Nine Energy outlook revised to negative at S&P amid cash flow concerns

S&P Global Ratings has revised its outlook on Nine Energy Service (NINE) to negative from stable, affirming its 'CCC+' rating, citing expectations of negative free operating cash flow in 2025 due to a projected slowdown in U.S. drilling activity and margin contraction. Despite a new $125 million asset-based lending facility, Nine's liquidity is considered less than adequate, with leverage remaining unsustainable as FFO to debt hovers around 5% and debt to EBITDA exceeds 5x; a downgrade is possible if liquidity deteriorates further, particularly with weaker commodity prices.

Analysis

S&P Global Ratings has revised its outlook on Nine Energy Service Inc. (NINE) to negative from stable, while affirming the 'CCC+' issuer credit rating, signaling heightened credit risk. This revision stems from S&P's expectation that Nine will generate negative free operating cash flow (FOCF) in 2025, despite a reported 6% year-over-year revenue increase and modest EBITDA margin improvement to just over 10% in the first quarter. The rating agency anticipates a slowdown in U.S. drilling and completion activity, coupled with likely margin contraction over the remaining three quarters of the year, as key headwinds. Nine's leverage is considered unsustainable, with funds from operations (FFO) to debt around 5% and debt to EBITDA exceeding 5x. Management has guided for lower revenue in the second quarter and noted falling prices for some products. The company recorded a FOCF deficit of $9.2 million in Q1 2025 after interest, working capital, and capital expenditure. S&P projects Nine's full-year 2025 EBITDA at $40 million-$45 million, which is insufficient to cover annual interest payments of approximately $40 million and capital expenditure of $15 million-$25 million. Although Nine secured a new $125 million asset-based lending facility due November 2027, providing about $22 million in additional liquidity (with $51.3 million available as of May 1), S&P assesses its overall liquidity as less than adequate. The company's $300 million 13% senior secured notes due 2028 trading at roughly $0.50 on the dollar suggest significant market distress and increase the likelihood of a distressed debt exchange or restructuring. Furthermore, Nine faces a potential NYSE delisting, with its stock trading below $1.00 since early April. S&P forecasts FFO to debt will remain around 5% in 2025, and debt to EBITDA above 5x in 2025-2026, alongside ongoing annual FOCF deficits. The U.S. rig count, a key driver for Nine, is down approximately 5% year-over-year, with potential for further declines if oil prices near $60 per barrel.

Key Decisions for Investors

• Investors should exercise extreme caution given the negative outlook, unsustainable leverage metrics, and S&P's projection of negative free operating cash flow, which significantly elevates the risk of default or distressed restructuring.
• Monitor closely U.S. drilling activity, oil price trends, Nine's quarterly liquidity position, and any announcements regarding its debt or potential NYSE delisting, as these factors are critical to its viability.
• Recognize that the 'CCC+' rating, the distressed pricing of its senior notes, and the potential for a downgrade imply a very high-risk profile, making any investment highly speculative and potentially suitable only for investors with a high tolerance for risk and a deep understanding of distressed situations.