Market Overview

Nine Energy Service Announces Second Quarter 2018 Results

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  • Revenue, Net Income and Adjusted EBITDAA of $205.5 million,
    $9.0 million and $30.6 million, respectively for the second quarter of
    2018
  • Second quarter 2018 Revenue and Adjusted EBITDA increased
    approximately 18% and 27%, respectively over the first quarter 2018
  • Second quarter 2018 ROICB of 8%

Nine Energy Service, Inc. ("Nine" or the "Company") (NYSE:NINE)
reported second quarter 2018 revenues of $205.5 million, net income of
$9.0 million and adjusted EBITDA of $30.6 million. Second quarter 2018
revenues increased approximately 18% as compared to the first quarter
2018 revenues of $173.8 million. For the second quarter of 2018, the
Company reported net income of $9.0 million, or $0.37 per diluted share.
This compares to net income of $1.7 million, or $0.08 per diluted share
in the first quarter of 2018. The Company reported second quarter 2018
adjusted EBITDA of $30.6 million, an increase of approximately 27%
compared to first quarter 2018 adjusted EBITDA of $24.1 million, and
represented the sixth sequential quarterly increase. The Company had
provided second quarter 2018 revenue guidance between $185.0 and $195.0
million and adjusted EBITDA guidance between $27.0 and $29.0 million,
with actual results outperforming the midpoint of second quarter 2018
revenue guidance by approximately 8% and the midpoint of second quarter
adjusted EBITDA guidance by approximately 9%. For the second quarter of
2018, the Company generated an ROIC of 8%, as compared to first quarter
2018 ROIC of 3%.

"The team at Nine continues to execute in the field and drive growth for
the Company," said Ann Fox, President and Chief Executive Officer, Nine
Energy Service. "We remain focused on offering our customers a unique
blend of outstanding wellsite execution and service with a portfolio of
innovative and reliable technology to increase efficiencies and decrease
cycle time," said Fox. "With our proven track record, we have been able
to gain market share and strategically increase price as seen through
the significant growth on the top line of approximately 18% and
increasing net income by over five times over the first quarter of 2018.
We were also happy to see our ROIC increase by approximately 500 basis
points this quarter. ROIC will continue to help guide management on
capital deployment decisions moving forward and gauging Company
performance."

"The trends in onshore completions continue to help propel the
Completion Solutions Segment across all service lines. Our completion
tools and wireline stages grew approximately 30% collectively quarter
over quarter despite US land rig count increasing approximately 7% and
market stage count growing approximately 8%. Operational efficiencies
within Nine continue to improve and help Nine navigate labor bottlenecks
with the average stages per employee per month increasing
over 40% through the first half of the year," said Fox.

"We remain positive on the outlook for North American shale and for the
company moving forward, anticipating another quarter of both revenue and
adjusted EBITDA growth in the third quarter of 2018. This growth will be
driven by both completion tools and our completions services, all of
which directly benefit from industry trends of more complex completions
and multi-pad development," Fox concluded.

Business Segment Results

Completion Solutions

During the second quarter of 2018, the Company's Completion Solutions
segment, which includes the Company's cementing, completion tools,
wireline and coiled tubing services reported revenues of $185.1 million
compared to first quarter 2018 revenues of $154.6 million, representing
an approximate 20% increase. For the second quarter 2018, Completion
Solutions reported adjusted gross profitc of $39.1 million
compared to first quarter 2018 adjusted gross profit of $33.2 million,
representing an approximate 18% increase.

Production Solutions

During the second quarter of 2018, the Company's Production Solutions
segment, which includes well services, generated revenues of
$20.4 million compared to first quarter 2018 revenues of $19.2 million,
representing an approximate 6% increase. For the second quarter 2018,
Production Solutions reported adjusted gross profit of $2.8 million
compared to first quarter 2018 adjusted gross profit of $2.4 million,
representing an approximate 18% increase.

Other Financial Information

During the second quarter of 2018, the Company reported selling, general
and administrative expense of $16.1 million, compared to $15.4 million
for the first quarter of 2018. Depreciation and amortization expense
("D&A") in the second quarter of 2018 was $15.1 million, compared to
$15.0 million for the first quarter of 2018.

During the second quarter of 2018, the Company's effective tax rate was
6.7%. The effective income tax rate for the quarter was primarily
attributable to changes in pre-tax book income and valuation allowance
positions as well as tax liability in states where income is expected to
exceed available net operating losses.

Liquidity and Capital Expenditures

During the second quarter of 2018, the Company reported net cash
provided by operating activities of $7.9 million, compared to $17.3
million for the first quarter of 2018.

As of June 30, 2018, Nine's cash and cash equivalents were $70.9 million
with $50.0 million of revolver capacity, $49.3 million of which is
currently available, resulting in a total liquidity position of $120.2
million as of June 30, 2018.

Capital expenditures totaled $11.6 million during the second quarter of
2018, compared to $6.5 million in the first quarter of 2018.

ABCSee end of press release for definitions

Conference Call Information

The call is scheduled for Monday, August 13, 2018 at 10:00 am Central
Time. Participants may join the live conference call by dialing U.S.
(Toll Free): (877) 524-8416 or International: (412) 902-1028 and asking
for the "Nine Energy Service Earnings Call". Participants are encouraged
to dial into the conference call ten to fifteen minutes before the
scheduled start time to avoid any delays entering the earnings call.

For those who cannot listen to the live call, a telephonic replay of the
call will be available through August 27, 2018 and may be accessed by
dialing U.S. (Toll Free): (877) 660-6853 or International: (201)
612-7415 and entering the passcode of 13681859.

About Nine Energy Service

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

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

Forward Looking Statements

  • The foregoing contains forward-looking statements within the meaning
    of Section 27A of the Securities Act of 1933 and Section 21E of the
    Securities Exchange Act of 1934. Forward-looking statements are those
    that do not state historical facts and are, therefore, inherently
    subject to risks and uncertainties. Forward-looking statements also
    include statements that refer to or are based on projections,
    uncertain events or assumptions. The forward-looking statements
    included herein are based on current expectations and entail various
    risks and uncertainties that could cause actual results to differ
    materially from those forward-looking statements. Such risks and
    uncertainties include, among other things, the general nature of the
    energy service industry risks related to economic conditions;
    volatility of crude oil and natural gas commodity prices; a decline in
    demand for our services, including due to declining commodity
    prices; our ability to implement price increases or maintain pricing
    of our core services; the loss of, or interruption or delay in
    operations by, one or more significant customers; the loss of or
    interruption in operations of one or more key suppliers; the adequacy
    of our capital resources and liquidity; our ability to implement new
    technologies and services; the incurrence of significant costs and
    liabilities resulting from litigation; the loss of, or inability to
    attract, key personnel; and other factors to be discussed in the
    "Business" and "Risk Factors" sections of the Company's Annual Report
    on Form 10-K for the year ended December 31, 2017 and the subsequently
    filed Quarterly Reports on Form 10-Q and Periodic Reports on Form 8-K.
    Readers are cautioned not to place undue reliance on forward-looking
    statements, which speak only as of the date hereof, and, except as
    required by law, the Company undertakes no obligation to update those
    statements or to publicly announce the results of any revisions to any
    of those statements to reflect future events or developments.
       
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In
Thousands, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended
June 30, 2018     March 31, 2018
 
Revenues $ 205,492 $ 173,807
Cost and expenses
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 163,591 138,227
General and administrative expenses 16,070 15,428
Depreciation 13,212 13,109
Amortization of intangibles 1,896 1,900
Loss on equity method investment 118 75
Loss (gain) on sale of property and equipment   (881 )       370  
Income from operations   11,486         4,698  
Other expense
Interest expense   1,815         2,930  
Total other expense   1,815         2,930  
Income before income taxes 9,671 1,768
Provision for income taxes   652         93  
Net income $ 9,019 $ 1,675
Net income per share
Basic $ 0.38 $ 0.08
Diluted $ 0.37 $ 0.08
Weighted average shares outstanding
Basic 23,895,858 21,902,519
Diluted 24,351,000 22,069,353
Other comprehensive income, net of tax
Foreign currency translation adjustments, net of tax of $0 and $0 $ (250 )     $ (394 )
Total other comprehensive loss, net of tax   (250 )       (394 )
Total comprehensive income $ 8,769 $ 1,281
       
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS

(In Thousands)
(Unaudited)
   
June 30,
2018
March 31,
2018
Assets
Current assets
Cash and cash equivalents $ 70,860 $ 72,900
Accounts receivable, net 140,968 116,080
Income taxes receivable 109 -
Inventories 23,091 21,748
Prepaid expenses and other 7,431 6,859
Notes receivable from shareholders   10,526     -  
Total current assets 252,985 217,587
Property and equipment, net 248,803 253,066
Goodwill 93,756 93,756
Intangible assets, net 59,749 61,645
Other long-term assets 1,093 1,181
Notes receivable from shareholders   -     10,501  
Total assets $ 656,386   $ 637,736  
Liabilities and Stockholders' Equity
Current liabilities
Long-term debt, current portion $ 5,899 $ 2,774
Accounts payable 39,002 36,446
Accrued expenses 25,871 22,383
Income taxes payable   -     721  
Total current liabilities 70,772 62,324
Long-term liabilities
Long-term debt 107,980 110,936
Deferred taxes 5,392 4,970
Other long term liabilities   62     66  
Total liabilities   184,206     178,296  
 
Stockholders' equity
Common stock (120,000,000 shares authorized at $.01 par value;
25,030,863
and 24,278,857 shares issued and outstanding at June
30, 2018
and March 31, 2018, respectively)
250 243
Additional paid-in capital 559,645 555,681
Accumulated other comprehensive income (loss) (4,328 ) (4,078 )
Retained earnings (accumulated deficit)   (83,387 )   (92,406 )
Total stockholders' equity   472,180     459,440  
Total liabilities and stockholders' equity $ 656,386   $ 637,736  
 
NINE ENERGY SERVICE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
       
Three Months Ended
June 30,
2018
March 31,
2018
 
Cash flows from operating activities
Net Income $ 9,019 $ 1,675
Adjustments to reconcile net income to net cash (used in) provided by
operating activities
Depreciation 13,212 13,109
Amortization of intangibles 1,896 1,900
Amortization of deferred financing costs 169 853
Recovery of doubtful accounts (30 ) (270 )
Deferred tax expense (benefit) 422 (47 )
Impairment of goodwill - -
Impairment of intangibles - -
Provision for inventory obsolescence 228 -
Stock-based and deferred compensation expense 3,971 2,240
Loss (gain) on sales of assets (881 ) 370
Loss (gain) on revaluation of contingent consideration 607 1,063
Loss on equity method investment 118 75
Changes in operating assets and liabilities, net of effects from
acquisitions
Accounts receivable (24,981 ) (16,387 )
Inventories (1,622 ) 406
Prepaid expenses and other current assets (571 ) 757
Accounts payable and accrued expenses 7,227 11,357
Income taxes receivable/payable (831 ) 140
Other assets and liabilities   (60 )   66  
Net cash provided by operating activities   7,893     17,307  
Cash flows from investing activities
Proceeds from sales of assets 198 1,096
Proceeds from property and equipment casualty losses 1,743 -
Purchases of property and equipment   (11,597 )   (6,468 )
Net cash used in investing activities   (9,656 )   (5,372 )
Cash flows from financing activities
Borrowings on revolving credit facilities - -
Payments on revolving credit facilities - (96,182 )
Payments on term loans - (155,701 )
Proceeds from term loan - 125,000
Payment of contingent liability on Scorpion purchase - -
Proceeds from issuance of common stock in IPO, net offering costs (166 ) 171,616
Proceeds from other issuances of common stock - 300
Deferred financing costs   -     (1,385 )
Net cash provided by (used in) financing activities   (166 )   43,648  
Net increase (decrease) in cash and cash equivalents (1,929 ) 55,583
Impact of foreign currency exchange on cash (111 ) (196 )
Cash and cash equivalents
Beginning of period   72,900     17,513  
End of period $ 70,860   $ 72,900  
       
NINE ENERGY SERVICE, INC.
SEGMENT DATA
(In
Thousands)
(Unaudited)
 
Three Months Ended
June 30, 2018     March 31, 2018
Revenues
Completion Solutions $ 185,111 $ 154,644
Production Solutions   20,381         19,163
$ 205,492       $ 173,807
Gross profit(1)
Completion Solutions $ 39,109 $ 33,218
Production Solutions   2,792         2,362
$ 41,901       $ 35,580
 
General and administrative expenses 16,070 15,428
Depreciation 13,212 13,109
Amortization of intangibles 1,896 1,900
Loss on equity method investment 118 75
Loss (gain) on sale of assets   (881 )       370
Income from operations $ 11,486       $ 4,698
 
Capital expenditures
Completion Solutions $ 10,630 $ 5,283
Production Solutions 955 692
Corporate   12         493
$ 11,597 $ 6,468
Assets
Completion Solutions $ 461,683 $ 442,433
Production Solutions 116,672 117,240
Corporate   78,031         78,063
$ 656,386 $ 637,736
 
(1) Excludes depreciation and amortization, shown below.
       

NINE ENERGY SERVICE, INC.

GEOGRAPHICAL SPLIT

(In Thousands)

(Unaudited)

 
Three Months Ended
June 30, 2018     March 31, 2018
Revenues
United States $ 197,430 $ 166,705
Canada   8,062       7,102
$ 205,492 $ 173,807
 
       
June 30, 2018     March 31, 2018
Long-lived assets:
United States $ 398,521 $ 415,138
Canada   4,880       5,011
$ 403,401 $ 420,149
     
NINE ENERGY SERVICE, INC.
RECONCILIATION OF ADJUSTED
GROSS PROFIT

(In Thousands)
(Unaudited)
     
Three Months Ended
June 30, 2018       March 31, 2018
Calculation of gross profit
Revenues $ 205,492 $ 173,807
Cost of revenues (exclusive of depreciation and
amortization shown separately below) 163,591 138,227
Depreciation (related to cost of revenues) 12,993 12,892
Amortization   1,896         1,900
Gross profit $ 27,012       $ 20,788
 
Adjusted gross profit (excluding depreciation and amortization)
reconciliation
Gross profit $ 27,012 $ 20,788
Depreciation (related to cost of revenues) 12,993 12,892
Amortization   1,896         1,900
Adjusted gross profit $ 41,901       $ 35,580
 
NINE ENERGY SERVICE, INC.
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(In Thousands)
(Unaudited)
           
Three Months Ended
June 30, 2018       March 31, 2018
EBITDA reconciliation:          
Net income $ 9,019         $ 1,675
Interest expense 1,815 2,930
Depreciation 13,212 13,109
Amortization 1,896 1,900
Provision from income taxes   652           93
EBITDA $ 26,594         $ 19,707
 
Adjusted EBITDA reconciliation:
EBITDA $ 26,594         $ 19,707
Transaction expenses - 377
Loss or gains from the revaluation of contingent liabilities (1) 607 1,063
Loss on equity investment 118 75
Non-cash stock-based compensation expense 3,971 2,240
Loss (gain) on sale of property and equipment (881 ) 370
Legal fees and settlements (2)   177           305
Adjusted EBITDA $ 30,586         $ 24,137
 
(1) Loss or gain related to the revaluation of liability for
contingent consideration relating to our acquisition of Scorpion to
be paid in shares of Company common stock and in cash, contingent
upon quantities of Scorpion Composite Plugs sold during 2016 and
gross margin related to the product sales for three years following
the acquisition.
 

(2) Amount represents fees and legal settlements associated with
legal proceedings brought pursuant to the Fair Labor Standards Act
and/or similar state laws.

       
NINE ENERGY SERVICE, INC.
RECONCILIATIONS OF ROIC
CALCULATIONS

(In Thousands)
(Unaudited)
 
Three Months Ended
June 30, 2018     March 31, 2018
 
Income from continuing operations, net of tax $ 9,019 $ 1,675
Add back:
Interest Expense 1,815 2,930
Taxes on interest   (381 )       (615 )
After-tax net operating profit $ 10,453 $ 3,990
 
Total capital as of prior period end:
Total stockholders' equity $ 459,440 $ 287,358
Total debt 115,274 242,235
Less cash and cash equivalents   (72,900 )       (17,513 )
Total capital $ 501,814       $ 512,080  
 
Total capital as of period end:
Total stockholders' equity $ 472,180 $ 459,440
Total debt 115,274 115,274
Less cash and cash equivalents   (70,860 )       (72,900 )
Total capital $ 516,594       $ 501,814  
Average total capital $ 509,204       $ 506,947  
ROIC 8 % 3 %
 

AAdjusted EBITDA is defined as EBITDA further adjusted for
(i) impairment of goodwill and other intangible assets, (ii) transaction
expenses related to acquisitions or the Combination, (iii) loss from
discontinued operations, (iv) loss or gains from the revaluation of
contingent liabilities, (v) non-cash stock-based compensation expense,
(vi) loss or gains on sale of assets, (vii) inventory write-down and
(viii) adjustment for other expenses or charges, to exclude certain
items which we believe are not reflective of ongoing performance of our
business, such as transaction expenses associated with our IPO, legal
expenses and settlement costs related to litigation outside the ordinary
course of business, and restructuring costs. Management believes
Adjusted EBITDA is useful because it allows us to more effectively
evaluate our operating performance and compare the results of our
operations from period to period without regard to our financing methods
or capital structure.

BROIC is defined as after-tax net operating profit, divided
by average total capital. We define after-tax net operating profit as
income (loss) from continuing operations (net of tax) plus interest
expense, less taxes on interest. We define total capital as book value
of equity plus the book value of debt less balance sheet cash and cash
equivalents. We then take 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.

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

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