National Energy Services Reunited Corp

Good day and welcome to NESR's fourth quarter and full year 2020 earnings call. With me today is Sherif Foda, Chairman and Chief Executive Officer of NESR. On today's call, we will comment on our fourth quarter results and overall performance. After our prepared remarks, we will open up the call to questions. Before we begin, I'd like to remind our participants that some of the statements we'll be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest earnings release filed earlier today and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our press release, which is on our website. Finally, feel free to contact us after the call with any additional questions you may have. Our investor relations contact information is available on our website. Now I'll hand the call over to Sherif.

Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. We're very pleased with our continued solid performance this quarter. We are extremely proud to see how we expanded in 2020, delivering a record growth of 27% year over year in full contrast to the industry. As a matter of fact, this is the highest year-on-year growth since the inception of the company or any other previous year for the combined businesses. As a reminder, we did grow in 2019 at 19% versus 2018. This demonstrates our ability to weather the market, the industry, even in the presence of a worldwide pandemic. As I have mentioned in the past, I believe these results and our accelerated growth re-emphasize that we are an outlier in the OFS space when compared to the rest of the industry. Our focus and execution capabilities, determination to the region, our flagship as the MENA national champion, and our customer centricity allow for a clear path to continue to grow at this pace for the foreseeable future. Middle East was and is going to be center of the oil and gas industry going forward. And all these developments further reinforce this narrative and I believe we have the front row seat in capitalizing on our unique positioning on the ground strength and customer relationships. I would like to really thank our troops in the field who have managed to achieve all that despite the pandemic. We never turned down a single job for any of our clients. We have maintained close proximity to our customers and worked faithfully with them to manage the work schedule, planning of personnel and equipment, spending significant amount of resources, testing facilities, expanded accommodation, and special flights. We absorbed all these costs and did not ask for any compensation due to these unforeseen circumstances. Yes, we do understand it did cost us a significant strain on our people being away from home for a long time, working long hours, quarantine in advance to be ready to go to the jobs, an increase of our cost of operation. However, we truly believe that this is our duties and obligation as the trusted advisor and partner to our clients We need to be there for them as the first reliable source of services. I'm extremely proud of our field crews and honored to be one of them serving our clients as best in class in the industry. I spent the majority of the time in the Middle East in September and I can tell you from personal experience how tough it is logistically as I had to be PCR tested About 35 times to travel between all the different countries. I did manage to visit the majority of them and I was very fortunate to be able to see my dear customers and have plenty of face-to-face time with the senior management. The feedback was extremely positive in how they are perceiving our services and expansion. They do value our readiness during the tough times. and I reiterated our commitment to maintain and keep improving our performance. Furthermore, I emphasized our promise to keep investing in human capital and the latest equipment. In addition to our new facilities and research center, most of which are moving as per our initial plans with minor delays due to the travel restriction or deferred laboratory equipment arrivals. It goes without saying, our ESG focus is always a big topic in our discussion. And they welcomed our new segment launch, which I will touch upon in detail. Coming to the macro, last quarter we set forth our view that we see that demand will rebound sharply and that the market underestimates how demand will come back once we have a line of sight to the solution of this COVID crisis, which we seem to have now. And as expected, the demand is coming back stronger as we predicted, leading to oil prices nudging up to the 60s, and our view is that it will continue to go higher. This is mainly due to the various reasons. Primarily, the significant underinvestment in any new project or large potential development and production, which will lead to a supply not being able to keep up with the demand. The continuation of U.S. shale discipline, which is still not yet at the level of one-to-one reserve replacement with the number of rack fleets presently deployed. The lack of appetite from the Big IOC to venture in new deepwater or big frontier discovery, which will make the dependence on the stable big reservoir place even higher. That is, Russia and Middle East. which have a very long-term view for their production and they are well coordinated in the OPEC+. Therefore, we could see a good run of oil and gas prices in the mid-term with some high spikes for any geopolitical turbulence. I do not see a risk on that except for another U-turn on the pandemic with more restrictions and less trouble. As an analogy, You don't need to go further than to see what happened in Texas, where we had one single cold front, spot gas prices are through the roof, not enough electricity despite being surrounded by a lot of resources, and despite being in the most powerful country. Many people stayed without water or power for a week. Now take that and apply to global oil supply. If you are a serious buyer, You don't want to depend on erratic supply and want to have a reliable long-term partner who have plenty of resources with plenty of options. And hence you look to the Middle East. And that is where you see the growing economies of the world are looking, both for gas, LNG or oil. Coming to our operation and its outlook, As expected, our customer closed the tab in the last weeks of the year to ensure they meet their budget and not overspend, which is opposite to what usually occurs as we call it year-end sales or overspending in prior years. We believe this will continue into the first couple of months. Then we will see pickup in activities across the board. I see actually our activity picking up in the key market much faster than anticipated. with oil prices at the current level. Rigs are returning in several countries, especially the ones that are warm stacked and never left the countries or even nearby fields. I see the second half of the year with potential higher increase in rig counts and rigless sites, which we are making sure we are well prepared for and maintain being the reliable provider to all our customers on a very short notice. We recently announced a testing contract award in Kuwait. This for us is a breakthrough as it now allows us to grow outside our core area and add diversity to our position in Kuwait. As you may recall, we did not have any existence in Kuwait earlier. And with these latest awards, we have solid contracts in production, drilling, and now evaluation services. From two years ago, our testing product line has gone from one country operation to now over five countries. And that is essentially the key to what we want to do with the organic expansion of our services. Like we did with our core drilling, similarly, we want to do that to the rest of the portfolio. As when the opportunity presents itself, we are working on another two potential awards that will be announced soon. which will represent another solid step for our expansion in the region. Last month, NEST was honored to participate in the Future Investment Initiative, or FII, in Riyadh, Saudi Arabia, where we announced the creation of our ESG's Impact Segment. As most of you know, the FII is an international platform for expert-led debate Thank you very much. and it was the right place and time to announce our new segment for which we have been working for over a year now. A lot of people have asked me what does ESG impact me and what does that imply for NESS? Let me explain. I'm a strong believer that our industry needs to move from the mindset of risk return to risk return impact. We need to demonstrate that not only we evaluate projects based on their return potential, but on their impact to the world. Impact needs to be measured and evaluated. It is our obligation, not only to the investment community, but to every single human being affected by these projects. We need to have an impact to their lives, to the climate, and to our Earth. Therefore, we formed our new segment where we will have the tools and the technologies to enable all of the above. We started the engagement with our key customers, and as expected, they welcomed the idea and were very keen to understand the details. We will start with three key areas. Water, climate change, and environmental waste. Let me expand on the water business in more detail. The water conservation and management product line will focus on delivering fresh water from produced water that is today either wasted or injected for reservoir pressure management or into disposal wells. This is infield stranded produced water which does not have an existing infrastructure linking them to an existing water handling facility. As an industry worldwide, we do produce more than 200 billion barrels of water per year. Only half of it is used for pressure management. The remainder has to find a home, either in disposable wells or just let evaporate in the desert. You have to realize that in the MENA region, water has been a hot topic for a long time, and the majority of solution has been water desalination plants. We have now an opportunity to make an impact to the community and provide fresh water to villages around us. We can have agriculture activity around the oil fields. We can plant trees to capture the CO2 and methane and get carbon credits. We can have a low carbon footprint by reusing the produced water for the different drilling or fracking operations. There are several applications and quick wins depending on the location of the produced water and the usage for it. However, the key factor here is we have the technology partner that can provide an economic solution that was impossible before. Our partnership with Soltech from Netherlands, who are innovative tech startup addressing this issue in other industries. And we evaluated the economic visibility to the oil field and currently in discussion with three of our customers to implement before year end. Another application will address the sulfate removal from well water or sea water with the help of Cleantech of Australia, eliminating the need to use higher quality aquifer water for oil feed application. I have talked about this in the last quarter, but essentially we have a specific opportunity to replace good aquifer usage with another aquifer which is sulfate heavy, as we did not have the technology to strip the sulfates before. We are progressing to a detailed study to set up in-field capability to provide water from a previously unusable water resource, which then saves the normal aquifer. In both these incidents, we chose to partner with technology providers who we believe have significant differentiation in delivering an economic solution. This is after the team looked at the whole spectrum of available water tech Most of which in our industry just convert produce water to brine, but it is not economical to take it to the next step of potable water. In addition, we have made commitment to invest in another technology which we believe will enable us to address how to use the excess gas at the well site which is traditionally flared to power those potential water plants. The Climate Change Mitigation Product Line will focus on the objective of establishing real-time monitoring of greenhouse gas emissions from oil field operations, including wellheads, gathering stations, and gas processing facilities. We are now in advanced discussion of bringing a couple of key technologies in methane monitoring to the region, with which we will be able to provide different levels of resolution of pinpointing where the leaks are from in a fully real-time basis. Furthermore, it will focus on flare gas treatment and its capture and transportation to the nearest power plant or gas gathering station. Although the region on average flares less than what you see in Midland, but there's still a substantial amount which needs addressing and finding an economical solution to this complex issue. that can be solved with the current standard processes and technologies. As you can see, we have a very extensive plan on developing our ESG impact segment, and we plan to hit the ground running in 2021 with measurable projects. Like we have done since the forming of our company to focus on the well-being of our people and our community where we work, developing key nationalities and Gender Diversity and always maintain the slogan, the national champion of the region. We have to expand to make a real impact to the bigger picture and have serious plans to mitigate climate change and provide fresh water in the desert as examples. Our aim is to be the reliable and responsible partner to our customers and the countries where we operate. Lastly, I will let Chris delve deeper into the numbers, but one key message I want everybody to take, that we grew 27% in times of distress, both in the industry and globally, which is a testament to our execution capabilities, and that is the same approach we will take with all these newer initiatives to grow the company and positively contribute towards our and the industry ESG objectives. On that note, I will pass the call over to Chris to talk about the finances.

Thank you, Sherif. As Sherif mentioned, we reported quarterly revenue of $213 million. This represents an increase of 15% over the prior year quarter and a 2% decrease over the third quarter. For the full year, revenue increased 27%, a significant achievement in light of market conditions. The sequential decline in revenue was primarily driven by lower production activities in several markets late in the year, as Sherif has mentioned. This was partially offset by higher evaluation services. The year-over-year quarterly increase was primarily driven from the addition of the unconventional product line and associated services. This was partially offset by decreases in other markets related to lower commodity prices. Adjusted EBITDA in the fourth quarter was $55 million or 26% of revenue. This represents an increase of 6% over the prior year quarter and a decrease of 2% over the prior quarter. EBITDA adjustments of $1.9 million for the quarter are mainly for integration costs associated with the recent acquisition and other restructuring activities. Despite the market conditions, we are pleased that our adjusted EBITDA margins have held steady. We incurred additional costs this quarter primarily related to non-cash charges for actuarial end-of-service benefit liabilities of nearly $3 million and significant COVID-related labor and supply chain inefficiencies and costs. With the onset of the second wave in Q4, we experienced extra costs related to additional testing, transportation, lodging, and labor mobility. Despite the increasing level of vaccinations in many markets, COVID restrictions have increased during the first quarter. We don't expect these costs to mitigate until later in the year. COVID and end of service costs were offset by a gain of $9.6 million on earnouts from the recent transaction as the final amount paid was less than originally estimated and provided for. These are real savings to cash in issued shares and lowers our basis in the transaction. This was achieved primarily from increased business levels and the improvement in our share price. As is our practice, we did not reflect any of these COVID-related or other items in EBITDA or EPS add-backs. Moving to our segments, our production segment revenue for the fourth quarter was $136 million, growing 12% over the same period last year, but declining 9% over the prior quarter. Full year revenue was up over 37%. Adjusted EBITDA margins for the production group were 29% in the fourth quarter, flat sequentially. Associated pass-through revenue was at the same level as the prior quarter. Separately, our drilling and evaluation segment revenue of $78 million in the fourth quarter was another quarterly record. of 21% compared to the same quarter last year and 11% sequentially. Full-year revenue increased 10%. The increase over the third quarter is primarily related to higher evaluation activity in Saudi Arabia. Adjusted EBIT margins of 25% in the fourth quarter were up from 24% in the prior quarter, due to the favorable mix of evaluation services and leverage on higher revenue. Depreciation and amortization decreased 29 million in the fourth quarter, compared to 32.2 million in the third quarter. Most of this decrease was due to a fixed asset valuation adjustment in the final purchase accounting of the recent acquisition. We expect D&A to run in the 31 to 32 million range per quarter in the first half of 2021. Interest expense in the fourth quarter was 3.4 million, down slightly from 3.8 million in the prior quarter. Our effective tax rate continues to track well below the rate seen in 2019 as we continue to optimize our tax structure. The reported effective tax rate for the full year of 2020 was 17.6% compared to the full year of 2019 rate of 24.9%. Excluding the benefit of this quarter's earn-out gain, which is non-taxable, the full year 2020 rate would have been 20.9%. We expect the 2021 effective tax rate to run in the lower 20% range. This resulted in reported net income of $16.5 million or $0.18 per diluted share and adjusted net income of $18.5 million or $0.20 per diluted share for the fourth quarter. Switching to operating and free cash flow, we are extremely pleased that we were up significantly sequentially with operating cash flow increasing to $49.3 million from $33.5 million last quarter and free cash flow increasing to $33.3 million from $8.7 million last quarter. For the full year, free cash flow was $44 million, a meaningful improvement over the negative free cash flow of $19 million in 2019. The sequential operating cash flow improvement was accomplished mainly due to higher collections of over $25 million from the hard work of many employees. However, we did experience less collections than expected in the final weeks of December as many customers closed their payment processes earlier than expected. This was offset through our own supplier payment management. These collections were caught up in January. Capital expenditures in the fourth quarter were $16 million, down from $25 million in the third quarter, which also helped the improvement in free cash flow. This reduction was due to the lower new CapEx orders placed in 2020 and improved utilization. A big portion of our cash capital expenditures in 2020 were for CapEx ordered in 2019 and not received or paid until 2020. In 2021, we expect capital expenditures to be flat with this year to support planned growth and pay for existing commitments. Free cash flow in 2021 should significantly increase over 2020 due to flat plan CapEx, continuous improvements on fleet utilization, and improved DSO. Also a positive, net debt decreased to $323 million at the end of the fourth quarter compared to $349 million at the end of the third quarter. The sequential decline is primarily from higher cash balances from improved free cash flow. As of December 31, 2020, our net debt to adjusted EBITDA ratio is 1.6, down from 1.7 last quarter, and should reduce to our target level of approximately 1.5 or lower in future quarters. Also, we remained in full compliance with our primary credit facility financial covenants in the fourth quarter. In conclusion, NESRA again strongly outperformed the market in revenue growth and margins in 2020 through our regional focus and strong operational execution while still generating positive and strong free cash flow. We expect the same momentum and more going forward. With this, I'd like to pass back to Sherif for his final comments.