Nine Energy Service, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited results. Nine provides onshore oilfield completion services. It sold its Production Solutions segment on August 30, 2019; results include that business only through the sale date. The 2019 comparison is also affected by the Magnum acquisition, completed in October 2018.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $202.3 million | $218.4 million | $669.5 million | $597.7 million |
| GAAP gross profit | $18.9 million | $37.3 million | $86.7 million | $85.1 million |
| Adjusted gross profit, excluding D&A | $35.5 million | $52.5 million | $139.5 million | $130.0 million |
| Operating income (loss) | $(10.2) million | $16.4 million | $30.7 million | $32.5 million |
| Net income (loss) | $(20.6) million | $13.7 million | $2.8 million | $24.4 million |
| Adjusted EBITDA | $24.2 million | $38.4 million | $101.4 million | $93.1 million |
| Cash from operating activities | Not presented separately | Not presented separately | $86.8 million | $50.8 million |
Q3 adjusted gross margin was approximately 17.5%, down from 24.1%; nine-month margin was approximately 20.8%, versus 21.8%. Q3 diluted loss per share was $0.70; nine-month diluted earnings per share were $0.09, versus $1.03 for the prior-year period.
At September 30, cash was $93.3 million, total debt before financing costs was $400.0 million, and undrawn ABL availability was approximately $118.0 million, for reported total liquidity of $211.3 million. The ABL had no borrowings outstanding. Nine-month cash purchases of property and equipment were $48.9 million; net cash used in investing activities was $19.6 million. The company reported $29.9 million of interest expense for the first nine months.
Material changes and unusual items
- Q3 revenue fell 7% year over year, primarily from pricing pressure and weaker activity in coiled tubing and wireline. Completion tools revenue increased, substantially reflecting Magnum. Nine-month revenue grew 12%, also largely due to Magnum.
- Q3 adjusted EBITDA fell $14.1 million year over year. Nine-month adjusted EBITDA increased $8.3 million, but GAAP net income declined $21.6 million year over year.
- The Production Solutions sale generated approximately $17.4 million in cash proceeds and a $15.8 million loss. The segment is no longer part of future results.
- Interest expense rose substantially following issuance of $400 million of 8.75% senior notes due 2023. The company reported compliance with debt covenants at quarter-end.
- A $5.8 million Q3 gain on contingent-liability revaluation helped results; the nine-month gain was $20.7 million, primarily reflecting reduced estimated sales of certain Magnum dissolvable plugs. The estimated contingent liabilities declined from $25.5 million at year-end 2018 to $4.6 million at September 30, 2019.
- Inventory obsolescence reserves rose to $5.6 million from $1.9 million at year-end 2018. Nine-month operating cash flow benefited significantly from working-capital changes.
Outlook, risks and controls
No quantified financial guidance is provided. Management said customer budgets for 2019 were constrained, operators were scaling back activity in Q3 and likely into Q4, and any near-term commodity-price improvement was not expected to materially increase activity under existing spending plans. Management also noted that complex, high-intensity completions may support demand for the company’s technical services.
Results are exposed to oil and natural gas prices, customer spending and completion activity, pricing pressure, competition, labor availability, weather, safety and operational incidents, and the company’s ability to integrate Magnum. The company cautioned that forward-looking statements are uncertain and undertook no general obligation to update them.
Management concluded disclosure controls were not effective at September 30, 2019 because of a continuing material weakness in segregation and independent review of accounting duties, including journal entries and account reconciliations. Remediation efforts were underway, but the weakness would persist until controls were implemented and validated. The filing says the identified weakness could allow a material misstatement to go undetected.
Important facts for investors to verify
- Whether pricing, activity levels and customer spending improved after the quarter, particularly in coiled tubing and wireline.
- How much of reported revenue and adjusted EBITDA growth reflects Magnum versus underlying performance, and how the Production Solutions divestiture affects future comparisons.
- Cash conversion and working-capital trends, capital spending needs, and liquidity relative to the $400 million notes and their 8.75% coupon.
- Actual Magnum earnout outcomes and the assumptions underlying the sharp reduction in contingent-liability fair value.
- Progress and independent validation of remediation for the material weakness in internal controls.