Nine(NINE) - 2019 Q4 - Annual Report

Part I Business Nine Energy Service, Inc. is a leading North American completion services provider for unconventional oil and gas development, focusing on complex, high-intensity wells - The company specializes in completion services for unconventional oil and gas wells, targeting complex and technically demanding projects like extended reach laterals and multi-well pads[17][18] - In October 2018, the company acquired Magnum Oil Tools, a leading provider of proprietary downhole completions products, including dissolvable and composite frac plugs[20] - On August 30, 2019, the company sold its Production Solutions segment to focus on its core completion services[22] - For the year ended December 31, 2019, the top five customers accounted for approximately 34% of revenues, with no single customer representing 10% or more[38] - The company's main competitors include large integrated oilfield service companies like Halliburton, Schlumberger, and Baker Hughes, as well as other specialized providers[41] Our Services The company provides a comprehensive suite of well completion services, including cementing, completion tools, wireline, and coiled tubing, ensuring well integrity and efficient stage isolation Key Service Line Metrics (as of Dec 31, 2019) | Service Line | Key Metrics | | :--- | :--- | | Cementing Services | 37 pumping units. Completed ~19,600 jobs from Jan 2014 - Dec 2019 with a 91% on-time rate | | Completion Tools | Deployed ~193,300 isolation/stage one tools and ~22,500 frac sleeves from Mar 2011 - Dec 2019 | | Wireline Services | 47 wireline pumpdown units in the U.S. Completed ~153,100 stages from Jan 2014 - Dec 2019 with a ~99% success rate | | Coiled Tubing Services | 14 coiled tubing units (12 extended reach). Performed ~9,100 jobs from Apr 2014 - Dec 2019 with a >99% success rate | Government Regulations and Environmental, Health, and Safety Matters The company's operations are subject to extensive environmental, health, and safety regulations, with particular significance placed on hydraulic fracturing activities - The business is dependent on hydraulic fracturing, which is subject to increasing regulation at federal and state levels concerning water use, chemical disclosure, and methane emissions[68][69] - The company is subject to laws like RCRA for waste management, CERCLA for environmental cleanup liability, and OSHA for worker health and safety, including new standards for crystalline silica exposure[58][59][60] - Potential regulations related to greenhouse gas emissions, climate change, and induced seismicity from wastewater injection could adversely affect customer operations and, consequently, demand for the company's services[67][74] Risk Factors The company faces significant risks primarily related to the cyclical and volatile nature of the oil and gas industry, substantial debt, intense competition, and operational hazards Risks Related to Our Business and Our Industry The company's business is highly cyclical and dependent on volatile oil and gas industry capital spending, facing substantial debt, intense competition, and regulatory changes - The business is cyclical and depends on the capital spending of oil and gas companies, which is highly volatile and sensitive to commodity prices; a sharp decline in oil prices on March 9, 2020, is noted as a significant risk[79][82] - As of December 31, 2019, the company had $400.0 million of 8.750% Senior Notes due 2023, and this substantial debt could have adverse consequences on the business[88] - The company faces intense competition for its dissolvable plug products, which has led to declines in pricing and profitability[95] - Federal, state, and local legislative and regulatory initiatives relating to hydraulic fracturing could prohibit, restrict, or increase the cost of operations, which would reduce demand for the company's services[145][150] - The company has recorded significant impairment charges in recent years, including a $20.3 million goodwill impairment and a $114.8 million intangible asset impairment in 2019, primarily related to its coiled tubing and completion tools units[125][126] Risks Related to Our Common Stock Risks related to the common stock include significant ownership concentration by SCF Partners, reduced disclosure requirements as an "emerging growth company," and identified material weakness in internal controls - As of December 31, 2019, SCF Partners owned approximately 30% of the common stock, giving it strong influence over corporate matters[168] - The company is an "emerging growth company" under the JOBS Act, allowing it to use reduced disclosure requirements and extended transition periods for new accounting standards, which may make financial comparisons difficult[173][174] - A material weakness in internal control over financial reporting was identified related to the segregation of certain accounting duties, which could result in a material misstatement of financial statements[178] - The company does not intend to pay dividends on its common stock in the foreseeable future, and its debt agreements place restrictions on its ability to do so[185] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[192] Properties The company's material facilities include its leased corporate headquarters in Houston, TX, and numerous owned and leased operational facilities strategically located in major North American oil and gas basins Summary of Material Facilities (as of Dec 31, 2019) | Location | Basin/Region | Leased or Owned | Principal Use | | :--- | :--- | :--- | :--- | | Houston, TX | — | Leased | Corporate Headquarters | | Multiple, TX/NM | Permian | Leased & Owned | Operations/Administrative | | Multiple, OK | SCOOP/STACK | Leased | Operations/Administrative | | Multiple, PA/OH | Marcellus/Utica | Leased | Operations/Administrative | | Multiple, ND/MT | Bakken | Leased & Owned | Operations/Administrative | | Multiple, TX | Eagle Ford | Leased | Operations/Administrative | | Multiple, AB, Canada | WCSB | Leased | Operations/Administrative | Legal Proceedings The company is subject to various claims and lawsuits in the ordinary course of business, with a specific fatal accident lawsuit settled in May 2019, fully funded by insurance - A lawsuit filed in December 2017 against a subsidiary (Big Lake Services) and Pioneer Natural Resources related to a fatal worksite accident was settled in May 2019; the settlement was fully funded by the company's insurance[485] Mine Safety Disclosures This item is not applicable to the company - Not applicable[196] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "NINE", with no anticipated cash dividends in the foreseeable future, and no reported sales of unregistered securities or issuer purchases of equity securities - Common stock is traded on the NYSE under the symbol "NINE"[198] - The company does not anticipate declaring or paying cash dividends in the foreseeable future[199] Selected Financial Data For fiscal year 2019, revenues slightly increased to $832.9 million, but the company reported a significant net loss of $217.8 million, largely due to major impairment charges, with total assets decreasing to $850.9 million from $1.14 billion in the prior year Selected Financial Data (Years Ended December 31) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenues | $832,937 | $827,174 | $543,660 | | Loss from operations | $(182,728) | $(28,293) | $(56,966) | | Net loss | $(217,751) | $(52,983) | $(67,682) | | Loss per share – basic | $(7.43) | $(2.17) | $(4.55) | | Total assets | $850,895 | $1,141,172 | $578,859 | | Long-term debt | $392,059 | $424,978 | $0 | | Total stockholders' equity | $389,877 | $594,823 | $287,358 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, revenue slightly increased to $832.9 million, but the company recorded a net loss of $217.8 million due to $201.3 million in impairment charges, with Adjusted EBITDA decreasing to $113.0 million from $141.1 million, and a cautious outlook for 2020 due to market volatility Results of Operations For 2019, revenue increased by 1% to $832.9 million, driven by the Magnum acquisition's full-year impact, but offset by the Production Solutions segment divestiture, leading to a significantly widened loss from operations of $182.7 million due to $201.3 million in impairment charges Comparison of Operations (2019 vs. 2018) | (in thousands) | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Revenues | $832,937 | $827,174 | $5,763 | | Completion Solutions | $774,665 | $745,316 | $29,349 | | Production Solutions | $58,272 | $81,858 | $(23,586) | | Loss from operations | $(182,728) | $(28,293) | $(154,435) | | Impairment Charges (Total) | $201,277 | $77,745 | $123,532 | | Impairment of property & equipment | $66,200 | $45,694 | $20,506 | | Impairment of goodwill | $20,273 | $12,986 | $7,287 | | Impairment of intangibles | $114,804 | $19,065 | $95,739 | | Net loss | $(217,751) | $(52,983) | $(164,768) | - The increase in Completion Solutions revenue was primarily due to a full year of revenue from the Magnum Acquisition, which boosted completion tools revenue by $67.6 million (57%); this was partially offset by a $48.4 million (27%) decrease in coiled tubing revenue[230] - The company recorded a $15.9 million loss on the sale of its Production Solutions segment in 2019[239] Non-GAAP Financial Measures For 2019, Adjusted EBITDA decreased to $113.0 million from $141.1 million in 2018, and Return on Invested Capital (ROIC) fell to 6.1% from 7.9%, reflecting lower operating income before impairments Adjusted EBITDA Reconciliation | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net loss | $(217,751) | $(52,983) | | EBITDA | $(113,817) | $35,522 | | Impairment charges (total) | 201,277 | 77,745 | | Transaction and integration costs | 13,047 | 10,327 | | (Gain) loss on revaluation of contingent liabilities | (21,187) | 3,262 | | Loss on sale of subsidiaries | 15,896 | — | | Stock-based compensation expense | 14,057 | 13,221 | | Other adjustments | 3,745 | 697 | | Adjusted EBITDA | $113,018 | $141,051 | - Return on Invested Capital (ROIC) decreased from 7.9% in 2018 to 6.1% in 2019[260] Liquidity and Capital Resources As of December 31, 2019, the company's total liquidity was $192.2 million, comprising $93.0 million in cash and $99.2 million available under its ABL facility, with $400.0 million in Senior Notes outstanding - As of December 31, 2019, the company had a total liquidity position of $192.2 million, comprising $93.0 million in cash and $99.2 million of availability under its 2018 ABL Credit Facility[268] - The company has $400.0 million in 8.750% Senior Notes due 2023 outstanding[270] Cash Flow Summary | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $101,305 | $89,577 | | Net cash used in investing activities | $(34,121) | $(389,765) | | Net cash (used in) provided by financing activities | $(37,905) | $346,691 | Critical Accounting Policies The company's critical accounting policies involve significant management judgment, particularly in the valuation and impairment testing of long-lived assets, goodwill, and intangible assets, which resulted in substantial impairment charges in 2019 - The company reviews long-lived assets, goodwill, and indefinite-lived intangibles for impairment annually on December 31 or when events indicate a potential impairment[291][295] - In Q4 2019, the company recorded a $66.2 million property and equipment impairment and a $7.1 million definite-lived intangible asset impairment in its coiled tubing asset group due to reduced demand and the adoption of dissolvable plug technology by customers[292] - In Q4 2019, the company recorded a $20.3 million goodwill impairment for its coiled tubing unit and a $107.7 million impairment of indefinite-lived trade names, primarily due to transitioning Magnum trade names and the weakened coiled tubing market outlook[298][433] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from volatile commodity prices affecting fuel costs and foreign currency exchange rates from Canadian operations, without engaging in hedging activities for either risk - The company's primary market risks are commodity price risk (affecting fuel costs) and non-U.S. currency exchange rate risk (U.S. vs. Canadian dollar)[310] - The company does not engage in hedging activities for either commodity price or foreign currency risks[311][312] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for 2019, 2018, and 2017, along with the independent auditor's report and detailed notes Consolidated Balance Sheets As of December 31, 2019, total assets decreased to $850.9 million from $1.14 billion due to significant impairment charges, while total liabilities decreased to $461.0 million from $546.3 million, and total stockholders' equity fell to $389.9 million from $594.8 million Balance Sheet Summary (as of Dec 31) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $92,989 | $63,615 | | Total current assets | $268,917 | $333,176 | | Property and equipment, net | $128,604 | $211,644 | | Goodwill | $296,196 | $307,804 | | Total assets | $850,895 | $1,141,172 | | Total current liabilities | $61,215 | $108,288 | | Long-term debt | $392,059 | $424,978 | | Total liabilities | $461,018 | $546,349 | | Total stockholders' equity | $389,877 | $594,823 | Notes to Consolidated Financial Statements The notes detail key events including the August 2019 divestiture of the Production Solutions segment for $17.1 million (resulting in a $15.9 million loss), the October 2018 Magnum Acquisition (totaling $554.7 million), and significant 2019 impairment charges of $201.3 million - On August 30, 2019, the company sold its Production Solutions segment to Brigade Energy Service LLC for approximately $17.1 million in cash, recording a loss of $15.9 million[339][393] - The October 2018 Magnum Acquisition had a total purchase consideration of $554.7 million, including $354.4 million in cash, $177.4 million in stock, and $23.0 million in contingent consideration[397] - In 2019, the company recorded total impairment charges of $201.3 million, including $66.2 million for property & equipment, $20.3 million for goodwill, and $114.8 million for intangibles[328] - The company has $400.0 million of 8.750% Senior Notes due 2023; the indenture contains covenants limiting activities such as incurring additional debt, paying dividends, and selling assets[443][446] - Contingent liabilities related to acquisitions totaled $4.0 million at year-end 2019, down from $25.5 million in 2018, primarily due to a revaluation gain of $20.9 million as an earnout target for the Magnum acquisition was not met[491][494] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of December 31, 2019, due to a material weakness in internal control over financial reporting related to inadequate segregation of accounting duties, despite ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of December 31, 2019[525] - A material weakness exists in internal control over financial reporting due to inadequate segregation of accounting duties related to journal entries and account reconciliations[529] - Remediation efforts include replacing legacy accounting systems from acquisitions and hiring an Internal Audit Director; the material weakness will continue to exist until remediation is fully implemented and validated[530][532] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of stockholders - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders[537] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of stockholders - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders[538] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of stockholders - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders[539] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of stockholders - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders[540] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for its 2020 annual meeting of stockholders - Information is incorporated by reference from the registrant's Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders[541] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Annual Report, noting the omission of financial statement schedules as the information is presented elsewhere, and includes a list of exhibits - All financial statement schedules have been omitted because they are not applicable or the required information is presented in the consolidated financial statements and related notes[545] Form 10-K Summary The company indicates that there is no Form 10-K summary - None[550]