Earnings call transcript: Source Energy Q4 2024 misses EPS expectations

Source Energy Services Ltd. reported its Q4 2024 earnings, revealing a larger-than-expected loss per share, which led to a slight decline in its stock price. Despite robust revenue growth, the company missed earnings estimates, impacting investor sentiment. The company’s shares fell 0.81% in after-hours trading, closing at $12.40. According to InvestingPro analysis, the stock currently appears undervalued, with analysts setting price targets between $11.16 and $13.95.

Key Takeaways

• Source Energy reported a Q4 2024 EPS of -$0.53, missing the forecast of -$0.29.
• Revenue for Q4 2024 reached $145 million, surpassing the forecast of $100.7 million.
• The stock price decreased by 0.81% following the earnings announcement.
• The company anticipates strong volume growth in 2025 and plans capital expenditures of $28-33 million.

Company Performance

Source Energy Services demonstrated strong revenue growth in 2024, with total revenue reaching $674 million, an 18% increase from 2023. The company’s sand sales volume hit 3.5 million tons, and adjusted EBITDA rose to $123.9 million, up by $24.8 million from the previous year. The company also generated $55.2 million in free cash flow, marking a significant improvement over the prior year. InvestingPro data shows the company maintains a strong return on assets of 40.65% and trades at an attractive EV/EBITDA multiple of 5.36x, though it suffers from weak gross profit margins of 18.97%.

Financial Highlights

• Revenue: $145 million in Q4 2024, exceeding the forecast of $100.7 million.
• Earnings per share: -$0.53, missing the forecast of -$0.29.
• Adjusted EBITDA: $25.8 million in Q4 2024.
• Free cash flow: $55.2 million for 2024, up $17.9 million from the previous year.

Earnings vs. Forecast

The company’s earnings per share for Q4 2024 were -$0.53, falling short of the forecasted -$0.29. This miss represents a 45.5% deviation from expectations. However, revenue significantly exceeded expectations, coming in at $145 million compared to the forecast of $100.7 million, a substantial positive surprise.

Market Reaction

Following the earnings announcement, Source Energy’s stock price declined by 0.81%, reflecting investor concerns over the earnings miss. The stock closed at $12.40, moving closer to its 52-week low of $8.17. This reaction contrasts with the broader market trend, where energy stocks have generally shown resilience. InvestingPro identifies the stock’s significant volatility with a beta of 2.83, while noting it has delivered a strong 47.62% return over the past year despite recent weakness.

Outlook & Guidance

Looking ahead, Source Energy’s management remains optimistic about 2025, anticipating strong volume growth over 2024. The company plans to invest $28-33 million in capital expenditures and is exploring opportunities to diversify its service offerings. Management also hinted at potential shareholder returns through a normal course issuer bid (NCIB).

Executive Commentary

CEO Scott Melborne expressed confidence in the company’s future, stating, "We expect a very strong year for 2025 with growth in volumes over 2024." He emphasized the company’s focus on enhancing its logistics chain and fracs, noting, "We continue to focus on enhancing our industry-leading fracs and logistics chain."

Risks and Challenges

• Potential U.S.-Canada tariffs could impact operational costs.
• Fluctuations in demand for sand products may affect revenue.
• Supply chain disruptions could hinder operational efficiency.
• Market saturation in the Montney region may limit growth opportunities.
• Macroeconomic pressures, such as inflation, could increase expenses.

In summary, while Source Energy Services exhibited strong revenue performance in Q4 2024, the earnings miss and subsequent stock price decline highlight challenges that the company must address to maintain investor confidence moving forward. For deeper insights into Source Energy’s valuation and financial health, including 10 additional exclusive ProTips and comprehensive financial metrics, visit InvestingPro, where you’ll find detailed analysis in our Pro Research Report.

Full transcript - Source Energy Services Ltd (SHLE) Q4 2024:

Conference Operator: Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services Fourth Quarter twenty twenty four Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

I would now like to I

Scott Melborne, CEO, Source Energy Services: would now like to turn the conference over to

Conference Operator: Scott Melborne. Mr. Melborne, please proceed.

Scott Melborne, CEO, Source Energy Services: Thank you, operator. Good morning, and welcome to Source Energy Services twenty twenty four year end conference call. My name is Scott Melbourne. I’m the CEO of Source. I’m joined today by Darren Newell, our CFO.

This morning, we will provide a brief overview of the quarter, which will immediately be followed by a question and answer period. Before I would get started, I would like to refer everyone to the financial statements and the MD and 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 and A and press release. On this call, sources numbers are in Canadian dollars, metric tons, and we will refer to adjusted gross margin, adjusted EBITDA and free cash flow, which are non IFRS measures as described in our MD and A. Except for these items just mentioned, our financial information is prepared in accordance with IFRS. SORTs had a very successful year on several fronts.

We sold record volume to our customers, delivered record volumes through our well site solutions teams and generated record adjusted EBITDA and free cash flow. In the fourth quarter, as we often do, we saw a seasonal slowdown from the very strong pace we had throughout 2024. Even with this slowdown in activity, SOR still delivered 768,000 tonnes of sand and generated $25,800,000 of adjusted EBITDA. As we announced on December 20, we completed the refinancing of our senior secured notes and our ABL facility. These transactions have pushed out our maturities, improved our liquidity and lowered our overall cost of borrowing.

The mandatory amortization and a quarterly cash flow sweep on the turn facility will ensure we continue to deleverage the balance sheet, which remains an ongoing priority for the business. Few highlights from 2024 include sand sales volume of 3,500,000.0 tons and total revenue of $674,000,000 a $104,200,000 increase from 2023. This improvement was created by all parts of the business. Gross margins for the year were $127,300,000 and adjusted gross margins were $162,600,000 increases of 1628% respectively when compared to 2023. We generated adjusted EBITDA of $123,900,000 a $24,800,000 improvement over 2023.

We announced a partnership with Trican to construct a unit train facility located in Taylor, British Columbia. The first phase of this project is now operational and we anticipate it to be fully operational in the second quarter of twenty twenty five. We closed two acquisitions for Sand Trucking assets, further strengthening SORCE’s last mile logistics. At the Chow Yun facility, we completed a rail track expansion into a full unit train facility, which will become a key terminal as the sand market in Northeast BC continues to expand. Sures’ tenth and eleventh Sahara units were both constructed and deployed to Alaska, where they are both fully contracted to operate on the North Slope, helping drive utilization of 78% across the 11 unit Sahara fleet for the year.

We generated $55,200,000 of free cash flow for the year, an increase of $17,900,000 from the prior year when excluding transaction costs related to the refinancing. As we look at industry activity in 2025, we believe the continued development in the Montney will be a key driver for the industry. In response to the growth in the Montney, Source is focused on the development of 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 our Peace River facility, SORUS can provide an unparalleled mine to wellsite offering for both Northern White and domestic sand. Ultimately, by utilizing our Northern White and domestic sand, we are able to offer the lowest landed cost in the model.

In 2025, we will upgrade the Peace River facility and increase its production capacity to 1,000,000 tonnes. We began this process in 2024 and have been working with our customers to help fund a portion of the project. The build out when complete will make the facility more reliable, increase capacity and allow us to better meet the growing demand from our customers who are looking for a blend of domestic and Northern White sand. This project is expected to be fully operational in the second half of the year and will cost approximately $7,000,000 to complete, net of the $6,000,000 in payments received from customers to help fund the expansion. As with all of our recent major capital expenditures, we have fully contracted the additional production capacity.

With the planned expenditure on the Peace River facility this year, we are anticipating our Before I turn it over to Darren, I’d like to discuss the results in more detail. Before I turn it over to Darren, I’d like to discuss the results in more detail. I’d like to touch on recent announcements by the U. S. Government to impose tariffs on goods imported from Canada and the Canadian government’s retaliatory tariffs on some goods imported from The U.

S. While we believe in the short term that tariffs are not likely to have a material impact on our customers’ activities, in the longer term, they may impact the capital plans of the industry. The additional export capability via LNG in Canada and the announced expedited permit of additional LNG projects will help mitigate any potential impacts. However, the overall impact to the industry and source is difficult to predict. More concerning in the short term is the Canadian government’s retaliatory tariffs, which include fraccent.

While sources contracts do allow for the flow through of these type of charges, any additional cost on the industry while facing a tariff on their exports and there is no readily available alternative is disappointing and counterproductive. In the event of retaliatory tariffs, we will work with industry participants and the federal government to seek an exemption on FRAXA.

Darren Newell, CFO, Source Energy Services: With that, I will now turn it

Scott Melborne, CEO, Source Energy Services: over to Darren to provide a brief overview of our financial results for the quarter.

Darren Newell, CFO, Source Energy Services: Thanks, Scott. As Scott mentioned, SORR sold 768,000 metric tons of sand in Q4 ’twenty four from which we generated $117,700,000 in sand revenue. Sand volumes were 6% lower than ’twenty three, while sand revenue decreased by $6,600,000 dollars Q4 ’twenty 3 was an unusually busy fourth quarter. SORCE usually sees customer activity slowdown in the fourth quarter if capital budgets are exhausted. In ’twenty three, however, this was not the case as work was completed that had been delayed by the wildfires in the summer of that year.

During the fourth quarter of ’twenty four, volumes from mine gate sales lowered average realized sand price by $0.76 per metric tonne. However, the sale of lower value mine made sales had a favorable impact on production costs by creating sand processing efficiencies. Wellsite solution revenue for Q4 ’twenty four was $26,700,000 a decrease of $2,700,000 or 9% compared to Q4 ’twenty three. Lower sand sales volumes have also impacted volumes hauled to the wellsite, resulting in lower trucking revenue for the quarter. The U.

S. Sahara fleet was 85% utilized during the fourth quarter with the two units now fully operational in the North Slope and Alaska. In Canada, the Sahara units were 48% utilized for the quarter due to lower activity levels. Terminal services revenue was $600,000 a decrease of $200,000 compared to the fourth quarter of ’twenty three million dollars due to lower revenue from chemical elevation realized in the period. On a total year basis, total revenue grew by $104,200,000 or 18% to $674,000,000 dollars The addition of new customers, strong customer activity throughout the year drove improved sand sales and record volumes were delivered by the last mile logistics teams, while the completion of the two new Sahara late in the year helped contribute to solid utilization rates for the Sahara fleet in ’twenty four, all of that boosting Wellsite Solutions revenue for the year.

Cost of sales, excluding depreciation, was $7,000,000 lower in Q4 than ’twenty three million dollars due to lower sand volumes and lower volumes handled by Las Nao Logistics Group as well as lower rail transportation costs. People costs and repairs and maintenance expenses were higher in Q4 ’twenty four compared to ’twenty three due to the impact of the sand trucking assets purchased in the year. The weaker Canadian dollar on U. S. Denominated costs increased our cost sales by $2.72 per metric ton in Q4 ’twenty three.

The impact was largely offset by U. S. Dollar denominated revenue for the quarter. On a full year basis, cost sales, excluding depreciation, increased our 23% due to higher sand sales volumes and increased transportation costs. These volumes driven increases were partially offset by lower cost to produce sand across all mining facilities and the cost savings realized through the acquisition of the sand and trucking assets.

The weaker Canadian dollar on a full year basis increased cost by $1.59 per metric ton compared to $23 This was largely offset by the movement in exchange rates on revenue in U. S. Dollars for the year. Gross margins decreased by $2,300,000 in Q4 ’twenty four because of lower sandalwood sales volumes, lower char volumes and lower Sahara utilizations compared to the same period last year. Excluding gross margin from Mindgate, adjusted gross margin per metric ton was $44.88 compared to $47.45 in Q4 ’twenty three.

Adjusted gross margin for the quarter was impacted by lower activity levels and higher trucking expenses related to severe weather conditions experienced late in the quarter. These impacts were partly offset by incremental gross margin generated from the sand trucking assets acquired in the year. The weaker Canadian dollar reduced adjusted gross margin by $0.35 per metric tonne as the foreign exchange impact on U. S. Denominated costs was more than the positive impact on U.

S. Denominated revenue. We continue to target to remain in a naturally balanced position and will continue to monitor our FX exposure and manage it if required. On a full year basis, gross margin increased by $17,900,000 or 16%. Excluding gross margin from 98 sales volumes, adjusted gross margin was 46.99 per metric ton compared to $46.07 in ’twenty three.

Again, adjusted gross margin benefited from higher sales volumes for sand beam charts, lower production costs as well as $3,200,000 of incremental gross margin generated from the sand trucking assets acquired during the year. On a year to date basis, adjusted gross margin had a negative impact of $0.31 per metric ton on our gross margin. Total (EPA:TTEF) operating and G and A expenses increased by $2,900,000 compared to the fourth quarter of ’twenty three. During Q4 ’twenty four, expenses increased by $900,000 due to higher compensation expense and increased selling and administration arising from increased royalty costs related to sand shipments from mines that require royalty payments as well as increased insurance expense. G and A expenses increased $2,000,000 during the fourth quarter, largely due to higher compensation expense.

Selling and administrative costs also increased due to higher IT expenses incurred for our new cloud based ERP system. Operating expenses increased by $2,600,000 for the full year due to higher royalty costs associated with increased sales volumes, increased insurance costs and compensation expense. G and A was up $5,500,000 largely the result of higher people costs due to increased well activity, the trucking assets acquired as well as legal and IT expenses. Finance expense was $9,100,000 for Q4 ’twenty four, which was comparable to last year. Interest expense was lower due to the impact of the note repurchases through the last two years and lower average draws on our ABL facility as well as lower accretion expense.

This was largely offset by higher interest incurred on lease obligations and the interest realized from the promissory notes that were issued as part of the charting acquisitions. On a full year basis, finance costs were down $1,700,000 primarily driven by lower interest on the notes and lower accretion expense. Capital expenditures net of proceeds on disposal and setting aside Taylor expenditures were $5,500,000 for the quarter, a reduction of $1,100,000 compared to last year. We included all capital expenditures with the increased with the commencement of the construction on the Taylor facility and improvements being made at the Peace River Mining facility were partly offset by lower capital costs incurred for a piece of equipment which malfunctioned at a terminal last year and lower overburden removal costs in the quarter. On a full year basis, net capital expenditures related, excluding expenditures related to Taylor increased by $6,000,000 and on including the Taylor increases were primarily driven by Taylor facility, the construction of the tenth and eleventh Sahara units, which were fully reimbursed by customer expenditures, the rail expansion at Chelan and higher amounts of overburden removal compared to the prior year.

We also had the purchase of the trucking assets contributing to the increase. As Scott mentioned, on December 20, we entered into a new term loan agreement with Silverpoint LLC for USD135 million facility, which also has a USD25 million delay draw available to the end of this year. This facility matures in December of ’twenty nine. It has a 5% annual amortization that is paid in quarterly installments and a quarterly excess cash flow sweep, which will ensure we are continuing to delever the balance sheet. The coupon is sulfur plus 5.25% and sulfur does have a floor 4.25%.

Key covenants are fixed charge coverage ratio at 1.25:one, a total leverage at 2.25:one that declines down to 1.75 over the term of the facility and a current ratio covenant at 1.5:one. As Scott mentioned, this facility was deliberately oversized to improve sources liquidity. The proceeds of this facility were used to repay the notes, the old ABL facility and pay off the promissory notes issued in the charging acquisitions.

Scott Melborne, CEO, Source Energy Services: On the

Darren Newell, CFO, Source Energy Services: same day, we entered a new ABL facility with CIBC (TSX:CM) for a CAD 40,000,000 ABL. This facility matures December 2027. It is backed by accounts receivable inventory and its coupon using primary ranges ranges from prime to prime plus 25 basis points. The facility is screening fixed charge one to one if availability is less than 10%. The facility has never been drawn and a year end source at available liquidity of $68,800,000,000 With that, I’ll turn it

Scott Melborne, CEO, Source Energy Services: back to you, Scott. Thanks, Darren. As we look ahead, we continue to believe industry activity levels will favorably impact sand supply and demand fundamentals in the WCSB. These strong Canadian industry fundamentals for my growth in Northeast BC coupled with sources capabilities will continue to support market share gains and strong financial results for 2025 and beyond. We believe the increased demand for natural gas driven by LNG exports, increased natural gas pipeline export capabilities and and power generation facilities will drive incremental demand for SIRSIS services.

See the completion of LNG Canada and the continued work on other proposed LNG projects such as cedar, wood fiber and KSI as positive developments for the basin and for our business. SORUS continues to focus on enhancing our industry leading fracs and 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 the growth in our core market, we continue to explore opportunities to diversify and expand our service offerings and further utilize our Western Canadian terminals. Thank you for your time this morning. That concludes forum portion of our call.

We’ll now ask the operator to open the lines for questions.

Conference Operator: Thank you. We will now begin the question and answer session. You. Today’s first question comes from Nick Corcoran with Acumen Capital. Please go ahead.

Nick Corcoran, Analyst, Acumen Capital: Good morning and thanks for taking my questions.

Darren Newell, CFO, Source Energy Services: Good morning, Nick. Good morning, Nick.

Nick Corcoran, Analyst, Acumen Capital: Just the first question for me. We’re about two months into the quarter. Any indication of how activity levels have been to start the year?

Scott Melborne, CEO, Source Energy Services: Yes. With The early indications are in the quarter was a very, very strong start to the year. Q1 is always a strong quarter for us, and I would say Q1 twenty twenty five is shaping up the same. As we look out into the balance of 2025 and despite some macro noise around the tariffs, we expect a very strong year for 2025 with growth in volumes over 2024. Good.

And with all the talk of

Nick Corcoran, Analyst, Acumen Capital: the tariffs, are you positioning for the tariffs with any additional inventory in the basin?

Jesus Sanchez Leon, Analyst, Castanar Investments: Yes.

Scott Melborne, CEO, Source Energy Services: We pre positioned inventory in Q1 really to deal with any weather related impacts, which really affect us in Q1. We’ll take a look at pre positioning inventory in response to the tariffs. However, it’s very difficult to do at this point in time, just given the lack of clarity around the timing or the lack of clarity around what is actually happening with the tariffs. So the plan would be to run the business as normal and if there’s an opportunity to pre position some inventory, then we’ll fill it up. But it’s a very short term two week to three week positioning of inventory that we can save on the tariffs.

Other than that, we don’t have enough inventory in the basin to position much more.

Nick Corcoran, Analyst, Acumen Capital: Good. And maybe one last question from me. The refinance was completed late last year. Any indication where your capital allocation priorities are going forward?

Scott Melborne, CEO, Source Energy Services: Yes. I think as we mentioned on the call, we obviously have a what we view as an amazing opportunity in front of us at Peace River. And so we’ll expand that facility. Apart from Peace River, we will continue to look to pay down debt. And apart from that, I expect that we’ve had some conversations at the Board level and I expect we’ll be announcing something in terms of an NCIB or something different to return some cash flow to shareholders in short order.

Conference Operator: Thank you. The next question comes from Jesus Sanchez Leon with Castanar Investments. Please go ahead.

Jesus Sanchez Leon, Analyst, Castanar Investments: Hi. Thank you very much and congrats on the results. My question is about CapEx. You touched a little bit about that, but maybe you can add more color and break it a little bit down. What drove the increase in CapEx?

Scott Melborne, CEO, Source Energy Services: Yes. Good morning, Jesus. Maybe I’ll start with that and then I’ll toss it out to Darren. Really, on a year over year basis, what we’re looking at in terms of an increase in CapEx is the expansion at the Peace River facility, which will be approximately $7,000,000 for us and about $6,000,000 in customer funded. And so that will drive most of the increase on a year over year capital.

As we get busier, we will need more mine development activities. So it’s just removal of overburden and just more mining activity as there’s more volume going through the logistics chain. And that drives really the balance of the increase in capital on a year over year basis.

Darren Newell, CFO, Source Energy Services: Nothing to add to that. But we did talk through last year where a number of projects that went on, The Chapman expansion, the two Sahara’s, the trucking assets, all things that have helped us set up for the future, and we think we’re in a good spot to be able to utilize those to serve the model better.

Jesus Sanchez Leon, Analyst, Castanar Investments: So for this 2025, we still expect that CapEx to decrease and go to more like twenty twenty three levels, discounting this $7,000,000 investment in Peace River?

Darren Newell, CFO, Source Energy Services: No. We expect our $2,025,000,000 dollars to be more in the $28,000,000 to $33,000,000 range.

Jesus Sanchez Leon, Analyst, Castanar Investments: Okay. Thank you very much. That will be all on my side.

Scott Melborne, CEO, Source Energy Services: Thank you.

Conference Operator: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Melborne for any closing remarks.

Scott Melborne, CEO, Source Energy Services: Thank you for your time today. If anyone has any follow-up questions, please feel free to reach out to myself or Darren.

Conference Operator: This brings to a close today’s conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.

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