Nine Energy Service, Inc. (NINEQ) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for joining today's conference call of Nine Energy Annual Meeting 2020. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Ernie Danner. Thank you. Sir, you may begin.

Good morning. It is now 8:30 a.m. And in accordance with the Notice of the Annual Meeting, I call the Nine Energy Service 2020 Annual Meeting of Stockholders to order. My name is Ernie Danner, Chairman of the Board of Directors and a stockholder of the company. I will preside at today's meeting, and Ted Moore will act as the secretary of the meeting and as the inspector of election. On behalf of the Board of Directors, I welcome you to the annual meeting. We find ourselves in extraordinary circumstances this year. As with many other companies, we are holding our annual meeting solely by electronic means instead of in-person. It is our belief this precautionary measure protects the health and well-being of our shareholders, employees and other stakeholders. At the same time, we believe it supports shareholder engagement and enable shareholders to participate in the meeting by voting electronically and asking questions. This year, voting will be available online for registered shareholders and duly appointed proxy holders during the meeting. To be able to vote during the meeting, you had to have joined the meeting by entering your control number at the registration screen. For registered shareholders, the control number was included in your meeting materials, and duly appointed proxy holders were required to contact our transfer agent, AST Trust Company, in order to receive a control number. As is our usual practice, registered shareholders and proxy holders are invited to ask questions, which we'll respond to later in the meeting. Similar to the instructions for voting, to be able to ask questions during the meeting, you had to have joined the meeting by entering your control number at the registration screen. To ask a question, click on the messaging button on the screen, enter your question in the text box and click the send button. I would like to take a moment to introduce the members of our current Board of Directors and executive officers. The directors in attendance today, in addition to me, are: David Baldwin, Mark Baldwin, Curtis Harrell, Scott Schwinger, Gary Thomas, Andrew Waite, Darryl Willis and Ann Fox, who is also the Chief Executive Officer of Nine. In addition to Ms. Fox, the officers in attendance today are: David Crombie, Executive Vice President and Chief Operating Officer; Guy Sirkes, Senior Vice President and Chief Financial Officer; Ted Moore, Senior Vice President and General Counsel; Brett Luz, Chief Accounting Officer; Heather Schmidt, Vice President, Strategic Development, Investor Relations and Marketing; and Anita Kerin, Assistant General Counsel. In addition, I would like to recognize [ Amy Lloyd ], who is attending as a representative of PricewaterhouseCoopers LLP, our independent registered public accounting firm. I have appointed Nine's General Counsel, Ted Moore, to act as the inspector of election for the meeting. The inspector of election has taken the oath of office, which I directed to be filed with the company's records. March 13, 2020 was set by resolution of the Board of Directors as the record date of today's annual meeting. Notice that this meeting was sent to all stockholders at least 10 days in advance of today's date. Each of the matters to be considered today are described in the Notice of the Annual Meeting mailed to all stockholders. As set forth in the agenda and the Notice of the Annual Meeting, the matters to be considered at today's annual meeting are: a, the election of 3 nominees for Class II directors to serve until the 2023 Annual Meeting of Stockholders or until their respective successors are elected and qualified; and b, the ratification of the selection of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the fiscal year ended December 31, 2020. Each of the matters to be considered today is described in the proxy statement, which were made available via the Internet to all stockholders. I have been advised by the inspector of election that based on the proxies received prior to this meeting, more than a majority of the company's issued and outstanding shares are present in person or represented by proxy at this meeting. Therefore, a quorum is present and the business of the meeting may proceed. Legal notice having been given, this meeting is now convened and open for the transaction of business. We will now have the presentations for the director nominations and the ratification of the selection of the independent registered public accounting firm of PricewaterhouseCoopers LLP, as specified on today's agenda. After these have been formally presented to the meeting, we will have a period for discussion in the presentation of any statements, in opposition or support. The first item of business is the election of 3 directors for a 3-year term. The Board's nominee for election are: Scott E. Schwinger, Gary L. Thomas, Andrew L. Waite. At this time, I will entertain a motion to approve this item of business.

Mr. Chairman, my name is Ted Moore, and I'm a stockholder. I move to approve the proposal to elect the 3 nominees proposed in the company's proxy statement.

Is there a second?

Mr. Chairman, my name is Anita Kerin, and I'm a stockholder. And I second the motion.

The second and final item of business is the ratification of the selection of PricewaterhouseCoopers LLP as the independent registered public accounting firm of Nine Energy Service for the fiscal year ending December 31, 2020. At this time, I will entertain a motion to approve this item of business.

Mr. Chairman, my name is Ted Moore. I move to approve the proposal to ratify the selection of PricewaterhouseCoopers as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020.

You have heard the motion. Is there a second?

Mr. Chairman, my name is Anita Kerin, and I second the motion.

There are no other proposals to come before this meeting since management has not made any other proposal and since no other proposals were submitted by stockholders in the matter prescribed in the company's bylaws, which requires that certain information concerning stockholders' proposals be provided to the company before the date of the meeting. It is now 8:38 a.m. on May 5, 2020. I now declare the polls open for voting each proposal. If you are a stockholder who has returned a proxy and do not wish to change your vote, your proxy will be counted. If you have not voted or if you would like to change your vote, you may do so now. [Voting]

The meeting is now open to stockholder questions. If you would like to ask a question, click on the messaging button on the screen, enter your question in the text box and click the send button. I see no questions on my screen. Does anybody else on the call have or see questions on their screen?

Ernie, I do not see any questions on my screen.

No questions on my screen.

Then seeing no questions, we will proceed with our agenda. This concludes the matters to be considered and voted upon at today's meeting. It is now 8:39 a.m. on May 5, 2020, and I now declare the polls closed. Will the secretary please announce the preliminary voting results?

As the secretary and the inspector of election, I can advise that based on a preliminary tabulation of the votes, more than the necessary number of votes cast in-person or by proxy by the holders of common stock voted in favor of: a, each of the company's 3 nominees for director to serve for the following 3 years and until their successors are duly elected; and b, the ratification of the selection of PricewaterhouseCoopers LLP as the independent registered public accounting firm of Nine Energy Service, Inc. for the fiscal year ending December 31, 2020. The final voting results will be tallied by me and subsequently announced in a timely-filed Form 8-K.

Following the conclusion of the business portion of this meeting, we will continue with a presentation by our CEO, Ann Fox. This concludes the formal business for the meeting. We are adjourned. Ann, our Chief Executive Officer, will now present a report to our stockholders regarding the company's 2019 strategy, financial and operational results.

Thank you, Ernie. And good morning, everyone. And welcome to the Annual Shareholders' Meeting. We are just going to wait a minute for the slides to come up on the screen. And you'll also notice that I pause in between slides because there will be a delay as we shift slides. So just bear with us a minute until those slides appear on the screen. Thank you. Anita, can you see the slides on your screen?

I'm still seeing the agenda slide. Can we advance the slide?

Doug, can you advance the slide?

It's been advanced.

And Doug, will you let me know when you can see it on your stockholders' screen, so I can begin.

If you can't see the presentation right now, just refresh your site. But the slide is ready to go.

Okay. And Anita, can you see it?

I can.

Okay. Okay. I cannot see it, but I'm going to work from the presentation. So Doug, could you please go to the disclaimer on Slide 2. I'm going to give everybody just a minute to look at the disclaimer and remind you that we have our earnings call on Thursday. So I will be doing a financial and strategic review of 2019. Okay. Doug, could you please move to Slide 4, the strategy slide? And then Anita, would you let me know when the strategy side appears?

I can see it.

Okay, great. Thank you. So as we know, we started to embark on this strategic initiative in 2018. The fundamental pieces of it were to be asset-light, to create barriers to entry, and to couple that with excellent service execution. In 2018, we consummated 2 key transactions: one was Magnum and one was Frac Tech out of Norway, that gave us incremental exposure to technology, to IP, and also helped us move into a more asset-light model while creating barriers to entry. In 2019, we also divested our Well Service business, which did not fit into the asset-light category nor did it help us increase our barriers to entry as we saw it as a service line that competed primarily on price. So that was the beginning of us embarking on this new strategy, which I think we'll see pay off in the cash flow generation and the ultimate long-term returns of the business. Advance the slide, please. And we should now be on Slide 6, which is an overview of Nine. Anita, please let me know when we're there.

I see a slide that says strategy on it.

Okay. So page down from the strategy. And Anita, let me know when the title says, An Overview of Nine. You should see the financial picture there.

Okay. It's there.

Great. Thank you. So on the left-hand side, you'll see our revenue and our adjusted EBITDA reflected for both 2018 as well as 2019. You'll see that in the course of that year, year-over-year, we had margin degradation and dropped about 3 points of margin. As you'll remember, H1 of 2019 was a very active time for us, and H2 2019, the North American land market really fell off a cliff. And that contributed to our enormous pricing pressure with activity declines. On the right-hand side of the page, you'll see a pie chart there. That gives you a derivation of our revenue. And again, part of our strategy was to be 100% completion-focused. This pie chart reflects that, and so does not reflect the well service business at all. The long-term piece of our strategy is to grow the 24% reflected on the left-hand side, that is completion tools. That is our most defensible business, and we would like to grow that as a percentage of the revenue. Advance the slide, please. And Anita, can you let me know when the next slide is up, please?

It still has the overview slide.

Okay. Once we get to strong 2019 cash generation, please just let me know.

Okay. Okay. There.

Okay. Thank you. So you can see one of the benefits of the asset-light model is the strong cash generation of the business. So even in the year where we declined 9% -- we lost 9% of our rig count, we generated $101.3 million of cash flow from operations. We fell within our CapEx guidance to the market, which originally we guided from $60 million to $65 million of CapEx, and we were at $62.1 million for the year. And we also increased our cash flow from operations year-over-year by 13%. Next slide, please.

Okay. I got it, Ann.

Thank you, Anita. So you'll see here that we have consistently gained market share. So obviously, very important to us to defend our margin and to be profitable, but also to make sure that we're still growing our share. And you can see, as we exited the last downturn, we had -- at the top part of the graph, you can see the gray bars. We had about 8% of the stages completed and the market were touched by 9%. And by the end of 2019, we had grown that percentage to 17%. So that's obviously something we continue to gain share. And also on the bottom of the page, you'll see our market share by rigs followed in our cementing business. So on the left-hand side, you can see the Eagle Ford Shale represented there. We grew our market share by 12% since the year-end of 2014 to the year-end of 2019, following about 19% of those rigs. And then if you move over to the right-hand side, you'll see the percentage of rigs followed in West Texas, and we've grown that by over 60%. That's a reflection of, obviously, incredible service execution and equipment. But it's also really a reflection of some of the incredible technology that we're using in our laboratory facilities to produce forward-leaning slurries that are both cost-effective and also have incredible integrity for the customer. So that is reflected there as well. Next slide.

Okay. Next slide is up.

Thank you, Anita. So you'll see here the capitalization of the company at December of 2019. We had an undrawn ABL facility. We had total liquidity of $192.2 million, again, as of December 31, 2019. We had free cash flow generation of $39.2 million. And the company continues to be focused on generating through-cycle returns and free cash flow with target leverage of 1x net debt to adjusted EBITDA. Advance the slide, please.

Next slide is up.

Okay. And Anita, does the slide say, People or the Safety Scores?

People.

Advance the slide, please.

Next slide is up.

Thank you. So I do want to spend a minute here. You'll notice that the trajectory of our safety has improved significantly. And so I'll just remind our shareholders that the lower the score, the better the safety results are. So these numbers here reflect the total recordable incident rate. We have the best safety score we've had in the history of the company. In 2019, it was at 0.77. And you can see in 2014, that was close to a 2.5. To give you some idea of where our customers are, you're not even allowed to access the well site if you have a 3.0 or higher. And most of our key big operators really want to see a safety score that's underneath a 1 or close to it. So this was an exemplary performance, and it's tied in with something I'll talk about on the next slide, which is our leadership development. Please advance the slide.

Next slide is up.

Okay. Thank you. So we started a leadership development program in 2015. We spent an enormous amount of time and capital dollars on training our folks not only on skills like public speaking and their ability to read P&Ls, but also how to manage people and how to be a good leader. And this is really to find the servant leader culture at Nine, and it has really allowed us to have committed and engaged teams 100% of the time. So this has been a huge focus of effort, and it also has facilitated our operational and cultural integration with Magnum and Frac Tech, which allows the communication flow between the field back to the R&D teams in order to generate new and innovative technology. Advance the slide, please. And Anita, we'll advance 2 slides here past the title slide.

Okay. Next slide is up.

Thank you. So I'll just bring your attention -- I'm going to talk about the plugs in just a minute, but I'll bring your attention to the far right-hand side. This is the breakthrough tool. It is our tool that allows our operators to better float their casing to bottom. And this is a device that was designed by our Norwegian engineering team that came on board with Nine in October of 2018. These 3 tools here represent our most powerful tools in our completion tool portfolio, but the breakthrough tool has been an excellent addition for us that we are running across North American land. Next slide, please.

Slide's up.

Thank you. So here, we've depicted what we call the plug evolution or revolution. And you can see how these tools have evolved. These are frac plugs. And we depict the cast iron plug that you saw from 2000 to 2005, moving on to the composite plug, the high temp dissolvable, and now the all-temp dissolvable. And a couple of things to note on this page. You'll see that the size of these plugs has greatly reduced over time. So from 2000 to 2005, you have a 28-inch plug, and our latest and greatest tool is only 5.5 inches. That really matters because it fundamentally reduces the service company's cost to manufacture, which allows us to produce a tool that is cheaper. And our ultimate goal here is to be cheaper and faster and to reduce the operator's cost to complete per lateral foot. So that's a really key thing to note. The other thing that you'll note here is on the bottom -- very bottom of that page, you'll see the drill out times. So back in the first days of the cast iron plugs, you had a 15- to 25-minute drill out time. And often, we're seeing upwards of 100 plugs per well today. So that would take an enormous amount of time. One of the key items here is efficiency for the operator and our ability to let them get their product to market faster so they can drive their returns. So that has also shifted tremendously. And then finally, you can see the evolution of these plugs is between 3 to 5 years before you see some type of shift change in the plugs. They are always being tweaked and changed in the interim, but really a long time frame before you see another tool hit the market. And again, I'll remind you that the plug on the far right-hand side is our newest plug, and it is -- now, we have it in for materials for all types of basins and temperatures. So this is the first year, Nine feels, that we've had a tool that can fully dissolve to address the entire completions market. Some of the benefits of having a plug that is 70% shorter is, again, that you can -- you have fewer components. It really streamlines the assembly and the supply chain, fundamentally reduces our cost. Obviously then, we are able to reduce the drilling and completion costs for our customers, and we're still able to increase our own margins. This type of innovation in dissolvable technology will also allow our operators to increase their returns, as I mentioned. Their cycle times are greatly reduced. And with dissolvable plugs, you're completely eliminating the drill out. Also something that we've seen as a real push from our customer base, to be better stewards of the environment. And these plugs have a 90% lower carbon footprint. And that's really because you're eliminating the need to drill out at surface. And so you're fundamentally reducing the emissions from diesel burning engines. So we're very excited about this. We piloted these tools last year and this year, various versions of them. So it's a very exciting time for us. And that really completes our presentation today, Ernie. So I will hand it back to you.

Thank you, Ann. This concludes the Nine Energy Service 2020 Annual Meeting of Stockholders. On behalf of the Board of Directors and employees of Nine Energy Service, I want to thank each of you for participating in today's meeting. And I think we can end the call now.

This concludes today's conference, you may now disconnect.