National Energy Services Reunited Corp (NESR) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to National Energy Services Reunited Corp.'s Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's call is being recorded. I'd now like to turn the conference over to our host Mr. Steve Calk. Please go ahead, sir.

Good day, and welcome to NESR Corp.'s Fourth Quarter and Full Year 2018 Earnings Call. With me today are Sherif Foda, Chairman and Chief Executive Officer; and Melissa Cougle, Chief Financial Officer. On today's call, Sherif and Melissa will comment on our fourth quarter results and overall performance. After our prepared remarks, we will open 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. And therefore, we 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, as we expect some callers today to be relatively new to the NESR story, please feel free to contact us after the call with any additional questions you may have. Our Investor Relations contact information is available at www.nesr.com.

Now I'll hand the call over to Sherif Foda. Sherif?

Thank you, Steve. Ladies and gentlemen, thank you for participating in this conference call. We are excited to report on our tremendous result in this quarter. But before I talk about our fourth quarter results, I would like to take a moment and reflect on our journey in 2018. As most of you know, we agreed to acquire both NPS and Gulf Energy in November of 2017 and spend most of the first half of 2018 securing SEC approvals and completing the remaining stock-closing mechanics. I'm very proud of the fact that we did all this work in record time and at the minimum cost. NPS and Gulf Energy are 2 of the largest and well-reputed local oilfield service companies in the MENA region with complementary geographical footprints and service line offerings.

The result is that today NESR is the largest indigenous oil field service provider in the region, with operations in 14 countries and over 3,500 employees. Today, we have a portfolio of over 90 contracts across the region, which we are continuously expanding. This is a result of continuous excellence and service delivery, understanding what our customer needs and continuously providing them with fit-for-purpose technology. For example, in our testing services in Saudi, we have gone from the #7 service provider to the #1 in a very short period of time. Good service delivery, listening, adapting to client needs and fast turnarounds always yield results. It does not matter if it is in Midland or Daman, the customers expect the same high level of efficiency, responsiveness and technology solutions to meet their specific requirements.

Now let me spend some time talking about the macro environment. As I mentioned last quarter, rig counts continue to exhibit quarter-over-quarter improvement in the Middle East. More importantly, underlying drivers indicate continued growth. If you look across the region, rig counts are increasing while at the same time, rigless work is on a faster growth pace. This is both for oil and gas. Gas activities continue to surpass expectation and budget are expected to expand even further year-over-year to cope with the local demand and higher internal consumption. On the E&P CapEx spend for the region, the recent estimates for year-over-year growth are in the 6% to 9% range, which we believe is at the low end of the spectrum.

As you have seen from the announcement by our customers, on their 5 to 10 years' budget, these numbers are significantly higher than the current market estimate for the yearly spend. All of this indicates that we are seeing a paradigm shift in the plans of NOCs going forward. What this means is that we will see approximately $60 billion to $70 billion average spend per year over the next 5 years compared to $40 billion, $45 billion over the last 5. This is a significant jump, and we are seeing that already in our key markets. The service intensity will continue to increase. Just as an example, Saudi Aramco, highlighting the importance of the company gas program, said it will attract investment of about $150 billion over the next decade. With production reaching 23 billion standard cubic feet a day from the current rate of 14 billion. This is a massive undertaking, especially knowing Aramco and how world-class their operations are and in particular, with their recent Unconventional Program.

Now let me focus on our performance in 2018 and update you on the progress of the key objectives we discussed on our first 2 calls. First, integration. After we completed the combination, our focus turned to rolling that out, our corporate vision and priorities, integrating our infrastructure, rationalizing our resource base and increasing the efficiency of assets and capital, all without compromising our service quality and footprint. We called these initiatives Phase 1. In Phase 1, we relocated some of the Gulf Energy operation into NPS base and vice versa in order to create synergies across the different portfolios and regions. We made several organizational changes across the company. We aligned our bonus structure at all levels to reflect the financial results and quality delivery of our services. The rationale behind this is that we want everyone to participate in the success of NESR, not just management and remain motivated to deliver best-in-class service. Everyone has the ability to double his or her bonus and stock awards, and everyone contributes and sees the reward of his or her hard work. Additionally, I plan to waive my stock award bonus for the second year to ensure this amount goes to our top key performers in the company without any dilution to the shareholders. We also consolidated our geographical management structure across each of our operating regions. Now each region has its director who oversees the day-to-day operation and has the empowerment to run his or her business overseeing all the product lines. This allows them to be very close to the customer, find solutions quickly without having to navigate layers of bureaucracy. Our Phase 2 efforts focus on harmonizing our back-office function and support services, including finance, HR and IT systems. These are process improvements which we are continually going to improve and be prepared to easily integrate any new acquisition to the company.

The second objective I talked about was our aggressive growth targets. Melissa is going to talk about the numbers in detail so I won't spend too much time here. Having said that, I want to highlight that what you have seen in the 6 months since closing, it's just a preview of how we see NESR story in the -- evolving over the next 4 to 5 years. We grew revenue approximately 21% year-over-year. And in the second half of 2018, revenue was 22% higher than the first half. We have increased our bidding activity and our win rate. This is essential to achieving our long-term market share objective in these key markets and business lines.

We plan to quadruple the company in 4 to 5 years, and we produced a detailed roadmap per country to be there with the required investment in equipment and in people. We will continue focusing on enhancing in-country value with local content at the top of our agenda. Our plans remain on target for manufacturing, recruiting, building the proper infrastructure in order to ensure we are in line with our customer directives and long-term plans.

Third, we wanted to improve and simplify our capital structure, and we now have measures underway to rationalize our debt structure and rightsize our working capital facilities. Similarly, we are working on our tax structure to bring down our effective tax rate. This is a key objective for our finance teams, and we have world-class tax expertise in the company so I am confident about the results. We are also ensuring that our teams on the ground constantly focus on the DSO, which has now gone down from 132 days to 104 over the last 6 months.

Fourth, we gave ourselves a very challenging objective of initiating operations in a new country. This is a very tough task in 6 months of life of a company. We did it in not only 1 but 2 countries. We were proud to enter Chad, and NESR has been awarded a coiled tubing contract there. This is a $45 million award over 5 years. As we have been saying, Sub-Saharan Africa as a region is of a great interest to us, and we will select the opportunities where we believe we can provide differentiated service that match our strength.

We as the management team have very good experience in the region and understand it well, so I look forward to building on this success. We are looking at more opportunities and remain in constant discussions with our customers in this area.

As you may have seen from our press release last Friday, we have been awarded a major cementing contract in Kuwait. This award marks the entry of our Production product line into Kuwait and will contribute up to $100 million to the top line over the next 5 years. This was a competitive bid with several incumbents and new bidders. This is a very critical win for us as this now further allows us to benefit from the growth in activity in Kuwait. I would like to thank KOC for putting their faith in us, and I'm confident our team will deliver and exceed their expectations. Kuwait has very strong and ambitious Production growth targets. Based on their history, consistent leadership, they are planning to grow in all types of production, being heavy oil, conventional and now offshore. We are very proud and honored to be part of that journey.

Lastly, we also wanted to introduce 2 new technologies by year-end, and we are proud to say we have accomplished this objective. As a matter of fact, we signed multiple partnership agreement and either started operating commercial services or doing field trials to prove the technology in the client field. As an example, we have started to run multiphase meters in Algeria for service measurements. These multiphase meters are sourceless, they don't have any radioactive sources, which is crucial in some places for safety precautions. The clients are receptive as it minimizes the safety risk and eliminates the need to [escort] those operations, which means more well tests can be performed daily and more cost effectively.

We are also working successfully on downhole coiled tubing stimulation technology, which has now expanded into 2 different countries, and we are looking for more application in 3 others. In addition, we are working on our field trials and licenses for perforations as well as directional services. We will be able to give you more color once we complete those trials and get the customer endorsement.

We remain very close to our esteemed customers and only step in with fit-for-purpose technology when we know we can provide flawless delivery. We are not shy to decline some types of wells, where we know we don't possess the expertise or the technology. And at times, we even advise our clients on the resonance of the overall technology, what stage of the lifecycle is this in and who has the best tool for their well. The key is to continue to build credibility and trust and provide the best possible advice to our clients and not focus on short-term profits.

I hope this summary -- all of you have a better understanding of where we are and where we are going in 2019. With this, I will pass the call over to Melissa to talk about financials.

Thanks, Sherif. This morning, we filed our earnings release reporting results for the fourth quarter. We are pleased with the results of our first 2 quarters of operation since combination.

Fourth quarter revenues continue to demonstrate meaningful growth quarter-over-quarter at almost 9% topline growth. In total, the second half of the year grew 22% sequentially from the first half of the year. Our adjusted EBITDA also shows that we continue to be able to translate our growth into the bottom line. In 2018, we achieved combined full year adjusted EBITDA of $152 million. This compares to $148 million in 2017, which is roughly 10% growth year-over-year. This growth was achieved with only 7 months of combined operations. Including our fourth quarter, which saw a significant drop in oil prices to levels not seen since 2015.

Our fourth quarter growth was driven primarily by the better utilization of our assets with increased activity across both segments as well as the expansion of new and existing contracts. We continue to realize the cost synergies from our integration work and begin to see some traction in our ability to cross-sell new services in our existing footprint. In addition to our segment topline growth, we were also able to advance our geographical footprint goals, growing quarter-over-quarter in all 5 of our largest operating locations. We posted a combined adjusted EBITDA of $50 million for the fourth quarter. This represents a sequential growth rate of 7% and year-over-year growth of more than 14%.

Drilling down, our Production segment revenue for the fourth quarter was $99 million with EBITDA of $36 million. The improvement over last quarter was influenced by higher coiled tubing activity across our operating locations. Larger scope projects for customers in Saudi and Iraq and overall margin improvements with a continuous focus on cost management.

Our Drilling and Evaluation segment for the fourth quarter was $61 million with EBITDA of $14 million. We saw continued strength of our well testing and logging activity across several regions. We continue to grow our D&E product lines at a much faster pace than the market, mainly by enabling cross-selling of the drilling portfolio of the former Gulf Energy into our current, larger global footprint.

We continue to invest in the D&E infrastructure and are positioned to capture the growth of these newly awarded contracts. You may notice lower margins between Q4 and Q3, and this was heavily influenced by the gain on the sale of overlapping business that occurred in Q3 and did not reoccur in Q4. Net income for the quarter totaled $23 million, which included the impact of transaction and integration costs of $1.2 million as well as amortization from our contract intangibles of $3.8 million. Net income was also impacted by an adjustment made to update the contingent earn-out consideration finalized at year-end.

And turning to cash generation, for the post-combination period of June through December 2018, cash flow that came from business operations was approximately $75 million and for the combined full year, totaled approximately $115 million. The combined company's free cash flow for the full year once adjusted for transaction cost totaled approximately $60 million.

As we think about 2019 and our anticipated cash flows, we remain steadfast in pursuance of an aggressive growth strategy, and we'll look for opportunities to deploy capital where we feel like we can create incremental value. Some of the highlights of our balance sheet include a cash and cash equivalent balance of $25 million as of December 31. This is compared to $68 million as of September 30. As you saw from our filing, in the quarter, we repaid $44 million of the Hana convertible loan that matured on December 14. The remaining balance was extended and repaid fully during the month of January. As of December 31, our net debt to adjusted EBITDA ratio was 1.7.

Post-combination income taxes totaled $9.4 million, giving us a successor period ETR of 21% for 2018. This rate was affected by the 2018 transaction costs that were largely not deductible for tax purposes. We continue to work on our restructuring activities and believe they will positively impact the tax rate in the future.

In 2019, we are already ramping up our capital spending to meet our growth plans for the year. It's our intention to get capital deployed and working as quickly in the year as possible. We look forward to 2019 with good momentum gained from our first 2 quarters of combined operations. We've set aggressive targets for ourselves and look forward to what the future holds.

With this, I would like to pass back to Sherif for his closing comments.

Thanks, Melissa. We are incredibly proud of the work our team is doing and are excited about our future. I would emphasize that 2019 will be a great year for MENA, and we are very well positioned to exceed the growth target of the region. As mentioned several times, we plan as a minimum to double the growth rate of the MENA region, and we have the people, focus, technology and financial capabilities to achieve that.

With this, I would like to take this opportunity to thank everybody for joining the earning call, and if there are any questions, we'd be happy to address them now. Thank you. Operator?

(Operator Instructions) Our first question is from Greg Colman with National Bank.

First of all, congratulations, everyone, on the inaugural year. Pretty big accomplishment. So excellent work.

Thanks, Greg.

I wanted to start with a couple of just sort of detail questions on the quarter and then 1 or 2 bigger-picture ones. Just on the gain of sale there, that's a bit of new information for us. But could you help us understand the impact that had on Q4 or Q3, I suppose, so we can try to normalize for the growth from the third to the fourth quarter?

Yes, Greg. This is Melissa. We had a small overlapping business in Oman that we sold shortly after the close of the business combination, and it was ultimately -- all the accounting took place in Q3. It was, if I'm recalling correctly, $1.8 million of gain.

Okay, got it. Then staying on that theme from the margin perspective, we saw a phenomenal growth from sort of first half of the year into the second half of the year. But now we're seeing EBITDA margins kicking in around that 31%, 32% level. Just wondering if that's the level we should be thinking about as we look out into 2019 or if we should be anticipating sort of margin growth reigniting. And where I'm coming from is, we don't have a ton of detail on the close to $0.5 billion in contracts you've signed. So I'm not too sure if the margin profile of the contract work coming on is going to be additive or dilutive to the margins we've seen in 2018.

So Greg, I mean, as I mentioned before, we look at all our opportunity and contracts across the region within a range of profitability. We do not -- some contracts you're going to win at a higher margin, some contracts you're going to win at lower margins. We have a window of, what we always said, between 25% to 35%, and we look in -- always in this window and operate. So sometimes, you will have contracts at much higher rate, sometimes you'll have contract at much lower rate. You have a startup cost as well as in some of these, but you always have to assume within that range, we are pleased to operate in most of the countries. So some -- we don't really run the business by quota, but it's within that range you will have most of our contract wins will be.

Fair call. Would it be -- so all the numbers you were talking about are consistent with sort of the margin profile we've seen so far kind of splitting down the middle? Is that a reasonable expectation going forward? And -- or are the contract wins bulking at either end of that 25% to 35% you mentioned? Or is it sort of evenly distributed throughout, and so using sort of the midpoint is a reasonable assumption?

Yes, I would say so.

Okay, great. Moving onto the contracts themselves, great to see the Kuwait win just before the quarter here. Wondering if you can offer us little bit more details on that. It is cementing -- you said a competitive bid with several incumbents. When should we expect that to kick off? Is that sort of first half '19? Or is it something that'll take a little bit of time to deploy assets? You guys aren't one to move slowly, so just trying to get a feel for when that starts.

Yes, I mean, basically, this is very typical of contract in this region. This was definitely a long process. It took a long time to -- the competitive bidding, especially, we are a newcomer. So they kept some incumbent, and they took 2 newcomers. And it takes usually 4 to 5 months to start up the contract between auditing, awarding. So the award was done. After that, usually they come and audit your side, you move the equipment, they start assigning you rigs. So you estimate second half of the year is a good assumption to start.

Good. Great to hear. And then the $45 million contract that you mentioned in your prepared remarks there, Sherif, the coiled tubing, is that something that I missed in prior announcements? Or is that a new announcement? Maybe it was part of the major multiyear contract you announced in December. Just trying to understand if that's additive to what you've announced or if it was already included in some your prior announcements.

No, it was not announced before that. It is just -- we just got awarded over the weekend, and that's why we just announced it now.

Phenomenal. Okay, great. So that's additive. And then just lastly, on the contracts, and I don't want to hog up all the time here, if we look at 2019, you're going to be incorporating a lot of stuff. So you've got the $45 million oil coiled tubing, $70 million in Kuwait, the combined contracts you announced earlier in 2018, [$380 million] and then the major multiyear at the end of December. Should we be worried at all about implementation costs or deployment costs, meaning should we kind of be a little bit more cautious on our margin profile in 2019 as you put a whole bunch of kit to work? Or is that just sort of part of normal issue for you, and you -- we wouldn't be too worried about sort of deployment costs or startup costs on all these new contracts?

Yes. I mean, you'll always have the startup cost. And again, if you run the company per quarter, you'll have a -- yes, for sure, you'll have a startup cost. So the earlier quarter, when you start to deploy this, your margins will be reflective to that. And then once you have the contract fully run, then you go back to your normal margins. So definitely, the earlier quarter of the implementation, you always have some cost -- startup cost.

Great. No, that makes sense. Just wanted to get that feeling. And then finally, capital structure, you mentioned just kind of working on that and keeping an eye to it. Should we be looking at your debt profile and kind of expecting any sort of more structured or permanent, longer-term terming there to just kind of lock in your interest rates? Or is the current structure, I guess, Melissa, is something that you're comfortable with and your current maturity dates?

So from the profile of the capital structure, I'm comfortable with it. But for the reasons I think you and I have previously talked about, I think, we're -- it makes sense for us to look at consolidating and maybe terming out some of that in a more efficient structure. So we continue to explore that, and that is what Sherif was mentioning in those measures. But from an overall debt level, we're comfortable with it. But we think that there's improvements we can make to create more efficiency within the structure for sure.

The next question is from the line of Igor Levi with BTIG.

So while most of your work is onshore, you guys do have a foothold in the offshore market in Qatar. So do you see an opportunity to increase your offshore presence in markets like Saudi, UAE, Kuwait, given the large number of offshore FIDs and -- indicating that we'll see a large uptick in offshore activity in the coming years?

Thank you, Igor. Yes, absolutely. Let me just remind everyone. So we do work onshore and offshore. We work both in the countries that you just mentioned. So we work offshore in Saudi Arabia, we work offshore in UAE. So the difference is we have a leading position in the offshore market in Qatar, especially on the coiled tubing business. So the difference between offshore jack-ups and offshore deepwater is basically the jack-ups today, when you operate them cementing, coiled tubing, slick line, wall line, it's almost like you're operating onshore one, right, because you go on a jack-up and you perform the work from there. We do not have any deepwater activities, but we do have offshore. So to go back to your question, yes, indeed, there are a lot of offshore project being sanctioned in the Middle East, especially new entry, like Kuwait, starting, Algeria, Egypt, et cetera. So we are working on all this in preparation of the equipment and the people, the personnel, et cetera. And again, we have the capability on working both offshore and onshore. So we have a very good position in Saudi as well.

Great. And could you provide us an update on pricing trends in the region and the competitive environment as you bid on new work?

Yes. So pricing remains competitive. Very -- I mean, all the bidding goes through the same competitive, long-term contracts, a lot of clarification. I mean if you look at the last award, we had 4, 5 clarification, even revising pricing. So it is very similar. The difference again is it's long term. People have a long view of the sustainability of the contract. When you get a contract, it's not only about the prices, it's about your service delivery, your nationalization, local content, et cetera. So there is advantage that we have on certain contract versus the other. If you look at the competitive of the large, huge project, which is like the LSTK, yes, this is very, very [unfortunately] challenging, and the pricing is quite low actually on these projects.

Great. And then lastly, how should we think about the first quarter in terms of revenue and margins? Do you expect any negative seasonality? Or is your order book strong enough to offset that?

So I mean, as we -- obviously, we don't give guidance, but I can tell you that from an activity point of view in the Middle East, it's always sequential quarters. So you'll always have the Q1 as the lowest and then most to Q3, Q2, Q4. This is not because of weather. It's mainly because usually, at the start of the year, all the NOCs have their budget approved, but people start the year with a cautious to understand where are the activities, et cetera, et cetera, and then you will have a slower start, especially on the rigless side, right, because the rig is already contracted. You have a rig growth, you have a percent year-on-year. So we will see always, for example, for ourselves and others, I will see year-on-year very strong growth as always. We will have a continuation of obviously all the contract wins we have. So we will weather a bit that seasonality from some of the others. But definitely, you'll have a stronger second half than the first half, always, in the Middle East.

At this time, I will turn the floor back to Sherif Foda for closing remarks.

Thank you very much. We really appreciate the time. We -- again, we are very excited about the MENA region for 2019. We think it's going to be a phenomenal year and looking forward to future calls. Thank you.

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