Good day and welcome to the National Energy Services Reunited Q1 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the floor over to Mr. Chris Boone, Chief Financial Officer. Please go ahead, sir.

Good day, and welcome to NESR's First Quarter 2021 Earnings Call. With me today is Sherif Foda, Chairman and Chief Executive Officer of NESR. On today's call, we will comment on our first 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. Also, as noted in our press release, the company is still reviewing the potential impact of the recent SEC guidance on accounting for warrants issued by SPACs. Certain GAAP financial information that could be subject to adjustment will not be discussed on the call today. This information will be provided upon the filing of our quarterly report with the SEC. 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 hand the call over to Sherif.

Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. I'm very pleased with our sustained momentum and solid start of the year. We continue to solidify our position organically and inorganically, in line with our strategy. We grew 7% year-on-year, while the market contracted by around 25% and maintained flat sequentially despite the usual slow start that was evident by our peer average drop Q-on-Q of 5% to 6%. We had a solid free cash flow of $37 million on the back of good collection this quarter, which gives me a very positive indication of the year as expected. I would like to thank our team in the field for their dedication, perseverance and efforts to achieve those outstanding results despite the evolving COVID situation. Middle East is now seeing the effect of the wave 2 and continue to be in a semi-lockdown mood, watching carefully what is happening in neighboring countries like India. We have maintained our 100% capacity of operations despite several countries in the region putting specific quarantine requirements, which has certainly made the logistics a very complex exercise. Our crisis management team continues to be running the show on a day-to-day basis, and we don't foresee it changing until we have a solid vaccination and ease of movement. Some countries are progressing very well with clear mandated vaccine to people entering their premises and operations. Abu Dhabi is a very good example where our client provided the vaccine for everyone. On the macro side, on the long term, Middle East continues to cement its place as the pivotal figure in the oil and gas landscape. No one can compete with the lowest-cost producers. In addition to the global pressure and speed to move out of fossil fuel and the acceleration of the…

Thank you, Sherif. Turning to our preliminary results, we reported quarterly revenue of $212 million. This represents an increase of 7% over the prior year quarter and flat over the fourth quarter. The year-over-year quarterly increase was primarily driven from the growth of the unconventional product line and new contracts in Kuwait and the UAE. These offset lower activity in other markets and other service lines related to the impact of COVID, which had little effect on our operations in the first quarter of last year. Adjusted EBITDA in the first quarter was $50 million or 24% of revenue. This represents a decrease from 26% in the prior year quarter and the prior quarter. EBITDA adjustments of $2 million for the quarter are mainly for integration costs associated with last year's acquisition, transaction costs associated with our recent acquisition and other restructuring activities. As we highlighted on our last call, we continue to incur significant COVID-related labor and supply chain inefficiencies and costs. We are carrying incremental labor costs in anticipation of the expected market recovery. However, NESR will be positioned to react immediately to new customer requests, while our competitors are delayed in ramping up their operations. 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 first quarter was $137 million, growing 3% over the same period last year and 1% over the prior quarter. Adjusted EBITDA margins for the Production group were 27% in the first quarter, down 2% sequentially due to the increased proportion of pass-through revenue from hydraulic fracturing operations. Separately, our Drilling and Evaluation segment revenue of $76 million in the first quarter was up 15% compared to the same quarter last year but…

Thanks, Chris. In conclusion, I would like to leave you with key takeaways. We are focused to be the trusted and reliable partner to our customers and have the capacity and resources to tackle their needs while managing the pandemic and restrictions. Two, we are already seeing activities starting to pick up, and I'm confident that we'll have very strong second half. Three, ESG IMPACT segment is progressing well with our water, flaring and methane detection efforts. Four, we will continue to produce free cash flow and will invest in new partnerships and accretive M&A. And on that note, I'd like to pass back the call to the operator for your questions. Christie?

[Operator Instructions] And our first question comes from David Anderson with Barclays.

So maybe I'll just start from kind of a bigger picture question to start with. So operations in the Middle East are heavily dependent upon a lot of labor from Southeast Asian countries, including India. And as you noted at the top, there's a lot of COVID issues still in those areas. I'm just wondering, as we look out to the back part of the year and we're all kind of seeing this ramp-up, is there any concern that this situation could delay anything? Is that a concern for you at all in terms of the labor situation and how that could play out to the Middle East?

So as an industry, you're absolutely right, some of the players will get affected, especially the ones that are dependent -- or they have a very small percentage of localization. They will get affected, especially with the restriction being put today on travel. I think for us, being, again, very national and have very high percentage of nationalization workforce, we will not see any of the issues that the others will. I would say, in some specific countries where you still have a high percentage, the industry overall will get affected and we might get affected accordingly because of some of the delays, for example, of rig readiness. So in some countries, yes, you might not have a rig crew, for example, if the current crew are being there now already for 7 to 8 months, and they will not be able to get a crew change. Definitely, there is a lot of things going on to replace some of those people. But yes, you're absolutely right; if the situation gets aggravated, you might get some delays of those rigs.

Now Sherif, you were talking about sort of the balance between natural gas and crude oil in the region. And I think over the last 10 years, I guess you could say that kind of Saudi and some of the neighbors have really shifted spending and activity towards natural gas. And if I'm not mistaken, I think around 60% of the onshore rig count in Saudi is actually directed towards natural gas; not sure what it is today. But just wondering, kind of bigger picture, the oil market is tightening, OPEC clearly looking to recapture share. Do you expect this mix to shift back to more the oil side? Do you expect the majority of tenders now to focus on the oil side? Or does that not actually change because of their capacity situation?

I think you're absolutely right in the second half of your question. It's not going to change. I think -- definitely, they have the capacity again to put oil to the market. Let's say, if the market gets even tighter and they need to put more than 6 million barrels, yes, they will -- you will have some short-term shift of some of the rigs going to the oil to get some of this production. But overall, I mean, their vision is to really get the gas in the different countries to be the main fuel for their internal demand. And always remember that most of this in the countries are done for internal consumption. The only one that has huge capacity to export is Qatar, but the majority of the rest is really using it for internal consumption. So this is not going to change. And you saw, for example, the Saudi leadership very clear on moving to renewable and to gas for all internal consumption and really sparing the production -- the oil production for export.

And then my last question, if I could just squeeze one more in. You talked about kind of preordering equipment in front of kind of what you're seeing as a ramp-up and want to make sure that you've got the capacity while others don't. We've seen the last couple of years, it seems like you've been growing. Everybody else has been sort of treading water. I'm just wondering if you can just kind of give us an overall sense of the capacity situation over there. I guess if you're preordering equipment, you must be thinking that the capacity situation is pretty tight. I know everybody's kind of looking at it a little bit different in terms of capacity. But just from your standpoint and your product lines, could this market really tighten really quickly in the back part of the year? It just seems like you're the only one who's really been spending any money over there.

I would say there's still excess capacity overall, right? What will happen is the readiness of this capacity. So if I want to be a bit more specific, today, I know that the market is going to get tight on some of the product line. For example, readiness of coil tubing fleets. When you have all this rigless activity that is going to sharply increase and people are not planning for it. Some people as well have issues with spare parts or equipment they did not prepare -- they did not, sorry, repair during the pandemic, and this equipment despite the fact they are physically there but they are not ready to answer some of the jobs. The jobs as well are getting a bit complicated where the client needs higher specs, longer reach, bigger pipe and some of this activity. This equipment are not ready in each country. And that's where I'm saying we front-loaded our CapEx. We looked at this last year. We have obviously -- I explained this in the prepared remarks, we looked at the opportunity to buy some of the equipment. So we bought actually several of those equipment at a fraction of its price, 20 cents on the dollar, and bought slickline equipment, wireline equipment, some of the high-pressure equipment, and we shipped all this to the Middle East. And we have that ready, green-tagged, as I call it -- ready to be deployed. So it is very important. I think some of the smaller companies will not be ready at all for this increase. Already, I see them turning down jobs, and we will be able to capture some of their work. And some of the others as well, some of the other, like, I would say, competitors, they have issue with cash, right? So either they have a restructuring or something like that. So they are not capable of putting CapEx as we can, right? So -- and I think this is where the client looks at who has a buffer when they make a call and ask for this. So today, you don't see that visibility, but I am quite confident that this is going to happen in H2. And that's why we are preparing for a specific market to have specific equipment for what I think they will need, and then I will be able to capture that before the others.

And our next question comes from George O'Leary with TPH & Co.

Just curious for a little more color on the shape of revenue throughout the year. Q1 '21 panned out much more resilient than a lot of your competitors and even our expectations, which was great to see. But I wondered if you could bifurcate a little bit between production and the D&E segment and talk about the progression of revenue Q2, Q3, Q4, just if it's heavier in the back half or if we see a nice ramp in the second quarter. And just curious on the bifurcation between the segments given some of the idiosyncratic factors that play in, like the M&A you guys have executed on, the partnership with Phoenix that could provide a boost to the directional drilling side and already seems to be doing. So any color there would be super helpful.

Okay. Great. So let me start with, first, the split. I would say that given, again, the size of the unconventional and the frac operation, with all the growth that we are seeing on the D&E, I would say, the split would not change that much until year-end. I would say it's going to start to change maybe from next year. But until year-end, I would say you would see more or less the 2/3, 1/3 in our business between production and D&E. In addition to that, as I said, the H2 is going to be very strong. And obviously, some of the countries will want to see some of their rigless and production activity increasing. I would say the demand of some of the production segment will increase. And even with the growth of the D&E, you're still going to get growth or higher growth even in the production segment because of that. On your second part of the question, I would say, H2 over H1 is going to be significant. And as I mentioned, you're going to get a little increase in Q2, but really you would see the real increase in H2. And one of the reasons of that, people have to remember that during Q2, you have the month of Ramadan, which we are in now, and then you have the holidays. So this usually comes a bit of a slower activity due to that. So I would say, you're going to see real ramp-up in H2, where, obviously, as well, the clients want to see clarity of the demand and clarity of the situation of the pandemic and the European opening and the border. I mean you see most of the countries now are talking about 1st of July, complete opening, tourism is back. You see there is still lockdown. There is still restriction. Some countries that did not open at all, and then you cannot even enter them, right, for example. So what I would say, you're going to see a significant H2 over H1, and that's why I call it always a double-digit growth for ourselves, in my opinion, H2 over H1 revenue. I don't know if I answered all your question, you had something...

No, that was great, Sherif. And then just drilling into the partnership with Phoenix a bit, and pun fully intended there, can you -- it seems like now you're in a good position to compete with the largest players there. And I think back to a conversation you and I had a few years ago when we first met in person in Houston, and that was kind of one of the areas you guys were really looking to press forward into and get more exposure to within the Middle East. So does this -- do all you guys need to do to compete against the big boys, so to speak, in that Middle East market on the high end of the directional drilling market?

No. The honest answer is absolutely not. This is basically, as they call, a stepping stone on the drilling portfolio. So you have to differentiate the drilling portfolio today, is you have the motors, high-spec motors, MWD business. And then the real rotary steerable market that is the large part of the business. And today that part is with LWD high spec or high end, right? So what we have been doing all along is we are very credible with our customer, and we want to only bring partners that are reliable and they make a difference. So what we looked at Phoenix, and I was very impressed with what they achieved here in the Permian and replacing everyone on their high-spec Atlas Motors and the Velocity with the MWD. So what we said, we looked at the market in the Middle East, we segregate it and we said, why nobody is doing that in that market? Why those sections are being drilled with normal motors. And we had a very good agreement with John Hooks with Phoenix, and we agreed, let's put those, but let's make sure when we go there and replace some of the competitors on that -- on those sections, we have to outperform. Otherwise, what's the point, right? So we did that, and they did an outstanding job. And every -- almost every single run, we outperformed the existing field average that they call ROP. So I was actually quite impressed yesterday when I looked at the numbers. And actually, we had an 83 to 84 per hour versus the average of 42, right? So basically, they doubled the ROP of that section, which is basically you can drill that section in 50% of the time. So if that section takes you 2 days -- for example, the example I put there is 60 hours, we do it in 30 hours. That's 1 day, 1.5 days. If the rig count and spread rate in the Middle East cost you around $45,000 to $55,000 a day, 1.5 days is significant, right? So you're talking about $70,000, $80,000. And if the price is the same or equivalent, then you already save this client. And that's where we see how can we grow this part. We have a full-blown technology road map on the drilling to ensure that we have all those factors. So we have high-spec motors working on MWD, LWD, et cetera, and this is when I would say I have a solid portfolio. And now I can tell you, yes, I can compete with the big boys for the entire drilling portfolio. But today, no, we are only specifically targeting that part of the market.

Great. I appreciate the honesty and the color there. That was very helpful context. I'd sneak in one more if I can. The acquisition you guys announced during the quarter was nice to see, and good to see you guys press into Kuwait further. Just wanted to get your thoughts on pull-through opportunities that might emerge from that. Or is this more a Kuwait-focused acquisition? Do you have opportunities to pull those revenues into other geo markets?

No. I would say, yes, this Kuwait basically make us, as I call it, an anchor country, like the big countries that we have. And this will make sure that we have that presence and breadth where we can have fantastic infrastructure. They have an amazing facility, 3 facilities. They have the solid, obviously, relationship and contracts for 5 years. The only part that I would say will make a big difference for us to go outside of Kuwait on this is the drilling fluids. So today, the drilling fluids they have is state-of-the-art. They just started that contract. They have a very strong base, and we will be able to demonstrate that ability to show some technology partnership that we have added to that contract and take that business the way we perform and showcase this to the other countries. It's exactly like, for example, what we did in the frac business in Saudi Arabia. Today, as we are the leader in that business, we can demonstrate this to all the neighboring countries. They see what we are doing in Saudi, and Saudi with their leadership in how they perform this as a client, how did they make this unconventional a huge success for them, how can -- and we were part of it as one of their provider, now if you do the same thing on the drilling fluids and then show it to the neighboring countries, then you start to gain share on that $1.5 billion market that today we don't even touch, right? So this drilling fluids is very good business that we just started now.

[Operator Instructions] Our next question comes from Igor Levi with BTIG.

On the ESG front, last quarter you talked about plans to convert infield water into drinkable water as well as remove sulfate from water so you can use lower-quality water for drilling, bring up higher-quality water for drinking. I remember you mentioned, I think you were in conversations with 3 customers and thought they may pull the trigger on a project before the end of the year. I wanted to see if you could provide some color on how many customers you're speaking with. Is that still the plan in terms of time line and such?

Thanks, Igor. Yes, absolutely. Very exciting about the water, especially the freshwater part. And we are in the final stage of designing the pilot, sending it, and we will have the pilot in 4 to 6 weeks, I would say, in the country, and we will be able to see the benefits and the results of that facility with one of our major customers. And then definitely this will be a showcase if it works exactly as we said it will work, being able to remove the solids, being able to, I would say, tested under an extreme condition. So what we are working on is actually taking that technology to a different level. So there is H2S, there is some oil content, there is very high salt and very high solids content. And we see -- we want to see how can we design that pilot to be able to remove all this and get fresh water on the other side, right? So yes, I would say, as promised, we will have that definitely before year-end. And we are, at the same time, in parallel negotiation with 2 other customers to make the same thing and making sure that we have this type of facility or a pilot as well before year-end. So we're very excited about the water. And I would say that we should see that. And then obviously, as we explained, we should see then after that big projects, making able to convert those pilots to big facilities because that's our aim, right, and the client as well. Most of our clients in the Middle East have huge, huge targets for their ESG and their circular economy. So you can see that they announced a lot of -- like the 5 billion trees and there is a lot of activity going on today for this, and this definitely will be a huge differentiation.

And as a follow-up, could you comment on how your partnership with ICE on the geothermal side will contribute to your ESG goals? Is that something we're going to actually see as well before the end of the year on that front?

No. This is now early investment, right? So this is basically -- no, if I give more even color on that. So the partnership we do is very important to differentiate. So we do -- some of the established companies have a proven technology. And we have that partnership, like, for example, we have with NexTier, like now we have with Phoenix. We just announced Beyond, which is actually with Beyond a joint venture as well, to operate with that joint venture into the international market, which is something that we announced and now we have 2 contracts awarded, so this JV will operate those contracts. And then you have the early stage, what I call the innovative people, that have something that is not proven, right? So it is -- today, ICE is -- an amazing idea is that they are working on some patents. They're working on some new technology. And here, we become an investor. So we put money like venture capital. So we put money with other investors and they are going to work on the idea they work on the technology, they are going to test the technology and then they have an [ EXP ], then they have an [ EMP ] and then we commercialize it. So as a small company, usually this cycle can take up to 2 to 3 years. As a small company and a small -- and very talented people like we have with ICE, we are targeting 1 year, so 12 months for that [ EXP ]. So basically, we put the investment, there will be call for an additional investment, and then the product will come in a year's time for us to be able to take it and pilot-test it. Whether we're going to pilot-test it directly in the Middle East or we're going to pilot-test it first in the U.S., then transfer it to the Middle East, that's yet to be seen. But today, Igor, we have around 4 or 5 of those that we are working on. And then it's -- again, that's our R&D. And that's what I always explain. That's our philosophy of open platform. So we target with very innovative people, and we give them money to try -- to start a new project or a new tool or a new idea. And that's how we see how it will work, and then take that outside. We have some -- we have one of them that we've been investing now more than a year but because it's heavy in electronics, I don't see this, for example, until next year. That's why we don't announce about it, right? But we are working on it. That's our R&D arm, and that's how we do it.

And our next question comes from Blake Gendron with Wolfe Research.

I want to follow up on the unconventional opportunity and really just frac broadly. I think before where there was more focus when this was ramping up, there was one unconventional fleet in Saudi and then maybe another quasiconventional/conventional fleet in Qatar and maybe rotating between a few countries. What do operations look like now? And now that we're getting through the pandemic somewhat here slowly but surely, what's the ambition to grow that part of the business for NESR?

Thanks, Blake. So let me just emphasize. We have today 2 fleets in Saudi Arabia. So we have -- and they are working actively between Jafurah Basin and the South Ghawar. And again, Saudi has been really a pioneer in developing those fields and state-of-the-art what they have done. So we are working with them. We are in discussion, as I explained earlier, with 3 other customers and other countries to start the frac business in those countries. The discussion is very active. We are -- our ambition is to land 2 of those before year-end. So as I explained before, what -- our aim is to have 4 fleets in the country -- in those countries before year-end. And my expectation is we're going to have one in H1 and one in H2, right? So that's exactly -- and then obviously you're going to see real revenue, I would say, in the second half of the year. The clients majority -- we have a lot of clients that are working round the clock around those activities. You have to, again, differentiate in the Middle East between unconventional and the convention. They do frac in the Middle East, but they do not frac what you know in the U.S., whatever you have. The only -- that style of multi-pad, 50, 60 stage per well is only done today in Jafurah Basin. The rest is really much smaller footprint. But you have a lot of fracs. You have fracs in Oman since a very long time. They have tight formation. You saw the announcement of UAE with His Excellency, with ADNOC and Total, and they exported -- they said they exported the first unconventional gas from Diyab. It was announced. Definitely, they have a huge program in UAE for the unconventional. You have unconventional everywhere, but I think the main activity -- or the mature activity is always going to be -- obviously is in Saudi because of the size, and then you would see more and more coming. So we are in a very, very, I would say, good shape to announce, hopefully, the awards of those fracs before year-end.

That's very helpful. Moving to the back half and the double-digit activity increase that you anticipated, it was helpful to hear about the equipment readiness. It was helpful to hear about to split between PS and DE. Just wondering in terms of your market share assumptions, it sounds like you're still going to be able to outmaneuver some of the smaller competitors that are maybe cash-strapped. It was our understanding though that through the pandemic, you were able to also maybe outmaneuver some of the larger competitors just because of travel restrictions. Do you anticipate those larger competitors perhaps reestablishing some share in the back half of this year? Or is it still very much NESR's for the taking just given your nimble-ity and equipment-readiness?

So we're obviously very careful about everybody, and we -- I would say, we have a lot of respect to every competitor we have. I would say that we have a path of our growth and our market share. I don't see this hampering or slowing down in the near future. Part of it is what we explained, that we understand the customer extremely well. We have kind of, I would say, visible activity what's coming in the second half. We prepare those equipment. We prepare the people. Honestly speaking, I don't think anybody else is. So there is a lot of constraint on the smaller guys for cash-strapped or profitability, et cetera. And some of it you have to really, I would call it, bite the bullet and, again, be socially responsible, especially with the pandemic, not to release the people, to make sure that you have your crew ready. You have to make sure as well you take care of them and their family, et cetera. And this will pay out, right? So we have readiness in a lot of the countries where I see our small competitors not ready. I see, again, the cash-strapped people or some of the competitors or even the international ones, some of them have some issues with the CapEx deployment. I don't see -- I'm not saying that the big guys are not ready. They are, obviously. But I don't see them being able to take part of our -- the growth that we are forecasting. I see that we are going to have the market share gain that we are planning. And I see that we are very confident that we're going to have the second half with double-digit on the first half. The path is clear. And I would say that we will make our numbers.

That's totally fair. One more housekeeping one if I could squeeze it in here, for Chris. It looks like very few charges and credits this quarter, obviously, versus last quarter and it was largely due to the transaction costs, it looks like, in this quarter. I know we had previously talked about logistics costs associated with pandemic and how you included those in numbers and not wanting to adjust those out. But Chris, are those charges and costs still very much there? And do you anticipate those to moderate through the year? And do you have any visibility into sort of the pace at which those heightened costs moderate for you?

So the costs are there. As Sherif said, the real key is having the revenue growth that will absorb them and improve the employee utilization. That's really the key. So it's just getting the leverage back on those employee costs. The costs will stay. The costs, they're not going away. They just need to be utilized.

Yes. I mean if I just maybe complement what Chris just said, I mean if you look at our -- the way we structured our -- the whole thing of the CMT and crisis management team, et cetera is we just said that this is part of the business and you just have to live with it. You see what I mean? So your PCR test, your extra people, your restriction on travel, your airport issues -- today for example, I'll just give you an example, that if you want to go to one of the countries, they are requiring you, if you come from a certain -- you have to stay in another country for 14 days. This -- all these people go to that other countries, stay there for 14 days and then after that, they -- what they call they are from the green country, then they will be able to travel to the other one. And all this is part of our business. If I look at our transaction and costs, which we take out -- we call out, that's all due to the nature of acquisition, M&A, lawyer fees, some of the exit of some people, for example, if we do some restructuring, and then all the stuff that we call out, like the preparation for SOX and et cetera, et cetera. That's the only cost we call out because that's -- basically, it should stop. And going forward, you should not have that, right? So I mean, I would say, you might see it for a while because we are very active in M&A. So you will see that. But definitely, as Chris explained, the pandemic and all the stuff, I cannot call this out because this might stay for, I don't know how long. But definitely, as we said, the CMT and the way we operate, we keep it the same way because we don't know how this will last, when it's going to stop, how it's going to work out. We are obviously working very hard with vaccinating our people, but we do this with the government and with the clients and with the customers in the different jurisdiction, right? So trying to elaborate more on that.

I didn't know if it was a source of upside potentially for you as we move through here. I know you don't call it out and appreciate that you don't call it out, but understand that there is a pandemic-related cost that's in there. And I just didn't know if it was going to be a source of upside potentially from [ these ] moving forward.

Yes. I mean, honestly, I -- there is a -- I wouldn't call it an -- I mean, yes, it might be. But I have to as well be quite frank that you have as well -- we save some cost because nobody is traveling, except a couple of people, right? So there is as well some cost avoidance, working on -- a lot of people, especially on the management side, on Zooms, et cetera, right? But yes, it might be.

And I'm showing no further questions from the phone line at this time. So I'll turn it back to management for any closing remarks.

Thanks, Christie. Thanks, everybody. Very excited again on a solid quarter and I would say, a very bright future. Quite optimistic actually about the next -- second half and next year. Thank you very much. Thanks for your time.

And that does conclude today's conference call. Thank you for attending. You may disconnect your lines at this time, and have a great day.