NINE - NYSE

Greetings, and welcome to Nine Energy Service Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Guy Sirkes. 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 fourth quarter and full year of 2022. With me today is Ann Fox, President and Chief Executive Officer. We appreciate your participation. We wanted to congratulate Heather on an upcoming addition to her family. She is currently out on maternity leave. Some of our comments today may include forward-looking statements reflecting Nine's view 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 and a reconciliation to the most directly comparable GAAP financial measures are also included in our fourth quarter and full year press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann Fox.

Thank you, Guy. Good morning, everyone. Thank you for joining us today to discuss our fourth quarter and full year results for 2022. 2022 was a strong year for the oilfield services space and Nine was able to capitalize on an improving market. Year-over-year, we increased our revenue by 70%, our adjusted EBITDA by over 17 times and increased our adjusted EBITDA margin from 1% to 16%. Our 2022 incremental adjusted EBITDA margin was 36% and return on invested capital for 2022 was approximately 16%. This is solid growth while simultaneously navigating inflationary pressures, labor constraints and new higher employee turnover. I am very pleased with our team's discipline and approach to managing liquidity while simultaneously delevering the company. Over the last several years, we've repurchased bonds on the open market, reducing our term debt by over $90 million. This aided in the execution of our successful refinancing in January of this year. With the new capital structure in place, we now have more optionality to unlock equity value, and we intend to continue to delever moving forward. While overall rig and frac activity increased year-over-year, I would categorize 2022 as more of a pricing story. Underinvestment in OFS equipment kept equipment undersupplied, and OFS companies did not have access to capital to invest in new or existing equipment. Additionally, the labor market remained extremely constrained. These two elements drove pricing leverage back towards service providers in 2022. During 2022, we grew market share, growing our percentage of stages completed within wireline and completion tools from approximately 18% in 2021 to approximately 20% in 2022. Additionally in cementing, we grew our market share of rigs followed and the basins we operate from approximately 17% in 2021 to approximately 19% in 2022. These market share gains came in conjunction with significant growth and profitability. In completion tools, we grew the total number of stages completed by approximately 38% year-over-year compared to U.S. EIA completions, which increased by approximately 22% over that same time period. We remain extremely happy with the performance of our dissolvable plug, increasing the total number of dissolvable Stinger unit sold by approximately 42% year-over-year. We have also maintained a strong composite plug business, increasing the total number of composite plugs sold by approximately 44% year-over-year. We estimate that in 2022 Nine, held approximately 20% of the total U.S. plug market, including both composite and dissolvable plugs. Our cementing service line increased the total number of jobs completed by approximately 50% year-over-year, while also increasing our average price per job by approximately 34% year-over-year. We're able to drive this profitable growth through our state-of-the-art lab facilities that create proprietary and highly technical slurries coupled with precise well site execution. Coiled tubing also demonstrated strong growth in both, activity and pricing, increasing days worked by approximately 37% year-over-year and the average day rate by approximately 40% year-over-year. Our coiled tubing team identified a new market in the Eagle Ford and maintained strong utilization and pricing within our existing markets. In wireline, total stages completed increased by approximately 26% year-over-year, with the average price per stage increasing by approximately 18%. This has been a challenging service line from a pricing perspective. However, it plays an important role in the customer's well completion and provides important intelligence and insight into the completion market. Nine made a substantial commitment to ESG through the development of internal policies, procedures and measurements as well as investment in new technologies that help our customers reduce their GHG emissions. Part of this strategy included identifying and quantifying our GHG emissions. We were able to quantify these emissions for the first time for 2021 and are working on 2022 data. Through this process, we are identifying gaps and procedures to make the collection of this data more accurate and efficient as we move forward while simultaneously developing strategies on how we can reduce our emissions. We will continue to provide details on our progress and priorities moving forward. We have also made it a priority to invest in technologies that drive profitability for the company while helping to reduce emissions. In 2022, we converted two hydraulic wireline units to electric and made a commitment to convert four more in 2023. The electric wireline units provide significant savings on both diesel and monthly maintenance costs for Nine. Our dissolvable plug significantly reduces GHG emissions. And during 2022, we introduced Nine, dissolvable pumpdown ring. The dissolvable pumpdown ring has been shown to reduce horsepower requirements by approximately 48%, water required to pump the plug to set at depth by approximately 28% and diesel fuel usage by approximately 42%. Lastly, I want to recognize the incredible team who led Nine through so many ups and downs, always keeping the reputation, service quality, integrity of the company intact. Once again, we ended the year with an excellent safety score with a total recordable incident rate of 0.41. Company revenue for the year was $593.4 million. Net income was $14.4 million or $0.45 per diluted share and $0.47 per basic share. Adjusted EBITDA was $93.7 million. Now turning to Q4, revenue for the quarter was $166.7 million, which fell within our original guidance of $150 million to $170 million. We generated adjusted EBITDA of $30 million, reflecting an adjusted EBITDA margin of 18%. Net income was $8 million or $0.24 per diluted share and $0.26 per basic share. ROIC for the fourth quarter was approximately 24%. Q4 was in line with management's expectations. Adjusted EBITDA was down slightly compared to Q3 due mostly to highly of international completion tool sales and holidays that is typical for Q4. I would now like to turn the call over to Guy to walk through detailed financial information.

Thank you, Ann. I want to begin by elaborating on Nine's new capital structure. In January, we announced the redemption of our senior notes due 2023, which was partially funded with the net proceeds of our offering of 300,000 units, each comprised of $1,000 principal amount of 13% senior secured notes due 2028 and five shares of Nine's common stock. In conjunction with the unit's offering, we amended and extended our existing asset-based revolving credit facility to January of 2027. Both the ABL and unit collateralization were completed within 30 days post-closing for the terms of the new amended ABL and unit offering. We believe this new capital structure provides more optionality to unlock equity value. And moving forward, we intend to delever through any free cash flow generation, which will be used to repay borrowings under the ABL facility and reduce term debt. As of December 31, 2022, Nine's cash and cash equivalents were $17.4 million, with $66.6 million of availability under the revolving credit facility, resulting in a total liquidity position of $84 million as of December 31, 2022. On December 31, 2022, the company had $32 million of borrowings under the revolving credit facility. On January 27, 2023, the company borrowed an additional $40 million under the revolving credit facility to pay for a portion of the redemption price of the 8.75% senior notes due 2023 and to pay for fees and expenses related to the units offering. During the fourth quarter, revenue totaled $166.7 million with adjusted gross profit of $40.1 million. During the fourth quarter, we completed 1,066 cementing jobs, a decrease of approximately 6% versus the third quarter. The average blended revenue per job increased by approximately 8%. Cementing revenue for the quarter was $65 million, an increase of approximately 2%. During the fourth quarter, we completed 5,879 wireline stages, an increase of approximately 3%. The average blended revenue per stage was flat quarter-over-quarter. Wireline revenue for the quarter was $30.3 million, an increase of approximately 3%. For completion tools, we completed 32,555 stages, a decrease of approximately 5%. Completion tool revenue was $35.3 million, a decrease of approximately 13%. During the fourth quarter, our coiled tubing days worked increased by approximately 5%, with the average blended day rate increasing by approximately 3%. Coiled tubing utilization during the quarter was 56%. Coiled tubing revenue for the quarter was $35.9 million, an increase of approximately 8%. During the fourth quarter, the company reported general and administrative expense of $13.9 million compared to $13.5 million for the third quarter. Full year G&A was $51.7 million. Depreciation and amortization expense in the fourth quarter was $10.1 million compared to $9.5 million in the third quarter. Full year G&A was $40.2 million. The company recognized an income tax provision of approximately $0.5 million for the year, resulting in an effective tax rate of 3.7% for 2022. Our tax provision for 2022 is primarily the result of our tax position in state and foreign tax jurisdictions. For the year end 2022, the company reported net cash provided by operating activities of $16.7 million. The average DSO for 2022 was 58.5 days, which is a reasonable proxy for DSO looking into 2023. Our total CapEx, spend for 2022 was $32.3 million, which fell slightly above management's original guidance of $20 million to $30 million, with $21.5 million following Q4. The $32.3 million includes approximately $3.7 million of 2021 CapEx that fell into 2022. Looking into 2023, we still anticipate total CapEx of $25 million to $35 million, with over 80% of this being allocated towards maintenance capital. The majority of our growth CapEx will go towards the conversion of four additional wireline units to electric. Given our substantial net operating loss carryforward balance, we do not anticipate any meaningful cash taxes. Working capital will move in conjunction with revenue changes. I will now turn it back to Ann.

Thank you, Guy. We anticipate 2023 total U.S. CapEx to increase by double-digits over 2022 and believe operators will need to drill more wells to keep production flat. Overall, market fundamentals remain supportive for a longer cycle with both U.S. operators and OPEC taking a more disciplined approach to production. Throughout 2022, we discussed both the equipment and labor constraints within OFS, neither of which have been alleviated. With this, OFS companies are adopting capital discipline and pledging to return cash to shareholders instead of investing in new equipment. There continues to be a lack of access to capital as well as labor constraints. The dissolvable technology continues to be a reliable, efficient and environmentally friendly option for operators. Since the introduction of our Stinger plug in Q1 of 2020, we have built up meaningful run history across basins and well types, which is allowing customers to become more comfortable with the quality and reliability of running plugs in their wellbore. We do anticipate our dissolvable sales will continue to be an important growth driver for Nine. Given our experience through the cycles, we believe maintaining a strong balance sheet is critical, and moving forward, delevering will continue to be one of Nine's top priorities. Our new capital structure gives us the flexibility to delever and any free cash flow will be used to repay the ABL and reduce term debt. Now transitioning to Q1, activity thus far has been down compared to Q4 with the rig count declining by 30 rigs since the end of 2022. Additionally, Nine loss between one to five days of operations depending on the service line to inclement weather requiring us to carry the cost of labor with no matching revenues, which will negatively impact our EBITDA margin. Over the last several months, we have seen a sharp decline in natural gas prices, which will affect activity levels in the Northeast and Haynesville. We anticipate these effects will be felt more strongly in the Haynesville in the near term. Together, the Northeast and Haynesville comprised approximately 30% of Nine's total revenue. That said, as we have seen, industry dynamics can shift very quickly, and we are operating this business for the long-term. We feel very strongly that these basins are vital to supply in the global markets and important pieces of Nine's footprint. With what we know today, we expect Q1 revenue to be down slightly versus Q4 with projected revenue of $160 million to $165 million. Nine is well positioned to take advantage of this sustained cycle and are differentiated by our service line diversity, forward-leaning technology, geographic diversity and balanced commodity exposure. We have proven our ability to grow earnings, and we have undoubtedly one of the best teams in the industry. We will now open up the call for Q&A.

Thank you [Operator Instructions]. Our first question comes from Waqar Syed with ATB Capital Markets. Please proceed with your question.

Good morning, thanks for taking my question.

Good morning, Waqar.

And - what's your guidance for incremental margins for Q1? How do you see those landing?

So, we're not guiding on the incremental margin quarter-over-quarter. Obviously, if you look at the midpoint of our revenue guidance, we're guiding $160 million to $165 million on the top line so, about 2.5% or so - at the midpoint decline on the revenue side. We will have some degradation to the margin, but this is still going to be a very strong margin. I suspect it's above our 2019 profitability levels. So still very stable, very strong, just not quite the rocket ship that we saw earlier in the year for Q1 and Q2, when gas was at 8%. And frankly, I think most of the globe missed the fact that January and February would be the warmest month we've seen since 1895. So that has really just slowed things down. But by no means is this cataclysmic or catastrophic. This is going to be a really still solid earnings profile for the company and let's just see where summer takes us. But, so some degradation on that margin, Waqar just carrying that labor over those weather days is, as you know, not fun and that was a pretty extreme storm. So again, obviously, a different gas market, we are eyes wide open. We are not - this again is not catastrophic by any means. So, we're still very excited for this year. It's just we haven't seen the propulsion that we thought we would see in Q1 just given the gas macro.

Yes, now the Haynesville rig count hasn't really come off as yet. It's possible that the next couple of months, we see some degradation there. How do you see that impacting your pricing in that basin or in any other basin?

It's a great question. I think the reality is that we had all of us had a really tough February looking at gas and now we're up over $3 on the gas side so that feels much more constructive. I think it would be surprising if OFS as a sector started to give up price because this is a sector that was negative net income in 2021. And those are companies of outside of the mega caps. Those are companies of scale and small companies, negative net income for 2021 and single-digit EBITDA margin, not sustainable. So I would say the price that we garnered as a sector in 2022 was simply reflation. It was just reflation. These are normalized costs now. And I think we had a Goldilocks scenario for our customers in the past. So I'll be very surprised if you see massive amounts of price being given up here because, again, this is still steady at and $3 is by no means the worst gas price this country has seen. So, we're not terribly concerned about this. We're just not going to forecast pricing inclining, which we certainly would have had we been in a scenario where instead of 30 rigs down, we have seen 30 rigs up, if that makes sense.

Yes, absolutely. And you've seen very strong market share gains last year, and thanks for sharing that data. What would you attribute that to because I know that you were also refusing jobs. So what really led to those substantial market share gains?

Well, so I think certainly for our cementing division, a lot of nose to the grinder on slurries and slurry development, and we made a lot of progress there last year, incredible service execution, very selective on the customers that we had and then picking up incremental customers that we knew would value those technical capabilities as well as that service execution. So I think we just - when Nine came out of this, our tenure of our employees that were hired before 2020 is around, on average, eight years. So, we were able to maintain our staff through the field so when we came into 2022, we were able to grab market share because we weren't reinventing the wheel here. We were simply bringing people that we had demoted through those downturns back up into their positions, so that rigor and execution - that rigor in the labs is still there and the same thing as well for the technology and the performance on the tool side. So, I don't know how else to say it. I just think this team does harder better and that's what you saw in 2022.

Okay. And then on the gas side, you mentioned that about 30% revenue exposure, what business lines have above that average exposure and which ones have below that average exposure?

Sorry, the average exposure to what Waqar, I missed the first part.

So the gas rigs you mentioned on the gas basin, you said - there was about a 30% revenue exposure. But I was just saying that which business lines have more exposure than the 30% number and which have less than that 30% number?

It's a pretty even mix. The only one that - well, wireline, we don't have in the Haynesville, but otherwise, it's a pretty even mix across the service lines.

Okay. And then just one final question, one very large service company has introduced - what's emission-friendly cement.

Yes [indiscernible].

Yes, and so what do you think - how does that change the competitive landscape?

I think, we have ready for trial our own green-friendly cement as well. So I think operators are going to play around with this. Certainly, the large manufacturers are getting pressure because of the carbon intensity of manufacturing cement. But the reality is, it's very, very challenging. I think to isolate these wellbores with the same integrity over the long-term. And so, I think it's yet to see what, are the implications for the long-term productivities on those wells. And in a time where U.S. shale is very much struggling with the degradation of productivity on those wellbores. I think this will be a slower start. Certainly, it's an important start. Certainly, it's one we're proud to have our own slurry that meets those green standards. But this, I think, will be a slower take-up than say, a dissolvable plug for instance.

Great. And then just one other, if I may on the dissolvable plug side, any comments you would like to make on international market penetration?

Yes, I would just say we love that, and it keeps going in the right direction. And as you know the bottom worker in Argentina as well as the Middle East have been a really great market for us, and we suspect those international markets also remain strong. So, very, very pleased with that.

Okay great, thank you very much. Thanks for your comments.

Thank you, Waqar. Thank you, Waqar.

Our next question is from Ignacio Bernaldez with EF Hutton. Please proceed with your question.

Hi good morning and thank you for your time today.

Good morning.

Good morning.

Just in the supply chain and are there any areas that you think you'll continue to have, call it, headwinds as we look at '23 and could have an impact on the year?

There's, no immediate term concerns I have to tell the market. I would just generally say on our heavy equipment, if you look at Peterbilt engines, for example, these are incredibly difficult to come by. So there's, gaps still in the manufacturing sector that are existing, it may slowdown fielding equipment. That remains the same picture as last year. I think the big, big challenge for the service space is, of course, as we all know, the recession that's supposed to be next week and never comes. We saw the jobs data, the private payroll data from ADT come out today. We've seen the Fed speak. So, I think labor is going to continue to be the number one, constraint for oilfield service. This unemployment rate seems to be unbendable and obviously, as China picks up and we see that economy expand I suspect oil and gas will not be the first pick of the average American labor. So, I think this industry is going to remain extremely tight on labor and we're concerned about it.

That's really helpful, thank you.

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to Ann Fox for closing comments.

I want to end by thanking you for your continued support. Additionally, I want to thank our team for an incredible 2022. Thank you.