Nine Energy Service, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; compared with the three months ended March 31, 2021. Balance-sheet comparisons are with December 31, 2021. Nine provides onshore oilfield completion services and reports as one segment. Unless noted, amounts are in millions.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $116.9 | $66.6 |
| GAAP gross profit (loss) | $12.7 | $(7.0) |
| Adjusted gross profit | $22.6 (19.3% margin) | $4.3 (6.5% margin) |
| Operating income (loss) | $1.1 | $(17.3) |
| Net loss | $(6.9) | $(8.2) |
| Adjusted EBITDA (non-GAAP) | $12.2 | $(3.4) |
| Operating cash flow | $(6.5) | $(5.2) |
| Capital expenditures | $0.9 | $2.4 |
- Revenue increased 76%, reflecting higher activity and pricing across service lines. Service revenue was $88.2 million and product revenue was $28.7 million.
- Cost of revenue rose 51% to $94.3 million, slower than revenue growth, but increased labor and materials costs pressured results. Interest expense was $8.1 million; loss per share was $0.23.
- Cash and cash equivalents were $19.9 million at quarter-end, down from $21.5 million at year-end. Working-capital investment, including higher receivables and inventory, contributed to operating cash use. Net cash decreased $1.6 million.
- Reported total debt was $341.5 million before deferred financing costs ($338.9 million carrying value); approximately $320.3 million was Senior Notes principal. Stockholders’ equity was negative $45.4 million.
- Management reported total liquidity of $74.6 million: $19.9 million cash plus $54.7 million ABL availability. A further $7.0 million was borrowed under the ABL in April 2022.
Material changes and unusual items
- All major revenue lines grew year over year: cementing 97%, coiled tubing 97%, wireline 68%, and tools 44%. Activity measures also increased, including cement jobs, worked days, and completed stages.
- Adjusted gross profit improved by $18.3 million. Management attributed the increase to higher activity and pricing, partly offset by labor, materials, and other cost inflation.
- Adjusted EBITDA improved by $15.6 million to $12.2 million. The comparison includes a $17.6 million debt-extinguishment gain in Q1 2021, which did not recur; Nine repurchased no Senior Notes in Q1 2022.
- Cash used in operating activities increased by $1.3 million year over year, primarily due to working-capital demands from higher sales, despite improved operating cash generation before working-capital changes.
Outlook, risks, and contingencies
- Management was optimistic about activity growth in 2022 and 2023 and expected profitability to increase through the remainder of 2022, supported by higher activity and pricing. The filing provides no numerical earnings or revenue guidance.
- Labor shortages, wage inflation, equipment and supply-chain constraints, and materials inflation may offset price increases or limit the company’s ability to perform work. Customer activity also depends on commodity prices, capital discipline, and broader market conditions.
- Management said liquidity was expected to continue eroding, in part because Senior Notes require semiannual interest payments of approximately $14.0 million each. The $320.3 million of Senior Notes mature October 25, 2023; absent repayment or refinancing, the ABL’s effective maturity would be April 28, 2023.
- Management plans to address maturities through refinancing or restructuring debt, other capital sources, asset sales, or a combination. It cautioned that these plans may not succeed and stated that failure to do so would leave insufficient resources to repay debt at maturity or meet cash needs over the next 12 months, raising substantial doubt about the company’s ability to continue as a going concern. Potential financing could materially dilute shareholders.
- Nine was in compliance with its debt covenants at March 31, 2022. The ABL’s 1.00-to-1.00 minimum fixed-charge coverage covenant is tested if availability falls below $18.75 million or a default occurs.
- The company disclosed ordinary-course litigation and a $0.9 million Frac Tech earnout liability; it believes litigation outcomes will not have a material adverse effect, while noting outcomes cannot be assured.
- Nine was out of compliance with the NYSE minimum market-capitalization requirement and under an accepted 18-month compliance plan with quarterly monitoring. Failure to regain compliance, or failure to meet other listing conditions, could lead to delisting and reduced share liquidity.
Investor facts to verify
- Progress and feasibility of refinancing, restructuring, asset sales, or other plans to address the 2023 debt maturities and the disclosed going-concern uncertainty.
- Cash burn, working-capital needs, ABL availability and borrowings, and the ability to meet the $14.0 million semiannual Senior Notes interest payments.
- Whether pricing gains and volume growth continue to exceed labor, materials, and supply-chain cost increases.
- Compliance with the NYSE plan and listing standards, and any effect on the stock’s trading liquidity.
- Adjusted gross profit and Adjusted EBITDA reconciliations, recognizing that these are non-GAAP measures and do not replace GAAP results or cash flow.