Q3 2024 Nine Energy Service Inc Earnings Call
Greetings and welcome to the Q3 'twenty 'twenty four nine energy service earnings call.
Speaker Change: At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Speaker Change: Should anyone require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference call 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 begin.
Heather Schmidt: Thank you good morning, everyone and welcome to the nine Energy Service earnings Conference call to discuss our results for the third quarter of 'twenty 'twenty four with me today are Ann Fox, President and Chief Executive Officer, Scott <unk>, Chief Financial Officer, We appreciate your participation.
Heather Schmidt: Some of our comments today may include forward looking statements, reflecting nine views about future events.
Heather Schmidt: 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 <unk>.
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.
Ann Fox: Thank you Heather good morning, everyone. Thank you for joining us today to discuss our third quarter results for 2020 for revenue for the quarter was $138 2 million, which was above the range of our original guidance of 127 to 137 million we generated adjusted EBITDA.
Ann Fox: A $14 3 million, an increase of approximately 47% quarter over quarter and diluted EPS of negative 26 cents incur.
Ann Fox: Incremental adjusted EBITDA margins were approximately 79%.
Ann Fox: Overall, the U S land market was relatively stable this quarter with the average U S rig count declining by approximately 3% from Q2.
Ann Fox: The natural gas price continues to be extremely challenging averaging just above $2 for the year through the end of Q3 low natural gas prices have led to sustained lower activity levels in the haynesville in northeast as well as completion delays and white space in the calendar <unk>.
Ann Fox: Despite this our total revenue grew by approximately 4% quarter over quarter, driven mostly by our cementing business, where we increased market share by approximately 23% quarter over quarter within the areas. We operate the thematic team increased jobs completed by approximately 9% quarter over quarter and revenue by approximately.
Ann Fox: <unk>, 12%, despite the rig count decreasing.
Ann Fox: Our cementing team adopted a deliberate strategy to win market share reevaluating, our pricing versus market share balance while boosting sales efforts and they were able to execute we also continue to offer the most advanced cement slurry is coupled with excellent delivery and onsite execution and service, which continues to differentiate us in the market.
Ann Fox: Pricing for all service lines remained relatively stable this quarter. However in conjunction with the revenue increase better utilization with N cementing and coil higher international tool sales and supply chain efforts across service lines adjusted EBITDA increased by approximately 47% quarter over quarter with incremental margins of approximately.
Ann Fox: 79%.
Ann Fox: We are always watching costs very closely but starting in late Q2, we began to see our cost reduction and supply chain initiatives positively impact our profitability cost reductions have come through a number of strategies and programs, including a reduction in the cost of our operating structure as well as vendor consolidation and rationalization.
Ann Fox: Nation across the organization, which has helped reduce some of our largest material costs. This is an ongoing effort and will continue to be a top priority as we look for sustainable ways to increase profitability.
Revenue within our remaining service lines was relatively flat quarter over quarter, our international completion tool revenue increased quarter over quarter, but was offset by lower activity levels, specifically in the northeast and Haynesville.
Ann Fox: We have been extremely happy with the commercialization of our pincer hybrid frac plug as well as our Frac dart.
Ann Fox: We are running our pincer plug with some of the largest operators in the U S and are quickly gaining market share across basins. As a reminder, this product has approximately 50% less material than our current composite frac plug and allows for plug drill out times as low as two minutes per club savings significant time and meaningfully reducing debt.
Ann Fox: There for our customers in some cases, eliminating a bit trip the scorpion with Frac Dart allows operators to chance to reinitiate pumped down operations. If the guns do not fire post plug setting with their frac dart operators can eliminate the need to pumped down a ball saving time water usage and money despite.
Ann Fox: Over 50% of our wireline revenue coming out of the northeast revenue remained flat this quarter and our team continues to hold steady in a very competitive market. Despite a very saturated the competitive landscape in the Permian basin, we have been able to win market share in this region supplement he worked with our crews from the northeast to maximize efficiency.
Ann Fox: Well tubing revenue increased by approximately 5% this quarter due to better utilization and with days worked increasing by approximately 8%. This quarter I would now like to turn the call over to Guy to walk through detailed financial information.
Guy: Thank you Ann as of September 30th 2024, Nine's cash and cash equivalents were $15 7 million with $27 6 million of availability under the revolving ABL credit facility.
Guy: Resulting in a total liquidity position of $43 3 million.
Guy: As of September 30th 2024 at.
Guy: At September 30, we had $50 million of borrowings under the ABL credit facility. During Q3, we paid down approximately $5 million on our ABL credit facility and on October 10th we paid down an additional $3 million.
Our current borrowings $47 million during.
Guy: During Q3, we also paid our interest payment of approximately $19 5 million.
Guy: At the end of last year, we put a $30 million ATM program in place to provide flexibility for the company.
Guy: During Q3, we sold approximately $1 2 million shares under the ATM program, which generated approximately $1 $4 million of net proceeds.
Guy: For the nine months ended September 30th 2024, we have sold a total of approximately $5 4 million shares which has generated net proceeds of approximately $8 2 million.
Guy: As per the terms of the indenture governing Neyens senior secured notes. The company is required to periodically offer to repurchase such notes with a portion of any excess cash flow.
Guy: Nine did not generate any excess cash flow as defined in the indenture and the most recently ended two fiscal quarters.
Guy: As a result, no excess cash flow offer will be made to note holders this month.
Guy: Okay.
Guy: During the second quarter revenue totaled $138 2 million with adjusted gross profit of $24 7 million.
Guy: During the third quarter, we completed 1005, cementing jobs, an increase of approximately 9%.
Guy: The average blended revenue per job increased by approximately 3%.
Guy: Cementing revenue for the quarter was $51 2 million an increase of approximately 12%.
Guy: During the third quarter, we completed 6318 wireline stages, a decrease of approximately 1%.
Guy: The average blended revenue per stage was flat.
Guy: Wireline revenue for the quarter was $27 9 million, which was flat compared to Q2.
Guy: For completion tools, we completed 24770 stages, an increase of approximately 4%.
Guy: Completion tool revenue was $31 4 million a decrease of approximately 3%.
Guy: During the third quarter, our coiled tubing days worked increased by approximately 8% with the average blended day rate decreasing by approximately 3% coiled.
Coil tubing utilization was 52% with revenue of $27 7 million an increase of approximately 5%.
Guy: During the quarter the company reported general and administrative expense of $12 4 million depreciation.
Guy: Depreciation and amortization expense was $9 million.
Guy: The company's tax provision was approximately 0.4 million year to date.
Guy: The tax provision for 2024, as a result of our tax position and state and non U S tax jurisdictions.
Guy: For the third quarter the company reported net cash used in operating activities of $5 9 million.
Guy: The average DSO for Q3 was 53.1 days.
Guy: Capex spend for Q3 was $3 6 million, bringing our total spend through September 30th $211 7 million.
As a reminder, we decreased our full year 2020 for Capex range to $10 million to $15 million down from our original guidance of $15 million to $25 million.
Speaker Change: I will now turn it back to Ann.
Ann Fox: You Guy it is a very dynamic time, creating volatility and low visibility for commodity prices. We still believe the long term demand for natural gas will increase due enlarge part to power demands from AI as well as the rise of LNG export. This capacity expands it is too early to provide specifics on 2020.
Ann Fox: Five activity levels, but assuming we seek more supportive commodity prices in conjunction with the resetting of customer budgets, we do anticipate a moderate activity pick up in 2025 over current levels, if natural gas prices averaged $3 or above we believe natural gas levered operators will bring activity back online.
Ann Fox: We are very well positioned in these basins, we have seen our earnings respond quickly and significantly in the past and we are ready and well positioned to capitalize on an improving market the northeast and Haynesville account for around 30% to 35% of our revenue and we still believe this is a significant catalyst for growth is.
Ann Fox: So gas prices recover.
Ann Fox: For Q4, we are anticipating a moderate slowdown due to budget exhaustion weather and holidays as well as a decrease in international tool sales because of this we expect Q4 to be down compared with Q3 with projected revenue between 132 and 142 million. We also anticipate that adjusted EBITDA.
Ann Fox: And our adjusted EBITDA margin will be down as well, we typically see activity declines in Q4 versus Q3 with weather seasonality and budget exhaustion. However, we view our Q3 results as repeatable and a similar rig count environment and do not see these results as an anomaly our team its purpose.
Ann Fox: Fall and executed a strategy implementing sustainable cost cutting measures and winning market share with sticky customers increasing profitability in a declining market I am extremely proud of this team who continues to innovate and differentiate within the market through our technology and service.
Speaker Change: We will now open up the call for Q&A.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would 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 you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up.
Speaker Change: Your handset before pressing the star keys, one moment, please while we poll for questions.
Speaker Change: The first question is from Waqar Syed of <unk> capital markets. Please go ahead.
Speaker Change: Good morning.
Speaker Change: And.
What is it.
Speaker Change: Thank you.
Speaker Change: Hmm.
Speaker Change: And what's leading to these market share gains in smelting, especially but and also other businesses.
Speaker Change: So I think we sat down and devised a very specific strategy with very specific customers and looked at kind of where we were.
Speaker Change: And the market and we got the whole team together and we're very very deliberate in its approach Ah. It yielded great results and we were specific on our Kpis and metrics and our performance and won the work I'm very pleased with the team I see market share gains you can never be sure.
Speaker Change: Sure Waqar that they last forever, but these feel very sticky because they were one on very solid previous performances.
Speaker Change: And we also picked up some customers that we hadn't worked for for a while so incredibly I'm pleased with the team here also and wireline, we've really differentiated on remedial wireline going after some significant remedial customers there, so really bringing an awesome differentiation.
Speaker Change: To the wireline business. So this was a targeted strategy that we started to devise earlier on this year and you're just seeing the results of that execution in Q3 as well as a very significant cost reduction program that we looked at mostly targeting not supply chain so that can be.
Speaker Change: Through consolidation of vendors repricing vendors on creating efficiencies internally and how we're thinking about product use et cetera. So you saw a two pronged strategy both attacking market share on the revenue side and then also simultaneously attacking the cost structure. So we do X.
Speaker Change: Specs that this quarter is a repeatable and sustainable and I would be surprised if you didn't see a quarter like this or better coming out of the box in Q1.
Speaker Change: Yeah.
Speaker Change: Great no.
Speaker Change: In terms of international sales picked up in the quarter, but when you compare like the first three quarters of this year versus the first three quarters of last year.
Speaker Change: Holiday tracking.
Speaker Change: Yeah, I think Waqar, we're actually on set to head to the Middle East are next week and we're also working on a strategy just to be very deliberate in expanding that business.
You'd probably see them a bit lower this year, but that's just you know.
Speaker Change: It's these are small numbers frankly, and so I think it's a it's just the law of small numbers more than anything but very excited about the success of our tool there I won't be surprised if you see incremental awards come, but again, where we're going to sit down and be very deliberate about other regions that we plan to attack.
Speaker Change: Based on the run rate and the success of some of the tools that we've had recently.
Speaker Change: Okay.
Speaker Change: And then you know given the success that you've had with lowering your costs. What is still now what would you say is the run rate for EBITDA.
Speaker Change: At which you can be a free cash flow at least breakeven and then positive.
Speaker Change: Yeah. So I think you know the entire team if they were sitting here. They would say if you want to come up with a number of your you're sitting around cash flow what I'll call neutral. If you hit that you know and this is all obviously give or take what car cash moves, but around $15 million a quarter as a team we're pounding the ground for that and obviously as you know.
This is a pretty depressed rig count environment. So if you do see that incremental activity pick up even just based on budget refresh next year I think very very achievable, we have more to come on the cost cuts, which we're excited about so we we expect increased efficiencies there.
Speaker Change: So we're just where we're at the start here.
Speaker Change: Okay, but no.
Speaker Change: Zoom.
Speaker Change: Activity does pick up what some of these costs come back or are these like sticky there.
Speaker Change: You know you don't have to do.
Speaker Change: Raise your base costs if.
Speaker Change: You know if activity picks up.
Speaker Change: Yeah. That's a great question and I think we have fundamentally improved the incremental margin on that dollar of revenue. So.
Speaker Change: So I would say these are very sticky cost cuts that youll see going forward.
Speaker Change: Okay.
Speaker Change: And then Oh, what do you hear from your customers, especially on the natural gas side.
Speaker Change: You know you've seen the Appalachia rig count actually come down quite hard.
Speaker Change: You recently and then.
Speaker Change: You know what what is the view of like next year, what they need to see.
Speaker Change: Both from a drilling rig perspective, when activity would pick up and.
Speaker Change: What would lead to activity pick up on the completion side and between if you could differentiate between Appalachia and the haynesville a little bit as well.
Sure you know, it's funny, because obviously the EIA is projecting a gas price with a three handle on the front end of it which we like to see I think our customers are also like us huge believers in the medium and long term natural gas demand.
Speaker Change: As you know we have on our board somebody from Microsoft to Ah reinforces to us are the need for power in those data centers. So we're all very very comfortable with what the power demand curve looks like over the next 10 years, specifically up in the northeast I think we would all love to see something with a three.
Speaker Change: Three on the front of it and probably the Haynesville. It takes a little bit of a higher price of a car because the temperatures and pressures are really extreme there. It's a very complicated and technical completion them. So you know you've you probably need a little bit of a higher price there I will say that the operators in the north east or just extra.
Speaker Change: And a really efficient we too as a service sector are not giving up on trying to create incremental efficiencies and provide them with new technologies, just like the pincer in the Frac dart that that helped alleviate any potential issues in the well and also save them costs, so theres going to be more efficiencies at <unk>.
Speaker Change: Come from the service sector. So I think you know again, if we could just see a three there we believe that really spurred a lot of activity I hope that answered your question.
Speaker Change: It does thank you very much and best of luck.
Speaker Change: Thank you.
Speaker Change: The next question is from John Daniel from Daniel Energy Partners. Please go ahead.
John Daniel: Hey, good morning team.
John Daniel: Good morning, gentlemen, I'm just curious if it's more of a theoretical question I guess, but if you went to see your very best customers who value.
John Daniel: Service quality, who value the crews.
Speaker Change: Let's just say during the Q1 time frame and said Hey, you know Something's got to get we need a bit more price relief here had these term hat in hand, but just you know the market it's been dicey.
Speaker Change: <unk> do you think they would work with you or do you think.
Speaker Change: The office like what's your view there.
Yeah, I mean, I think we take the view of you know, we're asking for price increases in a market where crude is wobbling to stay at a $70 price is really not where I have the team focused its you know as one of our teammates I always say like how do you make the customer hero and what we need.
Speaker Change: To do is reduce our costs, we need to get more efficient as you see with the pincer take a ton of material out obviously, if you reduce the cost so that we're providing them the opportunity to tell the street that they're completing at a lower cost per lateral foot.
Speaker Change: As you know the street as being relentless on our customers capital efficiency as well and as they move into lesser acreage their costs are naturally inflating. So our job here is to get creative on the R&D side and then also in the back offices to figure out how to do this cheaper.
Speaker Change: And faster and better.
Speaker Change: Alright fair enough one minute I want more of it yet.
Speaker Change: I know, there's no formal guidance for 25, which I guess.
Speaker Change: Is it your sense that you've got some assets that might come off the fence in Q1 to go back to work or is it too early.
Yes, that's my sense I sense that there's going to be some uplift here in 2025.
That's all I've got thank you for including me.
Speaker Change: Great. Thank you.
Speaker Change: This concludes the question and answer session I would like to turn the floor back over to Ann Fox, President and CEO for closing comments.
Ann Fox: Thank you for your participation in our call today I want to thank our employees, our E&P partners and our investors. Thank you.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Okay.
Speaker Change: [music].