Q2 2022 Nine Energy Service Inc Earnings Call
Good day and welcome to your Q2 2022 nine energy service earnings call. All lines have been placed on a listen only mode and the floor will be opened for your questions and comments following the presentation.
If you should require assistance throughout the conference. Please press star zero to reach a live operator at this time. It is my pleasure to turn the floor over to Heather Schmidt Vice President strategic development Investor Relations and marketing the floor is yours.
Thank you.
Everyone and welcome to <unk>.
<unk> service earnings Conference call.
Discussing our results for.
For the second quarter of 2022 with me today are 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 90 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 expectations.
We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC, we undertake no obligation to revise or update publicly any forward looking statements for any reason.
Our comp today. 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 second quarter press release and can be found in the Investor Relations section of our website I will now turn the call over to Ann.
Thank you Heather good morning, everyone. Thank you for joining us today to discuss our second quarter results for 2022, we had another very strong growth quarter with revenue of $142 3 million, which fell above our original guidance of 130 to 140 million and reflects the <unk>.
<unk>, 2% increase quarter over quarter, we generated adjusted EBITDA of $18 9 million, reflecting a 55% increase quarter over quarter and an adjusted EBITDA margin of 13%.
Incremental adjusted EBITDA margins were approximately 26%.
Overall, the market continues to improve from both in activity and pricing perspective, we estimate the average Frac crew count in Q2 was approximately 250, an increase of approximately 8% quarter over quarter.
E I, a reported completions increased by approximately 3% and new wells drilled increase by approximately 15% as I mentioned, our revenue increased by approximately 22% quarter over quarter versus the average rig count which increased by approximately 13%.
And the majority of our service lines, we have seen both activity and pricing improvements, we have and continue to implement net price increases specifically in our cementing and coil tubing service lines, enabling us to drive strong incremental margins again. This quarter. There continues to be a shortage of qualified labor and equipment in the industry.
Which has been the main catalyst for price increases for nine and many of our peers. This will only be exacerbate exacerbated by any incremental activity added throughout the remainder of 2022 and into 2023 and with what we know today, we anticipate price increases will continue.
Labor and supply chain bottlenecks remain an issue in the unemployment rate remains around 3.6% because of this there is still very little new labor coming to the energy space.
Our cementing service lines had another very strong quarter with revenue increasing by approximately 22% versus Q1, we have talked about the favorable competitive landscape in this service line and strong technical and capital barriers to entry because of this we have seen the strongest pricing leverage in this service line, thus far in 2022, coupled with increases in jobs.
Completed across all of the basins in which we operate.
Additionally, supply chain issues around the availability of raw cement have constrained some competitors, providing market share and pricing opportunities for nine we believe there's additional earnings power within this service line as we continue to move price and expand margins. Our completion tool division increased revenue by approximately 15% quarter over quarter.
And mostly by a 33% increase in Stinger Dissolvable plug sold our Dissolvable technology continues to perform well and we continue to believe in the adoption of the technology moving forward wireline revenue in the second quarter increased by approximately 23% driven mostly by market share gains in the Permian and price increases we are starting to see.
Some traction in wireline pricing, but this continues to be our most challenging service line for generating net price increases coiled tubing revenue increased by approximately 28% driven mostly by a combination of increased utilization and price increases recently, we began running coil operations in the Eagle Ford out of our cementing facility, which has helped propel revenue and earnings in there.
Service line.
Revenue for the quarter was $142 3 million net loss was negative 1 million and adjusted EBITDA was $18 9 million basic earnings per share was negative three.
Oh I see for the quarter was 11.4% I would now like to turn the call over to Guy to walk through detailed financial information.
Thank you Ann as of June 32022, Nine's cash and cash equivalents were $22 4 million with $52 1 million of availability under the revolving ABL credit facility.
Faulting and a total liquidity position of $74 5 million as of June 32022.
On June 32022, the company had 27 million of borrowings under the ABL credit facility. During the second quarter revenue totaled $142 3 million with adjusted gross profit of $29 6 million, an increase of approximately 31% quarter over quarter.
During the second quarter, we completed 1148, sometimes doing jobs and increase of approximately 14% versus the first quarter.
Blended revenue per job increased by approximately 7%.
<unk> revenue for the quarter was $55 2 million an increase of approximately 22%.
During the second quarter, we completed 5441 wireline stages, an increase of approximately 10%.
Average blended revenue per stage increased by approximately 11%.
Wireline revenue for the quarter was $26 3 million an increase of approximately 23%.
For completion tools, we completed 29342 stages, an increase of approximately 24% completion.
Completion tool revenue was $33 1 million an increase of approximately 15%.
During the second quarter, our coil tubing days worked increased by approximately 20% with the average blended day rate increasing by approximately 6%.
Coil tubing utilization during the quarter was 50%.
Coiled tubing revenue for the quarter was $27 7 million an increase of approximately 28%.
During the second quarter, the company reported general and administrative expense of $12 5 million depreciation and amortization expense in the second quarter was $10 3 million.
The Companys tax benefit for the second quarter was approximately zero point $5 million and zero point $4 million year to date. The benefit for 2022 is the result of our tax position and state and non U S tax jurisdictions the.
The company reported net cash used in operating activities of negative zero point $4 million.
The average DSO for Q2 was 57 days.
Capex spend for Q2, 2022 was $3 7 million, bringing total capex spent as of June 30 to $6 1 million.
Our full year Capex guidance is unchanged at $20 million to $30 million.
Even some of that Capex will depend on delivery of equipment.
This quarter, we also paid our senior note interest payment of approximately $14 million or second payment will be in October I will now turn it back to Ann.
Thank you Guy we remain very optimistic on nine outlook for the second half of 2022 and into 2023. It is difficult to gauge the magnitude of any recessionary pressures that may impact the industry. However, we believe north American shale and short cycle project product production will be vital.
Oh for global supply, while we have seen our public customers remain committed to capital discipline incremental activity will be needed to meet U S production forecast. Additionally.
The $1 million per day per month from the strategic reserves will end in Q4.
O F. S companies are also adopting capital discipline, which has limited equipment in the market for those that are allocating growth capital orders are delayed up to 12 months because the majority of new equipment will not arrive until mid 2023 and will need to be crude.
This backdrop sets up quite well for Oss and nine <unk>.
Despite both wage and material inflation, we have increased our adjusted EBITDA margin 900 basis points over the last few quarters and we are still focused on increasing prices, which we anticipate will continue to increase throughout the remainder of 2022 and into 2023 as I mentioned on our last.
Carl 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 adopting the technology. We expect revenue for all of our service lines to increase in Q3, and we should continue to see net price increases looking into next quarter, we expect Q3 to be up sequentially.
Versus Q2 with projected revenue between 145 to 155 million. We also anticipate adjusted EBITDA and cash flow will improve sequentially for Q3.
<unk> geographic and service line diversity positions us well for further growth.
We like our peers are bullish on the cycle, our asset and labor light strategy is working well our Q2 adjusted EBITDA margin is only 100 basis points below our full year 2019 margin with additional runway in moving price within our service lines as well as increasing volumes of our tools.
We will now open up the call for Q&A.
Thank you the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone we ask that while posing your question you pick up your handset to provide the best sound quality again, if you do have a question or comment. Please press star one on your <unk>.
Telephone keypad at this time, we will take our first question from John Daniel with annual Energy. Sir. Please go ahead.
Thank you good morning team.
Good morning, and I'd like to us.
I'd like to start on the cement markets.
The cement challenges that existed I think like you do in early Q3, if I'm not mistaken and how you've gained share I'm. Just curious the 30000 foot question. If the rig count goes up another 50 to 100 rigs, which I think is sort of what conventional wisdom is.
How does the cement supply how does that play out.
We're concerned about it and you know I think one of our folks on our team said some of our customers are like well is this the the little boy, who cried Wolf, but every single time, we think we've solved for the situations on it gets tighter and tighter and we come closer and closer in and not being able to solve for it. So we're already working through customer lesson.
Kind of deciding who may get it and who may not based on efficiencies and kind of length of time with us et cetera, I do think the U S market could run into a problem. We're clearly seeing a lot of our cement providers are doing seeming to do a lot more maintenance. We obviously also are seeing challenges.
With our imports from Turkey, that's where we import the largest amount of cement in the U S. So I think it's a really very very challenged situation and I don't think we've seen the worst of it yet.
Okay.
Uh Huh I'm going to turn it to the Dissolvable for a moment I think you said, 33% increase in units. So I'm curious if you could just characterize.
How much of the gains or new customers versus existing stepping up their purchases just any color.
Yeah sure I mean, I think we've seen as he said just to remind the market two of where we've been for a minute. When we acquired the Dissolvable technology in 2018, we estimate that the U S market with somewhere between 10% to 15% Dissolvable technology and at the time, we said we had hoped that by 2023 it would be.
35% to 50%.
Where we're convinced that it's around 25% of the U S market today, and I would say that where we're really split John and gaining traction with new customers as well as moving up the wellbore and gaining share.
Within the market. So I think where we're seeing both we're seeing conversion of composite plug customers and then we're seeing them more rent. If you will in the Wellbore I think also with the current potential SEC disclosure requirements around.
E S. P N emissions, our customers are certainly going to have to try and push down those emissions wherever possible and obviously avoiding drill outs is a very environmentally friendly option.
So I think again, we're pretty excited about this.
Okay, and then last one for me and hopefully it'll messes up if I asked it but as we think about the dissolvable.
Market I kind of think of like a plant that's making these units like where are we in terms of the capacity like how much could you.
How much more room for making more if you will exist.
Dumb question, but just to understand where we are from like no no. It's not it's not a dumb question and actually given your previous question on cement allocations. It's a very relevant one I think we don't feel constrained right now so at the moment, we feel like we've got capacity to serve the market.
Now as you're aware supply chain disruptions come to Ceos, and very unexpected ways with very little visibility, but at the moment, we don't see constraints there like we see for instance in cement.
Fair enough okay. Thank you very much.
Thank you Tom.
We will take our next question from Waqar Sayed with ATB capital markets. Please go ahead.
Thank you for taking my question good morning.
Good morning.
And.
<unk> gross profit margins were roughly around 30% in Q2, what's your expectations for Q3.
Yeah, I think much stronger I think youre going to see significant incremental margins coming into Q3, given the price increases that were handing customers. So I think youre going to see a much stronger incremental margin.
So 40% to 50% kind of range is that a doable number.
I think it could it could be in excess of that what car were really starting to get some traction here and I think what folks are going to see is the back half margin profile is is going to be very nice.
Okay great.
And the same lines of.
Do you see us.
Generating free cash flow positive free cash flow in Q3.
I think that's a very fair assumption yes.
Okay.
That seems a bit that.
Certainly positive and then for Capex I know you don't change the guidance.
The run rate seems to be very low for capex.
So is it like fair to say like the northern and $20 million is more realistic than the Brent.
Waqar I think it's just going to depend on the pace of deliveries.
So I think we'd like to maintain the full range 20 to 30.
As you know, it's it's difficult to.
To get things right now and so we're working on fulfilling our program. It is going to be back weighted and the the exact figure it lands on will just depend on timing of these deliveries.
Okay.
And in terms of what what are your clients kind of generally saying about the activity levels in the haynesville for.
For the second half and then.
And Permian as well and also like are you having initial discussions about 2023 activity levels and what are you hearing.
Yeah, I mean, I think the big question for the market is you know what happens with standard Q4 seasonality and I think that could be very different this year. Given the fact that the trains are not running on time operators need to meet their production guidelines, we're all well aware of supply chain constraints.
I think it's a mixed bag, but I think you could see operators.
You know be a little bit more forward on their activity they've clearly a lot of them have already guided to the upper end of their capex range for.
For next year, many of them are indicating there'll be some level of growth, although single digit growth. So I think for us on an already constrained market that bodes very well for us both from an activity and a pricing perspective.
As I said the people and equipment are both very challenged right now so any incremental activity of any significance.
You know again I think it sets up very well for continued strong.
Margin walks into next year.
Okay and then just one final question on SG&A. It was around Covid wasn't a half million for Q2, what's the expectations for Q3 and Q4.
It should be it should be similar going forward Walker.
Generally similar.
Okay, great. Thank you very much very helpful.
Thank you Waqar.
We will take our next question from Ben ticket with E. F. Hutton. Please go ahead.
I appreciate you guys, taking the question I just wanted to kick off.
Is margin question.
Maybe you could dial and do it a little bit deeper.
Your comments on the 50% incremental or.
Actually bullish.
Kind of the sustainability of that margin.
Margin to work and maybe your longer term when you look at the mix of the portfolio.
You know kind of a peak margin for the business looks like given all the kind of retooling that you guys have done.
Yeah, I mean, it's a it's I think it's everybody's question right is what does it peak margin look like if you look at 2018.
Obviously, a robust rig count at that time, you know the business had around a 17% adjusted EBITDA margin, which fell to about 14% in 2019.
So I think we're certainly going to see back half margins.
They get very close to that level and then the question will be in 2023, what kind of inflationary environment are we facing what.
What time type of activity to our customers come forward with and with our ability to continue to push price, but I do not think it's out of the norm for us to see a margin profile that looks very similar to 2018 going forward and of course, a much more cash generative business because we've got so much of our revenue derivation now from completion tools relative.
To where it was in 2018, so so we're very pleased with that.
Our completion tools as a business when you think about it that you know may be spent half a million dollars of capex a year right. So you're talking about a very low capital outlay and this was part of our strategic initiatives. When we came public was really to try and become more asset light and labor light.
Both of which are achieved through completion tools and that really balances off those heavier capex line. So so we're pretty excited about both the margin traction we see as well as the cash flow generation for the business and I hope that answers. Your question, if it doesn't and I'm happy to expound on it.
That's great. Thank you very much.
Thank you.
This concludes our question and answer session I would now like to turn the call back over to Ann Fox for closing remarks.
Thank you for your participation in our call today I want to thank our employees, our E&P partners and our investors. Thank you.
This does conclude today's teleconference. We thank you again for your participation you may disconnect. Your lines at this time and have a great day.
[music].
Yeah.
Hum.
Hum.
Okay.
Hum.
Yeah.
Oh.
Oh.
Okay.
Uh huh.
Hum.
Yes.
Okay.
Hmm.
Hum.
Hmm.
Yeah.
[music].
Okay.
[music].