Nine Energy Service, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 8, 2021. This is an annual report, not a standalone fourth-quarter report, and the supplied filing text does not provide clear discrete Q4 results. Nine provides completion services and tools to onshore oil and gas producers, including cementing, completion tools, wireline, and coiled tubing. The 2019 comparison includes Production Solutions revenue until its sale on August 30, 2019.
Financial performance
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Revenue | $310.9 million | $832.9 million | Down 63%; market activity and pricing weakened, and the prior year included the divested segment |
| GAAP gross profit (loss) | $(37.9) million | $97.6 million | Gross margin approximately (12.2)% vs. 11.7% |
| Adjusted gross profit | $8.7 million | $163.0 million | Adjusted gross margin approximately 2.8% vs. 19.6% |
| Operating loss | $(383.2) million | $(182.7) million | Includes $296.2 million goodwill impairment in 2020 |
| Net loss | $(378.9) million | $(217.8) million | Loss per share: $(12.74) vs. $(7.43) |
| Adjusted EBITDA (non-GAAP) | $(25.8) million | $113.0 million | Down $138.8 million |
| Operating cash flow | $(4.9) million | $101.3 million | Cash generation deteriorated |
| Cash and cash equivalents | $68.9 million | $93.0 million | Year-end cash decreased $24.1 million |
Revenue fell across all service lines: wireline 65%, cementing 53%, tools 58%, and coiled tubing 65%. U.S. completions declined materially; management attributed the downturn to the pandemic, the oil-demand and supply shock, lower commodity prices, reduced customer budgets, and pricing pressure.
Debt, liquidity, and other key metrics
- Debt: $346.7 million of 8.750% Senior Notes due 2023 and $2.0 million of Magnum promissory notes at year-end. Total debt before deferred financing costs was $348.6 million; balance-sheet debt net of those costs was $343.6 million. The Senior Notes’ estimated fair value was $156.0 million.
- ABL availability: $37.9 million, net of $0.5 million of letters of credit; cash plus availability totaled $106.8 million at year-end. Cash was approximately $62 million on February 28, 2021.
- Liquidity caveat: Management expected liquidity to materially erode, in part because of Senior Notes interest payments, but believed forecast cash, operations, and ABL borrowing capacity would fund requirements for at least 12 months from the financial statements’ issuance date. This depends on forecasts and market conditions.
- Interest and debt actions: Cash interest paid was $34.4 million. Nine repurchased about $53.3 million face value of Senior Notes for $14.6 million cash, recording a $37.8 million non-cash accounting gain.
- Capital spending: 2020 capital expenditures were $10.2 million. The company expected total 2021 capital expenditures of $15–20 million, including approximately $13–14 million for maintenance.
- Balance sheet: Total assets were $442.6 million, liabilities $422.2 million, and stockholders’ equity $20.4 million. Goodwill was fully written off in 2020.
Material changes, outlook, and risks
- Management expected 2021 customer capital spending and drilling and completion activity to be below 2020 levels, with near-term pricing depressed. It cautioned that any revenue improvement could be offset by pricing pressure; cementing and coiled tubing improvements were expected to be outweighed by weakness in tools and wireline.
- The company reduced costs, including headcount and salaries, and suspended matching contributions to its 401(k) plan effective April 2020. It reported 735 employees at year-end.
- The $296.2 million goodwill impairment reflected weaker expected cash flows, pandemic-related market disruption, lower oil and gas prices, and higher discount rates. Management reported no 2020 long-lived-asset impairment beyond goodwill, but further impairment remained possible if conditions deteriorated.
- Customer concentration is significant: the top five customers represented approximately 37% of 2020 revenue, and one customer exceeded 10%. Competitive pressure, particularly on dissolvable plugs, may constrain prices and profitability.
- Debt obligations and restrictive covenants create refinancing and liquidity risk. The ABL facility has a $200 million maximum commitment subject to a borrowing base and a fixed-charge covenant that is tested when availability falls below $18.75 million or a default occurs. Nine reported covenant compliance at year-end.
- Other material exposures include oilfield safety and environmental liabilities, uncollectible customer receivables, supply constraints, regulation of hydraulic fracturing and emissions, weather, and employment-related litigation. Nine said pending claims were not expected to have a material adverse effect, while noting outcomes are uncertain.
- The 2019 Production Solutions divestiture and 2020 debt repurchase affect period comparisons. Nine also adopted lease accounting in 2020, bringing operating lease assets and obligations onto the balance sheet.
Important facts for investors to verify
- Whether actual 2021 cash flows, customer activity, pricing, and liquidity support management’s stated 12-month funding outlook.
- ABL borrowing-base availability, covenant headroom, and maturity provisions relative to the Senior Notes due 2023.
- Progress in servicing or refinancing debt and the cash cost of the 8.750% notes, including scheduled interest payments.
- Whether utilization and pricing improve in completion tools and wireline enough to offset ongoing competitive pressure.
- Customer receivable quality and inventory obsolescence: the doubtful-account allowance rose to $3.4 million from $0.8 million, and the inventory obsolescence reserve rose to $13.3 million from $5.4 million.
- Potential further impairments, significant legal claims, and the effect of customer concentration on revenue and collections.
- The filing reports an unqualified audit opinion on the financial statements. Management said disclosure controls and internal control over financial reporting were effective at year-end and that a previously reported material weakness had been remediated; the auditor did not attest to internal control.