Nine Energy Service, Inc. Q1 FY2025 Earnings Call

Greetings, and welcome to Nine Energy Service's First Quarter 2025 Earnings Conference Call. All participants are in a listen-only mode, and a question and answer session will follow the formal presentation. This call is being recorded. I would now like to turn the conference over to your host, Heather Schmidt, Vice President of Strategic Development and Investor Relations.

Thank you. Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the first quarter of 2025. 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 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.

Thank you, Heather. Good morning, everyone. Thank you for joining us today to discuss our first quarter results for 2025. Revenue for the quarter was $150.5 million, which was in the upper range of our original guidance of $146 million to $152 million and an increase of approximately 6% versus Q4. We generated adjusted EBITDA of $16.5 million, an increase of approximately 17% quarter-over-quarter. Incremental adjusted EBITDA margins were approximately 26%. We had a strong quarter relative to the market as we continue to execute our strategy of market share gains and cost reductions. The U.S. land market was relatively stable in Q1, with the U.S. rig count remaining flat versus Q4. Despite this, we generated revenue growth within all of our service lines and generated incremental EBITDA margins of approximately 26%, driven in large part by increased activity from our market share gains, most specifically within cementing. Additionally, we did not have the negative impacts of holidays, weather and budget exhaustion we saw in Q4, resulting in more efficient operations and less white space, most evident in our coiled tubing division, where we increased revenue by approximately 16% quarter-over-quarter. Pricing across service lines was mostly stable in Q1 with the exception of our wireline operations in the Northeast, where we saw the impact of lower stage pricing implemented during the bidding process in 2024. As I mentioned, our total revenue grew by approximately 6% quarter-over-quarter with our cementing business increasing its revenue by approximately 4% and jobs completed by approximately 11% despite a flat rig count environment and sustained low activity levels in the Haynesville. Completion tool revenue for the quarter increased due to market share gains in the Permian Basin with our Plug offering. Our technology continues to perform very well, and we continue to be a premier completion tool provider for the U.S. and abroad. Our U.S. Wireline division increased revenue by approximately 7% quarter-over-quarter due in large part to more efficient operations in the Northeast as budgets reset and we did not have the impact of holiday shutdowns. We have seen stage price reductions in the Northeast as we repriced work for 2025 bids completed during a lower natural gas price in 2024. Coiled tubing revenue increased by approximately 16% this quarter. Utilization was significantly higher in Q1 versus Q4, driving an increase in both revenue and profitability quarter-over-quarter. I would now like to turn the call over to Guy to walk through detailed financial information.

Thank you, Ann. Before I walk through Q1 results, I want to discuss the recent refinancing of our ABL revolving credit facility. On May 1, we closed on a new asset-based revolving credit facility with White Oak Commercial Finance due November 2027. The new ABL will provide us with $125 million of commitments and a $50 million uncommitted accordion and will replace the company's previous revolving credit facility. Based on our March borrowing base and excluding one-time transaction costs, the new facility provides Nine with approximately $22 million of incremental covenant compliant liquidity through an increase in our borrowing base of approximately $14.4 million as well as lowering our fixed charge coverage ratio at trigger level by approximately $7.5 million. Additionally, the new ABL extends the previous maturity by approximately 9 months to November 2027. We estimate the new ABL will increase our annual cash interest expense by approximately $1 million. The combination of additional borrowing base availability and lower fixed charge covenant ratio trigger levels significantly increases our liquidity and financial flexibility, and we are excited about our new partnership with White Oak. A summary of the terms is contained within the company's recent filing with the SEC, and there is a supplemental presentation that can be found in the Investor Relations section of our website. As of March 31, 2025, Nine's cash and cash equivalents were $17.3 million with $36.5 million of availability under the previous revolving ABL credit facility, resulting in a total liquidity position of $53.8 million as of March 31, 2025. At March 31, we had $47 million of borrowings under the ABL credit facility. During Q1, we did not sell any shares under the ATM program. 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. Nine did not generate any excess cash flow as defined in the indenture in the most recently ended two fiscal quarters. As a result, no excess cash flow offer will be made to noteholders this month. During the first quarter, revenue totaled $150.5 million with adjusted gross profit of $28 million. During the first quarter, we completed 1,245 cementing jobs, an increase of approximately 11%. The average blended revenue per job decreased by approximately 6%. Cementing revenue for the quarter was $57.2 million, an increase of approximately 4%. During the first quarter, we completed 7,713 wireline stages, an increase of approximately 15%. The average blended revenue per stage decreased by approximately 7%. Wireline revenue for the quarter was $29.6 million, an increase of approximately 7%. For completion tools, we completed 29,057 stages, an increase of approximately 14%. Completion tool revenue was $33.9 million, an increase of approximately 2%. During the first quarter, our coiled tubing days worked increased by approximately 36% with the average blended day rate decreasing by approximately 15%. Coiled tubing revenue was $29.9 million, an increase of approximately 16%. During the first quarter, the company reported general and administrative expense of $13.3 million. Depreciation and amortization expense was $8.6 million. The company's tax provision was approximately $0.1 million for the first quarter of 2025. The provision for 2025 is the result of the company's tax position in state and non-U.S. tax jurisdictions. For the first quarter, the company reported net cash used in operating activities of $5.3 million. The average DSO for Q3 was 57.6 days. CapEx spend during Q1 was $4.3 million, and our full year CapEx budget remains unchanged at $15 million to $25 million. I will now turn it back to Ann.

Thank you, Guy. The recent decline in oil prices in conjunction with increased costs due to tariffs has created uncertainty for the energy industry and global markets. It is too early to understand the timing and totality of these impacts and what customer plans and U.S. activity levels will look like moving forward. Things can change quickly, and we are planning for every scenario. Commodity prices will impact activity levels, and our customers are currently in the process of evaluating plans. With the recent OPEC announcement, oil prices have fallen, and we are waiting to see the magnitude of operator reaction. We have seen supportive natural gas prices in Q1, but activity levels in the natural gas basins have remained flat thus far. We are optimistic about the long-term outlook for natural gas and the positive impacts it could have on Nine's earnings. Tariffs will directly impact Nine as well as the overall industry. We are most impacted by tariffs in our wireline division with our perforating guns and coiled tubing with our reels and with some of our component parts for our tools. We have already begun having pricing conversations with our customers and are simultaneously evaluating alternative sources of materials to offset some of these cost increases. In May, we began to see some activity declines as well as pricing pressure, specifically in the Permian Basin. As previously discussed, forward-looking plans are still very uncertain. But with what we know today, we anticipate both revenue and adjusted EBITDA to decline compared to Q1 and project Q2 revenue between $138 million and $148 million. This team has navigated uncertainty before, and we are prepared to pivot with market changes. We are ready to capitalize on any market growth in the natural gas-levered basins, and our diversity in geography and commodities remains an important differentiator for Nine. We will continue to focus on executing our strategy, the development of our technology, and maintaining our service quality and execution at the well site. Before we open up the call for Q&A, I wanted to mention the recent appointment of Joey Hall to the Board of Directors. As previously announced, the Board had made a strategic decision to change the composition and size of the Board. We knew it was crucial to have an upstream and industry expert on the Board, and we are confident Joey will bring deep experience and insights to the markets we serve. He most recently served as the Executive Vice President of Operations for Pioneer Natural Resources, and we are very excited to welcome him to the Board. We will now open up the call for Q&A.

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

Thank you. Good morning. Ann, my question relates to pricing pressures that you mentioned. Could you maybe provide some details around that? Which business line is being most impacted and maybe quantify some of the magnitude of the impact?

It's still quite early to quantify the extent of the pricing pressures. This situation is mainly linked to activities in West Texas, where we're experiencing some pressure in the cementing division. This is partly due to the impact of tariffs, which is not just an issue for our industry but requires discussions with customers regarding tariff effects. Additionally, we need to consider the commodity prices that our customers are dealing with. We've mostly noticed these pressures in West Texas. It's also worth mentioning that, as many of our peers and other industries have noted, it's premature for any of us to fully understand these impacts, which could be small or significant. We're awaiting announcements regarding trade agreements with the U.K. and meetings with the Chinese administration this weekend, and these factors can change rapidly. Regarding our Q2 guidance, we've had extensive discussions about what the figures should look like due to significant uncertainty for June based on pending developments. April was a very strong month for us, and if we were to base our quarter predictions solely on April's performance, we would have provided more optimistic guidance. May has also been a good month. A lot of companies are acknowledging the uncertainty on the horizon and striving for transparency without being misleading, but no one has experienced a drastic downturn yet. The potential downturn depends largely on factors from Washington and commodity price movements. We aim to present a cautious and conservative outlook.

Sure. And in the oil industry, like almost between the $62 oil price and $58 oil price may not be as huge magnitude difference. But optically for operators, it's a big difference when you have a $5 handle on commodity prices or oil prices. The current guidance that you've provided, is it more of a low 60s guidance? Or do you think it's more of a below $60 oil price, like $58, $59 oil price staying over the next three, six months?

I think it's still too early to say. The near-term oil prices are important, as is the forward market and the certainty surrounding it. We also need to consider global demand and production trends. This is just an initial take on the Q2 outlook, and we are not offering any guidance for the future. A price of $50 is significantly different from $60 or $70. It's crucial to recognize that our customers are assessing these factors in real time, determining their cash returns, production targets, and how to manage any tariffs that might remain. So, I believe it's premature for me to provide a definitive answer. I can only share the insights I have on Q2.

Sure. I appreciate that. And then you also talked about tariff-related impact on components that have a lot of steel, whether that's coiled tubing or perforating guns. What is your ability to pass those extra costs over to the customer given that the customers are getting squeezed from low oil prices as well?

Well, I think you're so well versed in all things oilfield service. And the service sector really at large does not have the capacity to absorb these tariffs. And so I think most of us will be going to our customers to absorb those tariffs. They are well understood. So unlike times in the past where you may face some organic issue relative to pricing, this is a matter that is well publicized and very transparent. So we are absolutely planning to pass those tariffs on. And I think, frankly, our customers understand that oilfield services do not have the capacity to absorb these tariffs. So we're planning to pass those on. I think that's been received, and those conversations are ongoing. Again, as you know, even this afternoon, that aluminum and steel tariff is in question with the U.K. So that's just one example. So I don't want to be too certain about anything because at any month, we could see something lifted or we could see something eased or we could see something become more difficult.

Sure. And then the natural gas markets, whether that's Haynesville or Appalachia, Northeast looks much better, the outlook there. And in your commentary, in the press release, there were some comments about relocation of equipment or refocus towards that. Could you maybe highlight that? What are you thinking along those lines?

Yes. So we right now are not planning to relocate any equipment. I do know you've heard from some of our customers. You heard from Coterra specifically that they'll focus their CapEx on the gas markets. But right now, we are not planning to relocate. As you know, we fought really hard when the average gas price last year was $2.19 to hang on to those gas footprints. We're so happy that we did because those are really nice bright spots for us right now. We do suspect, and you kind of look at where the strip pricing is for gas, it's a very happy place for our customers. So really excited about the gas markets for us going forward. But right now, we don't have a plan to reallocate any assets or equipment.

And then just final question on your international completion tool sales. Were there anything there in Q1?

I mean, yes, we had international sales there, and we're really pleased with how our multicycle barrier valve is performing. Really pleased with our outlook for the international tool sales this year, definitely a very bright spot as well. So looking forward to that. As you know, we're building a state-of-the-art completion tools facility in Texas, and that's going to have every possible test capability that will help us serve the domestic market, but really will also help us meet some really tough and stringent requirements to continue to play and expand in the international market.

Great. Well, thank you very much. I appreciate the comments.

Thank you so much, Waqar.

Our next question comes from John Daniel with Daniel Energy Partners. Please proceed with your question.

Good morning, everyone. I appreciate the opportunity to speak. Waqar asks great questions. I missed some of your opening remarks, Ann, so I apologize for that. I was wondering if you could discuss the Plug business. We're seeing an increase in testing for longer laterals, specifically 4-mile laterals in the Bakken. Looking ahead one to two years, how do you anticipate that demand will evolve? Additionally, are you experiencing similar pricing pressures for your technology offerings as you are for other products?

Good morning, John, we appreciate your questions and participation. Regarding your second question, oilfield services appear to be experiencing pricing pressure uniformly across all segments. When pricing pressure arises in this market, it seems to affect everyone. Now, addressing your first question, we are very excited about the trend of longer laterals. A few years ago, discussions about 4-mile laterals didn't generate much excitement due to their rarity, but that has changed. The complexity of completions is steadily increasing, and there is a constant emphasis on efficiency. We are pleased to see that the demand for technology related to frac plugs, which are vital for the overall effectiveness and production of these wells, will continue to rise. Our focus is on developing plugs that not only isolate each stage effectively but also dissolve quickly to facilitate efficient operations for our customers. We prioritize new innovations in frac plugs and are optimistic about the demand outlook. The increasing complexity in this field plays to our strengths in providing advanced technological solutions. We are excited about the opportunities ahead, and we believe this will significantly impact our market position. Additionally, I would like to mention that higher temperatures tend to favor dissolution, which makes the Haynesville basin a promising area for us in the coming years, which is also exciting.

Okay. And then just a quick follow-up. As international tool sales increase over time, do you see any opportunities for that to benefit your other services? Is it realistic to assume that you...

No. I'll be really clear about that. We have, at our size and scale, no interest in proliferating any, what I'll call, bricks-and-mortar heavy equipment or human assets on the ground. So we are absolutely going after that international market from a product perspective and a technology perspective. And one of our number one goals is to expand our offering for the conventional wellbore. So we're always happy to tap the unconventionals, but we're actively working on that. And we have, what we would say in Massachusetts, a wicked smart Norwegian team of engineers over in Norway working on those tools. So very excited about that. Those guys are really second to none. So it's something we don't often talk about, but they're actively working on it.

Okay, well thank you very much. And Joey is a good get. Congratulations.

Yes. He's an incredible gain. So thank you so much. We feel extremely happy to have him join our Board. Thank you.

You bet. Bye-bye.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Ann Fox for closing comments.

Thank you for your participation in the call today. I want to thank our employees, our E&P partners, and investors. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.