Q1 2021 Nine Energy Service Inc Earnings Call
Greetings and welcome to nine Energy Service earnings Conference call to discuss the results for the first quarter of 2021 at.
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At this time I'll turn the conference over to Heather Schmidt Vice President of strategy development and Investor Relations you May now begin.
Thank you good morning, everyone and welcome to the nine Energy Service earnings Conference call to discuss the results for the first quarter of 2021.
And on the calls me a day or Ann Fox, President and Chief Executive Officer, and Guy <unk> Chief Financial Officer, We appreciate your participation.
Some of our comments today may include forward looking statements, reflecting nine views about future events forward looking statements are subject to the number of risks and uncertainties many of which are beyond our control and these risks and.
Certainties can cause actual result did the.
The 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.
And 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 reconciliations of the most directly comparable GAAP financial measures are also included in our first quarter press release and can be found and the Investor Relations section of our website I will now turn the call over to Anthony.
Thank you Heather good morning, everyone and thank you for joining us today to discuss our first quarter results for 2021, well overall market activity improved quarter over quarter. We saw at a much slower start in January versus last year and weather conditions and February caused significant shutdowns and Texas the.
AIA reported completing completed wells decreased by approximately 3% quarter over quarter, driven mostly by Permian completion, which were down approximately 9% over the same time period. As a reminder, all of our service lines operating in the Permian and approximately 70% of our revenue comes out of Texas and was the <unk>.
By the shutdowns and U S. New wells drilled increased by approximately 25 per cent quarter over quarter.
A corner and there were there was estimated to be approximately 185 to 190 active frac crews and the U S with approximately half of those operating and the Permian.
Frac crew activity increased approximately 14% from January to February but remained mostly flat from February to March of this implies an increase of approximately 18% or 28 total new frac crews out of quarter over quarter. This compares to an average of 265 active frac crews and Q1 of them.
2020, or a decrease of approximately 30% despite completion decreasing by 3% quarter over quarter nine revenue increased quarter over quarter by approximately 8% driven mostly by strong increases and cementing and completion tool activity.
Pricing has largely stabilized across service lines, but remains extremely depressed, especially within tools and wireline.
We have already begun to feel some tightness and the labor market and if activity continues to increase at the same pace, we could potentially see and opportunity to and implement price increases as well as pass through incremental costs coming from materials and labor and the timing and magnitude of the potential price increases remains unknown and extremely dependent.
And the timing and pace of potential rig and Frac crew additions. The majority of activity growth is still coming out of the Permian. The both the northeast and Haynesville are steady from an activity perspective and remain critical pieces of nine earnings and cementing revenue increased by approximately 22% despite weather shut down.
And Texas. This increase is due in large parts of our incremental market share gains and the Delaware basin. Our haynesville location is fully operational and we have begun winning new work with customers coiled tubing revenue decreased quarter over quarter, due mostly to weather related shutdowns and the Permian.
Our total stages completed in wireline and completion tools increased by approximately 18% quarter over quarter. Despite completed well decreasing by approximately 3%. This increase reflects our 6% market share gain of stages completed achieved throughout 2020.
And I remain extremely happy with the performance of our Dissolvable plug technology, increasing the total number of Dissolvable stinger sold by over 80% quarter over quarter, we have been able to apply the material science from our legacy Magnum products and high temperature environments to our new Stinger product, which has helped us gain incremental.
<unk> share and hot temperature environments, specifically and the Haynesville and.
Increasing coil prices and diminishing service quality should serve as a tailwind for dissolvable plugs as well as our customers continued focus on ESG throughout 2020, we have discussed the significant pricing declines within our Dissolvable product line and we are currently working on lowering manufacturing costs to recover some of the margin.
Russian incurred throughout last year.
During Q1, we began running our new Scorpion pincer composite plug. This plug is over 35 per cent shorter than our scorpion plugs at approximately 14 inches and provides operators the shorter drill out times and less materials to flow back.
Do you do it the smaller size. It is also less expensive for nine to manufacture and will be an important product and nine portfolio moving forward and addressing the composite plug market.
During Q1, we once again saw an opportunity to purchase additional bonds on the open market and a significant discount and lowering our annual cash interest expense and reducing our overall debt outstanding during Q1, the company repurchased $26 3 million par value of bonds.
For $8 4 million of cash representing 32% of par to date nine has repurchased approximately $79.7 million of bonds for $22 9 million on average representing 29% of par value and leaving 320.
3 million par value of bonds outstanding and and Undrawn ABL.
The revenue for the quarter was $66 6 million net loss was negative $8 2 million and adjusted EBITDA was negative $3 4 million basic EPS was negative 28 cents.
I would now like to turn the call over to Guy to walk through the financial information for the quarter.
As Ed mentioned, we repurchased $26 3 million par value of bonds for $8 4 million of cash representing 2% of car to date and nine has repurchased approximately $79 $7 million of bonds were $22 9 million of cash on average representing 29% of par value and moving.
$323 million par value of bonds outstanding and and Undrawn ABL.
As of March 31, 2021, nine cash and cash equivalents were $53 million with $45 8 million of availability under the revolving credit facility.
Resulting in the total liquidity position of $98 8 million as of March 31, 2021.
Availability under the ABL is based on accounts receivable and inventory.
So as we unwind or of the working capital the ABL borrowing base will fluctuate.
During the first quarter revenue totaled $66 6 million with adjusted gross profit of $4 3 million.
During the first quarter, we completed 620, cementing jobs, an increase of approximately 22% versus the fourth quarter the.
The average blended revenue per job increased by approximately 3%.
Domestic revenue for the quarter was $22 9 million and increase of approximately 26 per second quarter over quarter.
During the quarter, we stopped 11 of our 40 cementing spreads.
During the first quarter, we completed 3448 wireline stages, a decrease of approximately 2% versus the fourth quarter.
The average blended per stage average blended revenue per stage decreased by approximately 7%.
Wireline revenue for the quarter was $12 8 million a decrease of approximately 9%.
During the quarter, we stacked 20 of our 47 units.
And completion tools, we completed 17351 stages and increase of approximately 24% versus the fourth quarter.
Completion tool revenue was $20 million and increase of approximately 11%.
During the first quarter, our coiled tubing days worked decreased by approximately 8%.
Average blended day rate for fuel and increased by approximately 1%.
Hello tubing utilization was 29% with revenue of $10 9 million a decrease of approximately 7%.
During the quarter, we stacked seven of our 14 units.
The company reported general and administrative expense of $10 2 million compared to $11 million for the fourth quarter.
Depreciation and amortization expense from the first quarter was $11 9 million compared to $11 8 million and in the fourth quarter.
The company's tax provision for the first quarter of 2021 was less than $100000.
During the first quarter of the company reported net cash used in operating activities of negative $5 2 million.
The average DSO for the first quarter was approximately 65 days compared to 66 days in Q4.
Total capital expenditures for Q1 were $1 9 million.
For Q2 of our largest cash outflows will be our senior notes interest payments of approximately $14 million Capex and changes in net working capital, which will closely mirror revenue changes I will now turn it back to Ann.
And thank you Guy we have continued to see moderate activity increases throughout Q2, thus far and feel confident the Q1 will be the worst quarter for nine this year.
That said our customers commitment to capital discipline remains steadfast as we all remain subject to heightened levels of uncertainty around COVID-19, OPEC and potential new policies and regulations coming from the by the New administration, we have not seen activity ramp at the same pace as the commodity price and do you believe this disconnect and will continue for the most.
Part throughout 2021 the <unk>.
And operators are responsible for the majority of recent rig addition, but their capacity is limited and their activity increases are not likely to continue at the same rate.
Pricing remains the biggest challenge for nine and the service sector, there's still very little pricing leverage for Oss companies, but we are starting to feel tightness and the labor market, which could potentially be a catalyst for price increases as well as the ability to pass through incremental costs coming from materials and labor.
We have also seen an uptick and call and work due to competitor performance issues. During frac activity. As these trends continue the highest quality of service providers will begin to strategically increase price without ceding market share we cannot pinpoint the timing of the of these increases as they will be gradual and.
The service cost increase and service quality diminishes, the dissolvable plugs will be and extremely economic option for our operators, while reducing risk and the human and environmental footprint at surface and we are committed to providing greener completion for our customers at the beginning of Q2, we began the process of converting two of our existing wireline unit.
Two electric wireline and the conversions were part of our original Capex guidance of $15 million to $20 million, which remains unchanged. We anticipate receiving the converted units by the end of Q2 similar to the Dissolvable plugs. The electric wireline units are able to reduce emissions when compared to a traditional wireline unit, while reducing sound.
And in no way and <unk> efficiencies today, we are focused on continuing to gain market share across service lines with quality customers and a positive gross margins the Permian northeast and Haynesville, We will continue to drive the vast majority of revenue generation for the company and the near term.
While we continue to see improvements and the market. We are soon to anticipating a challenging environment. In 2021 that said, we expect Q2 to be better sequentially and Q1 with projected revenue of 78 to 86 million. We also anticipate sequential revenue increases in Q3 over Q2.
Two.
We are monitoring the potential supply chain issues very closely we anticipate there could be delays in receiving materials are potentially materials will not be available at all leading to potential cost inflation across the industry. For example, we and all other cementing providers are navigating through cement shortages and are currently receiving al.
Occasions from our vendors, we do not know the magnitude of these potential supply chain constraints, but inventory management will be critical for capitalizing on and activity recovery. We are certainly not immune to supply chain and labor constraints, but do believe we are well equipped to handle these challenges we will now open up the call to Q&A.
Thank you at this time, we'll be conducting a question and answer session.
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One moment, please while we poll for questions and what's Gonna Star one.
Okay.
Thank you.
Our first question comes from the line of J B Lowe with Citi. Please proceed with your question.
Hey, good morning, and good morning, guys.
Just wanted to and good morning.
And good morning.
I just wanted to ask about what's kind of embedded in the in the <unk> revenue guide.
Both from a pricing perspective and.
How much of you guys and incorporating some of these of course material shortages that you spoke of.
Yeah. So the material shortages of I'll talk about and just the second.
I think we're not going to be specific on activity versus price, but I'll just color. It for you and I will tell you, it's mostly activity that's driving that.
And incremental market share gain.
So which is great because of course, if we can handouts and price towards the back half of the year or sooner.
And that will that will really help us. So we're seeing a lot of lot more volume and these businesses.
I'd say I'm more hopeful about the go forward picture of the business today and I've been in 18 months.
And I would also tell you that I would say over the past 14 to 21 days.
And the supply chain issues have surfaced why is that now I can't put my finger on it for you, but what I can say is it feels to me that we've vaccinated the elderly we kind of put them in the lifeboat.
And nobody was growing and then we move state by state within secession down to the 16 year olds and above and all of a sudden and it's like everybody's rowing. The labor shortages are the lead times of materials within very short periods of time of moving upwards of 60%. So when you think about the Cogs line you're no longer.
And just worried about what the inflationary impact from a cost perspective, youre worried about availability.
And then you think about kind of the customer base sitting at maintenance levels of production under spending capex rolling around and cash and you think at some point of the decline curves catch them and they have to increase activity and 22 will service. The there. It seems to me. The other thing we're learning and based on the quarter is the service sector is more broker.
And then we had anticipated and what I mean by that is the service quality issues are surfacing faster than we would've expected and I'm talking large scale competitors, taking knees. When we wouldn't think they would and that has been enormously helpful to us sooner than we had anticipated. So again I think you know.
By the time of our customer base recognizes this.
We will have lost the labor in the sector will be very challenged for instance, a lot of folks are going to have to get their allocations for pickup trucks for 22, now and you know better than idea. When you look at the net income line of the service sector for Q1, even for a larger scale of companies. It's ugly, it's negative so folks or not.
Going to lean out and get this stuff early.
And then you put activity on for 'twenty, two it could be kind of of disaster.
And so it's very interesting it's.
I think it's the very hopeful time for us and.
And I am traveling out to the field constantly you realize the depth of talent at this particular organization, which is yielding big market share gains Youre also because of the operators are so tight on production and theyre focusing on what is working and what is not.
And so finally, they are looking at quality of plugs. So the cheap Charlie mentality, they've had is starting to dissipate and theyre looking at things like fluid bypass and say well. Thank goodness are finally focused on that so all of these things feel really good to me and I have not felt this momentum for a long time.
Okay great.
And I guess kind of related to that.
Given given some of the tightness and the labor market what kind of.
Compared to kind of the I guess the.
The regular recovery what do you think of Incrementals should look like given all of these factors and.
And the second was the issue of Great question.
It's not it's not and industry you would qualify with revenue strength right. So when you hear about kind of the construction industry and even the capturing of the customer you know I would anticipate some lag there and I would also anticipate labor inflation moving more quickly than we had anticipated.
So you know that that lag is something I can't pinpoint I can just tell you it's probably there.
And but those costs I do think will rise sooner than I had anticipated.
You know when you look at D&C spending it could be slightly challenge.
But like Euro dollar is not going to do with bar.
Right.
And you would think that given the the revenue growth outlook positive EBITDA is more than likely in the second quarter.
And I would be disappointed if we didn't see some momentum on the EBITDA line and won't be specific but I would be disappointed okay.
Alright, thanks, guys.
Thank you the.
The next question is coming from the line of Waqar Syed with ATP. Please proceed with your question.
Thank you for taking my question.
Morning.
My question relates to incremental margins of the student environment of incremental margins of Baird.
The gross profit margin is still in the 2025% range or could we get into the upper 20% of even 30% plus and and.
In Q2, and then maybe subsequent quarters.
Oh of car it's guy.
And we're not we're not guiding profitability, but I think it's possible that we see over time higher incrementals as pricing.
The increases but.
And said, we haven't guided to the timing of those and also as you and the near term it could be that our costs rise before our pricing rises and so I think it's going to be.
Difficult to forecast for the next few quarters, but over time, you know as these things normalize and prices rise and costs are stabilized I think we will see higher incrementals, but it's difficult to point in any given quarter.
And so the timing of these things.
Okay and.
And then in terms of free cash flow outlook.
Do you see.
Any free cash flow positive quarters in 2021.
I think of gun Waqar, it's difficult to say because it's going to depend on the the timing of.
And the interest payments and the timing of Capex spend and ultimately working capital. So I think you know the faster revenue rises the more free cash flow of deficit will have and the near term.
Just as our accounts receivables rise.
So I think it's difficult to answer that with precision.
Sure.
And of.
And we're hearing a lot about the simultaneous frac market of kind of growing.
How does that impact nine.
And that's that segment of the market grows.
Oh, I love that because we get paid by the stage. So if I have the carrying my labor for shorter period of time and I can generate more revenue than I can really part of my margin. So you know one of the great things about nine is that as our customers get more efficient so too does our our EBITDA.
Your line.
And that's a perfect example of the whole field could turn to simulcast tomorrow, we'd be thrilled.
Okay.
Great and.
And then in terms of of <unk>.
Sure.
Completion tools business of.
Any traction and the international markets yet.
Yes in fact, we've got some new tools out into the international market, which hopefully will be able to talk about it next quarter and we're also getting traction there with our dissolvable plugs as well.
So that's been just wonderful this quarter to see.
Alright.
And then in terms of the cementing side of you have still I believe of 11.
Your next set of student of idle.
Do you expect them to return to work this year.
That's possible again I'm.
And I'm feeling really good about you know I'm feeling good about our market share gains.
And it's amazing to me kind of.
Where the service quality is so it just kind of that feeling of where you just feel like you are about to run over your competition and I think there's the possibility of that yes.
No.
You made a comment and then.
Again on service quality.
And the issue and all of the service lines that you participate and or is that the.
Cementing specific comment.
No.
I would say, it's very prevalent suddenly and tools.
It is this is not new but this always happens to coil right because it's such a tricky business and as activity grows coiled service quality will continue to degrade because when you bring new folks on and it's just it's a really tough one.
So I would say, we're seeing it across the board.
Probably the least impacted service line right now is wireline, but again you put any volume here.
And that's where you just start to see it break.
So I think and I think this might actually be.
And the toughest time, we've ever seen to claw of labor.
And that means and you kind of as the volume grows you're you know you're going to be really challenged to get talented folks.
And so I think the service quality and they get exacerbated and we've we're not even used to I mean I don't know if you saw the J B Hunt said, they've never seen the labor situation. This way and do we compete with trucking right.
I've never seen it like this for 37 years and that's a big comment.
So yeah, we're watching everything we're watching our labor I'm you know my weekly family of Pizza delivery has gone up three times and lead times and I was told last night, there's no driver and you might want to place the order.
So you know again this is moving very quickly the scariest part of course is availability of of product right.
And so you're trying to shift the closer of the company from shelter cash just in time inventory don't keep one boats on the shelf keep half of bolt glue. It together, if you need to and now you're suddenly saying no risk allocation of changed put stuff on the shelves. So we can capture the activity and it's like it's shifting the organization over.
The night to something that were feeling and the market.
Yeah.
Fair enough.
That's all from me for now and thank you.
Okay. Thanks for the car.
Our next question comes from the line of John Daniels of Daniel Energy Partners. Please proceed with your question.
Hey, good morning.
And just want to follow up on the.
The your comments on this and net market.
And the and the tightness in supply is that at this point and has it had an impact.
Oh.
On the operations and what not just for you just broadly for the industry and do you see it becoming an issue.
Later this year.
I would see the supply is tightening quickly and.
And I think John to answer your questions can be how much volume does the customer base and want to put into the market and then where are the manufacturers at that point and what we're doing right now John is we're competing with the construction industry for cement and clearly as you know they've been able to buy and much greater volume and so what's happened is as manufacturers of turn.
Their process to construction grade cement, which of course, we blend into the surface casing and when you're talking about the production strain you've got very specific classes of oilfield service the men and so suddenly those manufacturers are saying Hey, These guys are building homes at the rapid rate. So yeah, we don't really care about the oil and gas industry, we're going to turn.
And that off that's the problem. So those production strains are the ones that are really at risk.
Okay fair enough and the.
You'd noted.
The cement exposure and the Haynesville.
I, probably should know this but I don't use that of new yard for you guys or can you just give us his background.
Yep.
It is we so we decided to expand organically and 2020, and we got that yard up and running and we're really.
And we're excited about it the haynesville of a great basin for us.
So, yes, and we're and we're out and long view and it's a beautiful facility and we've got a super talented team there.
Lots of experience.
And as you know I mean, we it's harder there.
Yeah, if the water there, but you know we started the birth of our cement business was really got its start and the Eagle Ford shale. So we've got a lot of the technical background and our labs and our operations to deal with hot temperatures and the high pressures.
Okay would you find that the labor situation and east, Texas is tighter than other markets Youre in.
No.
And I would say the tightest market is probably if.
If I had to pin it today would be the northeast, but you know what John it's tightened significantly over the past 14 to 21 days.
Okay.
Well, here's the Mike this might be of politically and to that question. So I apologize in advance any listeners hear offended by it.
Do you see I mean.
Do you think we could see a loosening of.
And I and requirements to find another and to grow the labor pool.
And if you don't answer and Thats Fine and then just curious if that's an option.
How do you see the yeah, I don't need the answer to that.
Yeah, I I don't know the answer to that.
It could happen.
Not sure, but I didn't yeah.
Yeah. So I know again I have no basis to properly answer that.
No I have the same issue on pizza, and Kingwood and I cant and my favorite place shut down because they don't have and employees.
Should the advisors here.
And the capacity so yep yep.
Yeah, all right hey, good job on the debt reduction.
Thank you for your time. Thanks, That's my my Wizard and CFO over here just super great job. There. So it's very very very pleased with that.
Alright, you guys take care.
Alright. Thanks.
Oh and flow over two and Fox for additional remarks.
Thank you for your participation and the call today. We appreciate your continued support of nine thank you.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and we thank you for your participation.