Good day, and welcome to the Source Energy Services Third Quarter 2024 results conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Scott Melbourn, Chief Executive Officer. Please go ahead.
Thank you. Good morning, and welcome to Source Energy Services Third Quarter 2024 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 immediately be followed by a question-and-answer period. Before I get started, I would like to refer everyone to the financial statements and the MD&A that were posted to CR 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, 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&A. Except for the items just mentioned, our financial information is prepared in accordance with IFRS.
Strong business performance in the third quarter resulted in the third consecutive quarter of record sand volumes, total revenues, and EBITDA. The business performed well in all areas, including record volumes in the last-mile logistics and 83% utilization on the Sahara fleet. With the maturities of both our notes and ABL facility approaching, we have made significant progress on our refinancing. After taking the appropriate time to let the business performance improve, which ultimately unlocked additional refinancing options, we have now chosen partners and are working towards closing the transactions. We expect to be in a position to release further information on these transactions in the fourth quarter. At the end of September, our senior secured note balance was CAD 140.5 million. We had drawn CAD 13.6 million on our ABL facility. We also had a net working capital surplus of CAD 57.6 million.
In the third quarter, Source acquired the sand trucking assets of the PVT Group to further grow its fleet and enhance its last-mile logistics offering. The trucking acquisitions, coupled with the unit train terminals in Chetwynd and Taylor, truly enhance our logistics capabilities within the basin and specifically in Northeast BC. The Northern Montney will continue to be the resource play that feeds the West Coast LNG exports. The combination of Source's terminal infrastructure in Wembley, Chetwynd, Taylor, the last-mile trucking fleet, and the domestic sand in Peace River provides Source with an unparalleled offering to support growth in the region. Ultimately, Source believes that by utilizing its Northern White and domestic sand offerings, we will be able to offer the lowest landed cost in the region. Highlights for the third quarter included sand volumes of 964,000 metric tons and sand revenue of CAD 142.2 million.
These are new records for Source and represent a CAD 40 million increase in sand revenue from the third quarter of 2023. Total revenue was CAD 183.1 million, a CAD 54.8 million increase from Q3 last year. Gross margin was CAD 33.7 million, while Adjusted gross margin was CAD 43.3 million, an increase of 34% and 41% respectively, when compared to Q3 of 2023. Net income was CAD 10.2 million, while adjusted EBITDA was CAD 35.3 million, a 55% improvement from the same period of 2023. Closed the acquisition of nine sand trucks and related trailers during the quarter, bringing the total fleet size to 37 trucks, further strengthening Source's last-mile logistics. Free cash flow for the third quarter was CAD 20.1 million, an increase of CAD 12.7 million compared to last year. Improved operating results and lower financing expense were the principal reasons for the improvement.
Year-to-date free cash flow has reached CAD 49.1 million and is CAD 21 million ahead of the first nine months of 2023. With that, I'll now turn it over to Derren to provide a brief overview of our financial results for the quarter.
Thanks, Scott. As Scott mentioned, sand revenue for the third quarter of 2024 increased by CAD 41.1 million over the third quarter of 2023. The increase was due to a 254,000 metric ton or 36% increase in sand volumes and a $3.67 per metric ton, a 3% increase in the average realized sand price. Sand volumes were impacted by continued strong activity levels from our customers and the addition of a new customer last quarter, as well as a successful [TPAD] trial with another new E&P customer. Sand revenues were also impacted by improved performance from the Peace River facility. While sand revenue realized from mine gate sales lowered the average realized sand price in the quarter by $1.33 per metric ton, it did have a favorable impact on cost of sales and gross margins by improving production efficiencies and yields.
Wellsite revenue for the third quarter of 2024 was CAD 39.9 million, an increase of CAD 18.2 million, or 84% compared to the third quarter of last year. Last-mile solutions trucking volumes increased 70% compared to Q3 2023, and as Scott mentioned, it is the highest volume handled by that team. Sahara revenue was flat compared to Q3 2023. A 35% increase in Canadian Sahara revenue was offset by lower activity for the US Sahara unit in the quarter. Sahara Canada did begin operations in Alaska later in the quarter. Terminal service revenue for Q3 of 2024 was CAD 0.9 million, an increase of CAD 0.1 million compared to Q3 2023 due to improved chemical blending revenues. Cost of sales, excluding depreciation, increased by CAD 45.9 million compared to the third quarter of 2023. This increase was due to higher sales volumes, higher last-mile logistics volumes, and higher rail costs.
Sahara-related costs were also higher due to improved Canadian activity levels and higher regular maintenance costs in the quarter. The weaker Canadian dollar on our U.S.-denominated costs increased our cost by CAD 2.08 per metric ton compared to the same period last year. Gross margins increased by 8.6 million compared to the third quarter of 2023. The increase in gross margins arose from higher sand sales volumes and an 86% increase in gross margin of the last-mile logistics group in the quarter. Excluding gross margins from mine gate volumes, adjusted gross margin per metric ton was CAD 45.89 per metric ton compared to CAD 46.60 per metric ton for the same period last year. Adjusted gross margin in Q3 was impacted by the extreme heat experienced in the quarter, which impacted rail transportation and led to servicing customers from non-optimal terminals.
A weaker Canadian dollar during the third quarter reduced the adjusted gross margin by CAD 0.92 per metric ton, as the foreign exchange impact on the U.S.-denominated costs was more than the positive impact on the U.S.-denominated revenue realized in the quarter. We target to remain in a naturally balanced FX position, and we will continue to monitor our FX and actively manage it if required. Total operating general and administrative expenses in the quarter increased by CAD 1.6 million, operating expenses by CAD 1.2 million from the third quarter of 2023, primarily due to increased compensation expense and higher royalty costs related to shipping more sand from the mines with royalties, as well as higher insurance costs. General and administrative expenses increased CAD 0.4 million in the third quarter compared to the same period in 2023, primarily due to higher compensation expense and higher professional fees.
Finance expense was CAD 8.2 million for the third quarter of 2024, a decrease of CAD 0.6 million from the same period last year. The decrease was due to lower interest incurred on the senior secured notes due to the impact of the repurchases that occurred over the last year and lower other interest charges. Interest incurred on the ABL was higher than the prior year due to higher average draws outstanding on that facility to support the higher activity levels. On September 30th, principal outstanding in our notes was CAD 140.5 million, and Source had CAD 13.6 million drawn under its ABL facility, leaving CAD 45.2 million of available liquidity. As Scott mentioned, we looked at multiple term sheets for refinancing our ABL and our notes, and we explored several options, which we are several options.
We are now actively working on the refinancing transactions, and with that, I'll turn it back to you, Scott.
Thank you, Derren. As we look ahead, we continue to believe industry activity levels will favorably impact sand supply and demand fundamentals in the Western Canadian Sedimentary Basin. These strong Canadian industry fundamentals driven by growth in Northeast BC, coupled with Source's capabilities, will continue to support market share gains and strong financial results for the remainder of 2024 and beyond. We believe increasing demand for natural gas or LNG exports, increased natural gas pipeline export capabilities, and power generation facilities will drive incremental demand for Source's services. We see the completion of LNG Canada, the FID on Cedar LNG, and the work on other proposed projects, such as Woodfibre and Ksi, 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 a number of opportunities to grow the company and further our competitive advantage without impacting the balance sheet goals. In addition to growth in our core market, we continue to explore opportunities to diversify and expand our service offerings and to further utilize our existing 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.
Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And once again, that's star then one if you have a question. Today's first question comes from Nick Corcoran with Acumen Capital. Please go ahead.
It's in a record quarter. Just a few questions for me. We're partway through the fourth quarter. Any indication of how volumes are trending in the quarter?
Yeah. Sorry, Nick, you just broke up there a little bit, so let me repeat the question. How are volumes trending in the fourth quarter?
Exactly, yes.
Yeah. So, the fourth quarter for Source is always a little bit of a wild card and the seasonality in the completions industry. I think as we look at it today and as we sit here today, we're pleasantly surprised with the activity levels in Q4. We've seen a few of our customers pull capital from 2025 into Q4. And so we're cautiously optimistic that we're going to have a fairly favorable Q4 volumetrically. There's still obviously lots of the quarter, so at this point, we're just cautiously optimistic.
Good. And then maybe switching gears, how is the construction of Taylor progressing? And maybe a broader question about the relationship with Trican and whether there's potential for that to expand with time.
Yeah. Just a quick update on Taylor. The facility is currently under construction right now. We're targeting for the first phase, which is a rail-to-truck facility to be complete within the next month and for the first sand to be flowing through that facility in the first month. So on target, the ultimate completion of that facility will be in 2025 when we've completed the storage and the rest of the infrastructure build. So it's progressing well, and it's, for the most part, on time. In terms of the relationship with Trican, I think whenever you enter into commercial arrangements like we have for the Taylor facility, there's always an opportunity to continue to further that relationship and to work together and to work together constructively.
So obviously, nothing to report right now, but I think we continue to look forward to working with Trican and continue to look forward to working with our partner in that facility.
That's helpful, and maybe a question for Derren. There's a working capital build in the quarter, I think it's largely driven by AP. Can you give any color on what the driver of this was and what you'd expect to happen with the working capital in the fourth quarter?
The working capital build really in the quarter was primarily just driven off of timing differences between the end of last quarter and this quarter. No one real event drove anything. As we look forward to the fourth quarter, which we will often see if you look back at history, especially if activity slows down a little bit, we would expect working capital will naturally draw back a bit and then often will build out again as we get busy in the first quarter of next year. But looking forward, we expect it to reduce a little bit as we close the year out.
Great. And then maybe one last question for me. How are you thinking about your debt target for 2025?
We really haven't changed our targets at all. We're still wanting to continue to deliver. Obviously, keenly focused on the refinance transaction. I think that just gives us a new vehicle to continue to deliver the business, and that's going to remain a priority for a while yet.
Excellent. Thanks alot.
Thanks, Nick.
Thank you. And our next question today comes from Jesús Sánchez León with Castanar Investment. Please go ahead.
Hi, how are you? My third question will be about the forex impact. I read in your press release that the weakening of Canadian dollar negative impacted our gross margins. But my understanding is that we collect revenues in US dollars, and then we translate it to Canadian. So we should be favored on a weak Canadian dollar?
Yeah. So on our foreign currency you're correct , Jesús, we both have U.S. dollar revenue streams and obviously a large chunk of our production costs related to the Wisconsin operations are U.S. dollar-denominated costs. Both get translated. In the quarter, we saw the impact of the costs being slightly higher than the revenues. A good chunk of that was just the particular customers that we had sold to during the quarter happened to have a little more Canadian dollar revenue than previously. It's something we monitor very closely, and if you look back in our history, you'll see in the past we have used various foreign exchange contracts to help us manage that and keep it in check.
Can you quickly remind me the product mix or revenue mix in U.S. dollars and Canadian dollars?
We don't typically break it down, but I would say we're generally naturally balanced between our U.S. dollar costs and our U.S. dollar revenues.
Thank you. My last question will be if you can add any information on the progress for the refinancing for next year of our debt?
Other than kind of what we said, we picked parties. We're working on the refinancing transaction and hope to have some more news out soon.
Okay. Thank you very much. That will be all.
Thank you.
Our next question comes from Paul Tepsich with High Rock Capital. Please go ahead.
Congrats, guys. Great quarter. And on that front, given the recent operating performance that you've seen over the past several quarters or even two years now in the build, are you willing to give some forward guidance with a bit more meat on the bones for us?
Yeah. You know, Paul, it's an excellent question. And we kind of weigh this every year, whether we're able to give additional guidance on what we see coming at us. And we'll endeavor to each year as we see the year unfolding to give as much guidance as we're comfortable with. So as we start to get ultimate capital programs from our customers and we start to see volume sort of shape up for the year, we'll be in a much better position to provide a little more insight on 2025 and what we see in 2025. And we'll certainly endeavor to provide our investors with a little more info with what we're seeing.
Okay. Seems like the street's a little bit light looking forward. Just another question or two. What do you think or estimate your market share is in the Western Canadian Sedimentary Basin right now?
Yeah. We would estimate we're in and around 45% to, call it, 48% market share right now. So that's obviously going to jump around a little bit quarter to quarter and month to month, just depending on how active our customer base is versus the rest of the basin. But on average, we should be ranging around that kind of that 45%- 48%.
So it's damn close to 50%. So final question, and you don't have to comment, but given your stock right now is probably trading about 2.3 times next 12 months, unbelievably cheap, are you in any discussions with potential acquirers given you've got 50% market share?
Yeah. We're not in any discussions right now. I'd say happy to comment on that. And I would agree with you 100%. We're incredibly cheap.
Okay. That's it for me.
Thanks, Paul.
Thanks.
As a reminder to ask a question, please press star then one. Our next question comes from John Gibson with BMO Capital Markets. Please go ahead.
Morning, all, and congrats on the record quarter here. I just had one, and I'm just going to try to ask in a different way for 2025. Let's just say activity levels hold flat into 2025. What type of a volume uplift could we expect just given the customer additions that you've added here in 2024?
Yeah, John, excellent question. I think if we look at it and we just say right now that activity and overall sand volumes would be flat. So no other change in sand volumes just given our customer additions. I think we would be ranging between kind of 5%-10% in overall volume growth. And still, it's a little bit early days because we don't have our final capital plan from our customer group yet. But that would be ballpark. And then I think I do expect from our core customer base that we're going to see a little bit of growth, even if their well account and capital is flat. We'll just see a little bit of growth in increasing well intensity.
So kind of ballpark 5%-10%, I think, would be a good number just based on customer additions and then maybe a slight uptick on well intensities if capital was completely flat year over year.
Okay. Got it. And then one follow-up, I guess. How should we think about the contract structures in 2025 versus 2024, I guess, in terms of pricing for your major customers?
Yeah. I think how probably the really easy way to answer that is fairly consistent from 2024 to 2025 in terms of the amount under contract and the pricing. The customer base, obviously, every year changes a little bit with some acquisitions in the, or sorry, some consolidation of E&Ps in the market. But I would say it is fairly consistent on a year-over-year basis.
Okay. Great. Appreciate the responses. I'll turn it back.
Thanks, John.
Thank you and this concludes the question-and-answer session. I'd like to turn the conference back over to the company for any closing remarks.
Thank you, everyone, for joining us today. If anyone has any follow-up questions, please reach out to myself or Derren.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.