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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-Q
_________________________________
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED September 30, 2020
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-38347
__________________________________________________________________
Nine Energy Service, Inc.
(Exact name of registrant as specified in its charter)
__________________________________________________________________
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Delaware |
80-0759121 |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
2001 Kirby Drive, Suite 200
Houston, TX 77019
(Address of principal executive offices) (zip code)
(281) 730-5100
(Registrant’s telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the
Act: |
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, par value $0.01 per share |
NINE |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90
days. Yes x No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such
files). Yes x No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
☒ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☒ |
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Emerging growth company |
☒ |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes
☐ No x
The number of shares of the registrant’s common stock, par value
$0.01 per share, outstanding at November 2, 2020 was
31,561,578.
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking
statements that are subject to a number of risks and uncertainties,
many of which are beyond our control. All statements, other than
statements of historical fact, regarding our strategy, future
operations, financial position, estimated revenues and losses,
projected costs, prospects, plans, and objectives of management are
forward-looking statements. When used in this Quarterly Report on
Form 10-Q, the words “could,” “believe,” “anticipate,” “intend,”
“estimate,” “expect,” “may,” “continue,” “predict,” “potential,”
“project,” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking
statements contain such identifying words.
All forward-looking statements speak only as of the date of this
Quarterly Report on Form 10-Q; we disclaim any obligation to update
these statements unless required by law, and we caution you not to
place undue reliance on them. Although we believe that our plans,
intentions, and expectations reflected in or suggested by the
forward-looking statements we make in this Quarterly Report on Form
10-Q are reasonable, we can give no assurance that these plans,
intentions, or expectations will be achieved.
We disclose important factors that could cause our actual results
to differ materially from our expectations under “Risk Factors” in
Item 1A of Part I in our Annual Report on Form 10-K for the year
ended December 31, 2019 and “Risk Factors” in Item 1A of Part
II in the Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2020. These factors, some of which are beyond our
control, include the following:
•the
level of capital spending and well completions by the onshore oil
and natural gas industry;
•oil
and natural gas commodity prices;
•general
economic conditions;
•the
impact of the coronavirus pandemic on our business and the business
of our customers, including the effects of the resulting excess
supply of oil;
•geopolitical
factors, including actions by the Organization of the Petroleum
Exporting Countries (“OPEC”) and other significant oil-producing
countries and the ability of such producers to agree to and
maintain oil price and production controls;
•our
ability to employ, or maintain the employment of, a sufficient
number of key employees, technical personnel, and other skilled and
qualified workers;
•our
ability to implement price increases or maintain existing prices on
our products and services;
•pricing
pressures, reduced sales, or reduced market share as a result of
intense competition in the markets for our composite and
dissolvable plug products;
•our
ability to accurately predict customer demand;
•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;
•our
ability to implement new technologies and services;
•seasonal
and adverse weather conditions;
•our
ability to maintain compliance with the New York Stock Exchange
continued listing requirements and avoid the delisting of our
common stock;
•changes
in laws or regulations regarding issues of health, safety, and
protection of the environment, including those relating to
hydraulic fracturing, greenhouse gases, and climate change;
and
•our
ability to successfully integrate the assets and operations that we
acquired with our acquisition of Magnum Oil Tools International,
LTD and its affiliates (the “Magnum Acquisition”) and realize
anticipated revenues, cost savings, or other benefits of such
acquisition.
Additional risks or uncertainties that are not currently known to
us, that we currently deem to be immaterial, or that could apply to
any company could also materially adversely affect our business,
financial condition, or future results.
These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
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September 30,
2020 |
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December 31,
2019 |
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Assets |
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Current assets |
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Cash and cash equivalents |
$ |
80,338 |
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$ |
92,989 |
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Accounts receivable, net |
34,805 |
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96,889 |
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Income taxes receivable |
1,246 |
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660 |
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Inventories, net |
52,683 |
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60,945 |
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Prepaid expenses and other current assets |
19,526 |
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17,434 |
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Total current assets |
188,598 |
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268,917 |
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Property and equipment, net |
108,986 |
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128,604 |
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Intangible assets, net |
136,615 |
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148,991 |
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Goodwill |
— |
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296,196 |
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Other long-term assets |
4,260 |
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8,187 |
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Total assets |
$ |
438,459 |
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$ |
850,895 |
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Liabilities and Stockholders’ Equity |
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Current liabilities |
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Accounts payable |
$ |
10,022 |
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$ |
35,490 |
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Accrued expenses |
23,236 |
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24,730 |
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Current portion of long-term debt |
844 |
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|
— |
|
|
Current portion of capital lease obligations |
1,067 |
|
|
995 |
|
|
Total current liabilities |
35,169 |
|
|
61,215 |
|
|
Long-term liabilities |
|
|
|
|
Long-term debt |
343,036 |
|
|
392,059 |
|
|
Deferred income taxes |
— |
|
|
1,588 |
|
|
Long-term capital lease obligations |
1,391 |
|
|
2,201 |
|
|
Other long-term liabilities |
5,264 |
|
|
3,955 |
|
|
Total liabilities |
384,860 |
|
|
461,018 |
|
|
Commitments and contingencies (Note 10) |
|
|
|
|
Stockholders’ equity |
|
|
|
|
Common stock (120,000,000 shares authorized at $0.01 par value;
31,570,926 and 30,555,677 shares issued and outstanding at
September 30, 2020 and December 31, 2019,
respectively)
|
316 |
|
|
306 |
|
|
Additional paid-in capital |
766,402 |
|
|
758,853 |
|
|
Accumulated other comprehensive loss |
(4,731) |
|
|
(4,467) |
|
|
Accumulated deficit |
(708,388) |
|
|
(364,815) |
|
|
Total stockholders’ equity |
53,599 |
|
|
389,877 |
|
|
Total liabilities and stockholders’ equity |
$ |
438,459 |
|
|
$ |
850,895 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME (LOSS)
(In thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Revenues |
|
|
|
|
|
|
|
|
Service |
$ |
35,639 |
|
|
$ |
161,632 |
|
|
$ |
187,713 |
|
|
$ |
519,072 |
|
|
Product |
13,882 |
|
|
40,673 |
|
|
61,167 |
|
|
150,455 |
|
|
|
49,521 |
|
|
202,305 |
|
|
248,880 |
|
|
669,527 |
|
|
Cost and expenses |
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown
separately below) |
|
|
|
|
|
|
|
|
Service |
38,445 |
|
|
134,984 |
|
|
179,508 |
|
|
420,445 |
|
|
Product |
14,038 |
|
|
31,865 |
|
|
55,686 |
|
|
109,549 |
|
|
General and administrative expenses |
10,701 |
|
|
19,222 |
|
|
38,380 |
|
|
60,979 |
|
|
Depreciation |
7,763 |
|
|
12,196 |
|
|
24,753 |
|
|
39,572 |
|
|
Amortization of intangibles |
4,091 |
|
|
4,609 |
|
|
12,376 |
|
|
13,925 |
|
|
Impairment of goodwill |
— |
|
|
— |
|
|
296,196 |
|
|
— |
|
|
(Gain) loss on revaluation of contingent liabilities |
297 |
|
|
(5,771) |
|
|
781 |
|
|
(20,701) |
|
|
Loss on sale of subsidiaries |
— |
|
|
15,834 |
|
|
— |
|
|
15,834 |
|
|
Gain on sale of property and equipment |
(535) |
|
|
(466) |
|
|
(2,900) |
|
|
(799) |
|
|
Income (loss) from operations |
(25,279) |
|
|
(10,168) |
|
|
(355,900) |
|
|
30,723 |
|
|
Interest expense |
9,130 |
|
|
9,843 |
|
|
28,144 |
|
|
29,940 |
|
|
Interest income |
(43) |
|
|
(111) |
|
|
(593) |
|
|
(439) |
|
|
Gain on extinguishment of debt |
(15,798) |
|
|
— |
|
|
(37,501) |
|
|
— |
|
|
Other income |
(29) |
|
|
— |
|
|
(29) |
|
|
— |
|
|
Income (loss) before income taxes |
(18,539) |
|
|
(19,900) |
|
|
(345,921) |
|
|
1,222 |
|
|
Provision (benefit) for income taxes |
(37) |
|
|
727 |
|
|
(2,348) |
|
|
(1,548) |
|
|
Net income (loss) |
$ |
(18,502) |
|
|
$ |
(20,627) |
|
|
$ |
(343,573) |
|
|
$ |
2,770 |
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
Basic |
$ |
(0.62) |
|
|
$ |
(0.70) |
|
|
$ |
(11.56) |
|
|
$ |
0.09 |
|
|
Diluted |
$ |
(0.62) |
|
|
$ |
(0.70) |
|
|
$ |
(11.56) |
|
|
$ |
0.09 |
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
Basic |
29,849,753 |
|
|
29,361,633 |
|
|
29,708,673 |
|
|
29,288,113 |
|
|
Diluted |
29,849,753 |
|
|
29,361,633 |
|
|
29,708,673 |
|
|
29,397,636 |
|
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of $0 tax in each
period
|
$ |
132 |
|
|
$ |
(179) |
|
|
$ |
(264) |
|
|
$ |
261 |
|
|
Total other comprehensive income (loss), net of tax |
132 |
|
|
(179) |
|
|
(264) |
|
|
261 |
|
|
Total comprehensive income (loss) |
$ |
(18,370) |
|
|
$ |
(20,806) |
|
|
$ |
(343,837) |
|
|
$ |
3,031 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(In thousands, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in Capital |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Retained
Earnings
(Accumulated Deficit) |
|
Total
Stockholders’ Equity |
|
Shares |
|
Amounts |
|
|
|
|
|
Balance, June 30, 2020 |
31,652,635 |
|
|
$ |
317 |
|
|
$ |
764,382 |
|
|
$ |
(4,863) |
|
|
$ |
(689,886) |
|
|
$ |
69,950 |
|
|
Issuance of common stock under stock compensation plan, net of
forfeitures |
(80,882) |
|
|
(1) |
|
|
1 |
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation expense |
— |
|
|
— |
|
|
2,020 |
|
|
— |
|
|
— |
|
|
2,020 |
|
|
Exercise of stock options |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Vesting of restricted stock |
(827) |
|
|
— |
|
|
(1) |
|
|
— |
|
|
— |
|
|
(1) |
|
|
Other comprehensive income |
— |
|
— |
|
|
— |
|
|
132 |
|
|
— |
|
|
132 |
|
|
Net loss |
— |
|
— |
|
|
— |
|
|
— |
|
|
(18,502) |
|
|
(18,502) |
|
|
Balance, September 30, 2020 |
31,570,926 |
|
|
$ |
316 |
|
|
$ |
766,402 |
|
|
$ |
(4,731) |
|
|
$ |
(708,388) |
|
|
$ |
53,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in Capital |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Retained
Earnings
(Accumulated Deficit) |
|
Total
Stockholders’ Equity |
|
Shares |
|
Amounts |
|
|
|
|
|
Balance, June 30, 2019 |
30,683,009 |
|
|
$ |
307 |
|
|
$ |
752,072 |
|
|
$ |
(4,403) |
|
|
$ |
(123,667) |
|
|
$ |
624,309 |
|
|
Issuance of common stock under stock compensation plan, net of
forfeitures |
(98,954) |
|
|
(1) |
|
|
1 |
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation expense |
— |
|
|
— |
|
|
3,286 |
|
|
— |
|
|
— |
|
|
3,286 |
|
|
Exercise of stock options |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Vesting of restricted stock |
(1,471) |
|
|
— |
|
|
(10) |
|
|
— |
|
|
— |
|
|
(10) |
|
|
Other comprehensive loss |
— |
|
— |
|
|
— |
|
|
(179) |
|
|
— |
|
|
(179) |
|
|
Net loss |
— |
|
— |
|
|
— |
|
|
— |
|
|
(20,627) |
|
|
(20,627) |
|
|
Balance, September 30, 2019 |
30,582,584 |
|
|
$ |
306 |
|
|
$ |
755,349 |
|
|
$ |
(4,582) |
|
|
$ |
(144,294) |
|
|
$ |
606,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in Capital |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Retained
Earnings
(Accumulated Deficit) |
|
Total
Stockholders’ Equity |
|
Shares |
|
Amounts |
|
|
|
|
Balance, December 31, 2019 |
30,555,677 |
|
|
$ |
306 |
|
|
$ |
758,853 |
|
|
$ |
(4,467) |
|
|
$ |
(364,815) |
|
|
$ |
389,877 |
|
|
Issuance of common stock under stock compensation plan, net of
forfeitures |
1,164,797 |
|
|
11 |
|
|
(11) |
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation expense |
— |
|
|
— |
|
|
7,717 |
|
|
— |
|
|
— |
|
|
7,717 |
|
|
Exercise of stock options |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Vesting of restricted stock |
(149,548) |
|
|
(1) |
|
|
(157) |
|
|
— |
|
|
— |
|
|
(158) |
|
|
Other comprehensive loss |
— |
|
— |
|
|
— |
|
|
(264) |
|
|
— |
|
|
(264) |
|
|
Net loss |
— |
|
— |
|
|
— |
|
|
— |
|
|
(343,573) |
|
|
(343,573) |
|
|
Balance, September 30, 2020 |
31,570,926 |
|
|
$ |
316 |
|
|
$ |
766,402 |
|
|
$ |
(4,731) |
|
|
$ |
(708,388) |
|
|
$ |
53,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in Capital |
|
Accumulated
Other
Comprehensive
Income (Loss) |
|
Retained
Earnings
(Accumulated Deficit) |
|
Total
Stockholders’ Equity |
|
Shares |
|
Amounts |
|
|
|
|
|
Balance, December 31, 2018 |
30,163,408 |
|
|
$ |
302 |
|
|
$ |
746,428 |
|
|
$ |
(4,843) |
|
|
$ |
(147,064) |
|
|
$ |
594,823 |
|
|
Issuance of common stock under stock compensation plan, net of
forfeitures |
489,529 |
|
|
5 |
|
|
(5) |
|
|
— |
|
|
— |
|
|
— |
|
|
Stock-based compensation expense |
— |
|
|
— |
|
|
10,553 |
|
|
— |
|
|
— |
|
|
10,553 |
|
|
Exercise of stock options |
674 |
|
|
— |
|
|
15 |
|
|
— |
|
|
— |
|
|
15 |
|
|
Vesting of restricted stock |
(71,027) |
|
|
(1) |
|
|
(1,642) |
|
|
— |
|
|
— |
|
|
(1,643) |
|
|
Other comprehensive income |
— |
|
— |
|
|
— |
|
|
261 |
|
|
— |
|
|
261 |
|
|
Net income |
— |
|
— |
|
|
— |
|
|
— |
|
|
2,770 |
|
|
2,770 |
|
|
Balance, September 30, 2019 |
30,582,584 |
|
|
$ |
306 |
|
|
$ |
755,349 |
|
|
$ |
(4,582) |
|
|
$ |
(144,294) |
|
|
$ |
606,779 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
Cash flows from operating activities |
|
|
|
|
Net income (loss) |
$ |
(343,573) |
|
|
$ |
2,770 |
|
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities |
|
|
|
|
Depreciation |
24,753 |
|
|
39,572 |
|
|
Amortization of intangibles |
12,376 |
|
|
13,925 |
|
|
Amortization of deferred financing costs |
2,160 |
|
|
2,238 |
|
|
Provision for doubtful accounts |
2,121 |
|
|
236 |
|
|
Benefit for deferred income taxes |
(1,588) |
|
|
(2,876) |
|
|
Provision for inventory obsolescence |
1,919 |
|
|
4,502 |
|
|
Stock-based compensation expense |
7,717 |
|
|
10,553 |
|
|
Impairment of goodwill |
296,196 |
|
|
— |
|
|
Gain on extinguishment of debt |
(37,501) |
|
|
— |
|
|
Gain on sale of property and equipment |
(2,900) |
|
|
(799) |
|
|
(Gain) loss on revaluation of contingent liabilities |
781 |
|
|
(20,701) |
|
|
Loss on sale of subsidiaries |
— |
|
|
15,834 |
|
|
Changes in operating assets and liabilities, net of effects from
acquisitions |
|
|
|
|
Accounts receivable, net |
59,964 |
|
|
20,453 |
|
|
Inventories, net |
6,244 |
|
|
17,634 |
|
|
Prepaid expenses and other current assets |
(1,457) |
|
|
(405) |
|
|
Accounts payable and accrued expenses |
(27,073) |
|
|
(16,953) |
|
|
Income taxes receivable/payable |
(586) |
|
|
674 |
|
|
Other assets and liabilities |
5,087 |
|
|
151 |
|
|
Net cash provided by operating activities |
4,640 |
|
|
86,808 |
|
|
Cash flows from investing activities |
|
|
|
|
Acquisitions, net of cash acquired |
— |
|
|
1,020 |
|
|
Proceeds from the sale of subsidiaries |
— |
|
|
17,222 |
|
|
Proceeds from sales of property and equipment |
5,948 |
|
|
1,934 |
|
|
Proceeds from property and equipment casualty losses |
555 |
|
|
1,503 |
|
|
Proceeds from notes receivable payments |
— |
|
|
7,626 |
|
|
Purchases of property and equipment |
(7,053) |
|
|
(48,898) |
|
|
Net cash used in investing activities |
(550) |
|
|
(19,593) |
|
|
Cash flows from financing activities |
|
|
|
|
Purchases of Senior Notes |
(14,410) |
|
|
— |
|
|
Proceeds from 2018 ABL Credit Facility |
— |
|
|
10,000 |
|
|
Payments on 2018 ABL Credit Facility |
— |
|
|
(45,000) |
|
|
Payments on capital leases |
(738) |
|
|
(668) |
|
|
Payments of contingent liability |
(1,331) |
|
|
(250) |
|
|
Proceeds from exercise of stock options |
— |
|
|
15 |
|
|
Vesting of restricted stock |
(158) |
|
|
(1,643) |
|
|
Net cash used in financing activities |
(16,637) |
|
|
(37,546) |
|
|
Impact of foreign currency exchange on cash |
(104) |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
(12,651) |
|
|
29,706 |
|
|
Cash and cash equivalents |
|
|
|
|
Cash and cash equivalents beginning of year |
92,989 |
|
|
63,615 |
|
|
Cash and cash equivalents end of period |
$ |
80,338 |
|
|
$ |
93,321 |
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
Cash paid for interest |
$ |
18,901 |
|
|
$ |
19,619 |
|
|
Cash paid (refunded) for income taxes |
$ |
(482) |
|
|
$ |
649 |
|
|
Capital expenditures in accounts payable and accrued
expenses |
$ |
150 |
|
|
$ |
1,183 |
|
|
Property and equipment obtained by capital lease |
$ |
— |
|
|
$ |
1,621 |
|
|
Receivable from property and equipment sale (including
insurance) |
$ |
4,359 |
|
|
$ |
— |
|
|
Termination of contingent liability related to business
acquisition |
$ |
3,375 |
|
|
$ |
— |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
NINE ENERGY SERVICE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
1. Company and Organization
Background
Nine Energy Service, Inc. (the “Company” or “Nine”), a Delaware
corporation, is an oilfield services business that provides
services integral to the completion of unconventional wells through
a full range of tools and methodologies. The Company is
headquartered in Houston, Texas.
Risks and Uncertainties
The Company’s business depends, to a significant extent, on the
level of unconventional resource development activity and
corresponding capital spending of oil and natural gas companies.
These activity and spending levels are strongly influenced by the
current and expected oil and natural gas prices. The worldwide
coronavirus outbreak in early 2020, which was declared a pandemic
by the World Health Organization in March 2020, the uncertainty
regarding its impact, and various governmental actions taken to
mitigate its impact have resulted in an unprecedented decline in
demand for oil. In the midst of the ongoing pandemic, the
Organization of the Petroleum Exporting Countries and other oil
producing nations, including Russia, were initially unable to reach
an agreement on production levels for crude oil, at which point
Saudi Arabia and Russia initiated efforts to aggressively increase
production. The convergence of these events created the
unprecedented dual impact of a massive decline in the demand for
oil, coupled with the risk of a substantial increase in supply,
which has directly affected the Company. While the Company cannot
predict the length of time that market disruptions resulting from
the coronavirus pandemic and efforts to mitigate its effects will
continue, the ultimate impact on its business, or the pace or
extent of any subsequent recovery, the Company expects the
coronavirus pandemic and related effects to continue to have a
material adverse impact on commodity prices and its business
generally.
Historically, the Company has met its liquidity needs principally
from cash on hand, cash flow from operations and, if needed,
external borrowings. In response to the above events, the Company
has implemented certain cost-cutting measures across the
organization to continue to maintain its current liquidity
position. Based on its current forecasts, the Company believes that
cash on hand, together with cash flow from operations, and
borrowings under the 2018 ABL Credit Facility (as defined in Note 8
– Debt Obligations), should be sufficient to fund its capital
requirements for at least the next twelve months from the issuance
date of its condensed consolidated financial
statements.
2. Basis of Presentation
Condensed Consolidated Financial Information
The Condensed Consolidated Balance Sheet at December 31,
2019 and the Condensed Consolidated Statement of Stockholders’
Equity as of December 31, 2019 and 2018 are derived from
audited consolidated financial statements. In the opinion of
management, all adjustments consisting of normal recurring
adjustments necessary for the fair statement of the Company’s
financial position have been included. These condensed consolidated
financial statements include all accounts of the
Company.
These condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”) for interim financial
information. Accordingly, they do not include all of the
information and notes required by accounting principles generally
accepted in the United States of America (“GAAP”) for complete
financial statements. Therefore, these condensed consolidated
financial statements should be read in conjunction with the
Company’s audited consolidated financial statements and notes
thereto for the year ended December 31, 2019, which are
included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2019 filed with the SEC. The operating
results for interim periods are not necessarily indicative of
results that may be expected for any other interim period or for
the full year.
Principles of Consolidation
The condensed consolidated financial statements include the
accounts of Nine and its wholly owned subsidiaries. All
inter-company accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. These estimates are based on
management’s best knowledge of current events and actions that the
Company may undertake in the future. Such estimates include fair
value assumptions used in purchase accounting and in analyzing
goodwill, definite and indefinite-lived intangible assets, and
property and equipment for possible impairment, useful lives used
in depreciation and amortization expense, stock-based compensation
fair value, estimated realizable value on excess and obsolete
inventories, deferred taxes and income tax contingencies, and
losses on accounts receivable. It is at least reasonably possible
that the estimates used will change within the next
year.
Reclassifications
Certain reclassifications have been made to prior period amounts to
conform to the current period financial statement presentation.
These reclassifications relate to presenting “Revenues” and “Cost
of revenues” by product and service as separate line items in the
Company’s Condensed Consolidated Statements of Income and
Comprehensive Income (Loss).
3. New Accounting Standards
Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (the
“FASB”) issued Accounting Standards Update (“ASU”) 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework
–
Changes to the Disclosure Requirements for Fair Value
Measurement,
which eliminates, adds, and modifies certain disclosure
requirements for fair value measurements as part of its disclosure
framework project. The standard is effective for all entities for
fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The standard is required to be
applied retrospectively, except the new Level 3 disclosure
requirements are applied prospectively. The Company adopted ASU
2018-13 in the first quarter of 2020, and it had an immaterial
impact on the Company’s condensed consolidated financial
statements.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued
ASU 2016-02, Leases
(Topic 842), to
increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. The
standard, which requires the use of a modified retrospective
transition approach, includes a number of optional practical
expedients that entities may elect to apply. In July 2018, the FASB
issued a new, optional transition method that gives companies
the option to use the effective date as the date of initial
application on transition. For emerging growth entities, the
standard is effective for the fiscal years beginning after December
15, 2021 and interim periods within the fiscal years beginning
after December 15, 2022. Early adoption is allowed, and the
Company, as an emerging growth company, plans to early adopt the
standard for the fiscal years beginning after December 15, 2019 and
interim periods within the fiscal years beginning after December
15, 2020. To support the accounting and disclosure requirements
under the new standard, the Company is currently in the process of
accumulating and evaluating all the necessary information required
to properly account for its lease portfolio and developing and
implementing appropriate changes to its internal processes and
controls. Based on initial evaluation, the Company expects to
recognize a lease liability and offsetting right-of-use asset for
all of its operating leases with durations greater than twelve
months on its Condensed Consolidated Balance Sheets. The Company
will provide additional information about the expected financial
impact as it progresses through the evaluation and implementation
of the standard.
In March 2020, the FASB issued ASU 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting,
which provides optional expedients and exceptions for applying GAAP
to contract modifications and hedging relationships, subject to
meeting certain criteria, that reference London Interbank Offered
Rate (“LIBOR”) or another reference rate expected to be
discontinued. The amendments in ASU 2020-04 are effective for all
entities as of March 12, 2020 through December 31, 2022. An entity
may elect to apply the amendments for contract modifications as of
any date from the beginning of an interim period that includes or
is subsequent to March 12, 2020, or prospectively from a date
within an interim period that includes or is subsequent to March
12, 2020, up to the date that the financial statements are
available to be issued. The Company is currently evaluating the
impact of the standard on its condensed consolidated financial
statements.
In August 2018, the FASB issued ASU 2018-15,
Intangibles – Goodwill and Other – Internal-Use Software (Subtopic
350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service
Contract.
ASU 2018-15 provides additional guidance on the accounting for
costs of implementation activities performed in a cloud computing
arrangement that is a service contract. The amendments in ASU
2018-15 align the requirements for capitalizing implementation
costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs
incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal-use software license). Costs
for implementation activities in the application development stage
are capitalized depending on the nature of the costs, while costs
incurred during the preliminary project and post implementation
stages are expensed as the activities are performed. ASU 2018-15 is
effective for public businesses for fiscal years beginning after
December 15, 2019, and interim periods within those fiscal years.
As an emerging growth company, the Company is permitted, and plans,
to adopt the new standard for fiscal years beginning after December
15, 2020 and interim periods within fiscal years beginning after
December 15, 2021. The Company is currently evaluating the impact
of the standard on its condensed consolidated financial
statements.
In June 2016, the FASB
issued ASU 2016-13, Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. ASU 2016-13 requires
a financial asset (or a group of financial assets) measured at
amortized cost basis to be presented at the net amount expected to
be collected. The amendments in ASU 2016-13 replace the current
incurred loss impairment methodology in current GAAP with a
methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable
information. ASU 2016-13 is effective for SEC filers, excluding
smaller reporting companies, for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal
years. As an emerging growth company, the Company is permitted, and
plans, to adopt the new standard for the fiscal years beginning
after December 15, 2022, including interim periods within those
fiscal years. The Company is currently evaluating the impact of the
standard on its condensed consolidated financial
statements.
4. Revenue
Disaggregation of Revenue
The Company adopted Accounting Standards Codification 606 (“ASC
606”) on December 31, 2019, effective January 1, 2019, using
the modified retrospective method. Accordingly, results for the
year ended December 31, 2019 and periods thereafter are
presented in accordance with ASC 606 while prior period results,
including those presented below for the three and nine months ended
September 30, 2019, have not been adjusted and are reported under
the previous revenue recognition guidance.
Disaggregated revenue for the three and nine months ended September
30, 2020 and September 30, 2019 was as follows:
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Three Months Ended September 30, 2020 |
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Three Months Ended September 30, 2019 |
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Completion Solutions |
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Total |
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Completion Solutions |
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Production Solutions(2)
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|
Total |
|
(in thousands) |
|
(in thousands) |
|
Coiled tubing |
$ |
7,278 |
|
|
$ |
7,278 |
|
|
$ |
31,064 |
|
|
$ |
— |
|
|
$ |
31,064 |
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Cement |
15,332 |
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|
15,332 |
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|
55,799 |
|
|
— |
|
|
55,799 |
|
|
Tools |
13,882 |
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|
13,882 |
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|
40,673 |
|
|
— |
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|
40,673 |
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Wireline |
13,029 |
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|
13,029 |
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|
58,716 |
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|
— |
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|
58,716 |
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Well service |
— |
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|
— |
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|
— |
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|
16,053 |
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|
16,053 |
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Total revenues |
$ |
49,521 |
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$ |
49,521 |
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$ |
186,252 |
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$ |
16,053 |
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$ |
202,305 |
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Nine Months Ended September 30, 2020 |
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Nine Months Ended September 30, 2019 |
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Completion Solutions |
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Total |
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Completion Solutions |
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Production Solutions(2)
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|
Total |
|
(in thousands) |
|
(in thousands) |
|
Coiled tubing |
$ |
35,575 |
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|
$ |
35,575 |
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|
$ |
108,604 |
|
|
$ |
— |
|
|
$ |
108,604 |
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Cement |
84,400 |
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|
84,400 |
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|
165,799 |
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|
— |
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|
165,799 |
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Tools |
61,167 |
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|
61,167 |
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|
150,455 |
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— |
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|
150,455 |
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Wireline |
67,738 |
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|
67,738 |
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|
186,397 |
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— |
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|
186,397 |
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Well service |
— |
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— |
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|
— |
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|
58,272 |
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|
58,272 |
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Total revenues |
$ |
248,880 |
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$ |
248,880 |
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$ |
611,255 |
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$ |
58,272 |
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$ |
669,527 |
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Three Months Ended September 30, 2020 |
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Three Months Ended September 30, 2019 |
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Completion Solutions |
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Total |
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Completion Solutions |
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Production Solutions(2)
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Total |
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(in thousands) |
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(in thousands) |
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Service(1)
|
$ |
35,639 |
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$ |
35,639 |
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$ |
145,579 |
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$ |
16,053 |
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$ |
161,632 |
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Product(1)
|
13,882 |
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|
13,882 |
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|
40,673 |
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|
— |
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|
40,673 |
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Total revenues |
$ |
49,521 |
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$ |
49,521 |
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$ |
186,252 |
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$ |
16,053 |
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$ |
202,305 |
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Nine Months Ended September 30, 2020 |
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Nine Months Ended September 30, 2019 |
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Completion Solutions |
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Total |
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Completion Solutions |
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Production Solutions(2)
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Total |
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(in thousands) |
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(in thousands) |
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Service(1)
|
$ |
187,713 |
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$ |
187,713 |
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$ |
460,800 |
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$ |
58,272 |
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$ |
519,072 |
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Product(1)
|
61,167 |
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|
61,167 |
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|
150,455 |
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|
— |
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|
150,455 |
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Total revenues |
$ |
248,880 |
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|
$ |
248,880 |
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$ |
611,255 |
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$ |
58,272 |
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$ |
669,527 |
|
(1) The Company recognizes revenues from
the sales of products at a point in time and revenues from the
sales of services over time.
(2) The
Production Solutions
segment was sold to Brigade Energy Service LLC (“Brigade”) on
August 30, 2019. For additional information on the
Production Solutions
divestiture, see Note 13 – Segment Information.
Performance Obligations
At September 30, 2020 and December 31, 2019, the amount of
remaining performance obligations were immaterial.
Contract Balances
At September 30, 2020 and December 31, 2019, contract assets
and contract liabilities were immaterial.
5. Inventories
Inventories, consisting primarily of finished goods and raw
materials, are stated at the lower of cost or net realizable value.
Cost is determined on an average cost basis. The Company reviews
its inventory balances and writes down its inventory for estimated
obsolescence or excess inventory equal to the difference between
the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. The reserve
for obsolescence was $6.1 million and $5.4 million at
September 30, 2020 and December 31,
2019,
respectively.
Inventories, net as of September 30, 2020 and
December 31, 2019 were comprised of the
following:
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September 30, 2020 |
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December 31,
2019 |
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|
(in thousands) |
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Raw materials |
$ |
35,968 |
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$ |
38,823 |
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Work in progress |
93 |
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— |
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Finished goods |
22,685 |
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27,555 |
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Inventories |
58,746 |
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|
66,378 |
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Reserve for obsolescence |
(6,063) |
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|
(5,433) |
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Inventories, net |
$ |
52,683 |
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$ |
60,945 |
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6. Goodwill and Intangible Assets
Goodwill
The changes in the net carrying amount of the components of
goodwill for the nine months ended September 30, 2020 were as
follows:
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Goodwill |
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Gross Value |
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Accumulated
Impairment Loss |
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Net |
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(in thousands) |
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Balance as of December 31, 2019 |
$ |
408,732 |
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$ |
(112,536) |
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$ |
296,196 |
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Impairment |
— |
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|
(296,196) |
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|
(296,196) |
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Balance as of September 30, 2020 |
$ |
408,732 |
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$ |
(408,732) |
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$ |
— |
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Q1 2020 Goodwill Impairment
With a significant reduction in exploration and production capital
budgets and activity, primarily driven by sharp declines in global
crude oil demand and an economic recession associated with the
coronavirus pandemic, as well as, sharp declines in oil and natural
gas prices associated with international pricing and production
disputes, the outlook for expected future cash flows associated
with the Company’s reporting units decreased dramatically in the
first quarter of 2020.
Based on the above events, an indication of impairment associated
with the Company’s reporting units occurred, triggering an interim
goodwill impairment test of the Level 3 fair value of each
reporting unit under Accounting Standards Codification 350,
Intangibles - Goodwill and Other (“ASC 350”) at March 31, 2020. The
Level 3 fair value of each reporting unit was determined by using
the income approach (discounted cash flows of forecasted income)
based on the Company’s best internal projections and the likelihood
of various outcomes.
Determining fair value requires the use of estimates and
assumptions. Such estimates and assumptions include revenue growth
rates, operating profit margins, weighted average cost of capital,
terminal growth rates, future market share, the impact of new
product development, and future market conditions, among others.
The Company believes that the estimates and assumptions used in the
interim goodwill impairment test are reasonable and
appropriate.
Based on its Level 3 fair value determination in connection with
the interim goodwill impairment test under ASC 350, the Company
recorded goodwill impairment charges of $296.2 million in the first
quarter of 2020 associated with its tools, cementing, and wireline
reporting units. These charges represented a full write-off of
goodwill and were primarily attributed to the events described
above, coupled with an increased weighted average cost of capital
driven by a reduction in the Company’s stock price and the Level 2
fair value of its Senior Notes (as defined in Note 8 – Debt
Obligations).
These charges are included in the line item “Impairment of
goodwill” in the Company’s Condensed Consolidated Statements of
Income and Comprehensive Income (Loss) for the nine months ended
September 30, 2020.
Intangible Assets
The changes in the net carrying value of the components of
intangible assets for the nine months ended September 30, 2020
were as follows:
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Customer Relationships |
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Non- Compete Agreements |
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Technology |
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In-process R&D |
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Total |
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(in thousands, except weighted average amortization period
information) |
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Balance as of December 31, 2019 |
$ |
32,536 |
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$ |
1,534 |
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$ |
113,921 |
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$ |
1,000 |
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$ |
148,991 |
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Amortization expense |
(5,538) |
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|
(300) |
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|
(6,538) |
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— |
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|
(12,376) |
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Balance as of September 30, 2020 |
$ |
26,998 |
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$ |
1,234 |
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$ |
107,383 |
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$ |
1,000 |
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$ |
136,615 |
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Weighted average amortization period |
5.6 |
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3.1 |
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12.9 |
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Indefinite |
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Amortization of intangibles expense was $4.1 million and $12.4
million for the three and nine months ended September 30,
2020, respectively. Amortization of intangibles expense was $4.6
million and $13.9 million for the three and nine months ended
September 30, 2019, respectively.
Future estimated amortization of intangibles is as
follows:
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Year Ending December 31, |
(in thousands) |
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2020 |
$ |
4,091 |
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2021 |
16,116 |
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2022 |
13,463 |
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2023 |
11,516 |
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2024 |
11,183 |
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Thereafter |
79,246 |
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Total |
$ |
135,615 |
|
With a significant reduction in exploration and production capital
budgets and activity, primarily driven by sharp declines in global
crude oil demand and an economic recession associated with the
coronavirus pandemic, as well as, sharp declines in oil and natural
gas prices associated with international pricing and production
disputes, the carrying amount of long-lived assets (inclusive of
definite-lived intangible assets and property and equipment)
associated with the Company’s asset groups may not be recoverable.
As such, the Company performed an impairment assessment of
long-lived assets in its asset groups under Accounting Standards
Codification 360, Property, Plant and Equipment (“ASC 360”) at
March 31, 2020, based on its best internal projections and the
likelihood of various outcomes.
Based on its assessment, the Company determined that the estimated
future undiscounted cash flows derived from long-lived assets
associated with its asset groups exceeded the carrying amount of
long-lived assets associated with its asset groups, and no
impairment to long-lived assets was required.
No events triggered additional impairment tests under ASC 360
through September 30, 2020. However, the occurrence of future
events or deteriorating market conditions could result in
additional impairment assessments under ASC 360 subsequent to
September 30, 2020.
7. Accrued Expenses
Accrued expenses as of September 30, 2020 and
December 31, 2019 consisted of the following:
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September 30, 2020 |
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December 31, 2019 |
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(in thousands) |
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Accrued compensation and benefits |
$ |
5,519 |
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$ |
7,009 |
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Accrued interest |
12,948 |
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|
6,091 |
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Accrued bonus |
— |
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|
5,043 |
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Accrued sales tax |
303 |
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|
820 |
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Contingent liabilities |
396 |
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|
391 |
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Other accrued expenses |
4,070 |
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|
5,376 |
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Accrued expenses |
$ |
23,236 |
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$ |
24,730 |
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8. Debt Obligations
The Company’s debt obligations as of September 30, 2020 and
December 31, 2019 were as follows:
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September 30,
2020 |
|
December 31,
2019 |
|
|
(in thousands) |
|
Senior Notes |
$ |
347,168 |
|
|
$ |
400,000 |
|
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2018 ABL Credit Facility |
— |
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|
— |
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Magnum Promissory Notes |
2,250 |
|
|
— |
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Total debt before deferred financing costs |
$ |
349,418 |
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|
$ |
400,000 |
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Deferred financing costs |
(5,538) |
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|
(7,941) |
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Total debt |
$ |
343,880 |
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$ |
392,059 |
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Less: Current portion of long-term debt |
(844) |
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— |
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Long-term debt |
$ |
343,036 |
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$ |
392,059 |
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Senior Notes
Background
On October 25, 2018, the Company issued $400.0 million principal
amount of 8.750% Senior Notes due 2023 (the “Senior Notes”). The
Senior Notes were issued under an indenture, dated as of October
25, 2018 (the “Indenture”), by and among the Company, certain
subsidiaries of the Company and Wells Fargo, National Association,
as Trustee. The Senior Notes bear interest at an annual rate of
8.750% payable on May 1 and November 1 of each year, and the first
interest payment was due on May 1, 2019. The Senior Notes are
senior unsecured obligations of the Company and are fully and
unconditionally guaranteed on a senior unsecured basis by each of
the Company’s current domestic subsidiaries and by certain future
subsidiaries.
The Indenture contains covenants that limit the Company’s ability
and the ability of its restricted subsidiaries to engage in certain
activities. The Company was in compliance with the provisions of
the Indenture at September 30, 2020.
Upon an event of default, the trustee or the holders of at least
25% in aggregate principal amount of then outstanding Senior Notes
may declare the Senior Notes immediately due and payable, except
that a default resulting from certain events of bankruptcy or
insolvency with respect to the Company, any restricted subsidiary
of the Company that is a significant subsidiary or any group of
restricted subsidiaries that, taken together, would constitute a
significant subsidiary, will automatically cause all outstanding
Senior Notes to become due and payable.
Unamortized deferred financing costs associated with the Senior
Notes were $5.5 million and $7.9 million at September 30, 2020
and December 31, 2019, respectively. These costs are direct
deductions from the carrying amount of the Senior Notes and are
being amortized through interest expense through the maturity date
of the Senior Notes using the effective interest
method.
Extinguishment of Debt
The Company repurchased approximately $23.1 million and $52.8
million of Senior Notes at a repurchase price of approximately $7.0
million and $14.4 million in cash for the three and nine months
ended September 30, 2020, respectively. Deferred financing costs
associated with these transactions were $0.4 million and $0.9
million for the three and nine months ended September 30, 2020,
respectively. As a result, for the three and nine months ended
September 30, 2020, the Company recorded a $15.8 million gain and a
$37.5 million gain, respectively, on the extinguishment of debt,
which was calculated as the difference between the repurchase price
and the carrying amount of the Senior Notes partially offset by the
deferred financing costs. The gain on extinguishment of debt is
included as a separate line item in the Company’s Condensed
Consolidated Statements of Income and Comprehensive Income (Loss)
for the three and nine months ended September 30,
2020.
Subsequent to September 30, 2020, the Company repurchased an
additional $0.5 million of the Senior Notes for a repurchase
price of approximately $0.2 million in cash.
2018 ABL Credit Facility
On October 25, 2018, the Company entered into a credit agreement
dated as of October 25, 2018 (the “2018 ABL Credit Agreement”), by
and among the Company, Nine Energy Canada, Inc., JP Morgan Chase
Bank, N.A., as administrative
agent and as an issuing lender, and certain other financial
institutions party thereto as lenders and issuing lenders. The 2018
ABL Credit Agreement permits aggregate borrowings of up to $200.0
million, subject to a borrowing base, including a Canadian tranche
with a sub-limit of up to $25.0 million and a sub-limit of $50.0
million for letters of credit (the “2018 ABL Credit Facility”). The
2018 ABL Credit Facility will mature on October 25, 2023 or, if
earlier, on the date that is 180 days before the scheduled maturity
date of the Senior Notes if they have not been redeemed or
repurchased by such date.
Loans to the Company and its domestic related subsidiaries (the
“U.S. Credit Parties”) under the 2018 ABL Credit Facility may be
base rate loans or LIBOR loans; and loans to Nine Energy Canada
Inc., a corporation organized under the laws of Alberta, Canada,
and its restricted subsidiaries (the “Canadian Credit Parties”)
under the Canadian tranche may be Canadian Dollar Offered Rate
(“CDOR”) loans or Canadian prime rate loans. The applicable margin
for base rate loans and Canadian prime rate loans vary from 0.75%
to 1.25%, and the applicable margin for LIBOR loans or CDOR loans
vary from 1.75% to 2.25%, in each case depending on the Company’s
leverage ratio. In addition, a commitment fee of 0.50% per annum
will be charged on the average daily unused portion of the
revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and
negative covenants, including financial reporting requirements and
limitations on indebtedness, liens, mergers, consolidations,
liquidations and dissolutions, sales of assets, dividends and other
restricted payments, investments (including acquisitions), and
transactions with affiliates. In addition, the 2018 ABL Credit
Agreement contains a minimum fixed charge ratio covenant of 1.00 to
1.00 that is tested quarterly when the availability under the 2018
ABL Credit Facility drops below $18.75 million or a default has
occurred until the availability exceeds such threshold for 30
consecutive days and such default is no longer outstanding. The
Company was in compliance with all covenants under the 2018 ABL
Credit Agreement at September 30, 2020.
All of the obligations under the 2018 ABL Credit Facility are
secured by first priority perfected security interests (subject to
permitted liens) in substantially all of the personal property of
U.S. Credit Parties, excluding certain assets. The obligations
under the Canadian tranche are further secured by first priority
perfected security interests (subject to permitted liens) in
substantially all of the personal property of Canadian Credit
Parties, excluding certain assets. The 2018 ABL Credit Facility is
guaranteed by the U.S. Credit Parties, and the Canadian tranche is
further guaranteed by the Canadian Credit Parties and the U.S.
Credit Parties.
At September 30, 2020, the Company’s availability under the
2018 ABL Credit Facility was approximately $39.5 million, net of
outstanding letters of credit of $0.4 million.
Magnum Promissory Notes
On October 25, 2018, pursuant to the terms of a Securities Purchase
Agreement, dated October 15, 2018 (as amended on June 7, 2019, the
“Magnum Purchase Agreement”), the Company acquired all of the
equity interests of Magnum Oil Tools International, LTD, Magnum Oil
Tools GP, LLC, and Magnum Oil Tools Canada Ltd. (such entities
collectively, “Magnum”). The Magnum Purchase Agreement included the
potential for additional future payments in cash of (i) up to 60%
of net income (before interest, taxes, and certain gains or losses)
for the “E-Set” tools business in 2019 through 2026 and (ii) up to
$25.0 million based on sales of certain dissolvable plug products
in 2019 (the “Magnum Earnout”).
On June 30, 2020, pursuant to an amendment to the Magnum Purchase
Agreement to terminate the remaining Magnum Earnout and all
obligations related thereto (the “Magnum Purchase Agreement
Amendment”), the Company issued promissory notes with an aggregated
principal amount of $2.3 million (the “Magnum Promissory Notes”) to
the sellers of Magnum. The Magnum Promissory Notes bear interest at
a rate of 6.0% per annum. The principal amount of the Magnum
Promissory Notes will be paid in equal quarterly installments
beginning January 1, 2021. The entire unpaid principal amount will
be due and payable on the maturity date, which is the earlier of
October 1, 2022 and the business day after the date on which the
Company sells, transfers or otherwise disposes of the “E-Set” tools
business to an unaffiliated third party, unless such sale, transfer
or disposition is made, directly or indirectly, as part of the
sale, transfer or disposition of the Dissolvable Plugs Business or
due to the occurrence of a Change of Control Event (each as defined
in the Magnum Purchase Agreement).
For additional information regarding the termination of the Magnum
Earnout, see Note 10 – Commitments and Contingencies.
Fair Value of Debt Instruments
The estimated fair value of the Company’s debt obligations as of
September 30, 2020 and December 31, 2019 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
|
(in thousands) |
|
Senior Notes |
$ |
102,415 |
|
|
$ |
324,000 |
|
|
2018 ABL Credit Facility |
$ |
— |
|
|
$ |
— |
|
|
Magnum Promissory Notes |
$ |
2,250 |
|
|
$ |
— |
|
The fair value of the Senior Notes, 2018 ABL Credit Facility, and
the Magnum Promissory Notes is classified as Level 2 in the fair
value hierarchy. The fair value of the Senior Notes is established
based on observable inputs in less active markets. The fair value
of the 2018 ABL Credit Facility and the Magnum Promissory Notes
approximates their carrying value.
9. Related Party Transactions
The Company leases office space, yard facilities, and equipment and
purchases building maintenance services from entities owned by
David Crombie, an executive officer of the Company. Total lease
expense and building maintenance expense associated with these
entities was $0.2 million and $0.6 million for the three and nine
months ended September 30, 2020, respectively, and $0.2
million and $0.6 million for the three and nine months ended
September 30, 2019, respectively. The Company also purchased
$0.8 million and $1.3 million of equipment during the three and
nine months ended September 30, 2020, respectively, and $0.7
million and $1.3 million of equipment during the three and nine
months ended September 30, 2019, respectively, from an entity
in which Mr. Crombie is a limited partner. There were outstanding
payables due to this entity relating to equipment purchases of $0.1
million at both September 30, 2020 and December 31,
2019.
In addition, the Company leases office space in Corpus Christi and
Midland, Texas from an entity affiliated with Warren Lynn Frazier,
a beneficial owner of more than 5% of the Company’s stock. In the
third quarter of 2020, another entity affiliated with Mr. Frazier
began to sub-lease a portion of such space in Corpus Christi, Texas
from the Company. Total rental expense associated with this office
space, net of sub-leasing income, was $0.3 million and $1.0 million
for the three and nine months ended September 30, 2020,
respectively, and $0.4 million and $1.1 million for the three and
nine months ended September 30, 2019, respectively. There were
net outstanding payables due to the entity of $0.1 million at
September 30, 2020. Additionally, on June 30, 2020, the
Company issued the Magnum Promissory Notes to the sellers of
Magnum, including Mr. Frazier. At September 30, 2020, the
outstanding principal balance payable to Mr. Frazier was $2.1
million. For additional information regarding the Magnum
Promissory Notes, see Note 8 – Debt Obligations.
The Company purchases cable for its wireline trucks from an entity
owned by Forum Energy Technologies (“Forum”). Two of the Company’s
directors serve as directors of Forum. The Company was billed $0.0
million and $0.4 million for the three and nine months ended
September 30, 2020, respectively, and $0.6 million and $1.5
million for the three and nine months ended September 30,
2019, respectively. There were outstanding payables due to the
entity of $0.3 million at December 31, 2019. The Company purchases
coiled tubing string from another entity owned by Forum. The
Company was billed $0.9 million and $3.0 million for coiled tubing
string for the three and nine months ended September 30, 2020,
respectively, and $2.0 million and $6.2 million for the three and
nine months ended September 30, 2019, respectively. There were
outstanding payables due to the entity of $0.2 million and $0.9
million at September 30, 2020 and December 31, 2019,
respectively.
The Company purchases chemical additives used in cementing from
Select Energy Services, Inc. (“Select”). One of the Company’s
directors also serves as a director of Select. The Company was
billed $0.2 million and $1.0 million for the three and nine months
ended September 30, 2020, respectively, and $0.5 million and
$1.6 million for the three and nine months ended September 30,
2019, respectively. There were outstanding payables due to Select
of $0.1 million at both September 30, 2020 and December 31,
2019.
The Company provides products and rentals to National Energy
Reunited Corp. (“NESR”), where one of the Company’s directors
serves as a director. The Company billed NESR $0.2 million and $1.4
million for the three and nine months ended September 30,
2020, respectively, and issued credit memos of $0.5 million
for both the three and nine months ended September 30, 2020. The
Company billed NESR $0.6 million for both the three and nine months
ended September 30, 2019. During the fourth quarter of 2019,
the Company sold coiled tubing equipment for $5.9 million to NESR
with payments due in 24 monthly equal installments beginning on
January 31, 2020. Total outstanding receivables due to the Company
from NESR (inclusive of the equipment sale above) were $4.4 million
and $6.8 million at September 30, 2020 and December 31, 2019,
respectively.
On June 5, 2019, Ann G. Fox, President and Chief Executive Officer
and a director of the Company, was elected as a director of Devon
Energy Corporation (“Devon”). The Company generated revenue from
Devon of $1.2 million and $4.6 million for the three and nine
months ended September 30, 2020, respectively, and $5.4
million and $15.8 million for the three and nine months ended
September 30, 2019, respectively. There were outstanding
receivables due from Devon of $0.4 million and $1.0 million at
September 30, 2020 and December 31, 2019,
respectively.
10. Commitments and Contingencies
Litigation
From time to time, the Company has various claims, lawsuits, and
administrative proceedings that are pending or threatened with
respect to personal injury, workers’ compensation, contractual
matters, and other matters. Although no assurance can be given with
respect to the outcome of these claims, lawsuits, or proceedings or
the effect such outcomes may have, the Company believes any
ultimate liability resulting from the outcome of such claims,
lawsuits, or administrative proceedings, to the extent not
otherwise provided for or covered by insurance, will not have a
material adverse effect on its business, operating results, or
financial condition.
Self-insurance
The Company uses a combination of third-party insurance and
self-insurance for health insurance claims. The self-insured
liability represents an estimate of the undiscounted ultimate cost
of uninsured claims incurred as of the balance sheet date. The
estimate is based on an analysis of trailing months of incurred
medical claims to project the amount of incurred but not reported
claims liability. The estimated liability for self-insured medical
claims was $1.5 million and $1.8 million at September 30, 2020
and December 31, 2019, respectively, and is included under the
caption “Accrued expenses” in the Company’s Condensed Consolidated
Balance Sheets.
Although the Company does not expect the amounts ultimately paid to
differ significantly from the estimates, the self-insurance
liability could be affected if future claims experience differs
significantly from historical trends and actuarial
assumptions.
Contingent Liabilities
The Company has recorded the following contingent liabilities at
September 30, 2020:
Magnum Earnout
The Magnum Purchase Agreement included the potential for additional
future payments in cash of (i) up to 60% of net income (before
interest, taxes, and certain gains or losses) for the “E-Set” tools
business in 2019 through 2026 and (ii) up to $25.0 million based on
sales of certain dissolvable plug products in 2019.
In 2019, the Company did not meet the sales requirement of certain
dissolvable plug products during the year.
Pursuant to the Magnum Purchase Agreement Amendment, which
terminated the remaining Magnum Earnout and all obligations related
thereto, the Company made a cash payment of $1.1 million and issued
the Magnum Promissory Notes with an aggregated principal amount of
$2.3 million to the sellers of Magnum. For additional information
regarding the Magnum Promissory Notes, see Note 8 – Debt
Obligations.
Frac Tech Earnout
On October 1, 2018, pursuant to the terms and conditions of a
Securities Purchase Agreement (the “Frac Tech Purchase Agreement”),
the Company acquired Frac Technology AS, a Norwegian private
limited company (“Frac Tech”) focused on the development of
downhole technology, including a casing flotation tool and a number
of patented downhole completion tools. The Frac Tech Purchase
Agreement includes, among other things, the potential for
additional future payments, based on certain Frac Tech sales volume
metrics through December 31, 2023.
The changes in the components of contingent liabilities for the
nine months ended September 30, 2020 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magnum |
|
Frac Tech |
|
Total |
|
(in thousands) |
|
Balance at December 31, 2019 |
$ |
2,609 |
|
|
$ |
1,359 |
|
|
$ |
3,968 |
|
|
Revaluation adjustments |
766 |
|
|
15 |
|
|
781 |
|
|
Payments |
— |
|
|
(206) |
|
|
(206) |
|
|
Termination |
(3,375) |
|
|
— |
|
|
(3,375) |
|
|
Balance at September 30, 2020 |
$ |
— |
|
|
$ |
1,168 |
|
|
$ |
1,168 |
|
The contingent consideration related to the contingent liabilities
is reported at fair value, based on a Monte Carlo simulation
model. Significant inputs used in the fair value measurement
include estimated gross margin related to forecasted sales of the
plugs, term of the agreement, and a risk adjusted discount
factor. Contingent liabilities include $0.4 million reported
in “Accrued expenses” at both September 30, 2020 and
December 31, 2019, and $0.8 million and $3.6 million reported
in “Other long-term liabilities” at September 30, 2020 and
December 31, 2019, respectively, in the Company’s Condensed
Consolidated Balance Sheets. The impact of the revaluation
adjustments is included in the Company’s Condensed Consolidated
Statements of Income and Comprehensive Income (Loss).
11. Taxes
Income tax expense (benefit) included in the Company’s Condensed
Consolidated Statements of Income and Comprehensive Income (Loss)
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
(in thousands, except percentages) |
|
(in thousands, except percentages) |
|
Income tax provision (benefit) |
$ |
(37) |
|
|
$ |
727 |
|
|
$ |
(2,348) |
|
|
$ |
(1,548) |
|
|
Effective tax rate |
0.2 |
% |
|
(3.7) |
% |
|
0.7 |
% |
|
(126.7) |
% |
The Company’s tax benefit for the three and nine months ended
September 30, 2020 was less than $0.1 million and $2.3
million, respectively. The Company’s year-to-date tax benefit was
primarily a result of the discrete tax benefit recorded in the
first quarter of 2020 related to the Coronavirus Aid, Relief,
and Economic Security Act as well as the release of valuation
allowance due to the goodwill impairment which was also recorded in
the first quarter of 2020.
12. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share is based on the
weighted average number of shares outstanding during each period
and the exercise of potentially dilutive stock options assumed to
be purchased from the proceeds using the average market price of
the Company’s stock for each of the periods presented as well as
the potentially dilutive restricted stock, restricted stock units,
and performance stock units.
Basic and diluted earnings (loss) per common share was computed as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2020 |
|
Three Months Ended September 30, 2019 |
|
Net Loss |
|
Average Shares Outstanding |
|
Loss Per Share |
|
Net Loss |
|
Average Shares Outstanding |
|
Loss Per Share |
|
(in thousands, except share and per share amounts) |
|
Basic |
$ |
(18,502) |
|
|
29,849,753 |
|
|
$ |
(0.62) |
|
|
$ |
(20,627) |
|
|
29,361,633 |
|
|
$ |
(0.70) |
|
|
Assumed exercise of stock options |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Unvested restricted stock and stock units |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Diluted |
$ |
(18,502) |
|
|
29,849,753 |
|
|
$ |
(0.62) |
|
|
$ |
(20,627) |
|
|
29,361,633 |
|
|
$ |
(0.70) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2020 |
|
Nine Months Ended September 30, 2019 |
|
Net Loss |
|
Average Shares Outstanding |
|
Loss Per Share |
|
Net Income |
|
Average Shares Outstanding |
|
Earnings Per Share |
|
(in thousands, except share and per share amounts) |
|
Basic |
$ |
(343,573) |
|
|
29,708,673 |
|
|
$ |
(11.56) |
|
|
$ |
2,770 |
|
|
29,288,113 |
|
|
$ |
0.09 |
|
|
Assumed exercise of stock options |
— |
|
— |
|
|
— |
|
|
— |
|
— |
|
|
— |
|
|
Unvested restricted stock and stock units |
— |
|
— |
|
|
— |
|
|
— |
|
109,523 |
|
|
— |
|
|
Diluted |
$ |
(343,573) |
|
|
29,708,673 |
|
|
$ |
(11.56) |
|
|
$ |
2,770 |
|
|
29,397,636 |
|
|
$ |
0.09 |
|
For the three and nine months ended September 30, 2020 as well
as the three months ended September 30, 2019, the computation of
diluted earnings (loss) per share excluded all stock options,
unvested restricted stock, unvested restricted stock units, and
unvested performance stock units because their inclusion would be
anti-dilutive given the Company was in a net loss position. The
average number of securities that were excluded from diluted
earnings (loss) per share that would potentially dilute earnings
(loss) per share for the periods in which the Company experienced a
net loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Three months ended September 30, |
723,608 |
|
71,574 |
|
Nine months ended September 30, |
700,417 |
|
— |
13. Segment Information
On August 30, 2019, the Company entered into a Membership Interest
Purchase Agreement (the “Production
Solutions
Purchase Agreement”) with Brigade. Pursuant to the
Production Solutions
Purchase Agreement, on such date, through the sale of all of the
limited liability interests of its wholly owned subsidiary, Beckman
Holding Production Services, LLC, the Company sold its
Production Solutions
segment to Brigade. The
Production Solutions
Purchase Agreement contained customary representations and
warranties, covenants, and indemnification provisions. This
divestiture did not qualify as discontinued operations in
accordance with ASU 2014-08,
Presentation of Financial Statements (Topic 205) and Property,
Plant, and Equipment (Topic 360): Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity
as it did not represent a strategic shift that had a major effect
on the Company’s operations and financial results.
Prior to August 30, 2019, the Company reported its results in two
segments, the
Completions Solutions
segment and the
Production Solutions
segment. As a result of the Company’s sale of its
Production Solutions
segment, the Company considers the
Completion Solutions
segment to be its operating and reporting segment. This
segmentation is representative of the manner in which the Chief
Operating Decision Maker (“CODM”) and its Board of Directors view
the business in allocating resources and measuring financial
performance. The Company considers the CODM to be its Chief
Executive Officer.
The amounts labeled “Corporate” relate to assets not allocated to
either the
Completion Solutions
segment or the
Production Solutions
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
(in thousands) |
|
(in thousands) |
|
Revenues |
|
|
|
|
|
|
|
|
Completion Solutions |
$ |
49,521 |
|
|
$ |
186,252 |
|
|
$ |
248,880 |
|
|
$ |
611,255 |
|
|
Production Solutions |
— |
|
|
16,053 |
|
|
— |
|
|
58,272 |
|
|
|
$ |
49,521 |
|
|
$ |
202,305 |
|
|
$ |
248,880 |
|
|
$ |
669,527 |
|
|
Cost of revenues (exclusive of depreciation and amortization shown
separately below) |
|
|
|
|
|
|
|
|
Completion Solutions |
$ |
52,483 |
|
|
$ |
152,679 |
|
|
$ |
235,194 |
|
|
$ |
480,140 |
|
|
Production Solutions |
— |
|
|
14,170 |
|
|
— |
|
|
49,854 |
|
|
|
$ |
52,483 |
|
|
$ |
166,849 |
|
|
$ |
235,194 |
|
|
$ |
529,994 |
|
|
Adjusted gross profit (loss) |
|
|
|
|
|
|
|
|
Completion Solutions |
$ |
(2,962) |
|
|
$ |
33,573 |
|
|
$ |
13,686 |
|
|
$ |
131,115 |
|
|
Production Solutions |
— |
|
|
1,883 |
|
|
— |
|
|
8,418 |
|
|
|
$ |
(2,962) |
|
|
$ |
35,456 |
|
|
$ |
13,686 |
|
|
$ |
139,533 |
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
10,701 |
|
|
19,222 |
|
|
38,380 |
|
|
60,979 |
|
|
Depreciation |
7,763 |
|
|
12,196 |
|
|
24,753 |
|
|
39,572 |
|
|
Amortization of intangibles |
4,091 |
|
|
4,609 |
|
|
12,376 |
|
|
13,925 |
|
|
Impairment of goodwill |
— |
|
|
— |
|
|
296,196 |
|
|
— |
|
|
(Gain) loss on revaluation of contingent liabilities |
297 |
|
|
(5,771) |
|
|
781 |
|
|
(20,701) |
|
|
Loss on sale of subsidiaries |
— |
|
|
15,834 |
|
|
— |
|
|
15,834 |
|
|
Gain on sale of property and equipment |
(535) |
|
|
(466) |
|
|
(2,900) |
|
|
(799) |
|
|
Income (loss) from operations |
$ |
(25,279) |
|
|
$ |
(10,168) |
|
|
$ |
(355,900) |
|
|
$ |
30,723 |
|
|
Non-operating (income) expenses |
(6,740) |
|
|
9,732 |
|
|
(9,979) |
|
|
29,501 |
|
|
Income (loss) before income taxes |
(18,539) |
|
|
(19,900) |
|
|
(345,921) |
|
|
1,222 |
|
|
Provision (benefit) for income taxes |
(37) |
|
|
727 |
|
|
(2,348) |
|
|
(1,548) |
|
|
Net income (loss) |
$ |
(18,502) |
|
|
$ |
(20,627) |
|
|
$ |
(343,573) |
|
|
$ |
2,770 |
|
Capital expenditures by segment for the three and nine months ended
September 30, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
(in thousands) |
|
(in thousands) |
|
Completion Solutions |
$ |
2,193 |
|
|
$ |
9,146 |
|
|
$ |
7,193 |
|
|
$ |
44,343 |
|
|
Production Solutions |
— |
|
|
804 |
|
|
— |
|
|
2,790 |
|
|
Corporate |
— |
|
|
— |
|
|
— |
|
|
93 |
|
|
|
$ |
2,193 |
|
|
$ |
9,950 |
|
|
$ |
7,193 |
|
|
$ |
47,226 |
|
Total assets by segment as of September 30, 2020 and
December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020 |
|
December 31, 2019 |
|
(in thousands) |
|
Completion Solutions |
$ |
342,182 |
|
|
$ |
739,142 |
|
|
Corporate |
96,277 |
|
|
111,753 |
|
|
|
$ |
438,459 |
|
|
$ |
850,895 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements
for the three and nine months ended September 30, 2020,
included in Item 1 of Part I of this Quarterly Report on Form 10-Q
and the consolidated financial statements and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” including “Critical Accounting Policies,” included in
our Annual Report on Form 10-K for the year ended
December 31, 2019.
This section contains forward-looking statements based on our
current expectations, estimates, and projections about our
operations and the industry in which we operate. Our actual results
may differ materially from those discussed in any forward-looking
statement because of various risks and uncertainties, including
those described in the sections titled “Cautionary Note Regarding
Forward-Looking Statements” in this Quarterly Report on Form 10-Q,
“Risk Factors” in our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2020, and “Risk Factors” in
Item 1A of Part I of our Annual Report on Form 10-K for the
year ended December 31, 2019.
OVERVIEW
Company Description
Nine Energy Service, Inc. (either individually or together with its
subsidiaries, as the context requires, the “Company,” “Nine” “we,”
“us,” and “our”) is a leading North American onshore completion
services provider that targets unconventional oil and gas resource
development. We partner with our exploration and production
(“E&P”) customers across all major onshore basins in both the
United States and Canada as well as abroad to design and deploy
downhole solutions and technology to prepare horizontal, multistage
wells for production. We focus on providing our customers with
cost-effective and comprehensive completion solutions designed to
maximize their production levels and operating efficiencies. We
believe our success is a product of our culture, which is driven by
our intense focus on performance and wellsite execution as well as
our commitment to forward-leaning technologies that aid us in the
development of smarter, customized applications that drive
efficiencies.
Business Segments
The
Completion Solutions
segment provides services integral to the completion of
unconventional wells through a full range of tools and
methodologies. Through the
Completion Solutions
segment, we provide (i) cementing services, which consist of
blending high-grade cement and water with various solid and liquid
additives to create a cement slurry that is pumped between the
casing and the wellbore of the well, (ii) an innovative portfolio
of completion tools, including those that provide pinpoint frac
sleeve system technologies as well as a portfolio of completion
technologies used for completing the toe stage of a horizontal well
and fully-composite, dissolvable, and extended range frac plugs to
isolate stages during plug and perf operations, (iii) wireline
services, the majority of which consist of plug-and-perf
completions, which is a multistage well completion technique for
cased-hole wells that consists of deploying perforating guns to a
specified depth, and (iv) coiled tubing services, which perform
wellbore intervention operations utilizing a continuous steel pipe
that is transported to the wellsite wound on a large spool in
lengths of up to 30,000 feet and which provides a cost-effective
solution for well work due to the ability to deploy efficiently and
safely into a live well.
On August 30, 2019, we entered into a Membership Interest Purchase
Agreement (“Production
Solutions
Purchase Agreement”) with Brigade Energy Services LLC (“Brigade”).
Pursuant to the
Production Solutions
Purchase Agreement, on such date, through the sale of all of the
limited liability interests of our wholly owned subsidiary, Beckman
Holding Production Services, LLC, we sold our
Production Solutions
segment to Brigade.
For additional information on this divestiture, see Note 13 –
Segment Information included in Item 1 of Part I of this Quarterly
Report on Form 10-Q. Prior to August 30, 2019, we reported our
results in two segments, the
Completions Solutions
segment and the
Production Solutions
segment.
The
Production Solutions
segment provided a range of production enhancement and well
workover services that were performed with a well servicing rig and
ancillary equipment. Our well servicing business encompassed a full
range of services performed with a mobile well servicing rig (or
workover rig) and ancillary equipment throughout a well’s life
cycle from completion to ultimate plug and abandonment. Our rigs
and personnel installed and removed downhole equipment and
eliminated obstructions in the well to facilitate the flow of oil
and natural gas.
How We Generate Revenue and the Costs of Conducting Our
Business
We generate our revenues by providing completion services to
E&P customers across all major onshore basins in
both
the United States and Canada as well as abroad. We primarily earn
our revenues pursuant to work orders entered into with our
customers on a job-by-job basis. We typically will enter into a
Master Service Agreement (“MSA”) with each customer that provides a
framework of general terms and conditions of our services that will
govern any future transactions or jobs awarded to us. Each specific
job is obtained through competitive bidding or as a result of
negotiations with customers. The rate we charge is determined by
location, complexity of the job, operating conditions, duration of
the contract, and market conditions. In addition to MSAs, we have
entered into a select number of longer-term contracts with certain
customers relating to our wireline and cementing services, and we
may enter into similar contracts from time to time to the extent
beneficial to the operation of our business. These longer-term
contracts address pricing and other details concerning our
services, but each job is performed on a standalone
basis.
The principal expenses involved in conducting our business include
labor costs, materials and freight, the costs of maintaining our
equipment, and fuel costs. Our direct labor costs vary with the
amount of equipment deployed and the utilization of that equipment.
Another key component of labor costs relates to the ongoing
training of our field service employees, which improves safety
rates and reduces employee attrition.
How We Evaluate Our Operations
We evaluate our performance based on a number of financial and
non-financial measures, including the following:
•Revenue: We
compare actual revenue achieved each month to the most recent
projection for that month and to the annual plan for the month
established at the beginning of the year. We monitor our revenue to
analyze trends in the performance of our operations compared to
historical revenue drivers or market metrics. We are particularly
interested in identifying positive or negative trends and
investigating to understand the root causes.
•Adjusted
Gross Profit (Loss):
Adjusted gross profit (loss) is a key metric that we use to
evaluate operating performance. We define adjusted gross profit
(loss) as revenues less direct and indirect costs of revenues
(excluding depreciation and amortization). Costs of revenues
include direct and indirect labor costs, costs of materials,
maintenance of equipment, fuel and transportation freight costs,
contract services, crew cost, and other miscellaneous expenses. For
additional information, see “Non-GAAP Financial Measures”
below.
•Adjusted
EBITDA:
We define Adjusted EBITDA as net income (loss) before interest,
taxes, and depreciation and amortization, further adjusted for (i)
property and equipment, goodwill, and/or intangible asset
impairment charges, (ii) transaction and integration costs related
to acquisitions, (iii) loss or gain on revaluation of contingent
liabilities, (iv) gain on extinguishment of debt, (v) loss or gain
on the sale of subsidiaries, (vi) restructuring charges, (vii)
stock-based compensation expense, (viii) loss or gain on sale of
property and equipment, (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. For additional information, see “Non-GAAP Financial
Measures” below.
•Return
on Invested Capital (“ROIC”):
We define ROIC 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) property and equipment,
goodwill, and/or intangible asset impairment charges, (ii)
transaction and integration costs related to acquisitions, (iii)
interest expense (income), (iv) restructuring charges, (v) loss or
gain on the sale of subsidiaries, (vi) gain on extinguishment of
debt, and (vii) the provision or benefit for deferred income taxes.
We define total capital as book value of equity 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. For additional information, see “Non-GAAP
Financial Measures” below.
•Safety:
We measure safety by tracking the total recordable incident rate
(“TRIR”), which is reviewed on a monthly basis.
TRIR
is a measure of the rate of recordable workplace injuries, defined
below, normalized and stated on the basis of 100 workers for an
annual period. The factor is derived by multiplying the number of
recordable injuries in a calendar year by 200,000 (i.e., the total
hours for 100 employees working 2,000 hours per year) and dividing
this value by the total hours actually worked in the year. A
recordable injury includes occupational death, nonfatal
occupational illness, and other occupational injuries that involve
loss of consciousness, restriction of work or motion, transfer to
another job, or medical treatment other than first
aid.
Factors Affecting the Comparability of Our Results of
Operations
Our future results of operations may not be comparable to our
historical results of operations for the periods presented, and our
historical results of operations among the periods presented may
not be comparable to each other, primarily due to our divestiture
of the
Production Solutions
segment.
The historical results of operations for the three and nine months
ended September 30, 2020 included in this Quarterly Report on
Form 10-Q do not include activity related to the
Production Solutions
segment whereas the historical results of operations for the three
and nine months ended September 30, 2019 include activity
related to the
Production Solutions
segment through August 30, 2019.
Furthermore, future results of operations after August 30, 2019
will not include activity related to the
Production Solutions
segment. For additional information on the divestiture of
the
Production Solutions
segment, see Note 13 – Segment Information included in Item 1 of
Part I of this Quarterly Report on Form 10-Q.
Recent Events, Industry Trends, and Outlook
Our business depends, to a significant extent, on the level of
unconventional resource development activity and corresponding
capital spending of oil and natural gas companies. These activity
and spending levels are strongly influenced by the current and
expected oil and natural gas prices. The worldwide coronavirus
outbreak in early 2020, which was declared a pandemic by the World
Health Organization in March 2020, the uncertainty regarding its
impact, and various governmental actions taken to mitigate its
impact have resulted in an unprecedented decline in demand for oil.
In the midst of the ongoing pandemic, OPEC and other oil producing
nations, including Russia (“OPEC+”), were initially unable to reach
an agreement on production levels for crude oil, at which point
Saudi Arabia and Russia initiated efforts to aggressively increase
production. The convergence of these events created the
unprecedented dual impact of a massive decline in the demand for
oil coupled with the risk of a substantial increase in supply.
While OPEC+ agreed in April 2020 to cut production, downward
pressure on commodity prices has remained and could continue for
the foreseeable future. During the first half of the year, the
posted price for West Texas Intermediate (“WTI”) oil decreased from
a high of $63 per barrel in early January 2020 to a one-day low of
$(37) per barrel in late April 2020, a level which had not been
previously experienced, with physical markets showing signs of
distress as spot prices have been negatively impacted by the lack
of available storage capacity. Since the end of April 2020 through
the end of September 2020, the WTI price has averaged approximately
$38 per barrel.
In response to lower oil prices, our customers have generally
revised their capital budgets downward and adjusted their
operations accordingly, which has caused a significant decline in
demand for our products and services. These reductions were most
evident in the Permian Basin where total completions declined
approximately 57% in the second quarter of 2020 in comparison to
the first quarter of 2020, followed by another decrease of
approximately 28% in the third quarter of 2020 in comparison to the
second quarter of 2020 per the Energy Information Administration.
Additionally, between January 3, 2020 and September 30, 2020, the
total U.S. rig count has declined by approximately 67% according to
Baker Hughes. This overall decline in activity, coupled with
downward pricing pressure, has led to a significant reduction in
our revenue and profitability for the first nine months of the
year. We expect these trends to continue through at least the
remainder of the year and into 2021. Over the course of the third
quarter of 2020, we did see sequential activity and revenue
increases month over month, although revenue and activity levels
remained lower than they were in April 2020. We currently expect
the fourth quarter of 2020 to be better sequentially than the third
quarter of 2020 from an activity and revenue perspective; however,
as activity returns, we expect many competitors will seek to buy
market share, driving down prices and offsetting much of the
anticipated revenue increases.
While we cannot predict the length of time that market disruptions
resulting from the coronavirus pandemic and efforts to mitigate its
effects will continue, the ultimate impact on our business, or the
pace or extent of any subsequent recovery, we expect the
coronavirus pandemic and related effects to continue to have a
material adverse impact on commodity prices and our business
generally. We have experienced inefficiencies and logistical
challenges surrounding stay-at-home orders and remote work
arrangements, travel restrictions, and an inability to commute to
certain facilities and job sites, as we provide services and
products to our customers. For additional information regarding
risks relating to the coronavirus outbreak, see “Risk Factors” in
Item 1A of Part II of our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2020.
During the pandemic, we have maintained our commitment to the
safety of our employees, customers, vendors, and community at
large, and we have taken, and are continuing to take, a proactive
approach to navigating the pandemic. To mitigate exposure and
risk, we have implemented processes and procedures across our
entire organization based on federal, regional, and local
guidelines and mandates, and our Health, Safety & Environment
and management teams are in frequent communication with our entire
employee base to ensure they are receiving updated guidelines,
processes, and procedures. In response to the pandemic, we have
implemented the following changes, for example: at the field level,
we are working closely with our customers and vendors to update
standard operating procedures, based on social distancing, hand
washing, and other recommended best practices set forth by the
Centers for Disease Control and Prevention; electronic
assessments have been
employed to check the health of employees prior to reporting to
work, to ensure facilities are being properly cleaned and
sanitized, and to check visitor health before arrival to a Nine
location; internal case managers have been identified to handle all
coronavirus-related cases, and all confirmed and potential cases
are tracked through closure; many of our corporate and office
employees are working virtually to avoid unnecessary risk and
exposure; and we have significantly limited any work-related
travel.
We are actively monitoring updates from regulatory and government
bodies and evolving our strategy accordingly in an effort to keep
our workforce and communities healthy.
Other significant factors that are likely to affect commodity
prices for the remainder of the year include the extent to which
members of OPEC+ and other oil exporting nations continue to reduce
oil export prices and increase production; the effect of energy,
monetary, and trade policies of the United States; the pace of
economic growth in the United States and throughout the world,
including the potential for macro weakness; geopolitical and
economic developments in the United States and globally; the
outcome of the United States presidential election and subsequent
energy and Environmental Protection Agency policies; and overall
North American oil and natural gas supply and demand fundamentals,
including the pace at which export capacity grows. Even with price
improvements in oil and natural gas, operator activity may not
materially increase, as operators remain focused on operating
within their capital plans, and uncertainty remains around supply
and demand fundamentals.
In this challenging environment, we will nevertheless continue to
focus on generating returns and cash flow. Due to our high level of
variable costs and the asset-light make-up of our business, we were
able to quickly implement cost-cutting measures and will continue
to adapt as the market dictates. These cost-cutting measures
included salary reductions for key employees ranging from 10% to
15%, the suspension of the company match (which totaled $4.8
million in 2019) under our Nine Energy Service 401(k) Plan, and
headcount reductions of 55% across the entire organization as of
September 30, 2020 in comparison to December 31, 2019. In addition,
we have revised our capital expenditure budget, excluding possible
acquisitions, to between $10.0 million to $15.0 million for 2020
and deferred or eliminated certain capital projects, where
necessary. During the first nine months of 2020, we incurred
approximately $7.2 million of capital expenditures compared to
$47.2 million for the first nine months of 2019.
Generally, operators have continued to improve operational
efficiencies in completions design, increasing the complexity and
difficulty, making oilfield service selection more important. This
increase in high-intensity, high-efficiency completions of oil and
gas wells further enhances the demand for our services. We compete
for the most complex and technically demanding wells in which we
specialize, which are characterized by extended laterals, increased
stage spacing, multi-well pads, cluster spacing, and high proppant
loads. These well characteristics lead to increased operating
leverage and returns for us, as we are able to complete more jobs
and stages with the same number of units and crews. Service
providers for these projects are selected based on their technical
expertise and ability to execute safely and efficiently, rather
than only price.
Results of Operations
Results for the Three Months Ended September 30, 2020 Compared to
the Three Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
2020 |
|
2019 |
|
Change |
|
|
(in thousands) |
|
Revenues |
|
|
|
|
|
|
Completion Solutions |
$ |
49,521 |
|
|
$ |
186,252 |
|
|
$ |
(136,731) |
|
|
Production
Solutions
(1)
|
— |
|
|
16,053 |
|
|
(16,053) |
|
|
|
$ |
49,521 |
|
|
$ |
202,305 |
|
|
$ |
(152,784) |
|
|
Cost of revenues (exclusive of depreciation and amortization shown
separately below) |
|
|
|
|
|
|
Completion Solutions |
$ |
52,483 |
|
|
$ |
152,679 |
|
|
$ |
(100,196) |
|
|
Production
Solutions
(1)
|
— |
|
|
14,170 |
|
|
(14,170) |
|
|
|
$ |
52,483 |
|
|
$ |
166,849 |
|
|
$ |
(114,366) |
|
|
Adjusted gross profit (loss) |
|
|
|
|
|
|
Completion Solutions |
$ |
(2,962) |
|
|
$ |
33,573 |
|
|
$ |
(36,535) |
|
|
Production
Solutions
(1)
|
— |
|
|
1,883 |
|
|
(1,883) |
|
|
|
$ |
(2,962) |
|
|
$ |
35,456 |
|
|
$ |
(38,418) |
|
|
|
|
|
|
|
|
|
General and administrative expenses |
$ |
10,701 |
|
|
$ |
19,222 |
|
|
$ |
(8,521) |
|
|
Depreciation |
7,763 |
|
|
12,196 |
|
|
(4,433) |
|
|
Amortization of intangibles |
4,091 |
|
|
4,609 |
|
|
(518) |
|
|
Impairment of goodwill |
— |
|
|
— |
|
|
— |
|
|
(Gain) loss on revaluation of contingent liabilities |
297 |
|
|
(5,771) |
|
|
6,068 |
|
|
Loss on sale of subsidiaries |
— |
|
|
15,834 |
|
|
(15,834) |
|
|
Gain on sale of property and equipment |
(535) |
|
|
(466) |
|
|
(69) |
|
|
Loss from operations |
(25,279) |
|
|
(10,168) |
|
|
(15,111) |
|
|
Non-operating (income) expenses |
(6,740) |
|
|
9,732 |
|
|
(16,472) |
|
|
Loss before income taxes |
(18,539) |
|
|
(19,900) |
|
|
1,361 |
|
|
Provision (benefit) for income taxes |
(37) |
|
|
727 |
|
|
(764) |
|
|
Net loss |
$ |
(18,502) |
|
|
$ |
(20,627) |
|
|
$ |
2,125 |
|
(1)We
sold the
Production Solutions
segment to Brigade on August 30, 2019. For additional information
on the
Production Solutions
divestiture, see Note 13 – Segment Information included in Item 1
of Part I of this Quarterly Report on Form 10-Q.
Revenues
Revenues decreased $152.8 million, or 76%, to $49.5 million for the
third quarter of 2020 which is primarily related to reduced
activity and pricing pressure caused by poor market conditions,
including an economic recession associated with the coronavirus
pandemic, in comparison to the third quarter of 2019. We depend, to
a significant extent, on the level of unconventional resource
development activity and corresponding capital spending of oil and
natural gas companies onshore in North America. In turn, activity
and capital spending are strongly influenced by current and
expected oil and natural gas prices. During the third quarter of
2020, the average closing price was $40.89 per barrel of WTI, and
the average closing price of natural gas was $2.00 per MMBtu.
During the third quarter of 2019, the average closing price of WTI
was $56.34 per barrel, and the average closing price of natural gas
was $2.38 per MMBtu.
Additional information with respect to revenues by historical
reportable segment is discussed below.
Completion Solutions:
Revenue decreased $136.7 million, or 73%, to $49.5 million for the
third quarter of 2020. The decrease was prevalent across all lines
of service and was a direct reflection of pricing pressures caused
by reasons described above. More specifically, wireline revenue
decreased $45.7 million, or 78%, as total completed wireline stages
decreased by 74%, in comparison to the third quarter of 2019. In
addition, cementing revenue (including pump downs) decreased by
$40.4 million, or 73%, as total cement job count decreased 66% in
comparison to the third quarter of 2019, tools revenue decreased
$26.8 million, or 66%, as completion tools stages decreased by 56%
in comparison to the third quarter of 2019, and coiled tubing
revenue decreased by $23.8 million, or 77%, as total days worked
decreased by 66% in comparison to the third quarter of
2019.
Production Solutions:
Revenue decreased $16.1 million, or 100%, for the third quarter of
2020 as the
Production Solutions
segment was sold on August 30, 2019.
Cost of Revenues (Exclusive of Depreciation and
Amortization)
Cost of revenues decreased $114.4 million, or 69%, to $52.5 million
for the third quarter of 2020, which is primarily related to
reduced activity and pricing pressure caused by poor market
conditions, including an economic recession associated with the
coronavirus pandemic, in comparison to the third quarter of
2019.
Additional information with respect to cost of revenues by
historical reportable segment is discussed below.
Completion Solutions:
Cost of revenues decreased $100.2 million, or 66%, to $52.5 million
for the third quarter of 2020. The decrease in comparison to the
third quarter of 2019 was prevalent across all lines of service and
was a direct reflection of reasons described above. More
specifically, the decrease
was primarily related to a $56.3 million decrease in materials
installed and consumed while performing services, a $33.4 million
decrease in employee costs, a $10.8 million decrease in other costs
such as repair and maintenance, vehicle, travel, meals and
entertainment, and office expenses, and a $1.4 million decrease in
cost of revenue type restructuring charges primarily associated
with the third quarter of 2019 wind-down of our wireline services
in Canada that did not recur in the third quarter of 2020. The
overall decrease in cost of revenues was partially offset by a $1.1
million increase in non-cash facility lease costs and a
$0.6 million increase in bad debt expense between
periods.
Production Solutions:
Cost of revenues decreased $14.2 million, or 100%, for the third
quarter of 2020 as the
Production Solutions
segment was sold on August 30, 2019.
Adjusted Gross Profit (Loss)
Completion Solutions:
Adjusted gross profit decreased $36.5 million to a $3.0 million
loss for the third quarter of 2020 due to the factors described
above under “Revenues” and “Cost of Revenues.”
Production Solutions:
Adjusted gross profit decreased $1.9 million to $0.0 million for
the third quarter of 2020 as a result of the factors described
above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $8.5 million to $10.7
million for the third quarter of 2020. The decrease in comparison
to the third quarter of 2019 was primarily related to a $5.6
million decrease in employee costs due mainly to headcount
reductions across the organization. The overall decrease was also
partly attributed to a $1.4 million reduction in general and
administrative restructuring charges primarily associated with the
third quarter of 2019 wind-down of our wireline services in Canada
that did not recur in the third quarter of 2020. In addition, the
overall decrease was partly
attributed to a $1.0 million reduction in transaction and
integration costs associated with the Magnum Acquisition and a
$0.5 million decrease in other general and administrative
expenses such as professional fees, marketing, and travel expenses
between periods.
Depreciation
Depreciation expense decreased $4.4 million to $7.8 million for the
third quarter of 2020. The decrease in comparison to the third
quarter of 2019 was primarily related to a $2.7 million reduction
in depreciation expense associated with our coiled tubing business
mainly due to the property and equipment charge recorded in the
fourth quarter of 2019, coupled with a $1.2 million reduction in
depreciation expense in the
Production Solutions
segment, which was sold on August 30, 2019, and a $0.5 million
reduction in depreciation expense in other lines of service within
our
Completion Solutions
segment due to a decrease in capital expenditures between
periods.
Amortization of Intangibles
Amortization of intangibles decreased $0.5 million to $4.1 million
for the third quarter of 2020, primarily due to a $0.3 million
decrease in amortization associated with certain non-compete
agreements that were fully amortized in 2019, coupled with a $0.2
million decrease in amortization associated with our coiled tubing
business mainly due to the intangible asset impairment charge
recorded in the fourth quarter of 2019.
(Gain) Loss on Revaluation of Contingent Liabilities
We recorded a $0.3 million loss on the revaluation of contingent
liabilities for the third quarter of 2020 compared to a $5.8
million gain on the revaluation of contingent liabilities for the
third quarter of 2019. The $6.1 million change was primarily
related to a $6.0 million gain on the revaluation of the Magnum
Earnout (as defined in Note 8 – Debt Obligations included in Item 1
of Part I of this Quarterly Report on Form 10-Q) in the third
quarter of 2019 that did not recur in the third quarter of 2020.
The Magnum Earnout was terminated in the second quarter of
2020.
Non-Operating (Income) Expenses
We recorded $6.7 million in non-operating income for the third
quarter of 2020 compared to $9.7 million in non-operating expenses
for the third quarter of 2019. The $16.4 million change was
primarily related to a $15.8 million gain on the extinguishment of
debt related to the repurchase of Senior Notes (as defined in
“Liquidity and Capital Resources”) in the third quarter of 2020
that did not occur in the third quarter of 2019. The change is also
partly attributed to a $0.7 million reduction in interest expense
and a $0.1 million increase in interest income between
periods.
Provision (Benefit) for Income Taxes
We recorded less than a $0.1 million income tax benefit for
the third quarter of 2020 compared to a $0.7 million income tax
provision for the third quarter of 2019. The $0.8 million decrease
in the income tax provision was primarily driven by our valuation
allowance position and fluctuations in income between
periods.
Adjusted EBITDA
Adjusted EBITDA decreased $35.4 million to a loss of $11.1 million
for the third quarter of 2020. The Adjusted EBITDA decrease was
primarily due to the changes in revenues and expenses discussed
above. See “Non-GAAP Financial Measures” below for further
explanation.
Results for the Nine Months Ended September 30, 2020 Compared to
the Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
2020 |
|
2019 |
|
Change |
|
|
(in thousands) |
|
Revenues |
|
|
|
|
|
|
Completion Solutions |
$ |
248,880 |
|
|
$ |
611,255 |
|
|
$ |
(362,375) |
|
|
Production
Solutions
(1)
|
— |
|
|
58,272 |
|
|
(58,272) |
|
|
|
$ |
248,880 |
|
|
$ |
669,527 |
|
|
$ |
(420,647) |
|
|
Cost of revenues (exclusive of depreciation and amortization shown
separately below) |
|
|
|
|
|
|
Completion Solutions |
$ |
235,194 |
|
|
$ |
480,140 |
|
|
$ |
(244,946) |
|
|
Production
Solutions
(1)
|
— |
|
|
49,854 |
|
|
(49,854) |
|
|
|
$ |
235,194 |
|
|
$ |
529,994 |
|
|
$ |
(294,800) |
|
|
Adjusted gross profit |
|
|
|
|
|
|
Completion Solutions |
$ |
13,686 |
|
|
$ |
131,115 |
|
|
$ |
(117,429) |
|
|
Production
Solutions
(1)
|
— |
|
|
8,418 |
|
|
(8,418) |
|
|
|
$ |
13,686 |
|
|
$ |
139,533 |
|
|
$ |
(125,847) |
|
|
|
|
|
|
|
|
|
General and administrative expenses |
$ |
38,380 |
|
|
$ |
60,979 |
|
|
$ |
(22,599) |
|
|
Depreciation |
24,753 |
|
|
39,572 |
|
|
(14,819) |
|
|
Amortization of intangibles |
12,376 |
|
|
13,925 |
|
|
(1,549) |
|
|
Impairment of goodwill |
296,196 |
|
|
— |
|
|
296,196 |
|
|
(Gain) loss on revaluation of contingent liabilities |
781 |
|
|
(20,701) |
|
|
21,482 |
|
|
Loss on sale of subsidiaries |
— |
|
|
15,834 |
|
|
(15,834) |
|
|
Gain on sale of property and equipment |
(2,900) |
|
|
(799) |
|
|
(2,101) |
|
|
Income (loss) from operations |
(355,900) |
|
|
30,723 |
|
|
(386,623) |
|
|
Non-operating (income) expenses |
(9,979) |
|
|
29,501 |
|
|
(39,480) |
|
|
Income (loss) before income taxes |
(345,921) |
|
|
1,222 |
|
|
(347,143) |
|
|
Benefit for income taxes |
(2,348) |
|
|
(1,548) |
|
|
(800) |
|
|
Net income (loss) |
$ |
(343,573) |
|
|
$ |
2,770 |
|
|
$ |
(346,343) |
|
(1)We
sold the
Production Solutions
segment to Brigade on August 30, 2019. For additional information
on the
Production Solutions
divestiture, see Note 13 – Segment Information included in Item 1
of Part I of this Quarterly Report on Form 10-Q.
Revenues
Revenues decreased $420.6 million, or 63%, to $248.9 million for
the first nine months of 2020 which is primarily related to reduced
activity and pricing pressure caused by rapidly deteriorating
market conditions, including an economic recession associated with
the coronavirus pandemic, as well as international pricing and
production disputes, in comparison to the first nine months of
2019. We depend, to a significant extent, on the level of
unconventional resource development activity and corresponding
capital spending of oil and natural gas companies onshore in North
America. In turn, activity and capital spending are strongly
influenced by current and expected oil and natural gas prices.
During the first nine months of 2020, the average closing price was
$38.04 per barrel of WTI, and the average closing price of natural
gas was $1.87 per MMBtu. During the first nine months of 2019, the
average closing price of WTI was $57.04 per barrel, and the average
closing price of natural gas was $2.62 per MMBtu.
Additional information with respect to revenues by historical
reportable segment is discussed below.
Completion Solutions:
Revenue decreased $362.4 million, or 59%, to $248.9 million for the
first nine months of 2020.
The decrease was prevalent across all lines of service and was a
direct reflection of pricing pressures caused by reasons described
above. More specifically, wireline revenue decreased $118.7
million, or 64%, as total completed wireline stages decreased by
58% in comparison to the first nine months of 2019. In addition,
tools revenue decreased $89.3 million, or 59%, as completion tools
stages decreased by 49% in comparison to the first nine months of
2019, cementing revenue (including pump downs) decreased by $81.4
million, or 49%, as our total cement job count decreased 45% in
comparison to the first nine months of 2019, and coiled tubing
revenue decreased $73.0 million, or 67%, as total days worked
decreased by 57% in comparison to the first nine months of
2019.
Production Solutions:
Revenue decreased $58.3 million, or 100%, for the first nine months
of 2020 as the
Production Solutions
segment was sold on August 30, 2019.
Cost of Revenues (Exclusive of Depreciation and
Amortization)
Cost of revenues decreased $294.8 million, or 56%, to $235.2
million for the first nine months of 2020, which is
primarily related to reduced activity and pricing pressure caused
by rapidly deteriorating market conditions, including an economic
recession associated with the coronavirus pandemic, as well as
international pricing and production disputes, in comparison to the
first nine months of 2019.
Additional information with respect to cost of revenues by
historical reportable segment is discussed below.
Completion Solutions:
Cost of revenues decreased $244.9 million, or 51%, to $235.2
million for the first nine months of 2020. The decrease in
comparison to the first nine months of 2019 was prevalent across
all lines of service and was a direct reflection of reasons
described above. More specifically, the decrease was primarily
related to a $144.9 million decrease in materials installed and
consumed while performing services, a $76.6 million decrease in
employee costs, a $24.2 million decrease in other costs such as
repair and maintenance, vehicle, travel, meals and entertainment,
and office expenses, and a $3.2 million decrease in transaction and
integration costs associated with the Magnum Acquisition. The
overall decrease in cost of revenues was partially offset by a
$2.0 million increase in bad debt expense, a $1.1 million
increase in non-cash facility lease costs, and a $0.9 million
increase in cost of revenue type restructuring costs between
periods.
Production Solutions:
Cost of revenues decreased $49.9 million, or 100%, for the first
nine months of 2020 as the
Production Solutions
segment was sold on August 30, 2019.
Adjusted Gross Profit (Loss)
Completion Solutions:
Adjusted gross profit decreased $117.4 million to $13.7 million for
the first nine months of 2020 due to the factors described above
under “Revenues” and “Cost of Revenues.”
Production Solutions:
Adjusted gross profit decreased $8.4 million to $0.0 million for
the first nine months of 2020 as a result of the factors described
above under “Revenues” and “Cost of Revenues.”
General and Administrative Expenses
General and administrative expenses decreased $22.6 million to
$38.4 million for the first nine months of 2020.
The decrease in comparison to the first nine months of 2019 was
primarily related to a $14.5 million decrease in employee costs due
mainly to headcount reductions across the organization. The overall
decrease was also partly attributed to a $5.5 million decrease in
transaction and integration costs associated with the Magnum
Acquisition and a $3.3 million decrease in other costs
such as professional fees, marketing, and travel expenses, as well
as expenses associated with the recently sold
Production Solutions
segment. The overall decrease in general and administrative
expenses was partially offset by a $0.7 million increase in
severance and other general and administrative type restructuring
costs between periods.
Depreciation
Depreciation expense decreased $14.8 million to $24.8 million for
the first nine months of 2020. The decrease in comparison to the
first nine months of 2019 was primarily related to a
$7.4 million reduction in depreciation expense associated with our
coiled tubing business mainly due to the property and equipment
charge recorded in the fourth quarter of 2019, coupled with a $5.0
million reduction in depreciation expense in the
Production Solutions
segment, which was sold on August 30, 2019, and a $2.4 million
reduction in depreciation expense in other lines of service within
our
Completion Solutions
segment due to a decrease in capital expenditures between
periods.
Amortization of Intangibles
Amortization of intangibles decreased $1.5 million to $12.4 million
for the first nine months of 2020, primarily due to a $0.8 million
decrease in amortization associated with certain non-compete
agreements that were fully amortized in 2019, coupled with a $0.7
million decrease in amortization associated with our coiled tubing
business mainly due to the intangible asset impairment charge
recorded in the fourth quarter of 2019.
Impairment of Goodwill
We recorded goodwill impairment charges of $296.2 million for the
first nine months of 2020 in our tools, cementing, and wireline
reporting units due to sharp declines in global crude oil demand
and an economic recession associated with the coronavirus pandemic,
as well as, sharp declines in oil and natural gas prices associated
with international pricing and production disputes. No goodwill
impairment charges were recorded for the first nine months of
2019.
(Gain) Loss on Revaluation of Contingent Liabilities
We recorded a $0.8 million loss on the revaluation of contingent
liabilities for the first nine months of 2020 compared to a $20.7
million gain on the revaluation of contingent liabilities for the
first nine months of 2019. The $21.5 million change was primarily
related to an $0.8 million loss on the revaluation of the Magnum
Earnout (as defined in Note 8 – Debt Obligations included in Item 1
of Part I of this Quarterly Report on Form 10-Q) for the first nine
months of 2020 compared to a $21.4 million gain on the revaluation
of the Magnum Earnout for the first nine months of 2019. The Magnum
Earnout was terminated in the second quarter of 2020. The change
was partially offset by a $0.7 million loss on the revaluation of
the earnout associated with our acquisition of Frac Technology AS
for the first nine months of 2019 that did not recur for the first
nine months of 2020.
Non-Operating (Income) Expenses
We recorded $10.0 million in non-operating income for the first
nine months of 2020 compared to $29.5 million in non-operating
expenses for the first nine months of 2019.
The $39.5 million change was primarily related to a $37.5 million
gain on the extinguishment of debt related to the repurchase of
Senior Notes (as defined in “Liquidity and Capital Resources”) in
the first nine months of 2020 that did not occur in the first nine
months of 2019. The change is also partly attributed to a $1.8
million reduction in interest expense and a $0.2 million
increase in interest income between periods.
Provision (Benefit) for Income Taxes
We recorded a $2.3 million income tax benefit for the first nine
months of 2020 compared to an income tax benefit of $1.5 million
for the first nine months of 2019. The $0.8 million increase in the
income tax benefit was primarily driven by our valuation allowance
position and fluctuations in income between periods.
Adjusted EBITDA
Adjusted EBITDA decreased $113.3 million to a loss of $11.9 million
for the first nine months of 2020. The Adjusted EBITDA decrease was
primarily due to the changes in revenues and expenses discussed
above. See “Non-GAAP Financial Measures” below for further
explanation.
Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are supplemental non-GAAP financial
measures that are used by management and external users of our
financial statements, such as industry analysts, investors,
lenders, and rating agencies.
We define EBITDA as net income (loss) before interest, taxes,
depreciation, and amortization.
We define Adjusted EBITDA as EBITDA further adjusted for
(i) property and equipment, goodwill, and/or intangible asset
impairment charges, (ii) transaction and integration costs
related to acquisitions, (iii) loss or gain on revaluation of
contingent liabilities, (iv) gain on extinguishment of debt,
(v) loss or gain on the sale of subsidiaries, (vi)
restructuring charges, (vii) stock-based compensation 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 EBITDA and Adjusted EBITDA are useful because
they allow 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. We exclude the items listed above from net income (loss)
in arriving at these measures because these amounts can vary
substantially from company to company within our industry depending
upon accounting methods and book values of assets, capital
structures, and the method by which the assets were acquired. These
measures should not be considered as an alternative to, or more
meaningful than, net income as determined in accordance with
accounting principles generally accepted in the United States of
America (“GAAP”) or as an indicator of our operating performance.
Certain items excluded from these measures are significant
components in understanding and assessing a company’s financial
performance, such as a company’s cost of capital and tax structure,
as well as the historic costs of depreciable assets, none of which
are components of these measures. Our computations of these
measures may not be comparable to other similarly titled measures
of other companies. We believe that these are widely followed
measures of operating performance.
The following table presents a reconciliation of the non-GAAP
financial measures of EBITDA and Adjusted EBITDA to the GAAP
financial measure of net income (loss) for the three and nine
months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
(in thousands) |
|
(in thousands) |
|
EBITDA reconciliation: |
|
|
|
|
|
|
|
|
Net income (loss) |
$ |
(18,502) |
|
|
$ |
(20,627) |
|
|
$ |
(343,573) |
|
|
$ |
2,770 |
|
|
Interest expense |
9,130 |
|
|
9,843 |
|
|
28,144 |
|
|
29,940 |
|
|
Interest income |
(43) |
|
|
(111) |
|
|
(593) |
|
|
(439) |
|
|
Provision (benefit) for income taxes |
(37) |
|
|
727 |
|
|
(2,348) |
|
|
(1,548) |
|
|
Depreciation |
7,763 |
|
|
12,196 |
|
|
24,753 |
|
|
39,572 |
|
|
Amortization of intangibles |
4,091 |
|
|
4,609 |
|
|
12,376 |
|
|
13,925 |
|
|
EBITDA |
$ |
2,402 |
|
|
$ |
6,637 |
|
|
$ |
(281,241) |
|
|
$ |
84,220 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA reconciliation: |
|
|
|
|
|
|
|
|
EBITDA |
$ |
2,402 |
|
|
$ |
6,637 |
|
|
$ |
(281,241) |
|
|
$ |
84,220 |
|
|
Impairment of goodwill |
— |
|
|
— |
|
|
296,196 |
|
|
— |
|
|
Transaction and integration costs |
— |
|
|
1,418 |
|
|
146 |
|
|
8,864 |
|
|
(Gain) loss on revaluation of contingent liabilities
(1)
|
297 |
|
|
(5,771) |
|
|
781 |
|
|
(20,701) |
|
|
Gain on extinguishment of debt |
(15,798) |
|
|
— |
|
|
(37,501) |
|
|
— |
|
|
Loss on sale of subsidiaries |
— |
|
|
15,834 |
|
|
— |
|
|
15,834 |
|
|
Restructuring charges |
459 |
|
|
3,263 |
|
|
4,882 |
|
|
3,263 |
|
|
Stock-based compensation expense |
2,020 |
|
|
3,286 |
|
|
7,717 |
|
|
10,553 |
|
|
Gain on sale of property and equipment |
(535) |
|
|
(466) |
|
|
(2,900) |
|
|
(799) |
|
|
Legal fees and settlements
(2)
|
15 |
|
|
22 |
|
|
39 |
|
|
165 |
|
|
Adjusted EBITDA |
$ |
(11,140) |
|
|
$ |
24,223 |
|
|
$ |
(11,881) |
|
|
$ |
101,399 |
|
(1)Amounts
relate to the revaluation of contingent liabilities associated with
our 2018 acquisitions. The impact is included in our Condensed
Consolidated Statements of Income and Comprehensive Income (Loss).
For additional information on contingent liabilities, see Note 10 –
Commitments and Contingencies included in Item 1 of Part I of this
Quarterly Report on Form 10-Q.
(2)Amounts
represent fees and legal settlements associated with legal
proceedings brought pursuant to the Fair Labor Standards Act and/or
similar state laws.
Return on Invested Capital
ROIC is a supplemental non-GAAP financial measure. We define ROIC
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) property and equipment, goodwill, and/or
intangible asset impairment charges, (ii) transaction and
integration costs related to acquisitions, (iii) interest expense
(income), (iv) restructuring charges, (v) loss or gain on the sale
of subsidiaries, (vi) gain on extinguishment of debt, and (vii) the
provision or benefit for deferred income taxes. We define total
capital as book value of equity 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 is a meaningful measure 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. Management uses ROIC to assist them in capital
resource allocation decisions and in evaluating business
performance. Although ROIC is commonly used as a measure of capital
efficiency, definitions of ROIC differ, and our computation of ROIC
may not be comparable to other similarly titled measures of other
companies.
The following table provides an explanation of our calculation of
ROIC for the three and nine months ended September 30, 2020
and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
(in thousands) |
|
(in thousands) |
|
Net income (loss) |
$ |
(18,502) |
|
|
$ |
(20,627) |
|
|
$ |
(343,573) |
|
|
$ |
2,770 |
|
|
Add back: |
|
|
|
|
|
|
|
|
Impairment of goodwill |
— |
|
|
— |
|
|
296,196 |
|
|
— |
|
|
Transaction and integration costs |
— |
|
|
1,418 |
|
|
146 |
|
|
8,864 |
|
|
Interest expense |
9,130 |
|
|
9,843 |
|
|
28,144 |
|
|
29,940 |
|
|
Interest income |
(43) |
|
|
(111) |
|
|
(593) |
|
|
(439) |
|
|
Restructuring charges |
459 |
|
|
3,263 |
|
|
4,882 |
|
|
3,263 |
|
|
Loss on sale of subsidiaries |
— |
|
|
15,834 |
|
|
— |
|
|
15,834 |
|
|
Gain on extinguishment of debt |
(15,798) |
|
|
— |
|
|
(37,501) |
|
|
— |
|
|
Provision (benefit) for deferred income taxes |
— |
|
|
143 |
|
|
(1,588) |
|
|
(2,876) |
|
|
After-tax net operating profit (loss) |
$ |
(24,754) |
|
|
$ |
9,763 |
|
|
$ |
(53,887) |
|
|
$ |
57,356 |
|
|
Total capital as of prior period-end: |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
$ |
69,950 |
|
|
$ |
624,309 |
|
|
$ |
389,877 |
|
|
$ |
594,823 |
|
|
Total debt |
372,584 |
|
|
400,000 |
|
|
400,000 |
|
|
435,000 |
|
|
Less cash and cash equivalents |
(88,678) |
|
|
(16,886) |
|
|
(92,989) |
|
|
(63,615) |
|
|
Total capital as of prior period-end |
$ |
353,856 |
|
|
$ |
1,007,423 |
|
|
$ |
696,888 |
|
|
$ |
966,208 |
|
|
Total capital as of period-end: |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
$ |
53,599 |
|
|
$ |
606,779 |
|
|
$ |
53,599 |
|
|
$ |
606,779 |
|
|
Total debt |
349,418 |
|
|
400,000 |
|
|
349,418 |
|
|
400,000 |
|
|
Less cash and cash equivalents |
(80,338) |
|
|
(93,321) |
|
|
(80,338) |
|
|
(93,321) |
|
|
Total capital as of period-end |
$ |
322,679 |
|
|
$ |
913,458 |
|
|
$ |
322,679 |
|
|
$ |
913,458 |
|
|
Average total capital |
$ |
338,268 |
|
|
$ |
960,441 |
|
|
$ |
509,784 |
|
|
$ |
939,833 |
|
|
ROIC |
(29.3)% |
|
4.1% |
|
(14.1)% |
|
8.1% |
Adjusted Gross Profit (Loss)
GAAP defines gross profit (loss) as revenues less cost of revenues
and includes depreciation and amortization in costs of revenues. We
define adjusted gross profit (loss) as revenues less direct and
indirect costs 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.
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. Adjusted gross profit (loss) should not be
considered as an alternative to gross profit (loss), operating
income (loss), or any other measure of financial performance
calculated and presented in accordance with GAAP. Adjusted gross
profit (loss) may not be comparable to similarly titled measures of
other companies because other companies may not calculate adjusted
gross profit (loss) or similarly titled measures in the same manner
as we do.
The following table presents a reconciliation of adjusted gross
profit (loss) to GAAP gross profit (loss) for the three and nine
months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
(in thousands) |
|
(in thousands) |
|
Calculation of gross profit (loss) |
|
|
|
|
|
|
|
|
Revenues |
$ |
49,521 |
|
|
$ |
202,305 |
|
|
$ |
248,880 |
|
|
$ |
669,527 |
|
|
Cost of revenues (exclusive of depreciation and amortization shown
separately below) |
52,483 |
|
|
166,849 |
|
|
235,194 |
|
|
529,994 |
|
|
Depreciation (related to cost of revenues) |
7,219 |
|
|
11,994 |
|
|
23,020 |
|
|
38,916 |
|
|
Amortization of intangibles |
4,091 |
|
|
4,609 |
|
|
12,376 |
|
|
13,925 |
|
|
Gross profit (loss) |
$ |
(14,272) |
|
|
$ |
18,853 |
|
|
$ |
(21,710) |
|
|
$ |
86,692 |
|
|
Adjusted gross profit (loss) reconciliation: |
|
|
|
|
|
|
|
|
Gross profit (loss) |
$ |
(14,272) |
|
|
$ |
18,853 |
|
|
$ |
(21,710) |
|
|
$ |
86,692 |
|
|
Depreciation (related to cost of revenues) |
7,219 |
|
|
11,994 |
|
|
23,020 |
|
|
38,916 |
|
|
Amortization of intangibles |
4,091 |
|
|
4,609 |
|
|
12,376 |
|
|
13,925 |
|
|
Adjusted gross profit (loss) |
$ |
(2,962) |
|
|
$ |
35,456 |
|
|
$ |
13,686 |
|
|
$ |
139,533 |
|
Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, we have met our liquidity needs principally from cash
on hand, cash flows from operating activities and, if needed,
external borrowings. Our principal uses of cash are to fund capital
expenditures and acquisitions, to service our outstanding debt, and
to fund our working capital requirements. We may also, from time to
time, make open market debt repurchases (including our Senior Notes
as defined and described below) when it is opportunistic to do to
manage our debt maturity profile. In 2018, we issued $400.0 million
principal amount of 8.750% Senior Notes due 2023 (the “Senior
Notes”) to, together with cash on hand and borrowings under the
2018 ABL Credit Facility (as defined and described below), fund the
Magnum Acquisition as well as fully repay and terminate the term
loan borrowings and the outstanding revolving credit commitments
under our prior credit facility. For additional information
regarding the Senior Notes, see “Senior Notes” below. In the third
quarter of 2019, we divested the
Production Solutions
segment for approximately $17.1 million in cash. We used such
proceeds to support working capital requirements and fund a portion
of our 2020 capital expenditures.
We continually monitor potential capital sources, including equity
and debt financing, to meet our investment and target liquidity
requirements. Our future success and growth will be highly
dependent on our ability to continue to access outside sources of
capital. In addition, our ability to satisfy our liquidity
requirements depends on our future operating performance, which is
affected by prevailing economic conditions, the level of drilling,
completion and production activity for North American onshore oil
and natural gas resources, and financial and business and other
factors, many of which are beyond our control.
Although we do not budget for acquisitions, pursuing growth through
acquisitions may continue to be a significant part of our business
strategy. Our ability to make significant additional acquisitions
for cash will require us to obtain additional equity or debt
financing, which we may not be able to obtain on terms acceptable
to us or at all.
At September 30, 2020, we had $80.3 million of cash and cash
equivalents and $39.5 million of availability under the 2018 ABL
Credit Facility (as defined below), which resulted in a total
liquidity position of $119.8 million. In response to rapidly
deteriorating market conditions driven in large part by the
coronavirus pandemic and international pricing and production
disputes, we have implemented certain cost-cutting measures across
the organization to continue to maintain our current liquidity
position. Based on our current forecasts, we believe that, cash on
hand, together with cash flow from operations, and borrowings under
the 2018 ABL Credit Facility, should be sufficient to fund our
capital requirements for at least the next twelve months from the
issuance date of our condensed consolidated financial statements.
However, we can make no assurance regarding our ability to achieve
our forecasts. Furthermore, depending on our financial performance
and the ever-changing market, we may implement additional
cost-cutting measures, as necessary, to continue to meet our
liquidity and capital resource needs for at least the next twelve
months from the issuance date of our condensed consolidated
financial statements. We can make no assurance regarding our
ability to successfully implement such measures, or whether such
measures would be sufficient to mitigate a decline in our financial
performance.
Senior Notes
On October 25, 2018, we issued the Senior Notes due 2023 under an
indenture, dated as of October 25, 2018 (the “Indenture”), by and
among us, including certain of our subsidiaries, and Wells Fargo,
National Association, as Trustee. The Senior Notes bear interest at
an annual rate of 8.750% payable on May 1 and November 1 of each
year, and the first interest payment was due on May 1, 2019. The
Senior Notes are senior unsecured obligations and are fully and
unconditionally guaranteed on a senior unsecured basis by each of
our current domestic subsidiaries and by certain future
subsidiaries.
The Indenture contains covenants that limit our ability and the
ability of our restricted subsidiaries to engage in certain
activities. We were in compliance with the provisions of the
Indenture at September 30, 2020.
Upon an event of default, the trustee or the holders of at least
25% in aggregate principal amount of then outstanding Senior Notes
may declare the Senior Notes immediately due and payable, except
that a default resulting from certain events of bankruptcy or
insolvency with respect to us, any of our restricted subsidiaries
that are a significant subsidiary or any group of restricted
subsidiaries that, taken together, would constitute a significant
subsidiary, will automatically cause all outstanding Senior Notes
to become due and payable.
We repurchased approximately $23.1 million and $52.8 million of
Senior Notes at a repurchase price of approximately $7.0 million
and $14.4 million in cash for the three and nine months ended
September 30, 2020, respectively. Deferred financing costs
associated with these transactions were $0.4 million and $0.9
million for the three and nine months ended September 30, 2020,
respectively. As a result, for the three and nine months ended
September 30, 2020, we recorded a $15.8 million gain and a $37.5
million gain, respectively, on the extinguishment of
debt.
Subsequent to September 30, 2020, we repurchased an additional
$0.5 million of the Senior Notes for a repurchase price of
approximately $0.2 million in cash.
Unamortized deferred financing costs associated with the Senior
Notes were $5.5 million and $7.9 million at September 30, 2020
and December 31, 2019, respectively. These costs are direct
deductions from the carrying amount of the Senior Notes and are
being amortized through interest expense through the maturity date
of the Senior Notes using the effective interest
method.
2018 ABL Credit Facility
On October 25, 2018, we entered into a credit agreement dated as of
October 25, 2018 (the “2018 ABL Credit Agreement”), by and among
us, Nine Energy Canada, Inc., JP Morgan Chase Bank, N.A. as
administrative agent and as an issuing lender, and certain other
financial institutions party thereto as lenders and issuing
lenders. The 2018 ABL Credit Agreement permits aggregate borrowings
of up to $200.0 million, subject to a borrowing base,
including a Canadian tranche with a sub-limit of up to $25.0
million and a sub-limit of $50.0 million for letters
of credit (the “2018 ABL Credit Facility”). The 2018 ABL Credit
Facility will mature on October 25, 2023 or, if earlier, on the
date that is 180 days before the scheduled maturity date of the
Senior Notes if they have not been redeemed or repurchased by such
date.
Loans to us and our domestic related subsidiaries (the “U.S. Credit
Parties”) under the 2018 ABL Credit Facility may be base rate loans
or London Interbank Offered Rate (“LIBOR”) loans; and loans to Nine
Energy Canada Inc., a corporation organized under the laws of
Alberta, Canada, and its restricted subsidiaries (the “Canadian
Credit Parties”) under the Canadian tranche may be Canadian Dollar
Offered Rate (“CDOR”) loans or Canadian prime rate loans. The
applicable margin for base rate loans and Canadian prime rate loans
vary from 0.75% to 1.25%, and the applicable margin for LIBOR loans
or CDOR loans vary from 1.75% to 2.25%, in each case depending on
our leverage ratio. In addition, a commitment fee of 0.50% per
annum will be charged on the average daily unused portion of the
revolving commitments.
The 2018 ABL Credit Agreement contains various affirmative and
negative covenants, including financial reporting requirements and
limitations on indebtedness, liens, mergers, consolidations,
liquidations and dissolutions, sales of assets, dividends and other
restricted payments, investments (including acquisitions) and
transactions with affiliates. In addition, the 2018 ABL Credit
Agreement contains a minimum fixed charge ratio covenant of 1.00 t