Nine Energy Service, Inc. — Q1 2024 Form 10-Q
Business and period: Nine provides completion services and products for unconventional oil and gas wells, including cementing, tools, coiled tubing and wireline. This unaudited filing covers the three months ended March 31, 2024, compared with Q1 2023. The company reports one segment.
Key financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $142.1 million | $163.4 million | Down 13% |
| GAAP gross profit | $17.1 million | $26.5 million | Down $9.4 million |
| Adjusted gross profit | $26.1 million | $36.3 million | Down 28% |
| Operating income | $4.4 million | $6.9 million | Down 36% |
| Net loss | $(8.1) million | $(6.1) million | Loss widened $1.9 million |
| Adjusted EBITDA | $15.0 million | $25.0 million | Down 40% |
| Operating cash flow | $(8.8) million | $4.0 million | Declined $12.8 million |
| Capital expenditures, cash basis | $5.5 million | $6.3 million | Down $0.9 million |
GAAP gross margin was approximately 12.0%, versus 16.2% a year earlier; adjusted gross margin was approximately 18.4%, versus 22.2%. Diluted loss per share was $0.24, compared with $0.19.
Balance sheet and liquidity at March 31, 2024: Cash was $10.2 million, down from $30.8 million at year-end 2023. ABL availability was $27.3 million, giving reported total liquidity of $37.5 million. Debt obligations before deferred financing costs were $353.8 million, including $300.0 million principal on the 13% secured notes due 2028 and $52.0 million drawn on the ABL; reported debt net of deferred financing costs was $318.9 million. Stockholders’ deficit was $43.3 million. Total liabilities exceeded total assets.
Changes and drivers
- Revenue declined across all reported service lines. Cement revenue fell 23%, tools 7%, coiled tubing 8%, and wireline 6%. Management attributed the decline primarily to lower activity and pricing, and changes in product mix.
- Adjusted gross profit fell faster than revenue, reflecting operating deleverage amid lower activity. Cost of revenue declined 9%, less than the revenue decline.
- General and administrative expense fell 38% to $12.3 million, mainly because $6.4 million of Units-offering and refinancing costs in Q1 2023 did not recur.
- Cash used in operations was driven in part by lower cash collections from accounts receivable and other working-capital changes. Cash declined by $20.6 million in the quarter.
- Interest expense was $12.8 million, versus $12.5 million. Cash paid for interest was $20.9 million, compared with $7.5 million in Q1 2023.
Outlook, risks and other items
- Management expects Q2 2024 revenue, net income or loss, and Adjusted EBITDA to be lower than Q1. It cited continued depressed natural gas prices, reduced activity in gas-levered basins and customer pricing pressure. Management was cautiously optimistic about the medium- and long-term outlook, particularly if gas prices recover.
- Management stated that current forecasts indicate cash, operating cash flow and ABL borrowings should fund requirements for at least 12 months from issuance of the statements, while cautioning that this depends on achieving forecasts and changing market conditions. Semiannual cash interest on the 2028 Notes is approximately $19.5 million based on amounts outstanding.
- The company reported compliance with the 2028 Notes and ABL covenants at quarter-end. ABL availability was approximately $27.3 million, net of $1.3 million of letters of credit. The May 15, 2024 excess-cash-flow offer amount was stated as zero, so no offer was expected.
- Principal risks include commodity-price and customer-activity volatility, inflation and labor availability, competitive pricing, substantial debt and interest obligations, customer concentration, operational and environmental exposures, litigation, cybersecurity, and climate-related risks. The filing reports no material changes to the risk factors in the 2023 Form 10-K.
- Routine legal claims were disclosed; the company said it did not expect their ultimate liability to materially adversely affect its business or financial condition. A $0.4 million accrual for legal matters was recorded at quarter-end. The filing also discloses related-party transactions, including purchases and leases from entities associated with an executive and sales to entities associated with directors.
- No shares were sold under the company’s $30 million at-the-market equity program during the quarter. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the expected Q2 activity and earnings decline occurs, especially in gas-levered basins, and how pricing and utilization affect margins.
- Cash generation, working-capital movements, and whether liquidity remains adequate alongside substantial cash interest payments.
- Debt terms, covenant headroom, ABL borrowing-base availability, and the company’s capacity to address the 13% 2028 Notes.
- Underlying performance by service line and the reconciliation of non-GAAP Adjusted EBITDA and adjusted gross profit to GAAP results.
- Potential effects of litigation, contingent earnout obligations and disclosed related-party transactions.