Q4 2022 Nine Energy Service Inc Earnings Call
Speaker 2: Greetings and welcome to 9 Energy Service 4th Quater and full year 2022 earnings conference school. At this time all participants are on a listen only mode. A question and answer session will follow the formal presentation.
Speaker 2: If anyone wants to require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Guy Circus. Thank you, you may begin.
Speaker 2: Thank you. Good morning everyone and welcome to the 9 Energy Service earnings conference call to discuss our results for the fourth quarter and full year of 2022. With me today is Anne Fox, President and Chief Executive Officer. We appreciate your participation.
Speaker 2: We wanted to congratulate Heather on an upcoming addition to her family. She's currently out on maternity leave.
Speaker 2: Some of our comments today may include forward-looking statements reflecting nine's view 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.
Speaker 2: 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.
Speaker 2: Our comments today also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are also included in our fourth quarter and full-year press release and can be found in the Investor Relations section of our website. I will now turn the call over to Anne Fox.
Speaker 3: Thank you, guys. Good morning, everyone. Thank you for joining us today to discuss our fourth quarter and full-year results for 2022. 2022 was a strong year for the Oilfield Services space, and nine was able to capitalize on an improving market.
Speaker 3: Year over year, we increased our revenue by 70% our adjusted EBITDA by over 17 times and increased our adjusted EBITDA margin from 1 to 16%. Our 2022 incremental adjusted EBITDA margin was 36% and returned on invested capital for 2022 was approximately 16%.
Speaker 3: This is solid growth while simultaneously navigating inflationary pressures, labor constraints, and new higher employee turnover. I am very pleased with our team's discipline and approach to managing liquidity while simultaneously delivering the company. Over the last several years, we repurchased bonds on the open market.
Speaker 3: reducing our term debt by over $90 million. This dated in the execution of our successful refinancing in January of this year. With the new capital structure in place, we now have more optionality to unlock equity value, and we intend to continue to de-lever moving forward.
Speaker 3: While overall rig and frack activity increased year over year, I would categorize 2022 as more of a pricing story. Under Investment in OFS equipment, kept equipment under supplied, and OFS companies did not have access to capital to invest in new or existing equipment.
Speaker 3: Additionally, the labor market remained extremely constrained. These two elements drove pricing leverage back towards service providers in 2022.
Speaker 3: During 2022, we grew market share, growing our percentage of stages completed within wireline and completion tools from approximately 18% in 2021 to approximately 20% in 2022. Additionally, since seed-mencing, we grew our market share of raised follows in the the basins we operate from approximately 17% to
Speaker 3: which increased by approximately 22% over that same time period.
Speaker 3: We remain extremely happy with the performance of our dissolvable plug, increasing the total number of dissolvable stinger units sold by approximately 42% year-over-year. We have also maintained a strong composite plug business, increasing the total number of composite plugs sold by approximately 44% year-over-year.
Speaker 3: 50% year over year, while also increasing our average price per job by approximately 34% year over year. We were able to drive this profitable growth through our state-of-the-art lab facilities that create proprietary and highly technical slurries, coupled with precise well-sight executions.
Speaker 3: Coil tubing also demonstrated strong growth in both activity and pricing, increasing days worked by approximately 37% year over year and the average day rate by approximately 40% year over year. Our coil tubing team identified a new market in the Eagle Herd and maintained strong utilization and pricing within our existing industry.
Speaker 3: in the customer's well completion and provides important intelligence and insight into the completion market.
Speaker 3: NINE made a substantial commitment to ESG through the development of internal policies, procedures, and measurements, as well as investment in new technologies that help our customers reduce their GHG emissions. Part of this strategy included identifying and quantifying our GHG emissions. We were able to quantify these emissions for the first time for 2021 and are working with building communities with aware and accessible conditions that reduce the friction behind emissions 19 1th Depressionable
Speaker 3: priorities moving forward.
Speaker 3: We have also made it a priority to invest in technologies that drive profitability for the company while helping to reduce emissions. In 2022, we converted two hydraulic wireline units to electric and made a commitment to convert four more in 2023. The electric wireline units provide significant savings on both diesel and monthly maintenance costs for nine.
Speaker 3: Our dissolvable plug significantly reduces GHG emissions and during 2022, we introduced Nines' Dissolvable Pump Down Ring. The Dissolvable Pump Down Ring has been shown to reduce horsepower requirements by approximately 48%, water required to pump the plug to set at depth by approximately 28%, and diesel fuel usage by approximately 42%.
Speaker 3: Lastly, I want to recognize the incredible team who led nine through so many ups and downs, always keeping the reputation, service quality, integrity of the company intact. Once again, we ended a year with an excellent safety score with a total recordable incident rate of 0.41. Company revenue for the year was $593.4 million, net income was $14.4 million, or
Speaker 3: of $30 million, reflecting an adjusted EBITDA margin of 18%. Net income was $8 million or $0.24 per diluted share and $0.26 per basic share. ROIC for the fourth quarter was approximately 24%.
Speaker 3: Q4 was in line with management's expectations. Adjusted EBITDA was down slightly compared to Q3, due mostly to the timing of international completion tool sales and holidays that is typical for Q4. I would now like to turn the call over to Guy to walk through detailed financial information. Thank you, Anne.
Speaker 2: I want to begin by elaborating on 9's new capital structure. In January , we announced the redemption of our senior notes to 2023, which was partially funded with the net proceeds of our offering of 300,000 units. Each comprised of $1,000 principal amount of 13% senior secured notes to 2028.
Speaker 2: and five shares of Nine's Common Stock.
Speaker 2: In conjunction with the unit's offering, we amended and extended our existing asset-based revolving credit facility to January of 2027.
Speaker 2: Both the ABL and unit collateralization were completed within 30 days post-closing for the terms of the new amended ABL at unit offering.
Speaker 2: We believe this new capital structure provides more optionality to unlock equity value and moving forward we intend to deliver it through any free cash flow generation which will be used to repay borrowings under the ABL facility and reduce term debt.
Speaker 2: As of December 31, 2022, NINES cash and cash equivalents were $17.4 million with $66.6 million of availability under their evolving credit facility resulting in a total liquidity position of $84 million as of December 31, 2022.
Speaker 2: On December 31, 2022, the company had $32 million of borrowings under the revolving credit facility.
Speaker 2: On January 27, 2023, the company borrowed an additional $40 million under the revolving credit facility to pay for a portion of the redemption price of the 83 quarters percent senior notes due 2023 and to pay for fees and expenses related to the unit's offer. During the fourth quarter, revenue totaled 166.7...
Speaker 2: Cementing revenue for the quarter was $65 million, an increase of approximately 2%.
Speaker 2: During the fourth quarter we completed 5,879 wireline stages, an increase of approximately 3%. The average blended revenue per stage was flat quarter over quarter.
Speaker 2: Wireline revenue for the quarter was $30.3 million, an increase of approximately 3%. For completion tools, we completed 32,555 stages, a decrease of approximately 5%.
Speaker 2: Completion tool revenue was $35.3 million, a decrease of approximately 13%.
Speaker 2: During the fourth quarter, our coil tubing days worked increased by approximately 5%, with the average blended day rate increasing by approximately 3%.
Speaker 2: Coil tubing utilization during the quarter was 56%.
Speaker 2: Coil tubing revenue for the quarter was $35.9 million, an increase of approximately 8%.
Speaker 2: During the fourth quarter, the company reported general administrative expense of $13.9 million compared to $13.5 million for the third quarter.
Speaker 2: Four-year G&A was $51.7 million.
Speaker 2: The appreciation and amortization expense in the fourth quarter was $10.1 million compared to $9.5 million in the third quarter. All year DNA was $40.2 million.
Speaker 2: The company recognized an income tax provision of approximately $0.5 million for the year, resulting in an effective tax rate of 3.7% for 2022. Our tax provision for 2022 is primarily the result of our tax position in state and foreign tax jurisdictions.
Speaker 2: For the year end 2022, the company reported net cash provided by operating activities of $16.7 million.
Speaker 2: The average DSO for 2022 is 58.5 days, which is a reasonable proxy for DSO looking into 2023.
Speaker 2: Our total cap-back spend for 2022 was $32.3 million, which fell slightly above management's original guidance of $20 to $30 million, with $21.5 million following Q4.
Speaker 2: The $32.3 million includes approximately $3.7 million of 2021 CapEx that fell into 2022.
Speaker 2: Looking into 2023, we still anticipate total capex of $25 to $35 million, with over 80% of this being allocated toward maintenance capital. A majority of our growth capex will go toward the conversion of four additional wireline units to electric.
Speaker 2: Given our substantial net operating loss carry-forward balance, we do not anticipate any meaningful cash taxes.
Speaker 2: Working capital will move in conjunction with revenue changes. I will now turn it back to Anne.
Speaker 3: Thank you, Guy. We anticipate 2023 total U.S. CAPEX to increase by double digits over 2022 and believe operators will need to drill more wells to keep production flat. Overall market fundamentals remain supportive for a longer cycle with both U.S. operators and OPEC taking more disciplined approach to the U.S. economy.
Speaker 3: production. Throughout 2022, we discussed both the equipment and labor constraints within OFS, neither of which have been alleviated. With this, OFS companies are adopting capital discipline and pledging to return cash to shareholders instead of investing in new equipment. There continues to be a lack of access to capital as well as labor constraints.
Speaker 3: The dissolvable technology continues to be a reliable, efficient, and environmentally friendly option for operators. Since the introduction of our Stinger plug in Q1 of 2020, we have built up meaningful run history across basins and weld types, which is allowing customers to become more comfortable with the quality and reliability of running plugs when they're weld bore.
Speaker 3: We do anticipate our dissolvable sales will continue to be an important growth driver for 9.
Speaker 3: Given our experience through the cycles, we believe maintaining a strong balance sheet is critical and moving forward, de-levering will continue to be one of nine's top priorities. Our new capital structure gives us the flexibility to de-lever and any free cash flow will be used to repay the AVL and reduce term debt.
Speaker 3: Now transitioning to Q1. Activity thus far has been down compared to Q4 with the rig count declining by 30 rigs since the end of 2022. Additionally, 9 lost between 1 to 5 days of operations depending on the service line to inclement weather requiring us to carry the cost of labor with no matching revenues which will negatively impact our EBITDA margin.
Speaker 3: Over the last several months, we have seen a sharp decline in natural gas prices, which will affect activity levels in the Northeast and Haynesville. We anticipate these effects will be felt more strongly in the Haynesville in the near term. Together, the Northeast and Haynesville comprise approximately 30% of NINES total revenue. That said, as we have seen, industry dynamics can shift very quickly, and we are operating this business for the long term.
Speaker 3: We feel very strongly that these basins are vital to supplying the global markets and important pieces of NINE's footprint. With what we know today, we expect Q1 revenue to be down slightly versus Q4 with projected revenue of $160 to $165 million.
Speaker 3: Nine is well positioned to take advantage of this sustained cycle and are differentiated by our service line diversity, forward leaning technology, geographic diversity, and balanced commodity exposure. We have proven our ability to grow earnings and we have undoubtedly one of the best teams in the industry.
Speaker 3: to take advantage of this sustained cycle and are differentiated by our service line diversity, forward leaning technology, geographic diversity and balanced commodity exposure. We have proven our ability to grow earnings and we have undoubtedly one of the best teams in the industry. We will now open up the call for Q&A.
Speaker 4: Thank you. At this time we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad.
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Speaker 5: One moment please while we poll for questions.
Speaker 4: Our first question comes from Agar Saeed with ATB Capital Markets. Please proceed with your question. Please proceed with your question.
Speaker 6: Good morning. Thanks for taking my question. Good morning, Waqar.
Speaker 3: Anne, what's your guidance for incremental margins for Q1? You know, how do you see those landing? So, we're not guiding on incremental margin, quarter over quarter. Obviously, if you look at the midpoint of our revenue guidance, we're guiding 160 to 165 million on the top line.
Speaker 3: that we saw earlier in the year for Q1 and Q2, you know, when gas was at 8 and frankly, I think most of the globe missed the fact that January and February would be the, you know, warmest month we've seen since 1895. So that is really just slowed things down but by no means is this cataclysmic or catastrophic. This is going to be a really...
Speaker 3: still solid earnings profile for the company and let's just see where summer takes us. But so some degradation on that margin, WICAR just, you know, carrying that labor over those weather days is, as you know, not fun and that was a pretty extreme storm. So again, obviously a different gas market. We are eyes wide open. We are not, you know, this again is not.
Speaker 6: in the next couple of months we see some degradation there. How do you see that impacting your pricing in that basin or in any other basin?
Speaker 3: Oh, it's a great question. I think the reality is that, you know, we had all of us had a really tough February looking at gas and now we're up over $3 on the gas side so that feels much more constructive. I think it would be surprising if OFS as a sector started to give up price because this is Robert O'Neill talking about green energy and asset protection in new markets and it
Speaker 3: The price that we garnered as a sector in 2022 was simply reflation. It was just reflation. These are normalized costs now and I think we had a Goldilocks scenario for our customers in the past. So I'll be very surprised if you see massive amounts of price being given up here because again this is still steady, Eddie, and $3 is by no means the worst gas price this country has seen.
Speaker 6: strong market share gains last year and thanks for sharing that data.
Speaker 6: What would you attribute that to because I know that you were also refusing jobs. So what really led to those substantial market share gains?
Speaker 3: Well, so I think, you know, certainly for our cementing division, a lot of nose to the grinder on slurries and slurry development, and we made a lot of progress there last year. Incredible service execution, very selective on the customers that we had, and then picking up incremental customers.
Speaker 3: customers that we knew would value those technical capabilities as well as that service execution. So I think we just, when 9 came out of this, our tenure of our employees that were hired before 2020 is around on average 8 years. So we were able to maintain our staff through the field. So when we came into 2022, we were able to grab market share because we weren't
Speaker 3: And that's what you saw in 2022.
Speaker 6: And then on the gas side, you mentioned that about 30% revenue exposure, what business lines have above that average exposure and which ones have below that average exposure?
Speaker 6: Sorry, the average exposure to wet work are in the first part. So the gas rigs you mentioned on the gas base and you said there was about a 30% revenue exposure, but I was just saying that which business lines have more exposure than that 30% number and which have less than that 30% number.
Speaker 3: You know, it's a pretty even mix. The only one that, well, you know, wireline we don't have in the Haynesville, but otherwise it's a pretty even mix across those service lines.
Speaker 6: Okay, and then just one final question. One very large service company has introduced...
Speaker 6: emissions friendly cement. Yeah, EcoShield. Yeah, and so what do you think, how does that change the competitive landscape?
Speaker 3: I think you know we have ready for trial our own green friendly cement as well. So I think operators are going to play around with this. Certainly the large manufacturers are getting pressure because of the carbon intensity of manufacturing cement. But the reality is it's very, very challenging. I think
Speaker 3: to isolate these wellbores with the same integrity over the long term. And so I think it's yet to see what are the implications for the long-term productivities on those wells. And in a time where U.S. shale is very much struggling with the degradation of productivity on those wellbores, I think this will be a slower start.
Speaker 3: Certainly it's an important start. Certainly it's one we're proud to have our own flurry that meets those green standards. But this I think will be a slower take up than say a dissolvable plug for instance.
Speaker 6: And then just one other, if I may, on the disorbital plug side, any comments you would like to make on international market penetration?
Speaker 3: Yeah, and I would just say we love that and it keeps going in the right direction. And as you know, the Baca Muerta in Argentina as well as the Middle East have been really great markets for us. And we suspect those international markets also remain strong. So very, very pleased with that.
Speaker 6: Great. Well, thank you very much. Thanks for your comments. Thank you, Akar. Thank you, Akar.
Speaker 4: Thank you. Our next question is from Inatio Bernaldez with EF Hutton. Please proceed with your question.
Speaker 7: Hi, good morning and thank you for your time today. Just thinking about your supply chain and are there any areas that you think you'll continue to have, call it headwinds, as we look at 23 and could have an impact on the year? Yeah.
Speaker 3: You know, there's no immediate term concerns I have to tell the market. I would just generally say on our heavy equipment, if you look at Peterbilt engines, for example, these are incredibly difficult to come by. So there's gaps still in the manufacturing sector that are existing and may slow down fielding equipment.
Speaker 3: That remains the same picture as last year. I think the big, big challenge for the service space is, of course, as we all know, the recession that's supposed to be, you know, next week and never comes. We saw the jobs data or the private payroll data from ADP come out today. We've seen the Fed speak. So I think labor is going to continue to be a problem.
Speaker 3: the average American laborer. So I think this industry is going to remain extremely tight on labor.
Speaker 8: And we're concerned about it. That's really helpful. Thank you.
Speaker 4: As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment while we poll for questions.
Speaker 3: There are no further questions at this time. I would like to turn the call back over to Anne Fox for closing comments. I want to end by thanking you for your continued support. Additionally, I want to thank our team for an incredible 2022. Thank you.
Speaker 4: This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
Speaker 4: Today's conference call has ended. Please disconnect your lines at this time. Thank you.