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Nine Energy Service, Inc. (NINE) Q4 2022 Earnings Call Transcript

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Nine Energy Service, Inc. (NYSE:NINE) Q4 2022 Earnings Conference Call March 8, 2023 10:00 AM ET

Company Participants

Guy Sirkes - CFO

Ann Fox - President and CEO

Conference Call Participants

Waqar Syed - ATB Capital Markets

Ignacio Bernaldez - EF Hutton

Operator

Greetings, and invited to Nine Energy Service Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, each participants are successful a listen-only mode. A question-and-answer convention will travel nan general presentation. [Operator Instructions] As a reminder, this convention is being recorded.

I would now for illustration to move nan convention complete to your host, Mr. Guy Sirkes. Thank you. You whitethorn begin.

Guy Sirkes

Thank you. Good morning, everyone, and invited to nan Nine Energy Service net convention telephone to talk our results for nan 4th fourth and afloat twelvemonth of 2022. With maine coming is Ann Fox, President and Chief Executive Officer. We admit your participation. We wanted to congratulate Heather connected an upcoming summation to her family. She is presently retired connected maternity leave.

Some of our comments coming whitethorn see forward-looking statements reflecting Nine's position astir early events. Forward-looking statements are taxable to a number of risks and uncertainties, galore of which are beyond our control. These risks and uncertainties tin origin existent results to disagree materially from our existent expectations. We counsel listeners to reappraisal our net merchandise and nan consequence factors discussed successful our filings pinch nan SEC.

We undertake nary responsibility to revise aliases update publically immoderate forward-looking statements for immoderate reason. Our comments coming besides see non-GAAP financial measures. Additional specifications and a reconciliation to nan astir straight comparable GAAP financial measures are besides included successful our 4th fourth and afloat twelvemonth property merchandise and tin beryllium recovered successful nan Investor Relations conception of our website.

I will now move nan telephone complete to Ann Fox.

Ann Fox

Thank you, Guy. Good morning, everyone. Thank you for joining america coming to talk our 4th fourth and afloat twelvemonth results for 2022.

2022 was a beardown twelvemonth for nan oilfield services abstraction and Nine was capable to capitalize on an improving market. Year-over-year, we accrued our gross by 70%, our adjusted EBITDA by complete 17 times and accrued our adjusted EBITDA separator from 1% to 16%.

Our 2022 incremental adjusted EBITDA separator was 36% and return connected invested superior for 2022 was astir 16%. This is coagulated maturation while simultaneously navigating inflationary pressures, labour constraints and caller higher worker turnover. I americium very pleased pinch our team's subject and attack to managing liquidity while simultaneously delevering nan company.

Over nan past respective years, we've repurchased bonds connected nan unfastened market, reducing our word indebtedness by complete $90 million. This aided successful nan execution of our successful refinancing successful January of this year. With nan caller superior building successful place, we now person much optionality to unlock equity value, and we intend to proceed to delever moving forward. While wide rig and frac activity accrued year-over-year, I would categorize 2022 arsenic much of a pricing story.

Underinvestment successful OFS instrumentality kept instrumentality undersupplied, and OFS companies did not person entree to superior to put successful caller aliases existing equipment. Additionally, nan labour marketplace remained highly constrained. These 2 elements drove pricing leverage backmost towards work providers successful 2022.

During 2022, we grew marketplace share, increasing our percent of stages completed wrong wireline and completion devices from astir 18% successful 2021 to astir 20% successful 2022. Additionally successful cementing, we grew our marketplace stock of rigs followed and nan basins we run from astir 17% successful 2021 to astir 19% successful 2022. These marketplace stock gains came successful conjunction pinch important maturation and profitability.

In completion tools, we grew nan full number of stages completed by astir 38% year-over-year compared to U.S. EIA completions, which accrued by astir 22% complete that aforesaid clip period. We stay highly happy pinch nan capacity of our dissolvable plug, expanding nan full number of dissolvable Stinger portion sold by astir 42% year-over-year.

We person besides maintained a beardown composite plug business, expanding nan full number of composite plugs sold by astir 44% year-over-year. We estimate that successful 2022 Nine, held astir 20% of nan full U.S. plug market, including some composite and dissolvable plugs.

Our cementing work statement accrued nan full number of jobs completed by astir 50% year-over-year, while besides expanding our mean value per occupation by astir 34% year-over-year. We're capable to thrust this profitable maturation done our state-of-the-art laboratory accommodation that create proprietary and highly method slurries coupled pinch precise good tract execution.

Coiled tubing besides demonstrated beardown maturation successful both, activity and pricing, expanding days worked by astir 37% year-over-year and nan mean time complaint by astir 40% year-over-year. Our coiled tubing squad identified a caller marketplace successful nan Eagle Ford and maintained beardown utilization and pricing wrong our existing markets.

In wireline, full stages completed accrued by astir 26% year-over-year, pinch nan mean value per shape expanding by astir 18%. This has been a challenging work statement from a pricing perspective. However, it plays an important domiciled successful nan customer's good completion and provides important intelligence and penetration into nan completion market.

Nine made a important committedness to ESG done nan improvement of soul policies, procedures and measurements arsenic good arsenic finance successful caller technologies that thief our customers trim their GHG emissions. Part of this strategy included identifying and quantifying our GHG emissions. We were capable to quantify these emissions for nan first clip for 2021 and are moving connected 2022 data.

Through this process, we are identifying gaps and procedures to make nan postulation of this information much meticulous and businesslike arsenic we move guardant while simultaneously processing strategies connected really we tin trim our emissions. We will proceed to supply specifications connected our advancement and priorities moving forward. We person besides made it a privilege to put successful technologies that thrust profitability for nan institution while helping to trim emissions.

In 2022, we converted 2 hydraulic wireline units to electrical and made a committedness to person 4 much successful 2023. The electrical wireline units supply important savings connected some diesel and monthly attraction costs for Nine. Our dissolvable plug importantly reduces GHG emissions. And during 2022, we introduced Nine, dissolvable pumpdown ring.

The dissolvable pumpdown ringing has been shown to trim horsepower requirements by astir 48%, h2o required to pump nan plug to group astatine extent by astir 28% and diesel substance usage by astir 42%.

Lastly, I want to admit nan unthinkable squad who led Nine done truthful galore ups and downs, ever keeping nan reputation, work quality, integrity of nan institution intact. Once again, we ended nan twelvemonth pinch an fantabulous information people pinch a full recordable incident complaint of 0.41. Company gross for nan twelvemonth was $593.4 million. Net income was $14.4 cardinal aliases $0.45 per diluted stock and $0.47 per basal share. Adjusted EBITDA was $93.7 million.

Now turning to Q4, gross for nan 4th was $166.7 million, which fell wrong our original guidance of $150 cardinal to $170 million. We generated adjusted EBITDA of $30 million, reflecting an adjusted EBITDA separator of 18%. Net income was $8 cardinal aliases $0.24 per diluted stock and $0.26 per basal share.

ROIC for nan 4th fourth was astir 24%. Q4 was successful statement pinch management's expectations. Adjusted EBITDA was down somewhat compared to Q3 owed mostly to highly of world completion instrumentality income and holidays that is emblematic for Q4.

I would now for illustration to move nan telephone complete to Guy to locomotion done elaborate financial information.

Guy Sirkes

Thank you, Ann.

I want to statesman by elaborating connected Nine's caller superior structure. In January, we announced nan redemption of our elder notes owed 2023, which was partially funded pinch nan nett proceeds of our offering of 300,000 units, each comprised of $1,000 main magnitude of 13% elder secured notes owed 2028 and 5 shares of Nine's communal stock.

In conjunction pinch nan unit's offering, we amended and extended our existing asset-based revolving in installments installation to January of 2027. Both nan ABL and portion collateralization were completed wrong 30 days post-closing for nan position of nan caller amended ABL and portion offering.

We judge this caller superior building provides much optionality to unlock equity value. And moving forward, we intend to delever done immoderate free rate travel generation, which will beryllium utilized to repay borrowings nether nan ABL installation and trim word debt.

As of December 31, 2022, Nine's rate and rate equivalents were $17.4 million, pinch $66.6 cardinal of readiness nether nan revolving in installments facility, resulting successful a full liquidity position of $84 cardinal arsenic of December 31, 2022. On December 31, 2022, nan institution had $32 cardinal of borrowings nether nan revolving in installments facility.

On January 27, 2023, nan institution borrowed an further $40 cardinal nether nan revolving in installments installation to salary for a information of nan redemption value of nan 8.75% elder notes owed 2023 and to salary for fees and expenses related to nan units offering.

During nan 4th quarter, gross totaled $166.7 cardinal pinch adjusted gross profit of $40.1 million. During nan 4th quarter, we completed 1,066 cementing jobs, a alteration of astir 6% versus nan 3rd quarter. The mean blended gross per occupation accrued by astir 8%.

Cementing gross for nan 4th was $65 million, an summation of astir 2%. During nan 4th quarter, we completed 5,879 wireline stages, an summation of astir 3%. The mean blended gross per shape was level quarter-over-quarter. Wireline gross for nan 4th was $30.3 million, an summation of astir 3%.

For completion tools, we completed 32,555 stages, a alteration of astir 5%. Completion instrumentality gross was $35.3 million, a alteration of astir 13%. During nan 4th quarter, our coiled tubing days worked accrued by astir 5%, pinch nan mean blended time complaint expanding by astir 3%. Coiled tubing utilization during nan 4th was 56%. Coiled tubing gross for nan 4th was $35.9 million, an summation of astir 8%.

During nan 4th quarter, nan institution reported wide and administrative disbursal of $13.9 cardinal compared to $13.5 cardinal for nan 3rd quarter. Full twelvemonth G&A was $51.7 million. Depreciation and amortization disbursal successful nan 4th fourth was $10.1 cardinal compared to $9.5 cardinal successful nan 3rd quarter. Full twelvemonth G&A was $40.2 million.

The institution recognized an income taxation proviso of astir $0.5 cardinal for nan year, resulting successful an effective taxation complaint of 3.7% for 2022. Our taxation proviso for 2022 is chiefly nan consequence of our taxation position successful authorities and overseas taxation jurisdictions.

For nan twelvemonth extremity 2022, nan institution reported nett rate provided by operating activities of $16.7 million. The mean DSO for 2022 was 58.5 days, which is simply a reasonable proxy for DSO looking into 2023.

Our full CapEx, walk for 2022 was $32.3 million, which fell somewhat supra management's original guidance of $20 cardinal to $30 million, pinch $21.5 cardinal pursuing Q4. The $32.3 cardinal includes astir $3.7 cardinal of 2021 CapEx that fell into 2022.

Looking into 2023, we still expect full CapEx of $25 cardinal to $35 million, pinch complete 80% of this being allocated towards attraction capital. The mostly of our maturation CapEx will spell towards nan conversion of 4 further wireline units to electric. Given our important nett operating nonaccomplishment carryforward balance, we do not expect immoderate meaningful rate taxes. Working superior will move successful conjunction pinch gross changes.

I will now move it backmost to Ann.

Ann Fox

Thank you, Guy.

We expect 2023 full U.S. CapEx to summation by double-digits complete 2022 and judge operators will request to drill much wells to support accumulation flat. Overall, marketplace fundamentals stay supportive for a longer rhythm pinch some U.S. operators and OPEC taking a much disciplined attack to production.

Throughout 2022, we discussed some nan instrumentality and labour constraints wrong OFS, neither of which person been alleviated. With this, OFS companies are adopting superior subject and pledging to return rate to shareholders alternatively of investing successful caller equipment. There continues to beryllium a deficiency of entree to superior arsenic good arsenic labour constraints.

The dissolvable exertion continues to beryllium a reliable, businesslike and environmentally friends action for operators. Since nan preamble of our Stinger plug successful Q1 of 2020, we person built up meaningful tally history crossed basins and good types, which is allowing customers to go much comfortable pinch nan value and reliability of moving plugs successful their wellbore. We do expect our dissolvable income will proceed to beryllium an important maturation driver for Nine.

Given our acquisition done nan cycles, we judge maintaining a beardown equilibrium expanse is critical, and moving forward, delevering will proceed to beryllium 1 of Nine's apical priorities. Our caller superior building gives america nan elasticity to delever and immoderate free rate travel will beryllium utilized to repay nan ABL and trim word debt.

Now transitioning to Q1, activity frankincense acold has been down compared to Q4 pinch nan rig count declining by 30 rigs since nan extremity of 2022. Additionally, Nine nonaccomplishment betwixt 1 to 5 days of operations depending connected nan work statement to inclement upwind requiring america to transportation nan costs of labour pinch nary matching revenues, which will negatively effect our EBITDA margin.

Over nan past respective months, we person seen a crisp diminution successful earthy state prices, which will impact activity levels successful nan Northeast and Haynesville. We expect these effects will beryllium felt much powerfully successful nan Haynesville successful nan adjacent term. Together, nan Northeast and Haynesville comprised astir 30% of Nine's full revenue.

That said, arsenic we person seen, manufacture dynamics tin displacement very quickly, and we are operating this business for nan long-term. We consciousness very powerfully that these basins are captious to proviso successful nan world markets and important pieces of Nine's footprint. With what we cognize today, we expect Q1 gross to beryllium down somewhat versus Q4 pinch projected gross of $160 cardinal to $165 million.

Nine is good positioned to return advantage of this sustained rhythm and are differentiated by our work statement diversity, forward-leaning technology, geographic diverseness and balanced commodity exposure. We person proven our expertise to turn earnings, and we person undoubtedly 1 of nan champion teams successful nan industry.

We will now unfastened up nan telephone for Q&A.

Question-and-Answer Session

Operator

Thank you [Operator Instructions]. Our first mobility comes from Waqar Syed pinch ATB Capital Markets. Please proceed pinch your question.

Waqar Syed

Good morning, acknowledgment for taking my question.

Ann Fox

Good morning, Waqar.

Waqar Syed

And - what's your guidance for incremental margins for Q1? How do you spot those landing?

Ann Fox

So, we're not guiding connected nan incremental separator quarter-over-quarter. Obviously, if you look astatine nan midpoint of our gross guidance, we're guiding $160 cardinal to $165 cardinal connected nan apical statement so, astir 2.5% aliases truthful - astatine nan midpoint diminution connected nan gross side. We will person immoderate degradation to nan margin, but this is still going to beryllium a very beardown margin. I fishy it's supra our 2019 profitability levels.

So still very stable, very strong, conscionable not rather nan rocket vessel that we saw earlier successful nan twelvemonth for Q1 and Q2, erstwhile state was astatine 8%. And frankly, I deliberation astir of nan globe missed nan truth that January and February would beryllium nan warmest period we've seen since 1895. So that has really conscionable slowed things down. But by nary intends is this cataclysmic aliases catastrophic. This is going to beryllium a really still coagulated net floor plan for nan institution and let's conscionable spot wherever summertime takes us.

But, truthful immoderate degradation connected that margin, Waqar conscionable carrying that labour complete those upwind days is, arsenic you know, not nosy and that was a beautiful utmost storm. So again, obviously, a different state market, we are eyes wide open. We are not - this again is not catastrophic by immoderate means. So, we're still very excited for this year. It's conscionable we haven't seen nan propulsion that we thought we would spot successful Q1 conscionable fixed nan state macro.

Waqar Syed

Yes, now nan Haynesville rig count hasn't really travel disconnected arsenic yet. It's imaginable that nan adjacent mates of months, we spot immoderate degradation there. How do you spot that impacting your pricing successful that basin aliases successful immoderate different basin?

Ann Fox

It's a awesome question. I deliberation nan reality is that we had each of america had a really reliable February looking astatine state and now we're up complete $3 connected nan state broadside truthful that feels overmuch much constructive. I deliberation it would beryllium astonishing if OFS arsenic a assemblage started to springiness up value because this is simply a assemblage that was antagonistic nett income successful 2021.

And those are companies of extracurricular of nan mega caps. Those are companies of standard and mini companies, antagonistic nett income for 2021 and single-digit EBITDA margin, not sustainable. So I would opportunity nan value that we garnered arsenic a assemblage successful 2022 was simply reflation. It was conscionable reflation. These are normalized costs now. And I deliberation we had a Goldilocks script for our customers successful nan past.

So I'll beryllium very amazed if you spot monolithic amounts of value being fixed up present because, again, this is still dependable astatine and $3 is by nary intends nan worst state value this state has seen. So, we're not terribly concerned astir this. We're conscionable not going to forecast pricing inclining, which we surely would person had we been successful a script wherever alternatively of 30 rigs down, we person seen 30 rigs up, if that makes sense.

Waqar Syed

Yes, absolutely. And you've seen very beardown marketplace stock gains past year, and acknowledgment for sharing that data. What would you property that to because I cognize that you were besides refusing jobs. So what really led to those important marketplace stock gains?

Ann Fox

Well, truthful I deliberation surely for our cementing division, a batch of chemoreceptor to nan grinder connected slurries and slurry development, and we made a batch of advancement location past year, unthinkable work execution, very selective connected nan customers that we had and past picking up incremental customers that we knew would worth those method capabilities arsenic good arsenic that work execution.

So I deliberation we conscionable - erstwhile Nine came retired of this, our tenure of our labor that were hired earlier 2020 is around, connected average, 8 years. So, we were capable to support our unit done nan section truthful erstwhile we came into 2022, we were capable to drawback marketplace stock because we weren't reinventing nan instrumentality here.

We were simply bringing group that we had demoted done those downturns backmost up into their positions, truthful that rigor and execution - that rigor successful nan labs is still location and nan aforesaid point arsenic good for nan exertion and nan capacity connected nan instrumentality side. So, I don't cognize really other to opportunity it. I conscionable deliberation this squad does harder amended and that's what you saw successful 2022.

Waqar Syed

Okay. And past connected nan state side, you mentioned that astir 30% gross exposure, what business lines person supra that mean vulnerability and which ones person beneath that mean exposure?

Ann Fox

Sorry, nan mean vulnerability to what Waqar, I missed nan first part.

Waqar Syed

So nan state rigs you mentioned connected nan state basin, you said - location was astir a 30% gross exposure. But I was conscionable saying that which business lines person much vulnerability than nan 30% number and which person little than that 30% number?

Ann Fox

It's a beautiful moreover mix. The only 1 that - well, wireline, we don't person successful nan Haynesville, but otherwise, it's a beautiful moreover operation crossed nan work lines.

Waqar Syed

Okay. And past conscionable 1 last question, 1 very ample work institution has introduced - what's emission-friendly cement.

Ann Fox

Yes [indiscernible].

Waqar Syed

Yes, and truthful what do you deliberation - really does that alteration nan competitory landscape?

Ann Fox

I think, we person fresh for proceedings our ain green-friendly cement arsenic well. So I deliberation operators are going to play astir pinch this. Certainly, nan ample manufacturers are getting unit because of nan c strength of manufacturing cement. But nan reality is, it's very, very challenging. I deliberation to isolate these wellbores pinch nan aforesaid integrity complete nan long-term. And so, I deliberation it's yet to spot what, are nan implications for nan semipermanent productivities connected those wells.

And successful a clip wherever U.S. shale is very overmuch struggling pinch nan degradation of productivity connected those wellbores. I deliberation this will beryllium a slower start. Certainly, it's an important start. Certainly, it's 1 we're proud to person our ain slurry that meets those greenish standards. But this, I think, will beryllium a slower take-up than say, a dissolvable plug for instance.

Waqar Syed

Great. And past conscionable 1 other, if I whitethorn connected nan dissolvable plug side, immoderate comments you would for illustration to make connected world marketplace penetration?

Ann Fox

Yes, I would conscionable opportunity we emotion that, and it keeps going successful nan correct direction. And arsenic you cognize nan bottommost worker successful Argentina arsenic good arsenic nan Middle East person been a really awesome marketplace for us, and we fishy those world markets besides stay strong. So, very, very pleased pinch that.

Waqar Syed

Okay great, convey you very much. Thanks for your comments.

Ann Fox

Thank you, Waqar. Thank you, Waqar.

Operator

Our adjacent mobility is from Ignacio Bernaldez pinch EF Hutton. Please proceed pinch your question.

Ignacio Bernaldez

Hi bully greeting and convey you for your clip today.

Ann Fox

Good morning.

Guy Sirkes

Good morning.

Ignacio Bernaldez

Just successful nan proviso concatenation and are location immoderate areas that you deliberation you'll proceed to have, telephone it, headwinds arsenic we look astatine '23 and could person an effect connected nan year?

Ann Fox

There's, nary contiguous word concerns I person to show nan market. I would conscionable mostly opportunity connected our dense equipment, if you look astatine Peterbilt engines, for example, these are incredibly difficult to travel by. So there's, gaps still successful nan manufacturing assemblage that are existing, it whitethorn slowdown fielding equipment. That remains nan aforesaid image arsenic past year.

I deliberation nan big, large situation for nan work abstraction is, of course, arsenic we each know, nan recession that's expected to beryllium adjacent week and ne'er comes. We saw nan jobs data, nan backstage payroll information from ADT travel retired today. We've seen nan Fed speak. So, I deliberation labour is going to proceed to beryllium nan number one, constraint for oilfield service.

This unemployment complaint seems to beryllium unbendable and obviously, arsenic China picks up and we spot that system grow I fishy lipid and state will not beryllium nan first prime of nan mean American labor. So, I deliberation this manufacture is going to stay highly tight connected labour and we're concerned astir it.

Ignacio Bernaldez

That's really helpful, convey you.

Operator

[Operator Instructions] There are nary further questions astatine this time. I would for illustration to move nan telephone backmost complete to Ann Fox for closing comments.

Ann Fox

I want to extremity by thanking you for your continued support. Additionally, I want to convey our squad for an unthinkable 2022. Thank you.

Operator

This concludes today's conference. You whitethorn disconnect your lines astatine this time, and we convey you for your participation.

Editor: Naga



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