10-Q: NCS Multistage Holdings Reports Improved Q2 Results Amidst Market Volatility

NCS Multistage Holdings saw a revenue increase in the second quarter of 2024, driven by international and U.S. growth, despite ongoing market challenges.

Summary

• NCS Multistage Holdings reported a revenue of $29.7 million for the three months ended June 30, 2024, compared to $25.4 million for the same period in 2023.
• The increase in revenue was primarily driven by growth in international and U.S. markets, partially offset by a decrease in Canadian revenues.
• Product sales accounted for $19.0 million of the revenue, while services contributed $10.7 million.
• Cost of sales decreased as a percentage of revenue, from 68.7% in Q2 2023 to 61.9% in Q2 2024, due to higher-margin international work and restructuring efforts.
• Selling, general, and administrative expenses increased slightly to $14.8 million, reflecting higher annual incentive bonus accruals, offset by cost savings from 2023 restructuring.
• The company reported a net loss of $2.8 million for the quarter, a significant improvement compared to the $32.1 million loss in the same period last year, which was impacted by a $24.9 million litigation provision.
• For the six months ended June 30, 2024, revenue was $73.5 million compared to $68.9 million in 2023.
• The net loss for the six months ended June 30, 2024 was $0.3 million, a substantial improvement from the $47.1 million loss in the same period of 2023.
• The company's effective tax rate from continuing operations was (10.5%) for the three months ended June 30, 2024 and 160.7% for the six months ended June 30, 2024.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive due to improved financial results, cost-saving initiatives, and international growth. However, the company still faces challenges from market volatility and competitive pressures.

Positives

• The company experienced a significant increase in international revenues, driven by North Sea frac systems and Middle East tracer work.
• The cost of sales as a percentage of revenue decreased, indicating improved operational efficiency.
• The company's net loss improved significantly year-over-year, demonstrating progress in financial recovery.
• The company has a solid borrowing base under its ABL Facility, providing financial flexibility.
• The company is realizing cost savings from restructuring efforts, which are expected to continue in 2024.

Negatives

• Canadian revenues decreased due to customer deferrals and E&P consolidation.
• The company continues to face intense competitive pressure across all product and service offerings.
• The company experienced a foreign currency exchange loss of $0.5 million for the three months ended June 30, 2024.
• The company's effective tax rate from continuing operations was (10.5%) for the three months ended June 30, 2024 and 160.7% for the six months ended June 30, 2024.
• The company's net loss for the six months ended June 30, 2024 was $0.3 million, although a substantial improvement, it is still a loss.

Risks

• The company's performance is heavily influenced by oil and natural gas prices, which remain volatile.
• The company faces intense competition, which may impact market share and operating margins.
• Supply chain disruptions and higher prices for raw materials and components could affect profitability.
• Potential fresh water rationing in certain regions in Canada due to drought conditions could reduce completions activity.
• The company's business is subject to seasonality, which results in quarterly variability.
• The company's ability to meet its obligations and fund capital requirements depends on future financial performance, which is subject to factors beyond its control.

Future Outlook

The company expects annual average industry drilling and completion activity in Canada to be approximately flat or slightly higher compared to 2023, while expecting a decline in activity by 5% to 10% in the United States. International industry activity is expected to improve by approximately 5% on average in 2024 as compared to 2023.

Management Comments

• Based on E&P company activity to date and expected capital budgets for the remainder of 2024, as well as industry reports, we believe that annual average industry drilling and completion activity in Canada will be approximately flat or slightly higher compared to 2023.
• In the United States, we expect a decline in activity by 5% to 10% on average compared to 2023 due in part to reduced natural gas prices and E&P consolidation.
• International industry activity is expected to improve by approximately 5% on average in 2024 as compared to 2023.

Industry Context

The report reflects the ongoing volatility in the oil and gas industry, with fluctuating prices and varying activity levels across different regions. The company's performance is influenced by these market conditions, as well as competitive pressures and supply chain challenges. The company is also navigating the impact of E&P consolidation and the shift towards non-traditional energy markets.

Comparison to Industry Standards

• While specific competitor data is not provided, the report indicates that NCS Multistage is experiencing similar trends to the broader industry, including volatility in oil and gas prices and varying activity levels in different regions.
• The company's performance in Canada is consistent with the seasonal trends of higher activity in the first quarter and lower activity in the second quarter.
• The company's expectation of a decline in U.S. activity aligns with the broader trend of reduced drilling and completion activity due to lower natural gas prices and E&P consolidation.
• The company's international growth is a positive sign, as it indicates a diversification of revenue streams and a potential for future growth in these markets.
• The company's cost-saving initiatives are in line with industry trends of improving operational efficiency and reducing costs.

Management Changes

Legal Proceedings

• The company is involved in ongoing legal proceedings, including a patent infringement lawsuit in Canada and other patent matters.
• The company has appealed the judgment in the Canada patent matter and expects the appeal to be heard by late 2024, with a decision granted by mid-2025.
• The company is also involved in other patent matters, including cases against Nine Energy Services, Inc. and TCO AS, which are subject to appeal.

Stakeholder Impact

• Shareholders may view the improved financial results and cost-saving initiatives positively.
• Employees may be impacted by restructuring efforts and changes in compensation.
• Customers may benefit from the company's enhanced products and services.
• Suppliers may be affected by the company's efforts to manage costs and supply chain disruptions.
• Creditors may be reassured by the company's improved financial position and compliance with debt covenants.

Next Steps

• The company plans to incur approximately $1.5 million to $2.0 million in capital expenditures during 2024, including new computing equipment, upgrades to tracer diagnostics equipment, and upgrades to manufacturing and field service equipment.
• The company expects the appeal of the Canada Court decision to be heard by late 2024, with a decision granted by mid-2025.

Key Dates

Keywords

oil and gas, frac systems, tracer diagnostics, well completions, energy, North America, international markets, financial results, revenue, cost of sales, net loss, drilling activity, OPEC+, restructuring, capital expenditure