10-Q: NCS Multistage Holdings Reports Improved Q3 2024 Results Driven by International Growth

NCS Multistage Holdings saw a revenue increase in Q3 2024, driven by international operations and U.S. product sales, despite a decline in U.S. drilling activity.

Summary

• NCS Multistage Holdings reported a revenue of $44.0 million for the third quarter of 2024, a 15% increase compared to $38.3 million in the same period of 2023.
• The revenue growth was primarily driven by a significant increase in international services and U.S. product sales, particularly from the Repeat Precision joint venture.
• Product sales accounted for $31.7 million of the revenue, while services contributed $12.3 million.
• The company's cost of sales decreased slightly as a percentage of revenue, from 60.4% to 59.5%, due to higher-margin international work and operational restructuring.
• Selling, general, and administrative expenses increased to $14.1 million, primarily due to higher annual incentive bonus accruals.
• Net income attributable to NCS Multistage Holdings was $4.1 million, a slight decrease from $4.4 million in the same quarter of the previous year.
• The company's effective tax rate was (0.7%) for the quarter, compared to (15.0%) in the prior year, due to valuation allowances on deferred tax assets.
• For the nine months ended September 30, 2024, total revenue was $117.6 million, compared to $107.2 million for the same period in 2023.
• Net income attributable to NCS Multistage Holdings for the nine months was $3.1 million, a significant improvement from a loss of $42.8 million in the prior year, which was impacted by a large litigation provision.
• The company expects a 5% increase in Canadian drilling and completion activity for 2024, while U.S. activity is expected to decline by 10% to 15%.

Sentiment

Score: 7

Explanation: The document shows a positive trend with revenue growth and improved profitability, especially when compared to the previous year. However, there are still challenges related to market volatility, competition, and cost pressures. The company's outlook is cautiously optimistic.

Positives

• The company experienced a significant increase in international revenue, indicating successful expansion into new markets.
• Cost of sales as a percentage of revenue decreased, suggesting improved operational efficiency and higher margins.
• The company's net income improved significantly for the nine-month period compared to the previous year, indicating a turnaround in financial performance.
• The company has a strong available borrowing base under its ABL Facility, providing financial flexibility.
• The company is realizing cost savings from restructuring efforts implemented in 2023.

Negatives

• Net income attributable to NCS Multistage Holdings decreased slightly in the third quarter compared to the same period last year.
• Selling, general, and administrative expenses increased due to higher annual incentive bonus accruals.
• The company expects a decline in U.S. drilling and completion activity for 2024.
• The company experienced a foreign currency exchange loss for the nine-month period.

Risks

• The company faces intense competitive pressure across all product and service offerings, which may negatively impact market share and operating margins.
• Oil and natural gas prices remain volatile, which could impact drilling and completion activity and, consequently, the company's revenue.
• The company is exposed to supply chain disruptions and higher prices for certain raw materials and components.
• The company is subject to risks associated with international operations, including currency fluctuations and geopolitical instability.
• The company is subject to ongoing legal proceedings, including patent infringement cases, which could result in financial liabilities.
• The company's business is subject to seasonality, which results in quarterly variability in revenue.

Future Outlook

The company expects a 5% increase in Canadian drilling and completion activity for 2024, while U.S. activity is expected to decline by 10% to 15%. International activity is expected to improve slightly compared to 2023. The company plans to incur approximately $1.5 million to $1.7 million in capital expenditures during 2024.

Management Comments

• The company believes that its cash on hand, cash flows from operations, and potential borrowings under its ABL Facility and the Repeat Precision Promissory Note will be sufficient to fund its capital expenditure and liquidity requirements for the next twelve months.
• The company continues to face intense competitive pressure across all of its product and services offerings.
• The company has endeavored to increase customer prices to defray higher raw material and component costs, but these price increases have not always fully offset higher input costs.

Industry Context

The company's performance is closely tied to oil and natural gas drilling and completion activity, which is influenced by commodity prices. The company is navigating a volatile market with fluctuating oil and gas prices and varying activity levels in different regions. The company is also facing competitive pressures and supply chain challenges, which are common in the oil and gas industry.

Comparison to Industry Standards

• The company's revenue growth of 15% in Q3 2024 is a positive sign, especially considering the expected decline in U.S. drilling activity. This suggests that the company is gaining market share or successfully diversifying its revenue streams.
• The decrease in cost of sales as a percentage of revenue indicates improved operational efficiency, which is a key metric for companies in the oil and gas services sector.
• The company's net income improvement for the nine-month period is a significant achievement, especially compared to the large loss in the previous year. This suggests a successful turnaround strategy.
• The company's performance in Canada is relatively stable, while its international operations are showing strong growth. This indicates a successful expansion strategy.
• The company's ability to maintain a strong borrowing base under its ABL Facility is a positive sign of financial stability, which is important in a capital-intensive industry.

Legal Proceedings

• NCS is involved in ongoing legal proceedings, including a patent infringement lawsuit in Canada, where the company has appealed a decision against it.
• The company is also involved in other patent matters, including a patent infringement jury verdict against Nine Energy Services, Inc. and TCO AS, where the company has secured over $6.0 million to date, but the decisions are subject to appeal.

Stakeholder Impact

• Shareholders will be impacted by the improved financial performance and the company's ability to navigate market challenges.
• Employees may be impacted by the company's restructuring efforts and cost-saving measures.
• Customers may benefit from the company's innovative products and services, as well as its ability to adapt to changing market conditions.
• Suppliers may be impacted by the company's efforts to manage costs and supply chain disruptions.
• Creditors may be impacted by the company's ability to meet its debt obligations and maintain a strong borrowing base.

Next Steps

• The company expects the appeal of the Canada Court decision to be heard by early 2025, with a decision granted by late 2025.
• The company will record an operating lease right of use asset and corresponding liability of $2.3 million for the new manufacturing plant in Ojinaga, Mexico, in October 2024.
• The company will record a right of use asset and corresponding liability of $0.3 million for the new sales facility in Oklahoma City, Oklahoma, in October 2024.

Key Dates

Keywords

oil and gas, multistage, fracturing systems, well completion, tracer diagnostics, international operations, Repeat Precision, drilling activity, financial results, North America