Q2 2021 Nine Energy Service Inc Earnings Call
Greetings, ladies and gentlemen, and welcome to 9 energy second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone require operator assistance during the conference. Please press Star Zero and your telephone keypad and it's now my pleasure to introduce your host Ms. Heather Schmidt. Thank you you may begin.
Thank you good morning, everyone and welcome for the 9 Energy Service earnings Conference call to discuss our results for the second quarter 2021 on the call with me today are Ann Fox, President and Chief Executive Officer, and <unk> Chief Financial Officer.
Appreciate your interest.
Some of our comments today may include forward looking statements, reflecting 9 to EBITDA from service.
These 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 on the risk factors discussed on our filings with the SEC, we undertake no obligation to revise or update publicly any statements.
Our comments today also include non-GAAP financial measures additional details on our reconciliation on the most directly comparable GAAP financial measure for all completed in our second quarter press release can be found on the Investor Relations section of our last guidance I will now turn the call over to Andrew.
Thank you Heather good morning, everyone and thank you for joining us today to discuss our second quarter results for 2021.
For the quarter was in line with what we anticipated with Q2 revenue of $84.8 million coming towards the top of management's original guidance of 78 to 86 million and representing an increase of 27% over Q1.2021.
During the quarter, we wrote down $2.4 million of tools inventory as we replace legacy tools and transition our customers to our newest technology, which did negatively impact our operating results, including adjusted EBITDA.
Market activity improved throughout the quarter with June activity is slightly stronger than anticipated well somewhat skewed due to weather related shutdowns. During Q1, the EIA reported completed well, increasing approximately 19% quarter over quarter, driven mostly by Permian completions, which increased by approximately 26 per se.
On a quarter over quarter U S. New wells drilled increased by approximately 24% over that same time period.
Quarter end there was approximately there was estimated to be approximately 205 active frac crews in the U S with approximately half of those operating in the Permian. The average active frac crews increased approximately 13% quarter over quarter equating to 23 total new frac crews added.
Activity in the gassy regions, specifically, the Haynesville and northeast remains steady, but the vast majority of activity growth for the industry and for 9 has come out of the Permian. Despite.
Despite completion, increasing 19% quarter over quarter 9 revenue increased by approximately 27% driven by activity improvement across service lines.
Pricing remains depressed so we have begun implementing net price increases in our cementing service line in the 10 to 20 per cent range as well as minimal price increases in our coiled tubing service line in the 8% to 12% range, we have been navigating through materials and labor inflation, some of which we are able to pass through to our customers mostly.
Within cementing and coiled tubing we've.
We remain focused on strategically implementing incremental price increases where applicable without sacrificing crucial market share with key customers. The largest challenge today is labor.
Is extremely difficult to find and retain qualified field personnel, causing many of our service lines Smiths revenue because of an inability to man equipment.
Additionally, a lot for us is fighting for the same labor pool as other industries, causing wage inflation that is in some cases superseding price increases while the labor shortage may potentially be a catalyst for implementing price increases within our service lines moving forward the magnitude of potential price increases will depend a great deal on the timing.
And pace of further rig and Frac crew additions throughout the second half of the year.
We do anticipate some wage inflation to continue for the remainder of the year as Oss increases its capacity all of that said as Oss recovered our strategy of being an asset and lever like company is coming to fruition from Q1 for Q2.9 revenue increased by approximately 27% versus on.
Head count, which only increased by 6% and our stages completed per employee increased from $16.8 to $19.7.
This will be an advantage for 9 as LFS continues to battle wage inflation and finding qualified labor in order to meet revenue goals and seen that day revenue increased by approximately 19% driven by both activity and price increases.
This service line has performed very well because of 9 service quality and technical theory, we continue to see cement shortages across the industry, which is helps create pricing leverage as well. Additionally.
Additionally, we continue to gain market share on the Haynesville basin and have already begun work for multiple large operators from this region and estimate our market share is already 15% 20%.
Coiled tubing revenue increased by approximately 32% quarter over quarter. This is driven by a mix of price and activity increases in both the Permian and Haynesville.
Wireline revenue increased by 46% from Q2, we have not yet implemented net price increases from the service lines that have seen market share gains specifically in the Permian driving the majority of the quarterly growth. Our Dissolvable plug continues to perform very well this quarter, we increased the net total number of dissolved.
Singer sold by over 40% the efficiency in ESG benefits of Dissolvable plugs continue to be better understood by our customers helping to drive adoption.
During 2020, we saw significant pricing declines in the Dissolvable plug market.
While we continue to bring our manufacturing costs down the decrease in price is also helping to increase adoption as coiled tubing and other ancillary service cost increase and service quality diminishes. We believe more operators will transition from composite to dissolvable plugs as well as hybrid to full wellbore him Dissolvable we.
We've also seen significant increases in our composite plug sales from Q1 to Q2, we increased the total number of composite plugs sold by approximately 42%.
I am confident we have 1 of the best performing downhole completion tools portfolios in the U S. We continue to battle competitors offering very low prices for products. We do believe quality and performance will went out and we are holding price steady.
Our R&D team is working to lower our cost of manufacturing.
Company revenue for the quarter was $84.8 million net loss was negative $24.5 million and adjusted EBITDA was negative <unk> 4 million basic earnings per share negative 81 cents.
I would now like to turn the call over to Guy to walk through financial information for the quarter.
Thank you Ann as of June 32021, 9 cash and cash equivalents for $33.1 million with $52.3 million of availability under the revolving ABL credit facility, resulting in a total liquidity position on $85.4 million as of June 32021.
Availability under the ABL is based on accounts receivable and inventory balances. So as we build working capital in concert with rises in revenue the ABL borrowing base should increase this quarter, we did not repurchase any of our bonds.
During the second quarter revenue totaled $84.8 million with adjusted gross profit of $8.2 million, an increase of approximately 89% quarter over quarter.
During Q2, we wrote down $2.4 million of tools inventory as we replace legacy tools and transition customers to our newest technology and this did negatively impact adjusted EBITDA.
During the second quarter, we completed 641, cementing jobs, an increase of approximately 3% versus the first quarter.
Average blended revenue per job increased by approximately 15%.
Cementing revenue for the quarter was $27.3 million, an increase of approximately 19% quarter over quarter.
During the second quarter, we completed 4639 wireline stages, an increase of approximately 35% versus the first quarter.
The average blended revenue per stage increased by approximately 9%.
Wireline revenue for the quarter was <unk> was $18.6 million an increase of approximately 46%.
In completion tools, we completed 21826 stages, an increase of approximately 26% versus the first quarter.
Completion tool revenue was $24.4 million an increase of approximately 22%.
During the second quarter, our coiled tubing days worked increased by approximately <unk> 25 per cent.
The average blended day rate for Q2 increased by approximately 5%.
Coil tubing utilization was 36% with revenue of $14.5 million an increase of approximately 32%.
The company reported general and administrative expense of $12.2 million compared to $10.2 million in the first quarter.
This increase was largely due to a legal accrual.
Depreciation and amortization expense in the first quarter was $11.5 million compared to $11.9 million in the first quarter.
The company's tax provision for the second quarter of 2021 was approximately zero point $1 million and 0.1 million year to date.
The provision for the year is primarily attributable to state and non U S income taxes.
During the second quarter. The company reported net cash used in operating activities of negative $19.6 million.
The average DSO for the second quarter was approximately 64.3 days compared to 65 days in Q1.
Total capital expenditures for Q2 were 900000, bringing the total capex spend through Q2, 2021% to $2.8 million.
Our 2021 full year capex guidance of 15% to $20 million remains unchanged.
But there is a possibility that a portion of this is deferred into 2022 and 2021 Capex comes in below or at the bottom end of the range.
For Q2, our largest cash outflows were our senior notes interest payments of approximately $14 million Capex and changes in net working capital looking forward working capital will most likely continue to be a use of cash as revenue increases I will now turn it back to Ann Thank.
Thank you Guy.
This quarter, we saw moderate activity increases each month with June being 1 of our strongest months from a revenue perspective since Q1.2020, as we mentioned on our last call. We do anticipate Q3 will be better than Q2 from an activity and revenue perspective. Additionally, we will have price increase increase.
Is in place for some customers within our cementing and coiled tubing lines that said our public customers remain committed to capital discipline. Despite very supportive oil prices because of this we anticipate only moderate activity increases for the remainder of 2021.
Activity remains very low when compared to historical levels, but we are facing an unprecedented labor shortage, which will be the main catalyst for potential price increases in our labor heavy service lines, including cementing coil in wireline.
Similar to other downturns as <unk> begins to ramp up hiring and on stack equipment. We also began to see a deterioration in service quality and safety, causing many customers to shift their focus from cost to performance, which should provide a very good opportunity for 9 from a market share on pricing perspective.
<unk> in our tools business as steady as is always the case for tools, we do not anticipate any price increases for this business in the near term, but are instead, increasing volume while also working internally to lower manufacturing costs and increase the margin.
As part of 2021 growth Capex, we are converting 2 of our existing wireline units to electric wireline easier.
These units are powered by lithium ion battery pack and can significantly reduce carbon emissions. We are we expect to receive these new units mid Q3, we are very excited to pilot this new technology and provide greener completions for our customers.
Looking into next quarter, we expect Q3 to be better sequentially than Q2 with projected revenue of $95 million to $103 million driven mostly by activity increases as well as price increases.
Today, we remain focused on continuing to gain market share across service lines as quality customers at positive gross margins. It is very important debt, we are managing growth within the business as not sacrifice service and product quality as well as safety. We believe we are well positioned to capitalize on a recovery with our asset and lever light business model we will.
Now open up the call to Q&A.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star 1 on your telephone Keypad, Inc.
Information total indicate your line is on the question queue. You May press star 2 if you'd like to remove your question from the queue.
So we're just simply using speaker equipment, it may be necessary to pick up the handset before pressing the star kids.
On long Crazy, we poll for questions.
Yeah.
Our first question comes from the line of J B Lowe with Citi. Please proceed with your question.
Hey, good morning, guys how are you Mike.
My question was good morning, great great low.
That's just on Incrementals going into <unk>. It looks like you did about 35% Incrementals on the gross margin front in <unk> should we expect something similar for <unk>, given given the moving pieces between.
Cost inflation.
I think it's not unreasonable again.
I imagine you're normalizing for the inventory write down.
Yeah. So I'm on we're clearly not guiding it but I don't think it's unreasonable thought.
Hi.
Okay. So I guess.
The corollary to that is is how much of the pricing that you're pushing through do you think is going to be net as it all growth are you not pushing through all the pricing all the cost I mean Disney.
This is our conversation you know 6.7 times, a day and the data is moving so significantly on the cost side, both for labor as well as materials.
So for 2 days do you think you understand what that's going to be and then all of a sudden you'll get news that there's been inflation on some certain component or a piece of material that you're using.
And or wages have moved where you didn't think they were going to.
So my answer for you is we just we don't know yet.
We can suppose based on what the company has done historically and inflation we've faced in the past but is this is a very very dynamic market and I'll tell you.
Of the ups and downs and the contractions, we've dealt with before in the expansion. This has been the toughest 1 from a forecasting perspective, it's just it's literally like a movement and something you didn't expect every 3 days.
Got you.
The other day.
As you know we also the whole country, obviously as it is experiencing the delta variant.
So you're going to have some costs that come through from that as well.
<unk> already got short labor in the market.
We're already missing revenue prior to Delta for labor shortages on.
And this is generally speaking.
Oil patch, that's not you know.
Jumping up for joy over the vaccine.
So just factor that in as well and it's something that should be top of mind for everybody customers included.
Gotcha Okay.
The other 1 was just on guidance 1 might be for you. What do you. What are you guys expecting for free cash flow or cash.
Cash used from the back half on when do you think free cash flow positive this possibility.
Yes, so you know.
As we discuss working capital is going to continue to be a use of cash. So as revenue rises you'll see accounts receivable and to a lesser degree essentially inventories build as well so that's going to be.
On a drain on cash our Capex you would've seen we spent very little capex from the first half of the year. So our capex budget is necessarily going to be back weighted and we've also got.
A coupon payment for the bonds here in in the back half of the year as well.
Okay. Thanks.
Thanks.
Thank you. Our next question comes from the line of John Daniel with Daniel Energy. Please proceed with your question.
Hi, Thank you thanks for putting me on.
And it was hoped morning, John elaborate a bit more on the just the ESG benefits all good as all goals and have you had a chance to measure relative admissions from.
That oh products versus the traditional drill outs.
Any color would be yes.
Sure Yeah, So we actually did reach.
We conducted an independent environmental study when we took on the Dissolvable plug on what that means is it's a conversation frankly, we're seeing and frequently in the country, but what we did is called a cradle to grave environmental assessment. So that means from source all the way through manufacturer all the way through disposal looking at the entire life.
[noise] cycle of the conventional plug versus the Dissolvable plug.
And so I'll give you the round numbers, but it's about if you if you did a conventional clean out on.
And you had 70 clubs John it's about 75000 kilograms of carbon equivalent if you use that 70 plug dissolvable.
The offering that we have it's about 7000 kilograms of carbon equivalent on now if you look at a 6 well pad on youre talking about a pretty extreme difference. There. So you were talking about 400 and for a metric tons of carbon or 80 for cars coming off the road.
And I think you know when you think about our customers, it's darn hard to get to some of our goals and I think theyre going to have to look at everything on combustion is obviously a big concern in combustion is the service base.
So wherever we can we're trying to take the emissions from combustion out of the picture what really happens with the dissolvable as youre not youre not using the gallons of diesel on a drill out so when you're sitting there drilling out either with your workover rig or your coiled tubing unit all of those gallons of diesel.
Our significant we're taking that right off the pad on.
We're also working on other Dissolvable component I mean, I won't get into details, but we're seeing not only much less used in water pumping down.
But frankly tons of diesel savings so what we're starting to do as a company is really focus on that diesel on its measurable it's quantifiable.
And so we're trying to set this up where we can offer our customers the choice frankly.
Between some of the greener cleaner completions or more conventional and obviously you can imagine our public customers are going to be very focused on this some of our privates won't so we've got to have offerings that reflect those various pressures.
On each on on each constituent that we serve so we're really excited about it you know when we acquired Magnum in October this is part of our.
Part of our thesis and part of the industrial logic.
At that time nobody cared.
And now people do so I think we're going to start to see this pushed the dissolvable offering and on top of that you know the close day, so well that pricing is going to move very considerably because it is 1 of the most labor intensive and capital intensive service lines for when you think about the inflationary pressures on both of those lines we.
Back on and you think about the absolute cash constraints of this sector across the board.
That service line is going to become quite expensive and so we think that that coupled with the pricing degradation. We had on the dissolvable plug market last year is really going to further push the dissolvable offering. So we're pretty excited about that and we're also seeing our operators have a tremendous amount of trouble drilling out plugs in low pressure environment.
Out in the Permian, So and I'll just remind the market. We just introduced the Dissolvable technology for the Permian in Q1 of 2020, so it's hardly had a minute on.
To get up and run so we're pretty excited about this 40% quarter over quarter pop in the Dissolvable sales.
Okay.
I just want to follow up on that yesterday for now.
Although it's impossible to measure relative change in terms of customer that's on that but the ESG thing is clearly without looking real good I mean, absolutely.
Just elaborate on true cost of interest on Dissolvable willing to taken the beatings versus what might have interest in Q4, because we wanted to sell classes as I'll close on interest.
On the uptake has been on B livable, So I would say over the past 60 to 90 days. This went from something if you. If you talk to my guys out in the field selling there was never even the word emissions in the conversation.
Not even present and.
Now it seems to be.
On part of the conversation constantly I mean I was on a location up in the northeast everyone on a frac ban is talking about it I mean, it's just it's suddenly has appeared.
And the rate of change has been I can't quantify it for you, but it's been unbelievable okay.
Thank you very much good luck to score.
And then also John I'm going to tell you. Another thing is I think similar with our safety stats in the service sector. If you dropped back.
Before the service sector cared about safety the customers started carrying about it when you couldn't get on the well pad unless you were safe we see the same thing emerging with ESG metrics is that the service sector will come under pressure to demonstrate kpis in ESG.
And that will of course help 9.
Thank you very much on thank you.
Okay.
Thank you. Our next question comes from the line of what course I It with a T V capital markets. Please proceed with your question.
Thanks for taking my question and could you provide when he comes on.
Yes.
Could you provide some of my ear on what the mix is in terms of assumes between composite plugs and Dissolvable book space now.
Yeah.
You know, we actually don't give the exact mix.
Certainly has strong growth quarter over quarter on.
For Dissolvable <unk> as well as composite on.
But the stingers are our singer technology is a huge piece of our Dissolvable offering we launched as you know a bunch of new technology last year, we're seeing a lot of great adoption.
So you know again I can't quantify it for you, but I can tell you the percentage increases is very significant especially relative to the completions that we're seeing in the market and I would also give you a little color on the car, where we're seeing more customers now got a full wellbore.
So we haven't seen that previously and that's been a market change.
Yes.
Good.
And of vs.
Hitting about supply chain issues with on the cement.
Cement Inc side.
Quite a bit avail.
Availability of.
Well said cement.
Well, what's 9 doing with regards to getting and making sure that you've got the ample supplies of cement.
Okay.
Hello.
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You bet your life.
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Ladies and gentlemen, please standby.
Thanks for the technical difficulties.
Yes.
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Yes.
Okay.
And we now have them back on the line.
Okay.
Hello, Sorry, I think we had a technical issue there can you hear us.
Yes, we can.
Sorry for car I'm, not sure where I left off I was rambling for awhile there until we realize the line was cut.
No we were just talking about the cementing of supply chain.
Yeah. So.
I was just saying that there is.
Went all around about it but the long the short answer is there's no great way to shelter the service sector from the cement shortages.
The fortunate thing for US is our market share is so significant debt. We've got really good relationships. I was also saying that quality of Sina is really bad right now.
So I was I was saying that some of our folks are literally qualifying at bottom of the barrel, which means it's filled with lots of little rocks and things that shouldnt be in there and so to me if I'm a customer that makes me even more concerned about getting a cement company with excellent process.
And execution and QA QC.
As you're well aware, even on a rock or 2 can can throw off everything when you're trying to execute long strings. So.
I think it's a very real problem I think we will see it persists.
And I think we'll see it exacerbated in Q1 as our operators on potentially put up more rigs. So I think this is this is a big deal and if I'm a customer I'm worried about it.
And again, where we just haven't seen it at this level before ever.
All your suppliers trying to rectify this issue do you think that gets rectified or they're just so focused on providing.
Providing building cement that they don't really care about oil and gas sector.
I don't think they are trying to rectify it I think they don't care.
Historically, we've thought about the service industry as about 5% to 7%.
Of kind of the classes of cement globally. So we've always been a very small piece of the pie for these guys and now were just much smaller casino of course during the pandemic construction was great.
Clearly the oil and gas industry was not and so we're now an even smaller piece on far less relevant for them. So on.
I don't think there's really any reason for them to turn their wheels considerably right now.
So again.
We're watching this very very closely.
And I think we're well positioned relative to competition to handle it but it's I think the bigger concern is for the folks that are that are not locked in with long term relationships on this could be a very significant problem and of course, when you have the United States operating on razor thin maintenance production.
And very.
Very tight guidance quarterly for their production this could become very interesting.
So and we.
Are you seeing.
In pumping and other and others in other segments as well.
This.
Customer focus on low emissions fleet are you seeing any.
Any trends towards changing that upgrading cementing fleet towards low emissions as well.
I mean, I think the customers are very focused on having fleets that are electrified.
Even having a <unk>.
Products and materials that are renewing as possible I think the challenge is the customer base largely doesn't recognize the cash constraints on the service side.
Which is you know as you well know a diesel based service industry. So it's not that it can't be done is that there's no funding to do it.
So I think Thats therein lies the challenge.
But I do think there's.
Think 2021 is probably qualified as electric is more kind of the right to play on hold market share, but that could quickly turn to electric becomes.
A way in which you garner incremental price gestures scarcity.
Yes.
And.
And.
Because of labor shortages, I know last cycle as well that you were refusing jobs because you were worried about service quality.
And.
Are you close to debt and if so what do you think the revenue impact is by for foregoing jobs because of.
Labor labor not meeting your standards of quality.
Yeah, It's a great question Waqar.
Haven't quantified it for the market, but I suspect it gets worse not better on.
So again, we're getting labor that's obviously, if we get it its a very new to the market.
And so you've also of course, most service companies have cut back all support functions for your ability to and take that labor and properly train them on both from an operational execution perspective, as well as the safety perspective is limited.
And then you layer Delta variant on top of that very complex situation here.
So.
I think I think that gets more challenging not less challenging and I think this is going to be very similar to what we saw as the market ramped up and each 117.
For our customers had been ridiculously focused on price only on.
And suddenly had such massive service quality issues and safety issues are they starting to revert back to quality debt.
We suspect there will be a similar trend most especially as we come into 2022 and activity picks up even incrementally.
So again I think this is it's going to be an interesting time in.
And we will see and hopefully our customers start requiring vacs cards to get on the well site or it can be very challenging for service yeah.
Just 1 final question Guy.
Could you confirm that the coupon payments are due in Q4.
Yes, Theres a coupon payment that's due in Q4, yes $14 million.
Great. Thank you very much thanks, Thanks Anthony.
Thank you. Thank you ladies and gentlemen at this time there are no further questions I would like to turn the floor back to Ann Fox for closing comments.
Thank you for your participation in the call today. We appreciate your continued support of 9 thank you.
Okay.