Source Energy Services Q3 Earnings Call Highlights

Key Points

• Revenue rose 50% to CAD 188 million as sand sales volumes climbed 55% to 1 million metric tons; adjusted EBITDA increased CAD 6.6 million to CAD 26.9 million.
• Margins narrowed as Peace River ramp-up costs, higher diesel prices and customer/product mix pushed adjusted gross margin down to CAD 38.18 per metric ton from CAD 46.56 a year earlier. Management expects Peace River performance to improve in 2027.
• Management expects 2026 completion activity to be lower than 2025, with some customer work deferred to 2027, but sees higher activity and sand volumes next year. Domestic sand and last-mile logistics grew, while capital spending is expected to decline considerably in 2027.

Source Energy Services TSE: SHLE reported a 50% increase in third-quarter revenue as higher completion activity lifted sand sales volumes, though production costs at its Peace River facility and higher diesel prices weighed on margins.

Revenue rose to CAD 188 million, while sand sales reached 1 million metric tons, up 55% from the third quarter of 2025. Adjusted EBITDA increased by CAD 6.6 million to CAD 26.9 million, CEO Scott Melbourn said on the company’s earnings call.

Melbourn said the company expects full-year 2026 completion activity to be lower than in 2025, with activity slowing in the latter half of the fourth quarter and some customer pads deferred into 2027. Based on initial customer feedback, he expects higher activity and sand volumes in the Montney and broader Western Canadian Sedimentary Basin next year.

Margins pressured by Peace River costs

Adjusted gross margin, excluding the margin from mine gate sales, fell to CAD 38.18 per metric ton from CAD 46.56 a year earlier. CFO Derren Newell attributed the pressure in part to performance at Peace River and changes in customer and product mix.

Newell said cost of sales, excluding depreciation, rose CAD 55 million from a year earlier, reflecting higher sand and trucking volumes, increased Peace River production costs and higher diesel costs across operations. Increased domestic sand sales, which have a lower total landed cost, partly offset those factors.

Melbourn described the Peace River ramp-up costs as limited to 2026 and said he expects operational performance at the facility to improve in 2027. He also said he does not expect diesel prices to remain at the elevated levels seen in the latter half of the third quarter, though he acknowledged that fuel prices depend on factors outside the company’s control.

Domestic sand and logistics volumes grow

Sand revenue totaled CAD 143.8 million. The average realized sand price fell CAD 10.80 per metric ton from a year earlier as domestic and mine gate sales increased, Newell said. Domestic sales volumes rose 90%, while higher mine gate volumes contributed CAD 4.60 of the decline in the average price.

Well site solutions revenue increased CAD 19 million to CAD 43 million, driven by a 52% rise in last-mile volumes and longer hauls to well sites. Total truck volumes exceeded 774,000 metric tons during the quarter, Melbourn said.

Source’s 11-unit Sahara fleet had 67% utilization, and the company entered an agreement to deliver its third Sahara unit to Alaska. The unit will be the 12th in Source’s fleet and will operate under a long-term contract, Melbourn said.

Melbourn said demand for domestic sand has gained traction as rail fuel surcharges and other costs affect the price of imported sand. He expects Northern White sand to retain a place in the market, while near-term conditions continue to favor domestic supply. He also said higher oil prices have supported completion activity in the Lower 48 and increased demand for Northern White sand through mine gate sales.

Wet sand demand and spending outlook

Source’s well site teams completed four wet sand pads during the quarter. Melbourn said the company does not expect additional wet sand jobs for the balance of 2026 because of Western Canadian weather, but plans to resume work in early 2027, weather permitting.

He expects robust wet sand demand next year and said Source could add a couple of customers. Dry domestic and Northern White sand will remain in demand because wet sand cannot serve the market throughout the year, he said.

Net capital expenditures, excluding Taylor and customer-funded equipment purchases, were CAD 5 million in the quarter, down CAD 13.5 million from a year earlier. Melbourn said spending for the rest of 2026 will focus on overburden removal and minor maintenance. Although the company has not released a 2027 capital budget, he expects spending to decline considerably year over year as Source focuses on optimizing operations.

At quarter-end, the company had CAD 27.6 million in available liquidity, Newell said.

Melbourn also said a growing share of customers are sourcing sand directly rather than through pressure pumpers. He estimated that 75% to 80% of Source’s business is now directly sourced by exploration and production companies and suggested that share could rise to about 85% next year.

About Source Energy Services (TSE:SHLE)

Source is a company that focuses on the integrated production and distribution of frac sand, as well as the distribution of other bulk completion materials not produced by Source. Source provides its customers with an end-to-end solution for frac sand supported by its Wisconsin and Peace River mines and processing facilities, its Western Canadian terminal network and its 'last mile' logistics capabilities, including its trucking operations, and Sahara, a proprietary well site mobile sand storage and handling system.

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