Nine Energy Service, Inc. (NINE) Q1 2019 Earnings Call Transcript

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Nine Energy Service, Inc. (NYSE: NINE)
Q1 2019 Earnings Call
May. 10, 2019, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings and welcome to the Nine Energy Service First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) And as a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Heather Schmidt, Vice President of Investor Relations. Thank you, you may begin.

Heather Schmidt -- Vice President, Investor Relations and Marketing

Thank you. Good morning, everyone and welcome to the Nine Energy Service earnings conference call to discuss our results for the first quarter of 2019. With me today are Ann Fox, President and CEO and Clinton Roeder, CFO. We appreciate your participation.

Some of our comments today may include forward-looking statements reflecting Nine'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 first quarter press release and can be found in the Investor Relations section of our website.

I will now turn the call over to Ann Fox.

Ann G. Fox -- President and Chief Executive Officer

Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our first quarter results for 2019. The quarter was in line as what we anticipated with both revenue and adjusted EBITDA, falling at or above the midpoint of management's original guidance range. The company generated an adjusted EBITDA margin of approximately 17%, outperforming the majority of our peers in the space. Company revenue for the quarter was $229.7 million, net income was $17.3 million and adjusted EBITDA was $39.2 million. Basic earnings per share was $0.59. Adjusted net income for the quarter was $22.1 million or $0.76 per adjusted basic earnings per share, an increase of approximately 63% and 55% respectively versus the fourth quarter of 2018. Cash flow from operations was $5.9 million and ROIC for the first quarter was 13%.

Even with pricing concession realizations during the quarter, we were able to generate strong adjusted EBITDA margins, and double-digit ROIC. With a business profile more levered to completion tools, we anticipate this trend continuing and remain confident about the cash generation of the business moving forward. Reiterating our annual cash flow from operations per share target of $4 to $5. The market began to stabilize during the first quarter in conjunction with an improved commodity price backdrop, activity remains steady across the majority of our service lines with our cementing division outperforming the market, increasing activity by approximately 10% quarter-over-quarter.

We continue to gain market share in our cementing division, specifically in the Delaware and Midland Basins through the combination of highly technical slurry development and execution at the well site. Nine's market share in the Permian, defined as rigs followed was up significantly in Q1 over Q4. In March, our cementing division delivered their highest monthly revenue in the history of the company. Even more amazing is that we also had the highest on-time rate on record for the company during Q1 of over 95%.

We introduced a new trademark cement blend called CTT Trident (ph), which we successfully deployed in the Delaware Basin. This new blend is a lightweight slurry but does not utilize HGS or glass beads, but maintain strong compressive strength to ensure casing integrity. This slurry is cost-effective for the operator, while increasing efficiencies and we believe today, we are the only ones offering a slurry of this kind. The defensibility and technical barriers to entry in cementing remain strong, which has helped maintain the concentrated competitive landscape. We continue to build the infrastructure and work with customers in the mid-con for our greenfield expansion and believe the track record we have and continue to build will enable us to successfully penetrate this market. We still anticipate being up and running in the mid-con at the end of 2019.

Story continues

Pricing across service lines has stabilized and we believe the worst is behind us, as the majority of Q4 2018 pricing concessions were implemented during Q1. Demand for our products and services remain strong in Q1, with growth in activity quarter-over-quarter following what was a very busy Q4 for Nine. During Q1, we were able to grow market share of stages completed from approximately 18% in Q4 to approximately 20% in Q1. Wireline stages completed increased approximately 5% quarter-over-quarter and completion tools stages increased approximately 16%. Demand for our large diameter units remains consistent, utilization and days work have been affected mostly by pad timing and inefficiencies which decreases overall days worked. Utilization and pricing for our smaller diameter unit is down, overall, as demand for these units continues to decrease. We recorded our first full quarter of Magnum contribution and remain extremely positive on the dissolvable thesis and medium-term outlook. We are seeing strong appetites from our customers for an intervention list and more efficient isolation tool to complete their plug and perf wells.

We have successfully run and commercialized a fully dissolvable and reliable, high temperature plug and continue to focus on refining our low temperature option to ensure complete and predictable dissolution for every type of well bore. We anticipate having this ready for commercialization in 2020. We are simultaneously working on new, shorter composite and dissolvable plug designs utilizing IP from both Magnum and Nine. Our breakthrough casing flotation tool is gaining market share across the US and Canada and we increased the number of breakthrough tools sold by approximately 80% quarter-over-quarter.

The collaboration between R&D and the field have helped drive these developments and have compressed the R&D cycle, providing us a clear competitive advantage in the design and introduction of new tools. The integration of both Magnum and Frac Technology continues to progress very well. Both teams are as talented as we thought and are working well with the legacy Nine Group. We are pleased with our performance this quarter, our operational and financial results are some of the strongest among our peers and we remain focused on executing our strategy of offering customers leading-edge technology coupled with excellent service.

With that, I would like to turn the call over to Clinton to walk through segment and other detailed financial information for the quarter.

Clinton Roeder -- Senior Vice President, Chief Financial Officer

Thank you, Ann. In our Completion Solutions segment, first quarter revenue totaled $209.1 million, compared to 2018 fourth quarter revenue of $209 million. First quarter adjusted gross profit was $47.7 million compared to fourth quarter adjusted gross profit of $55.1 million. During the first quarter, we completed 1,139 cementing jobs, an increase of approximately 10% over the fourth quarter. The average blended revenue per job decreased by approximately 9%. This decrease was due to pricing concessions, as well as a lower ticket job mix during the quarter, which included an increase in the number of surface and lower revenue ticket jobs out of our North Texas facility.

Cementing revenue for the quarter was $53.3 million, which was flat quarter-over-quarter. During the quarter, we did not receive any incremental cementing spreads due to delays with the manufacturer. We anticipate receiving the last (ph) unit from 2018 CapEx during Q2. We ended Q1 with 31 units. During the first quarter, we completed 11,700 (ph) wireline stages, an increase of approximately 5% versus the fourth quarter. The average blended revenue per stage decreased by approximately 8%. Wireline pricing in the US decreased in the high-single to low double digits, but increased revenues from Canada during Q1, which includes higher stage pricing affected overall pricing movements. Wireline revenue for the quarter was $63.5 million, a decrease of approximately 4%. We received four incremental growth capital wireline units toward the back half of Q1, bringing our unit count to 59 at the end of the quarter.

In completion tools, we completed 26,193 stages, an increase of approximately 16% versus the fourth quarter. Completion tool revenue was $53.9 million, an increase of approximately 18%. During the first quarter, our coiled tubing days were decreased by approximately 9%. The average blended day rate for Q1 decreased by approximately 5%. Coiled tubing utilization during the first quarter was 59%. Coiled tubing revenue was $38.6 million, a decrease of approximately 13%. We are not adding any incremental coiled tubing units this year and have parked one of our small diameter units.

In our Production Solutions segment, first quarter revenue totaled $20.6 million compared to fourth quarter 2018 revenue of $20.5 million. Adjusted gross profit for the first quarter was $3.4 million compared to fourth quarter adjusted gross profit of $2.8 million. During the first quarter, well services had utilization of 62%, which was flat quarter-over-quarter. Total rig hours for the quarter was 46,088, which was also flat. Average revenue per rig hour during the quarter was $446, an increase of approximately 1%. During the quarter, approximately $14 million of net income was a result of the benefit of the revaluation of contingent liabilities of the earn-outs related to our two recent acquisitions of Magnum including dissolvable plug and ESAT tool cells (ph) and Frac Technology.

The initial earn-outs were determined in conjunction with the closing of these transactions in October of 2018 and also updated on 12/31/18. Changes to these initial projections are in large part due to more muted market conditions and outlook for 2019 and do not affect any full-year guidance we have provided today, including cash flow from operations per share and free cash flow margin.

The company reported selling, general and administrative expenses of $19.9 million compared to $21.2 million for the fourth quarter. This decrease was largely due to less transaction expenses and professional and legal costs. Depreciation and amortization expense in the first quarter was $18.2 million, compared to $18.2 million in the fourth quarter. During the first quarter of 2019, the company's effective tax rate was 2.6%. The effective tax rate for the quarter was primarily attributable to changes in pre-tax income and valuation allowance positions as well as tax liability in jurisdictions, where income is expected to exceed available net operating losses. During the first quarter, the company reported net cash provided by operating activities of $5.9 million, which includes a payment of approximately $12.3 million for 2018 bonuses, as well as prepaid expense related to CapEx and a one-time inventory bill as we transition from a third party vendor and shift to composite plugs assembly in-house. All of these items were anticipated in part of our full year guidance around cash flow from operations per share and free cash flow margin.

The average DSO for the quarter was approximately 62 days, which was flat quarter-over-quarter. Total capital expenditures were $23.5 million of which approximately 10% was maintenance CapEx. A large portion of the growth CapEx was ancillary items for coiled tubing, including high pressure pumps, tractors and a crane as well as items related to the greenfield expansion of our cementing division into the MidCon. The CapEx was part of our original full year CapEx guidance of $60 million to $70 million, which remains unchanged.

During the first quarter, we paid down approximately $20 million of the outstanding ABL credit facility borrowings, resulting in $15 million in outstanding revolver borrowings. As of March 31, 2019, Nine's cash and cash equivalents were $31.2 million with $129.7 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $160.9 million as of March 31, 2019.

I will now turn it back to Ann to discuss our Q2 outlook.

Ann G. Fox -- President and Chief Executive Officer

Thank you, Clinton. As I mentioned, the overall US environment and sentiment has improved following the commodity price recovery during Q1. Activity and pricing have stabilized and our customers remain consistent on their activity levels, while maintaining an unwavering focus on staying within capital budgets and returning value to shareholders.

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