes:
(1) One MT is approximately equal to 1.102 short tons.
(2) The average Canadian to US dollar exchange rate for the three and nine months ended September 30, 2023, was $0.7457 and 0.7432, respectively (2022 - $0.7659 and 0.7795, respectively).
(3) Adjusted EBITDA and Adjusted Gross Margin (including on a per MT basis) are not defined under IFRS, refer to ‘Non-IFRS Measures’ below for reconciliations to measures recognized by IFRS. For additional information, please refer to Source’s MD&A available online at www.sedarplus.ca.

Third Quarter 2023 Performance

Source realized continued gross margin improvement for the third quarter, driven by strong average realized sand pricing. This resulted in Adjusted EBITDA of $22.7 million for the quarter, an increase of 40% compared to the third quarter of 2022, excluding the gain on settlement of outstanding future forward exchange contracts settled last year. Overall sand sales volumes for the quarter were lower than anticipated due to customer operational delays and schedule changes that resulted in a shift of planned activity into the fourth quarter.

Source recorded total revenue of $124.7 million, an increase of $4.8 million or 4% compared to the third quarter of 2022, due to higher average realized sand pricing. Wellsite solutions revenue was relatively flat, on a quarter-over- quarter basis, also impacted by the customer delays noted above. During the third quarter, Source achieved records for the highest monthly revenue ever generated by the Sahara fleets for units working in both Canada and the US. Continued strength in spot pricing and pricing across all lines of business mitigated the impact of delayed sand sales volumes for the quarter.

Cost of sales, excluding depreciation, decreased for the third quarter of 2023, compared to the same period last year, primarily due to the lower sand sales volumes realized during the period as well as a reduction in cost for transportation fuel surcharges. These reductions were partially offset by a shift in terminal sales mix for the quarter. Cost of sales was impacted by a weakening Canadian dollar on US denominated costs relative to the third quarter last year; however, this impact was completely offset by an increase in US dollar denominated revenue realized during the quarter.

For the three months ended September 30, 2023, gross margin increased by $8.6 million, attributed to improved pricing and operational efficiencies achieved, compared to the third quarter of 2022. Excluding gross margin from mine gate volumes, Adjusted Gross Margin was $48.89 per MT, compared to $31.38 per MT in the third quarter of 2022, favorably impacted by improved pricing and lower transportation fuel charges, as noted above, despite the impact of terminal sales mix. Customer job delays, as discussed above, resulted in lower total sand volumes trucked compared to the same period last year, and also impacted gross margin and Adjusted Gross Margin for the third quarter.

Operating expenses increased by $0.7 million on a quarter-over-quarter basis, primarily due to higher royalty costs resulting from increased shipments compared to prior year, and higher people costs and variable incentive compensation cost incurred in the quarter. General and administrative expense increased by $0.9 million during the period, due primarily to higher salaries and variable incentive compensation expense compared to the third quarter last year.

As discussed above, Adjusted EBITDA was $22.7 million for the third quarter, an increase of $6.4 million or 40% when excluding the foreign exchange gain realized last year when Source wound up its outstanding foreign exchange forward contracts prior to the closing of the new revolving asset-backed senior credit facility (the “ABL”). Improved pricing and a reduction to certain transportation and operational costs, as well as production efficiencies, offset the volume reduction attributed to the shift in customer jobs. The weakening of the Canadian dollar negatively impacted cost of sales during the quarter; however, this was offset by an increase in revenue denominated in US dollars, which mitigated the impact of fluctuations in foreign exchange rates on US dollar denominated expenses for the quarter.

Adjusted EBITDA was favorably impacted by $0.3 million during the quarter, attributed to the movement in exchange rates on working capital.

Liquidity and Capital Resources

Free Cash Flow	Three months ended September 30,				Nine months ended September 30,
($000’s)	2023		2022		2023		2022
Adjusted EBITDA(1)	22,735		25,994		70,793		55,047
Financing expense paid	(7,001	)	(3,147	)	(21,845	)	(12,288	)
Capital expenditures, net of proceeds on disposal of
property, plant and equipment and reimbursement of capital costs	(3,585	)	(4,454	)	(6,373	)	(9,348	)
Payment of lease obligations	(4,758	)	(3,849	)	(14,504	)	(11,003	)
Free Cash Flow(1)	7,391		14,544		28,071		22,408
Note:
(1) Adjusted EBITDA and Free Cash Flow are not defined under IFRS and might not be comparable to similar financial measures disclosed by other issuers, refer to ‘Non-IFRS Measures’ below. The reconciliation to the comparable IFRS measure can be found in the table below.

Source generated Free Cash Flow of $7.4 million for the three months ended September 30, 2023, a decrease of $7.2 million compared to the third quarter of 2022. Excluding the $9.7 million gain realized on the settlement of foreign exchange contracts recognized in the third quarter last year, Source realized an increase in Free Cash Flow of $2.5 million. The increase is mainly attributed to the improvement in Adjusted EBITDA, driven by increased gross margin compared to the same period last year, as well as lower net expenditures for capital assets during the third quarter of this year, as outlined below. Finance expense paid was higher compared to the third quarter last year, due to the timing of the August 2022 interest payment for the senior secured notes which was not completed until after the closing of the new ABL facility in the fourth quarter of 2022. Payments for lease obligations for the third quarter of 2023 were higher than the prior year due to the replacement of short-term rentals with lower cost, longer-term leases for certain mine processing equipment and the impacts of a weaker Canadian dollar on US dollar denominated leases.

Source’s capital expenditures for the third quarter of 2023 were $3.6 million, a decrease of $0.8 million compared to the same period last year. Expenditures for maintenance and sustaining capital decreased by $0.9 million for the three months ended September 30, 2023. The change was primarily driven by a reduction in expenditures for the Peace River facility, now fully online and operational, partially offset by higher costs associated with overburden removal for mining operations, attributed to higher year-to-date sand sales volumes when compared to 2022. Capital expenditures were also impacted by the cost to rebuild a piece of equipment at a terminal facility which malfunctioned during the quarter; however, costs incurred will be recovered by insurance proceeds received in the fourth quarter. Management continues to assess equipment and other assets required to service Source’s operations to ensure optimal levels are maintained on an on-going basis.

BUSINESS OUTLOOK

Third quarter volumes were impacted by operational delays experienced by a number of Source customers. These delays pushed activity into the fourth quarter, a historically slower quarter where exploration and production (“E&P”) companies exhaust budgets as they approach the end of the year. Activity levels into the fourth quarter were strong in October and are expected to remain that way until the industry’s holiday slowdown, which begins in mid-December. Source renewed customer contracts with terms and conditions reflective of the current operating environment earlier in the year, and continues to improve production efficiencies through an expansion of mesh sizes and ongoing operating cost management. Source’s leading service offerings and logistics capabilities required for larger volumes of sand per well, as well as Source’s terminal network footprint, will continue to support strong gross margins for 2024. Source anticipates increases in activity levels in 2024, particularly in northeastern British Columbia with the expectation that LNG Canada will be online in 2025.

In the longer-term, Source believes the increased demand for natural gas, driven by power generation facilities, increased natural gas pipeline export capabilities and liquefied natural gas exports will drive incremental demand for Source’s services in the Western Canadian Sedimentary Basin (“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 is critical for the successful movement to a less carbon-intensive world.

Source 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.

THIRD QUARTER CONFERENCE CALL

A conference call to discuss Source’s third quarter financial results has been scheduled for 7:30 am MST (9:30 am ET) on Thursday, November 9, 2023.

Interested analysts, investors and media representatives are invited to register to participate in the call. Once you are registered, a dial-in number and passcode will be provided to you via email. The link to register for the call is on the Upcoming Events page of our website and as follows:

Source Energy Services Q3 2023 Results Call

The call will be recorded and available for playback approximately 2 hours after the meeting end time, until December 9, 2023, using the following dial-in:

Toll-Free Playback Number: 1-800-319-6413

Playback Passcode: 9674

ABOUT SOURCE ENERGY SERVICES

Source is a company that focuses on the integrated production and distribution of frac sand, as well as the distribution of other bulk completion materials not produced by Source. Source provides its customers with an end-to-end solution for frac sand supported by its Wisconsin and Peace River mines and processing facilities, its Western Canadian terminal network, its “last mile” logistics capabilities and Sahara, a proprietary wellsite mobile sand storage and handling system.

Source’s full-service approach allows customers to rely on its logistics platform to increase reliability of supply and to ensure the timely delivery of frac sand and other bulk completion materials at the wellsite.

IMPORTANT INFORMATION

These results should be read in conjunction with each of Source’s interim condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022, and Source’s audited consolidated financial statements for the year ended December 31, 2022, together with the accompanying notes (the “Financial Statements”) and its corresponding MD&A for such periods. The Financial Statements and MD&A and other information relating to Source, including the Annual Information Form, are available under the Company’s SEDAR+ profile at www.sedarplus.ca. The Financial Statements and comparative statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Unless otherwise stated, all amounts are expressed in Canadian dollars.

NON-IFRS MEASURES

In this press release Source has used the terms Free Cash Flow, Adjusted Gross Margin and Adjusted EBITDA, including per MT, which do not have standardized meanings prescribed by IFRS and Source’s method of calculating these measures may differ from the method used by other entities and, accordingly, they may not be comparable to similar measures presented by other companies. These financial measures should not be considered as an alternative to, or more meaningful than, net income (loss) and gross margin, respectively, which represent the most directly comparable measures of financial performance as determined in accordance with IFRS.

Reconciliation of Adjusted EBITDA and Free Cash Flow to Net Income

	Three months ended September 30,				Nine months ended September 30,
($000’s)	2023		2022		2023		2022
Net income	3,732		5,871		14,345		3,439
Add:
Interest expense	6,117		7,003		19,794		20,289
Cost of sales – depreciation	5,746		4,732		17,040		15,702
Depreciation	2,174		2,833		7,998		8,194
Gain on debt extinguishment	(280	)	—		(280	)	—
Finance expense (excluding interest expense)	2,660		1,520		7,473		4,046
Share-based compensation expense (recovery)	1,567		(271	)	5,038		302
Gain (loss) on asset disposal	356		2		(1,776	)	(1,181	)
Unrealized loss on derivative assets	—		4,157		—		1,718
Loss on sublease	—		—		3		—
Other expense(1)	663		147		1,158		2,538
Adjusted EBITDA	22,735		25,994		70,793		55,047
Financing expense paid	(7,001	)	(3,147	)	(21,845	)	(12,288	)
Capital expenditures, net of proceeds on disposal of property, plant and equipment and reimbursement of capital	(3,585	)	(4,454	)	(6,373	)	(9,348	)
costs
Payment of lease obligations	(4,758	)	(3,849	)	(14,504	)	(11,003	)
Free Cash Flow	7,391		14,544		28,071		22,408
Note:
(1) Includes expenses related to the incident at the Fox Creek terminal facility, asset repairs reimbursed by insurance claims and other one-time expenses, refer to ‘Contractual Obligations’ and ‘Operating and Financial Results’ above.

Reconciliation of Gross Margin to Adjusted Gross Margin

	Three months ended September 30,		Nine months ended September 30,
($000’s)	2023	2022	2023	2022
Gross margin	25,042	16,402	81,709	47,515
Cost of sales – depreciation	5,746	4,732	17,040	15,702
Adjusted Gross Margin	30,788	21,134	98,749	63,217

For additional information regarding non-IFRS measures, including their use to management and investors, their composition and discussion of changes to either their composition or label, if any, please refer to the ‘Non-IFRS Measures’ section of the MD&A, which is incorporated herein by reference. Source’s MD&A is available online at www.sedarplus.ca and through Source’s website at www.sourceenergyservices.com.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this press release constitute forward-looking statements relating to, without limitation, expectations, intentions, plans and beliefs, including information as to the future events, results of operations and Source’s future performance (both operational and financial) and business prospects. In certain cases, forward- looking statements can be identified by the use of words such as “expects”, “believes”, “continues”, “focus”, “trend”, or variations of such words and phrases, or state that certain actions, events or results “may” or “will” be taken, occur or be achieved. Such forward-looking statements reflect Source’s beliefs, estimates and opinions regarding its future growth, results of operations, future performance (both operational and financial), and business prospects and opportunities at the time such statements are made, and Source undertakes no obligation to update forward-looking statements if these beliefs, estimates and opinions or circumstances should change unless required by applicable law. Forward-looking statements are necessarily based upon a number of estimates and assumptions made by

Source that are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Forward-looking statements are not guarantees of future performance. In particular, this press release contains forward-looking statements pertaining, but not limited, to: costs incurred by the rebuilding of a piece of equipment at a terminal facility which malfunctioned and will be recovered by insurance proceeds received in the fourth quarter; expectations that activity levels will remain strong until the industry’s holiday slowdown; predictions for strong gross margins in 2024; anticipated increased activity levels in 2024, particularly in northeastern British Columbia with the expectation that LNG Canada will be online in 2025; expectations that increased demand for natural gas, increased natural gas pipeline export capabilities and liquefied natural gas exports will drive incremental demand for Source’s services in the WCSB; continued increase in demand from customers primarily focused on the development of natural gas properties in Montney, Duvernay and Deep Basin; views that natural gas is an important transitional fuel for the successful movement to a less carbon-intensive world; Source’s focus on and expectations regarding increasing its involvement in the provision of logistics services for other wellsite items; expectations with respect to improved production efficiencies through expanding mesh sizes and operating cost management; expectations respecting future conditions; and profitability.

By their nature, forward-looking statements involve numerous current assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Source to differ materially from those anticipated by Source and described in the forward-looking statements.

With respect to the forward-looking statements contained in this press release assumptions have been made regarding, among other things: proppant market prices; future oil, natural gas and liquefied natural gas prices; future global economic and financial conditions; future commodity prices, demand for oil and gas and the product mix of such demand; levels of activity in the oil and gas industry in the areas in which Source operates; the continued availability of timely and safe transportation for Source’s products, including without limitation, Source’s rail car fleet and the accessibility of additional transportation by rail and truck; the maintenance of Source’s key customers and the financial strength of its key customers; the maintenance of Source’s significant contracts or their replacement with new contracts on substantially similar terms and that contractual counterparties will comply with current contractual terms; operating costs; that the regulatory environment in which Source operates will be maintained in the manner currently anticipated by Source; future exchange and interest rates; geological and engineering estimates in respect of Source’s resources; the recoverability of Source’s resources; the accuracy and veracity of information and projections sourced from third parties respecting, among other things, future industry conditions and product demand; demand for horizontal drilling and hydraulic fracturing and the maintenance of current techniques and procedures, particularly with respect to the use of proppants; Source’s ability to obtain qualified staff and equipment in a timely and cost-efficient manner; the regulatory framework governing royalties, taxes and environmental matters in the jurisdictions in which Source conducts its business and any other jurisdictions in which Source may conduct its business in the future; future capital expenditures to be made by Source; future sources of funding for Source’s capital program; Source’s future debt levels; the impact of competition on Source; and Source’s ability to obtain financing on acceptable terms.

A number of factors, risks and uncertainties could cause results to differ materially from those anticipated and described herein including, among others: the effects of competition and pricing pressures; risks inherent in key customer dependence; effects of fluctuations in the price of proppants; risks related to indebtedness and liquidity, including Source’s leverage, restrictive covenants in Source’s debt instruments and Source’s capital requirements; risks related to interest rate fluctuations and foreign exchange rate fluctuations; changes in general economic, financial, market and business conditions in the markets in which Source operates; changes in the technologies used to drill for and produce oil and natural gas; Source’s ability to obtain, maintain and renew required permits, licenses and approvals from regulatory authorities; the stringent requirements of and potential changes to applicable legislation, regulations and standards; the ability of Source to comply with unexpected costs of government regulations; liabilities resulting from Source’s operations; the results of litigation or regulatory proceedings that may be brought by or against Source; the ability of Source to successfully bid on new contracts and the loss of significant contracts; uninsured and underinsured losses; risks related to the transportation of Source’s products, including potential rail line interruptions or a reduction in rail car availability; the geographic and customer concentration of Source; the impact of extreme weather patterns and natural disasters; the impact of climate change risk; the ability of Source to retain and attract qualified management and staff in the markets in which Source operates; labour disputes and work stoppages and risks related to employee health and safety; general risks associated with the oil and natural gas industry, loss of markets, consumer and business spending and borrowing trends; limited, unfavorable, or a lack of access to capital markets; uncertainties inherent in estimating quantities of mineral resources; sand processing problems; implementation of recently issued accounting standards; the use and suitability of Source’s accounting estimates and judgments; the impact of information systems and cyber security breaches; the impact of inflation on capital expenditures; and risks and uncertainties related to pandemics such as COVID-19, including changes in energy demand.

Although Source has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will materialize or prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement. Readers should not place undue reliance on forward-looking statements. These statements speak only as of the date of this press release. Except as may be required by law, Source expressly disclaims any intention or obligation to revise or update any forward-looking statements or information whether as a result of new information, future events or otherwise.

Any financial outlook and future-oriented financial information contained in this press release regarding prospective financial performance, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action based on management’s assessment of the relevant information that is currently available. Projected operational information contains forward-looking information and is based on a number of material assumptions and factors, as are set out above. These projections may also be considered to contain future oriented financial information or a financial outlook. The actual results of Source’s operations for any period will likely vary from the amounts set forth in these projections and such variations may be material. Actual results will vary from projected results. Readers are cautioned that any such financial outlook and future-oriented financial information contained herein should not be used for purposes other than those for which it is disclosed herein. The forward-looking information and statements contained in this document speak only as of the date hereof and have been approved by the Company’s management as at the date hereof. The Company does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

FOR FURTHER INFORMATION PLEASE CONTACT:

Scott MelbournChief Executive Officer(403) 262-1312investorrelations@sourceenergyservices.com

Derren NewellChief Financial Officer(403) 262-1312investorrelations@sourceenergyservices.com