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Investing.com -- S&P Global Ratings has revised its outlook on Nine Energy Service Inc (NYSE:NINE). to negative from stable while affirming the company’s ’CCC+’ issuer credit rating.
The rating agency expects the U.S.-based oil field services provider to generate negative free operating cash flow (FOCF) in 2025, despite a 6% year-over-year revenue increase and modest EBITDA margin improvement in the first quarter.
S&P cites an expected slowdown in U.S. drilling and completion activity and likely margin contraction over the remaining three quarters of the year as key factors in its decision. The company’s leverage, with funds from operations to debt around 5% and debt to EBITDA exceeding 5x, is viewed as unsustainable.
The negative outlook reflects the potential for a downgrade if Nine’s liquidity deteriorates to the point where it might miss an interest payment or breach a financial covenant within the next 12 months.
Nine’s operational results are highly correlated with the U.S. rig count, which is down approximately 5% year over year. S&P analysts believe the U.S. rig count could decline further if oil prices remain near $60 per barrel.
Although Nine reported EBITDA margins of just over 10% in the first quarter, management anticipates lower revenue in the second quarter and has noted falling prices for some of its products. The company generated a FOCF deficit of $9.2 million in the first quarter after interest payments, working capital, and capital expenditure.
S&P estimates Nine will generate EBITDA of $40 million-$45 million for full year 2025, which will not cover both its interest payments of roughly $40 million and capital expenditure of $15 million-$25 million.
On May 1, 2025, Nine closed on a new $125 million asset-based lending facility due November 2027 with private lender White Oak Commercial Finance, replacing its prior facility that was set to mature in February 2027. The new facility provides about $22 million of additional liquidity compared to the previous one, with $51.3 million of availability as of May 1.
Despite this new facility, S&P assesses Nine’s liquidity as less than adequate due to the forecast for negative FOCF and limited access to public markets.
The company’s $300 million 13% senior secured notes due 2028 currently trade at approximately $0.50 on the dollar, increasing the possibility of a debt repurchase or restructuring transaction that S&P would view as distressed. Nine is also at risk of being delisted from the NYSE as its stock has traded below $1.00 per share since early April.
S&P forecasts that Nine’s FFO to debt will remain around 5% in 2025, while its debt to EBITDA will stay above 5x in 2025-2026 as it generates annual FOCF deficits.
A rating downgrade could occur if Nine’s liquidity weakens further, particularly if demand for oilfield services declines more than currently anticipated due to weaker commodity prices. Conversely, S&P would consider revising the outlook to stable if Nine improves its liquidity position, which would likely require increased demand for U.S. oilfield services driven by higher or more stable oil prices.
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