Greetings, and welcome to the National Energy Services United Earnings Second Quarter Earnings Call . As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Blake Gendron, Vice President of Investor Relations. Please proceed.

Thanks, Maria. Good day, and welcome to NESR's Second Quarter 2021 Earnings Call. With me today are Sherif Foda, Chairman and Chief Executive Officer of NESR; 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 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, 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 wellbeing 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, locked down with strict measure to control the spread of these variants during the month of Ramadan and the Eid holidays. Mandatory quarantining in safe countries is now the rigor for most of our main operation 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…

Thank you, Sherif. 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 frac in Saudi Arabia and Kuwait. Adjusted EBITDA in the first -- 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 noncash FX charges due to currency weakness in Iraq and across North Africa. As Sherif 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 do 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…

Our first question is from James West with Evercore ISI.

Sherif, with the recent OPEC deal to add barrels to the market, I'm assuming -- I'm curious to hear your thoughts on this, but your main countries of operations are nano, you're having to ramp up to put those barrels back on the market. I guess is that, one, is that happening? And two, was that actually already underway, probably pre-deal announcement in anticipation of the need for barrels to come back to the market?

So all the clients and the main NOCs, as you rightly said, we're preparing for the growth, for the increase of activity. I would say the main delay on the increase is the COVID situation. So if you look at the -- obviously, there is a separate preparation from each country without going into more details in that. But you can see that the main constituent of the production, definitely have very, very strong plans to add rigs, to add rigless site production facility. Some of the projects were clearly announced publicly that they are back on track. I would say you -- if there were no coverage, you would have seen those rigs from this month straight after the Eid holidays. I would say that mainly you've got like a quarter delay because of the COVID situation. So some of the countries were announced to open up the borders 1st of August. Now they're saying it's September, some of the restriction of the countries on the travel and the airline got pushed another month or so. But definitely, everybody is in the plan of this is, as I said, long cycle. They will be adding rigs in facility to produce more. But obviously, they have, as you know, the buffer to be able to put that production without adding activity. So they have that capability to add production and add activity like a quarter later.

And then, Sherif, you outgrew the market very substantially, but sequentially and year-over-year. Do you think this level of outperformance versus the market is sustainable over the next several quarters, especially as things get going, as you mentioned, as the COVID restrictions ease, where you get through the COVID restrictions, or will there be some slowdown in that outperformance? I don't know I expect it to outperform, but I'm just been impressed by the continued significant outperformance.

I would say, obviously, our ambition is to continue to do the same. Our ambition is to have that outperformance definitely on a sequential basis and year-on-year. I would say the only drawback or the only restriction would be is the COVID. It's not only us. It's really the some of the capacity. I tried to explain it in my earlier remarks, is some of the actually like weak companies of the region, the local companies, they are suffering on their rig capacity. So even when we have projects that are lined up, we want the tender, we are waiting to do some of the work, the rig is not ready because they don't have a crew. And they rely on the crew on totally rotational people. So I would say the total market if it gets delayed, we would just have some delay. But definitely, our focus is to outpace the market as we've been doing because if you start to gain more contracts and you should be able to do the same.

Our next question is from David Anderson with Barclays.

Sherif, so you talked about the margins. So the margins were impacted this quarter by, you mentioned inflation, a bunch of COVID issues, a little bit of mix in there. I would think that maybe those should start to turn the corner, let's say, presumably over the next quarter. So you didn't mention pricing. And I was just wondering if maybe you could comment about kind of industry pricing as you see it? When things do start to pick up, I guess, kind of towards the back part of this year, where do you think pricing ends up? We've been hearing talk that the big guys have been very competitive on these big tenders. I know you don't participate in those. But is that spilling into your pricing mix? And maybe just how do you think about that as we go into next year?

So yes, definitely, I spoke about our cost, ourselves and the industry is definitely the COVID has now start to ease. You start to feel it, right? You start to feel this test per person to go to the site. I'll try to give you an example. Some of the rigs now if you have 1 case, the crane operator, for example, has COVID, then every single person on that facility will have to test twice and they quarantine the other crew for a week. So you have to pay for the hotel, you have to do all. So definitely, the costs start to really climb up. I would say the other part is the inflation, you don't see it yet, but we can feel it with talking to some of the CEOs of the chemical company, the transportation, et cetera. And they clearly say that they cannot afford to keep the pricing as is for the longer term. So you're trying to delay as much as possible, obviously, that increase until it really starts to hit you. So that mix, I think, is affecting everybody, affecting the industry, and you would see it. I think back to your point, pricing is, I would say, very honestly, it's a lack of leadership. So the pricing has not been -- nothing is passed on. People are still dropping the pricing, unfortunately, in all the tenders actually big and small, surprisingly, despite the fact that the situation is going to tighten dramatically over the next 6 months, we can see it in the service quality of some of the some of the service company in the region. They have very actually poor service quality in some of the projects. And you can see why because obviously, they continue to drop the price,…

Well, I've seen an up cycle, Sure thing. We know it's coming. And so I'm looking forward to seeing that again. But one big thing about up cycle is kind of capacity, right? And so I guess the one good thing about these LSTK projects is they're going to soak up a lot of capacity out of things. So talking about the health of the industry, haven't we seen a big cut in CapEx by those competitors of yours? So do you think that obviously, in order for pricing to pick up, you need to have sort of that combination of activity and where capacity levels are. Does that give you some confidence that the pricing can get passed through kind of early next year and that, that will come naturally in the market?

Yes, spot on. I think you've analyzed it extremely well, David. It's absolutely right. There is capacity in the international market still. That capacity is going to tighten, is exactly what I was saying. And actually, I think it's -- the talent of the people will actually be even worse, right? So people are not investing at all in CapEx, and I'm investing actually much more than as a percentage, obviously, of revenue on almost 15%. And as a buffer, again, on the capacity to make sure that we can do the projects, I think what will happen exactly what you said, once the capacity gets absorbed with the increase of activity that is coming and people will start to turn down jobs, the clients would see some service quality suffering, and then the pricing will start to come naturally. And absolutely you're spot on. This will come when the time -- which is similar to North America, but always there is a lag. But I'm going to try to explain that these contracts in the international market is a longer term scale and people just have to be aware that you should be careful of what you're priced now if you're going to -- if you have a contract for 4, 5 years, right? So it's important that people start to realize the fact that the health of the industry is very important.

Our next question is from George O'Leary with TPH & Company.

Apologies if I missed it, I got dropped from the call about 15 minutes in and had to redial in. But I wondered if you could just frame the revenue trajectory in the second half of 2021. Assuming the COVID issues kind of abate or don't get worse from here, is the expectation so that Q4 '21 revenue will climb very materially and much more so than in Q3? And then any initial expectations for revenue growth in 2022 based on what discussions with and/or announcements from your customers?

I think it's very positive. I'm extremely, extremely excited about the H2 and next year. I think I tried to make it clearly that it's a long cycle. I think we're going to see a nice upturn with activity increase. All the increase, in my opinion, will come from the OPEC countries. These are the folks that are capable. They are extremely, extremely smart, extremely organized. They have a very, very solid plan for the growth. They know where the rigs will go. They do their reservoir management, as I said, best-in-class in anything, any comparison to anybody else. So those increases you will see in H2, and as I think the commentary from most of the people, you will see a double-digit definitely H2 over H1 or H2 over H2 of last year, right? So you will see a double-digit growth going forward. We believe 2022 will even be much, much, much higher than people expect. I think as you put it, the only caveat here is what happened to the COVID? What happened to the restriction? And not in the matter of like Europe now saying that they might close again, et cetera, et cetera, I think the restriction you're seeing in the Middle East and some people are not aware of that, it's like they take very strong measure, like very, very strict. It's more of a Singapore approach or Australia, et cetera. So where you have a lot of restriction, who can go. The people cannot travel. Some of the countries are not allowed to enter, et cetera, et cetera. And I think this will just have, I would say, a shift maybe on the increase of activity by a quarter or so. But I say Q4 is going to be absolutely solid, absolutely solid. Because rigs will start to arrive. People will have the crews, et cetera, et cetera. So I'm extremely, extremely excited. And again, this is not I would say, six, seven months, I think this is going to be a nice several years up cycle.

And then M&A is especially an important part of the story. You touched on it a little bit in your prepared remarks. I wonder if you could flesh that out a little bit? Just how is the M&A landscape? What's your mindset with respect to M&A at this point? And then how do you balance that with forming partnerships, technology and investment focused? Any areas of interest to you as we move forward?

It's the same. I mean, we are very, since the beginning of the company, we know exactly what we want to do. We actually know who we want to buy. So we are focusing on ensuring that the geographical M&A, which is our main M&A has to be accretive, people have to be -- we have to buy companies cheaper than us, cheaper than how we trade. I think we trade very low multiple compared to what we are, how we are growing. However, if we still at that multiple, we have to buy somebody that is cheaper. The company has to add value. We look at the governance extremely in a very detailed eye. So we need to ensure that how they run their business, how they govern the company, the shareholder base, it's accretive to us. It's added value to the portfolio of the segments that they have in that country. So it's one plus one equal three. That's how we look at M&A geographically. On the partnership, we continue on the same path, like we did now, we have like almost a dozen of partnership. I'm very excited with the ESG Impact partnership. We have the 2 water companies. We are looking at emission. And now we are almost on the third or fourth company to look at that. We don't announce it yet because a lot of it is R&D kind of sensitive. So there is a lot of proprietary or IP that we kind of -- trying to make sure that it stays like confidential. So once we have this more matured, we will announce those partnerships that will add value and people will see in the market that why we're doing that. Meanwhile, we are looking again at early ventures, people with disruptive technology.…

Our next question is with Igor Levi with BTIG.

You talked about two water projects, one in Iraq and one in Saudi. If you could just provide a bit more color on the size and objectives and what are the differences in the two projects? It looks like Saudi is more of a pilot. And I believe on the previous call, I think you mentioned there were three pilots on the horizon. So also wondering what the updated project pipeline for water management looks like?

So look, the Iraq project is obviously with, as I said, with a super major extremely, extremely excited on it. We have the award. So we are awarded a contract to make conventional brine like they've been doing, like the competitors are doing. So we obviously -- you have to get awarded the normal way, which we did. And then our clients are extremely notion about the ESG, we went and presented to them. We are awarded. This is how you do it for the past two years and all the industry does the same. We like to change that. We like to put it -- we will honor the same price despite the fact that it will cost us more, but we will honor the same price, but we can do it with our partner company, which is the Clean TeQ guys from Australia. And if we do that, this is the amount of CO2 we're going to save. We do not have to ship any salt. We are going to take the existing salt from the produce and then clean it, remove the sulfate, put it back and use it as brine. So the footprint of that is going to be significantly the reduction of CO2. And we are going to have this as a nice ERT project. They loved it. They said it's a great idea. We need to make sure that you guys still deliver, as you said, on time, which we said yes, we will deliver on time, but we will do it this way. It will cost us more, but we will do it, right? So that project is going to be, I think, once it's started and working, it will be a flagship. And our approach here is to show this as a…

And shifting to Oilfield Services. As we think about the rest of the year, are there any major contracts set for renewal this year or even incremental work that you're anticipating could be awarded in the second half?

We tender all the time, Igor. So it's a $20 billion market. So I can tell you, if you just tender 10% of that, that's $2 billion. So it's an ongoing process. And I think that's what I tried to make on my earlier replies that the expectation that we see that those kind of big tenders and big contracts start to see different approach because of the inflation, because of how the whole market is going to develop. And that's what I just said. Unfortunately, we don't see that until now. So we are moving, and hopefully, as soon as we have some significant and client can allow us to announce awards, and we definitely do that. So we obviously do that always very frankly with our clients. And I see there is so many things going on, and we will -- you will know about it as soon as we -- if we secure some of these awards, we'll definitely announce that.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to management for closing remarks.

Thank you, Maria. Thanks, everybody, for attending our call. Again, very excited about an up cycle. We've been missing that for a while. And we look forward to speaking to you soon and all the best. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.