8-K: NCS Multistage Holdings Reports Mixed Q4 and Full Year 2023 Results, Impacted by Industry Downturn

NCS Multistage Holdings experienced a decrease in revenue for both the fourth quarter and full year 2023, though a legal settlement significantly boosted net income for the quarter.

Summary

• NCS Multistage Holdings announced its fourth quarter and full year 2023 results, showing a decrease in revenue compared to 2022.
• Fourth quarter revenue was $35.2 million, down from $40.2 million in the same period of 2022.
• Full year revenue totaled $142.5 million, a decrease from $155.6 million in the previous year.
• The company reported a net income of $39.6 million for the fourth quarter, primarily due to a $40.8 million reversal of a litigation provision, compared to $2.0 million in Q4 2022.
• However, the adjusted net loss for the quarter was $(0.9) million, compared to an adjusted net income of $1.8 million in the fourth quarter of 2022.
• For the full year, NCS reported a net loss of $(3.2) million, compared to a net loss of $(1.1) million in 2022.
• Adjusted EBITDA for the fourth quarter was $2.5 million, down from $6.4 million in the same period of 2022.
• Full year adjusted EBITDA was $11.9 million, compared to $15.1 million in 2022.
• Free cash flow after distributions to non-controlling interest was $2.6 million for 2023, an increase of $4.7 million compared to 2022.
• The company ended the year with $16.7 million in cash and $8.2 million in total debt.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to decreased revenue and adjusted earnings, despite a positive legal settlement and improved free cash flow. The company faces significant industry headwinds and risks.

Positives

• The company successfully settled a legal matter in Texas with no cash payment required from NCS, resulting in a $40.8 million reversal of a litigation provision.
• Free cash flow after distributions to non-controlling interest improved by $4.7 million year-over-year to $2.6 million.
• The company maintained its adjusted gross margin percentage at 39% despite a reduction in revenue.
• SG&A expenses were reduced by $1.8 million in 2023 compared to 2022.
• NCS has a strong balance sheet with $16.7 million in cash and an undrawn ABL facility with a borrowing base of approximately $16.4 million.
• The company is seeing growth in its customer base for PurpleSeal composite frac plugs in Canada.
• NCS added a new customer for fracturing systems in the North Sea.

Negatives

• Total revenues decreased by 12% in the fourth quarter and 8% for the full year compared to 2022.
• Adjusted net loss for the fourth quarter was $(0.9) million, a decrease from an adjusted net income of $1.8 million in the same period of 2022.
• Adjusted EBITDA decreased to $2.5 million in the fourth quarter and $11.9 million for the full year.
• The company experienced lower activity levels in the U.S. and Canada, impacting sales and services revenues.
• Sales in the U.S. were negatively affected by lower natural gas prices.
• Canadian sales were impacted by commodity price volatility and the effects of wildfires.
• International markets saw a significant decrease in revenue of 45% compared to the third quarter of 2023.

Risks

• The company faces risks related to declines in oil and natural gas exploration and production activity.
• Fluctuations in oil and natural gas prices could negatively impact the company's revenue.
• Significant competition in the industry could lead to pricing pressures and reduced market share.
• The company's inability to successfully implement its strategy of increasing sales in the U.S. and international markets poses a risk.
• Loss of significant customers could negatively impact the company's financial performance.
• The company faces risks related to uninsured or underinsured business activities and litigation.
• The company's inability to integrate or realize the expected benefits from acquisitions is a risk.
• The company may face challenges in achieving suitable price increases to offset the impacts of cost inflation.
• Loss of key suppliers or disruptions in the supply chain could negatively impact the company.
• The company faces risks in attracting and retaining qualified employees and key personnel.
• The company's joint venture arrangement poses operational risks.
• Currency exchange rate fluctuations could impact the company's financial results.
• Severe weather conditions could disrupt the company's operations.
• The company's inability to accurately predict customer demand could lead to excess or obsolete inventory.
• Impairment in the carrying value of long-lived assets, including goodwill, is a risk.
• Failure to comply with or changes to regulations could negatively impact the company.
• Changes in trade policy, including tariffs, could affect the company's business.
• The company's inability to successfully develop and implement new technologies, products, and services is a risk.
• The company faces risks related to protecting and maintaining intellectual property assets.
• Loss of information and computer systems, including cybersecurity breaches, could disrupt the company's operations.
• The company's failure to establish and maintain effective internal control over financial reporting is a risk.
• Restrictions on the availability of water for drilling and hydraulic fracturing processes could impact the company.
• Changes in legislation or regulation governing the oil and natural gas industry could negatively impact the company.
• The company's inability to meet regulatory requirements for the use of certain chemicals in its tracer diagnostics business is a risk.
• A reduction in the ABL Facility borrowing base or the company's inability to comply with debt covenants could impact its liquidity.
• The company's inability to obtain sufficient liquidity on reasonable terms is a risk.

Future Outlook

The company anticipates flat or slightly lower drilling and completion activity in Canada and a 5% to 10% decline in the U.S. in 2024, but expects U.S. activity to increase compared to December 2023 levels as the year progresses. International activity is expected to improve by 5% to 10%. NCS believes it is positioned to outperform these modest changes and improve revenue in 2024, particularly in the U.S. and international markets.

Management Comments

• Ryan Hummer, CEO, stated that the fourth quarter concluded a challenging year for NCS and the industry.
• He noted that customer activity levels declined throughout the year in the U.S. and Canada.
• He highlighted progress in certain areas, including growing revenue for PurpleSeal composite frac plugs in Canada and adding a new customer in the North Sea.
• He emphasized the company's focus on being better aligned with larger customers.
• He mentioned the company's ability to maintain its adjusted gross margin percentage and reduce SG&A expenses.
• He expressed excitement for 2024 and thanked the team for their hard work and dedication.

Industry Context

The announcement reflects the challenges faced by the oil and gas industry in 2023, including lower activity levels and commodity price volatility. The company's performance is indicative of the broader industry trends, with reduced drilling and completion activity impacting revenue. However, the company is positioning itself to capitalize on opportunities in international markets and through product innovation.

Comparison to Industry Standards

• The decrease in revenue and adjusted EBITDA aligns with the challenges faced by other oilfield service companies in 2023, such as Halliburton and Schlumberger, which also reported reduced activity in North America.
• The legal settlement benefit is unique to NCS and not a typical industry occurrence, making direct comparisons difficult.
• The company's focus on cost reduction and maintaining gross margins is a common strategy among oilfield service companies during downturns, similar to actions taken by Baker Hughes.
• The growth in international markets and product innovation is a strategy also pursued by companies like Weatherford International, which are looking to diversify their revenue streams.
• The free cash flow improvement is a positive sign, but the overall financial performance is weaker than some of the larger, more diversified service providers.

Legal Proceedings

• The company settled a legal matter in Texas with no cash payment required from NCS, resulting in a $40.8 million reversal of a litigation provision.
• A patent infringement case in Canada is ongoing, with mediation having taken place in late February 2024, but no agreement has been reached.

Stakeholder Impact

• Shareholders may be concerned about the decreased revenue and adjusted earnings, but the legal settlement and improved free cash flow are positive.
• Employees may be affected by the company's cost-cutting measures and restructuring efforts.
• Customers may be impacted by the company's focus on larger clients and product innovation.
• Suppliers may be affected by the company's efforts to streamline operations and reduce costs.
• Creditors may be reassured by the company's strong balance sheet and liquidity position.

Next Steps

• The company will host a conference call on March 8, 2024, to discuss the results and updated guidance.
• NCS will focus on capitalizing on near-term opportunities and aligning with core strategies.
• The company will continue to pursue international and offshore opportunities.
• NCS will focus on commercializing innovative solutions to complex customer challenges.

Key Dates

Keywords

oil and gas, well construction, well completions, hydraulic fracturing, multistage, energy, drilling, completions, North America, international, EBITDA, revenue, net income, legal settlement, free cash flow