Nine Energy Service, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Nine provides onshore oilfield completion services. The 2019 comparison includes Production Solutions, sold in August 2019, while 2020 does not; this limits comparability.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $52.7 million | $237.5 million | $199.4 million | $467.2 million |
| Operating income (loss) | $(26.9) million | $14.0 million | $(330.6) million | $40.9 million |
| Net income (loss) | $(24.2) million | $6.1 million | $(325.1) million | $23.4 million |
| Diluted EPS | $(0.81) | $0.21 | $(10.97) | $0.80 |
| Adjusted EBITDA, non-GAAP | $(11.0) million | $38.0 million | $(0.7) million | $77.2 million |
- Q2 revenue declined 78% year over year, driven by reduced customer activity and pricing pressure. Completion Solutions adjusted gross profit was a loss of $4.0 million, versus profit of $49.8 million a year earlier; GAAP gross loss was $15.9 million.
- First-half revenue fell 57%. First-half operating loss included a $296.2 million goodwill impairment, recorded in Q1, that fully wrote off goodwill. Excluding that charge, the reported net loss remains affected by severe market deterioration and other items.
- Q2 included an $11.6 million gain on repurchasing Senior Notes; the first-half gain was $21.7 million. The company repurchased $29.7 million principal for $7.4 million cash during the first half.
- Operating cash flow was $2.4 million for the first half, versus $17.4 million in 2019. Investing cash flow was positive $1.8 million, including asset-sale proceeds; capital expenditures were $2.9 million. Financing cash outflow was $8.3 million. Cash decreased $4.3 million.
Balance sheet and liquidity
- At June 30, cash was $88.7 million and current assets were $207.3 million, against current liabilities of $28.8 million.
- Total debt before deferred financing costs was $372.6 million, including $370.3 million of Senior Notes principal and $2.3 million of Magnum promissory notes. The reported debt carrying amount was $366.2 million. Senior Notes bear 8.75% interest and mature in 2023.
- ABL facility availability was $44.8 million, net of letters of credit; reported total liquidity was $133.5 million. The company reported compliance with debt covenants at quarter-end.
- Stockholders’ equity was $70.0 million, down from $389.9 million at year-end 2019, primarily reflecting the goodwill impairment and first-half net loss.
Changes, outlook, and risks
- The company attributed the downturn to COVID-19, the collapse in oil demand, supply uncertainty and producer-country pricing disputes. Q2 average WTI was $27.96 per barrel, versus $59.88 a year earlier. Management expected adverse industry trends to continue through at least the rest of 2020 and could not predict the timing or extent of recovery.
- Management described cost actions including salary reductions of 10%–15% for key employees, suspension of the company 401(k) match, and workforce reductions of 56% through July 20, 2020 versus year-end 2019. The 2020 capital expenditure budget was reduced to $10–$15 million.
- Management believed cash, operating cash flow and potential ABL borrowings would fund requirements for at least 12 months from the financial-statement issuance date, while cautioning that forecasts and further cost reductions were uncertain.
- Risks include further declines in customer activity, oil and gas prices, pricing pressure, pandemic-related disruption, workforce retention, competition, weather, execution of new technologies and acquisition integration. The company reported no material change to previously disclosed risk factors in this filing.
- Disclosure controls were concluded to be ineffective as of June 30 because of a material weakness in segregation of accounting duties and independent review of journal entries and reconciliations. Remediation actions were underway but not yet validated as fully effective.
- The Magnum earnout was terminated in June 2020 for a $1.1 million cash payment and $2.3 million of promissory notes. Remaining contingent liabilities were $0.9 million, primarily related to Frac Tech. The company said pending claims were not expected to have a material adverse effect, though outcomes are uncertain.
Most important facts for investors to verify
- Whether activity, pricing and cash generation stabilize, and whether the stated 12-month liquidity expectation remains supportable.
- Available borrowing-base capacity, ABL covenant headroom and the company’s ability to meet Senior Notes obligations.
- Whether cost reductions and the reduced capital budget are sufficient without impairing service capacity or customer relationships.
- Progress in remediating and validating the material weakness in internal controls.
- Potential further asset impairments, given the sensitivity of valuations to industry conditions and forecasts.