Q2 2023 Nine Energy Service Inc Earnings Call
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Greetings and welcome to nine energy service second quarter, 'twenty twenty-three earnings conference call.
At this time all participants are on a listen only mode. A 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 conference is being recorded.
I will now turn the conference over to Heather Schmidt.
Thank you.
Thank you good morning, everyone and welcome to the nine Energy Service earnings Conference call to discuss our results for the second quarter of 2023 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 nine's views about future events forward looking statements are subject to a number of risks and uncertainties many of which are beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. We undertake no obligation to revise or update publicly any forward looking statements for any reason our comments. Today also include non-GAAP financial measures additional details.
A reconciliation to the most directly comparable GAAP financial measures are also included in our second quarter press release 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 2023.
Revenue for the quarter was $161 4 million, which was within our original guidance of 158 to 166 million, we generated adjusted EBITDA of 21.7 million, reflecting an adjusted EBITDA margin of 13%.
Diluted earnings per share was negative eight pence and Aro I see for the quarter was 12, 9%. We continue to see activity declined throughout the quarter since the peak in Q4, the rig count has declined by over 100, Meg or approximately 14% for Q2 with approximately 74%.
He is coming out of the market in the second quarter versus the first.
These rig declines have resulted in additional pricing pressure throughout the quarter affecting all of our service lines, well activity and pricing declines have been strongest in gas levered basins like the Haynesville and Eagle Ford we are seeing some impact in the oil driven plays as well the northeast rig count has been more stable. However, we are receiving pricing pressure from <unk>.
Customers as well.
Delays in white space in the calendar affecting both revenue and margins for completion tools and wireline yeah.
E I, a reported completions were down by approximately 8% quarter over quarter and new wells drilled decreased by approximately 5%.
See my thing is our service line, most driven by rig count and new wells drilled and it's usually impacted first with activity changes in conjunction with the rig decline cementing and pricing were down single digits. This quarter compared to Q1, we have significant operations in the Eagle Ford and Haynesville, which collectively have seen rig count decline.
Approximately 27% through Q2 since the end of 2022.
The U S rig count declined approximately 15% through the first half of the year, but our total jobs completed in Q2 2023 only declined by approximately 2% compared to Q1 2023, we are focused on maintaining pricing wherever we can as well as maintaining market share with targeted customers through ARPA.
Primary theories and well site execution, we remain excited about this service line and our differentiation in the marketplace, but it too is subject to this market decline.
Completion tool revenue was up this quarter due in large part to a sizeable international order again this quarter North American revenue was down however, and has been significantly impacted by lower activity levels in areas like the Haynesville, where dissolvable frac plugs are frequently used we do believe this is temporary and that haynesville activity will reap.
Bound and be a vital component of export of natural gas in the medium term, even with a declining market. Thus far in 2023, we have sold approximately 50% more stinger Dissolvable unit in the first half 2023 versus the first half of 2022.
Wireline continues to be challenging from a pricing perspective, but remains an important part of ninth portfolio.
Permian Basin is highly fragmented and saturated and we are achieving pricing pressure in that service line.
Minimal price increases in 2020, yet.
The northeast we are maintaining market share, but we are seeing pricing pressure due to lower natural gas prices and delayed completions programs, which will compress margins.
<unk> is performing well considering over 50% of our revenue is generated in the Haynesville and eagle for the desktop increase in Haynesville, which could potentially provide significant future opportunities for this service line as well as the company's CFO I would now like to turn the call over to Guy to walk through detailed financial information. Thank.
Thank you Ann as of June 32023, and nine cash and cash equivalents were $41 1 million with $19 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $60 1 million as of June 32023.
At June 30th 2023, we had 72 million of borrowings under the ABL credit facility and our availability was approximately $19 million net of outstanding letters of credit of $1 3 million. Subsequent to June 30, we repaid $2 million of our outstanding of our outstanding borrowings under the ABL credit facility.
Additionally, our liquidity position will be impacted by the semi annual interest payments of $19 5 million based on amounts outstanding as of June 32023 to the holders of the 2028 notes, which began on August one 2023.
During the second quarter revenue totaled 161, 4 million with adjusted gross profit of $34 million.
During the second quarter, we completed 1004, cementing jobs, a decrease of approximately 2% versus the first quarter.
The average blended revenue per job decreased by approximately 5%.
Cementing revenue for the second quarter was $58 1 million a decrease of approximately 5%.
During the second quarter, we completed 6106 wireline stages, an increase of approximately 12%.
The average blended revenue per stage decreased by approximately 7%.
Wireline revenue for the quarter was 31 million an increase of approximately 4%.
For completion tools, we completed 27734 stages, a decrease of approximately 14%.
Completion tool revenue was $38 9 million an increase of approximately 3%.
During the second quarter, our coiled tubing days worked decreased by approximately 16% with the average blended day rate increasing by approximately 19%.
Coiled tubing utilization during the quarter was 54%.
Oil tubing revenue for the quarter was $33 5 million, which was flat quarter over quarter.
During the second quarter, the company reported general and administrative expense of $14 2 million depreciation and amortization expense in the second quarter was $10 3 million.
The Companys tax provision was approximately 0.2 million year to date the provision for 2023 as a result of our tax position.
They are non U S tax jurisdictions.
The company reported net cash provided by operating activities of $27 1 million. The average DSO for Q2 was 52 four days.
Capex spend for Q2 was $7 3 million, bringing the total for the first half of the year to $12 3 million.
Our full year Capex guidance is unchanged at $25 million to $35 million. However, we do anticipate coming in at the lower end of the range I will now turn it back to Ann Thank.
Thank you guy the market remains volatile, causing commodity prices to be erratic and unpredictable. It makes capital allocation decisions much more difficult for our customers peers and nine well inflation is flowing the job market remains tight making it difficult touched on wages and Israel.
It is imperative that we maintain key talent throughout the organization its markets can turn very quickly.
We will continue to invest in internal R&D, how creative and create new technologies I am cautiously optimistic that the rig count will reach a bottom during the third quarter and at current strip prices remain supportive we could begin to see rates being added back into the market starting in early 2024, and 2024 budgets will reset and.
Operators will focus on the need to maintain flat production, we are a spot business and our financial results will most closely with U S land activity levels, including rig count and Frac stages.
The main thing is most closely tied to the rig count and has been impacted the most by activity declines in the first half year, our remaining completion based businesses often lags and.
And we anticipate completion activity.
Half of the year to date decline compared to the first half activity levels. Thus far in Q3 are down and we continue to see pricing pressure from customers because at best we expect Q3 to be down compared with Q2 with projected revenue between 140 and $150 million. We also anticipate that.
At EBITDA and our adjusted EBITDA margin will be down as well.
Our business is nimble, which allows us to navigate unexpected market just like we have seen so far this year. Additionally, we are capital light, helping reduce capital allocation right.
Become much shorter sharper cycle.
We have a very strong team with a long tenure together, allowing us to effectively manage through this volatility as we have done before we are always focused on developing and looking for new technology, and we will continue to pursue increasing our market share both in the North American land and international markets, we have demonstrated our ability to navigate the shifting mark.
And proven we are able to capitalize very quickly on an improving market I also want to end by thanking David Baldwin for his contribution time and support as a director on the ninth floor you.
He resigned from nine four effective yesterday have more time to spend focusing on energy transition related opportunities that CF partners. We are deeply appreciative for all he has done for nine and wish him continued success in future endeavors.
Yeah for it means our largest shareholder.
Currently 26% of the company Andy Wade is the managing partner of <unk> partners and will remain on the board.
We will now open up the call for Q&A.
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 one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May press star two if he like to remove your question from the Q1 moment. Please while we poll for questions.
Our first question comes from Waqar Syed with a T. B capital markets. Please proceed with your question.
Good morning.
And while it's hard to do.
Okay.
Thank you and to the extent that you can provide some color on the international sales income completion tools could you maybe talk about.
The magnitude of the sales and it also looks like the sales are more of a cutting the nonrecurring now so maybe maybe if you could elaborate on that and maybe more supposed to talk about the strategy there.
Sure. Its a great question Waqar as you know depending on the timeframe International revenue is roughly four 5% of our revenue on a consolidated basis as part of our strategy over the medium long term is to really increase that profile decrease dependency exclusively on unconventional.
With American land, and we intend to do that through different tools that we offer into those conventional market.
Been cautious with the market she to let them know that just takes a long time, we're obviously a small company.
We're not going to outrun R&D spend to try and do this but we are slowly picking at it. So I would say that our international revenue you are correct recurs each and every year. However, it is lumpy and we have recently received a couple of months those have been helpful. I would love to say that those are going to recur.
I don't see that happening in Q3, but.
But I am pleased with the traction that we're gaining in the international markets, we sell through to about 22 countries now.
And so that's again, a big piece of our go forward strategy and we have zero infection or any heavy service lines into the international market, but as far as completion close we're hyper focused on it.
Now we have a an R&D center in Norway, and they've proven to be extremely effective and thinking about how to design tools.
Especially for the Middle East market as engineers are used to designing tools I was tolerances that can withstand north sea operations. So we're extremely lucky to have them. We acquired that team in 2018, and you guys. You know it takes a long time and they spent.
In the past couple of years effectively designing until it. So we're excited about it. So do you think youre going to see it recur, but ended the amount and the magnitude of which it hit the financials. Thank you to them I don't see that as a recurring yet if that answers your question.
It does thank you very much and then on the cementing business line.
You know how many units do you have stacked now.
Okay.
Waqar, we'll get back to you on the exact figures I had a follow up call, we'll pull those up.
Okay.
And then with regards to your debt outstanding you know there is the option to buy back some of the dead for the free cash flow.
And you did generate significant free cash flow in the quarter or whats the plan there for the remaining of the year.
Yes, what cars. So we did generate good cash flow in Q2, a lot of that was a working capital release as revenue declines.
You know we anticipate further revenue declines in Q3 as Ann mentioned, so we are going to have more cash flow, we're going to use that to pay down our credit facility first.
And then we will look to work on the bonds afterwards.
The thing that we need to be cautious about is that working capital is now a source of cash as revenues declining but to the extent that there is a rebound in activity.
Then we will need that cash again to absorb the working capital hit when revenue rises so we want to be cautious with that.
Yeah and.
Then.
And on the coiled tubing business line.
You had a view that with the Dissolvable plugs, making more inroads there'll be an impact on the demand for coiled tubing units Oh, you're seeing that are you seeing that demand has stayed relatively strong despite.
Despite the penetration of the Dissolvable plugs.
Well as you know we have a small fleet. We also think we have a very expert team out there and so we've really been able to deploy them both in the Permian, South, Texas and East, Texas has been hit pretty hard with the rig count decline and so we have not seen.
Our own business be impacted you know that as our operators move into laterals that extend beyond three mile. It becomes enormously challenging and extremely risky to drill the plugs out. So these are you know of course, reals and equipment that were looking out.
We want to be able to answer that that call, but we do think that's a huge driver for dissolvable plugs coming forward. So we're very excited about the dissolvable plug market. We also do you like the size of our coil business. So we're you know we're not intending to make any kind of.
M&A or massive organic truth in that service line, but to answer your question, we do believe over time that coiled tubing.
Mark it will be less than what it is today in the U S.
Okay, and then just the last our last question.
You know how have your conversations with your customers changed over the last couple of weeks with the strength that we've seen in commodity prices and somebody deviation of concerns regarding economic recession in the U S.
Yeah, I wish I could tell you that we've had a long enough duration with these strong commodity prices and to have conversations around them.
Moving some of that pricing pressure that we saw in the in the right direction that for US has not been the case and I think we need to see this commodity price environment continue to stabilize as it has and maybe even move up and then obviously those conversations will start again. So we view, we do believe that we're gonna find the bottom.
The rig count this quarter.
And we are very cautious.
Cautiously optimistic about the market.
Activity moving up so I think.
<unk>, there's pricing conversations will come with activity they tend to lag a bit what car I mean does he know where spot. So typically you'll see rigs come back on and pricing will then lag activity. So that's what we expect but to answer your question very specifically we are.
Not having conversations with customers right now about moving price up.
Yeah, and just the last question.
In my coverage universe of not about it got leveraged companies.
<unk> nine stood out in terms of the exposure to.
The gassy basins, Haynesville and Eagle Ford as you mentioned, but yet your revenues have held up a lot better than a lot of the peers what would you attribute that to.
Is it mostly just the international piece or is there something else as well there.
Yeah. So I mean, it's a great question the international certainly helps again.
But it was it was a it was a pretty sizable this quarter. So that was extremely helpful. I do think that we've been able to hold market share in our basins with our technology, but we've also had our management teams do a spectacular job of moving assets and people around which I did caution in the market that's easier said than done and.
Oftentimes as we head into these downturns people will say Oh, no problem al just to move all my stuff out of the gas markets and roll into the you know black crude markets and that's kind of the easy answer, but oftentimes we've seen that be very challenging them, we've actually been quite effective at that and so I think you've seen a little bit of resilience and some of these service lines.
Around be very nimble approach that the team has taken to moving Bose.
Heavy hard assets as well as our human assets into other locations.
Okay.
Great well. Thank you very much appreciate the answers.
Thank you thanks Waqar.
Okay.
Our next question comes from Tim Moore with <unk> Partners. Please proceed with your question.
Great Thanks, and I have two questions.
And I was just wondering maybe if you can provide some examples of tactics or maybe some details or even an example of how you really.
Pursuing more of the growth of completion tools, you know do you want to maybe get that to 40% of sales and maybe away from the more capex intensive service lines.
Can you just maybe give us some more examples of how you're talking to customers are demonstrating things and such.
Yes, it's a it's a great question Ken so.
So we we of course are very keen to start doing our own internal R&D and you've seen this done very effectively as I said through the Norway team. We designed a specific for you know can be run its course and other unconventional markets, but specifically for one of our middle eastern customer.
Ours are not where we want a contract with a tool that they did design. So one of the ways in which we're approaching this is organically with our own engineering hands and figuring out where to address the market, where perhaps the larger cap customers are contracting network out may not have those tools or we may see a wait.
To engineer something that creates efficiency.
Other way certainly that we are working on and through M&A and there are a bunch of wonderful inventor and entrepreneur is out there that have a desire and certain tools that are very interesting and often classes you know.
Find it and they find that it really accelerates our potential growth and profitability to partner with with larger companies and so I think our traction in the middle East now is not just with clubs, but it's with a couple of other tools and so that can then also be alluring to potential would be.
M&A candidates, so it's going to be a dual pronged strategy of both organic growth.
As well as M&A.
That's great color and yeah. It seems like a terrific approach for the three prongs there and then maybe just my other question Dissolvable plugs, the Frac plugs and maybe.
So maybe can you elaborate a little bit just for me to understand maybe some of the investors a little bit more just not now.
And I seem to have the materials and science adds I mean.
You can kind of track how long the formation takes the warm backed up after its fracked and can maybe just talk about that because it's you know my my estimate is probably gaining some market share from two of the other peers and just love here a little bit more story on that.
Yeah sure. Another great question. So on this is you know it was all kind of an example of using our wireline service line as well as our coiled tubing service line and the development of what we call the low temperature Dissolvable and what we've really put forward is that we have dissolvable.
Aerials that we design in concert with our operators that can really address temperatures that are you know very cool.
Room temperature type situations, all the way through the very natural hot markets that have always loved dissolvable. So we think we really differentiate on the materials science in so far as understanding the predictability of dissolution. So the operators are so are so highly specialized now and exactly the amount of time.
That they want to spend you know completing a lateral foot and we are now very good at saying well you're operating in this formation at this depth at this bottom hole temperature youre going to Frac for this long and you're also by the way using these fluid those maybe freshwater theres may have high salinity and so we've spent in <unk>.
Norm ex amount of time gathering a library of data to understand how various different materials will respond in inside of those well bores and so I think.
A major differentiator for US is it's not one size fits all it's a very very specialized tool designed in concert with the operator. So it's a strong partnership as I said, we've seen a huge amount of growth in those sales I'm very excited.
More large large operators have become very interested in this I think you'll continue to see that as they are successful and lengthening out these laterals.
Hmm.
Where it becomes very risky to drill out and complete pass a certain depth. So we're pretty excited about that it's a very.
A few people that are competing inside of the dissolvable space and a legitimate way at scale.
So that is the other thing we feel we've mastered is the QA QC and the manufacturing process, even though where you deliver these plugs. The way you package them is all highly specialized because of course, they're dissolvable. So there's only a few players we compete with that do this at scale and of course, you're always going to have your your folks in garages, saying, we have a plan.
But as far as who we see in the field.
Where we think we're one of the top three.
And we are honored by the way seeing a lot of traction in the international markets I'm on the unconventional side and that's been very exciting for us.
So the final piece I would just add here is depending on what the S. E. T comes out with this fall as far as there's climate and emissions related disclosures. This will be an even larger piece of the pie because of course youre taking out so much combustion and therefore C O two emissions whenever you use dissolvable.
Because you just don't have diesel based.
Pumps or stick type diesel engine, a drilling out plugs. So we think this is environmentally a much greener option are we certainly have quantified that for the market through independent studies or E. R. M. So we're also excited about that it was certainly part of the industrial logic and strategic Raj.
Now when we did the acquisition I think we were just a little bit maybe early and not and now our operators are very very focused on.
<unk> mission and strategies to reduce those emissions and this is certainly a fabulous way to do that.
Oh, great and that those are very helpful insights and the greener Optionality just seems terrific for catalyst.
Gross sales so the rest of my questions were already answered today, so thanks and have a nice weekend.
Thank you tell me too thank you.
Okay.
Our next question is from John Daniel with Daniel Energy Partners. Please proceed with your question.
Hey, good morning, all.
Hey, good morning, good morning.
I'd like to think that these are.
Census, or conventional wisdom holds that.
Activity fades moderates back half of the year, but didnt budgets reset and we go right back to work in the first half of 'twenty four.
Assuming that is the scenario I guess the question is how are you handling.
Labor right now given the volatility of the work schedules.
With also a hope that we're going to recover.
Okay.
Oh. This is a great question and it's I don't have an easy answer for you John because it's something we actively debate.
You've heard a lot of you know a lot of folks in this sector and say you know we're not we're not gonna take lower pricing. We're focused on returns we're gonna Park, our equipment and that's it is if you're not going to give us the price. We want we're done well that's very easy to say, except there is a human component called labor and so the problem.
Is that in order to hold those crews together, which as you know is critically important because the implicit communication and then the operational know how developed inside those crews if you're specializing them is extremely value valuable and so that collection of workforce is something that we have tried them through this.
Both rig count decline that we have tried to hold together that obviously reps into our margin and we're cognizant of that so I think you know had we not seen or a high spec drilling rig companies and kind of our market Sealers say, hey, we think September kind of bottoms out and the market starts to.
Come back how do if had we not seen kind of strip prices, where they are and maybe we would have made a different choice. This to me feels and we've been through a lot of views I know you have as well Jon This feels very different to me than some of kind of the longer term long dated downturns that we've been through before.
Where you are cutting our workforce quickly hum youre going to stay down under the water for a long time.
Feels like our team collectively have to get used to up like run up the mountain run down the mountain run right back up the next mountain and so I'm not necessarily saying by the way. This is gonna be a mountain because I don't think it serves anyone to just be you know overly optimistic about 2020 for activity and I'm, not saying that either.
But I do think it will be better than Q3, so I don't want to suggest to the market that I think this is going to be a huge ramp like it was an H a two to 2022, but I am suggesting to the market that we value what we have and we're really working hard to hang on to that I can't guarantee that.
But I would rather take other you know actions than just cut right now because I do feel them, we're going to see some recovery in activity.
Yeah, I would agree that the next one and this is another.
Tricky question, it's not meant to be a trick question.
But it does come back to the pricing right I mean, it's when the cycle started out the request from customers, where hey, we need some relief on service cost commodity prices have fallen.
And you guys charge too much which we can do.
No I agree to disagree with right that was the original sort of comments and then activity starts to fall and now it's just simply a supply demand there's too much supply not enough demand so prices fall.
And as you're sitting here with your customers.
I mean in your work and you want to work with them and partner with them. If you will if that if that still exists or even exist.
How do you get that reset on the price, where if you worked with your customer and you know gave some relief where you get to recover that.
I don't know I don't know what I'm, asking if that makes any sense, but it just seems like now I know, what you're asking if as vicious as it's always been so it's not changing.
It is I stab you and then you Stephanie it's that's just how it is and that is how it will be and you said supply demand fundamentals that is but it is so what will happen if activity returns. If the private has decided they want to chase the commodity price and it will start to tighten up the market you know the capex spend.
In the past few years in certain sector, it's not close to what it was.
Eventually you know that that lack of investment in equipment supposedly progress as well as new equipment catches up and so on.
We will hit our customers with price when when there's not enough equipment to go around and when they become scared about availability they will pay that price.
And that's just how it works.
And you know again, even for the I think the longer term contract guys. They're gonna contract when I think when they feel that they can get the best price so for a spot market.
The actual market and I wish I could tell you that it's different but it's not.
Okay.
My last one is on the wireline business and I was at the Mcdonald's drive through when you were going through the numbers. So I apologize, but I think you said guy that the revenues are actually up quarter over quarter.
That's right yes.
The market and just any any color you guys could elaborate because that's yeah and I wish I wish that I could tell you on that.
That was anything but catching some frac crews that we frankly didn't expect to catch those person spot frac crews that we picked up drove that up which is fabulous and great and that is just some sales guys literally you know turning over every rock and we appreciate that but it is a little bit counter to where the market was.
So it can fleets the picture, but it was just a really good crap.
Okay.
That's all I got thanks for letting me ask some questions.
Okay. Thanks, so much John good to hear from you.
Okay.
We have reached the end of the 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 investors. Thank you.
Yeah.
This concludes today's call you may disconnect your lines at this time and we thank you for your participation.