Nine Energy Service Inc (NINE) 2018 Q4 法說會逐字稿

Greetings, and welcome to the Nine Energy Service Fourth Quarter and Year-end 2018 Conference Call.

(Operator Instructions) Please note, this conference call is being recorded.

I will now turn the conference over to your host, Ms. Heather Schmidt.

Thank you, you may begin.

Thank you.

Good morning, everyone, and welcome to the Nine Energy Service earnings conference call to discuss our results for the fourth quarter and full year 2018.

With me today are Ann Fox, President and Chief Executive Officer; and Clinton Roeder, Chief Financial Officer.

We appreciate your participation.

Some of our comments today may include forward-looking statements reflecting Nine's views about future events.

Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control.

These risks and uncertainties can cause actual results to differ materially from our current expectations.

We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.

We undertake no obligation to revise or update publicly any forward-looking statement for any reason.

Our comments today also include non-GAAP financial measures.

Additional details and a reconciliation to the most directly comparable GAAP financial measures are also included in our fourth quarter press release and can be found in the Investor Relations section of our website.

As a reminder, all financial and operational results for the full year and fourth quarter are consolidated for Nine, Frac Technology and Magnum and includes the legacy Nine business in only the last 6 days of October and full month November and December for Magnum, reflecting the close of the transaction on October 25, 2018.

All of Magnum's and Frac Technology's financial information from the acquisition date forward are recorded under our Completion Solutions segment as part of our completion tools service line.

I will now turn the call over to Ann Fox.

Thanks, Heather.

Good morning, everyone.

Thank you for joining us today to discuss our fourth quarter and full year results for 2018.

I want to start by talking about the year and highlight some of the team's many accomplishments.

I am extremely proud of our team and the contributions that have come from every part of the organization.

This year, we have grown through both profitable organic growth as well as the strategic M&A.

We have and remain focused on driving value for our shareholders, customers and employees and are positioning Nine as a completion-focused company that has coupled excellent conveyance service and execution at the well sites with forward-leaning technology.

Nine has realized tremendous financial growth year-over-year, growing revenue by approximately 52% to $827.2 million, adjusted EBITDA by over 140% to $141.1 million and adjusted consolidated EBITDA margin by over 600 basis points.

Every quarter this year, we saw sequential margin expansion.

In Q1 of 2018, Nine's adjusted EBITDA margin was approximately 14%, representing margin expansion of approximately 700 basis points into Q4 margins of approximately 21%.

Our year-over-year incremental adjusted EBITDA margins were approximately 29%.

For 2018, we generated return on invested capital for the legacy Nine business of 12% and ROIC for Nine, Magnum and Frac Tech consolidated of 8%.

Nine's stand-alone ROIC outperformed management's original annual target of 8%.

We have used this adjusted calculation to provide a better indicator of company performance to exclude the impairment and other onetime-related expenses.

Our 2018 cash flow from operations was $89.6 million, an increase of approximately 15x over 2017.

In January, we completed our IPO and provided our shareholders and analysts with a 2018 organic growth plan, including ROIC and adjusted EBITDA targets, both of which we exceeded this year for the legacy Nine business.

Additionally, we have met or exceeded quarterly revenue and adjusted EBITDA guidance since coming public.

Providing accurate and transparent insight around the company will remain a cornerstone of our investor approach moving forward.

We appreciate the support of our shareholders throughout the year, and we'll remain focused on driving returns and being good stewards of capital as we continue life as a public company.

Organically, our service lines performed exceptionally well, winning profitable market share with the majority of our service lines executing large activity and pricing growth.

Including Magnum and Frac Tech for the closing period, year-over-year, we completed approximately 51,000 more stages as a company, an increase of approximately 86%.

An increase in our market share of U.S. stages completed from approximately 11% in 2017 to approximately 16% in 2018.

In cementing, we increased our number of jobs completed by approximately 21%, increased pricing by approximately 18% and increased revenue by approximately 44% year-over-year.

Wireline stages completed increased by approximately 51%, pricing increased by approximately 23% and revenue increased by approximately 86% year-over-year.

Year-over-year completion tool stages increased by approximately 115% and revenue increased by approximately a 100%.

Coiled tubing utilization increased by approximately 6%, while simultaneously increasing pricing by approximately 20% and revenue by approximately 34% year-over-year, while service utilization decreased by approximately 4% with pricing increasing by approximately 8% and revenue by approximately 5% year-over-year.

This year, we have also increased our stages per employee by approximately 14%.

We took the majority of our wage inflation during the first half of the year and increased our headcount by approximately 28% year-over-year increases of Magnum and Frac Tech.

These accomplishments are a result of our incredible team and their ability to execute at the well site as well as design and deploy reliable and forward-meaning downhole technology.

I had said throughout last year that I would be disappointed if we did not complete any M&A, and our desire was to leverage more of our top line towards completion tools, which, as a reminder, requires very little CapEx.

During 2018, we successfully executed the strategy with the consummation of the Magnum and Frac Tech acquisitions.

These partnerships excel Nine through a more balanced profile of completion tools and conveyance while creating additional barriers to entry in differentiation.

We are less labor-intensive, less capital-intensive and more free cash flow generative.

With both teams, we expanded our R&D capabilities to help ensure we are creating the tools of the future for our customers and staying ahead of industry trends.

We have always said the dissolvables will play a significant role in the completions moving forward as we reduced intervention downhole.

Having reliable dissolvable offering is imperative as we begin the early innings of adoption.

Magnum provided us with a strong first-mover advantage with a proven product and a growing market.

We believe that dissolvables are 10% to 15% of the total stage count today and will be 35% to 50% of the total stage count in the next 3 to 5 years because their value proposition is so significant to the operator.

With the proliferation of multi-well pad development, the time from spud to first sale have elongated.

And a 10,000-foot well or coiled tubing drill out can take approximately 3 to 4 days, and a well service drill out approximately 6 to 7 days.

The use of dissolvable plugs can eliminate this process, saving operators 4 days per well or 24 days for a 6-well pad.

Frac Tech, a Norwegian company, provided us the reliable and superior casing flotation tool that allows the operators to float casing to bottom while additionally bringing long-dated expertise and new technology development and commercialization.

We've continued to see adoption and market share gains with our Breakthru Tool in both the U.S. and Canada.

The integration for both of these transactions is going well, both operationally with cross-selling and the sharing of data as well as procedurally with system and platform implementations, including ADP, NetSuite and EHS Insight, our HSE tracking software.

Now turning to Q4.

We had a positive quarter from both the financial and operational perspective, outperforming our expectations with our adjusted EBITDA margins.

Revenue met the midpoint of management's original guidance and we beat the midpoint of original adjusted EBITDA guidance by approximately 13%, putting our adjusted EBITDA margin at approximately 21% for the quarter.

Company revenue for the quarter was $229.4 million, an approximate 5% increase over Q3.

Net loss was $77.3 million, which includes impairments for our well services business and adjusted EBITDA was $48 million, an increase of approximately 25% quarter-over-quarter.

During the fourth quarter of 2018, the company generated ROIC of 20% for the legacy Nine business and 13% for the Nine consolidated businesses.

Overall, we were extremely pleased with the execution this quarter and throughout 2018.

I remain confident in the team we have in place and our ability to differentiate.

I would like to now turn the call over to Clinton to walk through segments and other detailed financial information.

Thank you, Ann.

As a reminder, all financial information and operational metrics include the legacy Nine business and 2 months and 6 days of Magnum contribution, which is part of the Completion Solutions segment.

In our Completion Solutions segment, fourth quarter 2018 revenue totaled $209 million, an increase of approximately 6% compared to third quarter revenue.

Fourth quarter 2018 adjusted gross profit was $55.1 million, an increase of approximately 11% over Q3.

During the fourth quarter of 2018, we completed 1,038 cementing jobs, a decrease of approximately 3% versus the third quarter due to typical holiday shutdowns and budget exhaustion.

The average blended revenue per job increased by approximately 30%.

Cementing revenue for the quarter was $53.2 million, which was flat quarter-over-quarter.

At the end of Q4, we received 1 single-pump unit, bringing our year-end unit count to 31.

Delivery of the double-pump unit is now anticipated for Q1, but is included as part of the Q4 CapEx number.

During the fourth quarter, we completed 10,524 wireline stages, a decrease of approximately 2%.

The average blended revenue per stage decreased approximately 2%.

Wireline revenue for the quarter was $66.1 million, a decrease of approximately 4%.

The decrease in wireline revenue was in line to slightly less in historical results and was most affected by activity declines in the Northeast.

We did not add any growth capital wireline units during the quarter, bringing our year-end count to 55.

For completion tools, we completed 22,512 stages, an increase of approximately 21%.

Completion tool revenue was $45.5 million, an increase by approximately 70%.

The large increase was due to the partial addition of Magnum and Frac Tech during the quarter.

During the fourth quarter, our coiled tubing days were decreased by approximately 22% with the average blended day rate increased by approximately 19%.

Coiled tubing utilization during the quarter was 62%.

Coiled tubing revenue for the quarter was $44.6 million, a decrease of approximately 7%.

For the entire quarter, we had a small diameter unit down for maintenance, which brought down utilization, while also inflating the average day rates.

We did not add any additional coiled tubing units during the quarter bringing our year-end count to 16, 12 of which are large diameter units.

In our Production Solutions segment, fourth quarter 2018 revenue totaled $20.5 million, a decrease of approximately 6% compared to third quarter 2018.

Adjusted gross profit for the quarter was $2.8 million, a decrease of approximately 10%.

During the fourth quarter, well services had utilization of 60%, a decrease of approximately 8%.

Total rig hours for the quarter was 46,140, a decrease of approximately 7%.

Average revenue per rig hour during the fourth quarter was $444, an increase of approximately 1%.

Revenue declines were due in large part to activity declines in the Rockies and Bakken regions with weather and holidays and were similar to historical Q4 declines.

During the quarter, the company reported net loss of $77.3 million or $2.78 per basic share, which includes $77.7 million related to the impairments associated with the Production Solutions segment.

As a reminder, the Production Solutions segment is approximately 10% of our total revenue and includes 107 workover rigs across the U.S. While our team continues to outperform the competition, the impairment is a result of deteriorating well service market conditions due to lower commodity prices towards the end of the fourth quarter, coupled with deep reach coiled tubing and dissolvable technology taking market share in the completion-based drill out.

We are a completion-focused company, and well service remains a noncore asset that we will continue to evaluate.

Adjusted net income for the fourth quarter was $13.6 million, a $0.49 adjusted basic earnings per share.

Net loss for the full year 2018 totaled $53 million or $2.17 for a basic share.

For the year ended December 31, 2018, adjusted net income was $40.6 million or $1.66 adjusted basic earnings per share.

The company reported selling, general and administrative expenses of $22.7 million compared to $21.8 million for the third quarter.

This increase was largely due to transaction expenses and added cost coming with the Magnum and Frac Tech acquisitions.

Depreciation and amortization expense in the fourth quarter was $18.2 million compared to $15.5 million in the third quarter due to the addition of Magnum and the amortization associated with that transaction.

The company recognized income tax expense of approximately $500,000 in the fourth quarter of 2018 and overall income tax expense for the year of approximately $2.4 million, resulting in an effective tax rate of negative 4.7% for 2018.

The impact of pretax book income from the Q4 Production Solutions impairment and Magnum transaction costs is a primary driver behind the negative effective tax rate for 2018.

Our cash tax expense for 2018 was approximately $1.5 million.

Total capital expenditures were $9.6 million for the fourth quarter, of which approximately 29% was maintenance CapEx.

For the year ended December 31, 2018, we reported total capital expenditures of $52.6 million, of which approximately 22% was maintenance CapEx.

Approximately $4.2 million of 2018 capital expenditures will be delayed into 2019.

The average DSO for the fourth quarter was 62 days, which is flat in Q3 and averaged approximately 62 days for the full year.

With the Magnum transaction, we also put a new capital structure in place with long-dated maturities and enhanced financial flexibility.

This included $400 million of the 5-year senior unsecured notes at an 8.75% rate, along with a new $200 million, and 5-year ABL credit facility.

We have always had a conservative approach to debt and still believe onetime net debt-to-EBITDA is the optimal leverage.

We were uncomfortable with this new capital structure because of the cash generative and low capital nature of Magnum and Frac Tech and one of our priorities in 2019 will be deleveraging the company.

As of December 31, 2018, Nine's cash and cash equivalents were $63.6 million with $83.5 million of availability under our revolving credit facility, which does not yet include the full credit from the Magnum acquisition, which will increase our liquidity profile.

This results in a total liquidity position of $147.1 million as of December 31, 2018.

I will now turn it back to Ann to discuss outlook for Q1 and 2019.

Thank you, Clinton.

Clearly, the 2019 environment has shifted with the unanticipated decline in WTI at the end of 2018.

U.S. stage counts have been projected to be up as much as 14% in 2019 by research houses like Spears, which is now projected to be flat to slightly up with some projecting activity down as much as 10%.

Our customers were setting 2019 budgets working on RFQs and selecting service companies in a difficult context in conjunction with WTI declines of over 30% dipping below $45 in December.

This new revenue profile for operators led to an extreme focus on reducing capital budget, some over 30%, and lowering costs causing most service providers to reduce price and work with customers to align with this new environment.

At Nine, we work with our customers on pricing adjustments, which were on average in a low double-digits across service lines, none of which were immune to pricing discounts.

We believe, the majority, if not all of these pricing concessions, have been taken during Q1 of this year, and we do not anticipate any incremental pricing declines unless we see another significant decline in commodity prices.

The majority of our customers are larger, more efficient operators, so while we have seen some activity decline, this should not be as sharp as pricing concessions.

We are continuing to work with our vendors to lower costs and protect some of the margin we realized in Q4, but we are anticipating margin compression in Q1 and throughout 2019 as these pricing concessions are realized and we retain key personnel vital to Nine moving forward.

For Q1, we expect total revenue between $220 million and $230 million and adjusted EBITDA between $37 million and $41 million, putting our adjusted EBITDA margin at the midpoint of the range at approximately 17%.

Assuming an average WTI of $55 for 2019, Q1 will be a reasonable quarterly run rate for 2019.

We are not planning for a back-half recovery in 2019, but we are also not planning on any significant decline in WTI.

Our capital allocation priorities for 2019 are organic growth through market share gains and geographic expansion as well as delevering the balance sheet.

2019 will be defined by organic growth, which was always our plan even prior to the decline in WTI.

We closed 2 strategic acquisitions in 2018, and in 2019 we want to digest and properly integrate these teams.

We anticipate full year 2019 capital expenditures to range from $60 million to $70 million, including greenfield expansion of our cementing division into the MidContinent.

Approximately 70% to 75% of total capital expenditures will be related gross CapEx and 25% to 30% maintenance CapEx.

All of the growth CapEx will be within the Completion Solutions segment.

We anticipate with this capital plan to live within cash flows and to be very cash flow positive for 2019.

Our 2019 CapEx plan has increased year-over-year due only to the greenfield expansion of our cementing division into the MidCon basin.

We have talked a great deal about the technical barriers to entering this business and we feel confident with our historical performance and customer relationships we can move organically into what will be an important basin moving forward.

We have proven our ability to enter new markets in 2016 when we placed capital in the Delaware basin for cementing facility, which has enabled us to capture market share.

We are extremely excited for this expansion and anticipate to be operational towards the end of the year.

For unit additions, we anticipate the following: In cementing, we will be receiving the double cement pump that was part of our 2018 CapEx in Q1, and we are anticipating delivery of 8 double-pumps in 2019, which obviously, increase the unit for expansion into MidCon.

We will also be adding 6 wireline units in 2019.

In coil, we will not be adding any incremental units or completing any conversions, so our unit count will remain the same throughout the year.

We are currently forecasting cash tax expense of approximately $3 million for the full year, interest expense for 2019 will be approximately $37 million, and D&A will be approximately $81 million, approximately $61 million will be depreciation and $20 million of amortization.

We have a 2019 ROIC target of 7%.

We anticipated the Magnum acquisition in the near term being neutral to slightly dilutive to ROIC as we added debt to the balance sheet to finance the acquisition, but with the capital-light and cash-generative nature of the business would be very accretive for the medium to long term.

We anticipated the 2019 capital plan should be able to fund the majority of our 2020 growth needs.

Couple this with a larger portion of the top line lever to completion tools and our CapEx as a percentage of revenue is anticipated to continue to decrease.

This, along with productivity growth projected to be between 10% to 20% in 2020, we see a positive trajectory to create a significant gap between our WACC and ROIC in 2020 and beyond.

As a reminder, the legacy Nine business started 2018 with an ROIC of 3% in Q1 and finished the year with an ROIC of 20% in Q4.

ROIC will continue to be the most important metric used for evaluating capital deployment in M&A and a significant portion of the bonus targets for executive compensation will continue to be directly tied to meeting this target.

Now let's talk about cash flow generation.

Despite margin compression in 2019, we do anticipate generating significant free cash flow in 2019 with a free cash flow yield between 6% to 8% and a cash earnings per share between $4 to $5, which we define as cash flow from operations divided by diluted average share count.

Overall, I am very positive about the strategy and the positioning of the company and I believe we have the right combination of technology and service.

This strategy has enabled us to grow organically and build size and scale while simultaneously driving cash flow generation, higher margin despite a declining commodity price environment.

We will now open up the call for Q&A.

(Operator Instructions) Our first question is from Sean Meakim with JPMorgan.

Given the large job of moderately lower spending in the Lower 48 year-over-year and what I think was a pretty balanced outlook that you gave in terms of the progression what you expect over the course of '19.

Can you maybe talk through product service lines that have the greatest opportunity for incremental market share in '19?

How do you think about that playing into the outlook that you laid out?

Sure.

I mean, I think the '19 has demonstrated a great capacity to gain incremental market share, obviously, in both down markets as well as up markets.

I think, when we think about market share, clearly we see a great capacity for our cement business that's obviously why we're growing organically.

And I think we're very well positioned in the Permian basin.

So from a competitive landscape perspective, we've really not seen a big change there.

And so we remain very excited about that business.

I think when we think about our service lines and we think about 2019, I think, it's important for the market to understand where we see the greatest drivers of pricing degradation as it relates to Q1, and what's most defensible or not and when we think about that, as you think about Q1, the greatest driver of that pricing degradation has been the wireline business.

So when you think about defending these businesses and that's probably not a surprise to people, but inside of the Completion Services business, that has been the toughest service line from a pricing perspective coming into this quarter.

Cementing has really held up quite well as well as coiled tubing.

That's not to say any service line is immune from pricing in this market.

I think there was kind of a confluent of events at the end of Q4 and it's really the way I think about it is almost a trifecta of things.

You had a $45 prize slap us in the face which frankly, I think, shook all of us, operators and service companies.

And that was smack at the time that we were doing RFQ.

So had that been in July, I don't think service as an industry would have given up as much on the pricing front.

The second piece is, you had investors standing on E&P's heads to reduce their capital spend, live within their cash flows and start thinking about cash-on-cash returns, which I think that segment of the industry responded to and you saw a lot of cuts in those capital budgets.

And so I think that, that conflated a lot of issues for us.

And then third, you had this underlying parent-child well interference with the offset child wells potentially not being as productive and that's just a lurking issue underneath for the operators.

So that -- the timing of all of that, I think, resulted in, including us, yielding too much price.

And I think that does have an opportunity, Sean, to correct itself.

So I'm not worried about the service lines ability to constantly think about capturing incremental market share.

What I'm very focused on right now is the timing of recapturing price.

I don't mind my 17% margin, especially when I can generate this much cash flow, but I sure would like to get that 400 basis points back.

Got it.

And I think that makes a lot of sense.

That's very helpful.

If you can talk about Magnum for a second.

It sounds like the overall expectation for dissolvable adoption hasn't really changed, but not a surprise, but maybe can you give us a little more granularity how has customer uptake low-temperature plastic plugs been in the Permian and Northeast, any learnings thus far you've been able to look under the hood at Magnum and to get more direct customer interaction on the plugs?

Curious to hear a little more about on the ground feedback that you've gotten this far.

Sure.

It's a great question.

So I would say, we thought this is an excellent team before we transacted and the only difference now is we know they are.

And that's been excellent to watch the 2 teams.

And I'll touch on a couple different things.

When we think about the investment thesis for Magnum, it was really predicated on the adoption of dissolvables being between 35% to 50% over the next 3 to 5 years, and I'll get to that in a second.

So I think, the appetite for adoption is stronger than I had originally anticipated and the thesis around polymers versus metal-based magnesium plugs is also stronger than I had originally anticipated.

So I think on both of those fronts we have more confidence.

Certainly, we had anticipated for the market a slow walk of dissolvables across U.S. shale just as you experience, Sean, with cast iron fit plugs and composites.

It took a little while for new competitive entrants to really refine that technology and then also for the price point in that technology to come down.

And when those 2 variables crossed lines, you saw an absolute inflection point in the adoption rate.

That's why we give you a 3- to 5-year mark.

So as an industry and also as a company, there are 2 points here: we need to move the price point down for the operator and we need to increase the scope and range of the technology.

And what I mean by that is, if you think about polymers for the low-temperature environment, how do we increase the range of the technology so you're customizing less for the operator.

So if the operator fracs their wells for a certain period of hours, cools down that bottom hole temperature, we reduced the variability on the performance of that polymer so that we can put it into a bunch of wellbore and take the customization out, which takes out costs.

That's what we're working on.

We think we will have that standardization ready by the end of this year, which means that we can walk into a stronger appetite that we're seeing from some of the super majors out in the Permian basin to utilize dissolvables, both for a time efficiency perspective as well as a safety perspective.

So originally I had thought we would walk a hybrid wellbore with dissolvables at the toe of the well up to a certain portion of the well for a long period of time in U.S. shale, and I now realize that actually if we get the price point down sooner and dissolution more dependent across numerous variables, I think that becomes a full wellbore sooner than we had anticipated.

Our next question is from George O'Leary with Tudor, Pickering, Holt & Company.

I appreciate the color thus far.

I thought the pricing commentary across business lines was particularly interesting.

If I could peel back the onion there a little bit further.

On the wireline front, we've heard mix things from some of your peers or competitors out in the field with regards to the magnitude of pricing compression in various basins, and given you have a pretty broad footprint in that business, I was curious if you could speak to maybe what you're seeing in the Permian versus the Northeast versus even Canada or some other markets like that, just curious what that -- what the delta in pricing looks like across basins.

Yes.

I mean, I think if you think about -- it's a great question, by the way.

If you think about Canada, they never moved up the way the Lower 48 did.

So your compression there is just not going to be the same because the activity there never popped away.

We had, what, 26%, 27% stage count increase from '18 to '17 so -- '17 to '18.

So there, it's a little bit more muted because it's just never got off the ground.

And in the Northeast, I would say also, a little bit more muted than in the Permian.

I think the Permian, you could think about as where we're seeing the most extreme pricing degradation for sure.

And I think also there you've got parent-child well interference issues everywhere, but there, it can be pronounced.

And there you also have some big operators that are under a lot of pressure to deliver cash flows this year and we've seen some pretty deep CapEx capital budget cuts from some of those operators.

But you're in little bit of a way where you're splitting hair between the Northeast and the Permian, but for sure Canada is less of a decline than it was, but only because of the nuance that they never got of the ground.

Okay.

That's very helpful.

And then the commentary around using workover rigs less frequently for Completions work as both dissolvables and deep reach coil continue to take share -- or take share back from workover rigs.

And just -- was interesting -- I was just curious how far out are you guys now able to get into the lateral with deep reach coil?

I realize that varies by basin, but any kind of normalized metric you could provide?

Kind of what bounds are you guys pushing on the deep reach coil side?

And then secondarily goes along with that question, strategically, how do you think about that production or workover business going forward?

Sure.

So I'll take the last portion of your question first, which is how do we think about the production business going forward?

Well, you just saw we impaired it, and we've been talking a long time with the market about the lack of differentiation in that space, it's saturated, no barrier to entry, noncore to the business.

So that might be an indicator of our focus going forward and we're certainly evaluating opportunities all the time and thinking about that business and its future.

As it relates to coil drill outs and the depths reach, that is a very difficult question to answer and I'm happy to give you some general guidance on it.

But just remember the friction can be really different in these wellbores, the variables are so different, but we generally think we have one of the best coil teams certainly in the Lower 48, which then, obviously, means in the globe as a deep reach capable team.

We've got a memory tool that's proprietary, that works with a software and that's feeding a lot of data to us.

And I think it's fair to say that when you get beyond 20,000 feet of total measured depth, it's challenging.

It's very challenging.

And it's going to really matter you're coming down the vertical, where is the kick-off point.

It's going to matter out and far into New Mexico, you have a formation that doesn't like to hold, what we call, a column of fluid.

So that formation, it likes to suck up fluid.

And so as you're down there drilling, even with that drill bit drilling and you've got weight behind it, well, you need something to lubricate it.

And that circulation around that bit becomes more challenging in that geology.

So there's so many nuances, but I think, it's very fair to say with operators pushing their total measured depth in their lateral length, this is certainly a service line that gets challenged and that's what originally gave rise to our thought behind the hybrid wellbore with dissolvables and composites, which simply at first, the operator would look at it as derisking coil, but when the operator stands back what they're going to realize is that we're fundamentally shifting the time from when they spud to being able to sell their product.

So if you think of some of these operators used to punch a hole in the ground and 2 months later, they'd have first sale of products or they popped that well, well, that can be 6 months now with these multi-well pads.

So there's a two-pronged attack, but the long-term value proposition for the dissolvable plug, make no mistake, is time.

Absolutely, time and time means return on investment for the operators, not to mention the fact that one of the most dangerous things we do in the oilfield is drill out plugs.

Our next question is from Chase Mulvehill with Bank of America.

I guess, first question, if we can kind of talk about Magnum a little bit more, but maybe if we just think about 4Q, can you talk about sequential pro forma performance of Magnum just kind of maybe from a top line and margin perspective, not exact numbers, just kind of how you sell that progress in the fourth quarter?

Yes, sure.

So we're not putting the Magnum business out.

It's part of our Completion Solutions segment, and it falls into our completion tools division.

So if you remember prior to the transaction, we had about 12%-or-so of the top line with lever to completion tools.

We doubled that profile and one of -- on the financial side, the merits for the transaction certainly were margin expansion, quality of that EBITDA dollar.

So when you think about how much of that EBITDA dollar turns into cash for completion tools, give or take, it's close to 100%.

So we love the quality of that dollar.

I mean, we love, therefore, the free cash flow generation, both of which, I think, you see in our Q1 margins.

And again, think back to the legacy Nine business, we've put a lot of points on that margin even in a deteriorating and declining price environment.

If you think about the cash EPS number, that I gave you, which was for the year between $4 to $5, think about the share count roughly $30 million, you guys can back into that free cash flow from operation.

You've been given a CapEx number so you can start to see even if you hold activity flat you go 2019, 2020, 2021 and very quickly you get into a net debt 0 position and that means the denominator of your average capital balance for ROIC goes down significantly, while you're driving up the numerator.

So that entire financial prospect that was so compelling to us with completion tools is absolutely playing out, and I think it's been more pronounced as we've seen price come down, but we've seen our ability to grow that cash EPS regardless year-over-year.

So that's very exciting to us and then obviously, the strategic merits as I just talked about is that we think that this tool right about the time that we become net debt 0 and that year 3-or-so is going to have a very strong inflection point in the field.

So then your NOPAT is really going to move, again, on a denominator that's been fundamentally shifted down.

So we love this company, we love this acquisition and that's why we're not out there with a keen eye on M&A this year because we think we found the piece to the puzzle that we needed.

Yes.

Understood on that.

And then if we look at 1Q, we're now kind of, obviously, 2 months into the quarter.

Can you talk about your completion businesses and kind of from an activity standpoint, what started to get better relative to the fourth quarter?

What's kind of been more flattish?

And what -- maybe if there's anything down kind of as we look at quarter-to-date versus kind of the fourth quarter?

Yes.

I mean, that's a good question.

I think broadly, it's just the fact that you had some really stupendous growth in 2018.

As I said earlier, I mean, the stage count went up by 26%, 27% and so now you've got, depending on what research you look at, maybe 2% stage count increase this year, flat some to down.

So I think that just broadly affects our stage count driven businesses.

I wouldn't say it discriminates.

Where we see discrimination is in the pricing, not necessarily the activity.

But that being said, keep in mind, the activity profile for U.S. shale has shifted down this year and the reason that the company is not planning on a back-half recovery is solely a view that we believe our E&P community does want to deliver on those lower capital plans for the investment community and deliver those cash flows.

That doesn't mean they've solved the decline curves in the shale well, and it doesn't mean that 2020 can continue to show outsized production for lower spend.

So all of that is present in our minds.

We're not saying a back-half recovery couldn't happen, but when you think about the '19, we're kind of like a bunch of little mice running around on the ground and every shadow to us is an eagle.

And that's just the way we think about planning the business in oilfield service.

We're always thinking about worst-case scenario.

Yes, good to hear on that.

I have one quick last one.

The timing on the start-up of the MidCon cementing business, what's the timing on kind of getting some revenue associated with that business?

Yes.

We think towards the end of the year.

So as you greenfield these obviously cost a heck of a lot less to go in greenfield than it does for M&A, which we specifically explored for this region, by the way.

But it's obviously time to match the earnings to the deployment of the capital.

And so, again, I think you'd expect that revenue profile to start showing up at the end of the year once we have our -- that's assuming we get our equipment on time, which is back-end loaded.

Our next question is from J.B. Lowe with Citi.

But unfortunate for you, it opens up for a couple of more detailed questions probably than you were hoping.

Just wanted to dig in a little bit more, your comments on that you said that you thought that the full wellbore application of dissolvables was you thought it would happen sooner than you originally expected.

Can you just tell us a little bit about what kind of customer feedback you're getting that makes you think that?

Yes.

So again, when you think generally as you're a operating an OFS company, your biggest operators typically care the most about safety, and so I mentioned the safety aspect of the drill outs, and if you kind of walk back in the history of the U.S. oil patch, you'll find a lot of fatalities related to drilling out plugs.

So keep that in mind.

And then when you think about some of the big guys that have acreage in areas that I talked about that have difficulty holding a column of fluid that further complicates a coil drill out, some of those operators who also want to continue to extend laterals and have multi-well pads that elongates the time from spud to first sale, you can kind of get a picture of the folks that we think will be the primary drivers of the full wellbore adoption for dissolvables.

And I think the issue for us is, we need to do 2 things for them.

We need to reduce the price of this product and then we need to increase the scope of the range for the low-temperature polymer product, so that we can put it down one well and then the offset well, and then the other well and have a perfect dissolution rate.

And that is exactly what we're working on because there's a number of variables as we're introducing.

As you know, we introduced this technology about middle of the year last year.

And so those are things we're working on that we think we're going to have the nut cracked by the end of this year, maybe it's sooner, but I'd like the market to think about it by the end of the year.

And so my point there was, I had originally thought we would crack that nut, we would work on price, but the operator would still be hesitant to adopt.

And I'm thinking that's not the case any longer.

So I'm thinking we could see full wellbores proliferate for certain operators faster than I had originally anticipated and what that basically means, J.B., is that we are the bottleneck, not the operator.

And I thought there were 2 bottlenecks before: the operator and ourselves.

Okay.

Great.

That's helpful.

Next question was just on given the puts and takes on the kind of 1Q being a good run rate going forward, can you just talk about within your completion tools segment, I imagine that you're baking in some growth for at least that division in 2019.

So given that, that 1Q was a good run rate, where would -- are the other business lines all going to be declining a little bit or how -- what's the growth rate you're kind of assuming in just the completion tools segment?

Yes.

So we said if we stick to this average $55 WTI and our customers live within their budgets, I think, you can kind of bank on this because, again, we are working on the scope and range of our low-temp product, which is -- think about broadly, and I know you know a heck of a lot about plugs, but broadly for the market, think about the Permian and Northeast as cold formations, which is how I think about them because I like to simplify everything.

And those cold formations are specifically the Permian is a primary driver of this dissolvable product growth.

And that's the issue that we're solving for right now on the range of that technology.

That's where, I think, we will be by the end of the year.

And so that's where, I think, you'll see a tremendous amount of growth for the company going forward irrespective of commodity prices.

I would say the puts and takes on this plan are certainly, we gave too large of a concession to operators in Q4 because of the price decline that was occurring right at the time that we are agreeing on work.

So there's, obviously, an opportunity to ameliorate that as our operator get more comfortable in their belief in the forward strip, but that takes a little bit of time.

So there is some potential upside there as well.

As you know, we have acquired a casing flotation tool, which is doing spectacularly well, and we could see some great proliferation from that.

So I think, there is -- I think this is a conservative plan and we are a company that really does not want to overpromise.

Our investor base has been given way too many promises from this industry.

So I think, if anything, this is a conservative plan.

You can go to the bank with this plan and could there be upside?

Sure.

There could be upside to this plan in many different ways, none of which we're pricing in.

(Operator Instructions) Our next question is from Marshall Adkins with Raymond James.

I'm going to stick on this -- the 30% cut in capital budgets, because you have given us a lot of color, we all appreciate that.

But just to make sure, I'm parsing the information correctly.

It sounds like you're looking at revenues kind of across-the-board holding up better, but you're getting hit on pricing most in the wireline and the best pricing is holding up in cementing, but can you go through each of the Completion Services product lines, the coiled tubing, the completion tools, et cetera, kind of go through just directionally for the year given this 30% cut in capital budgets.

Which subsectors you see revenues kind of getting and pricing getting being more versus less?

And I assume that matches up with the wireline and cement comments, but just help us out on all segments.

Sure.

So if we think of our Completions business, we've got obviously cementing, coiled tubing, completion tools and wireline.

When you think about the walk in the quarters, as I said earlier, we're not anticipating any significant or incremental pricing declines.

We think we've taken those pricing declines.

So, if anything, there may be opportunity, as the market gets certainty, that in fact we're at a $55 to $58 a barrel range, not a $45 to $50 a barrel range that we can walk into some better pricing there.

So I think, that's just broadly for all of the service lines, Marshall, and that doesn't -- each service line took pricing concession.

And then when you think about the quarters, you obviously have Q1 and Q4.

In Q1, you've got the startup from January of weather.

In Q4, you have sometimes budget exhaustions, which maybe exacerbated this year, so operators are going to be strict about their capital budget declines.

But again, I think, for each service line, we don't suspect from this quarter going forward, any incremental pricing declines.

So I do want to be clear about that, if anything, there could be upward moving -- movement in pricing.

When you think about activity, I think 2019, yes, you're seeing some activity declines, but I think, this for a service and for this company, specifically, the margin degradation is driven by pricing.

This is not a situation where you're stacking equipment on a fence line.

So that basis point drop is really directly attributed to pricing.

And again, I'm being a little general, of course, there is some activity in there, but broadly speaking, we think about this as pricing whereas in '16 we had a utilization and a pricing problem at the same time, which was like a double whammy.

So activity feels -- our service lines where this revenue is now, it feels reasonable like we don't have any information that suggests we take a leg down, if that's your question.

Yes.

Well, you hit on that, that's exactly what I was trying to figure out.

The -- have your customer conversations changed today versus 3 months ago?

Or is it just too early to tell the consequences of the rebound in oil prices?

I think it's a little early to tell.

I think personally there is a price that triggers everyone in the market.

So it depends what your view is on commodity prices.

I think our operators and we certainly are very focused on being net exporters as a country.

And I think those -- the pipe capacity is just a thing of the past, the differentials are nice now, and I think you're going to see these operators chase that Brent pricing as we move into 2020 and 2021.

So I don't -- I couldn't possibly imagine that ExxonMobil would spend all of their money and place their big bet here if they thought commodities were trapped here or if they thought there was a massive light fleet problem in the global market and they couldn't move their products.

So I think what keeps us super bullish on North American shale is that capability to export, and it's precisely why we're in a different situation than our Canadian friends.

So we're pretty excited about the future.

And again, like I said, when I walk that cash flow figure through the next few years, even if you just took the doomsday scenario and held this business flat right where it is, you're still going to find yourself in a net debt 0 position before too long.

So we love that and we can still drive a great return on invested capital in the medium term.

So again, we don't see a flat market.

We think people just haven't realized the new positioning for the U.S. in the global market as it relates to North American shale.

All right.

Last one, quick one from me.

We talked a lot about the dissolvable plugs, and what you're doing on the technology there.

Are there any other technology initiatives, maybe even in other groups.

I'm not sure there would be whole a lot there, but I just thought I'd ask, any other things you're working on that we should be aware of?

Yes.

Glad you asked that question.

We also did not realize when we did the transaction that there were components of IP filed by Magnum and components of IP that has been filed by Nine that when we strip those components, we could create a different way to attack the composite plug market.

Se we're certainly working on that side of the house as well.

I know we talk a lot about dissolvables, but we also anticipate having those products ready by the end of the year.

Could we see deployment of those in Q4?

Potentially, but we are going to plan the business to have those deployed in 2020.

So that's been extremely exciting for us.

I think there's also some material science again that has been matched with some IP on the Nine side that's pretty exciting.

These engineering groups are working together phenomenally well, and again, the cultural mesh here has been excellent.

So it's putting 2 great teams together, and so there's some products you're going to see in 2020 that weren't on our radar previously.

We have reached the end of our question-and-answer session.

I would like to turn the call back over to Ann for closing remarks.

We want to thank you all for your participation in the call today as well as thank the investors and customers that have partnered with Nine throughout 2018.

Moving forward, our entire team is focused on being good stewards of our investors' capital and driving returns as well as helping our customers lower their overall cost to complete.

Lastly, I want to thank the team at Nine for an incredible 2018 and look forward to 2019.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time, and thank you for your participation.