Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services Q3 2023 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. 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 and 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 Q3 2023 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 review of the quarter. We'll immediately be question and answer. 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 EBITDA and free cash flow, non-IFRS measures, as described in our MD&A. Except for these items just mentioned, our financial information is prepared in accordance with IFRS.
Volumetrically, the quarter was slower than anticipated due to a number of our customers moving pads from September to October. These schedule changes were driven by various customer operational issues. Despite the lower volume, Source once again delivered gross margins, which led to improvements in Adjusted EBITDA over last year's Q3. The lower sales volume during the quarter has not changed our outlook for the year, and we are expecting one of the strongest Q4s we have seen in a few years. Highlights for the quarter include sand sales of 709,000 tons and sand revenue of CAD 102.2 million, a CAD 5 million increase from the Q3 of 2022. On a per ton basis, sand revenue increased 12% from the prior year.
Total revenue for the quarter was CAD 124.7 million, a CAD 4.8 million dollar increase from the Q3 of 2022. Strong records we realized from the Sahara fleets in both Canada and the U.S. Gross margin for the quarter was CAD 20 million, and gross margin 8%, which is a 50% compared to last year. With CAD 2.4 million dollar improvement over last year, if forward FX contracts recognized last year is excluded. From a balance sheet perspective, the improved business performance allowed us to reduce the face value of the total debt by CAD 17.1 million from the end of 2022, including the CAD 2.5 million of notes repurchased during the quarter. Subsequent to quarter end, we purchased and returned an additional 0.7 million of notes. Cash flow for the quarter was CAD 7.2 million dollars.
CAD 9.7 million dollar gain on FX contracts is excluded from the prior year. Free cash flow improved by CAD 2.5 million compared to Q3 of 2022. This improvement was driven by better gross margins and lower net capital expenditures in the quarter. Finance expenses were higher in 2023, as the August 2022 interest payment for the notes was delayed until after the closing of the ABL facility in the Q4 of last year. Payments for the lease obligation 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 U.S.-denominated leases.
As business performance continues to improve and we continue to generate additional free cash flow, we remain focused on reducing our overall debt levels to ensure we have an appropriate amount of leverage in the business. We remain confident that we will achieve our debt targets of funded debt to Adjusted EBITDA of 1.5 times or less by early to mid-2024. With that, I'll now turn it over to Derren to provide a brief overview of our financial results.
Thanks, Scott. Sand revenue for the Q3 of 2023 was CAD 102.2 million, an increase of CAD 5 million or 5% over the Q3 of 2022. The increase was due to a 12% increase in the average realized sand price. Excluding mine gate sales, the average sand price increased to CAD 40 per metric ton, Q3 2022. While sand revenue realized from the mine gate sales lowered the average realized sand price in the quarter by CAD 6.72 per ton, it did have an impact on cost of sales by improving production efficiencies and yields. Sand sales volumes were 43,000 below last year. Customer operational delays, predominantly in September.
These delayed sales will be completed in the Q4. Wells ite Solutions revenue for the Q3 of 2023 were CAD 21.7 million, which was consistent with realized in the Q3 of last year. Revenue was down marginally as customer delays resulted in slightly less volume being charged in the quarter. Sahara's operations in Canada set a monthly record for revenue in July, but were down slightly for the full quarter due to lower utilization. The Canadian improved performance from U.S. operations.
Terminal services revenue for Q3 was CAD 0.8 billion, a decrease of CAD 0.2 million compared to the Q3 of 2022. This reduction is due to a customer ending a storage arrangement with Source and the loss of rental income from the sale of the Berthold facility in Q2. Cost of sales, excluding depreciation, decreased by four point... compared to the Q3 of 2022. This decrease was due to lower sand volumes sold, lower transportation costs for rail due to lower fuel surcharges and operational. These savings were partially offset by a shift in terminal mix and the impact of some rail interruptions resulted in higher charge compared to the same period last year.
Gross margins increased by 8.6 million quarter of 2022, excluding CAD 9 per metric ton, compared to CAD 31 and 38 per metric ton for the same period, from improved pricing, the impacts of production efficiencies, and lower fuel surcharges, partially offset by increased trucking costs just discussed. Despite a weaker Canadian dollar during the Q3, adjusted gross margin terribly impacted by approximately CAD 0.37 per metric ton because of the effect of the movement in foreign exchange rates as denominated revenue. For the balance of 2023, we are naturally balanced in our FX position. We will continue to monitor our FX exposure and actively manage if required in the future.
Total operating general and administrative expenses in the quarter increased CAD 1.7 to CAD 8.4 million. Operating expenses increased by CAD 0.7 million from the Q3 of 2022 due to higher royalty costs, insurance costs, and higher incentive compensation expenses. General and administrative expenses also increased CAD 0.9 million in the quarter compared to the same period last year, primarily due to higher compensation expenses and incentive compensation expenses in 2023. Finance expenses were CAD 8.8 million for the Q3, which was comparable to the prior year, as higher accretion on the expense on the new ABL facility was partially offset by lower interest expense from the ABL facility due to the overall draws of the facility compared to the prior year.
As of the principal balance, outstanding on our notes was CAD 162.6 million, and Source had drawn CAD 12 million under its ABL facility, leaving CAD 17.9 million of available liquidity. In and after the Q3, Source has repurchased a total of CAD 9.6 million face value of its notes and generated a gain on debt extinguishment of CAD 0.7 million. Currently, the outstanding face value of the notes is at CAD 155.5 million. Source will continue to remain focused on the as it works on its current maturity, it's six months prior to the notes maturity of March 2025.
With the improving debt metrics, we're confident in executing our long-term plans for the balance sheet. Source's net capital expenditures for the Q3 were CAD 3.6 million, a decrease of CAD 0.8 million compared to Q3 2022, due to lower spending at Peace River year-over-year, being partially offset by higher spending on overburden removal. With that, I'll turn it back to Scott to talk about the outlook and wrap up the call.
Thanks, Derren. As we look ahead, we continue to believe strong industry activity levels will favorably impact frac sand, supply, and demand fundamentals in the WCSB. We are expecting a very strong four, Q4 this year as customers catch up on delayed work and finish their programs off for 2023. Source believes Canadian industry fundamentals, coupled with Source's leading service offering 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 services.
We see the completion of the Coastal GasLink pipeline as a positive step forward in LNG Canada becoming a reality in late 2024 and into 2025. We've also seen the positive momentum on Woodfibre LNG and other proposed LNG projects in Canada, which has the potential to drive additional demand for our products and services. Source continues to focus on enhancing our industry-leading frac sand logistics chain. We believe we have a unique opportunity in front of us 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 the 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 up the lines for questions.
Thank you. 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 will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. Once again, if you have a question, please press star then one on your telephone keypad. Please press star then one now. The first question comes from Nick Corcoran of Acumen Capital. Please go ahead.
Good morning, guys. I think you went over a lot of the questions I have in the prepared remarks, but just a question on what you're seeing in pricing, in terms of pricing in the spot market and how you expect that to translate into your results.
Yeah, good morning, Nick. Thanks for the question. You know, I think the market has remained pretty stable in the spot market pricing. And so we haven't really seen a massive movement upward as we cycle into the balance of this year and into 2024, that we'll start to see a little more movement in spot prices into 2024, and especially in Q1 2024, where you know, demand picks up or seasonal demand picks up. So, you know, we're expecting fairly consistent pricing for the balance of 2023. We're expecting a slight uptick in the spot prices and beginning in 2024.
With Coastal GasLink coming online, what are the discussions with your core customers being in terms of what they're forecasting for demand into 2025?
Yeah, I think as we look at, you know, 2024 and, you know, as we're getting an early look on programs from our core customers, you know, we do expect an uptick in the overall sand volume in 2024. And so, you know, we're cautiously optimistic with how 2024 is starting to shape up and how we're looking at it today. And so, you know, as we sit today, we certainly expect a slight uptick in 2024.
Thanks for talking to me.
Thanks, Nick.
The next question comes from Ed Sollbach of Spartan Funds. Please go ahead.
Hi, congrats on the quarter. I noticed at the top you referenced record monthly Sahara volumes. Is that so that is, that goes in the Wells ite Solutions bucket, is that right?
Yes, that's correct.
Okay. And is Sahara all of Wellsite Solutions?
No, our last mile logistics business also gets reported in Wells ite Solutions numbers.
Okay. Because, because if I look at Wells ite Solutions, it's down from last year. So does that mean in Q4 it's gonna be better, given you have the record monthly volume on Sahara? Or how much of Sahara is Wells ite Solutions?
Yeah, Wellsite Solutions, because it encompasses our last mile and Sahara, you know, it will be a bigger impact on a quarter-over-quarter or a year-over-year basis, will be driven by the Wellsite Solutions. And that's just the nature of, you know, the high revenue associated with the truck trips out to the wellsite. And so on any given quarter, you know, depending on the length of the trip from the terminal or from each site, you know, we'll have an outsized impact on Wellsite Solutions. So, you know, just looking at that line item won't give you a good gauge on, you know, the Sahara performance, which will have a bigger EBITDA impact on Wells ite Solutions, but a lower revenue impact on Wells ite Solutions. Does that make sense, Ed?
... Oh, okay. Okay. And how big is the, so getting into, like, how big is the Sahara? Just, the well site is CAD 21 million, was CAD 21 million for the quarter. Like, how big would the Sahara be?
It's not a number we're disclosing at this point, but.
Oh, okay. Okay, so just a couple line items I was interested in. If I look at G&A and operating, they were up 15% and 50% for G&A. That's a big jump. Like, so what's driving those numbers to go up and down? Like, and what do you see coming in for the year?
So in terms of OpEx, you know, as we said in the remarks, you've seen higher royalty costs in the year. We've had higher compensation expenses with improved both base compensation and incentive compensation. There's a bit of a timing issue how we recorded bonus programs between the two years, so that will start to level out in the Q4. And then we've had higher insurance costs year-over-year. On the G&A side, it's been more on the compensation piece, but we've also had higher professional fees year-over-year, just due to some things we've been working on. Where do we expect it to come in? I think probably Q3 run rates is a pretty good indication of Q4 levels, so.
Great. Well, thanks very much for that.
Thanks, Ed.
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. Any follow-up questions, feel free to reach out to myself or Derren.
This concludes today's conference call. You may disconnect your line.