Q3 2023 Nine Energy Service Inc Earnings Call
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I would now like to turn the conference over to your host Heather Schmidt Vice President of strategic development and Investor Relations. Thank you you may begin.
Thank you good morning, everyone and welcome to the nine Energy Service earnings Conference call to discuss our results for the third quarter of 2023 with me today are Ann Fox, President and Chief Executive Officer, and <unk> Chief Financial Officer, We appreciate your participation.
Some of our comments today may include forward looking statements, reflecting <unk> views about future events forward.
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.
The 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 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 third quarter results for 2023 revenue for the quarter was $140 6 million, which was within our original guidance of $140 million to $150 million, we generated adjusted EBITDA of $11 6 million, reflecting an adjusted EBITDA margin of 8% diluted EPS.
It was negative 39 cents.
We continue to see activity declined throughout the quarter since the end of 2022, the rig count has declined by over 150 rigs or approximately 20% through Q3 with over 80% of rates coming out in the second and third quarters. These rig declines led to additional pricing pressure in Q3 affecting all of our service lines for nine <unk>.
July began on a normal trend line. However, we experienced activity declines as well as the operational inefficiencies in August leading to elevated white space in the calendar significantly impacting revenue and profitability September returned to normalized levels and as we look forward. We are not expecting a recurrence of what happened in August. Thank you.
Sure and expect the business to be back to trend for Q4, there was some normal holiday and winter seasonality is expected within our existing service lines cementing is driven by the rig count and new wells drilled and it's typically impacted first with activity changes in conjunction with the rig declines cementing activity was down this quarter compared to Q2.
You nine to 19 Division operates in the Permian Eagle Ford and Haynesville and since the end of 2022, the collective rig count in these basins is down by almost 100 rigs or approximately 20% through the first three quarters of 2023. This has impacted both volume and pricing for this division we do expect.
Q4 revenue to be slightly higher than Q3, and cementing completion tool revenue was down this quarter due to a significant reduction in international sales quarter over quarter as well as reduction in U S completion activity as you may recall during Q2, we had a large one off international sale that inflated Q2 international.
During Q3 international sales returned to more normalized levels. The EIA reported U S completions were down by approximately 10% in Q3 versus Q2.
There is always a lag between rigs coming out of the market and completion activity and in Q3, we really began to see completion activity catch up with rig declines specifically in the Haynesville, where completions were down approximately 18% quarter over quarter.
The industry is pushing towards longer laterals, some of which are reaching as far as four miles and pushing beyond what the industry thought was possible longer laterals are beneficial in reducing costs and driving efficiencies, but also make the completion far more complex and riskier, especially with the drill out of flux.
Not only can coil get stuck but its a laterals extend it can also require additional trips in and out of the world to replace the bet. These macro trends are helping drive the adoption of ninth dissolvable plugs as well as shaping where we focus our R&D resources as part of that we are extremely excited to announce the commercialization of our new.
Pincer hybrid frac, but the pincer is comprised of 47% less material than our predecessors Scorpion fully comprised composite frac plug, which has seen over 350000 successful runs the new Pinscher club offers industry, leading drill out times and significantly reduces bit.
We're allowing for more plugs to be drilled on a single trip nine was able to utilize both composite and dissolvable materials to create this plug and we are confident it will provide substantial completion efficiencies for our customers. We have tested the plug with multiple customers and similarly to our other plug technology. We believe we will we will.
Be able to increase volumes.
We believe we will gain new market share by winning new customers, while simultaneously switching existing scorpion composite plug customers to the pincer, which has a higher margin profile. We will keep you updated as we introduce this technology to the market [laughter] wireline continues to be challenging from a pricing perspective, but remains an important part of ninth portfolio. We are.
Just on growing market share in the Permian basin, and our team has done a great job maintaining our strong market share in the north east pricing in this region has been depressed and we'll need to see significant activity increases and sustained gas prices over $3 for any pricing leverage to move back to O F. S Company.
Coiled tubing, you had a very difficult August but has rebounded nicely in September and thus far into Q4 calls you've been operating in the Permian Eagle Ford and Haynesville and any rate increases in these basins will provide nice growth opportunity for this business I would now like to turn the call over to Guy to walk through detailed financial information.
Thank you Ann as of September 30th 2023, and <unk> cash and cash equivalents were $12 2 million with $22 $7 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $34 9 million as of September 32023.
At September 30th 2023, we had 57 million of borrowings under the ABL credit facility.
We had a number of vendor payables go out before September 30th and the delay in some accounts receivable collections until early October.
As a result, our cash balance as of September 30th was out of a trough.
As of October 31, our cash balance have recovered to $34 8 million.
As per the terms of the indenture governing our senior secured notes we are required to periodically offered to repurchase such notes with a portion of any excess cash flow, we did not generate any excess cash flow as defined in the indenture and the most recently ended two fiscal quarters.
As a result, no excess cash flow offer will be made to noteholders. This month.
A reconciliation of this calculation is available in our Q3 earnings release.
During Q3, we also had an inventory reserve of approximately $1 2 million and our completion tools business, which was higher than normal and negatively impacted adjusted EBITDA.
During the third quarter revenue totaled $140 6 million with adjusted gross profit of $22 9 million.
During the third quarter, we completed 871, cementing jobs, a decrease of approximately 13% versus the second quarter.
The average blended revenue per job increased by approximately 3%.
Cementing revenue for the third quarter was $51 9 million a decrease of approximately 11%.
During the third quarter, we completed 5640 wireline stages, a decrease of approximately 8%.
The average blended revenue per stage decreased by approximately 1%.
Wireline revenue for the quarter was $28 3 million a decrease of approximately 9%.
For completion tools, we completed 25940 stages, a decrease of approximately 6%.
Completion tool revenue was $32 6 million a decrease of approximately 16%.
During the third quarter, our coiled tubing days worked decreased by approximately 13% with the average blended day rate decreasing by approximately 4%.
Coiled tubing utilization during the quarter was 47%.
Coiled tubing revenue for the quarter was $27 9 million a decrease of approximately 17%.
During the third quarter, the company reported general and administrative expense of $13 1 million depreciation and amortization expense in the third quarter was $10 2 million.
The Companys tax provision was approximately 0.4 million year to date the provision for 2023 as a result of our tax position and state and non U S tax jurisdiction.
The company reported net cash used in operating activities of $9 9 million.
The average DSO for Q3 was $55 seven days.
Capex spend for Q3 was $3 9 million, bringing the total capex spend through Q3 to $16 2 million.
Our full year Capex guidance was $25 million to $35 million and we anticipate coming in at the lower end or below the range.
I will now turn it back to Ann Thank you bye.
Third quarter, specifically the month of August was very challenging, but we do believe we have reached a bottoming of the rig count thus far in Q4, we have already begun to feel a shift in sentiment specifically in our cementing division, which is a leading indicator in market activity and trend.
For work have increased in October and customers are talking about rates coming back on the market in early 2024, the pace and magnitude of these additions are unknown, but it does provide us with confidence that activity will improve next year.
It is too early to provide specific outlooks on potential 2020 for activity levels, but we do believe activity will increase next year, mostly driven by private operators, assuming commodity prices remain supportive we are a spot business and our financial results move very closely with U S land activity levels, and we have demonstrated our ability to capitalize on an improving market.
For Q4, we anticipate overall pricing and activity levels to remain mostly flat, we do not anticipate a recurrence of August in Q4, but do you anticipate holidays weather and budget exhaustion to impact operations, especially in the northeast.
Because of this we expect Q4 to be flat or up slightly compared with Q3 with projected revenue between 137 and 147 million. We also anticipate that adjusted EBITA and our adjusted EBITDA margin will increase slightly as well we have shown our ability to capitalize quickly on market chefs and are busy.
As nimble I believe our service and geographic diversity provides us good balance and we remain focused on diversifying more of our topline revenue streams to completion tools in the international markets, our strategy of providing an asset light business with forward leaning technology, coupled with excellent service is unchanged and unique within oilfield services.
We will now open up the call for Q&A.
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Our first question comes from Tim Moore with <unk>. Please proceed with your question.
Thanks.
For product revenues was there any type of maybe one off that maybe happened during the quarter. I know you gave guidance for the fourth quarter I'm just kind of curious was there anything different going on or anything that might shift into the fourth quarter.
Yeah, you know we try to highlight we had an unusually large international order 10 in Q2, So I think that completed the move down from Q2 to Q3 Q3 was a much more normalized level. So we did highlight we try to highlight that on our last call.
This will reflect a more normalized level.
Yeah that makes sense now I remember the international so how are they a stinger dissolvable frac plugs doing I mean, they still pretty pretty steady and any pick up in the extended range ones.
Yes, so we're actually very excited about this push for even longer laterals from our customers. We're seeing that there they're really realizing the efficiencies of these and that obviously gets exacerbated in long laterals. So we've been extremely pleased with the uptake of that we are fielding the pincer because it's.
First there's a huge addressable market for more for composite based plugs. So you know you see is not just sitting down there we're constantly evolving and innovating on our technology, which is important because our customers are still driving efficiencies even to this day. So we want to be the basketball and the dissolvable space as well as in that hybrid composite space.
So that is what bags the introduction of the pincer them, but we're tremendously pleased with the uptake of Dissolvable and we we see that trend continuing with a four mile laterals.
Great and I just have them. My last question is a two parter I mean, it's actually two different questions.
You had some comments maybe about maybe seeing a little bit of sentiment for the maybe more predictability of private operators in the market. So there was a lot of lumpiness for everyone in the sector may through August.
Count went up a little bit in September then came back down.
So you just can maybe talk about the sentiment kind of.
You're seeing and then just for the gross margin within the services segment do you think that gross margin for the December quarter might be.
Or do you think you can get up to 20%.
So I'll take the first piece of the question on and and then the second and I think the sentiment has certainly shifted when we were inside of August what was really nice to see the sequential bounce them into September then continued into October we're always looking to our cementing business as an indicator of forward activity.
And the amount of customer calls and the activity level really on with the needle was really moved their coming into Q4. So when we talk about sentiment I would say, it's actually more than just sentiment. It it's real activity levels and customer activity I'm. So very confident that we've passed through that you know very ugly trough we.
Saw this summer and excited that Q4 is a bit more stable here and as you know I think most people are expecting increased activity in 2020 for many people wondering how much is that and how fast do those rigs come into the market, but regardless, we see that is stronger than a H 220.
Three.
And as far as the margin goes I'll flip that over to my CFO Guy Circus, yes, Thanks, Ann So Tim.
We're not providing specific guidance in terms of the breakout between the the.
The products and the services, but we are anticipating that overall adjusted EBITDA and adjusted EBITDA margin will increase obviously August was very difficult.
And we had a lot of white space in and.
EBITDA margin gross margin impact in that month, which we don't expect to recur so.
I'm, hoping for a better Q4 than Q3 in that sense.
No that makes sense, that's really helpful Guy in and thanks for that color, we definitely agree with it yeah.
Yeah, Ugly trough already past that so it's nice that its bottom and four accused ability makes sense.
Seems like investors should look forward to a pretty darn. Good early next year and a reacceleration of activity I mean, your stocks it seems silly cheap today, but well that's it for my questions. Thanks a lot.
Thank you so much.
We have reached the end of the question and answer session I'd now like to turn the call 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 conference you may disconnect your lines at this time and we thank you for your participation.
Today's conference has ended please disconnect your lines at this time. Thank you.