Nine Energy Service, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Nine provides onshore oilfield completion and production services in the U.S. and Canada through Completion Solutions and Production Solutions. The company completed its IPO in January 2018.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $173.8 million | $105.4 million |
| Operating income (loss) | $4.7 million | $(14.8) million |
| Net income (loss) | $1.7 million | $(20.7) million |
| Diluted EPS | $0.08 | $(1.50) |
| Operating margin | 2.7% | (14.0)% |
| Adjusted gross profit, excluding D&A (non-GAAP) | $35.6 million | $14.0 million |
| Adjusted EBITDA (non-GAAP) | $24.1 million | $6.1 million |
| Operating cash flow | $17.3 million | $(10.1) million |
| Capital expenditures | $6.5 million | $10.0 million |
Completion Solutions revenue rose 77% to $154.6 million; adjusted gross profit increased to $33.2 million from $11.0 million. Production Solutions revenue grew 6% to $19.2 million, while its adjusted gross profit declined to $2.4 million from $2.9 million. Revenue growth reflected higher North American activity and improved pricing; cost of revenue also increased with activity.
Liquidity, debt, and capital
- At March 31, cash and cash equivalents were $72.9 million, total debt before deferred financing costs was $115.3 million, and reported long-term debt was $110.9 million. The company reported total liquidity of $122.5 million, comprising cash and $49.6 million of credit-facility availability.
- In January, the IPO raised approximately $168.3 million net. Together with $125.0 million of new term-loan borrowings, proceeds funded repayment of the legacy credit facilities; a required $9.7 million term-loan prepayment followed the IPO over-allotment. The new facility includes a $50 million revolver and matures in July 2020. Nine reported compliance with its covenants at quarter-end.
- Shareholders’ equity increased to $459.4 million from $287.4 million at year-end, principally reflecting IPO proceeds. Shares outstanding were 24.3 million at March 31 and 25.0 million at May 11.
Changes, outlook, and risks
- Compared with Q1 2017, revenue increased 65% and the company moved from an operating and net loss to positive income. Management attributed improvement chiefly to increased completions activity and pricing. Interest expense fell to $2.9 million from $3.8 million, partly reflecting reduced debt following the IPO and refinancing.
- Management stated that rising oil and gas prices had supported increased activity and expected demand to improve further if the price environment held or strengthened. It anticipated potential pricing and margin benefits as demand and job complexity increased. The filing gives no specific financial guidance.
- Management expects incremental public-company general and administrative costs. Key business sensitivities include North American drilling and completion activity, commodity prices, pricing pressure, skilled-labor availability, equipment and operational hazards, weather, and regulatory changes.
- Disclosure controls and procedures were reported ineffective as of March 31 because of material weaknesses described in the 2017 Form 10-K; no material control changes occurred during the quarter. Management reported no material change to previously disclosed risk factors.
- A lawsuit seeks damages, including punitive damages, following a fatal 2017 worksite accident involving a subsidiary; the company tendered the matter to its insurer but cannot assure coverage will be adequate. Scorpion acquisition contingent consideration was revalued upward by $1.1 million in Q1, bringing the liability to $2.8 million, expected to be paid by year-end 2018. The filing also identifies goodwill impairment risk in Production Solutions under adverse conditions.
Investor verification points
- Verify whether activity-driven revenue growth and improved pricing translate into sustained margins and cash generation, particularly in Completion Solutions.
- Monitor working-capital needs, including receivables, and liquidity relative to capital spending and debt service.
- Review remediation of the material weaknesses and the effectiveness of disclosure controls in subsequent filings.
- Track the outcome and insurance treatment of the fatal-accident litigation and settlement of the Scorpion contingent liability.
- Assess customer concentration: one customer represented at least 10% of Q1 2018 revenue; the filing does not identify its share in the supplied text.