Earnings Call: Q3 2024

Nov 1, 2024

Greetings, and welcome to the Q3 2024 9 Energy Service Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Heather Schmidt, Vice President of Strategic Development and Investor Relations. Thank you. You may begin. Thank you. Good morning, everyone, and welcome to the Nye Energy Service earnings conference call to discuss our results for the Q3 of 2024. With me today are Anne Fox, President and Chief Executive Officer and Guy Serkis, Chief Financial Officer. We appreciate your participation. Some of our comments today may include forward looking statements reflecting Niall's views about future events. Forward looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. We undertake no obligation to revise or update publicly any forward looking statements for any reason. Our comments today also include non GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are also included in our Q3 press release and can be found in the Investor Relations section of our website. I will now turn the call over to Ann. Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our Q3 results for 2024. Revenue for the quarter was $138,200,000 which was above the range of our original guidance of $127,000,000 to $137,000,000 We generated adjusted EBITDA of $14,300,000 an increase of approximately 47% quarter over quarter and diluted EPS of negative $0.26 Incremental adjusted EBITDA margins were approximately 79%. Overall, the U. S. Land market was relatively stable this quarter with the average U. S. Rig count declining by approximately 3% from Q2. The national gas price continues to be extremely challenging, averaging just above $2 for the year through the end of Q3. Low natural gas prices have led to sustained lower activity levels in the Haynesville and Northeast, as well as completion delays and white savings in the calendar. Despite this, our total revenue grew by approximately 4% quarter over quarter, driven mostly by our cementing business, where we increased market share by approximately 23% quarter over quarter within the areas we operate. The cementing team increased jobs completed by approximately 9% quarter over quarter and revenue by approximately 12% despite the rig count decreasing. Our cementing team adopted a deliberate strategy to win market share, reevaluating our pricing versus market share balance, while boosting sales efforts, and they were able to execute. We also continue to offer the most advanced cement slurries, coupled with excellent delivery and on-site execution and service, which continues to differentiate us in the market. Pricing for all service lines remained relatively stable this quarter. However, in conjunction with the revenue increase, better utilization within cementing and coil, higher international tool sales and supply chain efforts across service lines, adjusted EBITDA increased by approximately 47% quarter over quarter with incremental margins of approximately 79%. We are always watching costs very closely, but starting in late Q2, we began to see our cost reduction in supply chain initiatives positively impact our profitability. Cost reductions have come through a number of strategies and programs, including a reduction in the cost of our operating structure as well as vendor consolidation and rationalization across the organization, which has helped reduce some of our largest material costs. This is an ongoing effort and will continue to be a top priority as we look for sustainable ways to increase profitability. Revenue within our remaining service lines was relatively flat quarter over quarter. Our international completion tool revenue increased quarter over quarter, but was offset by lower activity levels, specifically in the Northeast and Haynesville. We have been extremely happy with the commercialization of our pincer hybrid frac plug as well as our frac dart. We are running our pincer plug with some of the largest operators in the U. S. And are quickly gaining market share across basins. As a reminder, this product has approximately 50% less material than our current composite frac plug and allows for plug drill out times as low as 2 minutes per plug, saving significant time and meaningfully reducing bit wear for our customers, in some cases eliminating a bit trip. The SCORPION with Frac Dart allows operators the chance to reinitiate pump down operations if the guns do not fire post plug setting. With the Frac Dart, operators can eliminate the need to pump down a ball, saving time, water, usage and money. Despite over 50% of our wireline revenue coming out of the Northeast, revenue remained flat this quarter and our team continues to hold steady in a very competitive market. Despite a very saturated competitive landscape in the Permian Basin, we have been able to win market share in this region, supplementing work with our crews from the Northeast to maximize efficiency. Voalte Tubing revenue increased by approximately 5% this quarter due to better utilization with days work increasing by approximately 8% this quarter. I would now like to turn the call over to Guy to walk through detailed financial information. Thank you, Anne. As of September 30, 2024, Nine's cash and cash equivalents were $15,700,000 with $27,600,000 of availability under the revolving ABL credit facility, resulting in a total liquidity position of $43,300,000 as of September 30, 2024. At September 30, we had $50,000,000 of borrowings under the ABL credit facility. During Q3, we paid down approximately $5,000,000 on our ABL credit facility. And on October 10, we paid down an additional $3,000,000 making our current borrowings 47,000,000 dollars During Q3, we also paid our interest payment of approximately $19,500,000 At the end of last year, we put a $30,000,000 ATM program in place to provide flexibility for the company. During Q3, we sold approximately 1,200,000 shares under the ATM program, which generated approximately $1,400,000 of net proceeds. For the 9 months ended September 30, 2024, we have sold a total of approximately 5,400,000 shares, which has generated net proceeds of approximately $8,200,000 As per the terms of the indenture governing 9 senior secured notes, the company is required to periodically offer to repurchase such notes with a portion of any excess cash flow. 9 did not generate any excess cash flow as defined in the indenture in the most recently ended 2 fiscal quarters. As a result, no excess cash flow offer will be made to noteholders this month. During the Q2, revenue totaled $138,200,000 with adjusted gross profit of $24,700,000 During the Q3, we completed 1,005 cementing jobs, an increase of approximately 9%. The average blended revenue per job increased by approximately 3%. Cementing revenue for the quarter was $51,200,000 an increase of approximately 12%. During the Q3, we completed 6,318 wireline stages, a decrease of approximately 1%. The average blended revenue per stage was flat. Wireline revenue for the quarter was 27,900,000 dollars which was flat compared to Q2. For completion tools, we completed 24,770 stages, an increase of approximately 4%. Completion tool revenue was 31,400,000 a decrease of approximately 3%. During the Q3, our coiled tubing days work increased by approximately 8% with the average blended day rate decreasing by approximately 3%. Coiled tubing utilization was 52% with revenue of $27,700,000 an increase of approximately 5%. During the quarter, the company reported general and administrative expense of 12,400,000 Depreciation and amortization expense was $9,000,000 The company's tax provision was approximately $400,000 year to date. The tax provision for 2024 is the result of our tax position in state and non U. S. Tax jurisdictions. For the Q3, the company reported net cash used in operating activities of $5,900,000 The average DSO for Q3 was 53.1 days. CapEx spend for Q3 was 3,600,000 dollars bringing our total spend through September 30 to $11,700,000 As a reminder, we decreased our full year 2024 CapEx range to $10,000,000 to $15,000,000 down from our original guidance of $15,000,000 to $25,000,000 I will now turn it back to Anne. Thank you, Guy. It is a very dynamic time, creating volatility and low visibility for commodity prices. We still believe the long term demand for natural gas will increase due in large part to power demands from AI as well as the rise of LNG exports as capacity expands. It is too early to provide specifics on 2025 activity levels, but assuming we see supportive commodity prices in conjunction with the resetting of customer budgets, we do anticipate a moderate activity pickup in 2025 over current levels. If natural gas prices average $3 or above, we believe natural gas levered operators will bring activity back online. We are very well positioned in these basins. We have seen our earnings respond quickly and significantly in the past, and we are ready and well positioned to capitalize on an improving market. The Northeast and Haynesville account for around 30 percent of our revenue, and we still believe this is a significant catalyst for growth if natural gas prices recover. For Q4, we are anticipating a moderate slowdown due to budget exhaustion, weather and holidays, as well as a decrease in international tool sales. Because of this, we expect Q4 to be down compared with Q3 with projected revenue between $132,000,000 $142,000,000 We also anticipate that adjusted EBITDA and our adjusted EBITDA margin will be down as well. We typically see activity declines in Q4 versus Q3 with weather, seasonality and budget exhaustion. However, we view our Q3 results as repeatable in a similar rig count environment and do not see these results as an anomaly. Our team was purposeful and executed a strategy implementing sustainable cost cutting measures and winning market share with sticky customers, increasing profitability in a declining market. I am extremely proud of this team who continues to innovate and differentiate within the market through our technology and service. We will now open up the call for Q and A. Thank you. We will now be conducting a question and answer session. The first question is from wakar Syed of ATB Capital Markets. Please go ahead. Good morning. And what's leading to these market share gains in cementing specialty, but in also other businesses? So I think we sat down and devised a very specific strategy with very specific customers and looked at kind of where we were in the market and we got the whole team together and we're very, very deliberate in this approach. It yielded great results and we were specific on our KPIs and metrics and our performance and won the work. I'm very pleased with the team. I see market share gains, you can never be sure, Wakar, that they last forever, but these feel very sticky because they were 1 on very solid previous performances. And we also picked up some customers that we hadn't worked for, for a while. So incredibly pleased with the team here. Also, in wireline, we've really differentiated on remedial wireline going after some significant remedial customers there. So really bringing awesome differentiation to the wireline business. So this was a targeted strategy that we started to devise earlier on this year and you're just seeing the results of that execution in Q3 as well as a very significant cost reduction program that we looked at, mostly targeting that supply chain. So that can be through consolidation of vendors, re pricing vendors, creating efficiencies internally and how we're thinking about product use, etcetera. So you saw a 2 pronged strategy, both attacking market share on the revenue side and then also simultaneously attacking the cost structure. So we do expect that this quarter is repeatable and sustainable and I would be surprised if you didn't see a quarter like this or better coming out of the box in Q1. Great. Now in terms of international sales, they picked up in the quarter. But when you compare like the 1st three quarters of this year versus the 1st three quarters of last year, How are they tracking? Yes. I think, Wakar, we're actually I'm set to head to the Middle East next week, and we're also working on a strategy to be very deliberate in expanding that business. You probably see them a bit lower this year, but that's just, it's these are small numbers, frankly. And so I think it's just the law of small numbers more than anything. But very excited about the success of our tool there. I won't be surprised if you see incremental awards come. But again, we're going to sit down and be very deliberate about other regions that we plan to attack based on the run rate and the success of some of the tools that we've had recently. Okay. And then given the success that you've had with lowering your costs, what is still now what would you say is the run rate for EBITDA at which you can be free cash flow at least breakeven and then positive? Yes. So I think the entire team, if they were sitting here, they would say if you want to come up with a number, you're sitting around cash flow, what I'll call neutral, if you hit that. And this is all obviously give or take, Ricard, you know cash moves, but around $15,000,000 a quarter, as a team, we're pounding the ground for that. And obviously, as you know, this is a pretty depressed rig count environment. So if you do see that incremental activity pickup even just based on budget refresh next year, I think very, very achievable. We have more to come on the cost cuts, which we're excited about. So we expect increased efficiencies there. So we're just we're at the start here. Okay. But now let's assume activity does pick up. Would some of these costs come back or these are like sticky where you don't have to raise your base costs if if activity picks up? Yes. That's a great question. I think we have fundamentally improved the incremental margin on that dollar revenue. So I would say these are very sticky cost cuts that you will see going forward. Okay. And then what do you hear from your customers, especially on the natural gas side? We've seen the Appalachia rig count actually come down quite hard recently? And then what is the view of like next year, what they need to see, both from a drilling rig perspective, when activity would pick up and what would lead to activity pickup on the completion side? And between if you could differentiate between Appalachia and Haynesville a little bit as well? Sure. It's funny because obviously the EIA is projecting a gas price with a 3 handle on the front of it, which we like to see. I think our customers are also like us huge believers in the medium and long term natural gas demand. And as you know, we have on our board somebody from Microsoft who reinforces to us the need for power in those data centers. So we're all very, very comfortable with what the power demand curve looks like over the next 10 years. Specifically, up in the Northeast, I think we would all love to see something with a 3 on the front of it. Probably the Haynesville takes a little bit of a higher price, Bokar, because the temperatures and pressures are really extreme there. It's a very complicated and technical completion. So you probably need a little bit of a higher price there. I will say that the operators in the Northeast are just extraordinarily efficient. We too, as a service sector are not giving up on trying to create incremental efficiencies and provide them with new technologies just like the pincer and the frac dart that help alleviate any potential issues in the well and also save them costs. So there's going to be more efficiencies that come from the service sector. So I think again, if we could just see a 3 there, we believe that really spurs a lot of activity. I hope that answered your question. It does. Well, thank you very much and best of luck. Thank you. The next question is from John Daniel from Daniel Energy Partners. Please go ahead. Hey, good morning team. Good morning, John. I'm just curious, it's more of a theoretical question I guess, but if you went to see your very best customers who value the service quality, who value the crews, let's just say during the Q1 timeframe and said, hey, something's got to give, we need a bit more price relief here. I hate to use the term hat in hand, but just the market has been dicey. Do you think they'd work with you or do they think they'd kick you out of the office? Like what's your view there? Yes. I mean, I think we take the view of we're asking for price increases in a market where crude is wobbling to stay at a $70 price is really not where I have the team focused. It's, as one of our teammates always say, like how do you make the customer a hero? And what we need to do is reduce our costs. We need to get more efficient as you see with the pincer, take a ton of material out, obviously reduce the cost, so that we're providing them the opportunity to tell the Street that they're completing at a lower cost per lateral foot. As you know, the Street is being relentless on our customers' capital efficiency as well. And as they move into lesser acreage, their costs are naturally inflating. So our job here is to get creative on the R and D side, and then also in the back offices to figure out how to do this cheaper and faster and better. All right. Fair enough. Well, I'm going to throw one more at you. I know no formal guidance for 'twenty five, which I get, but is it your sense that you've got some assets that might come off the fence in Q1 to go back to work or is it too early? Yes, that's my sense. I sense that there is going to be some uplift here in 2025. Okay. That's all I've got. Thank you for including me. Great. Thank you. This concludes the question and answer session. I would like to turn the floor back over to Anne Fox, President and CEO, for closing comments. Thank you for your participation in the call today. I want to thank our employees, our E and P partners and our investors. Thank you.