Nine Energy Service, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Nine provides onshore oilfield completion services and tools for unconventional wells. Financial statements are unaudited.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $84.8 million | $52.7 million | $151.5 million | $199.4 million |
| GAAP gross loss | $2.8 million | $15.9 million | $9.8 million | $7.4 million |
| Adjusted gross profit | $8.2 million | $(4.0) million | $12.5 million | $16.6 million |
| Net loss | $24.5 million | $24.2 million | $32.8 million | $325.1 million |
| Adjusted EBITDA | $(0.4) million | $(11.0) million | $(3.8) million | $(0.7) million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(24.9) million | $2.4 million |
Q2 adjusted gross margin was approximately 9.7%; GAAP gross margin was approximately negative 3.3%. For the first half, adjusted gross margin was approximately 8.3% and GAAP gross margin approximately negative 6.5%. These gross-profit measures exclude depreciation and amortization only in the adjusted measure.
At June 30, cash was $33.1 million, down from $68.9 million at year-end 2020. Total current assets were $143.3 million and current liabilities $54.4 million. Total debt carrying value was $318.2 million, including $320.3 million principal outstanding on the 8.75% Senior Notes due 2023 and $1.7 million on Magnum promissory notes. Stockholders’ equity was negative $9.7 million. ABL borrowings were zero; availability was $52.3 million, net of $0.5 million in letters of credit. Total liquidity, as defined by the company, was $85.4 million.
Changes versus comparable periods
- Q2 revenue rose 61% year over year, with growth across tools, wireline, coiled tubing and cementing as activity recovered from the pandemic-driven downturn. Adjusted gross profit improved from a loss to a profit.
- First-half revenue fell 24%, reflecting weak activity and pricing from 2020’s market disruption and weather-related shutdowns in Q1 2021. Adjusted gross profit declined $4.1 million.
- First-half 2021 net loss was substantially smaller than in 2020, principally because the prior-year period included a $296.2 million goodwill impairment. The 2021 period included a $17.6 million gain on debt extinguishment.
- Operating cash flow shifted from $2.4 million provided to $24.9 million used, which management attributed primarily to a $32.1 million year-over-year working-capital decrease, including reduced cash collections.
Outlook, risks and unusual items
- Management expects only moderate activity growth for the remainder of 2021 and Q3 revenue above Q2. It cited June 2021 as one of its strongest revenue months since Q1 2020 and said it began modest net price increases in cementing and coiled tubing during Q2. No full-year numerical guidance is provided.
- Management expects pricing to remain depressed near to medium term and says higher commodity prices may not translate into materially higher activity, given customer capital discipline. Recruiting and retaining qualified labor is identified as a major challenge, alongside cost inflation.
- The company says current forecasts indicate cash, operating cash flow and potential ABL borrowings should fund requirements for at least 12 months from issuance of the statements, while warning that total liquidity is expected to materially erode, substantially due to Senior Note interest. Forecasts depend on financial performance and market conditions.
- Senior Notes carry an 8.75% coupon, with semiannual interest payments of approximately $14.0 million at current principal. The company repurchased approximately $26.3 million principal for $8.4 million cash in the first half, recording a $17.6 million gain. It may consider further repurchases or restructuring/refinancing, which could involve dilution or securities with senior rights.
- Legal accruals rose to $2.2 million from $0.2 million at year-end; a wage-and-overtime class action in New Mexico remains pending, with outcome and timing uncertain. The filing also discloses related-party transactions.
- Key risks include oil and gas activity and pricing cycles, pandemic-related effects, substantial debt and restrictive covenants, competition and pricing pressure, labor availability, customer concentration, operational and environmental liabilities, and climate-related demand risks. The company reported compliance with debt covenants at June 30 and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether operating cash flow and collections improve, and whether cash burn causes liquidity to decline faster than forecast.
- Ability to service or refinance the 2023 Senior Notes, and implications of any further debt repurchases or restructuring.
- Whether activity recovery and price increases can improve margins despite customer capital discipline, labor constraints and cost inflation.
- Potential outcomes and costs of the New Mexico wage-and-overtime litigation and other legal matters.
- How much reported performance depends on non-GAAP adjustments; adjusted EBITDA remained negative in both Q2 and the first half.