Nine Energy Service, Inc. Q4 FY2024 earnings call

• In 2024, despite challenges in the oilfield service sector, the Nine team achieved many accomplishments. Rig count in the U.S. market declined, driven by depressed natural gas prices. - Implemented a two-pronged strategy including cost-cutting measures and profitable market share gains, seeing financial impacts in Q3 and Q4. - Cementing division was the largest driver of revenue and profitability gains over the last two quarters, with revenue increasing by approximately 20% from Q2 to Q4 2024. - Continued focus on technology, introducing new completion tool technologies like the Pincer hybrid frac plug and adding a frac start element to the Scorpion Plug. - Wireline team increased profitability while maintaining flat revenue. - Launched first sustainability report in 2024, TRIR declined 22% from 2023. - Implemented cost reduction and supply chain initiatives, including reduction in operating structure cost and vendor consolidation. - Announced refresh of Board of Directors, welcoming two new members Julie Peffer and Richard Burnett.

In 2024, company revenue was $554.1 million. For Q4, revenue was $141.4 million, which was in the upper end of the original guidance of $132 million to $142 million and an increase of approximately 2% quarter-over-quarter. Adjusted EBITDA for the year was $53.2 million, and in Q4, adjusted EBITDA was $14.1 million, relatively flat to Q3. Cementing division: Q4 cementing revenue was $54.8 million, an increase of approximately 7%. From Q2 to Q4 2024, cementing revenue increased by approximately 20%. Wireline team: Profitability increased throughout the year while revenue was flat, and reported the best revenue month of the year in Q4. Completion tools: Revenue was $33.3 million, an increase of approximately 6%, with 25,587 stages completed, an increase of approximately 3%. Coiled tubing: Days work decreased by approximately 16% in Q4, average blended day rate increased by approximately 11%, utilization was 44%, and revenue was $25.8 million, a decrease of approximately 7%. Cementing had a market share of approximately 19% in the regions operated, an increase of approximately 14% over Q4 2023 average.

• Anticipates Q1 revenue between $146 million and $152 million, expecting sequential increase in revenue and adjusted EBITDA compared to Q4 due to sustained market share gains and ongoing cost-cutting measures. - Anticipates total CapEx for 2025 to be $15 million to $25 million. - Believes long-term demand for natural gas will increase due to power demand from AI and rise of LNG exports, with natural gas levered operators potentially bringing back activity, and Q1 off to a good start.

• Impact of depressed natural gas prices on revenue and profitability. - Tariffs may impact supply chain costs, and service sector needs to pass through costs to upstream customers. - Intense industry competition and challenges from declining rig count.

Q: Hopefully, you can hear me okay. I got two probably easy questions. But on the dissolvable business, the plugs, do you see any difference between the basins where the adoption rates are better than others?

A: Well, surely, as we've said before, John, your hot basins are -- they just love all things dissolvable. So that certainly sets up well for us. We're talking really about the Haynesville, obviously, the Eagle Ford. Those also happen as you well know, to be natural gas well, certainly the Haynesville and loss of natural gas in the Eagle Ford. So that confluence of events is wonderful for us as you think about dissolvable plugs this year or so really happy to see that gas price be so supportive and such a nice forward strip.

Q: And then just another housekeeping reminder question for me. But when you think about the customers that are using the plugs, do you see a higher adoption rate, let's say, the larger majors? And if so, one would think that would be beneficial? But the consolidation, that would be one benefit of consolidation, if you will?

A: Well, absolutely. So as you know, they've got the acreage to really extend those laterals. They're seeing quite a bit of benefit from that. And that's really, especially, in the long portion of those laterals. Those dissolvables are really an insurance policy. So we're very excited about that. As you know, they've got robust CapEx budgets that are well planned and well thought through. So that's just an incremental driver for really a premier plug provider to have a great position in North American shale.

Q: Congrats on a great quarter. Ann, we're hearing about all these tariffs, and I don't know exactly what the final deal looks like. But do you see, based on what we know right now, do you see any impact on your input cost of operations?

A: This is such a great question, Waqar. I'm sure everybody on the call has the very same question. And I think if you're not checking your phone on an hourly basis, it's hard to keep up to date with what is and is not happening. But at the moment, if the tariffs are to stay in place, yes, there will be impacts to the supply chain. And those -- I'm sure most of the service sector plans to pass those through. And that is the plan at the moment. So -- but if the tariffs stay in place and we don't reach any negotiations with our friends to the North and South, and yes, there will be impacts that will be passed through to the customer.

Q: Where do you see the most impact? What kind of products do you see -- expect the most impact?

A: Well, I think the whole sector is probably most concerned around steel. Certainly, cement is a concern. But in steel, that touches so many different areas of the well, and the construction of the well. And it also, of course, touches [indiscernible], it touches called coiled tubing string. So a lot of different components here. And I think what's very challenging for every U.S. entity when they look into their supply chain is really to understand the impact because there's a lot of there's a lot of inputs that you can't see. So you might assemble something you might add value to it in the U.S., and all those various small components and ingredients to make these cakes. We're a very global economy, as you well know. And it's -- we're -- at the moment, we're inextricably linked. We're starting to see potentially a delinking of that. So I think many people even understanding the tariffs is still difficult to understand the impact on the supply chain until we actually get into it. So let's hope that we reach some negotiations, and we can figure out how to lessen the impact here. But regardless, the service sector will be passing this through to the upstream customers, in my opinion.

Q: Yes. Do you think the service market is tight enough to be able to pass this on?

A: I do. And I also think the service sector is lean enough in their profitability at large that that's a must with some of the level of these tariffs. So I think it's broadly, it's like a game of pass a hot potato, or musical chairs, but I will be very surprised if the service sector does not, at large, pass these through to the upstream community.

Q: Sure. Now just digging deeper into your guidance for Q1, looks to be pretty solid guidance for Q1 revenue growth. Could you maybe talk about like which business segments do you see contributing most to the growth? Is it all evenly distributed? Is it just cementing that's driving it? Could you maybe drill down deeper into the Q1 outlook?

A: Sure. Right now, of course, the primary driver of this bullish outlook for us is cement. But also -- and we heard John's question closely followed by tools, because we are going to see these hot markets that are also gas markets hopefully lift. Hopefully, you see some change in activity with these gas prices, which will be supportive. So yes. And we're also seeing a rebalancing in coils. So we're seeing very good utilization in the coil business. so far, very supportive for the coil business as well.

Q: You typically have some revenues through the course of the year from the international market. Sometimes they can be lumpy on the completion tools side. Was there anything unusual in Q4 or anything unusual you'd expect in Q1?

A: No. No, you're very right. It is lumpy. We do expect growth in the international revenue 2025 over 2024. We are expecting that.

Q: Okay. Great. And then what kind of incremental margins do you expect for this revenue growth in Q1?

A: Yes. Waqar, we're not providing margin guidance. I think it will be relatively normal incremental margins relative to what we've had in the past. In general, we are expecting a good growth in both revenue and adjusted EBITDA.

Q: And on the natural gas side, what discussions are you having? You mentioned some increases are likely to happen. Could you maybe talk about the timing when that could happen? And do you expect to see Appalachia come back first or Haynesville? Or is it going to be with over $4 gas, like in both areas, you expect some pickup and the timing of that?

A: So I do think that we'll start to see the timing of that in Q2 and beyond. And obviously, Appalachia's really works well with this price Waqar. And I suspect we see some movement also in the Haynesville. So we've had some really good initial conversations with some of our customers, which gives us a great sense of optimism. And I'll just remind you, I know we talked about it a bit in the script. But we're really dealing with a very nice forward strip price right now. And just to remind you, 2024 average nat gas price was roughly $2.19. We're talking about a massive, massive change in the gas price. So that's really quite positive. And again, what's really positive about that is there's momentum moving forward also in that gas price. So really excited about that. Very, very bullish and excited about the natural gas markets. But specifically to answer your question is, we do think we'll see a more market change in Appalachia first. But Haynesville certainly should respond to this price.

Q: Great. And then just on the bearish side, the oil prices have really slipped down to the -- between $65 and $70 now. And if they were to sustain at these levels, how do you -- what do you think happens in the Permian if prices stay at these levels?

A: Yes. I think we really love to see $65 and above crude. So let us see if it can hang there. I do think if for some reason, we tumble into the $50s, and obviously, we're going to see activity pullbacks. That's what I would expect. But I am, again, I'm hoping that we can see a floor here of $65 at least for the next couple of quarters. And as you know, a lot of our operators are relatively maintenance level programs anyhow. So I don't suspect that, that changes dramatically with what we know today. But again, that assumes some kind of threshold level around $65.

Q: Okay. So at $65 a barrel WTI, you don't think Permian activity to come down?

A: I think it also depends Waqar on what happens with tariffs, right? What happens to the cost for our operators, which is extremely challenging to predict. I will be surprised if we end up in a permanent ever-escalating situation, I'm hoping that we'll find some resolution on the tariffs. But obviously, we love to see over $70, but I think we can do just fine with over $65.