Greetings. Welcome to Nine Energy Service Earnings Conference Call to discuss the results for the First Quarter of 2021. At this time, all participants will be in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

At this time, I'll turn the conference over to Heather Schmidt, Vice President of Strategy Development and Investor Relations. Heather, you may now begin..

Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the first quarter 2021. 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 statement 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 first 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. And thank you for joining us today to discuss our first quarter results for 2021. While overall market activity improved quarter-over-quarter, we saw a much slower start in January versus last year and weather conditions in February caused significant shutdowns in Texas.

The EIA reported completed wells decreased by approximately 3% quarter-over-quarter, driven mostly by Permian completions, which were down approximately 9% over the same time period. As a reminder, all of our service lines operate in the Permian and approximately 70% of our revenue comes out of Texas and was affected by the shutdowns. U.S.

new wells drilled increased by approximately 25% quarter-over-quarter. At quarter-end, there was estimated to be approximately 185 to 190 active frac crews in the U.S., with approximately half of those operating in the Permian. Frac crew activity increased approximately 14% from January to February, but remained mostly flat from February to March.

This implies an increase of approximately 18% or 28 total new frac crews added quarter-over-quarter. This compared to an average of 265 active frac crews in Q1 of 2020 or a decrease of approximately 30%.

Despite completion decreasing by 3% quarter-over-quarter, Nine’s revenue increased quarter-over-quarter by approximately 8%, driven mostly by strong increases in cementing and completion tool activity. Pricing has largely stabilized across service lines, but remains extremely depressed, especially within tools and wireline.

We have already begun to feel some tightness in the labor market. And if activity continues to increase at the same pace, we could potentially see an opportunity to implement price increases as well as pass through incremental costs, coming from materials and labor.

The timing and magnitude of potential price increases remains unknown and extremely dependent on the timing and pace of potential rig and frac crew additions. The majority of activity growth is still coming out of the Permian of both the Northeast and Haynesville are steady from an activity perspective and remain critical pieces of Nine’s earnings.

In cementing, revenue increased by approximately 22%, despite weather shutdowns in Texas, this increase is due in large part to our incremental market share gains in the Delaware basin. Our Haynesville location is fully operational, and we have begun winning new work with customers.

Coiled tubing revenue decreased quarter-over-quarter, due mostly to weather-related shutdowns in the Permian. Our total stages completed in wireline and completion tools increased by approximately 18% quarter-over-quarter, despite completed wells decreasing by approximately 3%.

This increase reflects our 6% market share gain of stages completed achieved throughout 2020. I remain extremely happy with the performance of our dissolvable plug technology increasing the total number of dissolvable Stingers sold by over 80% quarter-over-quarter.

We have been able to apply the material science from our legacy Magnum products in high temperature environments to our new Stinger product, which has helped us gain incremental market share in hot temperature environments, specifically in Haynesville.

Increasing coil prices and diminishing service quality should serve as a tailwind for dissolvable plugs as well as our customers’ continued focus on ESG. Throughout 2020, we have discussed the significant pricing declines within our dissolvable product line.

And we are currently working on lowering manufacturing costs to recover some of the margin compressions incurred throughout last year. During Q1, we began running our new Scorpion Pincer composite plug.

This plug is over 35% shorter than our Scorpion plug at approximately 14 inches and provides operators with shorter drill out times and less materials to flow back. Due to its smaller size, it is also less expensive for Nine to manufacturer and will be an important product in Nine's portfolio moving forward and addressing the composite plug market.

During Q1, we once again saw an opportunity to purchase additional bonds on the open market at a significant discount, lowering our annual cash interest expense and reducing our overall debt outstanding. During Q1, the company repurchased $26.3 million par value of bonds for $8.4 million of cash, representing 32% of par.

To-date, Nine has repurchased approximately $79.7 million of bonds for $22.9 million, on average representing 29% of par value and leaving $320.3 million par value of bonds outstanding, and an undrawn ABL. Company revenue for the quarter was $66.6 million. Net loss was negative $8.2 million and adjusted EBITDA was negative $3.4 million.

Basic EPS was negative $0.28. I would now like to turn the call over to Guy to walk through the financial information for the quarter..

Thank you, Ann. As Ann mentioned, we repurchased $26.3 million par value of bonds for $8.4 million of cash, representing 32% of par. To-date, Nine has repurchased approximately $79.7 million of bonds for $22.9 million of cash, on average representing 29% of par value and leaving $320.3 million par value of bonds outstanding, and an undrawn ABL.

As of March 31, 2021, Nine’s cash and cash equivalents were $53 million with $45.8 million of availability under the revolving credit facility, resulting in a total liquidity position of $98.8 million as of March 31, 2021.

Availability under the ABL is based on accounts receivable and inventory balances, so as we unwind or build working capital the ABL borrowing base will fluctuate. During the first quarter, revenue totaled $66.6 million with adjusted gross profit of $4.3 million.

During the first quarter, we completed 620 cementing jobs, an increase of approximately 22% versus the fourth quarter. The average blended revenue per job increased by approximately 3%. Cementing revenue for the quarter was $22.9 million, an increase of approximately 26% quarter-over-quarter.

During the quarter, we stacked 11 of our 40 cementing spreads. During the first quarter, we completed 3,448 wireline stages, a decrease of approximately 2% versus the fourth quarter. The average blended per stage – average blended revenue per stage decreased by approximately 7%.

Wireline revenue for the quarter was $12.8 million, a decrease of approximately 9%. During the quarter, we stacked 20 of our 47 units. In completion tools, we completed 17,351 stages, an increase of approximately 24% versus the fourth quarter. Completion tool revenue was $20 million, an increase of approximately 11%.

During the first quarter, our coiled tubing days worked decreased by approximately 8%. The average blended day rate for Q1 increased by approximately 1%. Coiled tubing utilization was 29% with revenue of $10.9 million, a decrease of approximately 7%. During the quarter, we stacked seven of our 14 units.

The company reported general and administrative expense of $10.2 million, compared to $11 million for the fourth quarter. Depreciation and amortization expense in the first quarter was $11.9 million, compared to $11.8 million in the fourth quarter. The company tax provision for the first quarter of 2021 was less than 100,000.

During the first quarter, the company reported net cash used in operating activities of negative $5.2 million. The average DSO for the first quarter was approximately 65 days compared to 60.6 days in Q4. Total capital expenditures for Q1 were $1.9 million.

For Q2, our largest cash outflows will be our senior notes interest payments of approximately $14 million, CapEx and changes in net working capital, which will closely mirror revenue changes. I will now turn it back to Ann..

Thank you. Guy. We have continued to see moderate activity increases throughout Q2 thus far, and feel confident that Q1 will be the worst quarter for Nine this year. That said, our customer's commitment to capital discipline remains steadfast.

As we all remain subject to heightened levels of uncertainty around COVID, OPEC and potential new policies and regulations coming from the Biden administration. We have not seen activity ramp at the same pace as the commodity price. And do believe this disconnect will continue for the most part throughout 2021.

The private operators are responsible for the majority of recent rig additions, but their capacity is limited and their activity increases are not likely to continue at the same rate. Pricing remains the biggest challenge for Nine and the service sector.

There's still very little pricing leverage for OFS companies, but we are starting to feel tightness in the labor market, which could potentially be a catalyst for price increases as well as the ability to pass through incremental costs coming from materials and labor.

We have also seen an uptick in coiling work due to competitor performance issues during frac activity. As these trends continue, the highest quality service providers will begin to strategically increase price without stealing market share. We cannot pinpoint the timing of these increases as they will be gradual.

As service costs increase and service quality diminishes, the dissolvable plug will be an extremely economic option for our operators while reducing risks and the human and environmental footprint at surface. We are committed to providing greener completions for our customers.

At the beginning of Q2, we began the process of converting two of our existing wireline unit to electric wireline. The conversions were part of our original CapEx guidance of $15 million to 20 million, which remains unchanged. We anticipate receiving the converted units by the end of Q2.

Similar to the dissolvable plugs, the electric wireline units are able to reduce emissions when compared to a traditional wireline unit while reducing sound and in no way impeding efficiencies. Today, we are focused on continuing to gain market share across service lines with quality customers at positive gross margins.

The Permian, Northeast and Haynesville will continue to drive the vast majority of revenue generation for the company in the near-term. While we continue to see improvements in the market, we are still anticipating a challenging environment in 2021.

That said, we expect Q2 to be better sequentially and Q1 with projected revenue of $78 million to $86 million. We also anticipate sequential revenue increases in Q3 over Q2. We are monitoring potential supply chain issues very closely.

We anticipate there could be delays in receiving materials or potentially materials will not be available at all, leading to potential cost inflation across the industry. For example, we and all other cementing providers are navigating through cement shortages and are currently receiving allocations from our vendors.

We do not know the magnitude of these potential supply chain constraints, but inventory management will be critical for capitalizing on an activity recovery. We are certainly not immune to supply chain and labor constraints, but do believe we are well-equipped to handle these challenges. We will now open up the call to Q&A..

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of J. B. Lowe with Citi. Please proceed with your question..

Good morning, Ann and good morning, Guy..

Hey, good morning..

Good morning.

Just wanted to ask about what's kind of embedded in the 2Q revenue guide both from a pricing perspective and how much are you guys incorporating some of these material shortages that you spoke of?.

Yes. So the material shortages I'll talk about in just a second. I think we're not going to be specific on activity versus price, but I will just color it for you. And I'll tell you it's mostly activity that's driving that, and incremental market share gains.

So which is great because of course, if we can hand out some price towards the back half of the year or sooner that will really help us. So we're seeing a lot more volume in these businesses. I would say, I'm more hopeful about the go-forward picture of the business today than I've been in 18 months.

I would also tell you that I would say over the past 14 to 21 days the supply chain issues have surfaced.

Why is that now? I can't put my finger on it for you, but what I can say is, it feels to me that we vaccinated the elderly, we kind of put them in a lifeboat, nobody was rowing, and then we moved state-by-state within succession, down to the 16 year olds and above and all of a sudden it's like everybody's rowing.

The labor shortages, the lead times are materials within very short periods of time are moving upwards of 60%. So when you think about the COGS line you're no longer just worried about what's the inflationary impact from a cost perspective, you're worried about availability.

And then you think about kind of the customer base sitting at maintenance levels of production under spending CapEx, rolling around in cash, and you think at some point it's the decline curve catch them and they have to increase activity in 2022 will service be there.

It seems to me the other thing we're learning based on the quarter is the service sector is more broken than we had anticipated. And what I mean by that, is the service quality issues are surfacing faster than we would have expected.

And I'm talking large scale competitors, taking these when we wouldn't think they would, and that has been enormously helpful to us sooner than we had anticipated.

So again, I think by the time our customer base recognizes this, we will have lost labor and the sector will be very challenged, for instance, a lot of folks are going to have to get their allocations for pickup trucks for 2022 now.

And you know better than I do when you look at the net income line of the service sector for Q1, even for larger scale companies, it's ugly, it's negative. So folks are not going to lean out and get this stuff early. And then you put activity on for 2022, it could be kind of a disaster.

And so it's very interesting, it's – I think it's a very hopeful time for us. And traveling out to the field constantly, you realize the depth of talent at this particular organization, which is yielding big market share gains. You're also – because the operators are so tight on production, they're focusing on what is working and what is not.

And so finally they're looking at quality of plugs. So the cheap Charlie mentality they've had is starting to dissipate and they're looking at things like fluid bypass. It's like, well, thank goodness, you're finally focused on that. So all these things feel really good to me and I've not felt this momentum for a long time..

Okay, great. I guess it's kind of related to that.

Given some of the tightness in the labor market, what kind of – compared to just kind of the – I guess a regular recovery, what do you think incremental should look like, given all these factors in the second and third quarters?.

Well, it's a great question because it's not an industry you would qualify with revenue strength, right? So when you hear about kind of the construction industry and they have immediate pass through to the customer, I would anticipate some lag there. And I would also anticipate labor inflation moving more quickly than we had anticipated.

So that lag is something I can't pinpoint, I can just tell you, it's probably there. But those costs, I do think will arrive sooner than I had anticipated. So it's – when you look at D&C spending, it could be slightly challenged, but your dollar is not going to do it par..

Right. But you would think that given the revenue growth outlooks positive EBITDA is more than likely in the second quarter..

I would be disappointed if we didn't see some momentum on the EBITDA line. I won't be specific, but I would be disappointed..

Okay. All right. Thanks guys..

Thank you. The next question is coming from the line of Waqar Syed with ATB. Please proceed with your questions..

Thank you for taking the question, good morning. My question relates to incremental margins.

Are we still in the environment where incremental margins, EBITDA or gross profit margins still in that 20%, 25% range? Or could we get into the upper 20% or even 30% plus in Q2 and then maybe subsequent quarters?.

Hi Waqar, it’s Guy. We're not guiding profitability, but I think it's possible that we see over time higher incrementals as pricing increases. But as Ann said, we haven't guided to the timing of those. And also as you – in the near-term, it could be that our costs rise before our pricing rises.

And so I think it's going to be difficult to forecast for the next few quarters. But over time, as these things normalized and prices rise and costs are stabilized, I think we will see higher incrementals, but it's difficult to point in any given quarter to the timing of these things..

And then in terms of free cash flow outlook, do you see any free cash flow positive quarters in 2021?.

I think again, we'll call it, it's difficult to say, because it's going to depend on the timing of the interest payments, the timing of CapEx spend and ultimately working capital. So I think the faster revenue rises, the more free cash flow deficit we'll have in the near-term, just as our accounts receivables rise.

So I think it's difficult to answer that with precision..

Okay.

And we're hearing a lot about the simultaneous frac market kind of growing, how does that impact Nine if that segment of the market grows?.

I love that, because, we get paid by the stage. So if I have to carry my labor for shorter period of time and I can generate more revenue, then I can really pop my margin. So one of the great things about Nine is that, as our customers get more efficient, so too does our EBITDA margin line.

And that's a perfect example of if the whole field could turn to simul frac tomorrow, we'd be thrilled..

Great.

And then in terms of your completion tools business, any traction in the international markets yet?.

Yes. In fact, we accept some new tools out into the international market, which hopefully we'll be able to talk about next quarter, and we're also getting traction there with our dissolvable plugs as well. So that's been just wonderful this quarter to see..

Great. And then in terms of the cementing side, you have still, I believe 11 units that have still idle.

Do you expect them to return to work this year?.

That's possible, again, I'm feeling really good about our market share gains, and it's amazing to me kind of where the service quality is. So it's just kind of that feeling where you just feel like you're about to run over your competition and I think there is a possibility of that, yes..

Now you made a comment again on service quality, is that an issue in all the service lines that you participate in or is that a cementing specific comment?.

No. I would say it's very prevalent suddenly in tools, it is – this is not new but this always happens to coil right, because it's such a tricky business. And as activity grows, coil service quality will continue to degrade because when you bring new folks on, it's just really tough one. So I would say we're seeing it across the board.

Probably the least impacted service line right now is wireline. But again, you put any volume here and that's where you just start to see it break. So I think – and I think this might actually be the toughest time we've ever seen to claw labor.

So that means you're kind of, as the volume grows, you're going to be really challenged to get talented folks. So I think the service quality may get exacerbated and we're not even used to. I mean, I don't know if you saw, but J.B. Hunt said they've never seen a labor situation this way, I mean, we compete with trucking, right.

They've never seen it like this for 37 years. That's a big comment. So we're watching everything, we're watching our labor, my weekly family's pizza delivery has gone up 3 times in lead time are told last night there's no driver. Do I want to place the order.

So again, this is moving very quickly, the scariest part of course is availability of product, right. And so you're trying to shift the culture of the company from shelter cash, just-in-time inventory, don't keep one bowl on the shelf, keep half a bowl, glue it together if you need to.

And now you're suddenly saying, nope, risk allocation has changed, put stuff on the shelves so we can capture the activity. And it's like, it's shifting the organization overnight to something that we're feeling in the market..

Yes. Fair enough. That sounds for me for now. Thank you..

Okay. Thanks, Waqar..

Our next question comes from the line of John Daniels with Daniel Energy Partners. Please proceed with your question..

Hey, good morning. Ann, just want to follow-up on your comments on the cement market and the tightness and supply.

Is that, at this point, has it had an impact on operations, not just for you but just broadly for the industry and do you see it becoming an issue later this year?.

I would see the supplies tightening quickly, and I think, John, to answer your question it's going to be how much volume does the customer base want to put into the market? And then where are the manufacturers at that point? But what we're doing right now John is, we're conceding with the construction industry for cement.

And clearly as you know, they've been able to buy in much greater volume. And so what's happened is as manufacturers have turned their process to construction-grade cement, which of course we blend in to the surface casing or when you're talking about the production string, you've got very specific classes of oil field service cement.

And so suddenly those manufacturers are saying, hey, these guys are building homes at a rapid rate. So we don't really care about the oil and gas industry, we're going to turn that off, that's a problem. So those production strains are the ones that are really at risk..

Okay, fair enough.

And you noted the cement exposure in Haynesville, I probably should know this by I don’t, is that a new yard for you guys or can you just give me a quick background on that?.

Yes. It is. We – so we decided to expand organically in 2020, we got that yard up and running and we're really – we're excited about it. The Haynesville is a great basin for us. So yes, we are in – we're out in long view and it's a beautiful facility and we've got a super talented team there, lots of experience.

And as you know, I mean, we – it's hotter there. Yes, It's hotter there, but we started the birth of our cement business has really got its start in the Eagle Ford Shale. So we've got a lot of the technical background in our labs and our operations to deal with hot temperatures and high pressures..

Okay.

Would you find that the labor situation in East Texas is tighter than other markets you're in, Ann?.

I would say the tightest market is probably if I had to pin it today, would be the Northeast. But you know what John, it's like tightened significantly over the past 14 to 21 days..

Okay. Well – here's a – might – this might be a politically incorrect question, so I apologize in advance any listeners who are offended.

But do you see, I mean, do you think that we could see a loosening of I-9 requirements to find another – to grow the labor pool, and if you don't answer that's fine, I am just curious if that's an option? How you see that coming….

Yes. I don't need to answer to that. Yes, I don't know the answer to that. It could happen. I'm just not sure. But I do – yes, so I – again, I have no basis to properly answer that..

No, I had the same issue on pizza in Kingwood and I can't my favorite place shut down because they don't have employees. So I sympathize with you and empathize with you. All right. Good job on the debt reduction. Thank you for your time..

Thanks. That's my wizard CFO over here, just super great job there, so very, very, very pleased with that..

All right. You guys take care..

All right, thanks..

At this time, I’ll hand the floor over to Ann Fox for additional remarks..

Thank you for your participation in the call today. We appreciate your continued support of Nine. Thank you..

Thank you. This will conclude today's conference. Let me disconnect your lines at this time. Let me thank you for your participation..