Nine Energy Service Inc. Q1 2023 Earnings Call

Greetings and welcome to the mine No just 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.

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As a reminder, this conference is being recorded it is now my pleasure to introduce your host right. So Chris Lee you may begin.

Thank you good morning, everyone and welcome to the nine Energy Service earnings Conference call to discuss our results for the first quarter of 2023.

With me today is Ann Fox, President and Chief Executive Officer, We appreciate your participation.

Some of our comments today may include forward looking statements, reflecting <unk> views about future events.

We're 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.

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 reconciliations to 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 Thank.

Thank you Guy good morning, everyone. Thank you for joining us today to discuss our first quarter results for 2023 revenue for the quarter was $163 4 million, which fell between our original guidance of 160 to 165 million, we generated adjusted EBITDA of 25 million.

Reflecting in an adjusted EBITDA margin of 15%.

Our ROIC for the quarter was 16, 2% the company's net loss included the impact of fees and expenses incurred in connection with its public offering.

And other refinancing activity in January .

As most of you are aware of it.

And again the market in response to the decline in natural gas prices over the past several months, resulting in a decrease in activity and pricing thus far in 2023 versus Q4 level at the end of Q1 U S rig count was down by 24 rate since the end of Q4.

During Q1, the rig count in the North East was relatively flat, but was down close to 10% in the Haynesville. We anticipate continued declines in the Haynesville in Q2, which will impact our revenue there are near term concerns around global economic uncertainty, however market fundamentals support a positive outlook for the energy sector and in especially.

A cold winter or some other geopolitical event could change the near term outlook very quickly on the operation side, we estimate the average Frac crew count today is between 250 and 275 yeah.

He gave a pretty completions were down by approximately 3% quarter over quarter and new wells drilled it decreased by approximately 1%.

Our <unk> service line continues to be a strong performer as a reminder, you might think it has very few competitors for the more complex horizontal that horizontal C met and jobs and almost 100% of the wells drilled in U S land require a schematic of the Wellbore. Additionally, we have some of the most technically advanced slurry then the IND.

History, and we are in the process of working on a more environmentally friendly option, even with the potential to pull back on our haynesville activity, we still have an opportunity to take share in the horizontal lateral completion in the basin. We remain very excited about the service line.

Continue to believe we have one of the top completion tool portfolio portfolios in the U S. Despite the finding activity the increase the total number of Dissolvable Stinger plug sold by approximately 23% due in large part to a significant international order and increased completion tool revenue by approximately 7% quarter over quarter.

We continue to be positive on the outlook for the adoption of the Dissolvable plug however in near term with the pullback in activity specifically in the gassy regions like the Haynesville, where solvable hold a high market share near term sales and dissolvable could be slowed.

Wireline remains fragmented and highly competitive and a significant percentage of nine wireline revenue comes out of the northeast, where we have had some pricing pressure with the decrease in natural gas prices.

Wireline plays an important role in both the R&D and sales process for completion tool as well as establishing a strong relationship with our customers and gaining intelligence on the types of completions operators are running coil tubing is performing well considering market conditions and our exposure in the haynesville.

Revenue for the quarter was $163 4 million net loss was $6 1 million and adjusted EBITDA was 25 million diluted earnings per share was negative 19%.

Oh I see for the quarter was approximately 16 point to first that I would now like to turn the call over to Guy to walk very detailed financial information. Thank you Ann as of March 31, 2023, and Nine's cash and cash equivalents were $21 4 million with $26 million of availability under the revolving ABL credit facility result.

And a total liquidity position of $47 4 million as of March 31, 2023.

On March 31, 2023, the company had $72 million of borrowings under the ABL credit facility.

Q1 results also include fees and expenses incurred in connection with the Companys January refinancing.

During the first quarter revenue totaled $163 4 million with adjusted gross profit of $36 3 million.

During the first quarter, we completed 1029, cementing jobs, a decrease of approximately 3% versus the fourth quarter.

The average blended revenue per job decreased by approximately 1%.

Cementing revenue for the first quarter was $62 5 million a decrease of approximately 4%.

During the first quarter, we completed 5455 wireline stages, a decrease of approximately 7%.

The average blended revenue per stage increased by approximately 5% wireline revenue for the quarter was $29 6 million or.

There are approximately 2%.

For completion tools, we completed 32219 stages, a decrease of approximately 1% completion tool revenue was $37 8 million an increase of approximately 7%.

Yeah.

During the first quarter, our coil tubing days worked increased by approximately 12% with the average blended day rate decreasing by approximately 17% coil.

Tubing utilization during the quarter was 64%.

Coiled tubing revenue for the quarter was $33 5 million a decrease of approximately 7%.

During the first quarter, the company reported general and administrative expense of $19 7 million.

Depreciation and amortization expense in the first quarter was $10 3 million.

The company's tax provision for the first quarter of 2023 was approximately 0.9 million the provision for 2023 as a result of our tax position and state non U S tax jurisdictions.

The company reported net cash provided by operating activities of $4 million. The average DSO for Q1 was 54.2 days cap.

Capex spend for Q1 was $5 million and our full year Capex guidance is unchanged at $25 million to $35 million I will now turn it back to Ann. Thank you Guy as you all know recessionary fears in the global market are affecting commodity prices, which have been erratic over the last several months with oil prices dropping.

$13 within 10 days in March, but far surpassing $80 again within another 10 days in early April following the unexpected OPEC production cut announcements and have once again dropped into the low seventies I do believe there will continue to be numerous factors that will impact commodity.

Prices, however, I remain optimistic on the outlook for the energy sector with both Opex and U S oil producers demonstrated commitment to capital discipline.

Our revenue will be impacted by lower activities activity levels within U S gasoline rig and Frac crew counts are good indicators for both our revenue outlook and potential pricing leverage so as market activity increases or decreases so too will our revenue and profitability in conjunction with job count and pricing, we started to see pricing pressure from some customer.

Across service lines in Q1, especially in the northeast and Haynesville.

Excellent active.

Activity levels, thus far in Q2 are slightly down and as I mentioned, we have begun to see some pricing pressure from slack customers because of that we expect Q2 to be down slightly compared to Q1 with projected revenue between 158 to 166 million. We also anticipate that adjusted.

EBITDA and our adjusted EBITDA margin will be down very slightly in conjunction with revenue and activity levels as well as full quarter realizations and price reductions.

Our priorities and goals are unchanged, we are focused on generating free cash flow, which will be used towards delevering by 2023 has not been a growth market. We anticipated. We have demonstrated we are able to capitalize on an improving market and the company will see financial impacts right away and Johnson as market changes we will.

The call for Q&A.

Thank you we will now be conduct a question and answer session. If you would like to ask a question. Please kras is Taiwan on your telephone keypad, a confirmation tone will win the Cade. Your line is in the question in queue.

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For participants using speaker equipment, it may be necessary to pick up their headset before pressing the star keys, one moment, please while with pool for questions.

And our first question will come from Waqar Sayed with <unk> capital markets.

Good morning.

In terms of the Capex guidance. Good morning, the Capex guidance of 25 million to $35 million range and are you leaning more towards the lower end you think that the changed kind of outlook or you still think it could be.

Midpoint, maybe even the higher end.

It's a great question my car and I think you'll see the team dialed back our Capex this year.

So yes, I think it's fair to say, we will not be at the high end of that Mark.

Okay.

You know you have like the cementing business has more leverage to your drilling activity and then.

Other business lines are more towards the completion side of things.

If you look into from an activity perspective, only where do you see them more softness on the drilling side.

Those businesses are the completion of its businesses.

You know I mean, that's a great question I think part of this is completed because of various levels of exposure inside the gas basins. So you saw that drilling activity come down 1% quarter over quarter. According to EIA.

But again, it's it's a little completed for us given where we have heavy exposures in the gas markets. So I think it's still a strong cementing market out there and and I think you know we are also watching netapp HCI price very carefully because we're concerned.

Concerned about our Permian operators and I think it's perhaps a little over corrected at this point, but right now if you think about the outlook for car. It feels steady so we're saying slightly down because we're working with really small numbers here and so on a margin basis that could be slightly down, but you're seeing a pretty flat revenue line.

So I hate to call it a boring and plateaued, but it's relatively boring and plateaued right now so it's not that we see some large inflection down from here nor do we see a large inflection up its just kind of a steady Eddie orderly market. If you will.

Yeah, you your revenue guidance of $1 58 to $1 66, because I hate it correctly 166 at the upper end.

Yes.

So what will drive it higher given all the indications are that are you know you could have a lower rig count.

In Q2, and we've already seen some cementing weakness, what what's driving that upside to a quarter over quarter.

You know it could it could be international markets what car.

You know I think it I think youre going to see it relatively flat to Q1, but those international orders can be lumpy and they can move things around.

Now you've had a decent order.

And in the Q1 as well is it now looking that it's becoming a lot more of a regular item on a quarterly basis the international business.

You know I don't want to call. It regular yet what I will tell you as a strategic objective of this management team is to get it to be regular and not as actively something we're working on as you know we are now running conventional tools in Abu Dhabi. So that's exciting for us, but I wouldn't want to tell the market. This is Greg.

Because this is something that we are growing them and again attempting to get to be a more regular way piece of our financials, but right now I would not call. It regular and that's why sometimes it's lumpiness, it's just hard to project.

So.

Now you said that the more most likely no.

Like like <unk> could be like it's flat revenues are now if you assume flat revenues and you don't get that Lumpiness of Q1 repeated into Q2 that you hadn't national business.

Maybe that you're indicating that that's.

The underlying North America business, our U S business could be actually could potentially grow in Q2 was skew one.

Am I understanding it correctly.

No no I know I think you'll see that revenue line flattened out and if anything youre going to see full quarter realizations on some of that pricing. So I think you're going to see I do think youre going to see some decrement to that EBITDA margin, it's just going to be small because now we're inside of the law of small numbers.

And trying to project exact cost movements and.

So we think it'll be flat to slightly down on the margin for the underlying North American business, you all spoke of potentially pop the top line that could be the lumpiness of a large international order coming in which is what could give rise to a higher topline, which is which gives cause the guidance 150, H $1 66.

Waqar, we are seeing you know pretty decent international revenues in both Q1 and Q2.

Okay.

Just the exact cadence of them is lumpy, but you know I think we've got a.

Good good pattern here for Q1 and Q2.

And would you kind of break down what the international revenue contribution was or is it in the Q anywhere.

We we actually don't break that down what car.

Okay.

The X and then in terms of the smelting business, you mentioned that you're looking into southern Nevada violently.

Friendlier I guess cement.

Your larger competitors have mentioned that they have.

Some problems in the marketplace could you maybe talk about the you know what youre working on and where do you stand in terms of introduction.

Yes, so yes, we've seen some of our competitors.

Competitors are mega cap competitors come out with a greener steam and and we too are are we think we're ready to put that downhole and go to trial I think the issue. There is that you're going to see operators demand to have something that is cost effect.

This so it's not good enough for our Mega caps ourselves develop.

Greener cements, that's ESG friendly. It also has to be cost competitive. So I think frankly, the market might be there on the technology ourselves included but were not yet there on the cost and that is probably the second leg and as you know it's going to take a bit of time to drive that down.

But yes, we are we aren't ready to trial that so we're really pleased with them with our progress there, but again I don't want to paint that is something that's going to take over the market until we can fundamentally reduce that cost because as you know in north American land, it's got to be good but it also has to be cheap, especially right now.

Commodity prices.

Fair enough.

And and just last question here.

We've heard a number of drilling contractors report and guide and we've also have a number of pumping companies.

A report and guide and there was kind of a little bit of.

It was a mismatch between the guidance for some of the largest drilling contractors versus guidance from some of the largest pumping companies and in terms of kind of the weakness that they are saying that some of the largest drilling contractor was saying like rig count could be down a day it could be down 10% quarter over quarter won.

You didn't hear something.

The the pumping guys, we're thinking more kind of flattish revenues.

You know when you look at who you talk to your customers really use come out in that kind of view in terms of completion versus didn't given that you have both those exposures.

Yeah, I mean, I think what car, it's all about absorption and uptake of basins that are levered more to black crude like the Permian and I think you know some of the Frac comenius assuming.

That's some of those frac spreads will be easily absorbed and moved into those basins and that's where I think we come back to you you know the W. Gi prices.

And what is that looking like for operators. So I think that is where you're seeing that debate is what happens there.

And whether those frac fleets can be absorbed in and I think that's a that's where the attention is between that drilling rig declines projected from those large drillers and where you're seeing Frac fleet.

Okay, well. Thank you very much really appreciate the color.

Of course, thanks Waqar.

Our next question comes from in Knoxville than August with her.

Tom.

Hey, good morning, Thank you for taking my questions and I. Appreciate your time I guess to start could you just walk through how you're thinking about capital allocation through the rest of 2023, given what you're seeing in the market right now.

Yeah.

Yeah, Hey, nausea, so for 2023, we're really going to be focused on jet.

Generating cash flow and Delevering as Anna mentioned previously.

I'm sorry.

So you know, it's not going to be a growth year as we expected. So we're going to see working capital be generally flattish.

We're trying to manage capex down toward the midpoint or lower end of the range and just overall use cash flow as we can to pay down our credit facility and improved liquidity and delever.

Perfect. That's really helpful and then I.

I guess, when you're thinking about the conversations you're having with customers at this point.

And ginger their sense of urgency about pricing, maybe some color on what they are saying and how those conversations are going.

It's a great question I think I would say there does it feel like Theres anything urgent right now in conversations I say that relative to previous markets that we've been through where there has been a great deal of urgency.

So again I think you've got a lot of our operators well hedged them. So this is maybe not maybe they're not rolling in as much cash as they were before some of them certainly.

You know more exposed than not to lower gas prices, perhaps some privates under more pressure, but I wouldn't say, there's any urgency to the conversation I would say, it's more I'm trying to look at the current environment and getting some price from it and some price relief from it so it feels more.

A slow and methodical it feels less panic to me than some of the markets we've seen previously.

So again, that's why I use the word orderly. So it's certainly not a growth market Ignacio, but this there's pricing pressure again, it seems methodical orderly and.

Less kind of widespread.

Spread than than previous times, where you've kind of just seen a market fall off a cliff.

This is a weird little bit of stability here in the market, but frankly, we haven't seen for a long time, we've either seen very sharp declines are very sharp inclines and this is just as I said, it's a little bit of a plateau.

That's that's perfect.

I appreciate the insight. Thank you so much for the time.

Of course, thank you so much.

We are closing our question and answer session now I would like to turn the floor back over to Ann Fox for closing comments. Please go ahead.

Thank you for your participation in our call today I want to thank our employees, our E&P partners and investors.

This concludes today's conference call you may disconnect. Your lines at this time, thank you for participation and have a great day.

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