Nine Energy Service, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited interim results; comparisons are with Q1 2018. Nine provides completion and production services to onshore oil and gas operators. The October 2018 Magnum acquisition makes the periods less comparable: Q1 2019 includes Magnum, but Q1 2018 does not.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $229.7 million | $173.8 million |
| GAAP gross profit | $33.1 million; 14.4% margin | $20.8 million; 12.0% margin |
| Adjusted gross profit, excluding depreciation and amortization | $51.1 million; 22.3% of revenue | $35.6 million; 20.5% of revenue |
| Operating income | $26.9 million; 11.7% margin | $4.7 million; 2.7% margin |
| Net income | $17.3 million; diluted EPS $0.59 | $1.7 million; diluted EPS $0.08 |
| Adjusted EBITDA, non-GAAP | $39.2 million | $24.1 million |
| Cash from operations | $5.9 million | $17.3 million |
Revenue rose 32%, primarily reflecting Magnum and increased activity in several Completion Solutions service lines. Completion Solutions revenue increased 35% to $209.1 million; Production Solutions revenue increased 7% to $20.6 million. Coiled tubing revenue declined 11%, with job count down 31%.
The $14.0 million gain from revaluing contingent acquisition liabilities materially benefited reported operating income. The liability revaluation was a $1.1 million loss in Q1 2018. Adjusted EBITDA excludes this gain, as well as other specified items; it is a non-GAAP measure and should not be viewed as a substitute for net income.
Financial position and liquidity
- At March 31, 2019, cash was $31.2 million, down from $63.6 million at year-end 2018. Total assets were $1.13 billion and stockholders’ equity was $615.5 million.
- Debt before deferred financing costs was $415.0 million: $400.0 million of 8.75% senior notes due 2023 and $15.0 million drawn under the asset-based revolving credit facility. The company repaid $20.0 million of revolver borrowings during the quarter.
- ABL availability was approximately $129.7 million, resulting in reported total liquidity of $160.9 million. The company reported compliance with debt covenants at quarter-end.
- Operating cash flow fell year over year, which management attributed mainly to increased working-capital use. Investing activities used $18.1 million, including $20.4 million in cash purchases of property and equipment. Financing activities used $20.3 million. Cash declined by $32.5 million during the quarter.
- Interest expense was $9.2 million, versus $2.9 million a year earlier, primarily due to higher debt and the Senior Notes issued in connection with Magnum.
Outlook, commentary and risks
- No numerical full-year guidance is provided. Management said 2019 customer budgets were more limited following the late-2018 oil-price decline and that customers had reduced E&P investment on average versus 2018. Even with higher commodity prices, it did not expect operator activity to materially increase if customers stayed within existing budgets.
- Management noted that more complex, high-intensity completions can support demand for its technical services. Commodity-price volatility, customer spending, competition, pricing, labor availability, weather, safety incidents and execution of new technologies remain risks.
- Magnum’s potential earnout payments include amounts tied to E-Set business results through 2025 and up to $25.0 million tied to certain dissolvable-plug sales in 2019. The fair value of contingent liabilities fell by $14.0 million in the quarter, mainly because estimated 2019 sales of certain plugs were reduced. Actual results and estimates could differ.
- The company reached an agreement in principle to settle a fatal 2017 worksite-accident lawsuit and expects insurance to fund the settlement; final documentation and court approval remained outstanding.
- Management concluded disclosure controls and procedures were not effective as of March 31, 2019, due to a material weakness previously described in the 2018 Form 10-K. The filing reports no material change in internal control over financial reporting during the quarter.
- The company expected no material retained-earnings adjustment upon adoption of the new revenue standard. Management was still assessing the effects of other upcoming accounting standards, including lease accounting.
Important facts for investors to verify
- How much of revenue and profit growth reflects Magnum versus organic activity, pricing and utilization; the filing says Magnum was integrated and its contribution was impractical to quantify.
- Whether operating cash flow improves as working-capital needs and capital spending evolve, given the sharp quarterly cash decline.
- Ability to service the 8.75% notes and preserve ABL availability if customer budgets, commodity prices or operating activity weaken.
- Actual performance of Magnum’s dissolvable plugs and E-Set business against earnout assumptions, and resulting future liability remeasurements or payments.
- Remediation of the material weakness and progress toward effective disclosure controls.
- Final resolution and insurance coverage for the worksite-accident settlement, and any material developments in other claims.