NCSM

Business Context and Reporting Period

NCS Multistage Holdings, Inc. (NCSM) filed its Form 10-Q for the quarterly period ended June 30, 2024. The company provides engineered products and support services for oil and natural gas well construction and completions, operating primarily in North America with international presence in the North Sea, Middle East, Argentina, and China. NCS is classified as a smaller reporting company and operates through one reportable segment.

Key Financial Metrics

Margins: Total gross margin was 38.1% for the quarter and 38.4% for the six-month period, an improvement over the prior year due to higher-margin international work and cost-saving initiatives.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 16.9% quarter-over-quarter (QoQ) and 6.7% year-to-date (YTD) compared to 2023. This was driven by a 34.1% QoQ increase in services revenue and a 9.1% increase in product sales.
• Geographic Shifts: International revenues surged 246.0% QoQ, driven by North Sea frac systems and Middle East tracer work. U.S. revenues increased 25.7% QoQ. Conversely, Canada revenues declined 15.8% QoQ due to wet weather and customer deferrals.
• Profitability Improvement: The net loss narrowed significantly compared to the prior year. The Q2 2023 results were heavily impacted by a $24.9 million litigation provision (Texas Matter) which was reversed in late 2023 after settlement. The YTD 2023 loss included a $42.4 million litigation provision.
• Cost Management: Selling, general, and administrative (SG&A) expenses decreased 6.5% YTD due to restructuring savings realized from 2023 initiatives, offset slightly by higher bonus accruals.

Outlook, Risks, and Contingencies

• Market Outlook: Management expects U.S. drilling and completion activity to decline 5% to 10% in 2024 compared to 2023 due to lower natural gas prices and E&P consolidation. Canadian activity is expected to be flat or slightly higher, though drought conditions may impact water availability. International activity is projected to improve by approximately 5%.
• Legal Contingencies:
  • Canada Patent Matters: NCS lost a patent infringement case against Kobold Corporation in October 2023, resulting in a $1.8 million cost award paid in November 2023 and an injunction. NCS has appealed the decision, with a hearing expected late 2024. Damages for infringement remain undetermined if the appeal fails.
  • Resolved Matters: The Texas Matter (settled Dec 2023) and Wyoming Matter (settled Aug 2023) were fully paid by insurance carriers in early 2024, resulting in no cash outflow for NCS.
• Liquidity: The company has $18.6 million in cash and a $35.0 million ABL facility with $14.4 million available. No borrowings were outstanding under the ABL or Repeat Precision Promissory Note as of June 30, 2024.
• Risks: Key risks include volatility in oil and gas prices, competitive pricing pressure, supply chain disruptions, and the outcome of ongoing patent litigation.

Investor Verification Checklist

• International Revenue Sustainability: Verify the durability of the 246% QoQ increase in international revenue, specifically regarding North Sea and Middle East contracts.
• Canada Weather Impact: Monitor the impact of wet weather and potential water rationing on Canadian rig counts and revenue recovery in H2 2024.
• Patent Litigation Status: Track the progress of the appeal against the Kobold patent infringement decision and potential future damages or injunction scope.
• Cost Inflation vs. Pricing Power: Assess the company's ability to pass on raw material and labor cost inflation to customers amidst competitive pressure.
• Debt Covenant Compliance: Confirm continued compliance with the ABL Facility covenants, particularly the fixed charge coverage ratio if liquidity declines.