Source Energy Services TSE: SHLE reported lower second-quarter revenue, volumes and adjusted EBITDA as weak Western Canadian natural gas prices reduced completion activity, while a sharp increase in U.S. mine-gate sales partly offset softer Canadian demand.
Chief Executive Officer Scott Melbourn said customers deferred or shifted a larger portion of their completion programs to the second half of 2026 amid low natural gas prices. The company expects Canadian activity to improve from first-half levels, particularly in liquids-rich plays, although it has tempered its expectations for total Canadian volumes because of canceled play-specific completions and uncertainty tied to merger-and-acquisition activity.
“Offsetting the Canadian market is a significant increase in mine gate sales,” Melbourn said, attributing the trend to higher oil prices, increased Lower 48 completion activity and greater demand for Northern White sand.
Quarterly Results Reflect Lower Activity
Source reported total sales volume of 831,000 metric tons, down 24% from the second quarter of 2025. Revenue totaled C$137.1 million, declining from a year earlier as lower customer activity outweighed growth in mine-gate and domestic sand sales.
The company generated C$17.4 million in gross margin and C$29.8 million in adjusted gross margin. Adjusted EBITDA was C$18.5 million, down C$16.7 million from the same quarter last year.
Melbourn said margins were affected by lower overall volumes, a sales-mix shift toward mine-gate volumes and production that was below expectations at the company’s Peace River facility. During the quarter, Source also completed what it described as the largest wet-sand job in Canada to date, pumping more than 71,000 tons over 23 days.
Chief Financial Officer Derren Newell said sand revenue was C$107.8 million during the quarter. The average realized sand price declined C$17.87 per ton from the prior-year period, including a C$12.34-per-ton effect from increased mine-gate sales. Higher domestic wet- and dry-sand sales also affected average pricing.
WellSite Solutions revenue was C$28.3 million, down C$10.9 million year over year, as lower customer activity reduced volumes delivered through Last Mile Logistics. Canadian Sahara unit utilization was 45% in the quarter, while Sahara units operating in the U.S. were fully contracted and 100% utilized. Terminal Services revenue declined C$0.1 million because of lower chemical elevation volumes.
Costs, Liquidity and Capital Spending
Cost of sales excluding depreciation fell C$46 million from the prior-year quarter, primarily reflecting lower sales volumes. Newell said lower Wisconsin production costs and greater sales of mine-gate and domestic sand, which carry lower landing costs, also contributed to the decline.
Those benefits were partly offset by lower Peace River production and higher fuel costs at the Taylor facility. Taylor remained on temporary power while awaiting connection to the BC Hydro grid, Newell said.
Excluding mine-gate gross margins, adjusted gross margin was C$38.81 per ton, compared with C$44.49 per ton in the second quarter of 2025. The decline reflected the sales-mix change, Peace River’s production performance and Taylor’s fuel costs, partly offset by improved trucking operations. Currency had minimal impact on quarterly gross margins, according to Newell.
Total operating and general-and-administrative expenses fell C$1.3 million, with lower incentive compensation reducing both categories. Finance expense increased C$0.4 million, driven mainly by higher interest on the asset-based lending facility and lease obligations associated with additional heavy equipment. At quarter-end, Source had C$27 million in available liquidity.
Capital expenditures, net of disposal proceeds and reimbursements and excluding Taylor construction and customer-funded equipment, totaled C$13.6 million in the quarter, up C$5.9 million from a year earlier. Growth spending increased largely because of the Peace River facility, while maintenance capital rose due to higher overburden removal costs.
Newell said the company remained comfortable with full-year capital-spending guidance of C$30 million to C$40 million and expected to finish near the middle to upper end of that range. Melbourn added that spending is expected to be much lower in the second half outside of overburden removal and customer-funded projects.
Wet Sand and Outlook
Management said wet-sand activity is expected to continue through the warmer months and increase further next year. Melbourn said the company has multiple wet-sand jobs in its pipeline and that margins on wet and dry domestic sand are “fairly similar.” He added that increasing wet-sand volumes could require less capital spending at Peace River than equivalent dry-sand growth.
Peace River’s lower output during the quarter resulted from a slower-than-expected start to the washing season, after upgrades to aspects of the wet plant extended into the season, Melbourn said. The company expects those issues to diminish as the facility ramps up.
For the remainder of 2026, Source expects stronger Canadian activity than in the first half, including continued demand for domestic Northern White wet and dry sand. In the Lower 48, it expects mine-gate sales to remain strong through year-end and said it is already quoting volumes for 2027.
Looking further ahead, Melbourn identified Montney development as a key industry growth driver and cited anticipated demand from condensate, LNG exports, expanded natural gas pipeline capacity and power generation. He said the company is also expanding chemical transloading capabilities and evaluating opportunities to diversify its services and further use its Western Canadian terminals.
Subsequent to the quarter, Source appointed Jeffrey Bowers to its board of directors. The company described Bowers as an energy executive with more than 25 years of experience in finance, capital markets and corporate governance.
About Source Energy Services (TSE:SHLE)
Source Energy Services 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.
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