NINE ENERGY SERVICE, INC. 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, 2022 , 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 Estimates," included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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" 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, 2021 . 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 theU.S. , as well as withinCanada and 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. 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 and isolation tools 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.
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 theU.S. , as well as withinCanada and abroad. We primarily earn our revenues pursuant to work orders entered into with our customers on a job-by-job basis. We typically enter into aMaster Service Agreement ("MSA") with each customer that provides a 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
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--------------------------------------------------------------------------------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 (Loss): Adjusted gross profit (loss) is a key metric that we use to evaluate operating performance. We define adjusted gross profit (loss) 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) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or 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. 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) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on extinguishment of debt, and (vii) the provision (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 period-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.
Recent Events, Industry Trends, and Outlook
Our business depends, to a significant extent, on the level of unconventional resource development activity and corresponding capital spending of oil and natural gas companies. These activity and spending levels are strongly influenced by current and expected oil and natural gas prices. In 2020, oil and natural gas prices as well as E&P capital spending reached historic lows. In the first quarter of 2021, oil and natural gas prices began to rebound and have steadily increased throughout 2021 and into the first quarter of 2022, reaching a 13-year high inMarch 2022 , primarily as a result of the conflict betweenRussia andUkraine igniting fears of shortages. With supportive commodity prices, activity levels improved in the first quarter of 2022, andU.S. completions increased approximately 3% as compared to the fourth quarter of 2021 according to theEnergy Information Administration , and activity levels are expected to continue to increase throughout 2022 and into 2023. Although there continues to be a disconnect between commodity price and activity levels in comparison to historical levels, such disconnect has lessened. In 2021, with the majority of public E&P companies focusing on capital discipline, despite average West Texas Intermediate ("WTI") price increasing 74% over 2020, the averageU.S. rig count in 2021 only increased 10% year over year. In the first quarter of 2022, the averageU.S. rig count increased by approximately 13% compared to the fourth quarter of 2021, while the average WTI price increased by approximately 23% over this same time period. With this improved environment, we are optimistic looking into 2022 and 2023. Underinvestment in oil and gas development, an increase in overall global demand coming out of the coronavirus pandemic, and international conflict, specifically betweenRussia andUkraine , is creating an undersupplied market and supportive commodity prices for activity growth. MostU.S. operators completed their premium drilled but uncompleted wells inventory in 2021 and will need to drill more wells in order to maintain or increase production levels in 2022, and North American capital spending in 2022 will likely increase in comparison to 2021. At the same time, the oilfield services industry is facing extreme labor shortages, as well as 16 -------------------------------------------------------------------------------- equipment and supply chain constraints. As a result, we have implemented price increases across many service lines thus far in 2022. Depending on the rate and quantity of rig and frac crew additions, we expect further pricing increases in 2022, and therefore, profitability should increase throughout the rest of 2022; however, the magnitude and timing of potential price increases will depend on a number of factors. Labor constraints will likely remain problematic for the industry, and we expect further wage and labor inflation. If activity continues to increase into 2022, we would expect further labor and equipment shortages in the market, which could lead to additional price increases across the industry. However, some of these price increases could potentially be offset by labor and material cost inflation, as well as an inability to complete work due to labor shortages or supply chain constraints. Additionally, as oilfield services companies continue to increase costs, our customers' activity levels could be negatively impacted due to their own cost inflation. Significant factors that are likely to affect commodity prices moving forward include the extent to which members of theOrganization of the Petroleum Exporting Countries and other oil exporting nations continue to reduce oil export prices and increase production; the effect of energy, monetary, and trade policies of theU.S. ; the pace of economic growth in theU.S. and throughout the world, including the potential for macro weakness; geopolitical and economic developments in theU.S. and globally, including conflicts, instability, acts of war or terrorism in oil producing countries or regions, particularlyRussia , theMiddle East ,South America andAfrica ; changes to energy regulations and policies, including those of theU.S. Environmental Protection Agency and other governmental bodies; and overall North American oil and natural gas supply and demand fundamentals, including the pace at which export capacity grows. As noted above, even with price improvements in oil and natural gas, operator activity may not materially increase, as operators remain focused on operating within their capital plans, and uncertainty remains around supply and demand fundamentals. In addition, the coronavirus pandemic and any resurgence and efforts to mitigate its effects may have a material adverse impact on demand for oil, commodity prices, and our business generally. See "Risk Factors - Risks Related to the Coronavirus Pandemic" in Item 1A of Part I of our Annual Report on Form 10-K for the year endedDecember 31, 2021 for more information.
Results of Operations
Results for the Three Months EndedMarch 31, 2022 Compared to the Three Months EndedMarch 31, 2021 Three Months Ended March 31, 2022 2021 Change (in thousands) Revenues$ 116,935
94,318 62,283 32,035
Adjusted gross profit $ 22,617 General and administrative expenses$ 11,836 $ 10,224 $ 1,612 Depreciation 6,504 7,789 (1,285) Amortization of intangibles 3,904 4,092 (188) (Gain) loss on revaluation of contingent liability 5 (190) 195 Gain on sale of property and equipment (714) (273) (441) Income (loss) from operations 1,082 (17,299) 18,381 Non-operating (income) expense 7,869 (9,080) 16,949 Loss before income taxes (6,787) (8,219) 1,432 Provision for income taxes 112 27 85 Net loss$ (6,899) $ (8,246) $ 1,347 Revenues Revenues increased$50.3 million , or 76%, to$116.9 million for the first quarter of 2022. The increase in comparison to the first quarter of 2021 was prevalent across all lines of service and was due to activity and pricing improvements. As compared to the first quarter of 2021, the averageU.S. rig count increased 13%, and active frac crew counts increased 29%. 17 -------------------------------------------------------------------------------- Cementing revenue (including pump downs) increased by$22.3 million , or 97%, as total cement job count increased 62% in comparison to the first quarter of 2021. In addition, coiled tubing revenue increased$10.6 million , or 97%, as total days worked increased by 44%, wireline revenue increased$8.7 million , or 68%, as total completed wireline stages increased by 43%, and tools revenue increased$8.7 million , or 44%, as completion tools stages increased by 37%, in each case, in comparison to the first quarter of 2021.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased$32.0 million , or 51%, to$94.3 million for the first quarter of 2022. The increase in comparison to the first quarter of 2021 was prevalent across all lines of service and was primarily related to increased activity, noted above, coupled with cost inflation associated with both labor and materials as well as headcount increases. More specifically, the increase was primarily related to a$19.7 million increase in materials installed and consumed while performing services, a$10.1 million increase in employee costs, and a$2.2 million increase in other costs such as repairs and maintenance, travel, and vehicle expenses, in comparison to the first quarter of 2021.
Adjusted Gross Profit (Loss)
Adjusted gross profit increased$18.3 million to$22.6 million for the first quarter of 2022 due to the factors described above under "Revenues" and "Cost of Revenues."
General and Administrative Expenses
General and administrative expenses increased$1.6 million to$11.8 million for the first quarter of 2022. The increase was primarily related to a$1.0 million increase in employee costs and a$0.8 million increase in professional fees in comparison to the first quarter of 2021.
Depreciation
Depreciation expense decreased$1.3 million to$6.5 million for the first quarter of 2022. The decrease in comparison to the first quarter of 2021 was associated with all lines of service and was primarily due to certain assets becoming fully depreciated in recent periods.
Amortization of Intangibles
We recorded$3.9 million in intangible amortization in the first quarter of 2022 and$4.1 million in intangible amortization for the first quarter of 2021, in each case, primarily attributed to technology and customer relationships. The$0.2 million decrease is related to certain intangible assets being fully amortized in the third quarter of 2021.
(Gain) Loss on Revaluation of Contingent Liability
In the first quarter of 2022, we had a$5 thousand loss on revaluation of the contingent liability as compared to a$0.2 million gain on revaluation of the contingent liability in the first quarter of 2021. The change was due to an increase in fair value of the earnout associated with our acquisition of Frac Technology AS between periods.
Non-Operating (Income) Expenses
We recorded$7.9 million in non-operating expenses for the first quarter of 2022 compared to$9.1 million in non-operating income for the first quarter of 2021. The change was primarily related to a$17.6 million gain on the extinguishment of debt related to the repurchase of Senior Notes (as defined and described in "Liquidity and Capital Resources") in the first quarter of 2021 that did not recur in the first quarter of 2022. The overall decrease in non-operating income is partially offset by a$0.5 million reduction in interest expense mainly due to a reduced debt balance attributed to such repurchases of Senior Notes in the first quarter of 2021.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of approximately$0.1 million for the first quarter of 2022 compared to an income tax provision of less than$0.1 million for the first quarter of 2021. The difference is primarily the result of our income tax position in state and foreign tax jurisdictions.
Adjusted EBITDA
Adjusted EBITDA increased
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--------------------------------------------------------------------------------increase was 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, taxes, depreciation, and amortization.
We define Adjusted EBITDA as EBITDA further adjusted for (i) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) loss or gain on revaluation of contingent liabilities, (iv) loss or 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 (loss) 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 (loss) 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, 2022 and 2021: Three Months Ended March 31, 2022 2021 (in thousands) EBITDA reconciliation: Net loss$ (6,899) $ (8,246) Interest expense 8,077 8,585 Interest income (12) (13) Provision for income taxes 112 27 Depreciation 6,504 7,789 Amortization of intangibles 3,904 4,092 EBITDA$ 11,686 $ 12,234 Adjusted EBITDA reconciliation: EBITDA$ 11,686 $ 12,234 (Gain) loss on revaluation of contingent liability (1) 5 (190) Gain on extinguishment of debt - (17,618) Restructuring charges 285 468 Stock-based compensation expense 927 2,010 Gain on sale of property and equipment (714) (273) Legal fees and settlements (2) 34 12 Adjusted EBITDA$ 12,223 $ (3,357) (1)Amounts relate to the revaluation of a contingent liability associated with a 2018 acquisition. 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 19 --------------------------------------------------------------------------------
Form 10-Q.
(2)Amounts represent fees, legal settlements and/or accruals associated with legal proceedings brought pursuant to the Fair Labor Standards Act and/or similar state laws.
Return on
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) goodwill, intangible asset, and/or property and equipment impairment charges, (ii) transaction and integration costs related to acquisitions, (iii) interest expense (income), (iv) restructuring charges, (v) loss (gain) on the sale of subsidiaries, (vi) loss (gain) on extinguishment of debt, and (vii) the provision (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 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. 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 ended
Three Months Ended March 31,
2022 2021
(in thousands)
Net loss $ (6,899) $ (8,246)
Add back:
Interest expense 8,077 8,585
Interest income (12) (13)
Restructuring charges 285 468
Gain on extinguishment of debt - (17,618)
After-tax net operating income (loss) $ 1,451 $
(16,824)
Total capital as of prior period-end: Total stockholders' equity$ (39,267) $
20,409
Total debt 337,436
348,637
Less cash and cash equivalents (21,509)
(68,864)
Total capital as of prior period-end$ 276,660 $
300,182
Total capital as of period-end: Total stockholders' equity$ (45,366) $
14,083
Total debt 341,511
322,031
Less cash and cash equivalents (19,941)
(52,982)
Total capital as of period-end$ 276,204 $ 283,132 Average total capital$ 276,432 $ 291,657 ROIC 2.1% (23.1)% Adjusted Gross Profit (Loss) GAAP defines gross profit (loss) as revenues less cost of revenues and includes depreciation and amortization in costs of revenues. We define adjusted gross profit (loss) as revenues less direct and indirect costs of revenues (excluding depreciation and amortization). This measure differs from the GAAP definition of gross profit (loss) because we do not include the impact of depreciation and amortization, which represent non-cash expenses. Management uses adjusted gross profit (loss) to evaluate operating performance. We prepare adjusted gross profit (loss) 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 (loss) 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. Adjusted gross profit (loss) may not be comparable to similarly titled measures of other companies because other 20 --------------------------------------------------------------------------------
companies may not calculate adjusted gross profit (loss) or similarly titled measures in the same manner as we do.
The following table presents a reconciliation of adjusted gross profit (loss) to GAAP gross profit (loss) for the three months endedMarch 31, 2022 and 2021: Three Months EndedMarch 31, 2022 2021 (in thousands) Calculation of gross profit (loss) Revenues $
116,935
94,318 62,283
Depreciation (related to cost of revenues) 6,049 7,244
Amortization of intangibles 3,904 4,092
Gross profit (loss) $ 12,664 $ (6,993)
Adjusted gross profit (loss) reconciliation:
Gross profit (loss) $ 12,664 $ (6,993)
Depreciation (related to cost of revenues) 6,049 7,244
Amortization of intangibles 3,904 4,092
Adjusted gross profit $ 22,617 $ 4,343 Liquidity and Capital Resources
Sources and Uses of Liquidity
Historically, we have met our liquidity needs principally from cash on hand, cash flow from operations and, if needed, external borrowings and issuances of debt securities. Our principal uses of cash are to fund capital expenditures, service our outstanding debt, fund our working capital requirements and, historically, fund acquisitions. Due to our high level of variable costs and the asset-light make-up of our business, we have historically been able to quickly implement cost-cutting measures and will continue to adapt as the market dictates. We have also used cash to make open market repurchases of our debt and may, from time to time, continue to make such repurchases (including with respect to our Senior Notes) when it is opportunistic to do so to manage our debt maturity profile. In addition, 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. AtMarch 31, 2022 , we had$19.9 million of cash and cash equivalents and$54.7 million of availability under the 2018 ABL Credit Facility (as defined below), which resulted in a total liquidity position of$74.6 million . We expect our liquidity position to continue to erode, due in large part to semi-annual interest payments onMay 1 andNovember 1 of each year of$14.0 million each on the Senior Notes. AtMarch 31, 2022 , we had$20.0 million of borrowings under the 2018 ABL Credit Facility and borrowed an additional$7.0 million inApril 2022 . 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. As ofMarch 31, 2022 , there were approximately$320.3 million aggregate principal amount of Senior Notes outstanding. The Senior Notes will mature onOctober 25, 2023 . In the absence of redemption or repurchase of the Senior Notes, the effective maturity date of the 2018 ABL Credit Facility would beApril 28, 2023 . Our plans to satisfy these obligations include refinancing or restructuring our indebtedness, seeking additional sources of capital, selling assets, or a combination thereof. Any such transactions may involve the issuance of additional equity or convertible debt securities that could result in material dilution to our stockholders, and these securities could have rights superior to holders of our common stock and could contain covenants that will restrict our operations. Our ability to successfully execute these plans is dependent on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions, and certain financial, business, and other factors, many of which are beyond our control. There can be no assurance that we will succeed in executing these plans. If unsuccessful, we will not have sufficient liquidity and capital resources to repay our indebtedness when it matures, or otherwise meet our cash requirements over the next twelve months, which raises substantial doubt about our ability to continue as a going concern.
Senior Notes
On
21
--------------------------------------------------------------------------------
indenture, dated as of October 25, 2018 (the "Indenture"), by and among us,
including certain of our subsidiaries, and Wells Fargo, National Association, as
trustee. As of March 31, 2022 , there were approximately $320.3 million aggregate
principal amount of Senior Notes outstanding. The Senior Notes bear interest at
an annual rate of 8.750% payable on May 1 and November 1 of each year, and the
first interest payment was due on May 1, 2019 . Based on current amounts
outstanding as of March 31, 2022 , the semi-annual interest payments are
$14.0 million each. 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 at March 31, 2022 .
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.
During the three months ended
For additional information on the Senior Notes, see Note 8 - Debt Obligations included in Item 1 of Part I of this Quarterly Report.
2018 ABL Credit Facility
OnOctober 25, 2018 , we entered into a credit agreement dated as ofOctober 25, 2018 (the "2018 ABL Credit Agreement") that 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. AtMarch 31, 2022 , we had$20.0 million of outstanding borrowings under the 2018 ABL Credit Facility, and our availability under the 2018 ABL Credit Facility was approximately$54.7 million , net of outstanding letters of credit of$0.5 million . We borrowed an additional$7.0 million under the 2018 ABL Credit Facility inApril 2022 . 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, 2022 . 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. 22 --------------------------------------------------------------------------------
Cash Flows
Cash flows provided by (used in) operations by type of activity were as follows
for the three months ended
Three Months Ended March 31,
2022 2021
(in thousands)
Operating activities $ (6,459) $ (5,243)
Investing activities 1,340 (1,585)
Financing activities 3,567 (9,061)
Impact of foreign exchange rate on cash (16) 7
Net change in cash and cash equivalents$ (1,568) $ (15,882) Operating Activities Net cash used in operating activities was$6.5 million in the first three months of 2022 compared to$5.2 million in net cash used in operating activities in the first three months of 2021. The$1.3 million increase in net cash used in operating activities was primarily a result of a$17.3 million increase in cash used for working capital, including an increase in accounts receivable from increased product and service sales, which has the effect of lagging cash collections, in comparison to the first three months of 2021. The overall change was partially offset by an increase of$16.0 million in cash flow provided by operations, adjusted for any non-cash items, in comparison to the first three months of 2021. Investing Activities Net cash provided by investing activities was$1.3 million during the first three months of 2022 compared to$1.6 million in net cash used in investing activities in the first three months of 2021. The$2.9 million change was primarily related to a$1.5 million decrease in cash purchases of property and equipment and a$1.4 million increase in proceeds from the sale of property and equipment (including insurance), in each case, in comparison to the first three months of 2021. Financing Activities Net cash provided by financing activities was$3.6 million during the first three months of 2022 compared to$9.1 million in net cash used in financing activities in the first three months of 2021. The$12.7 million change was primarily related to$8.4 million in purchases of the Senior Notes in the first three months of 2021 that did not recur in the first three months of 2022. The change was also partly attributed to$5.0 million in proceeds from the 2018 ABL Credit Facility in the first three months of 2022 that did not occur in the first three months of 2021. The change was partially offset by$0.4 million in payments on short-term debt in the first three months of 2022 that did not occur in the first three months of 2021, as well as a$0.3 million increase in payments on the Magnum Promissory Notes (as defined in Note 8 - Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q) between periods.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our critical accounting estimates, which are estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations, are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates" in Item 7 of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . There have been no material changes to our critical accounting estimates as described therein.
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.
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