Nine Energy Service, Inc. — Q2 2023 Form 10-Q
Business and period: Nine provides completion services and products for unconventional oil and gas wells, including cementing, tools, wireline and coiled tubing. This unaudited report covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $161.4 million | $142.3 million | $324.8 million | $259.3 million |
| Adjusted gross profit | $34.0 million | $29.6 million | $70.3 million | $52.2 million |
| Operating income | $9.3 million | $6.4 million | $16.2 million | $7.5 million |
| Net loss | $2.5 million | $1.0 million | $8.6 million | $7.9 million |
| Adjusted EBITDA | $21.7 million | $18.9 million | $46.7 million | $31.1 million |
| Interest expense | $13.0 million | $8.1 million | $25.4 million | $16.2 million |
Q2 adjusted gross margin was approximately 21.1%, versus 20.8% a year earlier; operating margin was approximately 5.8%, versus 4.5%. Revenue increased 13% in Q2 and 25% for the first half. Cost of revenue rose 13% in Q2 and 23% for the first half, while higher interest expense contributed to larger net losses.
Cash flow and liquidity: First-half operating cash flow was $31.1 million, compared with cash used of $6.9 million in 2022, primarily reflecting improved working capital and collections. Investing cash outflow was $11.1 million, including $12.3 million of property and equipment purchases. Cash increased $23.7 million to $41.1 million. At June 30, total liquidity was $60.1 million, including approximately $19.0 million of ABL availability.
Debt and equity: Gross debt before deferred financing costs was $372.3 million; reported debt carrying value was $332.9 million. The January 2023 offering issued $300 million of 13% senior secured notes due 2028 plus common shares; proceeds helped redeem $307.3 million of 8.75% notes due 2023. The ABL facility was amended, reduced from $200 million to $150 million subject to borrowing base, and extended to January 2027. ABL borrowings were $72 million at quarter-end, with $19 million availability; the company repaid $2 million after quarter-end. The 2028 notes require semiannual cash interest; the first payment, approximately $19.5 million based on quarter-end principal, began August 1, 2023. Stockholders’ deficit was $13.4 million.
Changes, outlook and risks
- Q2 revenue growth reflected higher coiled tubing and wireline activity, a large international tools order, and cement pricing increases. Cement job count fell 13%, despite higher cement revenue. For the first half, growth was broad-based, with higher activity and pricing.
- Labor and materials inflation, headcount increases and other operating costs raised expenses. First-half G&A also included $6.4 million of Units-offering and refinancing costs.
- Management said lower commodity prices reduced U.S. activity in the first half; the Baker Hughes rig count fell by more than 100 rigs from year-end 2022 to Q2-end, and Q2 U.S. completions were down 5% from Q4 2022. Customer pricing pressure was affecting revenue and margins and was expected to continue into Q3 2023.
- Management was cautiously optimistic that rig counts could bottom in Q3, with rigs potentially returning in early 2024, while emphasizing uncertainty and operators’ capital discipline. No specific financial guidance was provided.
- Key risks include commodity-price and activity volatility, customer pricing pressure, wage and materials inflation, labor availability, substantial debt and liquidity needs, and ABL availability/covenant requirements. The company reported compliance with debt covenants at June 30. It believes pending claims, to the extent uninsured or unprovided for, will not materially affect results; the filing describes ordinary-course litigation and a $0.9 million Frac Tech earnout liability.
- The company stated that its disclosure controls were effective at June 30 and that there were no material changes in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether operating cash generation and ABL availability remain adequate after the 2028 notes’ high cash interest payments and any required excess-cash-flow offers.
- Subsequent ABL borrowings, repayments, borrowing-base availability and compliance with minimum availability and fixed-charge requirements.
- Whether lower activity and pricing pressure persist into Q3 and how they affect revenue, adjusted gross profit and cash flow.
- The sustainability of reported Adjusted EBITDA growth, including the effect of excluded refinancing, stock-based compensation and other adjustments.
- Any developments in litigation, the Frac Tech earnout, inventory obsolescence or other contingencies.