Nine Energy Service, Inc. (NYSE:NINE) Q2 2023 Earnings Call Transcript

Nine Energy Service, Inc. (NYSE:NINE) Q2 2023 Earnings Call Transcript August 4, 2023

Operator: Greetings, and welcome to Nine Energy Service Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to Heather Schmidt, your host. Thank you.

Heather Schmidt: Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the second quarter of 2023. With me today are Ann Fox, President and Chief Executive Officer; and Guy Sirkes, Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward-looking statements reflecting Nine’s views about future events. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are also included in our second quarter press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann.

Ann Fox: Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our second quarter results for 2023. Revenue for the quarter was $161.4 million, which was within our original guidance of $158 million to $166 million. We generated adjusted EBITDA of $21.7 million, reflecting an adjusted EBITDA margin of 13%. Diluted earnings per share was negative $0.08 and ROIC for the quarter was 12.9%. We continue to see activity declines throughout the quarter. Since the peak in Q4, the rig count has declined by over 100 rigs or approximately 14% through Q2 with approximately 74% of these coming out of the market in the second quarter versus the first. These rig declines have resulted in additional pricing pressure throughout the quarter, affecting all of our service lines.

While activity and pricing declines have been strongest in gas-levered basins like the Haynesville and Eagle Ford, we are seeing some impact in the oil-driven plays as well. The Northeast rig count has been more stable, however, we are receiving pricing pressure from customers as well as seeing completion delays and white space in the calendar, affecting both revenue and margins for completion tools and wireline. EIA reported completions were down by approximately 8% quarter-over-quarter and new wells drilled decreased by approximately 5%. Cementing is our service line, most driven by rig count and new wells drilled and is usually impacted first with activity changes. In conjunction with the rig decline, cementing and pricing were down single-digits this quarter compared to Q1.

We have significant operations in the Eagle Ford and Haynesville, which collectively have seen rig count declines of approximately 27% through Q2 since the end of 2022. The U.S. rig count declined approximately 14% through the first half of the year, but our total jobs completed in Q2 2023 only declined by approximately 2% compared to Q1 2023. We are focused on maintaining pricing wherever we can as well as maintaining market share with targeted customers through our proprietary slurries and well site execution. We remain excited about this service line and our differentiation in the marketplace but it, too, is subject to this market decline. Completion tool revenue was up this quarter due in large part to a sizable international order again this quarter.

North American revenue was down, however and has been significantly impacted by lower activity levels in areas like the Haynesville where dissolvable frac plugs are frequently used. We do believe this is temporary and that Haynesville activity will rebound and be a vital component of exported natural gas in the medium term. Even with a declining market thus far in 2023, we have sold approximately 50% more Stinger dissolvable units in the first half of 2023 versus the first half of 2022. Wireline continues to be challenging from a pricing perspective but remains an important part of Nine’s portfolio. The Permian Basin is highly fragmented and saturated, and we are receiving pricing pressure in the service line despite minimal price increases in 2022.

In the Northeast, we are maintaining market share, but we are receiving pricing pressure due to lower natural gas prices and delayed completions programs, which will compress margins. Coil tubing is performing well, considering over 50% of our revenue is generated in Haynesville, and Eagle Ford. The rig count has increased in the Haynesville, which could potentially provide significant future opportunities for the service line as well as for completion tools. I would now like to turn the call over to Guy to walk through detailed financial information.

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Guy Sirkes: Thank you, Ann. As of June 30, 2023, Nine’s cash and cash equivalents were $41.1 million, with $19 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $60.1 million as of June 30, 2023. At June 30, 2023, we had $72 million of borrowings under the ABL credit facility, and our availability was approximately $19 million, net of outstanding letters of credit of $1.3 million. Subsequent to June 30, we repaid $2 million of our outstanding borrowings under the ABL credit facility. Additionally, our liquidity position will be impacted by the semiannual interest payment of $19.5 million based on amounts outstanding as of June 30, 2023, to the holders of the 2028 notes, which began on August 1, 2023.

During the second quarter, revenue totaled $161.4 million with adjusted gross profit of $34 million. During the second quarter, we completed 1,004 cementing jobs, a decrease of approximately 2% versus the first quarter. The average blended revenue per job decreased by approximately 5%. Cementing revenue for the second quarter was $58.1 million, a decrease of approximately 5%. During the second quarter, we completed 6,106 wireline stages, an increase of approximately 12%. The average blended revenue per stage decreased by approximately 7%. Wireline revenue for the quarter was $31 million, an increase of approximately 4%. For completion tools, we completed 27,734 stages, a decrease of approximately 14%. Completion tool revenue was $38.9 million, an increase of approximately 3%.

During the second quarter, our coiled tubing days were decreased by approximately 16%, with the average blended day rate increasing by approximately 19%. Coiled tubing utilization during the quarter was 54%. Coiled tubing revenue for the quarter was $33.5 million, which was flat quarter-over-quarter. During the second quarter, the company reported general and administrative expense of $14.2 million. Depreciation and amortization expense in the second quarter was $10.3 million. The company’s tax provision was approximately $0.2 million year-to-date. The provision for 2023 is the result of our tax position in state and non-U.S. tax jurisdictions. The company reported net cash provided by operating activities of $27.1 million. The average DSO for Q2 was 52.4 days.

CapEx spend for Q2 was $7.3 million, bringing the total for the first half of the year to $12.3 million. Our full-year CapEx guidance is unchanged at $25 million to $35 million. However, we do anticipate coming in at the lower end of the range. I will now turn it back to Ann.

Ann Fox: Thank you, Guy. The market remains volatile, causing commodity prices to be erratic and unpredictable. This makes capital allocation decisions much more difficult for our customers, peers and Nine. While inflation is slowing, the job market remains tight, making it difficult to push down wages and material costs. It is imperative that we maintain key talent throughout the organization since markets can turn very quickly. We will continue to invest in internal R&D to improve and create new technology within Nine. I am cautiously optimistic that the rig count will reach a bottom during the third quarter. And if current strip prices remain supportive, we could begin to see rates being added back into the market starting in early 2024.

In 2024, budgets will reset and operators will focus on the need to maintain flat production. We are a spot business and our financial results will move closely with U.S. land activity levels, including rig count and frac stages. Cementing is most closely tied to the rig count and has been impacted the most by activity declines in the first half of the year. Our remaining completion based businesses often lags the account, and we anticipate completion activity in the second half of the year to decline compared to the first half. Activity levels thus far in Q3 are down, and we continue to see pricing pressure from customers. Because of this, we expect Q3 to be down compared with Q2 with projected revenue between $140 million and $150 million.

We also anticipate that adjusted EBITDA and our adjusted EBITDA margin will be down as well. Our business is nimble, which allows us to navigate unexpected market shifts like we have seen so far this year. Additionally, we are capital light, helping reduce capital allocation risk and what has become much shorter and sharper cycles. We have a very strong team with a long tenure together, allowing us to effectively manage through this volatility as we have done before. We are always focused on developing and looking for new technology, and we will continue to pursue increasing our market share, both in the North American land and international markets. We have demonstrated our ability to navigate these shifting markets and proven we are able to capitalize very quickly on an improving market.

I also want to end by thanking David Baldwin for his contribution, time and support as a Director on the Nine Board. He resigned from Nine’s Board effective yesterday to have more time to spend focusing on energy transition-related opportunities with SCF Partners. We are deeply appreciative for all he has done for Nine and wish him continued success in his future endeavors. SCF remains our largest shareholder and owns approximately 26% of the company. Andy Wade is the Managing Partner of SCF Partners and will remain on the board. We will now open up the call for Q&A.

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Waqar Syed with ATB Capital Markets. Please proceed with your question.

Waqar Syed: Good morning.

Ann Fox: Good morning, Waqar.

Waqar Syed: Thank you. Ann, to the extent that you can provide some color on the international sales and completion tools, could you maybe talk about the magnitude of the sales? And it also looks like these sales are more recurring than nonrecurring now. So maybe if you could elaborate on that and maybe more also talk about the sales strategy there?

Ann Fox: Sure. It’s a great question, Waqar. As you know, depending on the time frame, international revenue is roughly 4% or 5% of our revenue on a consolidated basis. Part of our strategy over the medium and long-term is to really increase that profile, decrease dependency exclusively on unconventional North American land, and we intend to do that through different tools that we offer into those conventional markets. I’ve been cautious with the market to let them know that this takes a long time. We’re obviously a small company. We’re not going to outrun R&D spend to try and do this, but we are slowly picking at it. So I would say that our international revenue, you are correct, recurs each and every year. However, it is lumpy.

And we have recently received a couple of lumps, those have been helpful. I would love to say that those are going to recur. I don’t see that happening in Q3. But I am pleased with the traction that we’re gaining in the international markets. We sell through to about 22 countries now. And so that’s, again, a big piece of our go-forward strategy. We have zero intention of putting any heavy service lines into the international market. But as far as completion goes, we’re hyper focused on it. As you know, we have an R&D center in Norway, and they’ve proven to be extremely effective in thinking about how to design tools most especially for the Middle East market, as those engineers are used to designing tools with tolerances that can withstand North Sea operations.

So we’re extremely lucky to have them. We acquired that team in 2018. And as you know, it takes a long time, and they’ve spent the last couple of years effectively designing some tools. So we’re excited about it. So I do think you’re going to see it recur. But in the amount and the magnitude of which it hit the financials in Q2, I don’t see that as recurring yet, if that answers your question.

Waqar Syed: It does. Thank you very much. And then on the cementing business line, how many units do you have stacked now?

Guy Sirkes: Waqar, we’ll get back to you on the exact figures in our follow-up call, we’ll pull those up.

Waqar Syed: Okay. And then, Ann, with regards to your debt outstanding, there is an option to buy back some of the debt with the free cash flow and you did generate significant free cash flow in the quarter. What’s the plans there for the remaining of the year?

Guy Sirkes: Yes. Waqar, so we did generate good cash flow in Q2. A lot of that was a working capital release as revenue declines. We anticipate further revenue declines in Q3, as Ann mentioned. So we are going to have more cash flow. We’re going to use that to pay down our credit facility first, and then we’ll look to work on the bonds afterwards. I think the thing that we need to be cautious about is that working capital is now a source of cash as revenue is declining. But to the extent that there is a rebound in activity, then we’ll need that cash again to absorb the working capital hit when revenue rises. So we want to be cautious with that.