Q3 2022 Nine Energy Service Inc Earnings Call
Greetings and welcome to the third quarter 2022, nine energy service earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this congress.
Is being recorded it is now my pleasure to introduce your host Heather Schmidt Vice President of strategic development and Investor Relations. Thank you you May go ahead.
Thank you good morning, everyone.
The nine energy service earnings conference call to discuss our results for the third quarter of 2022 with.
With me today are Ann Fox, President and Chief Executive Officer.
S Chief Financial Officer, we appreciate your participation.
Some of our comments today may include forward looking statements, reflecting nine views about future events forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control. These rest 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 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 third quarter press release and can be found in the Investor Relations section.
I will now turn the call over to Ann.
Thank you Heather good morning, everyone. Thank you for joining us today to discuss our third quarter results for 2022, we had another very strong growth quarter with revenue of $167 4 million, which fell above our original guidance of $145 million to $155 million and risk.
Flex, an 18% increase quarter over quarter, we generated adjusted EBITDA of $32 6 million, reflecting a 72% increase quarter over quarter and an adjusted EBITDA margin of 19% incremental adjusted EBIT. The EBITDA margins were approximately 54%.
<unk> nine.
<unk> generated free cash flow of $26 8 million before changes in net working capital and 9.2 million after changes in networking capital. We use this free cash flow to repurchase bonds, we repurchased 13 million par value of bonds for $10 1 million of cash or 77 point.
7% of par this leaves nine with $307 million of bond outstanding of the original $400 million issue.
I am extremely happy with our teams ability to take over $90 million of debt off the balance sheet, bringing our net debt to adjusted EBITDA to approximately 2.4 times on a run rate basis.
I'll also maintaining strong liquidity throw out one of the most volatile environments, we have ever faced with our strong operating and financial momentum.
Macroeconomic outlook for 2023 and beyond and that's got to Q3 of 2022 adjusted EBITDA of approximately 2.4 times, we are actively considering our options for refinancing our capital structure in a constructive way on the operation side, we saw minimal right.
And this quarter with the majority of <unk> prior to your price increases.
Hey, guys.
Coiled tubing as well as increased volumes in completion tools.
We estimate the average Frac crew count today is between 270 and 275, an increase of approximately 7% versus the end of June EIA reported completions were flat quarter over quarter, and new wells drilled increased by approximately 6% as I mentioned our revenue increase.
By approximately 18% quarter over quarter versus the average rig count which increased by approximately 7%.
Service line pricing drove the majority of ninth gross this quarter and our store.
Incremental margins under supply of both equipment and labor.
Straining I showed you.
<unk> leverage that the service providers our customers are facing.
Okay.
Availability and best price our cementing service line has led nine on the pricing side and we had another extremely strong quarter in Q3 the consolidated.
Yes.
It's Don.
Built for.
R&D lab.
Pricing into Q4, and $2 20, you mentioned pricing has increased by approximately 58% in the last couple of quarters. This is an exacerbated by a shortage of proxy matters, but our ability to innovate and execute is demonstrated in nine strong market share position in the basins, we operate where we estimate our total.
Market share is approximately 20%.
We are continuing to work on forward, meaning slurry to help navigate or supply shortages as well as help reduce emissions and provide a greener cements option for our customers I remain extremely optimistic and excited about our completion tool division today, we believe nine hold the top market share position in the Dissolvable plug market.
And that over 75% of the total U S dissolvable plug market.
Of the total U S dissolvable plug market share it held amongst four competitors, including nine this is an extremely difficult space for competitors to enter or due to the complexity of the material science, which demands predictable and repeatable dissolution and dynamic wallboard the ability to scale this business and maintain quality.
Control has been a key differentiator for nine we continue to estimate that the total U S. Dissolvable market will continue to grow over 35% by the end of 2023.
Our combined clubs remain an important part of our portfolio and we estimate our U S.
But market share to be over 20% in Q3.
There are a larger number.
A lot of competitors in the U S market.
It's.
Been around for almost 10 years and it's not material.
Got it.
Along with the U S market the international markets should provide growth opportunities for nine our R&D team in Norway recently completed and received API Q1 certification for a multiyear cycle barrier valve targeted for a large middle eastern National oil company, we have risk.
Approximately 10 million in purchase orders for students to an N O see bid process with opportunities to obtain additional purchase orders moving forward.
It has been publicly stated that they send us the plans to accelerate production angry about 20025.
I'm extremely proud of my R&D capability, which have provided you arkady any international markets, our R&D as well.
Okay.
Re frac market through both strategic partnerships as well as in house development of neutral.
Wireline continues to be our most.
For January yet right. So it remains a very important piece of our portfolio our increased borrowing.
By approximately 85% from Q3 2022 Q3 of 2022 and has increased revenue per stage by approximately 28% in Q4 came out in FY 2022. This service line plays an important role in both Orange and sales process.
Our completion tools since nine months every type of plug downhole, which result in a quick understanding of any competitive offering our coiled tubing division has performed extremely well over the last couple of quarters driven by recent price increases.
Q4 of 2020, the coil you need day rate has increased by approximately 61% while also increasing days work by over 150% from Q3 2022 this quarter.
Company revenue for the quarter was 167 4 million net income was $14.
$14 3 million and adjusted EBITDA was 32.6 million basic EPS was up 46%.
Oh I see for the quarter was approximately 29% I am extremely proud of our team's performance thus far in 2022 and their ability to capture that growth without sacrificing service execution and maintaining a very strong safety record ending Q3 with a 2022 year to date T. Our I R.
0.56, I would now like to turn the call over to Guy to walk through detailed financial information.
Hum.
Thank you Ann as of September 32022, Nine's cash and cash equivalents were $21 5 million to $66 7 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $88 2 million as of September 32022.
The fourth quarter of 2022, we borrowed an additional $5 million not from the a b L.
This quarter, we generated strong free cash flow of $9 2 million or $26 8 million before changes in net working capital.
As Ann mentioned, we purchased $13 million par value of bonds for $10 1 million of cash were 77, 7% of par during Q3, bringing the total bonds outstanding to $307 3 million.
Using annualized Q3, adjusted EBITDA of $130 2 million brings our net debt to adjusted EBITDA to approximately two four times on a run rate basis.
During the third quarter revenue totaled $167 4 million with adjusted gross profit of $44 million, an increase of approximately 49% quarter over quarter.
During the third quarter, we completed 1130, cementing jobs, a decrease of approximately 2% versus the second quarter.
Average blended revenue per job increased by approximately 18%.
[laughter] cementing revenue for the quarter was $63 9 million an increase of approximately 16%.
During the third quarter, we completed 5701 wireline stages, an increase of approximately 5% the average blended revenue per stage increased by approximately 6%.
Wireline revenue for the quarter was $29 3 million an increase of approximately 11%.
For completion tools, we completed 34214 stages, an increase of approximately 17%.
Completion tool revenue was $40 8 million an increase of approximately 22%.
During the third quarter, our coiled tubing days worked increased by approximately 10% with the average blended day rate increasing by approximately 10%.
Grocery utilization during the quarter was 54%.
Coiled tubing revenue for the quarter was $33 4 million an increase of approximately 21%.
During the third quarter, the company reported general and administrative expense of $13 5 million depreciation and amortization expense in the third quarter was $9 5 million.
The company's tax provision for the third quarter of 2022 was approximately 0.5 million and less than $100000 year to date.
Waiting for 2022, as a result of our tax position and state and non U S tax jurisdictions.
The company reported net cash provided by operating activities of $15 1 million. The average DSO for Q3 was 57 one days.
Capex spend for Q3, 2022 was $4 6 million, bringing our total capex spent year to date as of September 30th 2022 to $10 8 million our full year Capex guidance is unchanged at 20 to 30 million, but we do believe because of supply chain constraints that a portion of 2022 capex.
Could fall back into that.
Yeah.
We would like to provide some high level guidance as we think about cash flows going forward with what we know today looking into 2023, we anticipate capex of 25 to 35 million with approximately 85% of this being allocated towards maintenance capital.
The majority of our growth Capex will go toward the conversion of four additional wireline units to electric.
Under our existing capital structure or other large cash outflows will be annual interest payments totaling approximately $32 million and any changes in net working capital.
Given our substantial net operating loss carry forward balance of $436 4 million as of December 31, 2021, we do not anticipate any meaningful cash taxes.
We have laid out our thoughts on ninth illustrative free cash flow based on our Q3, adjusted EBITDA run rate as well as an illustrative free cash flow walk using different activity and pricing assumptions.
<unk> 21, and 'twenty two of our Q3 Investor relations presentation, which can be found on our website.
Using nine Q3 annualized adjusted EBITDA of $130 million as a benchmark and assuming approximately $32 million of annual interest based on our existing capital structure, approximately $30 million of annual capital expenditures and 4 million of other annual miscellaneous cash outflows.
<unk> would generate approximately 64 million of annual free cash flow before changes in net working capital.
While we believe that we are poised for further growth in 2023, we believe that our business is well positioned to generate free cash flow even at current run rate levels.
With our strong operating and financial momentum supportive macroeconomic outlook for 2023 and beyond and net debt to Q3 of 2022 adjusted EBITDA of approximately 2.4 times, we are actively considering our options for refinancing our capital structure in a constructive way I will now turn.
Turn it back to ads.
As you all know the overall market has been extremely volatile. However, we remain very optimistic about nine outlook into 2023, there are and will continue to be numerous factors that will influence global supply and demand, but we believe north American shale production will be critical for the global supply moving forward.
We do think capital discipline for both operators and oilfield service providers will continue into 2023, keeping the market very tight obviously the macro drivers are out of our control that said when I look at nine business today operating under the current rig count in Q3, we are sustainable and have Jen.
<unk> adjusted EBITDA margin, surpassing 2019 levels with strategies on how to grow we have what we believe to be one of the top completion tool and cementing offerings and the United States with top market share positions and our service lines within the basins, which we operate I think the constraints on Oss equipment continue an increment.
Rig activity moving forward should put upward pressure on pricing and drive net margin.
We have strategically shifted more of our topline exposure to both completion tools and cementing we are starting to see the impact this will have on our free cash flow generation.
Our business has been designed to reduce our labor and capital now.
Not only increasing cash flow by reducing capital allocation risk in a cyclical business despite being a smaller company. Our R&D team has designed and commercialize tools used by some of the largest msas in the world as well as tools that compete against our largest peers here in the U S. We have also developed.
And commercialize technology to reduce emissions and continue to invest money in electrifying our wireline units.
Although we do anticipate activity growth in 2023, we have organic growth strategies in place to continue to expand both our topline and our margin. We are focused on market share gains coupled with strategic price increases as well as developing our completion tool reach internationally.
Visibility into Q4 slowdowns due to weather and budget exhaustion is still a bit blurry, but we do expect some seasonality into Q4. We also expect pricing to remain steady into Q4 with potential increases increases beginning again in early 2023 as budgets reset.
Of this we expect Q4 to be relatively flat to Q3 with projected revenue between $160 million to $170 million. We do anticipate growth returning in Q1 of 2023 and that 2023 activity will increase from where we are today.
<unk> geographic and service line diversity positions us well for further growth. We believe we have differentiation and service lines in which we operate with its strategy towards profitable growth even within a more moderated growth environment. In 2023, we will now open up the call for Q&A.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment it may be necessary.
Sorry, do you pick up your handset before pressing the Sarkies one moment, please while we poll for questions.
Okay.
Our first question comes from John Daniel of Daniel Energy Partners. Please proceed with your question.
Thank you good morning, good quarter as Jim.
Good morning.
First question is just on the valve opportunity with the N S C in the middle East.
Potentially I mean can you frame for us what the opportunity set would be over the next couple of years if at all possible.
Yeah, I can't I can't I'm, not going to quantify the number for you right here, but what I would say is this is for the conventional market. So it's the first time that we stepped off and actually this was almost a two year process, John where we had to get direct certification do direct field trials with the NRC.
So given that it is for the conventional market, which is quite a large market outside of North American shale. We think this can be a very significant opportunity for nine and really reflects our ability to designed from the start tools that you know our largest service providers do not offer.
Our internationally, so we're pretty excited about it and we will be exploring other niche is like this.
So this is it's a very big step for us.
And really starts to expand that completion tool profile and this is you know for the completion phase of the well right. Okay.
Okay. The next one.
Is that just on pricing broadly speaking you know a lot of the E&P calls this quarter companies speculate that another five to 10 per cent type price increase from here next year.
You kind of agree with those ranges or what's the pushback.
Yeah, No I think again, if you go back to January of 2020 to our customer base underestimated service inflation I would say that those numbers are again. Another example of underestimating service inflation coming into 2023, and you know just because capital budgets budgets reset for our custom.
It doesn't mean that we have a new equipment in place and certainly doesn't mean that the labor situation is any different so I still and I know I sound like a broken record I am still thinking 12, a highly qualified wireline folks in the North East 12. So this is a remarkable each.
Challenge Labor market, we thought it would ease by now I'm clearly it has not so I would be shocked if you saw an inflation number at 5% I think that's way too low.
Okay, and I was referring to from where we are today as opposed to not year over year, but yes, yeah, but I think that's too low.
Okay and then the last one is the additional investments in the summer Ah wireline is making them electric how much of that is.
Customer driven versus.
You all are being proactive on ESG front and seeing the opportunity set that makes some sense.
Yeah, I would say, it's a 100% customer driven and the customers are being proactive on the ESG front, which is filtering down to us. So yes, that's how I would answer that.
Oh apartments, we have at the end of the year in 'twenty three in terms of that or electric based off the current plant for six or seven.
Yes. It is.
It's gonna be six that will be fully electrified and then we have a seven that has some options on a side by side basis to be electric so yes cool. Okay. Thanks for letting me ask a question.
Thank you.
Okay.
Our next question comes from Wellcare stage with a T. B capital markets. Please proceed with your question.
Thank you first of all congrats on a.
Great quarter.
Thank you good.
I've missed the cementing revenue numbers to just could you can you repeat that please.
Okay.
Yeah sure so the cementing.
Revenue number is $63 9 million.
Okay and the stages.
So the completion tool stages.
No no cementing there there's one other data point that you gave as well right on cementing.
101, and 130 cementing jobs a judge Brendan.
For a job increase 18% yeah.
Okay.
Great No and the the order that you received in the middle East $10 million.
Is that all that converted to revenues or is that going to convert to that no.
Alright, those are just purchase orders.
Okay.
So when would when do you expect them to convert to revenues.
That will convert over the course of next year.
Okay. So is that going to be kind of a typical kind of lead time like you know to 12 month conversion of purchase orders in the international markets.
Yeah, I think it's for this tool specifically what car, it's a longer lead time and its just the contracts are a little bit different so there's going to be a longer lead time, but it's just it's product on contract specific.
Okay.
Right.
It'll be rolling it'll be rolling over next year and as Anne mentioned, we hope to get further orders. So it's just going to be a nice revenue stream for us going forward we hope.
Okay.
Would you be would you start reporting backlog then.
In your disclosures.
No it's not it's not so significant that it's.
That is like that where car.
Okay, and then and in terms of pricing. Thank you for your comments are you have you started negotiating.
With the E&ps already for next year and are you seeing.
Are you getting traction on pricing above that eight to 10 per cent that E&P assistance student.
We have started conversations with some of our customers and I would say for some of our service lines. We are moving in that direction as you well know in any incremental rig activity is going to put an enormous pressure on the RFS market its already extremely tight so that that's just.
Quite a bit of incremental activity for us.
Yeah.
And the the pricing because of the number that you're giving.
Are those kind of net pricing or do you think a lot of that gets eaten up in your own inflation.
Oh, well. The example that we gave and the IR deck that is assuming a no net pricing. So I think the big challenge always for every CEO out there is trying to predict how inflationary pressures impact the Cogs line and we've certainly had an enormous.
The amount of inflation that everybody's aware of and we've obviously been able to get really good net price added to the margin. So I think the last time. We saw this margin might have been in Q4 of 2018. So we're surpassing that very very nice for us to see I suspect this team.
Is so good at managing their costs and managing this inflationary environment has been proven this year that that those those price increases and I would suspect you'll see net margin impact.
Okay, and then for Q4, you mentioned the revenues could be relatively flat.
Do you expect EBITDA margins to be relatively flat as well.
Yes.
Well, we're not guiding EBITDA margins I mean, I think it's it's just a bit lumpy given the.
The mix so it's just going to be mix mixed dependent.
Okay, and so in which business lines do you expect revenues to stay flat, where you see growth and where you see a decline quarter over quarter into Q4.
Yeah, I think the biggest change for us will just be on our international orders will be will likely be down in Q4 on so as you think about margin and is it really thinks about margin you can factor that in and obviously those are our high margin sales as you all know Waqar I think what were and probably everybody in the sector.
We're seeing that our operators are already having to increase budget just to cover down on their their inflationary costs theyre extremely conscious of budget exhaustion is here.
So again I think they're waiting until that January one mark and you're not going to want to see them run out too far ahead, you're also seeing a lot of our customer base coming in much softer than expected on production.
One thing, obviously that everybody should be watching it came much sooner than our team thought it would come in and that's a very good that's very good factor for if the service sector.
Okay.
And then as we look into Q.
Q1.
Incremental margins this quarter were very strong above 50%.
Do you expect the margins to start moderating our incremental margin start moderating in Q1 to a lower number.
I think 54% incremental margin is definitely not something I would use as a run rate.
For 2022 over 2000, 2023, or 2022, but I do think that from this kind of and you're going to see very strong incremental margins next year coming into 2023, and I think it'll be a much better.
Better here certainly than 2022, and we're very excited about it. So I think it's gonna be a great year for nine and Waqar I think if you if you want to see how we think about incremental margins and.
Things like that you can have a look at the cash walk slides that we posted on our end.
Our investor deck, we put.
Some assumptions in there which are again purely illustrative, it's just going to depend on the dynamics in the market, but you get different incremental margins when it's activity based or price space. So obviously, it's going to depend on what actually transpires next year. Yeah. I think also what car when you think about it.
It's nice to see a business that we think in 2023 will outperform them on an adjusted EBITDA margin basis, where we were in 2018 and that really reflects the strategy that we started executing in 2018, so very nice to see that come to fruition.
So very much looking forward to the start of this next year.
Great well, thank you very much and congrats again.
Thank you.
Our next question is from Ben ticket, Yes Hassan. Please proceed with your question.
Hi, Thanks, and congrats on a really strong quarter.
Got it made people a bit more color on the free cash flow walk.
Can you can you guys just broadly talk about scenarios where.
Maybe you get more aggressive with growth capital you talked about kind of 80% maintenance capex in 'twenty three.
Maybe paint a picture, where where that would be where you could be more aggressive there.
Yeah, Ben Good morning, I'll start with this and then I'm going to flip it over to Guy, but I would just say generally when you think about gross now at nine am versus in the past remember a big chunk of this revenue derivation is from completion tools, which is incredibly capital light.
It's also very labor light. So when you think about expanding that top line and then also expanding the margin.
Just remember we don't need to put in as many dollars into this machine to generate those types of margins. So lots of growth there and that completion tools. The tool business for next year, they're just as we think about the cash walk in our capex needs for the business.
Just just remember that I think you know when you look at completion tools over a few year period, just to the market understands you're talking about over a few year period about a million dollars. There and catheter also where were your capital spend is just pickup truck trucks, and sometimes a tin roof lines, but very very capital light and I'll flip this.
Back to Guy.
Yeah, I mean, not really much to add to that Dan I mean, we tried to lay out some some guidance for 2023 just to help people think about the the cash walk again, it's it's going to depend on the pace of deliveries and supply chain constraints, we're just seeing.
You know like like all firms, it's just difficult to get equipment. So the exact pace of deliveries is gonna be a little bit of a moving target as it has been this year candidly.
Yep got it what about with with all that said.
Is there a way to think about just kind of working capital intensity of of growth into 'twenty three and beyond due.
So to the extent that you don't have to pull the capex lever as hard the common Schmidt on kind of free cash flow framework for twenty-three was excluding variability in working capital, but is there a rule of thumb to think about for X dollars of growth on the topline the working capital intensity should look like like why.
Yeah, I think the best way to think about working capital intensity is just on a days concept. So we reported 57.1 for our DSO.
So that's going to be your biggest driver so as revenue increases.
If you kind of hold that DSO flat, that's probably pretty reasonable we've been in that high fifties or 60 for DSO pretty.
Pretty regularly you can also hold your days payable you can see how those have trended kind of trend those going forward and inventories will rise a bit but not as not perfectly linearly with revenue. So.
If there is growth in revenue you do expect working capital to be a use of cash.
And the magnitude of which is just going to depend on the revenue growth.
And then another point not necessarily on the on your question, but just to think about it. If you think about our financials going forward. When do you think about labor light, which is something we don't talk about as much as capex late in 2018 and think about this business is roughly you know $830 million 140 million on the adjusted EBITDA line when you think about going.
Into 2023, if you look at our annualized EBITDA.
EBITA today at about 130 million.
In 2018 to generate that we had roughly 2300 employees today, we have slightly under 1200, so lots of efficiency. There. So again. These are all the reasons that we're excited about them about this the strategy being labor law and Capex light. So I just wanted to make sure the market understands.
That as well.
All right that's good color I appreciate it.
Again congrats.
Thank you.
Our next question comes from John Daniel Daniel Energy Partners. Please proceed with your question.
Hey, Thanks for letting me back yet and it just I was reading the press release here and there.
The plug sales really jumped out to me is I think plus 34% quarter over quarter.
So congratulations on that.
Yeah.
Is that driven by one or two big customers, saying Holy Cow. This works right. We're loading up on it or are you getting broader penetration across more customers just any color there would be appreciated yeah. No. I think this is a this is a very long broad customer list and it's actually very diverse as far as.
The basin that we're running these N and the commodity that's exposed to as you know we also run plugs internationally and that is really starting to pick up. So we're super excited about the momentum in the international market. So happy with our Dissolvable plug performance recently in a couple of really interesting plays like.
The Bakken work.
As well as the middle East So that's a lots of runway there for nine so that's been pretty awesome to see.
Okay.
Well. Thank you very much and you say and also John just one one more point on that too is just if you look in our IR deck, we did want to let the market know that we've sold 24% more dissolvable today than we have in 2018. So just as you kind of think about generally that growth.
I keep referencing 18, because that was really a pretty strong year for the service sector. So we like we like to look at numbers relative to 2018, how are we doing and that's been that's wonderful for us to say.
Okay.
Thank you all very much.
Thank you.
There are no further questions at this time I would now like to turn the floor back over to Ann Fox for closing comments.
Thank you for your participation in our call today I want to thank our employees, our E&P partners and investors. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time, thanks for your participation.
[music].
Yes.
[music].
Okay.
[music].
Yeah.
[music].
Yeah.
[music].
Yeah.
Okay.
Hum.
[music].
Yes.
[music].
Yes.
[music].
Uh huh.
Okay.
[music].
Okay.
Mhm.
Okay.
[music].
Yes.
[music].
Sure.
Okay.
[music].
Sure.
Mhm.
[music].
Okay.
[music].
Okay.
[music].
Yeah.
Yeah.
Okay.
Okay.
[music].
Yeah.
[music].
Okay.
Okay.
[music].
Yes.
Yes.
[music].
Yes.
[music].
Yes.
[music].
Yeah.
Yeah.
Okay.
[music].
Hum.
Yeah.
[music].
Yeah.
[music].
Hum.
[music].
Okay.
Okay.
Yeah.
Hum.
Mhm.
Okay.
[music].
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Mhm.
[music].
Okay.
Okay.
Yeah.
Hum.
Mhm.
Yeah.
Okay.
[music].
Okay.
Yes.
[music].
Yeah.
Okay.
[music].
Yes.
[music].
Okay.
Okay.
Yeah.
[music].