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Edited Transcript of SHLE.TO earnings conference call or presentation 15-Mar-19 1:30pm GMT

Q4 2018 Source Energy Services Ltd Earnings Call

CALGARY Mar 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Source Energy Services Ltd earnings conference call or presentation Friday, March 15, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley J. Thomson

Source Energy Services Ltd. - CEO, President & Director

* Derren J. Newell

Source Energy Services Ltd. - CFO

* Joe Jackson

Source Energy Services Ltd. - SVP of Commercial Development

* Scott Melbourn

Source Energy Services Ltd. - COO

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Conference Call Participants

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* Daine Biluk

CIBC Capital Markets, Research Division - Associate

* Ian Brooks Gillies

GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure

* Jeffrey Eric Fetterly

Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst

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Presentation

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Operator [1]

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Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Source Energy Services 2018 Fourth Quarter Financial Results Conference Call. (Operator Instructions)

Thank you. Mr. Thomson, you may begin your conference.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [2]

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Thank you, operator. Good morning, and welcome to Source Energy Services' Fourth Quarter 2018 Conference Call. My name is Brad Thomson, and I'm the CEO of Source. I'm joined today by Derren Newell, our CFO; Scott Melbourn, our COO; and Joe Jackson, our Senior Vice President of Commercial Development.

The formal portion of the call will be covered by Derren and myself, and Joe and Scott will be available for questions in the question-and-answer portion of the call.

Before we get started, I'd like to refer everybody to the financial statements and MD&A that were posted to SEDAR and the company's new website last night. I'd also like to 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, metric tonnes, and we'll refer to adjusted gross margin, EBITDA and adjusted EBITDA, which are all non-IFRS measures that describe -- that are described in our MD&A. With the exception of these items just mentioned, our financial information is prepared in accordance with IFRS.

I'll begin by discussing Source's performance in 2018, and then I'll speak to how Source is positioned for the trends we're seeing in the market. Finally, I'll discuss our expectations for 2019.

I'll start with the key highlights for 2018, which included the following items: In 2018, we improved our year-over-year operating results and financial performance with record sand sales of 2.6 million metric tonnes and sand revenue of $342.4 million. This is an increase of 35% and 50%, respectively, year-over-year; we also saw a year-over-year increase in adjusted gross margin of 40% or $89.3 million.

We recognized an increase in adjusted EBITDA from $43.6 million in 2017 to $59 million in 2018, which is an improvement of 35% year-over-year, and we reduced our net loss from 2017 to 2018 by $6.1 million or 68% year-over-year.

In addition to these financial achievements, Source completed a number of expansions and improvements to its asset base in 2018. These facilities improvements will allow Source to continue to grow its business without the need for significant future capital expenditures.

Examples of these items include the facility expansion and improvement at each of our Wisconsin production facilities that enable us to produce more sand more efficiently. We also completed expansion -- the construction of the Fox Creek terminal, which is the first and only unit train-capable facility in the Duvernay. And we completed additional storage and rail facilities at Wembley, making Wembley capable of servicing 2 unit trains at a time. This makes the facility the largest frac sand terminal in Western Canada. And in 2018, we also expanded our fleet of Sahara units to 6, with the sixth unit now being deployed to the Marcellus. And our seventh unit was completed in early 2019, and it was also deployed to the Marcellus.

In addition to the significant improvements to our assets, 2018 also saw us secure additional direct contracts with leading oil and gas companies that are active in the Montney and Duvernay. Our new contracts, including a long-term contract to Shell Canada and another contract with a multinational upstream company, are both contracts for frac sand. But just as importantly, these contracts provide to the companies the opportunity to receive logistic services from Source over the term of the contract.

And finally, in 2018, we improved and strengthened our balance sheet, providing the company with greater security in the face of market uncertainties, along with the ability to be opportunistic in the pursuit of strategic growth opportunities.

Improvements to our balance sheet include: issuance of an additional $50 million or 10.5% senior secured first lien notes that are due December 15, 2021, which were issued at an effective yield of 7.95%; we also increased our credit facility from $70 million to $88 million. This expanded credit facility was undrawn at year-end, and we had $4.6 million of cash on hand at the end of the year.

Looking specifically at the fourth quarter of 2018. It's well known to everybody on the call that the fourth quarter of 2018 was challenging for the entire industry. Although the quarter started out with a robust work schedule, completion activities quickly slowed due to a combination of E&P, budget exhaustion and the negative impacts of very wide price differentials for Canadian crude.

This fourth quarter slowdown wasn't isolated to Source or isolated to the WCSB as budget exhaustion and pipeline egress issues were experienced by E&P companies across North America.

Sand sale volumes in the fourth quarter of 2018 were just 373,000 metric tonnes, which was 33% lower than the same quarter of 2017 and 49% lower than the third quarter of 2018. But as previously announced, sand sales rebounded in Q1 of 2019.

In the fourth quarter of 2018, U.S. mine gate sales only represented 15% of our sales compared to the 30% that they represented in 2017. Looking ahead to 2019, we've now signed contracts with customers in the WCSB that will result in Source selling products that were previously sold in our mine gate in 2018 at better margins than the current mine gate price will allow. With these contracts, we're forecasting a decrease in our mine gate sales in 2019 and an increase in the percentage of our sand that's sold through our logistics network in Canada.

Looking specifically at our financial results for the quarter. Source had an adjusted EBITDA loss of $3.2 million, which was a decrease of $16.3 million when compared to the $13.1 million of adjusted EBITDA recognized in the fourth quarter of 2017. The decrease in EBITDA was almost entirely a result of the lower sand sales volumes. It was only partially offset by a higher average realized selling price recognized due to lower mine gate sales.

Fixed components of our sales, which are predominantly rail car leases, also impacted the results for the quarter.

I'd now like to turn our attention to our outlook for 2019. First, by speaking to expected activity levels and trends in the WCSB, and then about how Source is responding to create value for both customers and shareholders.

Source continues to see operators move into manufacturing mode in the Montney or Duvernay. While the first of these customers were the larger, more established companies, we're now also having conversations with numerous other well-capitalized smaller companies that are moving into this style of completion program.

Similar to our larger customers, these small customers require an efficient, reliable supply of frac sand for their manufacturing life completion programs. They regularly come to us because of how our distribution network and our logistics capabilities differentiate us from other frac sand suppliers who generally only focus on selling the commodity.

In addition to the increase in number of companies that are moving into manufacturing mode, we've also witnessed an increase in frac efficiency on the jobs we serve.

The increase in efficiency doesn't change the amount of sand that's used for each well, but it certainly changes the amount of sand that's being required each day. This increase in efficiency is resulting in a significant increase in the amount of profit required by operators at the well site each day. And it highlights our unique ability across the basin to move records amounts of frac sands to the well site for our customers.

Trend towards the fast use of large volumes of sand has and will continue to put a spotlight on our logistics capabilities, making Source's unit train-enabled, high-storage capacity terminals as well as its Sahara units more valuable than ever before. This trend has also allowed us to win new customers who were previously using local sand as our solutions offer more value to E&P customers when all the factors are considered.

These sales are delivered from our terminal networks with the majority also involving Source's last mile logistic services. It's our view that as you look forward, the sales that involve logistic services will be in higher demand, and as a result, be more stable than mine gate sales or other spot sales of frac sand.

As I previously mentioned, regardless of the slowdown in completion activities that occurred in the fourth quarter of 2018, we're also seeing a rapid resumption of activities in the first quarter of 2019. This trend is particularly evident with our 4 large contracted E&P customers. These contracts position Source to increase sales in the WCSB when compared to the fourth quarter, and provide an improved sales mix for the first quarter of 2019.

As always, in oilfield services, there's some risk that these parties will slow down their plans for the rest of 2019, but we feel that this is less likely to occur given the size and the nature of our customers.

As I mentioned earlier, Source has deployed 5 Sahara units in the WCSB under various arrangements, and in late Q4, we opened up our first U.S. field solutions location in the Marcellus, and we deployed our sixth Sahara unit to the region.

Based on the positive market reception to date, we've also delivered the newest unit in our fleet, Sahara unit #7 to the Marcellus, and we expect it to be available for work in the coming weeks.

As with all our other units, the decision of where we deploy Sahara 8, which is currently in construction, will be driven by customer demand. We expect that the location of the unit will be finalized in late March, and if we could secure the correct contractual arrangements for the Sahara units, then we may commit to build additional Sahara units after the eighth unit.

On the topic of capital spend, our 2019 capital spend program will consist of a modest amount of maintenance capital expenditures and capital for additional storage at Fox Creek, which is underpinned by a long-term dedicated contract.

The reduced capital program in 2019 will put Source in an ideal position to generate increased free cash flow in 2019.

On other corporate news, yesterday, our board approved the amendment of our normal course issuer bid program, which to date has seen 615,000 shares purchased by the company at a cost of $1.3 million.

The amendment to the program will allow Source to acquire an additional $1.6 million of common shares, which today's price should represent around 1.4 -- 1.54 million common shares.

Of course, of the amount of capital that we are authorized to apply to our NCIB program is governed by the restrictions in our current note trust indenture.

Finally, before I pass the mic over to Derren, I want to welcome Mick MacBean and Carrie Lonardelli to the board, and thanks to Hanlon for taking over as Chairman of the Board as Cody Church departs our board. I'd also like to thank Cody Church for all his contributions to the company over the last 5 years.

Now I'll turn things over to Derren Newell, who will provide you with more detail on our 2018 results.

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Derren J. Newell, Source Energy Services Ltd. - CFO [3]

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Thanks, Brad. Source recorded a net loss for the fourth quarter of $14.8 million or $0.22 per share. Due to the lower sales volumes and additional depreciation, this was a decrease of $13.7 million when compared with the fourth quarter of 2017. On a year-to-date basis, Source had a loss of $2.9 million compared to a loss of $8.9 million for the prior year as the impact of higher sales volumes and prices was partially offset by higher depreciation on assets acquired part way through 2017.

Source's revenue in the fourth quarter 2018 decreased by $21.1 million or 28% compared to the fourth quarter of 2017. Sand revenues decreased by 29% or 184,192 metric tonnes decrease in sand volume was partially offset by a 6% increase in the average realized price due to lower mine gate sales and the impact of a weaker Canadian dollar on the U.S. denominated sales.

Compared to the third quarter of 2018, Q4 sand revenues decreased by $54.3 million, owing to a 49% decrease in sand sales volumes, which was compounded by a $14.73 per metric tonne decrease in the average realized sand price because of an increase in mine gate sales in the fourth quarter 2018. Mine gate sales represented 15% of sales in the fourth quarter versus just 6% in the third quarter of 2018.

For 2018, sand revenues have increased by $114 million due to a 34% increase in sand volumes and an 11% increase in realized sand prices compared to full year 2017. Wellsite solutions revenue for the fourth quarter of 2018 decreased by $3 million compared with the fourth quarter of 2017 due to a 13% decrease in trucking revenues and a 51% decrease in Sahara revenue as a result of lower activity levels in the WCSB.

Wellsite solution revenue decreased by $14.6 million sequentially, primarily due to a 44% decrease in Sahara-related revenues and a 72% decrease in trucking revenues, as the volumes were 49% lower when compared to third quarter of 2018.

Compared to 2017, 2018 wellsite solution revenues increased by $12.4 million due to a 38% increase in trucking revenues and an increase in Sahara-related revenue due to the growth of the fleet.

Adjusted gross margin in the fourth quarter of 2018 was $18.64 per metric tonne, including a $5.33 per metric tonne impact of mine gate sales. This was $12.97 lower than the adjusted gross margin realized in the fourth quarter of 2017 due to the impact of lower sales volumes and the fixed cost impact of cost to sales.

For the fourth quarter -- for the year, the realized adjusted gross margin is $34.87 per metric tonne, including a $2.70 per metric tonne impact of mine gate sales. The adjusted gross margin has increased by $1.45 per metric tonne compared to 2017.

Operating and general and administrative expenses for the fourth quarter were $10.5 million, which was $3.2 million higher than the third quarter of 2018, and were $2.2 million higher than the fourth quarter of 2017 due to the impact of higher onetime selling costs. Finance expenses increased by $0.4 million to $6 million in the fourth quarter compared with the same period in 2017, due primarily to an increase in interest costs on the additional $50 million of notes issued during the second quarter of 2018.

Compared to the full year, finance cost decreased by $7.4 million as a result of not having additional accretion from the partial note repayment that occurred in 2017 and decreased professional fees related to debt equity transactions in 2018 versus 2017.

Source has very good liquidity at year-end as we had $4.6 million of cash on the balance sheet and we were only using our asset-backed loan facility to support $19.5 million of letters of credit. We have issued -- leaving us with $36.2 million of liquidity available. As we experienced a slowdown in the fourth quarter, the collection of trade receivables in the normal course provided liquidity and positioned us to resume our growth in the first quarter 2019.

Source recorded a tax recovery in the fourth quarter of 2018 of $0.4 million compared to recovery of $2.1 million in the fourth quarter of 2017. The reorganization in the April of 2017 changed Source's organizational structure from a series of partnerships to a corporate structure which caused the more traditional tax provision to begin being reported. Source has not recorded any current tax expense in 2018.

Capital expenditures for the quarter were $19.1 million, which focused on additional Sahara unit builds, other optimization projects at the plant as well as overburden removal.

For all of 2018, Source spent $65.6 million on capital expenditures, net of proceeds, in the amount of $2.4 million from the disposition of excess equipment.

Thank you for your time this morning, and that concludes the formal portion of our call. We now ask the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Daine Biluk from CIBC World Markets.

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Daine Biluk, CIBC Capital Markets, Research Division - Associate [2]

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Do you guys have any plans in place to idle production at your mines in 2019 outside of the normal seasonal fluctuations?

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [3]

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No, we don't, Daine. Right now, we need to take a look at our sales book rolling into 2019. We'll be operating in all 3 of our facilities in order to meet the demand we're seeing in Canada. Yes, because it's a combination of 2 things. Of course, it's volume and it's also the mass seismic, so we have to provide to our customers. So we'll need all 3 facilities and we've built that into our plans.

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Daine Biluk, CIBC Capital Markets, Research Division - Associate [4]

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Okay. And then just, I mean kind of part of it just for a modeling standpoint. In the fourth quarter, was there much in the way of 100 mesh sales?

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Joe Jackson, Source Energy Services Ltd. - SVP of Commercial Development [5]

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Daine, this is Joe Jackson. In the fourth quarter, we didn't have a lot of U.S. mine gate sales, which was a driver of 100 mesh sales for us in 2018. As we look to 2019, we now have committed customer demand, 400 mesh in Canada, and you'll see a larger percentage of our sales through our terminals in Canada due to those changes in customer and mesh size demand.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [6]

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Good. Yes. So what Daine was referring to is, in the U.S., of course, 100 mesh sand is used quite commonly, particularly in down the Permian and parts of Texas. We don't see a lot of 100 mesh sales in Canada. It represents probably less than 10% of the total sales in Canada. And a lot of it actually, coincidentally, a lot of the local sands that are produced in Canada are very fine, so as a result, they have a hard time finding market for that product in Canada. In April though, we do have a contract with one of our customers which will see us move some of the 100 mesh sand that we have in Wisconsin up into Canada for that particular customer.

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Daine Biluk, CIBC Capital Markets, Research Division - Associate [7]

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Okay, that's great color. And just the last one from me. To begin the year, has the Sahara fleet returned to work pretty quickly? Or was there a slow start in January at all? I'm just trying to get a sense of how we should be thinking about utilization in the quarter.

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Scott Melbourn, Source Energy Services Ltd. - COO [8]

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Daine, it's Scott. Maybe I'll take a stab at that one. In the first quarter, we saw a -- the fleet and the overall activity return very rapidly. And so we really didn't have any hiccups in the first quarter other than the kind of seasonality of the first 7 days are always slow in January. So we resumed activity and we've had fairly solid activities since the beginning of January.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [9]

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So Daine, I'm just going to jump on top of that a little bit and just elaborate on something I had in my script. One of the things we did see in February is we had some banner days in February, and that's largely due to the increased efficiency that we're seeing on the frac jobs in Western Canada, and the fact this is happening all across North America. In order to meet the daily requirements on some of these new jobs, you really have to have a lot of logistics and distribution capabilities. So where we've been able to meet the demand of these really highly efficient fracs. But going forward, as the market comes back, this is going to be a requirement for the industry that you have to have big distribution and logistics capabilities to meet the daily requirements of sand, which a year-or-so ago, you would see 1,000 or 1,500 tonnes of sand used on a wellsite. Not unusual to see twice that used on a wellsite today.

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Operator [10]

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Your next question is from Jeff Fetterly from Peters & Company.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [11]

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On the CapEx side, I know you talked about some modest spending this year, but can you give us a sense on the maintenance capital piece, the expansion at Fox Creek, and then what range of outcomes you're looking at for the Sahara units?

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Scott Melbourn, Source Energy Services Ltd. - COO [12]

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Yes, absolutely. Yes, Jeff, and it's Scott here. Maybe I'll take a first stab at that. So for 2019, we are looking at a -- the expansion of the Fox Creek which is a part of our contract for that region and that will be our really only growth capital that we have slated in for the program right now. In terms of the maintenance capital, the lion's share of our maintenance capital is overburden removal, and so that's going to range in about $6 million or $7 million. And then we just have the remaining portion, which would be our traditional maintenance capital, which is repairs and maintenance either on the Sahara fleet or at the production facilities or at the terminal. So all told, we're looking at a capital program of about $20 million to $23 million, with the expansion of Fox Creek and then our maintenance capital piece of that. And the variability will be in the amount of overburden or mine activities that we develop. In terms of the range of outcomes that we have for expansion of that capital program, we're really just targeting Sahara units. And as Brad mentioned in the prepared remarks, if we have the correct contractual commitments, we will commit to expanding the Sahara fleets. So just as a background, we have 5 in the Western Canadian Sedimentary Basin, we have 2 in the Marcellus right now, and we have 1 that is really yet to be decided where it will go, and that will be driven by customer demand. The -- a couple of things that we are seeing is we're excited about the opportunity in the Marcellus. And we've got the units out there now and 1 unit working and the customer feedback has been very good. So we expect to have a fairly nice opportunity in the Marcellus. And when we certainly still have more opportunity in the Western Canadian Sedimentary Basin, depending on activity levels in the back half of the year.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [13]

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Great. Yes, Jeff, I'm just going to dog pile on this just a little bit. Of course, we're constructing Fox Creek in the middle of a pretty -- we were constructing in the middle of a pretty severe winter, which is never a fun thing to do and it results in additional costs, but we still don't expect that our total capital spend will exceed that $23 million that we had put out there earlier.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [14]

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And that $20 million to $23 million range includes just the 8 Sahara units?

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [15]

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Correct. Correct.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [16]

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What sort of visibility or contractual commitments do you have in place for either of the Marcellus units at this point?

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Joe Jackson, Source Energy Services Ltd. - SVP of Commercial Development [17]

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Jeff, it's Joe Jackson here. Right now, we're out working on a term purchase order with a service company. And our expectation is that we're going to continue working with them throughout the year, but that isn't a firm commitment at this time. And then we're looking at bringing the next unit out for the same customer under terms that will be similar. So just like with sand, there's a lot of uncertainty in the market. But as Scott mentioned, what we're learning through our first couple months of operations out there is the significant value that Sahara adds to the Marcellus, specifically given the pad size constraints that are prevalent in the Marcellus. So we've got just the right mousetrap for the job and as sand intensity and daily pour rates increase, we're seeing how Sahara creates a lot of value in that basin, particularly by reducing truck rosters and by helping to create a more dense wellsite. So we're very, very encouraged that we could come back here next quarter and provide some updates on the contract side. And again, we're going to look for the correct contractual commitments if we're going to expand our capital on Sahara this year.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [18]

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In your comment earlier about Sahara utilization recovering or rebounding in Q1, is that more along the lines of what we've seen in recent quarters of 70-plus percent? Or is there still a lag compared to previous utilization?

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Derren J. Newell, Source Energy Services Ltd. - CFO [19]

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Yes -- no. It's the same. In fact, with some our customers are better, some of our units are better because our customers will lock them up for long periods of time. When you're dealing with the multinationals, quite often what they'll do is they'll say, "Okay, we need 1 or 2 Sahara units." And they'll contract them, not just for a month at a time, but take them for many months at a time to meet their needs for the entire year or their entire program anyways. So yes, it's going to be at least as good if not better than previous utilization.

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Jeffrey Eric Fetterly, Peters & Co. Limited, Research Division - Principal and Oilfield Services Analyst [20]

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Last question, just on the pricing side. I know you referenced in Q4 this shift in mix to more spot, and obviously, spot market weakness. What have you seen in terms of your mix in Q1? And what are you seeing in leading edge pricing right now?

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [21]

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Again, let's -- let Joe fill in on some of the details, but just at a high level, Q4 wasn't softening of the soft spot market. It was complete evisceration or evaporation of the spot market. It disappeared south of the border and it disappeared in Canada, so it did not -- there was not a spot market. So our sales were the sales under contract and parties that didn't have sales available to them under contracts, of course, weren't selling sand. As we come into Q1, things have started to get tight again in the U.S., particularly coming out of the winter season as a lot of people weren't producing sand. So we've seen the spot market come back there. And right now, in Western Canada, there is a very robust spot market if we've got it, the right sand available in the right place. Do you want to add anything on, Joe?

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Joe Jackson, Source Energy Services Ltd. - SVP of Commercial Development [22]

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Yes, thanks, Brad. So the mix in Q1, Jeff, we're seeing a heavy skew towards contract sales versus spot sales, and that's common. Programs in Q1 are fairly robust. A few things we're seeing that are supporting the continued growth in Source's market share in Canada are, as we've mentioned, the increased daily pour rates that really highlight the capabilities of our logistics network in Canada, but also our customer mix. And so for the rest of the year, we're seeing somewhere between 80% to 85% on forecast of our sales going to our contract customers for Canada, and that's encouraging. Now there is also, as has been shared by some of our public peers, a resurgent demand for Northern White sand from U.S. markets. And so we'll participate opportunistically in mine gate sales as those opportunities come up, but we are seeing year-over-year, a shift towards more contract sales for Source.

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Operator [23]

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Your next question is from Ian Gillies from GMP.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [24]

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As you went through Q4 and sales volume started to deteriorate, were you able to identify any places where you could potentially pull on the fixed cost structure to create some margin tailwinds as we head into 2019 to improve profitability?

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Joe Jackson, Source Energy Services Ltd. - SVP of Commercial Development [25]

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Ian, it's Joe. It's a great question. And historically, when Canadian demand has slowed, Source has looked to pursue U.S. opportunities to cover some of our fixed costs. And as was well documented in the markets, Q4 just had a massive slowdown from E&P budget exhaustion in the U.S. and then some takeaway constraints in the Permian. So that lever was uniquely not available to Source last year. As we look to 2H '19 activity in the U.S., we're expecting a significant change or de-bottlenecking of the Permian as well as some robust plans for other markets. So we think that if there is slowdown in Canadian activity this year, we'll have more opportunities available to us to cover fixed costs than we had last year.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [26]

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So Ian, one of the things that we did do, I mean yes, Q4 was a tough quarter for everybody. But one of the things we did is we used it to our advantage and we built about 190,000 tonnes of inventory in the basin. And as a result of that, that basically transferred right into availability of sand in Western Canada in Q1. So it actually worked out fine for us. It doesn't smooth the EBITDA profile but it definitely smooths things as far as operations capabilities go in the middle of winter.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [27]

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And that does lead into my next question. I mean there was obviously a big build in days of inventory or inventory in absolute terms. Do we need to be concerned at all? Or is there any about sales that are going to have come out at low margin just to reduce inventory levels or for a product that may not be in demand in Western Canada?

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Scott Melbourn, Source Energy Services Ltd. - COO [28]

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Yes, Ian, maybe I'll take a stab at that one. No, there isn't any concern about that. And our concern in Q1 is more on maintaining our inventory level given the backdrop of a very cold winter and the ability to -- for us to keep up with a robust demand in Q1. So we really don't have concerns on the inventory front of it moving and the concerns and inventory front will really shift over to the concern that we can maintain the inventory levels in the basin that we need.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [29]

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I'll say that another way, Ian. The 190,000 tonnes of storage that we had in December, plus every pound of sand that we could move into the basin in Q1, was needed to serve our customers' programs.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [30]

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Okay. G&A stepped up pretty materially quarter-over-quarter in Q4. I mean, is $10.5 million a quarter a reasonable run rate moving forward? Or should we expect that to kind of revert back into that $7 million to $8 million range?

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Derren J. Newell, Source Energy Services Ltd. - CFO [31]

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So Ian, I would actually look to the annual number and -- as better guidance. Fourth quarter, as we said, had some onetime selling cost adjustments in it. So if you looked at the $33 million on an annualized basis, that would be a better representation.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [32]

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Yes. It's closer to your $8 million there, Ian.

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Ian Brooks Gillies, GMP Securities L.P., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [33]

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Okay. And then there's been some public disclosures about Source and Tidewater looking at crude-by-rail in the Montney so on and so forth. Can you maybe update us on where you are at with -- I mean where you're at, I guess in that endeavor?

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Joe Jackson, Source Energy Services Ltd. - SVP of Commercial Development [34]

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Yes. I mean, the -- just so that people are aware, Source is actually diversifying on a few different respects. So our facilities are ideal for crude-by-rail and ideal for other commodities other than just frac sand. We always consider frac sand to be our first vertical, basically, for our distribution network. But where we're at basically is we've gone through an approval process with the town of Wembley, and we are in that approval process and we expect the permits to be issued in the next few couple weeks or 3 weeks. And then we'll be in a position to go down the path there pretty quickly on that facility. Crude-by-rail facility that we're planning on will be done in phases with Tidewater. Tidewater being the party that will be gathering barrels and we'll be the party facilitating loading those barrels to rail cars. But very minimal capital expenditure required on our facilities. And that capital that is required is being spent by our partner.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [35]

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With that, I think we don't have any additional people on the phone, do we?

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Operator [36]

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No further questions. Please proceed.

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Bradley J. Thomson, Source Energy Services Ltd. - CEO, President & Director [37]

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Great. Well, that concludes our call for today. Thank you very much for joining the Source Energy Services Q4 2018 Conference Call. If you have any calls -- questions, please don't hesitate to call any of the members of the management team, myself, Derren Newell, Scott Melbourn or Joe Jackson. We're all available this morning at our desks. So thank you very much, and have a good day.

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Operator [38]

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Ladies and gentlemen, this concludes today's conference call. We thank you for participating and ask that you please disconnect your lines.