Nine Energy Service, Inc. (NINE) is a leading completion services provider that targets unconventional oil and gas resource development. The company has established a strong foothold in the industry by partnering with exploration and production (E&P) customers across major onshore basins in the U.S. and Canada, as well as abroad, to design and deploy innovative downhole solutions and technologies.

Detailed Business Overview and Company History

Nine Energy Service, Inc. was founded in 2018 and is headquartered in Houston, Texas. The company provides a full range of tools and methodologies for the completion of unconventional wells. In 2018, Nine Energy acquired Frac Technology AS, a Norwegian company focused on the development of downhole technology, including a casing flotation tool and a number of patented downhole completion tools. This acquisition allowed Nine to expand its portfolio of innovative completion tools.

The company faced significant challenges in 2020 due to the COVID-19 pandemic and the related decline in oil and gas demand. Nine implemented cost reduction measures and was forced to record a $296 million impairment charge related to its goodwill and other intangible assets. Despite these challenges, the company was able to maintain operations and continue serving its customers.

In 2021, Nine continued to navigate volatile market conditions, reporting a net loss of $64.6 million for the year. The company worked to further streamline its operations and reduce costs to weather the downturn. Nine also made investments in new technologies, such as its Breakthru Casing Flotation Device, to differentiate its product and service offerings.

The market began to recover in 2022, and Nine reported net income of $14.4 million for the year. The company was able to regain some of the market share it had lost during the downturn and saw improved utilization across its service lines. Nine also continued to focus on innovation, launching new completion tools designed to improve efficiency and reduce costs for its customers.

Over the years, Nine Energy has continued to expand its service capabilities, adding cementing, wireline, and coiled tubing services to its already impressive arsenal of completion tools. The company's focus on providing comprehensive, cost-effective, and technologically advanced solutions has resonated well with its E&P customer base, allowing it to establish a reputation as a trusted partner in the industry.

Financial Strength and Performance

Nine Energy's financial performance has been marked by both successes and challenges in recent years. As of the latest reported quarter (Q3 2024), the company's revenue stood at $138.2 million, surpassing the original guidance range of $127 million to $137 million. This strong top-line performance was driven by market share gains in the cementing business, where the company increased its job count by 9% quarter-over-quarter and revenue by 12%, despite a decline in the overall rig count.

However, the company has also faced headwinds in the natural gas-focused basins, such as the Haynesville and the Northeast, where sustained low natural gas prices have led to reduced activity levels and completion delays. Despite these challenges, Nine Energy has demonstrated its ability to adapt and remain resilient, implementing cost-cutting and supply chain initiatives that have positively impacted its profitability.

For the first nine months of 2024, Nine Energy reported a net loss of $32.2 million, compared to a net loss of $21.9 million in the same period of the prior year. The company's adjusted EBITDA for the nine-month period was $39.1 million, down from $58.3 million in the prior-year period. The decline in adjusted EBITDA was primarily due to the lower revenue and increased costs associated with the challenging market environment.

In the most recent fiscal year (2023), Nine Energy reported revenue of $609.53 million, a net loss of $32.21 million, operating cash flow of $45.51 million, and free cash flow of $20.91 million. The company's performance in Q3 2024 showed a 4% year-over-year increase in revenue, primarily driven by a 12% increase in cementing revenue due to market share gains. However, net income and operating cash flow declined due to lower pricing and activity levels, partially offset by cost reduction initiatives.

Liquidity and Capital Structure

As of September 30, 2024, Nine Energy had $15.7 million in cash and cash equivalents, with $27.6 million in available borrowing capacity under its revolving ABL credit facility, resulting in a total liquidity position of $43.3 million. The company has been actively managing its debt obligations, including the redemption of its 8.75% Senior Notes due 2023 and the issuance of $300 million in 13% Senior Secured Notes due 2028.

The company's capital structure and liquidity position provide it with the flexibility to navigate the current market conditions and invest in growth initiatives as the industry recovers. Nine Energy's debt-to-equity ratio of -5.72 as of September 30, 2024, suggests a highly leveraged capital structure, which could pose a risk if the company's performance does not improve. The company's current ratio of 2.46 and quick ratio of 1.59 indicate a relatively stable short-term liquidity position.

Operational Highlights and Market Positioning

Nine Energy has made significant strides in its operational performance, particularly in the cementing business, where it has gained market share through a deliberate strategy of reevaluating its pricing versus market share balance and boosting sales efforts. The company's advanced cement slurries, coupled with excellent delivery and on-site execution, have allowed it to differentiate itself in the market.

Additionally, the successful commercialization of the company's innovative completion tools, such as the Pincer Hybrid Frac Plug and the Frac Dart, have further strengthened Nine Energy's competitive advantage. These products offer significant cost and time savings for customers, contributing to the company's ability to win business in a highly competitive environment.

Nine Energy operates in four key product segments:

1. Cementing Services: Blending high-grade cement and water with additives to create a cement slurry for well completion.

2. Completion Tools: Providing innovative technologies for completing horizontal wells, including fully-composite, dissolvable, and extended range frac plugs.

3. Wireline Services: Offering plug-and-perf completions for cased-hole wells.

4. Coiled Tubing Services: Performing wellbore intervention operations using continuous steel pipe.

While Nine Energy Service primarily operates in the United States, it also has some international sales of completion tools. However, the company does not break out performance by geographic region.

Outlook and Risks

Looking ahead, Nine Energy expects a moderate slowdown in Q4 2024 due to budget exhaustion, weather, and holiday seasonality, as well as a decrease in international tool sales. The company projects Q4 revenue to be between $132 million and $142 million, with adjusted EBITDA and adjusted EBITDA margin also expected to be lower compared to Q3.

However, the company remains cautiously optimistic about the long-term outlook for the energy sector, particularly if natural gas prices begin to recover. Nine Energy believes there is potential for a moderate activity pickup in 2025, and the company is well-positioned to capitalize on an improving market environment. Specifically, Nine Energy anticipates that if natural gas prices average $3 or above, natural gas-levered operators will bring activity back online, which would be a significant catalyst for growth since the Northeast and Haynesville account for 30-35% of their revenue.

Risks facing Nine Energy include the ongoing volatility in commodity prices, the competitive landscape in the oilfield services industry, and the company's highly leveraged capital structure. Additionally, the company's exposure to the Haynesville and Northeast regions, which have been impacted by low natural gas prices, presents a significant challenge that Nine Energy must navigate.

The oilfield services industry as a whole has been challenged by volatile commodity prices and reduced activity levels, with the U.S. rig count declining by around 35 rigs, or 6%, since the end of 2023. This industry-wide trend has contributed to the pricing pressures and lower activity levels experienced by Nine Energy.

Conclusion

Nine Energy Service is a well-positioned oilfield services provider that has demonstrated its ability to adapt and innovate in a challenging market environment. The company's focus on providing comprehensive, cost-effective, and technologically advanced solutions has allowed it to gain market share and establish itself as a trusted partner to its E&P customers.

While the company has faced headwinds in certain basins, its strong liquidity position and capital structure, coupled with its operational excellence, position it well to navigate the current market conditions and capitalize on the potential for a recovery in the industry. Investors should closely monitor Nine Energy's progress as it continues to execute its strategy and navigate the evolving landscape of the oilfield services sector.