10-K: NCS Multistage Holdings Reports Full Year 2023 Results Amidst Industry Volatility

NCS Multistage Holdings reports a net loss of $3.2 million on revenues of $142.5 million for 2023, reflecting a challenging year in the oil and gas sector.

Summary

• NCS Multistage Holdings reported a net loss attributable to the company of $3.2 million for the year ended December 31, 2023, compared to a net loss of $1.1 million in 2022.
• The company's revenue totaled $142.5 million in 2023, a decrease from $155.6 million in 2022.
• Total assets increased to $152.0 million as of December 31, 2023, up from $138.6 million the previous year.
• Approximately 65% of the company's 2023 revenue was derived from fracturing systems and enhanced oil recovery systems, 15% from Repeat Precision, and 10% each from well construction products and tracer diagnostics services.
• The company experienced a decrease in U.S. product sales and a decline in service activity across the U.S., Canada, and international markets.
• The average WTI crude oil price decreased to $77.58/BBL in 2023 from $94.90/BBL in 2022, while natural gas prices fell to $2.53 per MMBtu from $6.45 per MMBtu.
• The average U.S. land rig count decreased by 21% in the fourth quarter of 2023 compared to the same period in 2022.
• The company expects U.S. drilling activity to decline by 5% to 10% in 2024 compared to 2023, while international activity is expected to improve by 5% to 10%.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with a clear negative bias. While there are some positives like increased assets and cost-cutting measures, the significant net loss, revenue decline, and challenging industry outlook weigh heavily on the overall sentiment. The company faces significant headwinds and risks, making the outlook uncertain.

Positives

• The company's total assets increased year-over-year, indicating some growth in overall value.
• Cost reduction initiatives implemented in the second half of 2023 are expected to yield annualized savings of approximately $4.0 million.
• The company has a diverse portfolio of products and services, including fracturing systems, enhanced recovery systems, well construction products, and tracer diagnostics.
• The company has a broad customer base of over 225 customers, including major oil and gas companies.
• The company has a significant intellectual property portfolio with numerous patents.

Negatives

• The company experienced a net loss of $3.2 million in 2023, a significant increase from the $1.1 million loss in 2022.
• Revenue decreased by 8.5% year-over-year, indicating a decline in sales.
• The company faces intense competitive pressure across all product and service offerings, impacting market share and operating margins.
• The company experienced modest disruptions to its supply chain and higher prices for certain raw materials.
• The company experienced tight labor conditions throughout 2022 and 2023, leading to increased employee turnover and labor cost inflation.
• The company is exposed to currency fluctuations due to a significant portion of its revenue being generated in Canada.
• The company is subject to risks associated with the oil and gas industry, including price volatility and regulatory changes.

Risks

• The company's business is highly dependent on the level of expenditures by companies in the oil and natural gas industry.
• The cyclicality of the oil and natural gas industry may cause the company's results of operations to fluctuate.
• The company faces significant competition within the oilfield services industry.
• The company may not be able to successfully implement its strategy of increasing sales in the U.S. and international markets.
• The loss of any significant customers could cause the company's revenue and cash flow to decline substantially.
• The company's products and services are used in operations that are subject to potential hazards, exposing it to potential liabilities.
• The company is exposed to counterparty credit risk.
• The company's growth through acquisitions or strategic partnerships exposes it to various risks.
• The company may be adversely affected by the effects of inflation.
• Disruptions or delays involving suppliers could have an adverse effect on the company's business.
• The company's success may depend on the continued service and availability of key personnel.
• The company's operations may be limited or disrupted during severe weather conditions.
• The company may hold excess or obsolete inventory or have insufficient inventory.
• The company could be subject to additional income tax liabilities.
• The company's operations and its customers' operations are subject to a variety of governmental laws and regulations.
• Policy changes affecting international trade could adversely impact the company's business.
• The company's success depends on its ability to develop and implement new technologies.
• The company's competitors may infringe upon its intellectual property.
• The company may be adversely affected by disputes regarding intellectual property rights of third parties.
• The company may be unable to attract and retain skilled and technically knowledgeable employees.
• Loss of the company's information and computer systems could adversely affect its business.
• A cyber incident could occur and result in information theft, data corruption, operational disruption and/or financial loss.
• Restrictions on the ability of the company's customers to obtain water may have a material adverse effect on its business.
• The adoption of climate change legislation or regulations could result in increased compliance or operating costs.
• Federal, state and provincial legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions.
• The company may not be able to meet applicable regulatory requirements for its use of certain chemicals.
• The company's outstanding indebtedness could adversely affect its financial condition.
• Restrictive covenants in the agreement governing the company's ABL Facility may restrict its ability to pursue its business strategies.
• The company is controlled by the Advent Funds, whose interests may differ from those of its public stockholders.
• Future sales of the company's common stock could cause the market price to decline.
• Anti-takeover protections may discourage or prevent a takeover of the company.
• The company is a smaller reporting company and has elected to comply with reduced reporting requirements.
• The company may identify material weaknesses or otherwise fail to maintain an effective system of internal controls.
• Public and investor sentiment towards climate change, fossil fuels and other ESG matters could adversely affect the company's stock price.

Future Outlook

The company expects U.S. drilling activity to decline by 5% to 10% in 2024 compared to 2023, while international activity is expected to improve by 5% to 10%. Canadian activity is expected to remain flat to slightly lower.

Management Comments

• The company believes that annual average drilling and completion industry activity in Canada will be flat to slightly lower compared to 2023.
• The company expects activity in the United States will decline on average by 5% to 10% compared to 2023, although it expects U.S. activity to increase compared to December 2023 levels as the year progresses.
• The company expects international industry activity to improve on average between 5% to 10% in 2024 as compared to 2023.

Industry Context

The report reflects the ongoing volatility and challenges in the oil and gas industry, including fluctuating commodity prices, reduced drilling activity, and increased competition. The company's performance is directly tied to the capital spending of E&P companies, which are influenced by these market conditions.

Comparison to Industry Standards

• The company's revenue decline of 8.5% is indicative of the broader downturn in the oilfield services sector, where many companies have experienced reduced activity and pricing pressures.
• The company's net loss of $3.2 million is worse than some of its larger competitors, who have been able to maintain profitability through diversification and cost-cutting measures.
• The company's reliance on the Canadian market, which accounts for 69% of its revenue, exposes it to regional economic and weather-related risks, similar to other companies with significant operations in Canada.
• The company's focus on pinpoint stimulation technology is a differentiator, but it faces competition from traditional completion techniques and other providers of pinpoint stimulation equipment and services, such as Baker Hughes, Halliburton, and SLB.
• The company's efforts to reduce costs through consolidation and restructuring are in line with industry trends, as many companies are seeking to improve efficiency and profitability in a challenging market.

Corporate Governance

Legal Proceedings

• The company was involved in a lawsuit in Texas that was settled in December 2023, with the insurance carrier paying the settlement amount.
• The company was involved in a lawsuit in Wyoming that was settled in August 2023, with the insurance carrier paying the settlement amount and the company receiving reimbursement for unpaid invoices.
• The company is involved in a patent infringement lawsuit in Canada, where a decision was rendered against the company, and the company intends to appeal the judgment.
• The company is involved in other patent matters, including ongoing litigation with Nine Energy Services, Inc. and TCO AS.

Stakeholder Impact

• Shareholders may be concerned about the company's net loss and declining revenue.
• Employees may be affected by cost reduction initiatives and potential restructuring.
• Customers may be impacted by changes in the company's pricing and service offerings.
• Suppliers may be affected by changes in the company's procurement strategies.
• Creditors may be concerned about the company's financial performance and ability to meet its debt obligations.

Next Steps

• The company plans to incur approximately $2 million to $3 million in capital expenditures during 2024.
• The company intends to appeal the decision by the Canada Court regarding the patent infringement lawsuit.
• The company will continue to monitor and manage its supply chain and labor costs.
• The company will continue to pursue its strategy of increasing market share in the U.S. and international markets.

Key Dates

Keywords

oil and gas, hydraulic fracturing, pinpoint stimulation, well completion, tracer diagnostics, enhanced oil recovery, oilfield services, energy, drilling, patents