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 months endedMarch 31, 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 endedDecember 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" and "Risk Factors" in this Quarterly Report on Form 10-Q and "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . OVERVIEW Company DescriptionNine 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 theU.S. andCanada 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. OnAugust 30, 2019 , we entered into a Membership Interest Purchase Agreement ("Production Solutions Purchase Agreement") withBrigade 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 1 - Company and Organization included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Prior toAugust 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 theU.S. andCanada 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 16
--------------------------------------------------------------------------------
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 (Excluding Depreciation and Amortization): Adjusted gross profit (excluding depreciation and amortization) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (excluding depreciation and amortization) 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 onInvested 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 year-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. 17
--------------------------------------------------------------------------------
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.
In addition, the historical results of operations for the three months ended
18
--------------------------------------------------------------------------------
Results of Operations Results for the Three Months EndedMarch 31, 2020 Compared to the Three Months EndedMarch 31, 2019 Three Months Ended March 31, 2020 2019 Change (in thousands) Revenues Completion Solutions$ 146,624 $ 209,132 $ (62,508 ) Production Solutions (1) - 20,573 (20,573 )$ 146,624 $ 229,705 $ (83,081 ) Cost of revenues (exclusive of depreciation and amortization shown separately below) Completion Solutions$ 126,008 $ 161,439 $ (35,431 ) Production Solutions (1) - 17,151 (17,151 )$ 126,008 $ 178,590 $ (52,582 ) Adjusted gross profit Completion Solutions$ 20,616 $ 47,693 $ (27,077 ) Production Solutions (1) - 3,422 (3,422 )$ 20,616 $ 51,115 $ (30,499 ) General and administrative expenses$ 16,395 $ 19,939 $ (3,544 ) Depreciation 8,541 13,530 (4,989 ) Amortization of intangibles 4,169 4,688 (519 ) Impairment of goodwill 296,196 - 296,196 Gain on revaluation of contingent liabilities (426 ) (13,955 ) 13,529 Gain on sale of property and equipment (575 ) (23 ) (552 ) Income (loss) from operations (303,684 ) 26,936 (330,620 ) Non-operating (income) expenses (659 ) 9,166 (9,825 ) Income (loss) before income taxes (303,025 ) 17,770 (320,795 ) Provision (benefit) for income taxes (2,125 ) 460 (2,585 ) Net income (loss)$ (300,900 ) $ 17,310 $ (318,210 )
(1)We sold the Production Solutions segment to Brigade on
19
--------------------------------------------------------------------------------
Revenues
Revenues decreased$83.1 million , or 36%, to$146.6 million for the first quarter of 2020 which is primarily related to reduced activity and pricing pressure caused by rapidly deteriorating market conditions late in the first quarter of 2020, driven by an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes. 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 inNorth America . In turn, activity and capital spending are strongly influenced by current and expected oil and natural gas prices. During the first quarter of 2020, the average closing price of oil was$45.34 per barrel, and the average closing price of natural gas was$1.91 per MMBtu. During the first quarter of 2019, the average closing price per barrel of oil was$54.82 , and the average closing price of natural gas was$2.92 per MMBtu. Additional information with respect to revenues by historical reportable segment is discussed below. Completion Solutions: Revenue decreased$62.5 million , or 30%, to$146.6 million for the first 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, our tools revenue decreased$21.5 million , or 40%, as completion tools stages decreased by 19%, and completion tools revenue by stage decreased by 27% in comparison to the first quarter of 2019. Wireline revenue decreased$18.5 million , or 29%, as total completed wireline stages decreased by 18%. in comparison to the first quarter of 2019. Coiled tubing revenue decreased by$17.9 million , or 46%, as total days worked decreased by 35% in comparison to the first quarter 2019 and cementing revenue (including pump downs) decreased by$4.6 million , or 9% as our total cement job count decreased 8% in comparison to 2019. Production Solutions: Revenue decreased$20.6 million , or 100% for the first quarter of 2020 as the Production Solutions segment was sold onAugust 30, 2019 . Cost of Revenues (Exclusive of Depreciation and Amortization) Cost of revenues decreased$52.6 million , or 29%, to$126.0 million for the first quarter of 2020. which is primarily related to rapidly deteriorating market conditions late in the first quarter of 2020, driven by an economic recession associated with the coronavirus pandemic, as well as international pricing and production disputes. Additional information with respect to cost of revenues by historical reportable segment is discussed below. Completion Solutions: Cost of revenues decreased$35.4 million , or 22%, to$126.0 million for the first quarter of 2020. The decrease in comparison to the first 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$20.3 million decrease in materials installed and consumed while performing services, a$9.2 million decrease in employee costs, a$4.5 million decrease in other costs such as repair and maintenance, travel, meals and entertainment, and vehicle expenses and a$2.4 million decrease in transaction and integration costs associated with the Magnum Acquisition. The overall decrease in cost of revenues was partially offset by an increase in severance and other cost of revenue type restructuring costs of$1.0 million mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry. Production Solutions: Cost of revenues decreased$17.2 million , or 100% for the first quarter of 2020 as the Production Solutions segment was sold onAugust 30, 2019 . Adjusted Gross Profit Completion Solutions: Adjusted gross profit (excluding depreciation and amortization) decreased$27.1 million to$20.6 million for the first quarter of 2020 due to the factors described above under "Revenues" and "Cost of Revenues." Production Solutions: Adjusted gross profit (excluding depreciation and amortization) decreased$3.4 million to$0.0 million for the first 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$3.5 million to$16.4 million for the first quarter of 2020. The decrease in comparison to the first quarter of 2019 was primarily related to a$2.2 million decrease in transaction and integration costs associated with the Magnum Acquisition, a$1.7 million decrease in other costs such as marketing, office, travel, meals and entertainment and facility expenses and a$0.9 million decrease in employee costs mainly associated with the recently sold Production Solutions segment. The overall decrease in general and administrative expenses was partially offset by an increase 20
--------------------------------------------------------------------------------
in severance and other general and administrative type restructuring costs of$1.3 million mainly associated with headcount reductions and cost cutting measures in response to the challenging market conditions across the industry. General and administrative expenses as a percentage of revenue was 11.2% for the first quarter of 2019, compared to 8.7% for the first quarter of 2019. Depreciation Depreciation expense decreased$5.0 million to$8.5 million for the first quarter of 2020. The decrease in comparison to the first quarter of 2019 was primarily related to a 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. The decrease was also partly attributed to the reduction in depreciation expense in the Production Solutions segment, which was sold onAugust 30, 2019 . Amortization of Intangibles Amortization of intangibles decreased$0.5 million to$4.2 million for the first 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 intangible assets associated with our coiled tubing business mainly due to the intangible asset impairment charge recorded in the fourth quarter of 2019. Impairment ofGoodwill We recorded goodwill impairment charges of$296.2 million for the first quarter 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 quarter of 2019. (Gain) Loss on Revaluation of Contingent Liabilities Gain on the revaluation of contingent liabilities decreased$13.5 million to a gain of$0.4 million for the first quarter of 2020. The reduction was primarily related to a$14.1 million gain recorded in the first quarter of 2019 in connection with the estimated sales of certain dissolvable plugs associated in with the Magnum Acquisition that did not recur in the first quarter of 2020. The reduction was partially offset by an increased gain attributed to the earnout associated with our acquisition of Frac Technology AS. Non-Operating (Income) Expenses We recorded$0.7 million in non-operating income for the first quarter of 2020 compared to$9.2 million in non-operating expenses for the first quarter of 2019. The decrease in non-operating expenses was primarily related to a$10.1 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined in "Liquidity and Capital Resources") in the first quarter of 2020 that did not recur in the first quarter of 2019. Provision (Benefit) for Income Taxes We recorded an income tax benefit of$2.1 million for the first quarter of 2020 compared to an income tax provision of$0.5 million for the first quarter of 2019. The$2.6 million decrease in the income tax provision was primarily a result of the discrete tax impact from the net operating loss provisions of the Coronavirus Aid, Relief, and Economic Security Act and the goodwill impairment recorded during the quarter, coupled with changes in pre-tax income between periods. Adjusted EBITDA Adjusted EBITDA decreased$28.9 million to$10.3 million for the first quarter of 2020. The Adjusted EBITDA decrease is 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, depreciation, amortization of intangibles, and provision 21
--------------------------------------------------------------------------------
(benefit) for income taxes. 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 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 inthe 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 months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in thousands) EBITDA reconciliation: Net income (loss)$ (300,900 ) $ 17,310 Interest expense 9,828 9,326 Interest income (371 ) (160 ) Depreciation 8,541 13,530 Amortization of intangibles 4,169 4,688 Provision (benefit) for income taxes (2,125 ) 460 EBITDA$ (280,858 ) $ 45,154 Adjusted EBITDA reconciliation: EBITDA$ (280,858 ) $ 45,154 Impairment of goodwill 296,196 - Transaction and integration costs 146 4,762 Gain on revaluation of contingent liabilities (1) (426 ) (13,955 ) Gain on extinguishment of debt (10,116 ) - Restructuring charges 2,329 - Stock-based compensation expense 3,592 3,153 Gain on sale of property and equipment (575 ) (23 ) Legal fees and settlements (2) 4 68 Adjusted EBITDA$ 10,292 $ 39,159
(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.
22
--------------------------------------------------------------------------------
Return onInvested 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 then take the average of the current period-end and prior year-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 months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in thousands) Net income (loss)$ (300,900 ) $ 17,310 Add back: Impairment of goodwill 296,196 - Transaction and integration costs 146 4,762 Interest expense 9,828 9,326 Interest income (371 ) (160 ) Restructuring charges 2,329 - Gain on extinguishment of debt (10,116 ) - Benefit for deferred income taxes (1,588 ) (478 )
After-tax net operating profit (loss)
$ 389,877 $ 594,823 Total debt 400,000 435,000 Less cash and cash equivalents (92,989 ) (63,615 )
Total capital as of prior year-end
$ 91,851 $ 615,467 Total debt 386,171 415,000 Less cash and cash equivalents (90,116 ) (31,157 ) Total capital as of period-end$ 387,906 $ 999,310 Average total capital$ 542,397 $ 982,759 ROIC (3.3)% 12.5%
Adjusted Gross Profit (Excluding Depreciation and Amortization) GAAP defines gross profit as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (excluding depreciation and amortization) as revenues less direct and indirect costs 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. Management uses adjusted gross profit (excluding depreciation and amortization) to evaluate operating performance. 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. Adjusted gross profit (excluding depreciation and amortization) 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.
23
--------------------------------------------------------------------------------
Adjusted gross profit (excluding depreciation and amortization) may not be
comparable to similarly titled measures of other companies because other
companies may not calculate adjusted gross profit (excluding depreciation and
amortization) or similarly titled measures in the same manner as we do.
The following table presents a reconciliation of adjusted gross profit
(excluding depreciation and amortization) to GAAP gross profit (loss) for the
three months ended
Three Months Ended March 31, 2020 2019 (in thousands) Calculation of gross profit Revenues$ 146,624 $ 229,705 Cost of revenues (exclusive of depreciation and amortization shown separately below) 126,008 178,590 Depreciation (related to cost of revenues) 7,943 13,306 Amortization of intangibles 4,169 4,688 Gross profit $ 8,504$ 33,121 Adjusted gross profit (excluding depreciation and amortization) reconciliation: Gross profit $ 8,504$ 33,121 Depreciation (related to cost of revenues) 7,943 13,306 Amortization of intangibles 4,169 4,688 Adjusted gross profit (excluding depreciation and amortization)$ 20,616 $ 51,115 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. 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 "Liquidity and Capital Resources - Senior Notes" below. In the third quarter of 2019, we divested the Production Solutions segment for approximately$17.1 million in cash. We plan to use such proceeds to fund a portion of our 2020 capital expenditures and support working capital requirements. 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. We may also, from time to time, make open market debt repurchases (including our Senior Notes) when it is opportunistic to do to manage our debt maturity profile. In the first quarter of 2020, we repurchased approximately$13.8 million of the Senior Notes for a repurchase price of approximately$3.5 million in cash. As a result, we recorded a$10.1 million gain on extinguishment of debt which was calculated as the difference between the repurchase price and the carrying amount of the Senior Notes partially offset by$0.2 million in deferred financing costs. The gain on extinguishment of debt is included as a separate line item in our Condensed Consolidated Statements of Income and Comprehensive Income (Loss) for the three months endedMarch 31, 2020 . Subsequent toMarch 31, 2020 , we repurchased an additional$15.9 million of the Senior Notes for a repurchase price of approximately$3.9 million in cash. 24
--------------------------------------------------------------------------------
AtMarch 31, 2020 , we had$90.1 million of cash and cash equivalents and$93.5 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of$183.6 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 OnOctober 25, 2018 , we issued the Senior Notes under an indenture, dated as ofOctober 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 onMay 1 andNovember 1 of each year, and the first interest payment was due onMay 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 atMarch 31, 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. Unamortized deferred financing costs associated with the Senior Notes were$7.2 million and$7.9 million atMarch 31, 2020 andDecember 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 OnOctober 25, 2018 , we entered into a credit agreement dated as ofOctober 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 onOctober 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 toNine Energy Canada Inc. , a corporation organized under the laws ofAlberta, 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 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. We were in compliance with all covenants under the 2018 ABL Credit Agreement atMarch 31, 2020 . 25
--------------------------------------------------------------------------------
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 ofU.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 theU.S. Credit Parties, and the Canadian tranche is further guaranteed by the Canadian Credit Parties and theU.S. Credit Parties. AtMarch 31, 2020 , our availability under the 2018 ABL Credit Facility was approximately$93.5 million , net of an outstanding letter of credit of$0.2 million . Cash Flows Cash flows provided by (used in) operations by type of activity were as follows for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 (in thousands) Operating activities $ 745$ 5,888 Investing activities 535 (18,139 ) Financing activities (3,908 ) (20,279 ) Impact of foreign exchange rate on cash (245 ) 72
Net change in cash and cash equivalents
Operating Activities Net cash provided by operating activities was$0.7 million in the first quarter of 2020 compared to$5.9 million in net cash provided by operating activities in the first quarter of 2019. The$5.2 million decrease in net cash provided by operating activities was primarily a result of a$26.7 million decrease in cash flow provided by continuing operations, adjusted for any non-cash items, primarily due to a decrease in revenue in the first quarter of 2020 compared to the first quarter of 2019. The overall decrease in net cash provided by operating activities was partially offset by an increase of$21.5 million in cash collections and other changes in working capital which provided an increased source of cash flow in the first quarter of 2020 in comparison to the first quarter of 2019. Investing Activities Net cash provided by investing activities was$0.5 million in the first quarter of 2020 compared to$18.1 million in net cash used in investing activities in the first quarter of 2019. The$18.6 million decrease in net cash used in investing activities was primarily related to a decrease of$19.6 million in cash purchases of property and equipment in the first quarter of 2020 in comparison to the first quarter of 2019. The overall decrease in net cash used in investing activities was partially offset by$0.5 million in proceeds from notes receivable payments which were received in the first quarter of 2019 but did not recur in the first quarter of 2020. The overall decrease was also partially offset by a reduction in proceeds from sales of property and equipment (including insurance) of$0.4 million in the first quarter of 2020 compared to the first quarter of 2019. Financing Activities Net cash used in financing activities was$3.9 million in the first quarter of 2020 compared to$20.3 million in net cash flow used in financing activities in the first quarter of 2019. The$16.4 million decrease in net cash used in financing activities was primarily related to$20.0 million in payments on the 2018 ABL Credit Facility in the first quarter of 2019 that did not recur in the first quarter of 2020. The overall decrease in net cash used in financing activities was partially offset by$3.5 million of payments on the Senior Notes in the first quarter of 2020 that did not occur in the first quarter of 2019. Contractual Obligations Our contractual obligations atMarch 31, 2020 did not change materially, outside the normal course of business, from those disclosed under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations" in Item 7 of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 26
--------------------------------------------------------------------------------
Off-Balance Sheet Arrangements AtMarch 31, 2020 , we had a letter of credit of$0.2 million , which represented an off-balance sheet arrangement as defined in Item 303(a)(4)(ii) of Regulation S-K. As ofMarch 31, 2020 , no liability has been recognized in our Condensed Consolidated Balance Sheets for the letter of credit. Recent Accounting Pronouncements See Note 3 - New Accounting Standards included in Item 1 of Part I of this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.
© Edgar Online, source