Nine Energy Service, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Nine Energy provides completion services and products for unconventional oil and gas wells. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $140.6 | $167.4 | $465.5 | $426.7 |
| Adjusted gross profit | $22.9 | $44.0 | $93.2 | $96.2 |
| Operating income (loss) | $(0.8) | $19.8 | $15.4 | $27.3 |
| Net income (loss) | $(13.3) | $14.3 | $(21.9) | $6.4 |
| Adjusted EBITDA | $11.6 | $32.6 | $58.3 | $63.7 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $21.2 | $8.2 |
Q3 adjusted gross margin was approximately 16.3%, versus 26.3% a year earlier; nine-month adjusted gross margin was approximately 20.0%, versus 22.6%. These margins are calculated from the filing’s adjusted gross profit and revenue figures. Nine-month capital expenditures were $16.1 million; operating cash flow less capital expenditures was approximately $5.1 million.
At September 30, cash was $12.2 million, current assets were $162.5 million and current liabilities were $58.1 million. Total debt before deferred financing costs was $357.0 million; reported debt was $319.0 million after $38.0 million of deferred financing costs. Stockholders’ deficit was $26.1 million. Nine-month cash declined $5.3 million to $12.2 million.
Changes versus comparable periods
- Q3 revenue fell 16%, with decreases across service lines. Management attributed the decline mainly to lower activity; cementing, tools and coiled tubing revenues declined 19%, 20% and 17%, respectively.
- Q3 adjusted gross profit fell 48% and Adjusted EBITDA fell from $32.6 million to $11.6 million. The company moved from Q3 2022 net income to a $13.3 million net loss in Q3 2023.
- Nine-month revenue increased 9%, reflecting activity and pricing gains, product mix and a significant international tools sale. Adjusted gross profit fell 3%, while Adjusted EBITDA declined to $58.3 million from $63.7 million; higher labor, materials and other costs pressured profitability.
- Interest expense rose to $38.3 million for the first nine months from $24.3 million, principally following the refinancing into higher-cost 2028 notes.
Debt, outlook and risks
- In January 2023, the company issued $300 million of 13.0% senior secured notes due 2028 and used offering proceeds and ABL borrowings to redeem $307.3 million principal of 8.75% notes due 2023. The 2028 notes require cash interest payments semiannually; the company cited $19.5 million per payment based on balances at September 30.
- The ABL facility was amended: its borrowing limit was reduced from $200 million to $150 million and maturity extended to January 2027. At quarter-end, $57.0 million was drawn and availability was approximately $22.7 million, net of letters of credit. The company reported compliance with its debt covenants.
- Total liquidity was $34.9 million. Management said forecasts, cash on hand, operating cash flow and ABL borrowings should cover capital needs for at least 12 months from issuance of the statements, while cautioning that this depends materially on financial performance and market conditions. The filing states the November 14, 2023 excess-cash-flow offer amount would be zero.
- Management was cautiously optimistic that rig counts may stabilize and rigs could return starting in early 2024; this is not formal financial guidance. Commodity-price volatility, lower activity, customer pricing pressure, inflation, labor shortages and supply-chain constraints could affect results. Operators may not increase activity even if commodity prices improve.
- Other disclosed risks include substantial debt and restrictive covenants, competition, customer concentration, weather, operational and environmental liabilities, litigation, cybersecurity and international-market exposure. The company reported no material change to the risk factors in its 2022 Form 10-K. It believes pending claims will not materially affect it, although outcomes are uncertain.
Important facts for investors to verify
- Whether activity, pricing and margins stabilized after the reported Q3 declines, and whether management’s early-2024 rig-count expectation materialized.
- Cash generation, working-capital movements, capital spending and liquidity relative to the $19.5 million semiannual 2028-note interest payment and ABL availability.
- Debt terms, covenant headroom and the company’s ability to service 13.0% notes while maintaining adequate liquidity.
- The sustainability of nine-month revenue gains, including the effect of the significant international tools sale, and the pace of labor and materials cost inflation.
- Potential changes in the Frac Tech earnout liability, inventory obsolescence reserve and disclosed legal or self-insurance exposures.