Q1 2022 Nine Energy Service Inc Earnings Call
[music].
Operator: Greetings and welcome to Nine Energy Service Q1, 2022 earnings call.
Q1, 2022 earnings calls.
Operator: At this time, all participants are in listen-only mode.
Others are in a listen only mode.
Operator: A question and answer session will follow the formal presentation.
Operator: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Please.
Zero on your telephone keypad.
Operator: As a reminder, this conference is being recorded.
Operator: I would now like to turn the conference or to your host Heather Schmidt, Vice President Strategic Development and Investor Relations. Please, go ahead, ma'am.
Vice President strategic development and Investor Relations. Please go ahead ma'am.
Heather Schmidt: Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the first quarter of 2022. With me today are Ann G. Fox, President and Chief Executive Officer, and Guy Sirkes, Chief Financial Officer. We appreciate your participation.
And welcome to the nine Energy service earnings conference call to discuss our results for the first quarter of 2022 with me today are Ann Fox, President and Chief Executive Officer, and Guy <unk> Chief Financial Officer, We appreciate your participation.
Heather Schmidt: Some of our comments today may include forward looking statements, reflecting Nine views about future events. Forward looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. We undertake no obligation to revise or update publicly any forward looking statements for any reason.
Heather Schmidt: Filings with the SEC. We undertake no obligation to revise or update publicly any forward looking statements for any reason.
Heather Schmidt: Our comments today also include non-GAAP financial measures additional details, and a reconciliation to the most directly comparable GAAP financial measures are also included in our first quarter press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann.
Ann G. Fox: Thank you, Heather. Good morning, everyone and thank you for joining us today to discuss our first quarter results for 2022. We had a very strong growth quarter with revenue of $116.9 million, which fell above our original guidance of $108 million to $116 million, and reflect an 11% increase quarter over quarter. We generated adjusted EBITDA of $12.2 million, reflecting a 168% increase quarter over quarter, and an adjusted EBITDA margin of 10%. Incremental adjusted EBITDA margins were approximately 65%.
an 11% increase quarter over quarter. We generated adjusted EBITDA of $12.2 million, reflecting a 168% increase quarter over quarter, and an adjusted EBITDA margin of 10%. Incremental adjusted EBITDA margins were approximately 65%.
Ann G. Fox: Overall market activity did improve quarter over quarter with the average frac crew count increasing approximately 68% over Q4. According to 14 to 16 additional frac crews. According to the EIA, US completions increased approximately 3% and [inaudible] increased by approximately 15%.
The increase by approximately 15%.
Ann G. Fox: These increases are far from extraordinary, but as anticipated, any added incremental activity on a damaged OFS industry, has caused labour, equipment and material shortages, enabling us to implement price increases across most of our service lines and drive strong incremental margins.
Ann G. Fox: The majority of our service lines experienced activity or pricing increases this quarter. Cementing had an exceptionally strong quarter, with revenue increasing approximately 31% quarter over quarter, versus the average rig count, which increased approximately 13%.
Ann G. Fox: Along with activity increases, we`ve been able to implement double digit price increases and have had the most pricing leverage in this service line, thus far in the recovery. We anticipate it will continue to be a very strong service line for the remainder of the year. We operate in the most active basins in the US, including the Permian, Haynesville and Eagle Ford.
And continue to gain profitable market share through superior technology and service. Our market share in the Haynesville has already grown to approximately 33%., after just entering the market at the end of 2020. As a reminder, on our last call. We provided an update on the overall US`s solvable plug market, and estimated that approximately 20% to 25% of the US stages, completed at the end of 2021, used dissolvable plugs, versus 10% to 15% at the end of 2018. We project these percentages will increase to over 35% by the end of 2023.
solvable plug market, and estimated that approximately 20% to 25% of the US stages, completed at the end of 2021, used dissolvable plugs, versus 10% to 15% at the end of 2018. We project these percentages will increase to over 35% by the end of 2023.
By the end of 2023.
ESG initiatives, specifically the proposed climate rules, recently announced by the FCC, should help propel the adoption of dissolvables, as operators look for cost effective and scalable technology to help reduce emissions.
Typically the proposed climate ruled recently announced by the FCC should help propel the adoption of Dissolvable us as operators look for cost effective and scalable technology to help reduce emissions.
Along with dissolvables, we continue to believe we have one of the top performing completion tool portfolios in the US.
Wireline activity is steadily increasing.
Our team in the northeast has done an excellent job maintaining strong market share position in that region, and we have recently won market share in the Permian basin, which is reflected in the 7% activity increased quarter over quarter. With the exception of tools service line, we rarely forecast price increases. Wireline has been the most challenging service line to implement net price increases, due to the extensive competitive landscape, but we are beginning to gain traction as labor scarcity continues.
service line to implement net price increases, due to the extensive competitive landscape, but we are beginning to gain traction as labor scarcity continues.
Coil tubing revenue increased by approximately 11%, driven mostly by price increases of approximately 18% quarter over quarter. While we have gained traction on pricing, cost inflation, especially on wages, just continues to be a challenge. For example, the hourly rate for one of our entry level driving positions, which does require a CDL, has increased approximately 40% over the last 8 to 12 months.
It does require a CDL has increased approximately 40% over the last eight to 12 months.
While this is not the case across the organization, it illustrates the magnitude of these increases. Wage increases flow up the organization and while we work with the customer as quickly as possible to pass through these increases, there is typically a lag which can affect margin.
Company revenue for the quarter was 116.9 million, net loss was negative $6.9 million and adjusted EBITDA was $12.2 million. Basic earnings per share was negative 23 cents, ROIC for the quarter with 2.1%. I would now like to turn the call over to Guy to walk through detailed financial information.
All information.
Guy Sirkes: Thank you, Ann. As of March 31st, 2022, Nine's cash and cash equivalents were $19.9 million, with $54.7 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $74.6 million, as of March 31st, 2022.
On March 31st, 2022, the company had $20 million of borrowings under the ABL credit facility, and then subsequently borrowed an additional $7 million.
During the first quarter, revenue totalled $116.9 million, with adjusted gross profit of $22.6 million, an increase of approximately 52% quarter over quarter.
During the first quarter, we completed 1006 cementing jobs, an increase of approximately 14% versus the fourth quarter.
The average blended revenue per job increased by approximately 16%.
Cementing revenue for the quarter was $45.2 million, an increase of approximately 31%.
During the first quarter, we completed 4924 wireline stages, an increase of approximately 7%.
The average blended revenue per stage decreased by approximately 8%.
Wireline revenue for the quarter was $21.4 million, a decrease of approximately 2%.
For completion tools, we completed 23729 stages, a decrease of approximately 8%.
Completion tool revenue was $28.7 million, a decrease of approximately 2%.
During the first quarter, our coil tubing days worked decreased by approximately 6%, with the average blended day rate increasing by approximately 18%.
Coil tubing utilization during the quarter was 42%.
Coiled tubing revenue for the quarter was $21.6 million, an increase of approximately 11%.
During the first quarter, the company reported general and administrative expense of $11.8 million, which was flat quarter over quarter. Depreciation and amortization expense in the first quarter was $10.4 million, compared to $10.7 million in the fourth quarter.
The company recognized income tax expense of approximately 0.1 million for the quarter, resulting in an effective tax rate of negative 1.7% for the three months ended March 31st, 2022.
The tax expense for 2022 is primarily the result of our tax position, and state and foreign tax jurisdictions.
The company reported net cash used in operating activities of negative 6.5 million. The average DSO for Q1 was 62.7 days.
Capex spend for Q1 2022 was $2.4 million. As a reminder, we guided $20 million to $30 million of Capex for the full year.
The cadence of that Capex will depend on delivery of equipment.
In Q1, 2022, we largely offset our capex with asset sales, but we do not forecast this could continue for the balance of the year.
For Q2, our largest cash outflows will be our senior note 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.
Ann G. Fox: Thank you, Guy. We remain optimistic looking into the rest of 2022 and into 2023. Although WTI prices have been extremely supportive, we have not seen significant increases in activity above pre-announced 2022 plan, especially with the recent released from the US reserves, coupled with cost inflation for operators as price increases are implemented across OFS.
LFS.
As I mentioned previously, cementing has led on both activity and pricing with N9 service lines, due to the strong inflection in drilling activity at the end of Q4 and into Q1.
We anticipate this service line will continue to grow, but not at the same rate, as the pace of drilling activity increases normalized. We do expect completion activity to increase throughout the rest of the year, which should be a catalyst for further price increases in coil tubing and wireline.
Labour challenges continue, as well as finding reliable, well-maintained equipment. While we have begun to see positive traction in pricing, we still have a long way to go to return to sustainable profitability, and I believe we will continue to see OFS pricing increase throughout the rest of the year. This may serve as a headwind for operators to add incremental arrays in the near term, but additional activity will be needed to maintain and/or grow production in the medium to long term. OFS is also facing wage and material inflation.
arrays in the near term, but additional activity will be needed to maintain and/or grow production in the medium to long term. OFS is also facing wage and material inflation.
As I mentioned before, we are bullish on the outlook for the dissolvable plug market and its` continued growth. And I remain very happy with both the performance and adoption of the technology. We expect revenue for all of our service lines to increase in Q2, and we should continue to see net price increases in the majority of our service lines.
Looking into next quarter, we expect Q2 to be up sequentially versus Q1, with projected revenue of $130 million to $140 million.
We also anticipate adjusted EBITDA will increase in Q2 versus Q1.
[inaudible] both wage and material inflation, incremental adjusted EBITDA margins will be lower and more normalized for Q2 versus this past quarter.
We continue to prove our ability to capture a growing market, more than doubling our adjusted EBITDA in only one quarter. Our team is prepared and well positioned to generate growth with diversified service lines and geographic footprint.
We will now open up the call for Q&A.
Operator: Thank you.
At this time, we'll be conducting a question and answer session.
If you would like to ask a question, press star and one on your telephone keypad.
Star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You may press star two if you would like to remove your question from the queue.
For participants using speaker equipment it may be necessary to pick up your handset before pressing the star keys.
It may be necessary to pick up your handset before pressing the star keys.
One moment, please, while we poll for questions.
Four questions.
Our first question is from the line of John Daniel with Daniel Energy Partners. Please, go ahead.
John Matthew Daniel: And I guess first question is going to be a hard one [inaudible].
Hardwood minutes as Mark Technologists, who are you going to ask.
Let's assume the Dissolvable market achieves the estimated market share, so call it 35% ish, I think that's the number you had mentioned in the prepared remarks. Would a wide range of that, what would that mean to your financial results?
I assume the Dissolvable market achieved.
Estimated market share so call it 35% ish I think that's the number you had mentioned in the prepared remarks.
With a wide range of like what would be the what. What would that mean to you.
What would that mean to you.
Ann G. Fox: So think about this two ways. One, obviously, we feel we're market leader and very few folks have the position that we have in the dissolvable market. So, the competitive landscape there is just not saturated when you talk about scaling the technology. So, when you talk about dependability on execution, when you talk about materials dissolution and the predictability of that material dissolution, I would put us at number one, so when we work with the operator, you can, in a very accurate way, tell them when that material will be gone. And then, of course, we have to obviously isolate the wellbore properly. So, I think we do both in a fabulous way. So, if that market share grows, obviously it'll impact our revenue line significantly, but as you well know, part of our strategy, when we came public, was to be a relatively asset light inside of [inaudible] space. So that's a huge generator of cash. And, you know, as you also know, we were very, very light on R&D expense. We have a few incredible engineers, so we just don't over engineer this particular division, so the cash dropdown is huge. And also, think about the free cash flow conversion on $1 of EBITDA. It's almost 100%, not quite there, but again I'll remind the market capex in that business line is a pickup truck in a tin roof. So, you know.
So think about this two ways. One obviously, we feel we're market leader and very few folks have the position that we have in the dissolvable market. So the competitive landscape. There is just not saturated when you talk about scaling the technology. So when you talk about dependability on execution when you talk about materials.
One obviously, we feel we're market leader and very few folks have the position that we have in the dissolvable market. So the competitive landscape. There is just not saturated when you talk about scaling the technology. So when you talk about dependability on execution when you talk about materials.
Dissolution and the predictability of that material that solution I would put us at number one so when we work with the operator you can in a very accurate way tell them when that material will be gone and then of course, we have to obviously isolate the wellbore properly. So I think we do both in a fabulous way to is that market share.
Grows obviously it'll impact our revenue line significantly, but as you well know part of our strategy. When we came public was to be a relatively asset light inside of that space. So that's a huge generator of cash and you know as you also know we were very very light on R&D expense, we have a few.
Engineers, so we just don't.
We just don't over engineer this particular division.
So the cash dropdown is huge and think about the free cash flow conversion on $1 of EBITDA.
It's almost 100% because not quite there, but again I'll remind the market capex in that business line is a pickup truck.
In a tin roof. So you know it's that.
That part is pretty exciting and, I'm not sure if you've looked at the proposed SEC regulations, but they are onerous as a kind word I mean, its a kind word.
I think our operators had been looking first at frac, but frankly they`re going to need to look at every single thing if they`re going to punch down these emissions.
John Matthew Daniel: I have not read the SEC rules, that would put me sleep. I'm curious, as you're talking to the customers, I mean, clearly this is going to be an issue for them. At what point do they have the epiphany and say "you know what? we should pivot more." Does that makes sense?
But I have not read listen she rules that would put me sleep, but the. I'm curious as you're talking to the customers I. I mean, clearly this is going to be an issue for them at what point do they have the Epiphany and say you know what we should pivot. Pivot more does that makes sense.
I'm curious as you're talking to the customers I. I mean, clearly this is going to be an issue for them at what point do they have the Epiphany and say you know what we should pivot. Pivot more does that makes sense.
I mean, clearly this is going to be an issue for them at what point do they have the Epiphany and say you know what we should pivot. Pivot more does that makes sense.
Pivot more does that makes sense.
Ann G. Fox: Yep.
I`m thinking some time in the next 6 to 12 months, because these large accelerated filers, they're going to get hit with this very quickly. And so, I think you'll see our large publics will turn quickly. Obviously, John, your privates, you know, they don't care, so, it's kind of like how fast do they get gobbled up by the large publics? But, it'll be a very fast and furious focus and I think the timing to implement this stuff for the SEC, if it's adopted, it's pretty quick.
The next six to 12 months because you know these large accelerated filers, they're going to get hit with this.
Very quickly and so I think you'll see our large publics will turn quickly obviously John you are private you know they don't care. So it's kind of like how fast do they get gobbled up by the large publics, but it'll be it'll be a very fast and furious focus and I think the timing to implement this stuff for the S. E C. If it's adopted.
It's pretty quick.
John Matthew Daniel: Okay, and then a last one for me, its sort of a Monkey math question. I know you don`t want to give long term guidance, but I`ll ask, nonetheless.
But nonetheless, it seems to me I mean.
You guys could potentially be sort of on a run rate appointed by adjusted EBITDA by Q3, and that's right in that range. Would that pass the [inaudible] test ?
The smelter.
Ann G. Fox: It's not, it does pass the [inaudible] test.
John Matthew Daniel: Thank you very much.
Ann G. Fox: Thank you John .
Operator: Thank you. Our next question is from Waqar Mustafa Syed with ATB Capital Markets. Please, go ahead.
Next question is from Waqar Sayed with a T V capital markets. Please go ahead.
Waqar Mustafa Syed: Thank you for taking my question. Congrats, and a great quarter.
In the wireline and completion tools business, revenues kind of declined a little bit.
Could you maybe provide some guidance in why the revenue declined?
Ann G. Fox: Sure. So, if you do remember, obviously, we said the EIA project has told us that the completions activity went up about 3% quarter over quarter, but, just remember, in a lot of the basins that we work we had very significant weather delays on top of massive sand shortages.
So, we saw some pullback there.
We do not anticipate that in Q2. So we're very excited about that and you shouldn't see that again.
Waqar Mustafa Syed: Okay, and then could you give us the numbers for your active units for cementing, wireline and coil tubing in the Q1?
Cementing wireline and coil tubing in the Q1.
Ann G. Fox: Yes, and we're happy to do that all Waqar, maybe post this call would be best, but I would tell you that, if you think about utilization broadly, we are really mapped out on cementing, the one service line where you could see spare capacity on the frontline. In a chunky way, as wireline, the challenge for the service sector broadly is there`s no crews. So, to just give you an idea of the magnitude of this problem. I've been trying to hire 12 individuals for a large region in the Marcellus Utica for over 60 days for. And we cannot get them. Now, that doesn't mean we don't bring young folks in, and then they tap out in two days. I'm talking about retaining 12 qualified individuals. That is how tight this labor market is. So, regardless of stacked equipment, it's going to be a crew and labor problem, which we just can't accurately predict when that pressure eases. But it is very significant. So, that's going to be a real continued challenge for all of us.
Really mapped out on cementing the one service line, where you could see spare capacity on the frontline.
Chunky way as wireline the challenge for the service sector broadly is theres no crews.
So to just give you an idea of the magnitude of this problem I've been trying to hire 12 12 individual for a large region in the Marcellus Utica for over 60 days for.
For over 60 days and we cannot get them now that doesn't mean, we don't bring young folks in and then they they you know tap out in two days I'm talking about retaining 12 qualified individuals that is how tight the labor market is.
So regardless of stacked equipment. It it's going to be a crew in labor problem, which you know we just we can't accurately predict when that pressure eases.
It is very significant so I just you know that's going to be a real continued challenge for Oss.
Waqar Mustafa Syed: Yeah. And so there was also comments made that some of the capex for the year is for additional equipment. Would you be ordering that equipment given some of the labor tightness that you talked about? Number one. And then, in what areas are you thinking of adding capacity and what's kind of the lead time on new equipment orders?
And so there was also comments made that some of the capex for the year is for additional equipment would you be ordering that equipment given the some of the labor tightness that you talked about a number one and in what areas are you thinking of adding capacity and what's kind of the lead time on.
On new equipment orders.
Ann G. Fox: So, this is the capex budget that we put to the market earlier. I think, the point we've really wanted to make to the market is that the net capex of almost zero in Q1 is not going to continue, because we do expect to take delivery of those units that we put on order sometime this year. The challenge, as you mentioned, is that the labor market, I just painted a picture of that, the equipment market is even worse.
Mentioned is that the labor market I, just painted a picture of that the equipment market is even worse.
So OFS it's going to really struggle to get equipment delivered in a timely manner.
To get equipment delivered in a timely manner.
So, I think when the US operators go to increase their activity next year, which will have to do even if they want to maintain production, they will be doing that largely on the same equipment that they have today, because deliveries are already backed up sometimes to March and June of 2023. So, this is where we`re going to really see the supply chain struggle, which of course, you know, we don't dislike because it means that our opportunity to raise price goes up.
We're going to really see the supply chain struggle, which of course, you know, we we don't dislike because it means that our opportunity to raise price goes up.
So again, I think you can think about lead times, if you're going to place an order today you`re going to get that equipment sometime in June of 2023.
So again I think it's a you can think about lead times. If you have if you're going to place an order today youre going to get that equipment sometime in June of 'twenty three.
Waqar Mustafa Syed: Okay. And then, in terms of Q2, is due to incremental margins you mentioned more kind of normalize. So, what do you consider normalized margins?
And then in terms of Q2 is due to incremental margins you mentioned more kind of normalize so what do you consider normalized margins.
Ann G. Fox: Well, definitely not a 65% incremental, and I'll flip it to Guy, but far, far less than that. And again, I think you could see some stronger incremental in the back half, because Q3 is typically a very strong quarter for the service sector. But I'm going to flip it over to Guy.
Far far less than that.
And again I think you could see some stronger incrementals in the back half.
Because Q3 is typically a very strong quarter for the service sector.
But I'm going to flip it over to Guy.
Guy Sirkes: Waqar, we`re not guiding on margins quite yet. I think it's tough to guide incremental margins because there's so many moving pieces: pricings changing, labor costs, material costs are all changing, reactivating crews. All these things contribute to choppiness there.
We're not guiding on margins quite yet I think it's tough to guide the incremental margins because there's so many moving pieces pricings changing.
Labor costs material costs are all changing we're activating crews in.
All these things contribute to choppiness there.
I do expect there to be positive incremental margins. So, EBITDA should continue to increase, but we haven't guided a specific level. I mean, historically people think about incremental margins for this sector in the 20% to 40% contacts and I know that's a broad range.
But, it could be somewhere in there, or outside of that.
It's difficult to say right now.
Waqar Mustafa Syed: It makes sense. Thank you very much. That`s very helpful.
Thank you very much see helpful.
Ann G. Fox: Thank you so much, Waqar.
Operator: Thank you, ladies and gentlemen. There are no further questions at this time. And now, I would like to turn the call back to Ann Fox for closing remarks.
Yeah.
Thank you ladies and gentlemen, there are no further questions at this time.
And now I would like to turn the call back to on Fox for closing remarks.
Ann G. Fox: Thank you for your participation in our call today. I want to thank our employees, our E&P partners and investors. Thank you.
Operator: Yeah. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah. Yeah. [noise]. Yeah. Okay. Yeah. Yeah. Yeah. [noise].
Yeah.
[noise].
Yeah.
Okay.
Yeah.
Yeah.
Yeah.
[noise].