Source Energy Services Q2 2026 Earnings Report

Source Energy Services EPS Results

• Actual EPS: -C$0.43
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Source Energy Services Revenue Results

• Actual Revenue: $137.12 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Source Energy Services Announcement Details

• Quarter: Q2 2026
• Date: 7/29/2026
• Time: After Market Closes
• Conference Call Date: Thursday, July 30, 2026
• Conference Call Time: 9:30AM ET

Source Energy Services (TSE:SHLE) Ltd is a Canada based company engaged in the production, supply, and distribution of Northern White frac sand, as well as the distribution of other bulk completion materials not produced by the company. It provides customers with an end-to-end solution for frac sand supported by its Wisconsin mines and processing facilities, its Western Canadian terminal network and its last mile logistics capabilities. The company also offers storage and logistics services for other bulk oil and gas well completion materials and has developed Sahara, a proprietary wellsite mobile sand storage and handling system. The geographical segments of the group are the US Operations and Canadian Operations.

Source Energy Services Q2 2026 Earnings Call Transcript

Key Takeaways

• Negative Sentiment: Q2 results weakened amid slower Canadian natural-gas completion activity: sales volumes fell 24% year over year to 831,000 tons, revenue declined to CAD 137.1 million, and adjusted EBITDA dropped to CAD 18.5 million from CAD 35.2 million.
• Positive Sentiment: Stronger U.S. activity and higher oil prices drove a more than 60-fold increase in mine-gate sales, with robust demand expected to continue through year-end and volumes already being quoted into 2027.
• Negative Sentiment: Profitability was pressured by a shift toward lower-priced mine-gate and domestic sand, weaker-than-expected Peace River production, and elevated fuel costs at Taylor while the facility remains on temporary power.
• Positive Sentiment: Management expects Canadian activity to improve in the second half of 2026, particularly in liquids-rich plays, and reported a record Canadian wet-sand job exceeding 71,000 tons; additional wet-sand work is expected through the warmer months and into 2027.
• Positive Sentiment: Management sees a favorable longer-term demand outlook from LNG exports, pipeline expansion, condensate demand, and power generation, potentially increasing Western Canadian sand demand from roughly 8–9 million tons today to 15–16 million tons within five years.

Presentation

[Operator]

Good morning. Thank you for standing by. This is the conference operator. Welcome to the Source Energy Services second quarter 2026 results conference call. As a reminder, all participants are in a listen-only mode. 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 then zero. I would now like to turn the conference over to Scott Melbourn, CEO. Mr. Melbourn, please proceed.

[Scott Melbourn, CEO at Source Energy Services]

Thank you, operator. Good morning. Welcome to Source Energy Services second quarter 2026 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'd like to refer everyone to the financial statements in 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 CAD and metric tons. 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.

[Scott Melbourn, CEO at Source Energy Services]

The second quarter continued the trend of slower natural gas-based completion activity as Western Canadian natural gas prices remained weak. As a result of the weak commodity prices, our customers have planned or deferred a larger portion of their completion activity to the last half of this year. Over the balance of 2026, we are expecting Canadian activity levels to improve from the first half levels with a focus on liquids-rich plays. We have seen some play-specific completions canceled and some uncertainty related to M&A, which has resulted in us tempering our expectations with respect to overall Canadian volumes for 2026. Offsetting the Canadian market is a significant increase in mine gate sales as the increased oil prices have led to more completion activity in the lower 48 and an increased call for Northern White sand.

[Scott Melbourn, CEO at Source Energy Services]

Noteworthy items from the quarter include total sales volume of 831,000 tons, a 24% decrease from last year. Generated total revenue of CAD 137.1 million, a decrease from the second quarter of 2025 due to lower customer activity, a more than 60x increase in U.S. mine gate sales, and a significant increase in domestic sand sales. We realized gross margin of CAD 17.4 million and adjusted gross margin of CAD 29.8 million. Gross margins were impacted by lower sales volume, a shift in sales mix to more mine gate volumes, and a lower than anticipated production level at our Peace River facility. Adjusted EBITDA was CAD 18.5 million, a CAD 16.7 million decrease from the same period in 2025. During the quarter, we renewed our NCIB program. We completed the largest wet sand job in Canada to date, which pumped over 71,000 tons in 23 days.

[Scott Melbourn, CEO at Source Energy Services]

Subsequent to the quarter, I'm pleased to announce that Jeffrey Bowers has been appointed to the board of directors. Jeffrey is a seasoned energy executive with more than 25 years of leadership experience in the energy industry, spanning finance, capital markets, and corporate governance. With that, I will now turn it over to Derren.

[Derren Newell, CFO at Source Energy Services]

Thanks, Scott. In the second quarter, Source generated CAD 107.8 million in sand revenue. The average realized sand price decreased CAD 17.87 compared to the prior year due to the increased mine gate sales, which lowered the average price by CAD 12.34 a ton. The average price was also impacted by the increase in domestic wet and dry sand sales in the quarter. WellSite Solutions revenue was CAD 28.3 million for the second quarter, a decrease of CAD 10.9 million compared to Q2 last year. This decrease was driven by lower volumes delivered through Last Mile Logistics, reflecting lower customer activity levels. Sahara units in Canada were 45% utilized in the second quarter, and the Sahara units deployed in the U.S. remain fully contracted and 100% utilized. Terminal Services revenue decreased CAD 0.1 million compared to Q2 2025 due to lower chemical elevation volumes.

[Derren Newell, CFO at Source Energy Services]

Cost of sales, excluding depreciation, decreased by CAD 46 million for Q2, primarily due to lower sales volumes. The decrease also reflects lower production costs in Wisconsin and the change in sales mix to more mine gate and domestic sand, which have lower landing costs. These improvements were partly offset by the impact of lower production levels of Peace River, as that facility is working through some operational issues as it scales up. The Taylor facility continued to have higher than expected fuel costs as they were still on temporary power while we wait for BC Hydro to connect the facility to the grid. Excluding gross margins from mine gate, adjusted gross margins for Q2 were CAD 38.81 compared to CAD 44.49 in Q2 2025. The decrease reflects the shift in sales mix, weaker production performance at Peace River, and higher fuel costs.

[Derren Newell, CFO at Source Energy Services]

Partly offsetting this was the improved operational performance of the trucking group. I will note currency had a minimal impact on gross margins in the quarter. For Q2 2026, total operating and G&A expenses decreased by CAD 1.3 million. Operating expenses decreased by CAD 0.4 million, and G&A was down by CAD 0.9 million, both due to lower incentive compensation costs. Finance expense for Q2 2026 increased by CAD 0.4 million compared to 2025. The increase was mainly driven by higher interest on the ABL facility and higher interest on lease obligations due to the addition of heavy equipment. These increases were partly offset by lower interest expense on the term loan and due to its lower average principal outstanding and lower other interest costs. At quarter end, Source had available liquidity of CAD 27 million.

[Derren Newell, CFO at Source Energy Services]

Capital expenditures net of proceeds on disposals were reimbursements excluding expenditures for Taylor facility and customer-funded equipment, were CAD 13.6 million for Q2, an increase of CAD 5.9 million compared to last year. Growth capital expenditures, excluding construction for the Taylor facility and customer-funded equipment purchases, increased by CAD 3.7 million, largely attributed to expenditures of Peace River facility. Maintenance capital expenditures increased by CAD 2.2 million, primarily due to increased overburden removal. In the back half of the year, CapEx will be focused on customer-funded projects, overburden spending, and some smaller capital projects. Lease obligations increased from the prior year, largely due to the timing of the addition of heavy equipment for Peace River and higher renewal rates on Yellow Iron leases for mining in Wisconsin. With that, I'll turn it back to you, Scott.

[Scott Melbourn, CEO at Source Energy Services]

Thanks, Derren. For the remainder of the year, we are anticipating that our customers will maintain a flexible approach to their capital budgets as they deal with uncertainty and fluctuating commodity price, especially in the Western Canadian Sedimentary Basin, where we see natural gas prices continue to remain challenged. For our Canadian volumes, we expect a busier second half of the year with continued demand for wet and dry domestic Northern White. For the Lower 48, we expect the strong mine gate sales to continue for the balance of the year, and we are quoting volumes into 2027. As we look at industry activity in 2027 and beyond, the continued development in the Montney will be a key growth driver for the industry.

[Scott Melbourn, CEO at Source Energy Services]

Source has an unparalleled mine-to-well site services for both Northern White and domestic sand, which will continue to support market share gains in the Montney and specifically Northeast B.C. In addition to our offerings in frac sand and related logistics, we've expanded our chemical transloading capability, which we believe will be a growth area for Source. Over the longer term, we believe the macro picture has strengthened considerably, and the increased demand for natural gas and natural gas liquids driven by condensate demand, LNG exports, increased natural gas pipeline export capability, and power generation will drive incremental demand for Source's services. Source continues to focus on enhancing our industry-leading frac sand logistics chain, and we will continue to execute on a number of opportunities to grow the company and further our competitive advantage.

[Scott Melbourn, CEO at Source Energy Services]

In addition to growth in our core market, we continue to explore opportunities to diversify and expand our service offering and to further utilize our Western Canadian terminals. Thank you for your time this morning. This concludes the formal portion of the call. We'll now ask the operator to open the lines for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. To ask a question, 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 the keys. To withdraw your question, please press star then two. Our first question today will come from Nick Corcoran with Acumen Capital. Please go ahead.

[Nick Corcoran, Analyst at Acumen Capital]

Morning, guys, thanks for taking my questions.

[Scott Melbourn, CEO at Source Energy Services]

Morning, Nick.

[Nick Corcoran, Analyst at Acumen Capital]

Just the first question from me, you mentioned a wet sand frac in the quarter. Are there additional jobs like this in the pipeline? How do margins for wet sand compare to your traditional dry sand?

[Scott Melbourn, CEO at Source Energy Services]

Thanks, Nick. Good question. The answer to that first question is, we do have a number of wet sand jobs coming up in the queue. We do expect this trend to continue throughout the warmer months for the balance of this year. We do expect the trend to kind of pick up pace next year as well. In terms of margins for our wet and dry domestic, they're fairly similar. There's no negative to Source Energy Services for a wet sand versus a dry sand.

[Scott Melbourn, CEO at Source Energy Services]

The one win for Source Energy Services on wet sand versus dry sand jobs is when we look at the Peace River facility and we look at capital expenditures going forward, we do expect that there's going to be less capital required to meet sort of growing volumes if those volumes are growing on the wet sand of the equation versus the dry sand of the equation. I hope that answers your question.

[Nick Corcoran, Analyst at Acumen Capital]

That does. On Peace River, it sounds like there's lower production in the quarter. What's your read on that, and have you been able to ramp it up in the third quarter?

[Scott Melbourn, CEO at Source Energy Services]

The real driver behind the lower volumes at Peace River was a slower than anticipated start. Through the shutdown over the winter, we had improved some aspects of the wet plant, which the final touches on those were straggling into the washing season, we got a little less washing at the beginning of the season. We do expect as we continue to ramp the facility, that those issues will go away. That was the real driver behind the lower volumes at Peace River this year or this quarter, sorry.

[Nick Corcoran, Analyst at Acumen Capital]

Maybe one last question from me, just on the CapEx. What are you expecting for the full year?

[Scott Melbourn, CEO at Source Energy Services]

Derren, you want to take that one?

[Derren Newell, CFO at Source Energy Services]

I think we're sort of comfortable with our guidance that's out in the 30-40 range. We'll probably be towards the middle to upper end of that range, that's kind of where we're at.

[Scott Melbourn, CEO at Source Energy Services]

Nick, maybe I'll just add a little color. Our capital program, and I think as we mentioned in our comments last quarter, was very much front-end loaded. For the second half of the year, we expect a much smaller capital program. We actually expect a very small amount outside of overburden removal and the customer-funded capital.

[Nick Corcoran, Analyst at Acumen Capital]

Good color. Thanks. Took my question. That's all for me.

[Scott Melbourn, CEO at Source Energy Services]

Thanks, Nick.

[Operator]

Once again, if you'd like to ask a question, please press star then one. Our next question will come from John Gibson with BMO Capital Markets. Please go ahead.

[John Gibson, Analyst at BMO Capital Markets]

Morning. Thanks for taking my questions. Just on the wet sand trend, how is this impacting your volumes from Wisconsin? Obviously, the U.S. market has picked up. I just kind of wondering if it's able to sort of offset what you're seeing or what's been taken away from the wet sand jobs.

[Scott Melbourn, CEO at Source Energy Services]

Yeah. Specifically on the wet sand jobs, John, we see this as sort of interchangeable with dry domestic. The more wet sand jobs that are, or the more wet sand volumes that are hitting Source are probably impacting dry do`mestic more than they're impacting Northern White. With that said, we also see as a year like or a quarter like this where we see lower volumes, we're seeing some of our domestic sales impact what historically would be our Northern White sales. As we go forward and as I think we get a more normal quarter in terms of volume in Canada, I think that balances out a little more, we still expect a robust Northern White volumes and coupled with growing domestic wet or dry volumes.

[John Gibson, Analyst at BMO Capital Markets]

Okay, great. Second one, have you seen any, or I know it's probably a bit early, but have you heard any indications about 2027 capital programs from your customers?

[Scott Melbourn, CEO at Source Energy Services]

Yeah, we're a bit early on 2027 to be having those discussions. I think it's probably a little bit too early in the market. Our expectation for 2027 will be growth over top of the 2025 numbers and certainly over top of the 2026 volume numbers. We're a little early in the discussion period with our customers to confirm that.

[John Gibson, Analyst at BMO Capital Markets]

Okay, great. Last one from me. We know we've seen some positive third-party data around sand needs going forward in the basin with LNG demand rising. I guess where could you see peak demand for the basin over the next few years, I guess off the base of this year?

[Scott Melbourn, CEO at Source Energy Services]

Yeah. I think there's a number of parties that have kind of put out some sand forecasts. I think if we see all of the LNG export capacity, the pipe capacity, and the power generation for data centers or for other kind of come to fruition, I can see this basin growing from CAD 8 million - CAD 9 million, where it is today, to CAD 15 million - CAD 16 million at some point in the next five years. Obviously, that's why we mentioned on the call, we see the macro improving considerably and probably has improved considerably over the last three months. I think for overall sand demand in the market, it's looking very bright for Source and for the overall industry.

[John Gibson, Analyst at BMO Capital Markets]

Got it. Thanks a lot. I'll turn it back to you.

[Scott Melbourn, CEO at Source Energy Services]

Thanks, John.

[Operator]

This will conclude our question and answer session. I'd like to turn the conference back over to Scott Melbourn for any closing remarks.

[Scott Melbourn, CEO at Source Energy Services]

Yeah. Thank you for your interest in Source, and thank you for your time today. Hope everyone has a great day.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

Participants

Executives

• Scott Melbourn, CEO
• Derren Newell, CFO

Analysts

• Nick Corcoran, Analyst at Acumen Capital
• John Gibson, Analyst at BMO Capital Markets