Nine Energy Service, Inc. — FY 2022 Form 10-K
Business context and reporting period. The filing reports the fiscal year ended December 31, 2022, compared with FY 2021. Nine is an oilfield-services provider focused on completion solutions for unconventional wells, including cementing, completion tools, wireline and coiled tubing. It operates primarily in U.S. onshore basins; 99.7% of 2022 revenue came from the United States. The company reports one segment, Completion Solutions.
Financial performance and condition
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $593.4 million | $349.4 million |
| Operating income (loss) | $43.6 million | $(50.0) million |
| Net income (loss) | $14.4 million; diluted EPS $0.45 | $(64.6) million; diluted loss per share $(2.13) |
| Adjusted gross profit | $136.3 million; 23.0% of revenue | $41.4 million; 11.9% of revenue |
| Adjusted EBITDA | $93.7 million; 15.8% of revenue | $5.2 million; 1.5% of revenue |
| Operating cash flow | $16.7 million | $(40.4) million |
| Cash and cash equivalents at year-end | $17.4 million | $21.5 million |
Revenue rose 70%, reflecting increased activity and improved pricing across service lines. Adjusted gross profit increased $94.9 million. Costs of revenue rose 48%, with higher activity and inflation in labor and materials. Interest expense was $32.5 million. The 2022 income-tax provision was $0.5 million; the effective rate was 3.7%, affected primarily by state and foreign taxes and valuation allowances.
Cash from operations improved by $57.1 million year over year, but accounts receivable and inventory increases absorbed working capital. Cash purchases of property and equipment were $28.6 million; operating cash flow less these purchases was approximately negative $11.9 million. Year-end total debt before deferred financing costs was $341.6 million, including $307.3 million of 8.75% notes and $32.0 million drawn under the ABL facility. Current liabilities were $81.0 million versus current assets of $196.7 million.
Material changes and unusual items
- U.S. average rig count increased 51% and U.S. completions increased approximately 22% in 2022, according to the company’s cited industry sources. Revenue increased in all four reported service lines: cementing to $229.4 million, tools to $138.0 million, wireline to $107.4 million, and coiled tubing to $118.6 million.
- In January–February 2023, the company issued $300 million of 13.0% senior secured notes due 2028 as part of units that also included five common shares per unit. It used offering proceeds and $40 million of additional ABL borrowing to redeem all $307.3 million principal of its 2023 notes, plus $6.7 million accrued interest. As of February 1, 2023, it reported $300 million of 2028 notes and $72 million of ABL borrowings outstanding.
- The ABL facility was amended: its maximum size fell from $200 million to $150 million, its maturity was extended to January 2027, and pricing increased to a 2.00%–2.50% margin over Term SOFR, subject to leverage. Availability and fixed-charge conditions restrict certain payments.
- The company abandoned its E-Set tools business and wrote off a $1.0 million in-process research and development asset. It also recorded a $2.8 million gain on repurchasing 2023 notes in 2022, versus a $17.6 million gain in 2021.
Outlook, risks and contingencies
Management expected U.S. E&P capital spending to increase in 2023, but at a slower pace than in 2022. It noted lower rig counts early in 2023 and sharp natural-gas price declines that could weigh on the Northeast and Haynesville, which together represented 30% of 2022 revenue. Pricing was described as mostly steady early in 2023; further price increases were uncertain and could be offset by labor and materials inflation. The company budgeted $25–$35 million of 2023 capital expenditures, including expected maintenance spending of $20–$30 million. Management stated that forecast cash, operating cash flow and ABL availability were expected to fund requirements for at least twelve months, while cautioning that forecasts depend on operating performance and market conditions. No specific revenue or earnings guidance is provided.
- Leverage and liquidity: High debt service, the 13.0% secured notes coupon, variable-rate ABL borrowings, restrictive covenants and borrowing-base availability create financing and refinancing risks. Year-end 2022 liquidity was $84.0 million, consisting of $17.4 million cash and $66.6 million ABL availability; subsequent financing changed the capital structure.
- Operating and market exposure: Results depend on volatile commodity prices, customer spending, service pricing and utilization. Labor shortages, wage and materials inflation, supply constraints, weather and seasonal slowdowns may pressure margins or activity.
- Legal matters: A jury found against the company in January 2022 in a patent lawsuit concerning its BreakThru casing flotation device; the company said it intended to appeal. The filing also notes outstanding wage-and-hour litigation and other claims. Management believes unprovided or uninsured liabilities from claims and proceedings will not materially adversely affect the company, but outcomes are uncertain.
- Other risks: Environmental, emissions, hydraulic-fracturing and climate-related regulation could raise costs or reduce customer demand. The company also identifies safety, insurance, cybersecurity, customer concentration, supplier dependence and impairment risks. Its five largest customers together contributed approximately 21% of 2022 revenue; no single customer exceeded 10%.
- The company reported $442.2 million of federal and state net operating loss carryforwards, subject to expiration and potential ownership-change limitations. A valuation allowance remains against U.S. domestic and Canadian deferred tax assets.
Investor verification points
- Review the 2023 refinancing and subsequent debt, interest, liquidity and covenant disclosures, including ABL availability and the high-coupon secured notes.
- Track operating cash conversion, accounts receivable collections, inventory levels and capital spending relative to operating cash flow.
- Assess whether revenue and pricing gains persist as rig activity, natural-gas prices and customer spending evolve, and whether labor and input-cost inflation offsets pricing.
- Check the status, potential exposure and accounting treatment of the patent appeal and wage-and-hour proceedings.
- Evaluate NOL utilization and valuation-allowance changes, as well as the company’s dependence on industry activity and major customers.
The financial statements were audited by PricewaterhouseCoopers LLP, which gave an unqualified opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal control effectiveness.