Nine Energy Service, Inc.

Greetings and welcome to Nine Energy Service first quarter 2024 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. Instructions will be given at that time. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the conference over to your host, Heather Schmidt, Vice President of Strategic Development and Investor Relations.

Thank you. Good morning, everyone, and welcome to the Nine Energy Service Earnings Conference Call to discuss our results for the first quarter of 2024. With me today are Anne Fox, President and Chief Executive Officer, and Guy Sirkis, Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward-looking statements reflecting nine 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 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. Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our first quarter results for 2024. Revenue for the quarter was $142.1 million, which was within the upper range of our original guidance of $135 to $145 million. We generated adjusted EBITDA of $15 million, reflecting an adjusted EBITDA margin of 11%. Diluted earnings per share was negative 24 cents. During Q1, the markets were relatively stable, with the average U.S. rig count remaining flat quarter over quarter. This was reflected in our revenue, which also remained relatively flat quarter over quarter, coming in where we anticipated. Despite a flat rig count, our adjusted EBITDA increased quarter over quarter, due mostly to better utilization within coil tubing. Coil tubing days worked increased by over 40%, driving revenue growth of approximately 11% quarter over quarter. Demand for coiled tubing work was strong in the Permian, and we were able to supplement this work by sending equipment and personnel to the region from the Hainesville. Completion pool revenue was relatively flat quarter over quarter. We reached a major milestone in Q1, surpassing 60,000 dissolvable stinger units sold since we introduced the technology in Q1 of 2020. I am extremely proud of the team and the way they scaled this product without compromising quality and reliability. We remain bullish on not only the capability of our dissolvable technology, but on the continued adoption of dissolvable plugs in the U.S. market and abroad. In Q1, we began to see the impact of pricing pressure within our cementing business as we balanced market share and profitability within this rig count environment. In wireline, we maintained excellent market share in the Northeast and continue to focus on gaining additional market share in the Permian while increasing exposure to remedial and conventional wireline. I would now like to turn the call over to Guy to walk through detailed financial information.

Thank you, Anne. As of March 31, 2024, NINES cash and cash equivalents were $10.2 million, with $27.3 million of availability under the revolving ABL credit facility. resulting in a total liquidity position of $37.5 million as of March 31, 2024. At March 31, we had $52 million of borrowings under the ABL credit facility. As a reminder, during Q1, we had a $19.5 million interest payment for our notes and paid down $5 million on the ABL. Additionally, we had $5.6 million of CapEx for the quarter. As a result, our cash balance as of March 31 was at a trough, and we have already begun to build back our cash balance. All of these cash outflows were anticipated, and our cash balance will continue to ebb and flow in conjunction with our interest payments that are made in January and August. At the end of last year, we put a $30 million ATM program in place to provide flexibility for the company. During Q1, we did not sell any shares under the ATM program and have not sold any to date. As for the terms of the indenture governing our senior secured notes, we are required to periodically offer to repurchase such notes with a portion of any excess cash flow. We did not generate any excess cash flow as defined in the indenture in the most recently ended two fiscal quarters. As a result, no excess cash flow offer will be made to note holders this month. A reconciliation of this calculation is available in our Q1 earnings release. During the first quarter, revenue totaled $142.1 million with adjusted gross profit of $26.1 million. During the first quarter, we completed 943 cementing jobs, a decrease of approximately 3%. The average blended revenue per job decreased by approximately 5%. Cementing revenue for the quarter was $48.3 million, a decrease of approximately 8%. During the first quarter, we completed 6,486 wireline stages, an increase of approximately 14%. The average blended revenue per stage decreased by approximately 13%. Wireline revenue for the quarter was $27.9 million, which was flat compared to Q4. For completion tools, we completed 28,074 stages, an increase of approximately 4%. Completion tool revenue was $35.3 million, a decrease of approximately 2%. During the first quarter, our coil tubing days worked increased by approximately 41%, with the average blended day rate decreasing by approximately 21%. Coil tubing utilization was 63%, with revenue of $30.7 million, an increase of approximately 11%. During the first quarter, the company reported general and administrative expense, of $12.3 million. Depreciation and amortization expense was $9.5 million. The company's tax provision was approximately $0.2 million for the quarter. The provision for 2024 is the result of our tax position in state and non-US tax jurisdictions. The company reported net cash used in operating activities of $8.8 million. The average DSO for Q1 was 57.5 days. CapEx spend for Q1 was $5.6 million. Our 2024 CapEx guide is unchanged at $15 to $25 million, but is flexible if market conditions dictate a reduction. I will now turn it back to Anne.

Thank you, Guy. Q1 activity levels were stable, driven mostly by a supportive oil price. However, we saw further declines in natural gas prices below $2 starting in February and continuing into Q2. Because of this decline, We are anticipating activity slowdowns in the natural gas levered basins, including delayed completions, rig declines, and overall more white space in the calendar, specifically in the northeast, Hainesville, and with some impact in the Eagleford. As a reminder, in 2023, approximately 34% of NINES revenue was generated out of the northeast in Hainesville. We view this decline in natural gas-related activity as a temporary slowdown or pause, and we remain positive on the medium and long-term outlook for the gas markets. It is imperative to maintain our footprint and people within these basins to ensure we are able to capitalize when gas prices recover. However, this will have short-term negative impacts on our margins. We are watching the markets very closely and will adjust course as dictated by the markets and outlooks. The oil markets have remained mostly stable, with the majority of public companies keeping capital and activity programs flat in 2024 versus 2023 in the oil levered basins. There could be potential for additional rigs coming into areas like the Permian if commodity prices remain supportive in the second half of this year. We have supplemented our Permian operations with units and personnel from our Hainesville and Northeast locations, specifically within coil tubing and wire lines. For Q2, we anticipate activity declines in waste space within the gas levered basins, as well as full quarter realizations of pricing pressure within our cementing business. Because of this, we expect Q2 to be down compared with Q1, with projected revenue between $130 and $140 million. We also anticipate that adjusted EBITDA and our adjusted EBITDA margin will decrease from Q1 levels. We have shown our ability to capitalize quickly on market shifts, and our business is nimble. Our service and geographic diversity provides us good balance, and we are focused on diversifying more of our top-line revenue streams to completion tools in the international market. Our strategy of providing an asset-like business with forward-leaning technology coupled with excellent service is unchanged. We will now open up the call for Q&A.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. My first question comes from Mughar Saeed with ATB Capital Markets. Please proceed with your question. Good morning.

Good morning, Mughar. Good morning. So the international business, are you assuming any sales from that in your revenue outlook or anything substantial there?

We always have a projection of that revenue. Just as a reminder, international revenue on an annual basis is roughly between 4% to 5%. And it's very lumpy, as we've told the market before. So we would continue to anticipate having international sales in Q2.

Okay. And then, Anne, the recent consolidation that we've seen in the E&P industry, has that impacted impacted your business positively or negatively, or do you foresee that to impact going forward?

It's a great question, Mukar. We definitely see continued consolidation. For us so far, this has not been a negative impact. And when we analyze business with both Exxon and Pioneer, we're very pleased with that, for example. So right now, we've not seen a negative impact. And I think if anything, you could start to see some consistency, as we know, with large publics. They tend to put out their DNC programs and budgets, and so that streamlines the process and, frankly, can help us. So, to answer your question specifically, no, we've not seen any negatives.

Okay. And the The issue on the pricing side in cementing, is it kind of broad in all basins, or is it very basin-specific right now?

Yeah, no. Well, clearly, you know, coming into the Haynesville has not been wonderful just given where gas prices are. But I would say it's more broad relative to the overall rig count environment in the United States right now. That pricing pressure is felt across basins.

Okay. Are you seeing stability in the spot pricing, or do you see more pressure in that particular market as maybe some more risks come off in the gas basins?

The gas basins could require. I think, though, we've taken that pricing impact. It's just that you'll get a full quarter of that realization in Q2. So we're not seeing a downward slope on that right now that is stabilized, but we did experience that.

And then in terms of your visibility into the second half on the, let's say, you know, oil side first, are you seeing any discussions with E&Ps, privates or publics about picking up activity later this year or into next year?

I think most of our publics have been pretty firm that they're going to maintain, you know, flat programs this year. We do have some oily customers actually in the Northeast that I would be surprised if they don't put a rig or two up later in the year. But by and large, our publics at the moment are steadfast in their programs. So as we know, that could always change. We're seeing, you know, obviously folks are going to start to build ducts here, so it could be a very nice 2025, really nice duct builds in the Hainesville as well. So, as you know, if the operators all start at once, that creates tremendous velocity for pricing. So, it could be an exciting time for us coming into 2025. Okay.

Okay. And from the private side, are you seeing any hints of them picking up activity or new privates being formed, you know, as more personnel become available from the consolidation in the E&P industry?

No. No, we aren't, Wakar. I would say consolidation is more the theme of the day.

Okay. Well, thank you very much and appreciate the color.

Sure. Thank you.

Our next question is from Tim Moore with EF Hutton. Please proceed with your question.

Thanks, Anne and Guy. Two of my questions about public and private. Operator Sedaming was just asked, and thanks for answering that. You know, you mentioned, you know, cementing softness to continue in the June quarter. I'm just trying to think out, I know we talked about lead times on that, and they seem to bounce back fast later on when there's an upswing. I mean, would I be unreasonable thinking that, you know, maybe the cementing jobs count, not necessarily pricing, could the volumes can maybe start increasing September or late summer? Or is that too quick based on visibility?

No, I think that's reasonable, Tim.

Yeah, I mean, defensively, they always bounce back. I mean, you just lax downturns and the rate count's been quite stable since mid-September, especially on the oil side. So it seems like I'm not going to put words in your mouth, but it seems like it would be inevitable that you're not that far away from the bottom on the volume side on cementing. Yes, that's how it feels. Good. Maybe just switching gears, how's the Pinsir hybrid frac plug doing and what are some of the customer responses to it?

Well, we're having a great response. We are in the middle of field testing right now with some customers and then also commercialized other customers. So as you know, that plug is A hybrid has a little bit of dissolvable materials, some composite material, and it offers our customers much better drill-out times. And so it's really for the customer that loves the reliability and dependability as they perceive it with a composite, and that's how we're trying to answer that market and innovate really on the composite side. So it's not an answer to replace the dissolvable plug. It's really an answer to go after that very large composite market. which is still the preponderance of slugs run today in the U.S. And so we're still very pleased with that. Thank you for asking.

No, that's great. I mean, I really think that's going to be very good. You know, I can't wait to hear a couple years from now how many thousands of those you've sold because, you know, like you said, it's not going to cannibalize. It's incremental. So that's a really good design there. Maybe just following up on international expansion, I know you get asked this a lot. I think I asked last quarter. You know, I know it's only maybe 4% to 5% of sales. That's such a good untapped opportunity for you. Do you give any color maybe on some of the countries where you've done some demos and pilots the last couple quarters and where you think might be the focus countries, you know, the rest of this year?

Sure. So, as you know, we sell into about 22 countries, but the majority of our sales will be in the Middle East region as well as Argentina. And so when you think about – The Middle East, you're talking mostly about the UAE as well as Saudi.

Great. And how do you, like, handle capacity for the country? I mean, it seems like you're full up on demand there. Are you – I mean, I guess you're probably working hard to add extra capacity as orders come in and you're able to satisfy them?

Yes. We have not had a problem with that thus far, so I think we do a really good job of managing that supply chain. So, so far, that's not been a bottleneck.

Great. Great. Just two other quick questions. I know you reiterated that capital expenditure guidance this year, $15 to $20 million, and you spent almost $6 million in the first quarter. At what point this year, I mean, would you decide if you might be more towards the lower end or the high end of that range? You probably... We'll wait to see how things shake out this summer and then, you know, maybe finish your CapEx budget September, October?

Right. So it's a great question. So we've guided the market 15 to 25 with a back-end loaded range. And if for some reason this summer we don't see any turn in anticipated, you know, gas pricing coming into the winter season, then obviously we'd make adjustments. So we've purposely planned flexibility to do just that. So I think we're all waiting to see, you know, what does the weather shape out like? Where does gas production fall? And what do those gas prices look like? So we're ready to make those changes. And, you know, as you know, we're always very flexible here with CapEx.

Great, Anne. Thanks a lot. And that's it for my questions, Anna Guy. Appreciate it.

Thank you.

Our next question is from John Daniel with Daniel Energy Partners. Please proceed with your question. Hey, Ann.

Hi there, team. Just one for me, Ann. We've had several of the EMT companies this quarter talk up, you know, opportunities on the refract market. And I'm just curious how you see that opportunity set over the next few years. Is it?

Oh, well, good morning, John. Thank you. That's a great question. I think you've started to see some of our public companies actually make this part of their program and talk about it routinely. So the technology has changed here a lot. We actually forecast refrac into our business now. We're one of very few companies in the U.S. that offers this solution yet. So this is a wonderful niche market for us, and we're really excited to continue to see it grow. We've experienced certainly a lot of growth last year. We're looking forward to more growth this year. So very promising market. They certainly are looking at it from a production capacity. We're also aware that these are obviously cleaner barrels. So all the way around, these refracts are making a ton of sense, and we're seeing wonderful results. thus far with our refract technology.

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

Okay. Great. Thank you so much.

You bet. Okay.

Great. Thank you for your... Go ahead, Ann. I was just saying we wanted to thank our employees and our EMP partners and investors. Thank you all so much.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.