Nine Energy Service, Inc. — Q2 2022 Form 10-Q
Business and period: Nine Energy Service provides onshore oilfield completion services and tools, including cementing, wireline, coiled tubing and completion tools. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the same periods in 2021. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $142.3 million | $84.8 million | $259.3 million | $151.5 million |
| Adjusted gross profit | $29.6 million | $8.2 million | $52.2 million | $12.5 million |
| Operating income (loss) | $6.4 million | ($16.5 million) | $7.5 million | ($33.8 million) |
| Net income (loss) | ($1.0 million) | ($24.5 million) | ($7.9 million) | ($32.8 million) |
| Adjusted EBITDA | $18.9 million | ($0.4 million) | $31.1 million | ($3.8 million) |
| Cash from operating activities | Not separately provided | Not separately provided | ($6.9 million) | ($24.9 million) |
Margins: Q2 adjusted gross profit margin was approximately 20.8%, versus 9.7% a year earlier; GAAP gross margin was approximately 13.9%, versus negative 3.3%. Operating margin was approximately 4.5%, versus negative 19.4%.
Q2 revenue increased 68%, while cost of revenues excluding depreciation and amortization rose 47%. Management attributed growth across service lines to higher activity and improved pricing. For the first half, working-capital use—including higher receivables as sales increased—contributed to negative operating cash flow. Investing cash outflow was $1.6 million and financing cash inflow was $9.5 million; cash increased $0.9 million to $22.4 million.
Balance sheet, debt and liquidity
- At June 30, 2022, cash was $22.4 million and reported total liquidity was $74.5 million, comprising cash and $52.1 million of ABL availability. ABL borrowings were $27.0 million.
- Total debt before deferred financing costs was $348.1 million; carrying value was $346.0 million. Senior Notes had $320.3 million principal outstanding, bear 8.75% interest and mature October 25, 2023. Semiannual interest payments are approximately $14.0 million.
- The ABL facility’s effective maturity would be April 28, 2023 if the Senior Notes are not redeemed or repurchased; the facility is classified as current on the balance sheet. The company reported covenant compliance at quarter-end.
- Current assets were $172.7 million and current liabilities were $93.4 million. Stockholders’ deficit was $46.3 million.
Changes, outlook and risks
- Revenue growth reflected higher industry activity and price increases. In Q2, cementing revenue rose 102%, coiled tubing 91%, wireline 41% and tools 36% year over year. Cost inflation, particularly for labor and materials, partly offset pricing gains.
- Management was optimistic about the second half of 2022 and 2023, citing supportive commodity prices and expected activity growth. It anticipated potential further price increases, but gave no specific financial guidance.
- Management cited labor shortages, wage inflation, equipment and supply-chain constraints, and the possibility that customer cost pressures could limit activity. Commodity-price volatility, capital discipline among E&P customers and broader economic weakness are additional uncertainties.
- Management said refinancing or restructuring debt, raising capital, asset sales, or a combination may be needed to meet upcoming obligations. It warned that failure to execute these plans would leave insufficient liquidity to repay debt at maturity or meet cash requirements over the next 12 months, raising substantial doubt about the company’s ability to continue as a going concern. Potential equity or convertible financing could materially dilute shareholders.
- The filing also identifies the company’s noncompliance with the NYSE minimum market capitalization requirement and the risk of delisting. Ordinary-course claims and proceedings were disclosed; management did not expect them to have a material adverse effect.
Investor verification priorities
- Track refinancing or restructuring progress well ahead of the 2023 Senior Notes and effective ABL maturities, including the terms and potential dilution of any capital raise.
- Verify ABL availability, borrowing-base capacity, covenant headroom and the effect of the facility’s early-maturity provision.
- Assess whether cash collections and working-capital trends improve as revenue grows, and whether operating cash flow turns positive.
- Compare price increases with labor, materials and supply-chain costs to determine whether margin gains are sustainable.
- Monitor NYSE market-capitalization compliance and any delisting developments.