Nine Energy Service Announces Third Quarter 2022 Results

Nine Energy Service, Inc. ("Nine" or the "Company") (NYSE: NINE) reported third quarter 2022 revenues of $167.4 million, net income of $14.3 million and adjusted EBITDA of $32.6 million. For the third quarter of 2022, adjusted net income^C was $12.2 million, or $0.39 adjusted basic earnings per share^D.

The Company had provided original third quarter 2022 revenue guidance between $145.0 and $155.0 million, with actual results falling above the provided range and representing a sequential revenue increase of approximately 18% quarter over quarter.

“Q3 was a very strong quarter for Nine,” said Ann Fox, President and Chief Executive Officer, Nine Energy Service, “driven mostly by price increases across our service lines, as well as increased volumes within completion tools, which enabled us to drive strong incremental margins again this quarter.”

“De-levering the balance sheet continues to be a top priority for Nine. During Q3, we repurchased $13.0 million par value of bonds for $10.1 million of cash or 77.7% of par, leaving $307.3 million outstanding. I am extremely happy with our team’s ability to take over $90 million of debt off the balance sheet, while also maintaining strong liquidity throughout one of the most volatile environments we have faced. The Company is poised to generate free cash flow going forward and we plan to continue to reduce our financial leverage. Going forward, we believe that Nine can de-lever through a combination of growth in profitability, as well as reduction in net debt.”

“All of our service lines performed well this quarter and cementing continues to outperform the market, increasing sequential revenue by approximately 16%, versus the average U.S. rig count, which increased by approximately 7%. We continue to grow our completion tool business through both new technology and market share gains. In Q3, we increased the total number of dissolvable plugs sold by approximately 34% quarter over quarter, despite EIA reported completions remaining flat. Today, we believe we have a leading market share position within the U.S. dissolvable plug market. Along with the U.S. market, the international markets could provide growth opportunities for Nine. Our R&D team in Norway recently completed and received API-Q1 certification for our multi-cycle barrier valve for a large Middle Eastern national oil company (“NOC”). We have received approximately $10 million in purchase orders pursuant to an NOC bid process, with opportunities to obtain additional purchase orders moving forward. I am extremely proud of Nine’s R&D capabilities, which have provided new opportunities in the international markets.”

“The overall market has been volatile; however, we remain positive about Nine’s outlook into 2023 and beyond. There are and will continue to be numerous factors that will influence global supply and demand, but we believe North American shale production will be critical for global supply. We do think capital discipline for both operators and oilfield service providers will continue into 2023 keeping the market tight; however, we believe the constraints on oilfield service equipment will continue, and incremental rig activity moving forward should put upward pressure on pricing and drive net margin.”

“We do expect to see some seasonality impacts into Q4, especially as our customers remain focused on staying within capital budgets. With what we know today, we anticipate revenue to be relatively flat sequentially for Q4, with growth returning as we enter Q1 of 2023.”

“We have proven Nine’s ability to generate strong growth and earnings within the current rig environment. As we have strategically shifted more of our top line exposure to both completion tools and cementing, we are starting to see the positive impacts this will have on our free cash flow generation, which we expect to continue into 2023. While we do anticipate activity increases into 2023, we do not believe we need significant activity increases in 2023 to continue to grow both our revenue and expand our margin.”

“Nine’s geographic and service line diversity positions us well for this next cycle. We believe we have differentiation in the service lines in which we operate with a strategy towards more profitability even within a more moderated growth environment in 2023.”

Operating Results

During the third quarter of 2022, the Company reported revenues of $167.4 million, gross profit of $35.0 million and adjusted gross profit^E of $44.0 million. Gross profit increased by approximately 77% quarter over quarter, and adjusted gross profit increased by approximately 49% quarter over quarter. During the third quarter, the Company generated ROIC of 28.8%.

During the third quarter of 2022, the Company reported selling, general and administrative expense of $13.5 million. Depreciation and amortization expense in the third quarter of 2022 was $9.5 million.

The Company’s tax provision for the third quarter of 2022 was approximately $0.5 million and $0.08 million year to date. The provision for 2022 is the result of our tax position in state and non-U.S. tax jurisdictions.

Liquidity and Capital Expenditures

During the third quarter of 2022, the Company reported net cash provided by operating activities of $15.1 million. Capital expenditures totaled $4.6 million during the third quarter of 2022.

As of September 30, 2022, Nine’s cash and cash equivalents were $21.5 million, and the Company had $66.7 million of availability under the revolving credit facility, resulting in a total liquidity position of $88.2 million as of September 30, 2022. On September 30, 2022, the Company had $27.0 million of borrowings under the 2018 ABL Credit Facility. In the fourth quarter of 2022 to date, the Company borrowed an additional $5.0 million, net.

During the third quarter, the Company repurchased $13.0 million of the senior notes for a repurchase price of $10.1 million in cash. As a result, the Company recorded a $2.8 million gain on extinguishment of debt with no cash tax obligation. To date, the Company has repurchased $92.7 million of the senior notes for a repurchase price of $32.9 million in cash, leaving $307.3 million of bonds outstanding.

^ABCDESee end of press release for definitions

Conference Call Information

The call is scheduled for Monday, November 7, 2022, at 9:00 am Central Time. Participants may join the live conference call by dialing U.S. (Toll Free): (877) 524-8416 or International: (412) 902-1028 and asking for the “Nine Energy Service Earnings Call”. Participants are encouraged to dial into the conference call ten to fifteen minutes before the scheduled start time to avoid any delays entering the earnings call.

For those who cannot listen to the live call, a telephonic replay of the call will be available through November 21, 2022, and may be accessed by dialing U.S. (Toll Free): (877) 660-6853 or International: (201) 612-7415 and entering the passcode of 13732302.

About Nine Energy Service

Nine Energy Service is an oilfield services company that offers completion solutions within North America and abroad. The Company brings years of experience with a deep commitment to serving clients with smarter, customized solutions and world-class resources that drive efficiencies. Serving the global oil and gas industry, Nine continues to differentiate itself through superior service quality, wellsite execution and cutting-edge technology. Nine is headquartered in Houston, Texas with operating facilities in the Permian, Eagle Ford, SCOOP/STACK, Niobrara, Barnett, Bakken, Marcellus, Utica and Canada.

For more information on the Company, please visit Nine’s website at nineenergyservice.com.

Forward Looking Statements

The foregoing contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are those that do not state historical facts and are, therefore, inherently subject to risks and uncertainties. Forward-looking statements also include statements that refer to or are based on projections, uncertain events or assumptions. The forward-looking statements included herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Such risks and uncertainties include, among other things, the level of capital spending and well completions by the onshore oil and natural gas industry, which may be affected by geopolitical and economic developments in the U.S. and globally, including conflicts, instability, acts of war or terrorism in oil producing countries or regions, particularly Russia, the Middle East, South America and Africa, as well as actions by members of the Organization of the Petroleum Exporting Countries and other oil exporting nations, and which has been and may again be affected by the COVID-19 pandemic and related economic repercussions; general economic conditions and inflation, particularly, cost inflation with labor or materials; the adequacy of the Company’s capital resources and liquidity, including the ability to meet its debt obligations, which may including refinancing or restructuring its indebtedness by seeking additional sources of capital, selling assets, or a combination thereof; equipment and supply chain constraints; the Company’s ability to attract and retain key employees, technical personnel and other skilled and qualified workers; the Company’s ability to maintain existing prices or implement price increases on our products and services; pricing pressures, reduced sales, or reduced market share as a result of intense competition in the markets for the Company’s dissolvable plug products; conditions inherent in the oilfield services industry, such as equipment defects, liabilities arising from accidents or damage involving our fleet of trucks or other equipment, explosions and uncontrollable flows of gas or well fluids, and loss of well control; the Company’s ability to implement and commercialize new technologies, services and tools; the Company’s ability to grow its completion tool business; the Company’s ability to manage capital expenditures; the Company’s ability to accurately predict customer demand, including that of its international customers; the loss of, or interruption or delay in operations by, one or more significant customers, including certain of the Company’s customers outside of the United States; the loss of or interruption in operations of one or more key suppliers; the incurrence of significant costs and liabilities resulting from litigation; changes in laws or regulations regarding issues of health, safety and protection of the environment; and other factors described in the “Risk Factors” and “Business” sections of the Company’s most recently filed Annual Report on Form 10-K and subsequently filed Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, and, except as required by law, the Company undertakes no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments.

^AAdjusted EBITDA is defined as net income (loss) before interest, taxes, and depreciation and amortization, further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or gain on the extinguishment of debt, (v) loss or gain on the sale of subsidiaries, (vi) restructuring charges, (vii) stock-based compensation and cash award expense, (viii) loss or gain on sale of property and equipment, and (ix) other expenses or charges to exclude certain items which we believe are not reflective of ongoing performance of our business, such as legal expenses and settlement costs related to litigation outside the ordinary course of business. Management believes Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance and compare the results of our operations from period to period without regard to our financing methods or capital structure and helps identify underlying trends in our operations that could otherwise be distorted by the effect of the impairments, acquisitions and dispositions and costs that are not reflective of the ongoing performance of our business.

^BReturn on Invested Capital (“ROIC”) is defined as after-tax net operating profit (loss), divided by average total capital. We define after-tax net operating profit (loss) as net income (loss) plus (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on extinguishment of debt, and (vii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity (deficit) plus the book value of debt less balance sheet cash and cash equivalents. We compute the average of the current and prior period-end total capital for use in this analysis. Management believes ROIC provides useful information because it quantifies how well we generate operating income relative to the capital we have invested in our business and illustrates the profitability of a business or project taking into account the capital invested.

^CAdjusted Net Income (Loss) is defined as net income (loss) adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) restructuring charges, (iv) loss or gain on the sale of subsidiaries, (v) loss or gain on the extinguishment of debt and (vi) the tax impact of such adjustments. Management believes Adjusted Net Income (Loss) is useful because it allows us to more effectively evaluate our operating performance and compare the results of our operations from period to period and helps identify underlying trends in our operations that could otherwise be distorted by the effect of the impairments and acquisitions.

^DAdjusted Basic Earnings (Loss) Per Share is defined as adjusted net income (loss), divided by weighted average basic shares outstanding. Management believes Adjusted Basic Earnings (Loss) Per Share is useful because it allows us to more effectively evaluate our operating performance and compare the results of our operations from period to period and help identify underlying trends in our operations that could otherwise be distorted by the effect of the impairments and acquisitions.

^EAdjusted Gross Profit (Loss) is defined as revenues less cost of revenues excluding depreciation and amortization. This measure differs from the GAAP definition of gross profit (loss) because we do not include the impact of depreciation and amortization, which represent non-cash expenses. Our management uses adjusted gross profit (loss) to evaluate operating performance. We prepare adjusted gross profit (loss) to eliminate the impact of depreciation and amortization because we do not consider depreciation and amortization indicative of our core operating performance.

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