Nine Energy Service, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Nine provides completion services and products for unconventional oil and gas wells, including cementing, completion tools, wireline, and coiled tubing. It reports one segment, Completion Solutions. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $167.4 million | $92.9 million | $426.7 million | $244.3 million |
| Adjusted gross profit | $44.0 million | $14.0 million | $96.2 million | $26.5 million |
| Operating income (loss) | $19.8 million | $(8.1) million | $27.3 million | $(41.9) million |
| Net income (loss) | $14.3 million | $(16.1) million | $6.4 million | $(48.8) million |
| Adjusted EBITDA | $32.6 million | $4.5 million | $63.7 million | $0.7 million |
Revenue increased 80% in Q3 and 75% for the nine-month period. Adjusted gross margin was approximately 26.3% in Q3 versus 15.1% a year earlier, and 22.6% for nine months versus 10.9%. Q3 net margin was approximately 8.5%; nine-month net margin was approximately 1.5%. Adjusted EBITDA and adjusted gross profit are non-GAAP measures and should not be treated as substitutes for GAAP results.
Q3 revenue growth reflected higher activity and pricing across all service lines. Cementing revenue rose 116%, coiled tubing 95%, tools 51%, and wireline 52%. Cost of revenue rose 56% in the quarter, slower than revenue growth, but increased labor, materials, headcount, and other operating costs. Management attributed the nine-month earnings improvement primarily to stronger activity and pricing. Results also included a $2.8 million debt-extinguishment gain in 2022; the prior-year nine-month comparison included a $17.6 million gain.
Cash, debt, and liquidity
- Nine-month operating cash flow was $8.2 million, compared with cash used of $26.7 million in 2021. Working capital absorbed cash, including a $39.8 million increase in receivables and a $13.5 million increase in inventory.
- Investing cash outflow was $6.2 million, including $9.4 million of property and equipment purchases. Financing cash outflow was $1.8 million. Cash ended the period at $21.5 million, nearly unchanged from year-end 2021.
- At September 30, cash plus available ABL borrowing capacity was $88.2 million. ABL borrowings were $27.0 million, with $66.7 million of availability net of letters of credit. The company reported an additional $5.0 million of net ABL borrowing in Q4 through the filing date.
- Gross debt was $334.6 million, including approximately $307.3 million principal of 8.75% Senior Notes due October 25, 2023. The ABL facility also matures October 25, 2023, or earlier—April 28, 2023—if the Notes remain outstanding. The balance sheet classified $27.3 million of debt as current.
- During Q3, Nine repurchased approximately $13.0 million principal of Notes for $10.1 million cash. Semiannual Note interest payments were approximately $13.4 million each; the November 1, 2022 payment had recently occurred, with another due May 1, 2023.
Outlook, risks, and other notable items
Management said supportive commodity prices and rising completion activity had improved demand, and expected activity to continue increasing into 2023, though likely at a slower rate than in 2022. It remained optimistic about 2023 and anticipated potential further pricing increases, dependent on market conditions. The filing provides no specific revenue or earnings guidance.
Management highlighted labor shortages, wage inflation, equipment and supply-chain constraints, and material-cost inflation as pressures that could offset price increases or limit work performed. Activity also depends on volatile oil and gas prices, customer capital discipline, and broader economic, geopolitical, and supply-demand conditions.
Going-concern risk: The Senior Notes mature in less than one year from the financial statement issuance date. Management plans to refinance or restructure debt, seek other capital, sell assets, or combine these actions, but stated there is no assurance it will succeed. Failure to do so could leave Nine unable to meet obligations and raises substantial doubt about its ability to continue as a going concern. Potential financing could dilute shareholders or impose restrictive terms. The company reported compliance with debt covenants at quarter-end.
Other notable disclosures: the company regained NYSE continued-listing compliance in September 2022 but is subject to a 12-month follow-up review. Management reported disclosure controls were effective and no material change in internal control during the quarter. The company said pending routine claims and proceedings were not expected to have a material adverse effect, while noting outcomes cannot be assured.
Important facts for investors to verify
- Progress, terms, and timing of refinancing or restructuring the 2023 Notes and ABL facility, and the related going-concern assessment.
- Cash collections and working-capital needs as revenue grows, given the substantial increases in receivables and inventory and the additional Q4 ABL borrowing.
- Whether pricing gains can continue to outpace wage, materials, and other cost inflation, and whether labor and equipment constraints limit activity.
- Debt-service capacity, including the $13.4 million semiannual interest payments, and the company’s liquidity after those payments.
- NYSE listing status during the follow-up period and developments in the stock price relative to continued-listing standards.