Greetings and welcome to the Q3 2024 Nine Energy Service Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] 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..

Thank you. Good morning, everyone and welcome to the Nine Energy Service earnings conference call to discuss our results for the third quarter of 2024. 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 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 Fox..

Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our third quarter results for 2024. Revenue for the quarter was $138.2 million, which was above the range of our original guidance of $127 million to $137 million.

We generated adjusted EBITDA of $14.3 million, an increase of approximately 47% quarter-over-quarter and diluted EPS of negative $0.26. Incremental adjusted EBITDA margins were approximately 79%. Overall, the US land market was relatively stable this quarter with the average US rig count declining by approximately 3% from Q2.

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 and Northeast as well as completion delays and white spaces in the calendar.

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 cementing team increased jobs completed by approximately 9% quarter-over-quarter and revenue by approximately 12% despite the rig count decreasing. 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 slurries, coupled with excellent delivery and on-site execution and service, which continues to differentiate us in the market. Pricing for all service lines remained relatively stable this quarter.

However, in conjunction with the revenue increase, better utilization within 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 79%. 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 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.

We have been extremely happy with the commercialization of our pincer hybrid frac plug as well as our frac dart. We are running our pincer plug with some of the largest operators in the US 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 plug, saving significant time and meaningfully reducing bit wear for our customers, in some cases, eliminating a bit trip.

The Scorpion with Frac Dart allows operators the chance to reinitiate pump-down operations if the guns do not fire post plug setting. With the frac dart, operators can eliminate the need to pump down a ball saving time, water, usage and money.

Despite 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 competitive landscape in the Permian Basin, we have been able to win market share in this region, supplementing work with our crews from the Northeast to maximize efficiency. Coiled tubing revenue increased by approximately 5% this quarter due to better utilization 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..

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, resulting in a total liquidity position of $43.3 million as of September 30th, 2024. At September 30th, 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, making our current borrowings $47 million. During Q3, we also paid our interest payment of approximately $19.5 million.

At the end of last year, we put a $30 million ATM program in place to provide flexibility for the company. During Q3, we sold approximately 1.2 million shares under the ATM program, which generated approximately $1.4 million of net proceeds.

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. As per the terms of the indenture governing nine senior secured notes, the company is required to periodically offer to repurchase such notes with a portion of any excess cash flow.

Nine 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. During the second quarter, revenue totaled $138.2 million with adjusted gross profit of $24.7 million.

During the third quarter, we completed 1,005 cementing jobs, an increase of approximately 9%. The average blended revenue per job increased by approximately 3%. Cementing revenue for the quarter was $51.2 million, an increase of approximately 12%. During the third quarter, we completed 6,318 wireline stages, a decrease of approximately 1%.

The average blended revenue per stage was flat. Wireline revenue for the quarter was $27.9 million, which was flat compared to Q2. For completion tools, we completed 24,770 stages, an increase of approximately 4%. Completion tool revenue was $31.4 million, a decrease of approximately 3%.

During the third quarter, our coiled tubing days work increased by approximately 8% with the average blended day rate decreasing by approximately 3%. Coiled tubing utilization was 52% with revenue of $27.7 million, an increase of approximately 5%. During the quarter, the company reported general and administrative expense of $12.4 million.

Depreciation and amortization expense was $9 million. The company's tax provision was approximately $0.4 million year-to-date. The tax provision for 2024 as a result of our tax position in state and non-US tax jurisdictions. For the third quarter, the company reported net cash used in operating activities of $5.9 million.

The average DSO for Q3 was 53.1 days. CapEx spend for Q3 was $3.6 million, bringing our total spend through September 30th to $11.7 million. As a reminder, we decreased our full year 2024 CapEx range to $10 million to $15 million, down from our original guidance of $15 million to $25 million. I will now turn it back to Ann..

Thank 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 in large part to power demands from AI as well as the rise of LNG exports as capacity expands. It is too early to provide specifics on 2025 activity levels.

But assuming we see supportive commodity prices, in conjunction with the resetting of customer budgets, we do anticipate a moderate activity pickup in 2025 over current levels. If natural gas prices average $3 or above, we believe natural gas levered operators will bring activity back online. 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 if natural gas prices recover.

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 million and $142 million.

We also anticipate that adjusted EBITDA 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 in a similar rig count environment and do not see these results as an anomaly.

Our team was purposeful 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.

We will now open up the call for Q&A..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question is from Waqar Syed of ATB Capital Markets. Please go ahead..

Good morning..

Good morning..

Good morning..

Thank you.

Ann, what's leading to these market share gains in cementing especially, but in also other businesses?.

So I think we sat down and devised a very specific strategy with very specific customers and looked at kind of where we were in the market and we got the whole team together and we're very, very deliberate in this approach. 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, Waqar, that they last forever, but these feel very sticky because they were won on very solid previous performances. And we also picked up some customers that we hadn't worked for a while. So incredibly pleased with the team here.

Also, in wireline, we've really differentiated on remedial wireline going after some significant remedial customers there. So really bringing awesome differentiation 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 that supply chain.

So that can be through consolidation of vendors, repricing vendors, 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 expect that this quarter is 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..

Yes. Great. Now in terms of your international sales, they 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, how are they tracking?.

Yes. I think, Waqar, we're actually I'm set to head to the Middle East next week, and we're also working on a strategy to be very deliberate in expanding that business. You'd probably see them a bit lower this year, but that's just it's -- these are small numbers, frankly. And so I think 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, we're going to sit down and be very deliberate about other regions that we plan to attack based on the run rate and the success of some of the tools that we've had recently..

Okay.

And then given the success that you've had with lowering our costs, what is still now, what would you say is the run rate for EBITDA at which you can be free cash flow at least breakeven and then positive?.

Yes. So I think the entire team, if they were sitting here, they would say if you want to come up with a number, you're sitting around cash flow, what I'll call neutral if you hit that, and this is all, obviously, give or take, Waqar, you know 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 expect increased efficiencies there.

So we're just -- we're at the start here..

Okay. But now let's assume activity does pick up.

Would some of these costs come back or these are like sticky where you don't have to raise your base cost if activity picks up?.

Yes, that's a great question. I think we have fundamentally improved the incremental margin on that dollar revenue. So I would say these are very sticky cost cuts that you'll see going forward..

Okay. And then what do you hear from your customers, especially on the natural gas side? We've seen the Appalachia rig count actually come down quite hard recently.

And then what is the view of like next year, what they need to see both from a drilling rig perspective, when activity would pick up and what would lead to activity pick up on the completion side, and between, if you could differentiate between Appalachia and Haynesville a little bit as well?.

Sure. It's funny because, obviously, the EIAs projecting a gas price with a three handle on the front 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.

And as you know, we have on our Board, somebody from Microsoft who reinforces to us 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 on the front of it.

Probably the Haynesville takes a little bit of a higher price, Waqar, because the temperatures and pressures are really extreme there. It's a very complicated and technical completion. So you probably need a little bit of a higher price there. I will say that the operators in the Northeast are just extraordinarily 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 and the frac dart that help alleviate any potential issues in the well and also save them cost. So there's going to be more efficiencies that come from the service sector.

So I think, again, if we could just see a three there, we believe that really spurs a lot of activity. I hope that answered your question..

It does. Well, thank you very much, and best of luck..

Thank you..

Thank you. The next question is from John Daniel from Daniel Energy Partners. Please go ahead..

Hey. Good morning, team..

Good morning, John..

I'm just curious, it's more of a theoretical question, I guess. But if you went to see your very best customers who value the service quality who value the crews, let's just say, during the Q1 time frame and said, hey, something's got to give. We need a bit more price relief here. Hate to use the term hat in hand, but just the market has been dicey.

Do you think they'd work with you or do they think they'd keep you out of the office? Like what's your view there? ..

Yes. I mean I think we take the view of -- 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. It's -- as one of our teammates always say like how do you make the customer a hero.

And what we need to do is reduce our cost, we need to get more efficient as you see with the pincer take a ton of material, obviously, to 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.

As you know, the Street is 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 and faster and better..

All right. Fair enough. I'm going to throw one more at you.

I know no formal guidance for $25 million, which I get, but 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 is going to be some uplift here in 2025..

Okay. That's all I've got. Thank you for including me..

Great. Thank you..

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..

Thank you for your participation in the call today. I want to thank our employees, our E&P partners and our investors. Thank you..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..