Q3 2021 Nine Energy Service Inc Earnings Call
Greetings and welcome to the nine energy service third quarter 2021 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will solve a formal presentation.
Anyone should require operators citizens during the conference. Please crestar zero on your telephone keypad.
Reminder, this conference is being recorded it is now my pleasure to introduce your host other Schmidt. Thank you Heather you may be again.
Thank you good morning, everyone and welcome to the night Energy service, earning comical. He sat results for the third quarter of 2021 on the call with me today are and Fox, President and Chief Executive Officer, and guys Tear-gas Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward looking statements, reflecting 19.
Is 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 expectation revivalist Nourished review our earnings release and the risk factors to shop terrifying for the S. E C.
Take no obligation to revise our update publicly any forward looking statements for any reason or calm. 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 third quarter press release and can be found in the Investor Relations section of our website I will now turn the call over an impasse.
Thank you Heather good morning, everyone and thank you for joining us today to discuss our third quarter results for 2021, the quarter was slightly lower than what we anticipated rescue three revenue of 92.9 million coming below management's original guidance of 95 to 103 million, but still representing an increase.
9% over Q2, 2021, which outpaced both frat crew editions and U S completed wells, which increased between five and 6% quarter over quarter.
Q3 revenue was less than anticipated due in large part to labor constraints in the Permian basin, specifically related to our wireline operation we have spoken at great length about the labour scarcity and turnover in the oilfields, especially in the most active basins like the Permian.
We continue to compete with our peers for the same labor pool, driving up wages as little to no new Labour is coming into the industry because of this we were unable to field anticipated wireline jobs in this region starting in August and continuing through September by the end of the quarter, we were able to fulfill the majority of our labor needs for the Permian.
Airline division, but anticipate labor shortages will continue to be a significant challenge for nine across about business lines and for the O F S industry more broadly.
We saw nominal market activity increases throughout the quarter. The E. I, a reported completed wells, increasing approximately 6% quarter over quarter and U S. New wells drilled increasing by approximately 14% over that same time period.
A quarter and there was estimated to be approximately 209 active frat cruise in the U S, which was down approximately 2% from the August average of 213, the average active frack cruise increase approximately 5% quarter over quarter equating to approximately 11 total new frat Cruz added.
Even with very supportive gas prices activity in both the Haynesville in northeast Green study U S completions in the northeast and Haynesville increased approximately 2% and 5% percent respectively quarter over quarter, we are waiting to get more visibility into how natural gas prices will impact capex and <unk>.
<unk> in these regions for 2022, but expect areas like the Haynesville will see supportive activity increases for next year.
Despite U S completions, only increasing six per cent quarter over quarter ninth revenue increased by approximately approximately 9% driven by a very strong quarter in our completion tool business.
Reising across service lines remains low that said, we are continuing to implement incremental price increases of approximately 5% to 10% in both cementing and coil tubing, which will go into effect in queue for.
Within wireline price increases remain very challenging mostly due to the large competitive landscape within the service line. We anticipate completion tool pricing will remain steady into Q4 2021. The majority of current price increases are being offset by rising labor and material costs.
As I mentioned at the beginning of the call retaining recruiting Onboarding qualified labor remains very challenging the industry is not attracting lieber sources outside of the energy industry, which is creating a very competitive labor market and driving up wages on top of that our operational team is navigating COVID-19 many cruise or have.
Into quarantine unexpectedly and immediately and we are not able to fill in was excess labor not only doing this revenue, but we are taking on the cost of paying wages. During this quarantine period and any associated medical expenses.
All that said if activity picks up the labor market is so tight we would anticipate price increases in 2022, but we do not anticipate any major activity spiked for the remainder of 2021, despite very supportive oil and natural gas prices are operational team continues to execute in the field with revenue increase.
Across service lines between three and 18% and cementing revenue increased by approximately 8% driven by activity increases of approximately 18%.
The average revenue per job was down this quarter due to job and geographic mix, but overall, we continue to increase price and the service line.
<unk> revenue increased by approximately 18% quarter over quarter. This was driven by a mix of price and activity increases in both the Permian and Haynesville.
[noise] wireline revenue increase by approximately 3% in Q3 as I mentioned northeast activity remains steady and we were not able to field previously anticipated work in the Permian due to labor shortages.
Our dissolvable plug continues to perform very well this quarter, we increase the total number of Dissolvable Stinger sold by 18% significantly outperforming U S. Completions nine is uniquely positioned in having an extensive completion two offerings, which will require a little to no capital commitment or additional labor to grow with the recovery.
Additionally, the Dissolvable plugs will provide a more environmentally friendly completion option that eliminates or reduces the need for drugs services.
We anticipate pricing for drought services will continue to rise and potentially be unavailable as activity levels increase into 2022.
We still expect that Dissolvable plug will become a larger percentage of overall plug run in the U S and abroad, especially as our Dissolvable plug continues to perform very well downhole overall market activity increases and the labor and equipment market becomes less available and reliable I would now like to turn the call over to guy to walk through some.
Natural information for the quarter. Thank you ma'am.
September 30th 2021, ninth cash and cash equivalents were 30 million with 55.4 million of availability under the revolving credit so.
Resulting in a total liquidity position of 84 4 million as of September 30th 2021.
Availability under the a b O is based on accounts receivable and inventory bounces two hours, we build working capital in concert with Verizon revenue.
Borrowing base should increase quarter, we did not refer somebody available.
During the third quarter revenue totaled 92.9 million with adjusted gross Crawford.
An increase of approximately 71% quarter over quarter.
<unk> Q3, we did have approximately $2.4 million one off adjustments. They are positively affected adjusted EBITDA, including a sales tax refund of approximately 0.9 million as well as a workers compensation insurance refund of approximately 1.5 million.
During the third quarter, we completed 758, sometimes three jobs, an increase of approximately 18% versus the second quarter.
Bridge blended revenue per job decrease bright approximately 8%.
Some nursing revenue for the quarter was 29.5.
An increase of approximately 8% quarter over quarter.
During the third we completed 4793 wireline citizens, an increase of approximately 3% versus the second quarter.
The average blended revenue per Cedras, Florida.
Wireline revenue for the quarter was 19.2 million an increase of approximately 3%.
Incompletion tools, we completed 21815 stages.
Which was relatively flat or.
Completion tool revenue was 26.9 million an increase of approximately 10% due mostly to a larger mix of dissolvable plugs and higher price tool sold this quarter.
During the third quarter tubing day's work in approximately 12%.
Average blended dayrate for Q3 increase for approximately six or something.
<unk> utilization was 40% with revenue of $17.1 million, an increase of approximately 18%.
The company reported general and administrative expense of 11.1 million compared to 12.2 million for the second quarter Depree.
Depreciation and amortization expense in the third quarter was 11 million compared to 11, and a half million dollars in the second quarter.
The companies tax provision for the third quarter of 2021 was approximately zero and 0.2 million a year to do the.
The provision for the year is primarily attributable to sit in non U S income taxes.
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During the third quarter the company reported net cash used in operating activities of negative 1.8 billion.
The average dear so for the third quarter was approximately 58 days compared to 64.3 days in Q2, and 65.4 days year to date through September 30th.
Total capital expenditures for two three or 2.1 million.
The total capex through Q3, 2000 $21 million to $4.9 million.
Catholics Gardens remains unchanged at 15 to 20 million, but could come in below or at the bottom of the range. If we are unable to take delivery of equipment. This year, which we are unable to predict.
Looking ahead to queue for our largest outflows of cash will include our senior notes interest payment of approximately 14 million Ah remaining 2021, chopper and any changes in that working capital.
At the end of Q3 D E. B O was undrawn subsequent to September 30th we have drawn approximately 10 million on R. A b O credit facility as a reminder, as revenue increases so too with our accounts receivables inventory, which will increase availability of the ABL I will now turn it back to him.
Thank you Guy during Q3, we saw only moderate activity increases and do not anticipate significant activity increases going into Q4 operators are still focused on coming within or below their original 2021 Capex budget.
Which means we will have some typical queue for seasonality. However, we do not anticipate it will be as severe as we have seen in prior years as I mentioned, we have implemented minor price increases during the quarter and see mentoring and coil tubing, but wages and material costs are arising simultaneously, which is leading to little or no net price increases for the remainder of.
2021, we.
We are all very focused on 2022 and have begun bidding on work across all of our service lines. We are waiting for our customers to provide formalized plans to get a better understanding of activity levels, but with what we know today, we do anticipate north American capex, increasing meaningfully year over year, but it is too early to.
Provide formalized guidance on where we see the market going.
We do believe supply chain constraints, especially labor will become more severe not lesson into 2022.
Our appears we have conserved cash and delayed capex when possible and capital will be needed to get equipment back to work. Additionally, I do not see any near term solution for the labor shortages, we are facing putting more activity on a very fragile O F. S industry will lead to an inability to hire and fire crews.
As well as under performance at the website.
This will likely provide pricing leverage back to the service providers, which could allow the industry to drive net price increases.
Commodity prices are extremely supportive today and look to remain supportive into next year as OPEC and U S operators remain disciplined basins like the Permian and Haynesville will continue to be significant growth drivers for the industry and nine.
Looking into next quarter, we expect queue for to be flat to slightly up sequentially versus Q3 with projected revenue of 92, two 100 million.
We remain optimistic looking into 2022 at nine we remain focused on continuing to gain market share and net price increase across service lines through our technology and web site execution or completion tool business will be critical as labor and equipment continue to be a bottleneck, we are well positioned with balance.
Exposure across basins, and commodities, which will allow us to capitalize on activity increases across North America and abroad. We will now open up the policy Q&A.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation told me indicate that your line is in the question too.
You mean.
You make a store too if you'd like to move your questions in the queue for participants Susan's Peter equipment, and there'll be necessary to pick up your handset before pressing Mister <unk> one moment, please while I pull for questions.
Thank you our first question comes from <unk>.
To the capital markets. Please proceed with your question.
Thanks for taking my question.
God the the seven source of around 10 $75000. How would they are located between GMA in opec's in the quarter.
We'll call it would be mostly in mostly in opex, but I can I can come back to you off line with a better breakdown.
That's okay as long as we know it's most needed some help excess that's that's good to know okay and then in the.
And in terms of.
Revenues, you mentioned that it could be flat to up.
It is the same true for if it does well for Q4.
Yeah, we're not guarding adjusted EBITDA you know we did provide a range of 92 to 100 I would also remind you we had about 2.4 million of what we view as non-recurring items.
Items that affected adjusted EBITDA. So as you think about Incrementals I mean, you can make your assumptions there consider adjusting those one off items and just reflect.
The revenue guidance or whatever revenue forecast, yeah, I would also add to that will car that we are moving entry entry level labor costs, so that moves kind of what I'll call of the stock. So this poaching that's going on and the oilfield is creating.
Real traction in wage increases and we are not seeing corresponding.
Levels of of price increase to get again to get in that price that would ultimately impact that margin to the positive.
That doesn't mean, we don't think we get that in in 2022, but as it relates specifically to queue for I do think that will impact the margin.
Sure and typically what kind of delay do you see in Boston gone cost to the customer is there like a quarter.
Delayed typically.
In months.
Do you how would you classify that it's it's not a quarter it shouldn't be a quarter.
But it could be 30 to 45 days, so when the field folks cents, an issue or a problem with wage rates in the field as you know they're going to move instantly. So that'd be a day, one activity and by the time, they can pushing it price through.
That could be a 30 to 45 day lab. So again. These are these are gonna be drags on Oss margin as we all moved to retain our labor force that we have enter 2022, because there's you know Q1 will be very important.
Obviously as well the remaining quarters of 2022.
So again, it's a very dynamic environment. If you had asked me eight weeks ago. If I saw this tape of inflation on the wage line in this manner I would say no.
So at the I would say that there are so many variables that the leaders of these businesses are trying to anticipate but absolutely cannot predict accurately and I would say at the moment for 2021 without the increased capex spending without the increased rig count that is going to put downward pressure on Oss margins.
For 2021.
Yeah.
Okay.
And then.
And so there's still some time, but like what equally three is.
People are focused on that and you've got some bit payments coming due.
What's the.
Having discussions with the lenders and what's going to be the strategy over the next maybe six to eight months.
Yeah, well I am Gonna, let guy take the back half of this conversation I would say that right now we see a very supportive outlook for 22, perhaps an even more supportive outlook for 23 cities.
<unk>. This is truly a nice tied turn and I would also just to remind the market that this is a business it did somewhere around $10 million of the EBITDA and 16 somewhere around 140 in 2018, so the operating leverage and the ability to spring has proven.
It's not a guess and we are certainly a far better business today than when we came public so you're you've got.
Close to over 30% of your topline driven by completion tools. It wasn't near that in 17, it might've been 3% so.
Very differently position business far more capital light far more labor light.
And obviously far far greener, because we don't have the standard capital intensive. So I think we're very excited about the macro backdrop.
We've clearly moved our stage count and market share.
From that pre IPO time of maybe 5% to 7% of the stages in the U S market to up over 20% of the U S market. That's a very significant market share you can't see it in our financials right now because oss pricing is so depressed but.
But if we do see an inflection point in that Oss pricing it will be significant for our financials. So I think I personally and more optimistic for the outlook of the business then I have been in over two years and for new England or it's tough to be optimistic.
But with that I'll pass onto Guy.
Yeah. Thanks Man I think we'll card just add to that we've got we've got a healthy amount of liquidity.
We do have interest payment semiannually as you know.
But we think the company continues to operate as a going concern and we don't have any any concerns in that respect. So we'll continue on the business. There is a lot to look forward to in 2022, and obviously to the extent of our capital markets are supportive them and there's something to be done and then we'll certainly look to refinance or a.
Capital structure, that's something we're focused on we just need to see where this what the market has in store for us in 2022, but we're very focused on maximizing our earnings potential there yeah I would I would also just add one other driver here will car, we've been talking about Dissolvable plug for a long time, when we transacted with Magnum in ox.
Over 18, we forecasted for the market that we felt that north American land stages would be 35% to 50% dissolvable stages in three to five years and if you look at 2023.
Don't think we're going to be far off that forecast as it relates to percentage of Dissolvables. So we're feeling extremely encouraged about that clearly this ESG initiative is a major major push if we do see a price for carbon per metric ton. We've also obviously proven that we've reduced in metric tons on each wealth.
<unk> with the Dissolvable plug.
So again, we've also on top of that we have close to 60% stage efficiency for employee since 2018.
So again much more labor light not just not just capital light. So again very very encouraged as the macro backdrop is there.
As you make an important point in terms of when you compared to this to you said the completion tunes business is going to be the biggest piece of the business now than before.
Could you maybe highlights everybody just remind us again why is that important is it because you think the margins and completion towards a significantly better than some of the other businesses. So why do you highlight that is a key point yeah.
Yeah. So I highlight that is a key point because then the O F. S industry. When you hit a recovery point and if we had a recovery point in 22, you typically find businesses constrained because they have to put so much capex. So much capital N to drive the revenue and to drive the EBITDA. So when we came public one of our strategies was to be.
Capital light and completion tool of your Capex his pickup trucks right.
In a tin roof line the expenses the R&D, we have a very very nimble and flexible and low cost R&D program here and we're still able to be on the leading edge not only a frock plug but also other tools that we're working on a niche markets both in the U S Argentina and the middle.
<unk>.
So again I think you were looking at.
Less than the labor is less than half well less than half on a percentage basis of the revenue.
So it is a critically important service line very cash generative when you look at $100 of EBITDA and the completion tool business.
The great majority of that flows right down to your net cash increased so you just don't have the deductions coming out of that that you have for your other capital intensive businesses.
The other thing is again just that you think about the cruise for Frack first dementing for wireline for coil, that's tough that's a really tough piece of the business. So we're extremely excited.
We've got a product line, we launched in the teeth of Covid that has frankly taken off which is a real tribute not just to the R&D team, but also to the sales and operational team and I think honestly, we've got one of the best operational teams for completion tool. So sometimes you see people trying to a products.
Just be a products company and throw a product that the customer these wells are still.
Very unique very bespoke wells and they really do need tailored applications and that's what this team does so.
I really believe we're top three completion tool is in the market again, we've just gone through an epic downturn. So you don't see that in our financials and the.
Market share gains. His company has made is just tremendous and that will show up if this stage count rig count goes up.
Thank you very much and I appreciate the answers.
Thank you. Our next question comes from John Daniel Daniel Energy Partners. Please proceed with your question.
Good morning.
Earning.
And first of all congratulations on this Harper fidelis or very cool.
Thank you.
Question first I just have a good picture cause I'm not that smart when you look at the the tracks and your gun on that this call will block right now is it leaning more toward large cup cokes versus smaller player I'm, just curious who tends to do the early adopters.
Well I actually think that beauty here is that we're seeing.
Adopters from both.
Supermajors all the way down to small private and what we're really starting to see now John is increase share inside the wellbore. So for instance, where we really started seeing these used at the towed or really derisked, the toe and the drill out in the toe of these long laterals, we're starting to see those dissolvables really come up the well and.
As crushing and is punishing us COVID-19 was if forced our team to reduce the price of that dissolvable narrowing the gap between the Dissolvable in a composite.
And what that did it gives a completion engineer a chance to have an equal.
And yet they have.
Much much less emissions and a much smoother go of it and I think some of these operators as you well know they've got very tight production guidance right, they're spending very little capital and they've got they've got to answer to the street each quarter on their production. So if for some reason coil can't show up.
Because the capital is not there or the labor is not there and you can't get those wells online I mean, that's catastrophic most especially considering this commodity price environment. So those operators that are choosing to use dissolvables really derisked that next year.
And once someone.
Test the technology and cheese that at work.
Goofy questions because of a lack of line like what's the timeline of the process and then the likelihood that someone just says hey, we are absolutely standardizing on there and then you see a step change when your business.
I'm just you know my my folks would have much better answer, but if I had to give you an average I would say somewhere between three to six months.
Okay.
<unk> turned into a labor morning, and that John is over a period.
Again.
No.
Terrible degradation and break counts and completion natural already so what does that look like in a hot market. Obviously, the timeline gets compressed significant right right. Okay.
It just seems logical to me like if it works with the standard or conquer cause I'm a simpleton.
Labor markets in touch on the permanent being awful what degree of awful or the other markers for Ya Oh, I mean, the Bakken terrible like so I think operators up there really.
They're going to struggle a lot.
And you know we saw this remember in 2012, when the rig count was out of control in the Bakken folks couldn't even get their their wealth frack. So they went to sliding please not because it yielded better production or or or better well results, but because they couldn't get their wealth back. So they did the bulk of all places right.
And that's actually why we need it wasn't going to be extrapolated across the U S. Because it didn't yield better production answer the Vulcan is just a nightmare.
So and that's just because people don't live there. So you are having to import labor that state and.
And no one's doing that.
The Permian, it's just approaching nightmare it's.
It's just going to keep going so I would say, we hire and I think I've I've said this before but we're hiring three employees for one.
Right.
So that's you know.
That's not fun and if some of this infrastructure Bill gets passed us the same calling labor that the oilfield service industry needs.
Alright, so that's gonna that's gonna Cook this even even more.
Okay.
Oh sounds like fun, the laffer furniture, yeah, I think so I think every every leader is just I mean, we're going to be tremendously worried about safety out there.
Because devolves stretched our team so hard right, where we should have four we have three and we were we end the operators will start to see that show up in their safety Records.
That's good that's right, Okay, I'm, sorry, one more here Carter.
Oh hold on the phone recently announced the success of running the electric wireline ended up in the northeast.
Mm.
I'm curious what is the.
We always hear about electric rock and emission are currently equipment. There just what's the colon interest from customers on the wireless technology.
Yeah, I would say I would say when we first place the capital we took it in and out of the budget. Many times like do we need this is it relevant.
By the time the units were delivered and we had them we knew we had to have them.
So I would say that's been extremely dynamic where.
The call is strong for electric and.
And if you can green the whole pad people are very keen on that so you know again as you well know combustion might make up 30% of an operator's emissions.
The only way to reduce carbon is for us to actually take that diesel out and we were collecting data on this John but like our wireline trucks that we've refurbs, we might use 10%.
Of the diesel that we typically is so again, that's still a data collection, but regardless it looks to me, it's going to be significantly less so our approach to ESG is just beginning at nine.
But it will absolutely be practical and when I say that I mean, it's gotta be profitable for us and better for the environment.
And where are we can find those solutions like electric wireline that are both profitable for us and cleaner will do that all day long.
Okay.
Alright, that's all I have thank you for one of the questions.
Thank you.
Thank thank you for your <unk>.
Thank you for your participation in the call today. We appreciate your continued support of nine thank you.
This concludes today's conference disconnect your lines at this time, thank you for your participation.