Nine Energy Service, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 9, 2020. Nine provides completion services and tools to oil and gas producers. It sold its Production Solutions segment on August 30, 2019, and 2019 results include a full year of Magnum operations, versus only about two months in 2018.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $832.9 million | $827.2 million |
| GAAP gross profit / margin | $97.6 million / 11.7% | $125.0 million / 15.1% |
| Adjusted gross profit, excluding D&A | $163.0 million | $187.9 million |
| Operating loss | $182.7 million | $28.3 million |
| Net loss | $217.8 million | $53.0 million |
| Adjusted EBITDA | $113.0 million | $141.1 million |
| Cash from operations | $101.3 million | $89.6 million |
| Capital expenditures | $62.1 million | $52.6 million |
Revenue rose 1%, but adjusted gross profit fell $24.9 million and Adjusted EBITDA declined $28.0 million. Completion Solutions revenue increased 4% to $774.7 million, reflecting Magnum tools and higher cementing activity, while coiled tubing revenue fell 27% and wireline revenue fell 3% amid lower utilization and pricing pressure. Production Solutions revenue was $58.3 million for the eight months before its sale.
Fourth-quarter revenue was $163.4 million; operating loss was $213.5 million and net loss was $220.5 million. The quarter included substantial impairment charges. Full-year impairment charges totaled $201.3 million: $66.2 million for property and equipment, $20.3 million for goodwill, and $114.8 million for intangible assets. Management cited weaker coiled tubing demand, excess industry capacity, adoption of dissolvable plugs, and a decision to transition Magnum trade names.
Liquidity, debt, and capital
At year-end, cash was $93.0 million and unused ABL availability was $99.2 million, for stated total liquidity of $192.2 million. The company had $400.0 million principal amount of 8.750% Senior Notes due 2023 and no ABL revolver borrowings; carrying-value long-term debt was $392.1 million, net of deferred financing costs. Cash less note principal implies net debt of approximately $307.0 million. Operating cash flow exceeded property-and-equipment purchases by approximately $36.3 million, using cash-flow-statement purchases of $65.0 million. The company reported compliance with debt covenants and said forecast cash and borrowing capacity should fund requirements for at least 12 months, while cautioning forecasts may not be achieved.
Management expected 2020 capital expenditures of $20–25 million, compared with a 2019 budget of $60–70 million. The Production Solutions sale generated approximately $17.1 million in cash proceeds and a $15.9 million accounting loss. No cash dividends were anticipated.
Outlook, risks, and other material items
- Management expected customer budgets in 2020 to decline from 2019 and described operator spending discipline, volatile oil prices, and weaker natural gas prices as risks to activity, utilization, and service pricing. The filing discussed the coronavirus outbreak and March 2020 oil-market disruption; it provided no quantified revenue or earnings guidance.
- The company cited substantial leverage, debt-service and refinancing risk, intense competition and pricing pressure, customer concentration in one industry, and potential further asset impairments. The five largest customers represented about 34% of 2019 revenue; no individual customer exceeded 10%.
- Magnum acquisition consideration included potential earnouts. Nine did not meet the 2019 sales requirement for certain dissolvable plug products and recorded a $20.9 million revaluation gain on the related contingent liability. A separate E-Set earnout may depend on results through 2026.
- Management and the CEO/CFO concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness in segregation of accounting duties. Remediation was underway, but not yet fully implemented and validated; the auditor did not attest to internal controls.
- Routine claims and proceedings were disclosed. A fatal 2017 worksite accident lawsuit was settled and funded by insurance in 2019. The company also disclosed outstanding wage-and-hour litigation risk and stated it does not insure against such claims.
- Other risks include environmental and hydraulic-fracturing regulation, safety incidents, weather, supplier concentration for some acquired product lines, and foreign-exchange exposure. Nine did not hedge fuel or currency risk.
Important facts for investors to verify
- Whether operating cash flow and available ABL capacity remain sufficient under the filing’s weaker-activity outlook, and how the 2023 notes will be addressed.
- Whether coiled tubing demand, utilization, pricing, and asset values stabilize after the 2019 impairment charges.
- Whether 2020 customer budgets and commodity-market conditions materially worsen from the assumptions underlying management’s liquidity statement.
- Progress in remediating the accounting-control material weakness and whether controls are operating effectively.
- Actual Magnum earnout obligations, further acquisition integration costs, and any additional impairment or contingent-liability changes.