NINE - NYSE

Greetings, and welcome to Nine Energy Service Third Quarter 2023 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, 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 Guy Sirkes, 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 and a reconciliation to the most directly comparable GAAP financials 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 was negative $0.39. We continue to see activity decline 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 rigs 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, July began on a normal trend line. However, we experienced activity declines as well as 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 in Q4 and expect the business to be back to trend for Q4 though 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 is typically impacted first with activity changes. In conjunction with the rig decline, cementing activity was down this quarter compared to Q2. Nine cementing 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 3 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 sales that inflated Q2 international revenue. 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 cost and driving efficiencies, but also make the completion far more complex and riskier, especially with the drill out of plugs. Not only can coil get stuck, but as the laterals extend, it can also require additional trips in and out of the wells to replace the bit. These macro trends are helping drive the adoption of Nine’s 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 plug. The Pincer is comprised of 47% less material than our predecessor Scorpion fully composite frac plug, which has seen over 350,000 successful runs. The new Pincer plug offers industry-leading drill-out times and significantly reduces bit wear, 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 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. Wireline continues to be challenging from a pricing perspective but remains an important part of Nine’s portfolio. We are focused on growing market share in the Permian Basin, and our team has done a great job maintaining our strong market share in the Northeast. 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 OFS companies. Coiled tubing had a very difficult August, but has rebounded nicely in September and thus far into Q4. Coil tubing operates in the Permian, Eagle Ford and Haynesville, and any rig 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 30, 2023, Nine’s 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 30, 2023. At September 30, 2023, we had $57 million of borrowings under the ABL credit facility. We had a number of vendor payables go out before September 30 and a delay in some accounts receivable collections until early October. As a result, our cash balance as of September 30 was at a trough. As of October 31, our cash balance had recovered to $34.8 million. As per the terms of the indenture governing our senior secured notes, we are required to periodically offer 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 in 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 in 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 5,640 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 25,940 stages, a decrease of approximately 6%. Completion tool revenue was $32.6 million, a decrease of approximately 16%. During the third quarter, our coil tubing days work decreased by approximately 13% with the average blended day rate decreasing by approximately 4%. Coil tubing utilization during the quarter was 47%. Coil 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 company’s tax provision was approximately $0.4 million year-to-date. The provision for 2023 is the result of our tax position in state and non-U.S. tax jurisdictions. The company reported net cash used in operating activities of $9.9 million. The average DSO for Q3 was 55.7 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, Guy. The 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 trends. Bids for work have increased in October and customers are talking about rigs 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 2024 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 and Q4, but do 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 million and $147 million. We also anticipate that adjusted EBITDA and our adjusted EBITDA margin will increase slightly as well. We have shown our ability to capitalize quickly on market shifts and our business is nimble. I believe our service and geographic diversity provides us good balance and we remain focused on diversifying more of our top line revenue streams to completion tools and 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.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Tim Moore with EF Hutton. 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?

Yes, we try to highlight. We had an unusually large international order, Tim, in Q2. I think that conflated the move down from Q2 to Q3. Q3 was a much more normalized level. So we did highlight – we tried to highlight that on our last call. So this will reflect a more normalized level.

Yes, that makes sense. I remember the international. So how are the Stinger dissolvable frac plugs doing? Are they still pretty steady and any pickup 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 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, of course, there’s a huge addressable market for composite based plugs. So you see us 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 best both in the dissolvable space as well as in that hybrid composite space. So that is what begs the introduction of the Pincer. But we’re tremendously pleased with the uptake of dissolvables, and we see that trend continuing with the four-mile laterals.

Great. Ann, I just have – 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 markets. There was a lot of lumpiness for everyone in the sector May through August. The rig count went up a little bit in September, then came back down. So just can maybe talk a little bit about the sentiment kind of that you’re seeing? And then just for the gross margin within services segment, do you think that gross margin for the December quarter might be in the teens or do you think you can get up to 20%?

So I’ll take the first piece of the question and then the second. I think the sentiment has certainly shifted. When we were inside of August, what was really nice is to see the sequential bounce 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, the needle was really moved there coming into Q4. So when we talk about sentiment, I would say it’s actually more than just sentiment, it’s real activity levels and customer activity. So very confident that we’ve passed through that 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 2024. Many people wondering how much is that and how fast do those rigs come into the market? But regardless, we see that as stronger than H2 2023. And as far as the margin goes, I’ll flip that over to my CFO, Guy Sirkes.

Yes, thanks, Ann. So, Tim, we’re not providing specific guidance in terms of the breakout between 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 and EBITDA margin, gross margin impact in that month, which we don’t expect to recur. So hoping for a better Q4 than Q3 in that sense.

That makes sense. That’s really helpful, Guy. And Ann thanks for that color. We definitely agree that, yes, ugly trough already passed that, so it’s nice that it’s bottom and 4Q stability makes sense and seems like investors should look forward to a pretty darn good early next year and a reacceleration of activity. Your stock just seems silly cheap today, but that’s it for my questions. Thanks a lot.

Thank you so much.

We’ve 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 the call today. I want to thank our employees, our E&P partners and investors. Thank you.