Nine Energy Service Q1 2024 Earnings Call Transcript

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May 7, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the 9 Energy Service First Quarter 20 24 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Instructions will be given at that time. I would now like to turn the conference over to your host, Heather Schmidt, Vice President of Strategic Development and Investor Relations.

Speaker 1

Thank you. Good morning, everyone, and welcome to the 9 Energy Service earnings conference call to discuss our results for the Q1 of 2024. With me today are Anne Fox, President and Chief Executive Officer and Guy Sirkus, Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward looking statements, reflecting Niall's views about future events.

Speaker 1

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.

Speaker 1

Additional details and a reconciliation to the most directly comparable GAAP financial measures are also included in our Q1 press release and can be found in the Investor Relations section quarter results for 2024. Revenue for the quarter was quarter results for 2024. Revenue for the quarter was $142,100,000 which was within the upper range of our original guidance of $135,000,000 to $145,000,000 We generated adjusted EBITDA of $15,000,000 reflecting an adjusted EBITDA margin of 11%. Diluted earnings per share was negative $0.24 During Q1, the markets were relatively stable with the average U. S.

Speaker 1

Rig count remaining flat quarter over quarter. This was reflected in our revenue, which also remained relatively flat quarter over quarter coming in where we anticipated. Despite a flat rig count, our adjusted EBITDA increased quarter over quarter due mostly to better utilization within coiled tubing. Coiled tubing days worked increased by over 40%, driving revenue growth of approximately 11% quarter over quarter. Demand for coiled tubing work was strong in the Permian and we were able to supplement this work by sending equipment and personnel to the region from the Haynesville.

Speaker 1

Completion tool revenue was relatively flat quarter over quarter. We reached a major milestone in Q1, surpassing 60,000 dissolvable Stinger units sold since we introduced the technology in Q1 of 2020. I am extremely proud of the team and the way they scaled this product without compromising quality and reliability. We remain bullish on not only the capability of our dissolvable technology, but on the continued adoption of dissolvable plugs in the U. S.

Speaker 1

Market and abroad. In Q1, we began to see the impact of pricing pressure within our cementing business as we balanced market share and profitability within this rig count environment. In Wireline, we maintained excellent market share in the Northeast and continue to focus on gaining additional market share in the Permian, while increasing exposure to remedial and conventional wireline. I would now like to turn the call over to Guy to walk through detailed financial information.

Speaker 2

Thank you, Ann. As of March 31, 2024, Nine's cash and cash equivalents were $10,200,000 with $27,300,000 of availability under the revolving ABL credit facility, resulting in a total liquidity position of $37,500,000 as of March 31, 2024. At March 31, we had $52,000,000 of borrowings under the ABL credit facility. As a reminder, during Q1, we had a $19,500,000 interest for our notes and paid down $5,000,000 on the ABL. Additionally, we had $5,600,000 of CapEx for the quarter.

Speaker 2

As a result, our cash balance as of March 31 was at a trough and we have already begun to build back our cash balance. All of these cash outflows were anticipated and our cash balance will continue to ebb and flow in conjunction with our interest payments

Speaker 3

that

Speaker 2

are made in January August. At the end of last year, we put a $30,000,000 ATM program in place to provide flexibility for the company. During Q1, we did not sell any shares under the ATM program and have not sold any to date. As for the terms of the indenture governing our senior secured notes, we are required to periodically offer to repurchase such notes with a portion of any excess cash flow. We did not generate any excess cash flow as defined in the indenture in the most recently ended 2 fiscal quarters.

Speaker 2

As a result, no excess cash flow offer will be made to note holders this month. A reconciliation of this calculation is available in our Q1 earnings release. During the Q1, revenue totaled $142,100,000 with adjusted gross profit of $26,100,000 During the Q1, we completed 9 43 cementing jobs, a decrease of approximately 3%. The average blended revenue per job decreased by approximately 5%. Cementing revenue for the quarter was 48,300,000 dollars a decrease of approximately 8%.

Speaker 2

During the Q1, we completed 6,486 wireline stages, an increase of approximately 14%. The average blended revenue per stage decreased by approximately 13%. Wireline revenue for the quarter was $27,900,000 which was flat compared to Q4. For completion tools, we completed 28,074 stages, an increase of approximately 4%. Completion tool revenue was 35,300,000 dollars a decrease of approximately 2%.

Speaker 2

During the Q1, our coiled tubing days worked increased by approximately 41% with the average blended day rate decreasing by approximately 21%. Oil tubing utilization was 63% with revenue of $30,700,000 an increase of approximately 11%. During the Q1, the company reported general and administrative expense of $12,300,000 Depreciation and amortization expense was 9,500,000 dollars The company's tax provision was approximately $200,000 for the quarter. The provision for 2024 is the result of our tax position and state and non U. S.

Speaker 2

Tax jurisdictions. The company reported net cash used in operating activities of 8,800,000 The average DSO for Q1 was 57.5 days. CapEx spend for Q1 was 5,600,000 dollars Our 2024 CapEx guide is unchanged at $15,000,000 to $25,000,000 but is flexible if market conditions dictate a reduction. I will now turn it back to Anne.

Speaker 1

Thank you, Guy. Q1 activity levels were stable, driven mostly by a supportive oil price. However, we saw further declines in natural gas prices below $2 starting in February and continuing into Q2. Because of this decline, we are anticipating activity slowdowns in the natural gas levered basins, including delayed completions, rig declines and overall more white space in the calendar, specifically in the Northeast, Haynesville and with some impact in the Eagle Ford. As a reminder, in 2023, approximately 34% of Nine's revenue was generated out of the Northeast and Haynesville.

Speaker 1

We view this decline in natural gas related activity as a temporary slowdown or pause and we remain positive on the medium and long term outlook for the gas markets. It is imperative to maintain our footprint and people within these basins to ensure we are able to capitalize when gas prices recover. However, this will have short term negative impacts on our margins. We are watching the markets very closely and will adjust course as dictated by the markets and outlook. The oil markets have remained mostly stable with the majority of public companies keeping capital and activity programs flat in 2024 versus 2023 in the oil levered basins.

Speaker 1

There could be potential for additional rigs coming into areas like the Permian if commodity prices remain supportive in the second half of this year. We have supplemented our Permian operations with units and personnel from our Haynesville and Northeast locations, specifically within coiled tubing and wireline. For Q2, we anticipate activity declines in white space within the Gas Leaberg basins, as well as full quarter realizations of pricing pressure within our cementing business. Because of this, we expect Q2 to be down compared with Q1 with projected revenue between $130,000,000 $140,000,000 We also anticipate that adjusted EBITDA and our adjusted EBITDA margin will decrease from Q1 levels. We have shown our ability to capitalize quickly on market shifts and our business is nimble.

Speaker 1

Our service and geographic diversity provides us good balance and we are focused on diversifying more of top line revenue streams to completion tools in the international markets. Our strategy of providing an asset light business with forward leaning technology coupled with excellent service is unchanged. We will now open up the call for Q and A.

Operator

Thank

Speaker 3

you.

Operator

Our first question comes from Wigar Syed with ATB Capital Markets. Please proceed with your question.

Speaker 3

Good morning.

Speaker 1

Good morning, Waghkar.

Speaker 3

Good morning. So the international business, are you assuming any sales from that in your revenue outlook or anything substantial there?

Speaker 1

We always have a projection of that revenue. Just as a reminder, international revenue on an annual basis is roughly between 4% to 5%, and it's very lumpy as we've told the market before. So, we would continue to anticipate having international sales in Q2. Okay.

Speaker 4

We've seen in the

Speaker 3

E and P industry, has that impacted your business positively or negatively? Or do you foresee that to impact going forward?

Speaker 1

It's a great question, Makar. We definitely see continued consolidation. For us, so far, this has not a negative impact. And when we analyze business with both Exxon and Pioneer, we're very pleased with that, for example. So right now, we've not seen a negative impact.

Speaker 1

And I think if anything, you could start to see some consistency, as we know, with large publics. They tend to put out their D and C programs and budgets. And so that streamlines the process and frankly can help us. So to answer your question specifically, no, we've not seen any negatives.

Speaker 3

Okay. And the issue on the pricing side in cementing, is it kind of broad in all basins or is it very basin specific right now?

Speaker 1

Yes. No, it's well, clearly, coming into the Haynesville has not been wonderful just given where gas prices are. But I would say it's more broad relative to the overall rig count environment in the United States right now. That pricing pressure is felt across basins. Okay.

Speaker 3

Are you seeing stability in the spot pricing or do you see more pressure in that particular market as maybe some more rigs come off in the gas basins?

Speaker 1

The gas basins could, Wicar. I think though we've taken that pricing impact. It's just that you'll get a full quarter of that realization in Q2. So we're not seeing a downward slope on that right now. That is stabilized, but we did experience that.

Speaker 3

And then in terms of your visibility into the second half on the, let's say, oil side first. Are you seeing any discussions with E and Ps, privates or publics about picking up activity later this year or into next year?

Speaker 1

I think most of our publics have been pretty firm that they're going to maintain flat programs this year. We do have some oily customers actually in the Northeast that I would be surprised if they don't put a rig or 2 up later in the year. But by and large, our publics at the moment are steadfast in their program. So as we know, that could always change. We're seeing, obviously, folks are going to start to build DUCs here, so it could be a very nice 2025, really nice DUC builds in the Haynesville as well.

Speaker 1

So, as you know, if the operators all start at once, that creates tremendous velocity for pricing. So it could be an exciting time for us coming into 'twenty five.

Speaker 3

Okay. And from the private side, any are you seeing any hints of them picking up activity or new privates being formed as more personnel become available from the consolidation in the E and P industry?

Speaker 1

No. No, we aren't, Wachar. I would say consolidation is more the theme of the day.

Speaker 3

Okay. Well, thank you very much and appreciate the color.

Speaker 1

Sure. Thank you.

Operator

Our next question is from Tim Moore with EF Hutton. Please proceed with your question.

Speaker 4

Thanks, Ann and Guy. Two of my questions about public and private. Operator, sentiment was just asked and thanks for answering that. You mentioned cementing softness to continue in the June quarter. I was trying to think out, I know we talked about lead times on that, they seem to bounce back fast later on when there's an upswing.

Speaker 4

I mean, would I be unreasonable thinking that maybe the cementing jobs count, not necessarily pricing, could the volumes can maybe start increasing September or late summer, or is that too quick based on visibility?

Speaker 1

No. I think that's reasonable, Tim.

Speaker 4

Okay. Good. I mean, because eventually they always bounce back. I mean, you just lap downturns and the rig count has been quite stable since mid September, especially on the oil side. So it seems like I'm not going to put words in your mouth, it seems like it would be inevitable that you're not that far away from the bottom on the volume side on cementing?

Speaker 1

Yes, that's how it feels.

Speaker 4

Good. And maybe just switching gears, how is the Pinsir Hybrid Frac Plug doing and what are some of the customer responses to it?

Speaker 1

Well, we're having a great response. We are in the middle of field testing right now with some customers and then also commercialized other and it offers our customers much better drill out times. And it offers our customers much better drill out times. And so it's really for the customer that loves the reliability and dependability as they perceive it with a composite. And that's how we're trying to answer that market and innovate really on the composite side.

Speaker 1

So it's not an answer to replace the dissolvable plug. It's really an answer to go after that very large composite market, which is still the preponderance of plugs run today in the U. S. And so we're still very pleased with that. Thank you for asking.

Speaker 4

No, that's great. I mean, I really think it's going to be very good. I can't wait to hear a couple of years from now how many thousands of those you sold because, like you said, it's not going to cannibalize, it's incremental. So it's really good design there. And maybe just following up on international expansion, I know you get asked this a lot, I think I asked last quarter, I know it's only maybe 4% to 5% of sales, but such a good untapped opportunity for you.

Speaker 4

Could you give any color maybe on some of the countries where you've done some demos and pilots the last couple of quarters and where you think might be the focus countries the rest of this year?

Speaker 1

Sure. So, as you know, we sell into about 22 countries, but the majority of our sales will be in the Middle East region as well as Argentina. And so when you think about the Middle East, you're talking mostly about the UAE as well as Saudi.

Speaker 4

Great. And how do you like handle capacity for those countries? I mean, it seems like you could be full op on demand there. Are you I mean, I guess, are you probably working hard to add extra capacity as orders come in and you're able to satisfy them?

Speaker 1

Yes. We have not had a problem with that thus far. So I think we do a really good job of managing that supply chain. So, so far that's not been a bottleneck.

Speaker 4

Great, great. Just two other quick questions. I know you reiterated the capital expenditure guidance this year of $15,000,000 to $20,000,000 You spent almost $6,000,000 in the Q1. At what point this year, I mean, would you decide if you might be more towards the lower end or the high end of that range? You probably will wait to see how things shake out this summer and then maybe finish your CapEx budget September, October?

Speaker 1

Right. So it's a great question. So we've guided the market 15 to 25 with a back end loaded range. And if for some reason this summer, we don't see any turn in anticipated gas pricing coming into the winter season, then obviously we'd make adjustments. So we've purposely planned, flexibility to do just that.

Speaker 1

So I think we're all waiting to see what is the weather shape out like, where is gas production fall and what are those gas prices look like. So we're ready to make those changes and as you know we're always very flexible here with CapEx.

Speaker 4

Great, Anne. Thanks a lot. And that's it for my questions, Anne and Guy. Appreciate it.

Speaker 1

Thank you.

Operator

Our next question is from John Daniel with Daniel Energy Partners. Please proceed with your question.

Speaker 5

Hey, Anne, Heather, team. Just one for me. And we've had several of the E and P companies this quarter talk up opportunities on the refrac market. And I'm just curious how you see that opportunity set over the next few years. Is it I'm in?

Speaker 1

Good morning, John. Thank you. That's a great question. I think you've started to see some of our public companies actually make this part of their program and talk about it routinely. So the technology has changed here a lot.

Speaker 1

We actually forecast refrac into our business now. We're one of very few companies in the U. S. That offers this solution. So this is a wonderful niche market for us and we're really excited to continue to see it grow.

Speaker 1

We've experienced certainly a lot of growth last year. We're looking forward to more growth this year. So very promising market. They certainly are looking at it from a production capacity. We're also aware that these are obviously cleaner barrels.

Speaker 1

So all the way around these refracs making a ton of sense and we're seeing wonderful results thus far with our refrac technology.

Operator

Okay. That's all I had. Thank you for including me.

Speaker 1

Okay. Great. Thank you so much.

Speaker 4

You bet.

Speaker 1

Okay. Great. Thank you for your

Operator

Go ahead, Ann.

Speaker 1

I was just saying we wanted to thank our employees and our E and P partners and investors. Thank you all so much.

Operator

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.

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Key Takeaways

  • Revenue for Q1 was $142.1 million, at the top of guidance, with adjusted EBITDA of $15 million (11% margin) and a diluted EPS loss of $0.24.
  • Coiled tubing utilization surged, with days worked up 41% quarter-over-quarter—driving an 11% boost in coiled tubing revenue—while overall EBITDA benefited from improved efficiencies.
  • It achieved a major milestone of 60,000 dissolvable Stinger units sold since 2020, underscoring confidence in continued adoption of its dissolvable and hybrid frac plug technologies.
  • Facing pricing pressure in its cementing segment, the company forecasts Q2 revenue of $130–$140 million and expects lower adjusted EBITDA and margins compared to Q1.
  • Natural gas prices below $2 have led to anticipated activity slowdowns in gas-levered basins (Northeast, Haynesville, Eagle Ford), but management maintains a positive medium- to long-term outlook, emphasizing its nimble, asset-light strategy and geographic diversification.
AI Generated. May Contain Errors.
Earnings Conference Call
Nine Energy Service Q1 2024
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