Greetings, and welcome to the Nine Energy Service Q2 2020 Earnings Call [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Heather Schmidt, Vice President of Investor Relations. Thank you, Ms. Schmidt, you may begin..

Thank you. Good morning, everyone and welcome to the Nine Energy Service earnings conference call to discuss our results for the second quarter 2020. On the call 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 reconciliations to the most directly comparable GAAP financial measures are also included in our second quarter press release and can be found in the Investor Relations section of our Web site. I will now turn the call over to Ann Fox..

Thank you, Heather. Good morning everyone, and thank you for joining us today to discuss our second quarter results for 2020. I hope that you and your families are staying safe and healthy during these very difficult times.

At Nine, we are continuing to practice CDC, federal, and state guidelines to ensure the health and safety of our employees, vendors, customers, and community at large.

This remains our highest priority, and I want to commend the employees at Nine who have demonstrated great discipline and leadership across the organization, while navigating these unprecedented times. As anticipated, Q2 was an extremely challenging quarter.

In response to the extreme reduction in demand related to the COVID-19 pandemic and low commodity prices, North American operators significantly cut capex, either reducing or completely suspending activity.

These reductions were most evident in the Permian Basin where frac crews were estimated to reach loads in the 20 to 25 range during Q2, and total completions in this region decreased by approximately 54% from Q1 to Q2 and by approximately 77% from the February high to the trough in June.

The EIA reported only 101 total completions in the Permian for the month of June. In the Northeast, activity remained minimal, but steady with no indications today of increased activity in this region with an estimated 20 to 25 active frac crews during the quarter. The remaining U.S.

basins and Canada remain mostly dormant with the exception of the Haynesville, which has maintained minimal activity levels of approximately eight to 13 active frac crews. Overall, U.S. frac crews were estimated to be down approximately 70% year-to-date by June with the largest reductions coming in May and into June. U.S.

completed wells decreased approximately 55% quarter-over-quarter, while new wells decreased by approximately 54%, both of which were inflated by April activity levels.

Activity reductions affected revenue and profitability across service lines with the largest revenue declines coming in our coiled tubing and wireline businesses, with cementing and completion tools both seeing significant declines, but not as severe. Activity declines range from 53% to 76% and pricing declines range from 1% to 22%.

From a pricing perspective, our heavier service lines endured pricing pressure in the second half of 2019 and into Q1 of 2020, which we do anticipate continuing for the remainder of the year. Our company is and will continue to stack equipment before we work at negative gross margins.

We have seen sequential revenue declines month-over-month over the course of Q2 and believe that we are at or near the trough for 2020. Activity began dropping in the last half of March and accelerated into April.

April was meaningfully better than May and June, and we expect to fully edge up from those trough levels over the course of Q3 and into the end of the year. As we discussed on our last call, our priority is the preservation of cash and our debt service.

Because of the high variable cost and asset-light makeup of Nine, we were able to quickly take cost-cutting measures and will continue to reduce costs as the market dictates.

The majority of cost savings has come through payroll reductions of approximately $54 million and a headcount reduction of approximately 56%, excluding one-time cash severance costs. With what we know today, we do believe that the vast majority of cost-cutting measures and headcount reductions have been implemented to meet current market demand.

Guy will talk in more detail around liquidity, but our focus on working capital management has resulted in a strong cash balance of $88.7 million as of June 30. Company revenue for the quarter was $52.7 million; net loss was $24.2 million; and adjusted EBITDA was negative $11 million. Basic EPS was negative $0.81 per share.

Adjusted net loss for the quarter was negative $33.7 million or negative $1.13 per share. Our team continues to gain ground with the commercialization of our low temperature dissolvable plug, receiving incremental trials with new customers and expanding market share with existing customers despite the extremely low level of completion activity.

Even with the extreme drop in completions, we more than doubled the number of Stingers deployed quarter-over-quarter. The low temp dissolvable plug continues to perform very well, which has allowed us to maintain some momentum during this downturn, and we feel strongly it is the best dissolvable option in the market.

The majority of the low temp dissolvable plugs are being deployed in both the Permian and Northeast where temperatures are below 150 degrees, sometimes below 80 degrees. And there is some level of completion activity taking place. We have seen several of our customers shift from running partial well bores to full well bores.

The absolute number of trials and tools run is not where we thought it would be coming into 2020, due to the extreme decline in completions activity.

We are confident when activity resumes, we will see an uptick in tools sold based on the appetite we have seen from our customers even in this environment and the reliability and consistency we have seen from the tools downhole. Our high temp dissolvable plug is complete, and we have begun only minimal trials due to lack of activity.

We are confident in the tool design, which is identical to the low temp dissolvable as well as the dissolution as we leverage our successful and extensive run history in these hotter basins, which includes the Eagle Ford, Bakken, and Haynesville.

We continue to work on the commercialization of our new composite plug, which has been delayed due to supply chain issues related to the COVID pandemic, causing delays in the manufacturing of our slips. We are delaying commercialization of the composite plug until this issue can be resolved.

Because of the run history we have built with our current Scorpion composite offering, we are confident in our ability to get our newest version into trials quickly and successfully once the tool is complete. I remain extremely excited about our technology and the unique growth opportunity it provides the company once activity returns.

Unlike some of the heavier service lines within OFS, these products will require little to no capital as sales ramp and will help operators address many of the concerns including headcount at surface that have been exacerbated by the covered pandemic.

I would now like to turn the call over to Guy to walk through financial information for the quarter before I provide an outlook for Q3 and the remainder of the year..

Thank you, Ann. On our last call, we announced the purchase of our bonds with a face value of approximately $29.7 million for a total purchase price of approximately $4 million using cash on the balance sheet and reducing our overall debt and interest payments.

Approximately $15.9 million of the bond repurchases took place in the second quarter and we did not do any bond repurchases incremental to what was previously announced. As Ann mentioned, our first priority is the preservation of cash in liquidity, so we will continue to monitor the market for attractive M&A for bond repurchase opportunities.

As of June 30, 2020, Nine's cash and cash equivalents were $88.7 million with $48 million of availability under the revolving ABL credit facility resulting in a total liquidity position of $133.5 million as of June 30, 2020.

As a reminder, availability under the ABL is based on accounts receivable and inventory balances, so as we unwind working capital and build cash on the balance sheet, the ABL availability would decrease. As of June 30, 2020, we had $39.4 million in accounts receivables.

We also had $59.3 million in inventory, the majority of which is related to completion tools. We are very focused on our inventory monetization, particularly in completion tools and believe that we will be able to slowly work down the inventory balance over the course of the year.

During the second quarter, revenue totaled $52.7 million with adjusted gross loss of negative $4 million and adjusted EBITDA of negative $11 million. In Q2 we booked bad debt reserves of approximately $1.7 million.

Additionally, in Q2 we got approximately $1.4 million in prepaid asset impairments related to legacy completion tool products and an insurance audit settlement of approximately $0.6 million. All of these items impacted adjusted EBITDA. During the second quarter, we completed 443 cementing jobs, a decrease of approximately 58% versus the first quarter.

The average blended revenue per job decreased by approximately 1%. Cementing revenue for the quarter was [$28.4] million, a decrease of approximately 58% quarter-over-quarter. During this quarter, we received one incremental cementing unit and stacked 12 of our 38 cementing spreads.

At this time, we anticipate receiving the remaining 2 cementing units related to 2019 CapEx in Q3. During the second quarter, we completed 2232 wireline stages, a decrease of approximately 76% versus the first quarter. The average blended revenue per stage decreased by approximately 12%.

Wireline revenue for the quarter was $9.7 million, a decrease of approximately 79%. We did not receive any incremental wireline units during the quarter and have stacked 22 of our 47 units. In completion tools, we completed 9935 stages, a decrease of approximately 53% versus the first quarter.

Completion tool revenue was $15.1 million, a decrease of approximately 53%. During the second quarter, our coiled tubing days were decreased by approximately 53%. The average blended day rate for Q2 decreased by approximately 22%. Coiled tubing utilization was 21% with revenue of $7.6 million, a decrease of approximately 64%.

We did not receive any incremental coiled tubing units during the quarter and have stacked seven of our 14 units. The company recorded selling, general, and administrative expense of $11.3 million compared to $16.4 million for the first quarter, a decrease of approximately 31%. This decrease was largely due to cost reductions across the organization.

Depreciation and amortization expense in the second quarter was $12.6 million compared to $12.7 million in the first quarter.

The company recognized an income tax benefit of approximately $200,000 in the second quarter of 2020 and an overall income tax benefit year-to-date of approximately $2.3 million resulting in an effective tax rate of 0.7% against year-to-date results.

The company's year-to-date income tax benefit is primarily a result of the discrete tax benefit recorded in the first quarter of 2020 related to the CARES Act as well as the release of a portion of our valuation allowance due to goodwill impairment, which was also recorded in the first quarter of 2020.

During the second quarter, the company reported net cash provided by operating activities of $1.6 million. The average DSO for the second quarter was approximately 67.9 days compared to 57.5 days in Q1.

The increase was attributable to customers beginning to pay more slowly and an increase in the proportion of our sales that come from international customers who have typically -- who typically have longer payment cycles. International sales have remained more steady through the first half of 2020.

We are focused on maximizing our collections process and achieve the $53.3 million reduction in accounts receivable in Q2. Total capital expenditures for Q2 were $3.6 million. I will now turn it back to Ann to discuss our Q3 and 2020 outlook..

Thank you, Guy. While there has been more optimism around the market outlook for the remainder of the year, the second half of 2020 will continue to be very challenging and unpredictable.

With the COVID pandemic, we have seen massive demand destruction across the globe and with the resurgence of cases in many areas, it is impossible to know when demand will truly recover.

Our team is in constant conversation with our customers regarding their activity plans, but schedules change quickly in conjunction with the volatile macro backdrop that has many variables and uncertainties. With the recent uptick in the commodity price, we have seen early signs of minimal frac crews being added in July in the Permian.

It is very difficult to estimate, but we believe there were 20 to 25 active frac crews in the Permian in June and that number rose to 30 to 35 by the end of July. Additionally, current operations are sometimes less efficient and start-stop, which can generate negative profitability.

So we are being very careful about what work we accept and moving too quickly to hire back staffing. Assuming WTI stays in the $35 to $45 range, our customers in the Permian are indicating additional anemic activity pickup starting in late August or early September, which has been the consistent messaging since the beginning of Q2.

I'm optimistic about a slight increase of activity during this time, but cautious that this is off of a very low base of activity and customers have the same lack of visibility. So these plans could change if the broader macro backdrop is not cooperative.

It is very difficult to pinpoint how many frac crews may be added during this time frame, but it is minimal and does not indicate a meaningful recovery. As I mentioned, Northeast activity has remained depressed, and we do not anticipate activity increases in this region during Q3.

Future natural gas prices are more positive, which could lead to increased activity in both the Northeast and Haynesville in Q4 of 2020 or Q1 of 2021.

We have an extremely strong completion tool and wireline presence in the Northeast and coiled tubing and completion tool footprint in the Haynesville and do believe we can capitalize on any potential activity increases in both of these basins.

The Permian, Northeast, and Haynesville will likely drive the vast majority of the revenue generation for the company in the near term. However, we will fight to hold our broad North American footprint like we did in 2016 because geographic diversity is critically important.

Each basin performs very differently and has its own regulatory infrastructure and commodity challenges and nuances. In January, having significant gas exposure appeared to be a detriment to the company, but today it's helping offset broader activity declines and could potentially be a growth driver for the company.

From Q1 to Q2, Nine's revenue in the Permian declined by approximately 70% versus the Haynesville and Northeast, which saw revenue declines of approximately 42% quarter-over-quarter. This balance in both commodity exposure and service line diversity will remain part of Nine's strategy moving forward.

With what we know today, we believe that we are at or near the trough from an activity perspective. However, significant uncertainty remains. We anticipate gradual recovery beginning in the July and August time frame with marginal sequential monthly increases throughout Q3.

As a reminder, we had not seen the full impact of activity shutdowns in April, which [Technical Difficulty] Q2 revenue, and we do not anticipate any months in Q3 reaching April revenue levels. The majority of cost-cutting measures were implemented throughout Q2, and full quarter realizations will be evident in Q3 results.

We will [Technical Issues] costs, if we see a change in our current activity expectations. Capex guidance is unchanged and will range from $10 million to $15 million for 2020. This includes approximately $5.6 million of our 2019 capital expenditures related to our cementing spreads, which have been delayed into 2020.

We will not be providing guidance for Q3 because of the uncertainty of customer plans. These times remained very challenging, but we have built the company of high survivability with high variable costs, which allows us to sustain these cycles and adjust quickly to the market.

We have an opportunity to come out of this downturn leaner with a unique technology growth driver and lower capital requirements. We will now open up the call to Q&A..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Sean Meakim from JP Morgan. Please proceed with your question..

So Ann, I thought, in light of what was obviously an incredibly challenging quarter, but the flexibility that the business showed in terms of being able to avoid burning cash in any material way in the quarter, as you think about the myriad of different outcomes we could see over the next 18 months, like the probability of distribution seems pretty wide, can you just maybe speak to your confidence level in being able to sustain the balance sheet as it stands without material cash burn over the next several quarters under kind of that wide spectrum of potential outcomes..

So obviously, as you know, Sean, the working capital that we will release this year, that's obviously a one-time event, but I think what is heartening to us is we do feel like we hit the trough in Q2. And because of the variable costs in the business, we were able to shelter the margin somewhat, so the detrimental margin wasn't too terribly bad.

And so I think we will be able to shelter the balance sheet, I think the big question for everybody is what does '22 and '23 look like and what does '21 look like, and our team is largely expecting a rather anemic '21, and that's okay. We don't have any worry that we're not going to survive this or sustain this s in a good way.

We're super pleased with our technology, so we think that could be a huge growth driver and if you believe the strip pricing for '21, it's not fabulous, but it's not a $27 WTI price that we saw in Q2, right? So we can work with that, we don't love it, but we can work with that and I think, like the rest of the globe, we're hopeful we get a vaccine in '21 and so I think the big question mark is what happens with global demand in '22 and beyond.

If for some reason, a vaccine doesn't come out which nobody can say yet, then that's a different -- as you said, there is a wide variability as to what could happen, but everything in our sights right now, we feel like we've seen the worst, and we've been able to shelter the cash, so obviously if activity were to pick up considerably or spike, you would see a use of working capital, but we've got plenty of liquidity to handle that and that obviously then would unwind, so that to me is not problematic.

So I'm not sure if that answers your question..

No, I guess I think that's helpful. So you mentioned technology being a key part of the story. As we look, let's say if things are directionally better in '21, like you said, not a great market but something you can live with.

How do you envision customer willingness to engage on new technology this year, particularly difficult, everyone is trying to shut it down as fast as they can. But '21 could have a little bit more stability and maybe mental breathing room for your customers.

So how do you think about customer willingness to engage and how that could unfold based on much to say as a base case, something like with strip offers for next year, how would you unpack that opportunity for next year..

So I'll start with something historical which is Q2 and I will tell you I was frankly shocked that we increased the number of stingers deployed by 100% in a market where completions declined by 55% and according to the [Indiscernible] stage count dropped by 64%.

So I think that speaks to the appetite, right, and that tells you that what we're experiencing in our own technology is more related to activity, just overall level of completion versus customer appetite.

So if that's an indication of where our customers are and they are willing to actually adopt these in a time where, I'm not sure we've ever seen a quarter like Q2 in the industry, that to me is a really good sign about their appetite for new technology, but also for dissolvable technology.

So if you extrapolate that into what we might be able to do in '21, I think that's very helpful for us and again, as you know, we are a team that likes to be fairly conservative, but I think that's a really good sign.

And that is far better than what I had imagined once this confluence of events hit, meaning COVID, the production war with Saudi and Russia, etc. Nobody certainly anticipated the rapid decline in North American activity, but given that we were still shocked at the percentage increase quarter-over-quarter in those Stingers deployed.

We're also fabulously pleased with the performance of the tool and the dissolution results even at room temperature, so that material science aspect is something that we focused on and -- where we think that's going to be a real, real differentiator for us.

So I would say that we've got a very strong possibility of gaining incremental market share in '21 with our tools and technology. And we will come out with that composite plug, and that's going to be another mover for us because it will help our margin and will help lower costs for the operator.

So again, it is really still about lowering our cost to complete per lateral foot. So, yeah, I'm very excited about that opportunity. I think '21 will certainly be a lot healthier for us than 2020 just because of what we all experienced in Q2..

Thank you. Our next question is from Taylor Zurcher from Tudor, Pickering, Holt & Co. Please go ahead..

Ann, you talked about seeing some anemic or marginal activity increases from a completion standpoint relative to May and I'm curious as we trend through Q3 if there is any one product line or service line within your portfolio that seemed the most immediate pickup in demand.

And then you talked about April being a relatively strong month all things considered, and probably not getting back to that level or even close to it over the course of Q3, so as we see activity continue to increase each month over the course of Q3, I mean is that going to be enough to drive sequential revenue improvement for you in Q3 or is it too soon to say right now..

Yes, so let me kind of just walk through that -- the shape of the revenue of the topline and I say anemic, I actually mean if you calculate the percentage of the frac crew increase, right, it's pretty significant, it's just anemic because it's so low generally.

So when you think about what happened to us in Q2, Q1 coming into Q2, you had March, you declined in April, you declined in May, you declined in June, you started to pick up in July.

Sequentially, you should see a pickup in August, a pickup in September, and carry on through and then again because of our gas exposure and where we're seeing strip prices coming in for the end of Q4 as well as beginning of Q1, those are good prices for us. So we do -- we are seeing a shape that's increasing sequentially.

I did just want to remind the market that April was a stronger month than what we think we will see, potentially September gets there, let's just see the timing of the incremental frac crew adds from what's already been added, but it's not something that is material in that it's going to be a major driver of earnings growth, I mean it is still a really depressed market.

So it is massive frac crew activity growth from a low of 20 to 25 in the Permian, but it's not significant -- it's not a significant recovery and we just want to make sure that people understand that. So it's a much healthier activity, we like it a lot better than what we saw in May and June, and we are experiencing that recovery as we speak.

But again, Q3 will be a better quarter than Q2..

And just a follow-up. It might be too soon to say but as you're talking with your customers around some potential activity increases in the coming months, do you have a sense as to what their plans look like for Q4.

Obviously there is holidays in Q4 and always some seasonality in that quarter, but this year as operators start to get going, at least marginally here in Q3, again the seasonality in Q4 is probably going to be a bit less than it usually is and so just curious how customer conversations around Q4 and in the seasonality aspect there are progressing right now..

Yes, I mean, of course, we had to call it right now. I do not think we're going to see the cliff dive in Q4 that we saw last year.

If we wanted to kind of shape this for the market, It was really pronounced last year and last year was the first year with our operators really stick to the mantra of capital discipline and they are still obviously very capital disciplined.

But I don't think we're going to see that cliff dive that we saw last year and again the Northeast is always a big question mark because of where gas prices are going. So again, I don't think that we'll see that in Q4, we will see some seasonality for sure. Do you see the impact of holidays? Absolutely.

I just don't think it's going to be as steep as it was last year. If that answers your question.

And I also, I failed to answer a piece of your first question, which was which service lines have we seen respond to the activity pick up and I think certainly those completions focus lines the coil and the tools [Indecipherable] seen respond to this frac crew activity pick up in Q3..

Thank you. The next question comes from Waqar Syed from ATB Capital Markets. Please proceed with your question..

Thank you for taking my question. And just some housekeeping items first. I missed, you had quoted those numbers before, I've either missed, but what was the number of cementing units at the end of Q2..

At the end of Q2, it was 37..

It was 37, okay and it was after that that you retired or stacks up..

We were stacking equipment across service lines during the quarter Waqar, both on the wireline side as well as on the cementing side as well as on the coil side..

S it is just that the average number -- so what was the average number of cementing units that were being marketed in Q2..

On average, we had about 12 stacked during the quarter..

And then now you're adding two more in the third quarter, is that correct?.

Yes..

And then on the wireline side, what was kind of the average number of wireline units that were working?.

I'm just looking here at Heather, we had about 22 stacked during the quarter, but I'm not sure if that answers your question..

So out of 61 about 22 were stacked, is that right? Am I doing the math, right?.

Out of 47..

Out of 47, 22 were stacked..

Correct..

And then as you look at the supply side of let's say cementing units of wireline Coil Tubing, how has that changed and there have been some companies that are very in difficult financial conditions, are there some permanent asset retirements that you've seen across the industry and so if could maybe comment on the supply side of things going forward..

I mean I think certainly, as you know Waqar, cementing has always been a service line that this team has seen as the least saturated from a number of companies providing production strength cementing.

Primarily we're competing with Halliburton and Schlumberger next year and BJ Services, so you all are aware of the competitive landscape and obviously there has been some companies that have just hit financial hurdles.

So I think across the board in OFS, we'll see a rationalization of equipment, not just on cementing, but on coil and e-line and other equipment.

So that's coming and as you said, we are seeing some companies hit some -- hit some bumps and hurdles here, so that will help the competitive landscape and I think really the heavier CapEx lines, the question mark will be when we need to capitalize those again where what does OFS do and where they place their capital, but the point is that the competitive landscape gets better from here, not worse.

Access to capital as you know is extremely tight on all fronts and all forms and kinds of it..

But are you seeing like permanent removal of equipment as well or is it more kind of just stacking and then, as activity comes back, this equipment comes back with [Multiple Speakers]….

No, I think we're seeing both and of course folks are watching some processes to see whether they are Chapter 11, but there has definitely been scrapping and I think, again, some of this equipment was already old, it was heavily utilized in the North American land market. It's just not worth putting CapEx into.

And so I think you're going to see a good chunk of equipment scrapped. Now that being said, Waqar, one exception to that is probably in the Coiled Tubing market where you saw an incredible influx of units come into the market in 2019.

So that's -- that was probably one of the service lines that had an infusion of equipment right as the market turned down, so we estimate maybe 40 to 45 units came into the market during the year in 2019..

And from your own equipment in cementing and wireline, the equipment that you stacked, what would be kind of the incremental cost to bring that back into the service -- into service and then what are the prospects of retiring some of that equipment..

So we won't be retiring that equipment. It's good equipment and it can easily be utilized and answer to your question is it is usually correlated with capital intensity of the service line.

So when you think about the fact that a [cement spread] is anywhere from $3 to $4 million and a wireline truck can be $1 million -- $1.5 [Technical Difficulty] it out, you're going to see a corresponding maintenance capital or a re-unstacking of that equipment off the fence.

So for wireline, not too many incremental dollars, for a full cement spread depending on how long you stack at. Yes, you're going to have a one-time cost to warm that stuff up and bring it back and I think that's something the industry generally underestimates by the way..

And just one final question from me.

At the current price, the prevailing spot prices at what -- at which your equipment is currently working cementing, wireline, Coiled Tubing, would you add stacked equipment back at those prices or do you need higher pricing to bring that equipment in?.

Generally speaking, where we're seeing pricing right now in the market, we wouldn't, that's a really general statement because it depends on which customer you're working for and what their well pad program is, so are you going to bring it offline for a small operator that has a single well pad? No.

Are you going to bring it offline for one of your larger superindependents that's got a pretty strong completion, cadence coming forward potentially, so the volume matters, but I would generally make a comment to the market that the OFS pricing right now in the market is not sustainable for the long term.

So something is going to have to shift and this is very clear, so you're going to have some people that will ride this out and then hit a wall where they realize they don't have enough cash to actually put back into their equipment or their people, but it is not sustainable, it has dropped even off of Q1.

So again just you look at the well cost savings from customers, I think right now too much of it has come out of pricing. And that's, that'll probably further the rationalization honestly, Waqar, of any equipment that was kind of on the edge of whether it should be scrapped or not because some of this pricing is just really [indiscernible]..

There are no further questions at this time. 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 hope you and your family stay safe and healthy during these very difficult times. Thank you..

This concludes teleconference. You many now disconnect your lines. Thank you for your participation..