Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services second quarter 2023 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After their presentation, there will be an opportunity to ask questions. To join the question queue, you may press Star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star, then zero. I would now like to turn the conference over to Scott Melbourn, CEO. Mr. Melbourn, please proceed.
Thank you, operator. Good morning, and welcome to Source Energy Services second quarter 2023 conference call. My name is Scott Melbourn. I'm the CEO of Source. I'm joined today by Derren Newell, our CFO. Today, Derren and I will cover the formal part of the call, and we will be available to answer any questions you may have. Before I get started, I'd 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, adjusted EBITDA, and free cash flow, which are non-IFRS measures as described in our MD&A.
Except for these items just mentioned, our financial information is prepared in accordance with IFRS. Source has had a strong second quarter operationally and financially, despite the impacts of the wildfires, floods, and rail disruptions, which delayed a number of our customer jobs. These delays ultimately ended up shifting approximately 100,000 tons of sales into the last half of this year. Highlights from the second quarter include sand sales volume of 702,000 tons and sand revenue of CAD 102 million, an 8.4% increase from the second quarter of 2022. On a per ton basis, sand revenue increased by 24% when compared to the same period last year. Total revenue was CAD 127 million, a 14% increase from the second quarter of 2022, and the third highest quarterly revenue generated since the inception of Source.
New operational records were set for the largest daily sand volume fed into a blender in a 24-hour period and for daily sand volume throughput at our Wembley terminal. Wellsite Solutions had another strong quarter, recording utilization of 82% for the Canadian Sahara fleet and 67% for the U.S. Sahara fleet. Last mile trucking saw a 48% increase in revenues and a 28% increase in tons hauled compared to the second quarter of last year. We realized gross margin of CAD 24.9 million and adjusted gross margin of CAD 30.2 million, increases of 51% and 39% when compared to Q2 of 2022. Net income for the quarter was CAD 2.7 million, a CAD 2.6 million improvement from the second quarter of 2022, when excluding the unrealized gain on derivative instruments recognized last year.
Adjusted EBITDA was CAD 20.4 million, a 38% increase from the second quarter of 2022 . During the quarter, we entered into a contract to build and operate Source's tenth Sahara unit. It's a unique deal where our customer will be fully funding the construction of the unit. Once the unit is constructed, it will be delivered to Alaska, where we will operate it for an initial term of three years. At the end of the three-year period, the agreement can be renewed, the customer can elect to purchase the unit at fair market value for use only in Alaska, or the unit can be returned to Source for use in the existing fleet. Sahara 10 is expected to be fully operational in the second quarter of 2024 .
Free cash flow for the second quarter was CAD 7.8 million, which was 408% higher than the CAD 1.5 million generated for the second quarter of 2022. This increase is due to CAD 5.6 million increase in adjusted EBITDA, reflecting improved adjusted gross margins compared to the prior year and lower net capital expenditures in the quarter. This is partially offset by an increase in payments for lease obligations and the associated interest expense due to an increase in renewal rates on rail cars and the impact of a weaker Canadian dollar on US-denominated contracts. As business performance continues to improve in 2023, and we continue to generate additional free cash flow, we will remain focused on reducing debt levels and ensure we have an appropriate amount of leverage in the business for the cyclicality of our industry.
We remain confident that we will achieve our debt reduction targets in 2023 and early 2024. With that, I will turn it over to Derren to provide a brief overview of our financial results for the quarter.
Thanks, Scott. Sand revenue for the second quarter of 2023 was CAD 102 million, an increase of CAD 8.4 million, or 9% over the second quarter of 2022. The increase was due to a 24% increase in average realized sand price. Excluding mine gate sales, the average realized sand price increased by CAD 29.33 per metric ton compared to Q2 2022.
While sand revenue realized from mine gate sales lowered the average realized sand price in the quarter by CAD 7.29 per metric ton, it did have a favorable impact on cost of sales and gross margins by improving production efficiencies and yields. Sand sales volumes were 98,000 metric tons below last year due to the impact of the fires and the floods. Wellsite Solutions revenue for the second quarter of 2023 was CAD 24 million, an increase of 46% or CAD 7.5 million compared to the second quarter of 2022. In the quarter, we trucked 28% more volume than we did a year ago and saw a 48% increase in trucking revenue. Sahara-related revenue increased 40%, due to a 22% increase in days utilized across the mining fleet.
Sahara units operating in the US generated a revenue increase of CAD 0.9 million, or 119% compared to the second quarter of last year, while the Canadian fleet generated increased revenue of CAD 1.1 million, or 26%. Terminal services revenue for Q2 of 2023 was CAD 1 million, a decrease of CAD 0.6 million compared to the second quarter of 2022. The decrease was due to a 1-time special order of ceramic proppant in the second quarter of last year. Cost of sales, excluding depreciation, increased by CAD 6.9 million in Q2 compared to the second quarter of 2022. This increase was primarily due to higher transportation costs for rail and trucking and a shift in terminal sales mix.
The weaker Canadian dollar on our US denominated costs also increased our cost CAD 5.15 per metric ton compared to the same period last year. These increases were partially offset by production efficiencies achieved, attributed in part to the introduction of an additional mesh size earlier this year. Gross margins increased by CAD 8.4 million compared to the second quarter of 2022. Excluding gross margins from mine gate volumes, adjusted gross margins were CAD 46.73 per metric ton, compared to CAD 29.07 per metric ton for the same period last year. The increase in gross margins arose from improved pricing and improved gross margins from Wellsite Solutions.
Despite a weaker Canadian dollar during the second quarter, adjusted gross margin was favorably impacted by approximately CAD 0.89 per metric ton because of the effect of movement in foreign exchange rates on our increased US dollar denominated revenue realized in the quarter. For the balance of 2023, we are in a naturally balanced FX position, we will continue to monitor FX exposure and actively manage if required. Total operating and general and administrative expenses in the quarter increased CAD 2.4 million to CAD 9.9 million. Operating expenses increased by CAD 1.1 million from the second quarter of 2022 due to higher equipment costs for repairs and maintenance, Peace River, the impact of an executive severance, and higher variable incentive compensation.
General and administrative expenses also increased CAD 1.2 million in the second quarter of 2023 compared to the same period in 2022, primarily due to higher compensation expense, the timing of recognizing variable incentive compensation in 2023 compared to 2022, and higher professional legal fees incurred. The timing difference in the variable incentive compensation is largely expected to resolve itself by year-end. Finance expense was CAD 9.2 million for the second quarter, a CAD 1.3 million increase over the prior year due to higher accretion expense on the new ABL facility, increased interest on renewed lease obligations, an increase fees on the standby letter of credit facility and other various interest charges. These increases were partially offset by lower interest expense from the ABL due to overall lower draws on the facility compared to the prior year period.
On June 30th, the principal outstanding on our notes was CAD 165.1 million, and Source had CAD 17.1 million drawn under its ABL facility, leaving CAD 13.6 million of available liquidity. Source's net capital expenditures for Q2 2023 were CAD 0.6 million. Source spent CAD 6.2 million, an increase of CAD 2.6 million compared to the same period last year. The increase in expenditure was primarily related to beginning the construction of Sahara 10, that Scott addressed earlier, and which has been fully offset by the receipt of our customer's first installment on that unit. Overburden spending was also slightly higher during the quarter.
We had excess equipment and property sales, which generated proceeds of CAD 3.3 million in Q2 2023. Management continues to assess equipment and other assets required to service our operations to ensure optimal levels are maintained on an ongoing basis. With that, I'll turn it back to Scott to wrap up the call.
Thanks, Derren. As we look ahead, we continue to believe strong industry activity levels will continue to favorably impact frac sand supply and demand fundamentals in the Western Canadian Sedimentary Basin. We are expecting a very strong third quarter, and as we've seen in prior years, we are awaiting more clarity from customers on fourth quarter activity level as they find a balance between budgeted expenditures and commodity price. Source believes the strong Canadian industry fundamentals, coupled with Source's leading service offerings and logistics capability, will continue to support market share gains and strong financial results for the remainder of 2023 and beyond. In the longer term, we believe the increased demand for natural gas, driven by power generation facilities, increased natural gas pipeline export capabilities, and LNG exports, will drive incremental demand for Source of services in the WCSB.
We continue to see an increased demand from our customers that are primarily focused on the development of natural gas and natural gas liquids properties in the Montney, Duvernay, and Deep Basin. This trend is consistent with Source's view that natural gas will be an important transition 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 logistic services to expand its service offering and further utilize its Western Canadian terminal network. Thank you for your time this morning. That concludes the forum portion of our call. We'll now ask the operator to open the lines for questions.
Certainly. We will now begin the question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star and two. The first question comes from Nick Corcoran from Acumen Capital Partners. Please go ahead.
Good morning, guys. Thanks. Take my questions.
Good morning, Nick. Morning.
Just a couple questions for me. You mentioned that wildfires and floods had an impact in the second quarter. Can you provide any indication if that has carried over into the third quarter?
Yeah. You know, as we mentioned, we had a number of jobs that were delayed due to the wildfires and/or, you know, the floods after the fact. You know, all of those jobs are transitional and then they weren't canceled, so most of them moved into Q3. I suspect we're gonna see, just because of the level of concentration of activity in Q3, for some of that work to then slide into Q4, just given the level of activity in Q3. You know, we expect all of those pads to proceed and will proceed in Q3 and/or Q4.
That's helpful. Then, in terms of spot prices, are you seeing any movement in the price of frac sand?
Yeah, no, we're, you know, we, we really, we really didn't see a lot of movement in, in Q2, which is actually a very positive thing for the frac sand market. Just given there are some lower activity levels in Q2 due to wildfires, and just due to the seasonality of Q2. If we were gonna see any weakness in spot price, we, we would probably see it in Q2. You know, we didn't, we didn't experience any weakness in, in spot price in, in Q2. So, you know, we really do view the, the spot price as, as stabilized, and we forecast it to remain fairly stable for the, for the balance of 2023.
Good. Then maybe one last question from me on the strategic priorities. I know you mentioned the debt reduction targets in your prepared remarks. How are you thinking of growth, CapEx and M&A going forward?
Yeah, you know what? I, I think, you know, we're, you know, right now very focused on reducing our, our leverage, and reducing the, the ultimate leverage in the, in the company to a, a level that, that we feel is gonna be sustainable in, in sort of all markets, up or down. You know, that, that's our number one priority. You know, with that, we also recognize there, there is an opportunity for growth, and we don't wanna stand still as a company. You know, as we look at, at, the Sahara 10, you know, build, you know, that's, that's a one example of, you know, how we're able to grow, and, and grow the company without impacting our cash flow and without impacting our, our ability to, to reduce our debt levels.
You know, we continue to focus on maybe some unique opportunities out in the market, where we can, we can maintain our, our desire to reduce our debt levels and still grow. You know, as we, as we get to the balance sheet in a, in a position to, that, that we like, you know, I, I think that at that point, you know, we, we have a number of opportunities, that we, we would look to deploy some growth capital. It really won't be until we get that balance sheet in a, in a position that we, that we wanted it.
That's good. Thanks. Thanks for my questions.
Thanks, Nick.
Once again, if you have a question, please press star and one . The next question comes from John Gibson from BMO Capital Markets. Please go ahead.
Good morning, guys. congrats on the solid quarter, considering the fire and weather impact. We just had a... I have one on the balance sheet. If you could maybe just give a sense, I mean, you've generated, you know, CAD 8 million in free cash flow this quarter. Maybe just give a sense if, if all things go according to plan, volumes sort of hold as the market is expecting, where do you, where do you see the balance sheet at year-end 2023? Then maybe as we look into 2024 when the facility or facility notes come due, what are your expectations for potential refinancing?
Yeah. Thanks, John, and thanks for the question. I'm going to let Derren weigh into that.
You know, I, I think what we're trying to do, John, is, you know, we want to take all of our free cash flow we can generate out of the business this year and apply as much as possible while we keep our liquidity in the right spot against the debt. You know, we think that'll have a, a noticeable impact on the, on the debt levels. We're also looking at other things that, that are on the balance sheet, where there's cash that we can access, and try to figure out how we can best get those sort of settled and then use that excess cash to begin to pay down notes as well. Without giving a number specifically, you know, we're really focused on it.
Ideally, we'd like to get this business down on the note side to about one times kind of EBITDA is the long-term target, so.
Okay, great. I'll turn it back. Thanks for the call.
Thanks, John.
This concludes the question and answer session. I would like to turn the conference back over to Scott Melbourn for any closing remarks.
Thanks, operator. I think we see one more question in the queue.
The next question comes from Josef Schachter from Schachter Energy Research. Please go ahead.
Thanks, Scott, for picking me up, and picking me up for the last couple questions. One, how much does a Sahara fleet or Sahara unit cost to build? Just trying to get an idea of the cost there for building that for Alaska.
Yeah. You know, the Sahara unit will. It will depend a little bit on what the total package looks like. Obviously, you know, for an Alaska package, you know, we have some cold weather items. For a Texas package, it looks a little different. You know, it will range kind of from the $ 3.5 million-$4 million for a total Sahara package.
Okay. you're up 82% utilization in Canada. Do you need to start contemplating adding this, another unit in Canada, given the growth from LNG and the activity in Northeast BC?
You know, I, I, I, I think the easy answer to that question is yes. You know, we continue to, to look, you know, and, look at the opportunities to add additional units to, to our Sahara fleet. You know, I think we're seeing opportunities, not only in, with the, the increase of activity level in, in Northeast BC, but we're also seeing some, you know, pull from, the, the customers in the U.S. for additional Sahara units. You know, like I said before, you know, we want to be very focused and deliberate. You know, the, the first priority will be to, to, you know, pay down debt and, and reduce leverage on the balance sheet. As...
When we get that into a position that we want it, then we'll look to additional units in the US or in Canada. You know, the, we do see opportunity for an additional unit or two in Canada to support the, the growth in Northeast BC. We also probably see an additional unit or two in the US to support growth in the, in the lower 48.
Super. My last one, I asked this with prior chief, in prior, discussions. You've got a fabulous logistics system. You've mentioned in the past that it might be worthwhile, to find businesses that could use the advantage of it and create extra revenue and, lower your operating costs. Has anything, material come out of that yet?
Yeah. You know, we continue to evaluate opportunities, and we continue to see a number of opportunities come out on that front. You know, we don't really have anything to report on that, you know, this quarter, and we're hopeful that we'll have, you know, some more opportunities to report on it next quarter. You know, we continue to look at the opportunities, and we continue to chase some of those opportunities.
Okay, great. Thanks for answering my questions, and congratulations on the improvement.
Thanks, Joseph.
The next question comes from Paul Mikalachki from Bloomberg. Please go ahead.
Hello, gentlemen. Congratulations on a very good quarter. All the challenges notwithstanding, I've been impressed how you've continued to execute and have raised the profile of Source Energy Services over the past couple of years. Again, yeah, we're hoping to see more re- visibility in terms of what metrics are needed, what numbers you need to hit in order to start paying down debt. One question, and there's been some change in terms of the registered holders of Source Energy Services. Can you comment on Jeff Belford's investment in the company?
You know, it, it... Paul, thanks for the question. At this time, I don't think we would comment on anyone's investments in the company or outside the company. You know, Jeff Belford is a board member and has been an investor in the company since really the inception of Source. He still remains a board member, and he still remains an active member of Source.
Excellent. Thank you very much, gentlemen.
Thank you.
At this time, we have no more questions in the queue. This concludes the question and answer session. I would like to turn the conference back over to Scott Melbourn for any closing remarks.
Thank you everyone for your time today. Please feel free to reach out to myself or Derren if you have any follow-up questions. Thanks, have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.