Nine Energy Service, Inc. — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Nine provides onshore oilfield completion services and tools, primarily to North American unconventional-well operators. It reports as one segment.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $66.6 million | $146.6 million |
| Adjusted gross profit (loss), non-GAAP | $4.3 million | $20.6 million |
| GAAP gross profit (loss) | $(7.0) million | $8.5 million |
| Operating loss | $(17.3) million | $(303.7) million |
| Net loss | $(8.2) million | $(300.9) million |
| Adjusted EBITDA (non-GAAP) | $(3.4) million | $10.3 million |
| Operating cash flow | $(5.2) million | $0.7 million |
| Capital expenditures | $2.4 million | $0.8 million |
| Cash and cash equivalents, quarter-end | $53.0 million | $68.9 million at Dec. 31, 2020 |
| Total debt, before deferred financing costs | $322.0 million | $348.6 million at Dec. 31, 2020 |
Revenue fell 55% year over year. Adjusted gross margin was approximately 6.5% of revenue, versus 14.1% in Q1 2020; GAAP gross margin was approximately negative 10.5%. Basic and diluted loss per share was $0.28, compared with $10.22 in Q1 2020. The prior-year loss included a $296.2 million goodwill impairment.
Material changes and financial position
- Revenue declined across all major lines: wireline fell 72%, cementing 53%, coiled tubing 47%, and tools 38%. Management attributed the declines mainly to lower activity and pricing pressure, with weather-related shutdowns also contributing.
- Completed wireline stages fell 62%; cement job count fell 41%; completion-tools stages fell 19%; and coiled-tubing days worked fell 34% year over year.
- Adjusted gross profit fell $16.3 million to $4.3 million. G&A declined $6.2 million to $10.2 million, primarily from lower employee costs and other cost reductions.
- Q1 2021 net loss includes a $17.6 million gain from repurchasing approximately $26.3 million face value of Senior Notes for about $8.4 million cash. This non-cash accounting gain materially offset operating and interest costs.
- Cash decreased $15.9 million during the quarter. Financing cash use was $9.1 million, including Senior Note purchases; operating cash use was $5.2 million.
- Quarter-end liquidity was $98.8 million: $53.0 million cash plus $45.8 million available under the ABL facility. There were no ABL borrowings outstanding; availability was net of $0.5 million of letters of credit.
- Senior Notes carry an 8.75% coupon and mature in 2023. The company reported $320.3 million principal outstanding at March 31, 2021; semiannual interest payments were approximately $14.0 million based on amounts outstanding at April 30. The ABL facility has a $200 million maximum commitment, subject to its borrowing base.
- Stockholders’ equity was $14.1 million, down from $20.4 million at year-end 2020; accumulated deficit was $752.1 million.
Outlook, commentary, risks and contingencies
Management said customer activity and pricing remained depressed despite improved oil prices. Customers generally reduced 2021 capital budgets versus 2020 and prioritized capital discipline; management saw little pricing leverage and said activity increases had not offset price declines. It cautioned that even further oil-price improvement may not materially improve Nine’s 2021 results, depending on customer activity and the company’s ability to raise prices.
Management expects liquidity to erode, particularly due to Senior Note interest payments, but believes cash, operating cash flow and potential ABL borrowings should fund capital requirements for at least twelve months from the financial statements’ issuance date. This assessment depends on forecasts and market conditions and is not assured. The company continued cost-cutting measures and may take further steps.
Key risks include oil-and-gas activity and commodity-price cyclicality; ongoing pandemic and economic effects; high debt and restrictive covenants; competition and pricing pressure, especially in dissolvable plugs; customer concentration; weather; operational and safety incidents; environmental regulation; and potential impairment. The company reported covenant compliance at quarter-end. It disclosed ordinary-course claims and litigation, but said it did not expect any uninsured or unprovided ultimate liability to materially affect its business, results or financial condition. No material risk-factor changes from the 2020 Form 10-K were reported.
Important facts for investors to verify
- Whether operating activity and pricing improve enough to restore positive adjusted gross profit and EBITDA, given Q1 operating cash use and negative GAAP gross profit.
- Whether the company’s liquidity forecast holds as cash declines and approximately $14.0 million semiannual Senior Note interest payments come due.
- Senior Note principal, market value, maturity and refinancing options; Q1’s debt-extinguishment gain arose from repurchases below carrying value and is not recurring operating income.
- ABL borrowing-base availability and the fixed-charge coverage covenant, which is tested when availability falls below $18.75 million or after a default.
- Customer capital budgets, oilfield-service pricing, and exposure to weather, pandemic-related disruption and competition.