Greetings, and welcome to the Nine Energy Service Third Quarter 2021 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 is being recorded. It is now my pleasure to introduce your host, Heather Schmidt. Thank you. Heather, you may begin.

Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the third quarter of 2021. On the call with me today are Ann Fox, President and Chief Executive Officer; and Guy Sirkes, Chief Financial Officer. 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 third 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.

Thank you, Heather. Good morning, everyone, and thank you for joining us today to discuss our third-quarter results for 2021. The quarter was slightly lower than what we anticipated with Q3 revenue of $92.9 million, coming below management's original guidance of $95 million to $103 million but still representing an increase of 9% over Q2 2021, which outpaced both frac crew additions and U.S. completed wells, which increased between 5% and 6% quarter-over-quarter. Q3 revenue was less than anticipated due in large part to labor constraints in the Permian Basin specifically related to our wireline operations. We have spoken at great length about the labor scarcity and turnover in the oil field, especially in the most active basins like the Permian. We continue to compete with our peers for the same labor pool, driving up wages as little to no new labor is coming into the industry. Because of this, we were unable to field anticipated wireline jobs in this region starting in August and continuing through September. By the end of the quarter, we were able to fulfill the majority of our labor needs for the Permian wireline division but anticipate labor shortages will continue to be a significant challenge for Nine across business lines and for the OFS industry more broadly. We saw nominal market activity increases throughout the quarter. The EIA reported completed wells increasing approximately 6% quarter-over-quarter and U.S. new wells drilled increasing by approximately 14% over that same time period. At quarter end, there was estimated to be approximately 209 active frac crews in the U.S., which was down approximately 2% from the August average of 213. The average active frac crews increased approximately 5% quarter-over-quarter, equating to approximately 11 total new frac crews added. Even with very supportive gas prices, activity in both the Haynesville and Northeast remained steady. U.S. completions in the Northeast and Haynesville increased approximately 2% and 5%, respectively, quarter-over-quarter. We are waiting to get more visibility into how natural gas prices will impact CapEx and activity in these regions for 2022 but expect areas like the Haynesville will see supportive activity increases for next year. Despite U.S. completions only increasing 6% quarter-over-quarter, Nine's revenue increased by approximately 9% driven by a very strong quarter in our completion tool business. Pricing across service lines remains low. That said, we are continuing to implement incremental price increases of approximately 5% to 10% in both cementing and coiled tubing, which will go into effect in Q4. Within wireline, price increases remain very challenging mostly due to the large competitive landscape within this service line. We anticipate completion tool pricing will remain steady into Q4 2021. The majority of current price increases are being offset by rising labor and material costs. As I mentioned at the beginning of the call, retaining, recruiting and onboarding qualified labor remains very challenging. The industry is not attracting labor sources outside of the energy industry, which is creating a very competitive labor market and driving up wages. On top of that, our operational team is navigating COVID. Many crews are having to quarantine unexpectedly and immediately, and we are not able to fill in with excess labor. Not only do we lose revenue but we are taking on the cost of paying wages during the quarantine period and any associated medical expenses. All that said, if activity picks up, the labor market is so tight, we would anticipate price increases in 2022, but we do not anticipate any major activity spikes for the remainder of 2021 despite very supportive oil and natural gas prices. Our operational team continues to execute in the field with revenue increase across service lines between 3% and 18%. In cementing, revenue increased by approximately 8% driven by activity increases of approximately 18%. The average revenue per job was down this quarter due to job and geographic mix. But overall, we continue to increase prices in this service line. Coiled tubing revenue increased by approximately 18% quarter-over-quarter. This was driven by a mix of price and activity increases in both the Permian and Haynesville. Wireline revenue increased by approximately 3% in Q3. As I mentioned, Northeast activity remained steady, and we were not able to field previously anticipated work in the Permian due to labor shortages. Our dissolvable plug continues to perform very well. This quarter, we increased the total number of dissolvable stingers sold by 18%, significantly outperforming U.S. completions. Nine is uniquely positioned in having an extensive completion tool offering, which will require little to no capital commitment or additional labor to grow with the recovery. Additionally, the dissolvable plugs will provide a more environmentally friendly completion option that eliminates or reduces the need for drill-out services. We anticipate pricing for drill-out services will continue to rise and potentially be unavailable as activity levels increase into 2022. We still expect that dissolvable plugs will become a larger percentage of overall plugs run in the U.S. and abroad especially as our dissolvable plug continues to perform very well downhole, overall market activity increases and the labor and equipment market becomes less available and reliable. I would now like to turn the call over to Guy to walk through financial information for the quarter.

Thank you, Ann. As of September 30, 2021, Nine's cash and cash equivalents were $30 million with $55.4 million of availability under the revolving ABL credit facility, resulting in a total liquidity position of $85.4 million as of September 30, 2021. Availability under the ABL is based on accounts receivable and inventory balances. So as we build working capital in concert with licensing revenue, the ABL borrowing base should increase. This quarter, we did not repurchase any of our bonds. During the third quarter, revenue totaled $92.9 million with adjusted gross profit of $14 million, an increase of approximately 71% quarter-over-quarter. During Q3, we did have approximately $2.4 million of one-off adjustments that positively affected adjusted EBITDA, including a sales tax refund of approximately $0.9 million as well as a workers' compensation insurance refund of approximately $1.5 million. During the third quarter, we completed 758 cementing jobs, an increase of approximately 18% versus the second quarter. The average blended revenue per job decreased by approximately 8%. Cementing revenue for the quarter was $29.5 million, an increase of approximately 8% quarter-over-quarter. During the third quarter, we completed 4,793 wireline stages, an increase of approximately 3% versus the second quarter. The average blended revenue per stage was flat. Wireline revenue for the quarter was $19.2 million, an increase of approximately 3%. In completion tools, we completed 21,815 stages, which was relatively flat quarter-over-quarter. Completion tool revenue was $26.9 million, an increase of approximately 10% due mostly to a larger mix of dissolvable plugs and higher-priced tools sold this quarter. During the third quarter, our coiled tubing days worked increased by approximately 12%. The average blended day rate for Q3 increased by approximately 6%. Coiled tubing utilization was 40% with revenue of $17.1 million, an increase of approximately 18%. The Company reported general and administrative expense of $11.1 million compared to $12.2 million for the second quarter. Depreciation and amortization expense in the third quarter was $11 million compared to $11.5 million in the second quarter. The Company's tax provision for the third quarter of 2021 was approximately zero and $0.2 million year-to-date. The provision for the year is primarily attributable to state and non-U.S. income taxes. During the third quarter, the Company reported net cash used in operating activities of negative $1.8 million. The average DSO for the third quarter was approximately 58 days compared to 64.3 days in Q2 and 65.4 days year-to-date through September 30. Total capital expenditures for Q3 were $2.1 million, bringing the total CapEx spent through Q3 2021 to $4.9 million. CapEx guidance remains unchanged at $15 million to $20 million but could come in below or at the bottom of the range if we are unable to take delivery of equipment this year, which we are unable to predict. Looking ahead to Q4, our largest outflows of cash will include our senior notes interest payment of approximately $14 million, our remaining 2021 CapEx and any changes in net working capital. At the end of Q3, the ABL was undrawn. Subsequent to September 30, we have drawn approximately $10 million on our ABL credit facility. As a reminder, as revenue increases, so too will our accounts receivable and inventory, which will increase the availability of the ABL. I will now turn it back to Ann.

Thank you, Guy. During Q3, we saw only moderate activity increases and do not anticipate significant activity increases going into Q4. Operators are still focused on coming within or below their original 2021 CapEx budget, which means we will have some typical Q4 seasonality. However, we do not anticipate it will be as severe as we have seen in prior years. As I mentioned, we have implemented minor price increases during the quarter in cementing and coiled tubing, but wages and material costs are arising simultaneously, which is leading to little or no net price increases for the remainder of 2021. We are all very focused on 2022 and have begun bidding on work across all of our service lines. We are waiting for our customers to provide formalized plans to get a better understanding of activity levels. But with what we know today, we do anticipate North American CapEx increasing meaningfully year-over-year. But it is too early to provide formalized guidance on where we see the market going. We do believe supply chain constraints, especially labor, will become more severe, not lessened, into 2022. Like our peers, we have conserved cash and delayed CapEx when possible, and capital will be needed to get equipment back to work. Additionally, I do not see any near-term solution for the labor shortages we are facing. Putting more activity on a very fragile OFS industry will lead to an inability to hire and find crews as well as underperformance at the well site. This will likely provide pricing leverage back to the service providers, which could allow the industry to drive net price increases. Commodity prices are extremely supportive today and look to remain supportive into next year as OPEC and U.S. operators remain disciplined. Basins like the Permian and Haynesville will continue to be significant growth drivers for the industry and Nine. Looking into next quarter, we expect Q4 to be flat to slightly up sequentially versus Q3 with projected revenue of $92 million to $100 million. We remain optimistic looking into 2022. At Nine, we remain focused on continuing to gain market share and net price increase across service lines through our technology and well site execution. Our completion tool business will be critical as labor and equipment continue to be a bottleneck. We are well positioned with balanced exposure across basins and commodities, which will allow us to capitalize on activity increases across North America and abroad. We will now open up the call to Q&A.

Our first question comes from Waqar Syed with ATB Capital Markets.

Guy, the severance costs of around $375,000, how were they allocated between G&A and OpEx in the quarter?

Waqar, it would be mostly in OpEx, but I can come back to you off-line with a better breakdown of that.

No, that's okay as long as it's mostly from the OpEx line. That's good to know. Okay. And then in terms of revenues, you mentioned that it could be flat to up. Is the same true for EBITDA as well for Q4?

Yes. Waqar, we're not guiding adjusted EBITDA. We did provide a range of $92 million to $100 million. And I'd also remind you, we had about $2.4 million of what we view as nonrecurring items that affected adjusted EBITDA. So as you think about incrementals, I mean you can make your assumptions there, consider adjusting those one-off items and just reflect the revenue guidance or whatever revenue forecast you have.

I would also add to that, Waqar, that we are moving entry-level labor costs, so that moves kind of what I'll call up the stack. So this poaching that's going on in the oil field is creating real traction in wage increases. And we are not seeing corresponding levels of price increase to get net price that would ultimately impact our margin to the positive. That doesn't mean we don't think we get that in 2022. But as it relates specifically to Q4, I do think that will impact the margin.

Sure. Typically, what kind of delay do you experience in passing costs onto customers? Is it usually a quarter delay, or does it extend to months? How would you quantify that?

No, it's not a quarter. It shouldn't be a quarter, but it could be 30 to 45 days. When the field teams detect an issue or a problem with wage rates, they will respond immediately. That would be a day one activity. However, by the time they can push the net price through, there could be a 30- to 45-day lag. These factors are expected to negatively impact OFS margins as we strive to retain our workforce throughout 2022, especially during the important first quarter and the other quarters of 2022. It's a very dynamic environment. If you had asked me eight weeks ago if I anticipated this kind of wage inflation, I would have said no. There are numerous variables that business leaders are trying to predict, but they cannot do so accurately. Currently, without increased capital expenditures and without a higher rig count, we expect downward pressure on OFS margins for 2021.

Yes. Okay. There's still some time, but with 2023 approaching, people are concentrating on that and there are some debt payments coming due. Have you begun discussions with the lenders? What will be the strategy over the next six to eight months?

Yes, I'm going to let Guy continue with the second half of this discussion. Currently, we have a very positive outlook for 2022 and potentially even a stronger outlook for 2023. This is definitely a significant turning point. I want to remind everyone that our business generated around $10 million in EBITDA in 2016 and about $140 million in 2018. This demonstrates our operating leverage and capacity for growth is established, not a mere speculation. We are undoubtedly in a better position now compared to when we went public. Over 30% of our top line is now driven by completion tools, a substantial increase from about 3% in 2017. We are positioned very differently now—much more capital-light and labor-light, and also more environmentally friendly due to reduced capital intensity. We're very enthusiastic about the macroeconomic environment. We've increased our stage count and market share from about 5 to 7% before our IPO to over 20% of the U.S. market now, which represents significant growth. Although you may not see this reflected in our financials currently due to low OFS pricing, any eventual recovery in that pricing will have a major impact on our finances. I personally feel more optimistic about our business outlook than I have in over two years, even in challenging markets like New England. With that, I will turn it over to Guy.

Yes. Thanks, Ann. To add to that, we have a solid amount of liquidity. We do have semiannual interest payments, as you know. However, we believe the Company will continue to operate successfully, and we have no concerns in that area. We will keep running the business and are looking forward to what 2022 has to offer. If the capital markets are favorable and there are refinancing opportunities, we will definitely consider adjusting our capital structure. We are focused on this, and we just need to see how the market develops in 2020, but we are very committed to maximizing our earnings potential.

Yes. I would also just add one other driver here, Waqar. We've been talking about dissolvable plugs for a long time. When we transacted with Magnum in October '18, we forecasted for the market that we saw that North American land stages would be 35% to 50% dissolvable stages in three to five years. And if you look at 2023, I don't think we're going to be far off that forecast as it relates to percentage of dissolvables. So we're feeling extremely encouraged about that. Clearly, this ESG initiative is a major, major push. If we do see a price for carbon per metric ton, we've also obviously proven that we reduce the metric tons on each well significantly with the dissolvable plugs. So again, we've, on top of that, we have close to 60% stage efficiency per employee since 2018. So again, much more labor-light, not just capital-light. So again, very, very encouraged if the macro backdrop is there.

And you make an important point in terms of when you compare to history, you said the completion tools business is going to be a bigger piece of the business now than before. Could you maybe highlight for everybody, just remind us again, why is that important? Is it because you think the margins in completion tools are significantly better than some of the other businesses? So why do you highlight that as a key point?

I want to emphasize a crucial aspect here. In the Oilfield Services industry, when we reach a recovery point, businesses often face challenges as they need to invest heavily in capital expenditures to boost revenue and EBITDA. When we went public, our strategy was to operate with a more capital-light approach. In the completion tools sector, our capital expenditures primarily involve pickup trucks and a tin roof line, while research and development is our main expense. We have developed a highly agile and cost-effective R&D program that keeps us at the forefront of the market, not just in frac plugs but also in other tools for niche markets in the U.S., Argentina, and the Middle East. The labor costs in this area are significantly lower than in other capital-intensive sectors, making it a vital and cash-generating service line. For every $100 of EBITDA in the completion tool business, most of that translates directly into net cash growth, without the extensive deductions seen in other businesses. Additionally, the operational challenges in areas like frac, cementing, wireline, and coil are considerable. We are very excited about a product line we introduced during the COVID pandemic that has seen remarkable success, thanks to the efforts of our R&D, sales, and operations teams. I've got to say, we have one of the finest operational teams in the completion tools market. While some may treat it as a product-centric business, our wells require unique, customized solutions, which is precisely what our team provides. I firmly believe we rank among the top three in completion tools in the market. Despite having just navigated a significant downturn, our financials don’t reflect our market share gains, which are substantial and will become evident as rig counts and stage counts increase.

Our next question comes from John Daniel with Daniel Energy Partners.

Ann, first of all, congratulations on the Semper Fidelis Award. Very cool.

Oh, thank you, John.

Question, first, just kind of big picture because I'm not that smart. When you look at the traction you're getting on the dissolvable plugs, right now, is it leaning more towards sort of large-cap folks versus smaller players? I'm just curious who tends to be the early adopters.

Well, I actually think the beauty here is that we're seeing adopters from both super majors all the way down to small privates. And what we're really starting to see now, John, is increased share inside the wellbore. So for instance, where we really started seeing these used at the toe to really derisk the toe and the drill out in the toe of these long laterals, we're starting to see those dissolvables really come up the well. And as crushing and as punishing as COVID was, it forced our teams to reduce the price of that dissolvable, narrowing the gap between a dissolvable and a composite. And what that did is it gives the completion engineer a chance to have an equal AFE and yet they have much less emissions and a much smoother go of it. And I think some of these operators, as you well know, they've got very tight production guidance, right? They're spending very little capital, and they've got to answer to the market each quarter on their production. So if for some reason, coil can't show up because the capital is not there or the labor is not there and you can't get those wells online, I mean that's catastrophic, most especially considering this commodity price environment. So those operators that are choosing to use dissolvables really derisk that next year.

Once someone tests the technology and observes it in operation, what's the timeline and the process, and how likely is it that someone will decide to standardize on this, leading to a significant change in your business?

My colleagues would provide a more accurate answer, but if I had to estimate, I would say it’s typically between three to six months.

Okay. Got it. Turning to the labor market...

That, John, occurs during a time of significant decline in both rig count and completion activity. So in a strong market, how does that appear? Clearly, the timeline would be much shorter.

Okay. It just seems logical to me, like if it works, you just standardize on it, but again, I'm a simpleton. Labor markets, you touched on the Permian being awful. What degree of awful are the other markets for you right now?

The Bakken is facing significant challenges. Operators in that region will have a tough time, as we saw back in 2012 when the rig count was excessively high. Many struggled to get their wells fracked, which led them to adopt sliding sleeves, not because of improved production, but out of necessity. This approach to well completion didn't produce better results, which is why we realized it wouldn't be applicable across the U.S. The Bakken's situation is complicated further by the low population in the area, requiring labor to be imported, which isn't happening. On the other hand, the Permian has become highly competitive for talent, and the hiring ratio is quite unfavorable—we are hiring three employees for every one position filled. Additionally, if parts of the infrastructure bill are implemented, it will further strain the labor market needed by the oil field service industry.

Okay. Sounds like fun. The last one for me kind of...

Yes. I believe every leader is genuinely concerned about safety because we've pushed our teams so hard. Where we should have four, we only have three. As a result, both we and the operators will likely see that reflected in their safety records.

That's right. Sorry for taking up time on the call. You recently shared the success of your electric wireline unit in the Northeast. I'm interested in understanding the level of customer interest in the wireline technology, especially since we often hear about electric frac and emission-friendly equipment. That's all from me.

Yes. I would say when we first placed the capital, we took it in and out of the budget many times. Do we need this? Is it relevant. By the time the units were delivered and we had them, we knew we had to have them. So I would say that's been extremely dynamic where the call is strong for electric. And if you can green the whole pad, people are very keen on that. So again, as you well know, combustion might make up 30% of an operator's emissions. And the only way to reduce that carbon is for us to actually take that diesel out. And we're collecting data on this, John. But like our wireline trucks that we've refurbed, we might use 10% of the diesel that we typically use. So again, that's still a data collection. But regardless, it looks to me it's going to be significantly less. So our approach to ESG is just beginning at Nine, but it will absolutely be practical. And when I say that, I mean it's got to be profitable for us and better for the environment. And where we can find those solutions like electric wireline that are both profitable for us and cleaner, we'll do that all day long.

All right, that's all I have. Thank you for taking the question.

Thank you for your participation in the call today. We appreciate your continued support of Nine. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.