Greetings, and welcome to the Nine Energy Service Fourth Quarter and Year End 2021 Conference 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 is being recorded.

It is now my pleasure to introduce your host, Heather Schmidt, Vice President, 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 fourth quarter and full year of 2021. 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 fourth quarter and full-year press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann Fox..

Thank you, Heather. I would like to pause before beginning our regular comments today to recognize the people of Ukraine. Nine and many others in the energy industry have cut off all sales of products and services with end use in Russia. We stand in on admiration of the resolve and strength of the Ukrainians and their fight for freedom.

Their courage shows no limits and their resilience is profound. The oil and gas industry for many of us is our lifelong pursuit in our career, it is a complex dynamic and interesting industry.

However, I want to caution all of our constituents to be reminded today that the recent run up in commodity prices, no doubt represents thousands of times of Ukrainians blood spilled. The loss of innocent life, even amongst children is not something to forget.

So as I speak today about the bullish outlook for Nine, it is with the somber tone, it is a grave and difficult time for the world. I am extremely proud of the work that Nine does to support natural resources that do so much good in the world. We are charged with doing that now on a cleaner basis, and we take that charge seriously.

However, we at Nine are not cheering on these recent prices or profits. In fact, we are keeping the people of Ukraine in our thoughts, our prayers and we – and our children at home are inspired by you in every way. I will now begin our regular comments. Thank you for joining us today to discuss our fourth quarter and full year results for 2020.

As we anticipated, 2021 was a challenging year for the oil field services sector. During 2021, the energy industry began to emerge from what was one of its worst downturns and began to piece back a decimated supply chain, compete to higher qualified labor and return field ready equipment to market.

Simultaneously, we were battling COVID and extreme inflationary pressures for both wages and materials. If you had told me in Q2 of 2020, that we would have an average WTI price of over $68 per barrel in 2021, I would've thought the oil field services industry would be thriving. However, public U.S.

operators remain committed to capital discipline, creating a significant disconnect between commodity prices and activity levels. Even with a $68 average WTI price, an increase of approximately 74% year-over-year, the average rig count only increased approximately 10%. According to the EIA total U.S.

completions increased approximately 32% and new wells drilled were relatively flat. Just for some perspective, in 2019 the average WTI price was approximately 16% lower than the 2021 average, but the rig count was almost double.

So while commodity prices appeared very supportive to the oil field services industry, North American activity levels remained low in 2021, creating a challenging pricing environment, coupled with cost inflation. If we step back for a minute to look at early 2018.

We started executing on our strategy to better align our business portfolio to be an asset-light completions focused company, with higher barriers to entry around our business lines. This plan included the divestment of certain service lines like well service, as well as the acquisition of growing technologies and tools like Magnum.

In 2017, we only had approximately 3% of our top line revenue from completion tools and technology, which has grown to almost 30% by the end of 2021.

We have continued to better position the company over the last several years, despite an unprecedented market backdrop, which should enable us to capitalize on what looks like to be a growth environment for the near to medium term. For the seventh consecutive year, we once again, grew market share growing our percentage of U.S.

stages completed from approximately 20% in 2020 to approximately 22% in 2021. We will start to see the impact of these market share gains in our financial results as pricing and overall activity increases. Operational metrics across many of our service lines improved year-over-year with most outpacing mark activity.

In cementing, we increased the total number of jobs completed by approximately 22% outperforming EIA reported new wells drilled and the average rig count. In 2020, we made a strategic decision to organically expand our cementing services into the Haynesville.

In the span of 12 months, we have already grown our market share in that region to approximately 26% by year end, demonstrating our ability to execute in the field and develop the most technically advanced slurries. We commercialized our new Stinger Dissolvable plug technology in Q1 of 2020.

And we have been extremely happy with both the success of our tool as well as the market's overall adoption of dissolvable plugs. When we acquired Magnum in 2018, we estimated that approximately 10% to 15% of the U.S. plug market was utilizing dissolvable plug technology.

At the end of 2021, we believe that percentage has grown to 20% to 25% and that our initial prediction of the dissolvable plug market expanding to 35% to 50% by the end of 2023 is very achievable. Our Stinger Dissolvable technology continues to perform extremely well in the field and is proven in our numbers.

In 2021 we increased the total number of Stinger products sold by over 400% significantly outpacing EIA reported completions, which increased approximately 32% over that same time.

Additionally Nine’s mix of dissolvable plugs sold compared to composite increased from 23% in 2020 to 27% in 2021, which also reflects the shift we are seeing in the market. We believe the adoption of dissolvable plugs will continue to grow as the benefits are better understood and the reliability of the product continues to prove out.

Dissolvable plugs can reduce carbon emissions by over 90% per wellbore compared to traditional composite drill-outs and significantly reduce cycle times and overall risk. Additionally, dissolvable plugs require almost no labor and no equipment.

So as other drill-out services increase prices and face labor and equipment constraints, the dissolvable plug becomes an even more appealing option for our customers. Despite a year of battling COVID restrictions as well as labor shortages and employee turnover, Nine ended 2021 with an excellent total recordable incident rate of 0.48.

This is due to our incredible employees and their leadership within the organization and community. Company revenue for the year was $349.4 million, net loss was negative $64.6 million and adjusted EBITDA was $5.2 million. Basic EPS was negative $2.13. Now turning to Q4. Unlike past years, we did not see a slowdown of activity in Q4.

And in fact, estimate the average frac crew count was flat to slightly up, ending the year at approximately 215 to 220 active U.S. frac crews. Revenue increased across all of our service lines in Q4, ranging between 9% and 17%.

We realized higher levels of revenue than anticipated due to stronger activity levels within cementing, better than expected wireline pricing and higher than expected sales volumes within completion tools. While we anticipate price increases moving into 2022, net price was relatively flat across service lines during the quarter.

In cementing, we increased the number of jobs completed by approximately 17% versus the average rig count that only increased by approximately 13% quarter-over-quarter. In completion tools, our total number of stages completed increased by 18% quarter-over-quarter versus EIA completed wells, which increased by approximately 4%.

For the full year 2021, we increased our total number of completion tool stages by approximately 60%. This is a testament to our completion tool portfolio and our ability to gain market share. Company revenue for the quarter was $105.1 million. Net loss was negative $15.7 million and adjusted EBITDA was $4.6 million.

Basic earnings per share was negative $0.52. ROIC for the fourth quarter was negative 11.4%. I would now like to turn the call over to Guy to walk through detailed financial information..

Thank you, Ann. As of December 31, 2021, Nine's cash and cash equivalents were $21.5 million with $43.2 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $64.7 million as of December 31, 2021. We did not repurchase any additional bonds during Q4.

On December 31, 2021, the company had $15 million borrowings under the ABL credit facility and borrowed an additional $5 million in the first quarter of 2022. During the fourth quarter, revenue totaled $105.1 million with adjusted gross profit of $14.9 million.

During the fourth quarter, we completed 886 cementing jobs, an increase of approximately 17% versus the third quarter. The average blended revenue per job was flat. Cementing revenue for the quarter was $34.4 million, an increase of approximately 17%. During the fourth quarter, we completed 4,606 wireline stages, a decrease of approximately 4%.

The average blended revenue per stage increased by approximately 18%. Wireline revenue for the quarter was $21.8 million, an increase of approximately 13%. For completion tools, we completed 25,770 stages, an increase of approximately 18%. Completion tool revenue was $29.4 million, an increase of approximately 9%.

During the fourth quarter, our coiled tubing days worked increased by approximately 9%, with the average blended day rate increasing by approximately 4%. Coiled tubing utilization during the quarter was 42%. Coiled tubing revenue for the quarter was $19.5 million, an increase of approximately 14%.

During the fourth quarter, the company reported general and administrative expense of $11.8 million compared to $11.1 million for the third quarter. The majority of this increase was related to legal costs. Full year G&A was $45.3 million compared to $49.4 million for 2020.

Depreciation and amortization expense in the fourth quarter was $10.7 million compared to $11 million in the third quarter. Full year D&A for 2021 was $45 million compared to $48.9 million for 2020. The company recognized income tax of approximately zero for the year, resulting in an effective tax rate of approximately 0% for the year.

For the year-end 2021, the company reported net cash used in operating activities of negative $40.4 million. The average DSO for 2021 was 56 days. Total CapEx spend for 2021 was $14.8 million, which fell below management's original guidance range of $15 million to $20 million.

Looking at 2022, we anticipate our largest cash outflows to be our senior note interest payments of approximately $28 million, CapEx of $20 million to $30 million and changes in net working capital, which should closely mirror revenue changes.

Our CapEx does not include any new unit additions within our service lines and approximately 15% of the total would be classified as growth. I will now turn it back to Ann..

Thank you, Guy. We remained very optimistic looking into 2022 and 2023. Under-investment in oil and gas development and an increase in overall global demand coming out of the pandemic is creating an undersupplied market and supportive commodity prices for activity growth. Most U.S.

operators completed their premium DUC inventory in 2021 and will need to drill more wells in order to maintain or increase production levels in 2022.

Our cementing business is driven by rig count and new wells drilled, and we are already beginning to see significant activity increases within the service line thus far in Q1 as rigs are added to the market.

Typically, completion activity lags the rig count and so we expect to see more robust activity increases in our completion-based service line in the back half of this year in light of the rig count increases thus far in Q1 and expected into Q2.

Like many of our peers, we anticipate North American capital spending to increase by at least 20% in 2022, which should continue to grow into 2023. We believe activity increases will impact all the major U.S. basins, but the majority of the activity growth for Nine will come out of the Permian, Haynesville and the Northeast.

We anticipate all service lines will benefit from activity increases in 2022. With the exception of tools, a service line we rarely project price increases, we do expect net price increases across our other service lines throughout the year.

The magnitude and timing of those price increases will depend on labor inflation and availability, timing of rig and frac crew additions and inflationary pressures. I have continued to talk about labor, but this will be one of the most important levers for oilfield service price increases in 2022.

The conversations with many of our customers are shifting from one of price to availability. I do not see any near-term solution for labor shortages. And as our customers try to increase activity, this will provide pricing leverage back to the service providers. Wage inflation will likely continue in 2022.

With this, Nine's completion tool business, specifically dissolvable plugs, will become extremely appealing for operators as drill-out services raise prices and do not have qualified labor available to service wells. So while we rarely expect price increases within our tools business, the volume should increase helping to drive profitability.

As I mentioned before, we are bullish on the outlook for the dissolvable plug market and its continued growth. Our dissolvable technology as well as our broader portfolio of completion tools will be a growth driver for Nine moving forward.

There are very few reliable dissolvable plugs on the market today, and we can service the entire addressable plug market across the U.S. and abroad with our composite and dissolvable offering. This technology also offers a greener solution for our customers.

At Nine, we are extremely focused on accurately quantifying and measuring emissions so that we can then set realistic and impactful goals for the company. During 2022, our ESG efforts will be focused on data acquisition and diligence, identifying gaps and implementing the proper infrastructure to track ESG metrics.

Simultaneously, we will develop Nine's ESG principles, goals and governance. While we share our progress, we will be careful about releasing formal reports until verified, ensuring we provide real data, allowing our shareholders to make fact-based investing decisions. Managing liquidity in a growth environment is a balancing act.

To capitalize on the recovery and grow earnings, we must invest in our equipment and people. Additionally, we are managing inventory across service lines to ensure we stay ahead of supply chain constraints, specifically in completion tools and cementing. That said, we will continue to be very careful with cash and preserving liquidity.

For Q1, we have seen moderate activity increases thus far, but there are a number of variables affecting operations and earnings. Some of our completion jobs are being delayed because of an inability to get frac sands and inability to bring on new labor for both Nine and other service providers we work with on the well site is also causing delays.

We are passing the majority of the inflation on our materials and wages to our customers, but it is not immediate and can often drive margins for a two to four week time period. We think Q1 will continue to be choppy as the supply chain ramps to accommodate additional activity.

Looking into next quarter, we expect Q1 to be up sequentially versus Q4 with projected revenue of $108 million to $116 million, coupled with very strong incremental margins. With what we know today, we anticipate revenue and earnings to improve each quarter this year.

Nine is differentiated by our service line diversity, forward-leading technology, geographic diversity and balanced commodity exposure. We have proven our ability to grow earnings while emerging from a downturn, and we have undoubtedly one of the best teams in the industry. We will now open up the call for Q&A..

Thank you [Operator Instructions] Thank you. Our first question comes from the line of Waqar Syed with ATB. Please proceed with your question..

Thank you. Good morning, Ann..

Good morning, Waqar..

My first question kind of relates to the very strong stock price action that you've seen in the last couple of days.

Do you have any views on that? Do you have any insights into the very strong trading volume that we've seen as well as the strong price action?.

It's a great question, Waqar. We have no more insight than you may have..

Okay. And then just – you mentioned that you see very strong incremental margins in Q1.

Could you maybe provide some book-ends what do you mean by strong incremental margins? Are we talking about 25% to 30% or we're talking about 40%, 45%-plus?.

Waqar, it's Guy here. I don't think we want to provide specific figures, but I do think we expect them to get much stronger. The EBITDA line has remained relatively steady even as revenue has ramped. I think we'll start to see that change in a pretty – in a much more meaningful way here in Q1 and hopefully going forward..

Okay. Ann, the EBITDA numbers – absolute EBITDA numbers have been the mid kind of – mid-single-digit kind of level.

Do you see a path this year of getting into that maybe $15 million to $20 million of quarterly EBITDA?.

I think it's possible. It just really depends on the pace of activity. And certainly with the current environment and the sanctions, it's impossible for any leader of any company to accurately predict where inflation comes and where stoppages may come. So yes, it's possible..

And just to clarify one point. You mentioned that the CapEx growth could be, let's say, 20% plus, but your revenues should grow at a substantially higher rate than the upstream CapEx growth.

Is that correct?.

Yes, that's correct..

And then on the cementing side, you've got about 40 cementing units.

How many of those are currently active?.

About 30..

And would that change going forward? Do you plan to stick with about 30 crew – active crews this year?.

I suspect that increases, Waqar..

Okay.

And then just for the same thing on the wireline side, how many units are stacked?.

We have about 15 to 20 at the moment..

Okay. Great. That’s all I have for now. Thank you very much..

Thank you, Waqar. Thank you..

[Operator Instructions] Our next question comes from the line of John Daniel with Daniel Energy Partners. Please proceed with your question..

Good morning, Ann..

Good morning, John..

How are you?.

I actually have one question really just kind of comes down to pricing for us. I know you guys were sort of early trying to push pricing up late last year.

As you look at the market, did you – I mean, as you down the stand, did you kind of come out and say, okay, January 1, we're going to raise our rates X percent and then necessarily we stay for the year or is this something where you test it every quarter? How are you approaching it?.

No, no, this is constant. I mean, this is a constant move in price. As the market has moved and as activity has increased, you get more and more confident in pushing your sales folks out to say we're not taking on that incremental truck. We're not following that incremental drilling rig unless it's X price. So it's a constant conversation.

And as our – I mean, wages are moving on me right now. I even had a conversation this morning. So we're going to be countering those inflationary pressures obviously with the goal to drop down some good points of margin for ourselves too. So I think price continues. And clearly, you can see the customers can afford it..

I guess, my question is, I'm not trying to have you do any test percent of the cost. But when you see the same press releases in your commentary that we hear, which is, okay, we're budgeting service costs up 10% or 12% or 15%.

As I sit back and it just is like that sounds way wrong, right, in terms of what we're seeing in some of the leading edge service pricing and efforts.

I mean, what say you on that front?.

I'd say that's incorrect and inaccurate. And I think those inflationary costs would just cover the basics that were already incurred last year on the wage line and completion parts. I don't understand those numbers. And I'm sure my team probably would say the same thing..

Fair enough. I don't either. Okay, that’s all I had. Thank you for putting in..

Okay. Great. Thank you John..

We have reached the end of the question-and-answer session. Ms. Fox, I would now like to turn the call back over to you for closing comments..

I want to end by thanking you for your continued support. Additionally, I want to thank our incredible employees who are executing in the field and innovating every day so that we can partner with the best operators in the industry. I hope you and your families are safe and healthy. Thank you..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..