National Energy Services Reunited Corp

and welcome to Nessar's second quarter 2021 earnings call. With me today are Sharif Foda, Chairman and Chief Executive Officer of Nessar, and Chris Boone, Chief Financial Officer. On today's call, we will comment on our second 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 risk 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 reconciliation 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 Sharif. Thanks, Blake.

Ladies and gentlemen, good morning and thank you for participating in this conference call. I'm very pleased with our continued growth momentum in the second quarter, with revenues growing 16% year over year and 11% sequentially, outpacing the market and all our peers. If you compare it from the start of the pandemic, we have grown roughly 20% While the broader sector has dropped more than 20%, over the last 12 months, our free cash flow conversion has been in excess of 40% of EBITDA, near to top among our larger, more mature peers, which, considering the continued growth CapEx needed to sustain our trailing three-year CAGR of 22%, is indicative of the strength in our strategy and execution. We continue to be very watchful and vigilant about the evolving COVID situation with the Delta variant causing disruptions in most of the countries where we work. More importantly, we are very focused on the well-being of our employees and their family members back in their hometown. As you have seen, some countries suffered higher degree of disruptions and travel restrictions, like India. We will continue to strive for utmost support of personnel throughout the organization during these challenging times. As most of you would appreciate, it has been a fluid situation which has led to several changes in plans by the countries where we operate. In several cases, some have gone into curfews, lockdown with strict measures to control the spread of these variants during the month of Ramadan and Eid holidays. Mandatory quarantining in safe countries is now de rigueur for most of our main operations and severe restrictions have been put in place for citizens leaving or coming from certain countries from where a large portion of the workforce comes from. While this has affected the service sector globally, we have been advantaged due to our large in-country workforce and have navigated these logistical hurdles with the target of 100% operational capacity under the leadership of our crisis management team. Several of our customers have mandated vaccine requirements to access their facilities, and we are working very closely to enable access to our personnel. Vaccine availability is a bit varied across the different countries, and we are working with these limitations and have achieved more than 50% vaccination across our population. Our goal remains as zero turned down of any job, and we are meeting that necessary goal. The other angle to all of this is the significant cost this continued state of new normal under COVID is causing. Just to give you a scale, to date and since we started keeping records, we are approaching 13,000 PCR tests. I personally passed already the 100 PCR tests since the beginning. When you start to add additional quarantine, Hotel costs for 14 days. Airline to and from green countries. You start to capture a non-negligible cost to the countries, and we continue to record it as normal cost to operation. I know some of the small service companies, especially the ones relying heavily on crew rotation, are suffering a great deal from restrictions to their employees, sharp increase of their internal costs, and in some instance, they will not be able to deliver on their rig capacity or services in the short term. Now moving to the macro and activity outlook. Global oil demand is now expected to eclipse pandemic level by the end of 2022, which is exactly what we predicted a year ago. We can see all the OPEC countries are preparing for the increase of production and readiness to deliver the supply to the world. The main NOCs have the capacity and capability to ramp up and manage the speed in an efficient manner to respond to this growth. Near all of the low-cost swing producers are in the MENA region and are our key customers. The rest of the region either needs to invest in long cycle projects or in exploration where they have access to reserves. As you have seen by the commentary from some of the majors, They first have to clear the hurdles they are facing in the market and their shareholders in terms of what the company can invest in or need significant spend to upgrade the aging infrastructure, which cannot be cranked up even though the resources might be in the ground. On top of it, there now is a need to see a certain level of capital discipline. The retail matrix has evolved such that the past regime of production sharing contracts, or higher IRR in the case of U.S. independence, have all moved to higher thresholds. All of this leads to one thing. Price of oil, in my opinion, will be solid, and we are now going to see a longer cycle, early 2000, which lasts several years. The only folks who will be able to deliver are the NOCs in the region, as they have concrete plans and are very well organized with long-term goals, and very importantly, have the ability to adjust as the marginal costs are the lowest in the world. Additionally, they are focused on energy transition, and they need to continue to develop their massive gas fields for their internal consumption. The other topic which is very relevant for the service industry and consequently to our customers is the overall health of the industry, which I believe needs some thought. We have all seen several commentaries on inflation, but if you look at the numbers and the actions of the industry, it gives you a separate picture on the state of affairs. Since the beginning of the year, if you look at the main constituent of the PPI composite index, like steel, chemicals, as an example, these have gone up by almost 100%. If you look at shipping container cost, we have seen cost increase by an excess of 50%. And obviously, there is a significant labor cost inflation, which are a consequence of demand across many industries. If we look back to the start of the last major cycle in 2000 and index the cost to that, you would see key representative oil feed service input costs increase by 100% till 2008. Since 2008, the input costs have grown steadily in line with overall inflation till basically the beginning of 2021, where it has just skyrocketed. Oil price has had several runs in this period, and the service industry has adjusted and largely absorbed any changes to these costs in that period, allowing the operator to continue to produce effectively at much lower oil price environment. Obviously, the supply organization are managing at best to curb those increases. However, at a certain point, one cannot escape the baseline structure increase. Most of the time, the industry finds innovative technologies over the years to enable such sharp reduction of prices against inflationary pressure. In most of the countries where we work, service industry upstream costs are essentially a very small fraction of the oil price, especially when the total lifting cost is in single digits. Unlike 2008, where the baseline profitability of the service industry was good and enabled a solid investment in new innovation and technology, now after more than 10 years of absorbing additional costs, the industry slowed down their R&D spending compared to earlier cycles. As a matter of fact, we need more investment in disruptive technology, especially with the need to find sustainable tools and methods to produce oil and gas in a friendly manner. Also, opposite to some of our peers, we continue to invest in CAPEX and tools to ensure we have the capacity and buffer of resources in order not to affect our service quality and operation delivery. We need to ensure, despite all odds, that we are able to be the reliable provider to our customers in the coming cycle where talent and equipment will start to tighten and the differentiation in service delivery will be the key factor of deciding work scope and tender awards. Our customers in the region are extremely smart, and they know and understand who is spending and investing for the long-term healthy growth, and they see how the different companies perform. We are very proud of scoring the best quality provider to one of our major customers for the fifth consecutive quarter. Now switching gears. To another topic, which is very close to my heart, is our progress on our ESG and energy transition effort under the auspices of our ESG impact segment. We are pleased to have published our inaugural ESG report in the second quarter, which we view as a pact with customers, shareholders, and community alike, in driving impactful change that transcends subjective rating metrics. This report will perpetually serve as a yard marker for continuous ESG improvement for us. I encourage everybody to read it. And as the national champion of MENA, we are proud to lead the way for other companies from the region. In our view, the environmental category is where oil field service broadly have the most potential to pave new commercial avenues. As our large NOC and IOC customers push head-along into the energy transition. We are excited about a broad opportunity set across water, emission, flaring, and most notably, the announced flagship water management project that will showcase the combined power of Nest service delivery and technology partnerships. As we recently announced, we got awarded a significant contract to make brine for one of the majors in Iraq. We have worked with our customer to now change the existing conventional approach on the facility and deploy technology developed with our partner, Cleantech, to use produced water to be the feedstock for the operation and allow the salt generated from this process to be used to generate brine. Given we are moving away from the existing process and deploying new technology, there is higher capex upfront, but we believe it is our duties and responsibilities to move from risk-return mentality to risk-return impact. Our customer is very excited to partner with us. It supports their efforts to take what is historically a carbon-intense project and flip it 180 degrees into something which benefits the environment due to its circular economy. In addition to this, we are discussing how to now use their flared or excess gas to drive the electricity needs of the plant in stage two, completely turning a very heavy carbon footprint into something which will have a very small incremental. Again, we are working to transform that project to a flagship to the industry to follow. I believe this will be the world first for such a facility. On the other hand, we are moving ahead with the project in Saudi. where we are looking at produced water to potable water with another strategic partner, Soltech from Holland. We are in the middle of shipping the pilot project equipment. Upon trial completion, we'll lead to a significantly larger water facility. Again, our client leads the industry in looking at ways to have a significant impact to the environment. They have the lowest CO2 intensity per barrel. and they are focused on creating value and looking for state-of-the-art projects that serve the community and the environment. It is a pleasure working with them, as we are totally aligned in the approach. As we have worked together on the FRAC business that is essentially transformational to the region, today we have proven that working closely together, we can achieve the top quartile delivery of a number of stages per month than any U.S. operator has achieved. This was basically considered an impossible task just a year ago and together our customer proved it is a reality and they remain by far the best in class in everything they do. Lastly, we announced last quarter that early in Q2 we closed on our M&A in Kuwait and are fully in charge of running the contracts despite the elevated restriction of travel and entry to the country. We have planned properly to send equipment from within the company to handle the increased amount of work which we are targeting. We are extremely excited to establish our stronger presence and have Kuwait as one of our anchor countries in the region. They have solid plans for growth and activity expecting to increase in the years to come. We are investing for the long-term partnership with our esteemed customers in Kuwait. As a reminder, we funded the first tranche of payment, which is the main part for this acquisition through our operating cash flow. All the M&A we have done up till now have been funded internally. This might change going forward, depending on the size of the opportunity, but our excellent cash generation capabilities allow us this freedom to be very nimble when the opportunities present themselves. On that note, I will pass the call back to Chris to talk the financial details.

Thank you, Sharif. Turning to our results, we reported quarterly revenue of $235 million. This represents an increase of 16% over the prior year quarter and 11% over the first quarter. The year-over-year and sequential quarterly increases were driven by higher production activity, primarily coiled tubing stimulation and frack, in Saudi Arabia and Kuwait. Adjusted EBITDA in the second quarter was $54 million, or 23% of revenue. This represents a decrease from 26% in the prior year quarter and 24% in the prior quarter. The sequential decline was driven primarily by the impact of inflation and D&E product line mix. EBITDA adjustments of $5 million for the quarter were mainly for headcount restructuring costs in certain markets transaction and integration costs associated with our recent Kuwait acquisition, and certain non-cash FX charges due to currency weakness in Iraq and across North Africa. As Sharif highlighted in his commentary, we continue to incur significant COVID-related costs such as labor, testing, travel restrictions, and administrative costs. As an example, employees must be tested several times a week before entering the operating sites on some rigs. 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 second quarter was $153 million, growing 10% over the same period last year and 12% over the prior quarter. Sequential growth was primarily driven by higher FRAC in Saudi Arabia and activity in Kuwait. Adjusted EBITDA margins for the production group were 27% in the second quarter, flat sequentially as inflation and COVID costs offset the benefit of higher utilization of manpower. Separately, our drilling and evaluation segment revenue of $82 million in the second quarter was up 28% compared to the same quarter last year and 9% sequentially. The sequential increase was driven by higher drilling-related activities across multiple markets in the region. Adjusted EBITDA margins of 21% in the second quarter were down from 25% in the prior year quarter and 24% to last quarter due to the impact of inflation and a less favorable product line mix. Depreciation and amortization increased to 35.1 million in the second quarter compared to 31.8 million in the first quarter of this year. The sequential increase was primarily related to the additional DNA from the recent Kuwait acquisition as well as the impact of an additional employee equity grant. We expect DNA to be in the $36 million range next quarter. Interest expense in the second quarter was $3.2 million, flat from $3.2 million in the prior quarter. The reported tax rate for the first six months of 2021 was 17.2%. Excluding the net benefit of adjustments of reserves on prior year taxes, our reported tax rate would have been 20.2%. which we expect to continue to improve upon going forward. Adjusted net income and EPS, which includes the impact of the noted EBITDA adjustments, were 12.8 million and 14 cents per diluted share. Switching to free cash flow, we are pleased with another quarter of positive free cash flow generation of 12 million. This brings the year-to-date cash generation to 47 million, compared to two million in the first six months of last year. The sequential free cash flow decline was primarily related to higher VAT and income tax payments, as well as higher capital expenditures. We continue to improve in our invoicing and collections. Overall DSO improved by another nine days over the prior quarter level, bringing the year-to-date DSO down by 25 days, a strong accomplishment by the whole NUSR organization. Additional actions are in process to lower DSO even further during the second half of the year. Capital expenditures in the second quarter were 21 million, up from 11 million in the first quarter. In 2021, we continue to expect capital expenditures to be flat to slightly up from 2020 levels to support planned growth. CapEx spending should increase to 30 to 35 million per quarter during the second half. We continue to expect free cash flow in 2021 to significantly increase over 2020 levels due to flat plan CapEx, continuous improvement on fleet utilization, and improved ESO. Net debt increased to $335 million at the end of the second quarter compared to $302 million at the end of the first quarter. The sequential increase is primarily from the use of our existing cash balances to fund the Kuwait transaction. As of June 30, 2021, our net debt to adjusted EBITDA ratio is 1.6, flat from 1.6 last quarter, and should reduce to our target level of approximately 1.5 or lower in future quarters. Also, we reigned in full compliance with our primary credit facility financial covenants in the second quarter. We are very pleased with the strong financial health of our balance sheet and our ability to fund acquisitions internally. We are currently working on several other technology investments, and we are ready to fund those as they come along. With this, I'd like to pass to the operator for your questions.