Nine Energy Service, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Nine provides onshore oilfield completion services, including cementing, completion tools, wireline and coiled tubing. Its Production Solutions business was sold in August 2019, so prior-year comparisons include that business through the sale date and are not fully comparable.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $49.5 million | $202.3 million | $248.9 million | $669.5 million |
| Adjusted gross profit (loss) | $(3.0) million | $35.5 million | $13.7 million | $139.5 million |
| Net income (loss) | $(18.5) million | $(20.6) million | $(343.6) million | $2.8 million |
| Adjusted EBITDA | $(11.1) million | $24.2 million | $(11.9) million | $101.4 million |
| Operating cash flow | Not separately provided | Not separately provided | $4.6 million | $86.8 million |
Q3 revenue fell 76% year over year, reflecting lower activity and pricing; all Completion Solutions service lines declined. Adjusted gross profit turned negative. Nine-month revenue fell 63%. Nine recorded a $296.2 million goodwill impairment in Q1, which drove most of the nine-month GAAP loss and fully eliminated goodwill. Nine-month gross profit under GAAP was a loss of $21.7 million; adjusted gross profit excludes depreciation and amortization.
At September 30, cash was $80.3 million, total current assets $188.6 million and current liabilities $35.2 million. Cash and cash equivalents declined $12.7 million from year-end 2019. Total debt carrying value was $343.9 million, including $347.2 million of Senior Notes principal and $2.3 million of Magnum notes, offset by deferred financing costs; there were no ABL borrowings. ABL availability was $39.5 million, giving reported total liquidity of $119.8 million. Equity was $53.6 million.
In the first nine months, capital expenditures were approximately $7.1 million. Financing cash use was $16.6 million, including $14.4 million spent to repurchase Senior Notes. Nine bought back $52.8 million principal of notes for $14.4 million cash and recognized a $37.5 million extinguishment gain. The notes bear 8.75% interest and mature in 2023; their disclosed fair value was $102.4 million at quarter-end. Nine reported compliance with debt covenants at September 30.
Outlook, risks and notable items
- Management expected Q4 2020 activity and revenue to improve sequentially from Q3, but anticipated competitive pricing could offset much of the increase. It expected pandemic-related and market effects to remain materially adverse through at least the rest of 2020 and into 2021; no quantified revenue or earnings guidance was provided.
- Management cited reduced customer capital budgets, lower oil and gas prices, COVID-19 impacts and oil-supply uncertainty as key demand risks. It reported sequential monthly activity and revenue increases during Q3, while levels remained depressed.
- Cost actions included salary reductions of 10%–15% for key employees, suspension of the company 401(k) match and a 55% workforce reduction versus year-end 2019. The 2020 capital expenditure budget, excluding possible acquisitions, was revised to $10–$15 million.
- Management believed cash, operating cash flow and ABL availability would fund requirements for at least 12 months from issuance of the statements, subject to forecast uncertainty. The ABL has a minimum fixed-charge covenant that is tested under specified low-availability or default conditions.
- Disclosure controls and procedures were deemed ineffective due to a material weakness involving segregation and independent review of journal entries and account reconciliations. Remediation steps were underway but not yet validated as effective.
- Ordinary-course claims and proceedings were disclosed; management did not expect uninsured liabilities to materially affect the company. The Magnum earnout was terminated in Q2 2020 in exchange for a $1.1 million cash payment and $2.3 million of promissory notes.
Key facts for investors to verify
- Whether Q4 activity and revenue improved as management expected, and whether pricing pressure limited any recovery.
- Cash generation, working-capital needs and continued access to the $39.5 million ABL availability amid ongoing losses.
- Senior Notes repurchases, market value, interest burden and maturity/refinancing risks.
- Potential further asset impairments if market conditions or forecast cash flows deteriorate.
- Progress in remediating the material weakness and restoring effective disclosure controls.