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, 2023 , 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, 2022 . 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, 2022 . 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 completion services provider that targets unconventional oil and gas resource development withinNorth America and abroad. 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 and reduce emissions. 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 technologies used for completing the toe stage of a horizontal well, liner installations used in refrac operations, casing flotation devices, and fully-composite, dissolvable, and extended range frac plugs to isolate stages during plug-and-perf operations, (iii) wireline services, including electric wireline units, 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, providing a cost-effective solution for well work due to the ability to deploy efficiently and safely into a live well.
Recent Events
OnJanuary 30, 2023 , we completed our public offering of 300,000 units with an aggregate stated amount of$300.0 million (the "Units"). Each Unit consists of$1,000 principal amount of our 13.000% Senior Secured Notes due 2028 (collectively, the "2028 Notes") and five shares of our common stock. We received proceeds of$279.8 million from the Units offering, after deducting underwriting discounts and commission, which was deposited with the trustee of the 8.750% Senior Notes due 2023 (the "2023 Notes"), along with$40.0 million of cash received from borrowings under the ABL Credit Facility (as defined and described below in "Liquidity and Capital Resources"). OnJanuary 30, 2023 , we instructed the trustee of the 2023 Notes to apply such deposits toward the payment of the 2023 Notes onFebruary 1, 2023 , and we elected to discharge the indenture governing the 2023 Notes, thereby releasing us from our remaining obligations under such indenture as ofJanuary 30, 2023 .
On
For additional information on our Units offering, the ABL Credit Facility, which
was amended in connection with such offering, and the redemption of the 2023
Notes (such transactions together, the "refinancing"), see Note 8 - Debt
Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
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--------------------------------------------------------------------------------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 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 EBITDA (which is 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) Units offering and other refinancing fees and expenses, (iv) loss or gain on revaluation of contingent liabilities, (v) loss or gain on extinguishment of debt, (vi) loss or gain on the sale of subsidiaries, (vii) restructuring charges, (viii) stock-based compensation and cash award expense, (ix) loss or gain on sale of property and equipment, and (x) 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) Units offering and other refinancing fees and expenses, (iv) interest expense (income), (v) restructuring charges, (vi) loss (gain) on the sale of subsidiaries, (vii) loss (gain) on extinguishment of debt, and (viii) the provision (benefit) for deferred income taxes. We define total capital as book value of equity (deficit) 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 17 --------------------------------------------------------------------------------
consciousness, restriction of work or motion, transfer to another job, or medical treatment other than first aid.
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 steadily increased throughout 2021 and remained supportive into 2022, with oil prices reaching a 13-year high inMarch 2022 , primarily as a result of the conflict betweenRussia andUkraine igniting fears of shortages. Due to the rise in interest rates, economic uncertainty and recessionary fears, oil prices began to decline in late 2022 and have continued to be volatile into 2023. Additionally, due to the unseasonably warm winter, natural gas prices declined by approximately 69% frommid-December 2022 to the end of the first quarter of 2023. Because of the decline in commodity prices, activity levels have declined thus far in 2023, withU.S. rig counts experiencing the first quarterly decline since 2020. The Baker Hughes rig count was down by 24 rigs from the end of the fourth quarter of 2022 to the end of the first quarter of 2023, andU.S. completions in the first quarter of 2023 were down 3% compared to the fourth quarter of 2022 according to theEnergy Information Administration . Activity levels in 2023 could continue to decline, especially in natural gas producing regions, such as the Haynesville, Marcellus, andUtica if commodity prices remain low. While there is uncertainty and recessionary fears in the global market affecting commodity prices, we remain optimistic on the long-term outlook for the energy sector.OPEC , with its most recent production cut announcement, as well as publicU.S. producers remaining committed to capital discipline, rather than increasing drilling, could help prevent any potential supply surplus. Additionally, the ongoing conflict betweenRussia andUkraine provides additional uncertainty with global supply. With the decline in commodity price and overall activity levels, especially in the natural gas producing regions, we are no longer implementing price increases and have received pricing pressure from select customers across service lines. Our revenue will be impacted by activity levels within theU.S. , and depending on the rate and quantity of any further rig and frac crew declines in 2023, we could potentially expect further pricing pressure in 2023; however, the magnitude and timing of potential price decreases will depend on a number of factors. Significant factors that are likely to affect commodity prices moving forward include actions of the members ofOPEC and other oil exporting nations that relate to or impact oil production or supply; 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. Furthermore, although as noted above, our customers' activity and spending levels, and thus demand for our services and products, are strongly influenced by current and expected oil and natural gas prices, 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. 18 --------------------------------------------------------------------------------
Results of Operations
Results for the Three Months EndedMarch 31, 2023 Compared to the Three Months EndedMarch 31, 2022 Three Months Ended March 31, 2023 2022 Change (in thousands) Revenues$ 163,408 $ 116,935 $ 46,473 Cost of revenues (exclusive of depreciation and amortization shown separately below) 127,118 94,318 32,800 Adjusted gross profit$ 36,290 $ 22,617 $ 13,673 General and administrative expenses$ 19,714 $ 11,836 $ 7,878 Depreciation 7,420 6,504 916 Amortization of intangibles 2,896 3,904 (1,008) (Gain) loss on revaluation of contingent liability (292) 5 (297) Gain on sale of property and equipment (330) (714) 384 Income from operations 6,882 1,082 5,800 Non-operating expense 12,107 7,869 4,238 Loss before income taxes (5,225) (6,787) 1,562 Provision for income taxes 884 112 772 Net loss$ (6,109) $ (6,899) $ 790 Revenues Revenues increased$46.5 million , or 40%, to$163.4 million for the first quarter of 2023. The increase was prevalent across all lines of service and was due to activity and pricing improvements as the averageU.S. rig count increased 20% in comparison to the first quarter of 2022. More specifically, cementing revenue (including pump downs) increased by$17.2 million , or 38%, as total cement job count increased 2% in comparison to the first quarter of 2022. In addition, coiled tubing revenue increased$12.0 million , or 55%, as total days worked increased by 56%, tools revenue increased$9.1 million , or 32%, as completion tools stages increased by 36%, and wireline revenue increased$8.2 million , or 38%, as total completed wireline stages increased by 11%, each in comparison to the first quarter of 2022.
Cost of Revenues (Exclusive of Depreciation and Amortization)
Cost of revenues increased$32.8 million , or 35%, to$127.1 million for the first quarter of 2023. The increase in comparison to the first quarter of 2022 was prevalent across all lines of service and was 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 related to a$14.7 million increase in materials installed and consumed while performing services, a$12.4 million increase in employee costs, and a$5.7 million increase in other costs such as repairs and maintenance, travel, and vehicle expenses, in comparison to the first quarter of 2022.
Adjusted Gross Profit (Loss)
Adjusted gross profit increased$13.7 million to$36.3 million for the first quarter of 2023 due to the factors described above under "Revenues" and "Cost of Revenues."
General and Administrative Expenses
General and administrative expenses increased$7.9 million to$19.7 million for the first quarter of 2023. The increase was primarily related to$6.4 million in costs associated with the Units offering in the first quarter of 2023 that did not occur in the first quarter of 2022. The increase was also partially attributed to a$1.7 million increase in employee costs due to increases in headcount and compensation between periods. 19 --------------------------------------------------------------------------------
Depreciation
Depreciation expense increased$0.9 million to$7.4 million for the first quarter of 2023. The increase in comparison to the first quarter of 2022 was primarily related to an increase in capital expenditures across certain lines of service over the last twelve months.
Amortization of Intangibles
Amortization of intangibles, which was primarily comprised of technology and customer relationships, decreased$1.0 million to$2.9 million for the first quarter of 2023. The decrease in comparison to the first quarter of 2022 was related to certain intangible assets being fully amortized in the last twelve months.
(Gain) Loss on Revaluation of Contingent Liability
We recorded a
(Gain) Loss on Sale of Property and Equipment
Gain on sale of property and equipment decreased
Non-Operating (Income) Expenses
Non-operating expenses increased$4.2 million to$12.1 million for the first quarter of 2023. The increase in comparison to the first quarter of 2022 was primarily related to an increased interest rate in conjunction with the 2028 Notes, which were entered into in the first quarter of 2023 in connection with the Units offering.
Provision (Benefit) for Income Taxes
We recorded an income tax provision of$0.9 million for the first quarter of 2023 compared to an income tax provision of$0.1 million for the first quarter of 2022. The difference between the periods was primarily attributed to our income tax position in state and foreign tax jurisdictions.
Adjusted EBITDA
Adjusted EBITDA increased$12.8 million to$25.0 million for the first quarter of 2023. The Adjusted EBITDA 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 Adjusted EBITDA
Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our financial statements, such as industry analysts, investors, lenders, and rating agencies.
We define Adjusted EBITDA as EBITDA (which is net income (loss) before interest,
taxes, 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) Units
offering and other refinancing fees and expenses, (iv) loss or gain on
revaluation of contingent liabilities, (v) loss or gain on extinguishment of
debt, (vi) loss or gain on the sale of subsidiaries, (vii) restructuring
charges, (viii) stock-based compensation and cash award expense, (ix) loss or
gain on sale of property and equipment, and (x) 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 Adjusted EBITDA is useful because it allows us to more
effectively evaluate our operating performance and compare the results of our
operations from period to period without regard to our financing methods or
capital structure. We exclude the items listed above from net income (loss) in
arriving at this measure 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. Adjusted EBITDA should not be considered as an alternative to, or
more meaningful than, net income (loss) as determined in accordance with
accounting principles generally
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accepted in the United States of America ("GAAP") or as an indicator of our
operating performance. Certain items excluded from Adjusted EBITDA 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
Adjusted EBITDA. Our computation of Adjusted EBITDA may not be comparable to
other similarly titled measures of other companies.
The following table presents a reconciliation of the non-GAAP financial measure
of Adjusted EBITDA to the GAAP financial measure of net income (loss) for the
three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
2023 2022
(in thousands)
Adjusted EBITDA reconciliation:
Net loss $ (6,109) $ (6,899)
Interest expense 12,454 8,077
Interest income (185) (12)
Provision for income taxes 884 112
Depreciation 7,420 6,504
Amortization of intangibles 2,896 3,904
EBITDA $ 17,360 $ 11,686
(Gain) loss on revaluation of contingent liability (1) (292) 5
Certain refinancing costs (2) 6,396 -
Restructuring charges 406 285
Stock-based compensation and cash award expense 1,469 927
Gain on sale of property and equipment (330) (714)
Legal fees and settlements (3) - 34
Adjusted EBITDA $ 25,009 $ 12,223
(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 Form 10-Q.
(2)Amounts represent Units offering and other refinancing fees and expenses, including cash incentive compensation to employees following the successful completion of the Units offering, that were not capitalized.
(3)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) Units offering
and other refinancing fees and expenses, (iv) interest expense (income), (v)
restructuring charges, (vi) loss (gain) on the sale of subsidiaries, (vii) loss
(gain) on extinguishment of debt, and (viii) the provision (benefit) for
deferred income taxes. We define total capital as book value of equity (deficit)
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.
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The following table provides an explanation of our calculation of ROIC for the
three months ended
Three Months Ended March 31,
2023 2022
(in thousands)
Net loss $ (6,109) $ (6,899)
Add back:
Interest expense 12,454 8,077
Interest income (185) (12)
Certain refinancing costs (1) 6,396 -
Restructuring charges 406
285
After-tax net operating income$ 12,962 $
1,451
Total capital as of prior period-end: Total stockholders' deficit$ (23,507) $
(39,267)
Total debt 341,606
337,436
Less cash and cash equivalents (17,445)
(21,509)
Total capital as of prior period-end$ 300,654 $
276,660
Total capital as of period-end: Total stockholders' deficit$ (11,341) $
(45,366)
Total debt 373,305
341,511
Less cash and cash equivalents (21,374)
(19,941)
Total capital as of period-end$ 340,590 $ 276,204 Average total capital$ 320,622 $ 276,432 ROIC 16.2% 2.1%
(1) Amounts represent Units offering and other refinancing fees and expenses, including cash incentive compensation to employees following the successful completion of the Units offering, that were not capitalized.
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
companies may not calculate adjusted gross profit (loss) or similarly titled
measures in the same manner as we do.
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The following table presents a reconciliation of adjusted gross profit (loss) to
GAAP gross profit (loss) for the three months ended
Three Months Ended
2023 2022
(in thousands)
Calculation of gross profit:
Revenues $
163,408
127,118 94,318
Depreciation (related to cost of revenues) 6,901 6,049
Amortization of intangibles 2,896 3,904
Gross profit $ 26,493 $ 12,664
Adjusted gross profit reconciliation:
Gross profit $ 26,493 $ 12,664
Depreciation (related to cost of revenues) 6,901 6,049
Amortization of intangibles 2,896 3,904
Adjusted gross profit $ 36,290 $ 22,617 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, and fund our working capital requirements. 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 when it is opportunistic to do so to manage our debt maturity profile. 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. Although we do not budget for acquisitions, pursuing growth through acquisitions may continue to be a 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. AtMarch 31, 2023 , we had$21.4 million of cash and cash equivalents and$26.0 million of availability under the ABL Credit Facility, which resulted in a total liquidity position of$47.4 million . We expect our liquidity position to be impacted by the 2028 Notes' semi-annual interest payments ($19.5 million based on amounts outstanding as ofMarch 31, 2023 ). We believe that, based on our current forecasts, our cash on hand, together with cash flow from operations and borrowings under the 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, which are materially dependent on our financial performance and the ever-changing market.
Units Offering and 2028 Notes
OnJanuary 30, 2023 , we completed our public offering of Units and issued 300,000 Units with an aggregate stated amount of$300.0 million . Each Unit consists of$1,000 principal amount of the 2028 Notes and five shares of our common stock. We received proceeds of$279.8 million from the Units offering, after deducting underwriting discounts and commission, which was used to fund a portion of the redemption price of the 2023 Notes. Each Unit will be separated into its constituent securities (the 2028 Notes and the shares of our common stock) automatically onOctober 27, 2023 , or, if earlier, on the date, if any, on which a change of control or event of default (each as defined in the indenture governing the 2028 Notes) occurs.
A holder of Units may elect to separate its Units into its constituent securities, in whole but not in part, on or after
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--------------------------------------------------------------------------------OnJanuary 30, 2023 , we, and certain of our subsidiaries entered into an indenture, dated as ofJanuary 30, 2023 (the "2028 Notes Indenture"), withU.S. Bank Trust Company, National Association , as the trustee and as notes collateral agent, pursuant to which the 2028 Notes, which form a part of the Units, were issued. The 2028 Notes will mature onFebruary 1, 2028 and bear interest at an annual rate of 13.000% payable in cash semi-annually in arrears on each ofFebruary 1 andAugust 1 , commencingAugust 1, 2023 . The 2028 Notes are our senior secured obligations and are guaranteed on a senior secured basis by each of our current domestic subsidiaries and by certain future subsidiaries, subject to agreed guaranty and security principles and certain exclusions. On eachMay 15 andNovember 14 , commencingNovember 14, 2023 (each, an "Excess Cash Flow Offer Date"), we are required to make an offer (an "Excess Cash Flow Offer") to all holders of the 2028 Notes and, if required by the terms of any Pari Passu Notes Lien Indebtedness (as defined in the 2028 Notes Indenture), to any holders of any Pari Passu Notes Lien Indebtedness to purchase, prepay or redeem, together on a pro-rata basis, the maximum principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (plus all accrued interest (including additional interest, if any) on the 2028 Notes and any such Pari Passu Notes Lien Indebtedness and the amount of all fees and expenses, including premiums, incurred in connection therewith) that may be purchased, prepaid or redeemed using an amount of cash equal to the Excess Cash Flow Amount (as defined in the 2028 Notes Indenture and which is 75.0% of Excess Cash Flow (as defined in the 2028 Notes Indenture), as determined immediately prior to the Excess Cash Flow Offer Date), if any, subject to certain exceptions set forth in the 2028 Notes Indenture. The offer price in any such offer will be equal to 100% of the principal amount of the 2028 Notes and any such Pari Passu Notes Lien Indebtedness (or, in respect of any such Pari Passu Notes Lien Indebtedness, such lesser price, if any, as may be provided for by the terms of such Pari Passu Notes Lien Indebtedness), plus accrued and unpaid interest and additional interest, if any, to, but excluding, the date of purchase, prepayment or redemption, subject to the rights of holders of the 2028 Notes or any such Pari Passu Notes Lien Indebtedness on the relevant record date to receive interest due on an interest payment date that is on or prior to the date of purchase, prepayment or redemption, and will be payable in cash. The 2028 Notes Indenture contains covenants that, among other things and subject to certain exceptions and qualifications, limit our ability and the ability of our restricted subsidiaries to engage in certain activities. We were in compliance with the provision of the 2028 Notes Indenture atMarch 31, 2023 .
For additional information on the Units and the 2028 Notes, see Note 8 - Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
2023 Notes
OnOctober 25, 2018 , we issued$400.0 million of 2023 Notes under an indenture, dated as ofOctober 25, 2018 (the "2023 Notes Indenture"), by and among us, including certain of our subsidiaries, and Wells Fargo, National Association, as trustee. The 2023 Notes bore interest at an annual rate of 8.750% payable onMay 1 andNovember 1 of each year. The 2023 Notes were senior unsecured obligations and were fully and unconditionally guaranteed on a senior unsecured basis by each of our current domestic subsidiaries and by certain future subsidiaries. OnFebruary 1, 2023 , all of the outstanding 2023 Notes were redeemed at a redemption price of 100.0% of the principal amount thereof ($307.3 million ), plus accrued and unpaid interest ($6.7 million ), and the 2023 Notes Indenture was discharged as ofJanuary 30, 2023 .
For additional information on the 2023 Notes, see Note 8 - Debt Obligations included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
ABL Credit Facility
OnOctober 25, 2018 , we entered into a credit agreement dated as ofOctober 25, 2018 (the "2018 ABL Credit Agreement") that permitted 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 "ABL Credit Facility"). Pursuant to the 2018 ABL Credit Agreement, the ABL Credit Facility was set to mature onOctober 25, 2023 or, if earlier, on the date that was 180 days before the scheduled maturity date of the 2023 Notes if they had not been redeemed or repurchased by such date. OnJanuary 17, 2023 , we entered into the First Amendment to Credit Agreement (the "ABL Facility Amendment") withJP Morgan Chase Bank, N.A. , as administrative agent, and the lender parties thereto, which amended certain terms of the 2018 ABL Credit Agreement (as amended the "ABL Credit Agreement"). The ABL Facility Amendment became effective on 24 --------------------------------------------------------------------------------
Pursuant to the ABL Facility Amendment, the maturity date of the ABL Credit Facility was extended fromOctober 25, 2023 toJanuary 29, 2027 . In addition, the ABL Facility Amendment, among other changes, revised the terms of the ABL Credit Facility as follows: (a) decreased the size of the ABL Credit Facility from$200.0 million to$150.0 million , subject to the borrowing base (the "Loan Limit"), (b) changed the interest rate benchmark from London Interbank Offered Rate to Term Secured Overnight Financing Rate with a 10 basis point spread adjustment and increased pricing from the existing range of 1.75% to 2.25% to a range of 2.00% to 2.50%, in each case depending on our leverage ratio, (c) modified the financial covenant, enhanced reporting and cash dominion triggers in the ABL Credit Facility from the existing minimum availability threshold of the greater of$18.75 million and 12.5% of the Loan Limit to a minimum availability threshold of (i)$12.5 million fromJanuary 30, 2023 untilMay 31, 2023 and (ii) the greater of$17.5 million and 12.5% of the Loan Limit thereafter, (d) decreased the Canadian tranche sub-limit from$25.0 million to$5.0 million , (e) decreased the letter of credit sub-limit from$50.0 million to$10.0 million and (f) made satisfaction of the Payment Conditions (as defined in the ABL Facility Amendment) a condition to an Excess Cash Flow Offer in addition to a condition to voluntary payments of the 2028 Notes. The Payment Conditions in summary are (A) no default or event of default on a pro forma basis and (B) immediately after and at all times during the 30 days prior, on a pro forma basis, (1) (x) availability under the ABL Credit Facility shall not be less than the greater of 15% of the Loan Limit and$22.5 million and (y) the fixed charge coverage ratio shall be at least 1.00 to 1.00 or (2) availability under the ABL Credit Facility shall not be less than the greater of 20% of the Loan Limit and$30.0 million . The 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. We were in compliance with all covenants under the ABL Credit Agreement as ofMarch 31, 2023 . Pursuant to the ABL Credit Agreement, all obligations under the ABL Credit Facility are secured by security interests (subject to permitted liens) in substantially all of the personal property of our domestic subsidiaries, excluding certain assets. The obligations under the Canadian tranche are further secured by security interests (subject to permitted liens) in substantially all of the personal property ofNine Energy Canada, Inc. , a corporation organized under the laws ofAlberta, Canada , and its restricted subsidiaries, excluding certain assets.
Both the ABL Credit Facility and the Units collateralization were completed within 30 days after closing in accordance with the terms of the ABL Facility Amendment and the Units offering.
At
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,
2023 2022
(in thousands)
Operating activities $ 3,965 $ (6,459)
Investing activities (5,284) 1,340
Financing activities 5,344 3,567
Impact of foreign exchange rate on cash (96) (16)
Net change in cash and cash equivalents$ 3,929 $ (1,568) Operating Activities Net cash provided by operating activities was$4.0 million in the first three months of 2023 compared to$6.5 million in net cash used in the first three months of 2022. The change was primarily attributed to a$8.1 million increase in cash provided by working capital, including an increase in cash collections in comparison to the first three months of 2022. The change was also partially attributed to a$2.4 million increase in cash flow provided by operations, adjusted for any non-cash items, in comparison to the first three months of 2022. 25 --------------------------------------------------------------------------------
Investing Activities
Net cash used in investing activities was$5.3 million during the first three months of 2023 compared to$1.3 million cash flow provided in the first three months of 2022. The change was attributed to a$5.4 million increase in cash purchases of property and equipment, coupled with a$1.2 million decrease in proceeds from the sale of property and equipment (including insurance), in each case, in comparison to the first three months of 2022.
Financing Activities
Net cash provided by financing activities was$5.3 million during the first three months of 2023 compared to$3.6 million in the first three months of 2022. The increase in comparison to the first three months of 2022 was primarily attributed to$279.8 million in proceeds received from the Units offering coupled with an increase of$35.0 million in proceeds received in connection with the ABL Credit Facility. The overall increase was largely offset by the$307.3 million redemption of the 2023 Notes in the first quarter of 2023, coupled with$5.9 million in debt issuance costs associated with the Units offering.
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, 2022 . 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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