SHLE.TO(SHLE.TO)
SHLE.TO
Operator: Good morning, and thank you for standing by. This is the conference operator. Welcome to the Source Energy Services Second Quarter 2026 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to you, Scott Melbourn, CEO. Mr. Melbourn, please proceed.
Scott Melbourn: Thank you, operator. Good morning, and 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 be -- 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 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 the items just mentioned, our financial information is prepared in accordance with IFRS. 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 large portion -- 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. However, 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. Noteworthy items from the quarter include total sales volume of 831,000 tonnes, a 24% decrease from last year. Generated total revenue of $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 $17.4 million and adjusted gross margin of $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 $18.5 million, a $16.7 million decrease from the same period in 2025. During the quarter, we renewed our NCIB program, and we completed the largest wet sand job in Canada to date, which pumped over 71,000 tonnes in 23 days. 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: Thanks, Scott. In the second quarter, Source generated $107.8 million in sand revenue. The average realized sand price decreased $17.87 compared to the prior year due to the increased mine gate sales, which lowered the average price by $12.34 a tonne. The average price was also impacted by the increase in domestic wet and dry sand sales in the quarter. Well site solutions revenue was $28.3 million for the second quarter, a decrease of $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 $0.1 million compared to Q2 '25 due to lower chemical elevation volumes. Cost of sales, excluding depreciation, decreased by $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 landed 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 scaled 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 $38.81 compared to $44.49 in Q2 '25. The decrease reflects the shift in sales mix, weaker production performance at Peace River and higher fuel costs. Partly offsetting this was the improved operational performance of the trucking group, and I will note, currency had a minimal impact on gross margins in the quarter. For Q2 '26, total operating and G&A expenses decreased by $1.3 million. Operating expenses decreased by $0.4 million and G&A was down by $0.9 million, both due to lower incentive compensation costs. Finance expense for Q2 '26 increased by $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 $27 million. Capital expenditures, net of proceeds on disposals, reimbursements, excluding expenditures for Taylor facility and customer-funded equipment were $13.6 million for Q2, an increase of $5.9 million compared to last year. Growth capital expenditures, excluding construction for the Taylor facility and customer-funded equipment purchases increased by $3.7 million, largely attributed to expenditures at Peace River facility. Maintenance capital expenditures increased by $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: 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. And 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. 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 BC. In addition to our offerings in frac sand and related logistics, we have 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, natural gas liquids, 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 have and we will continue to execute on a number of opportunities to grow the company and further our competitive advantage. 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: [Operator Instructions] And our first question today will come from Nick Corcoran with Acumen Capital.
Nick Corcoran: Just the first question for me. You mentioned a wet sand frac in the quarter. Are there additional jobs like this in the pipeline? And how do margins for wet sand compare to your traditional dry sand?
Scott Melbourn: Yes. Thanks, Nick. Good question. Yes. And so the answer to the first question is, yes, we do have a number of wet sand jobs coming up in the queue. And so we do expect this trend to continue throughout the warmer months for the balance of this year, and 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. And so there's no negative to Source for a wet sand versus a dry sand. So the one win for Source on wet sand versus dry sand job 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. So that's -- I hope that answers your question.
Nick Corcoran: Yes, that does. And then on Peace River, it sounds like there's lower production in the quarter. What drove that? And will you be able to ramp it up in the third quarter?
Scott Melbourn: Yes. 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 were -- the final touches on those were straggling into the washing season. And so 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. And so -- but that was the real driver behind the lower volumes at Peace River this year or this quarter.
Nick Corcoran: One last question for me, just on the CapEx, what are you expecting for the full year?
Scott Melbourn: Derren, do you want to take that one?
Derren Newell: I think we're sort of comfortable with our guidance. It's out in the $30 million to $40 million range. We'll probably be towards the middle to upper end of that range, but that's kind of where we're at.
Scott Melbourn: And 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. So for the second half of the year, we expect a much smaller capital program, and we actually expect a very small amount outside of overburden removal and the customer-funded capital.
Operator: [Operator Instructions] Our next question will come from John Gibson with BMO Capital Markets.
John Gibson: 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 offset what you're seeing or what's been taken away from the wet sand jobs?
Scott Melbourn: Yes. Specifically on the wet sand jobs, John, we see this as sort of interchangeable with dry domestic. And so the more wet sand jobs that are -- or the more wet sand volumes that are hitting Source are probably impacting dry domestic, more than they're impacting northern white. But 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 the domestic -- our domestic sales impact our -- 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. And so we still expect a robust northern white volumes and coupled with growing domestic wet or dry volumes.
John Gibson: Okay. Great. Second one, have you seen any -- I know it's probably a bit early, but have you heard any indications about '27 capital programs from the customers?
Scott Melbourn: Yes. We're a bit early on '27 to be having those discussions. And I think there's probably a little bit -- it's probably a little bit too early in the market. Our expectation for '27 will be growth over top of the '25 numbers and certainly over top of the 2026 volume numbers. But we're a little early in the discussion period with our customers to confirm that.
John Gibson: Okay. Great. Then last one for me. We've always 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: Yes. I think there's a number of parties that have kind of put out some sand forecast. And 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 8 million to 9 million, where it is today to 15 million to 16 million at some point in the next 5 years. And so obviously, that's why we mentioned on the call, we see the macro improving considerably, and probably has improved considerably over the last 3 months. So I think for overall sand demand in the market, it's looking very bright for Source and for the overall industry.
Operator: And 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: Yes. Thank you for your interest in Source, and thank you for your time today. I hope everyone has a great day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.