National Energy Services Reunited Corp. (NESR) Q4 2019 Earnings Report, Transcript and Summary

Greetings. Welcome to National Energy Services Reunited Fourth Quarter 2019 Earnings Call. [Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to Chris Boone, CFO. Mr. Boone, you may begin.

Thank you and good day, and welcome to NESR's Fourth Quarter and Full Year 2019 Earnings Call. With me today is Sherif Foda, Chairman and Chief Executive Officer of NESR. On today's call, we will comment on our fourth quarter results and overall performance. After our prepared remarks, we will open up the call to questions. Before we begin, I'd like to remind our participants that some of the statements we'll be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest earnings release filed earlier today and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our press release, which is also on our website. Finally, please feel free to contact us after the call with any additional questions you may have. Our Investor Relations contact information is available on our website. Now I'll hand the call over to Sherif.

Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. We are very excited to report on this quarter and our 2019 results as well as some of the key events since our last call, which will have a significant effect on how 2020 shapes up for NESR. I'm also going to spend a fair bit of time talking about our recently announced unconventional operations in Saudi and our latest announcement to acquire SAPESCO, which generally enhance our position in the region and will open a new market for the company. This quarter was a record quarter as we grew our revenue 17% year-over-year and 15% sequentially despite geopolitical turbulence in North Africa and Iraq. As you have seen recently, tension continue in Libya, whereby the situation has escalated in the last quarter and the production is down significantly. We continue to monitor and adjust accordingly. And we have not changed our view on what we want to do there and the overall potential products. Similarly, in Algeria, the political situation is in flux, and this affected the rig activity and efficiency of operations. Again, we continue to be close to our customers and ensure we support them as best as we can in those difficult situations. Overall, NESR grew at an average growth rate of 20% over the last 2 years, and this is on the back of growth across all our portfolio. Chris will cover the details on the numbers, but I want to highlight some key points. I think that we are one of the few, if not the only one, which grew at this pace and are predicted to grow significantly in 2020 and in the near future. We secured most of this growth this year, and we have bigger plans for the future. Also, we are proud to deliver on all the promises we have provided last year. So this growth, gain in market share, financial performance need to be seen in the light of a very competitive, oversupplied and sometimes irrational pricing behavior in the service industry today. This is a credit to the resilience of the Middle East market, innovative business model we have developed and how well we understand our customers and the environment which we operate. Most importantly, all this growth has also been achieved while maintaining stellar health, safety, environment and quality metrics as perceived by our customers. As a strongly people-oriented and customer-focused organization, we have achieved over 70% reduction in loss time injury frequency rate, even though, in the same period, our head count has increased by 25% and overall operating hours increased by approximately 50%. This is a remarkable safety performance as to the highest international standards. In our business, you'll see this quality of service delivery is as good as what the customers think of you. And I'm very proud that again this quarter, our leading customer ranked us the best service delivery provider when measured in terms of nonproductive time. This belief of our customers that we are capable of delivering the stretch goals and beating the best, even though we do not have the history like the others in those business lines, is a strong testament to our ability to execute on what we say we are going to deliver. Which brings me to the first main topic, the commencement of our unconventional fracturing operation in Saudi Arabia. I will touch base on the bigger macro picture before I delve in more into the specific of our frac operations. What we are seeing today are seismic shifts happening in the industry in the MENA region. You recently saw the announcement from UAE of the discovery of the 80 Tcf Jebel Ali reservoir, which is the largest discovery of a gas reservoir since 2005. Followed by a bigger one, the Jafurah field in Saudi Arabia, which a record 200 Tcf of gas, the size of the Eagle Ford. Saudi Arabia intention is to become a gas and industrial chemical exporter. The Kingdom has been investing in the country's tourism for a while with impressive results to boost its industrial footprint and increase the gas usage for domestic power consumption. So how does this affect the oilfield service business and NESR? We think that most of the incremental gas production will come from how fast our customers can bring this unconventional and conventional reservoir online. So a complete reset needs to happen on how they approach this when gas was not the prime focus. Our customer wants a break from the old ways and really want to adopt a business model where they are able to leverage the best and the brightest ideas and execution across the value chain to speed up the delivery of the key objectives. This is where NESR has been instrumental in changing the paradigm of the region. We started discussion with Saudi Aramco in the first half of 2019 on the drilling in North American site high-efficiency fleets as well as duplicating our existing solid performance in coal, testing, site management of our conventional revenue. We signed a contract with Aramco, brought on NexTier as a partner, [ shipped the fleet ] as well as other technologies, which we selectively preclude or partnered with and finished the qualification, executed the drive jobs in the second half. And by the way, we broke all the records on stages per day within the first week and the stages in a month within the first full month of operation. Needless to say, our customer is very pleased with our groundbreaking performance and has recently decided to award us a long-term contract for 2 solid years. All this typically will take years in the previous way of working and landscape. We went from nothing to breaking records in 6 months. This is not only reflects our capabilities, but also our customer nimbleness, willingness to think out of the box and inner faith, which is extremely commendable considering they are the largest company in the world. Just to give you the scale of our operation of which fracking is a subset. We take on the website, everything from frac fleets, wireline, fracturing, milling and blowback testing until we give the producing one went back to our client. All of this is part of our root scope. We also run the site, which include the camps, [ jet ] train, sand logistics as well as provide all the chemicals. The scale of what we have achieved in terms of a cold start is an impressive feat. It is credit to both our teams, NexTier and NESR, and the support of our client unconventionally. Our innovative business model called for partnership. Rather than changing a new fleet, we opted to leverage the existing capacity and significant experience of NexTier. This partnership also allowed us to leverage the supply chain of both the companies, resulting in a win-win to both the client and us. Let me now proceed on other countries in the region. We are now at full tilt of our cementing operations in Kuwait, increasing our market share on the back of a solid start-up, which our customer complimented us on. We also deployed assets in Libya, which we are now working in Q1 towards qualifying those services. We give competition market share in Iran and won a couple of small contracts in India. In Iraq, we won a large integrated contract with a super major that we never worked with before. This is a 3-year contract, which is a significant milestone for us as it gives us further diversification of our revenue stream in Iraq. In the fourth quarter, we opened a casing accessory manufacturing facility in Nizwa in Oman. It was integrated in the presence of various ministries from the Ministry of Oil and Gas, PDO and other customers. The plant has the capacity to handle all the demand in Oman. This is ESG in action and one of the key sustainability drivers of the region. Ensure we bring as much of the value chain in the country to generate skills, employment for the nationals. We have previously demonstrated from the -- our investment in the drilling tools and fishing businesses that we can create a large-scale manufacturing and maintenance setup and employ a large number of Omani, essential for in-country value mission. We are going to continue and grow our efforts in this regard, and we are complement -- completely aligned with the country vision. In Saudi, we just completed the IKTVA 2020 Forum, during which, we had groundbreaking of our research and innovation center, NORI. Now I would like to touch on the second major point on the call, which we recently announced, that is our agreement to acquire SAPESCO, the oldest service company in the mainland region with operation across Egypt, Libya, UAE, Kuwait and Saudi Arabia. We have been working on this acquisition for now 1 year. As announced, the deal is financially accretive upfront and allows NESR to enter the last country in the MENA region. In addition, we gain a new product line, industrial pipeline services, with a leadership position. Egypt is one of the growth markets in MENA with their recent move to be a gas hub for Eastern Med. In addition, several new exploration contracts were signed recently with ExxonMobil, Chevron, among others. Outside of Egypt, SAPESCO has contract, which we don't have, like [ Laclerk NDRS ] in Saudi, [ Perforation and Ganco in the region. ] They have a strong leadership position in the industrial service business in Egypt, and we plan to take it to our footprint of other countries and operations. We have immediately started partnering with them in countries like Saudi and UAE. NexTier will obviously introduce its business lines which could beat SAPESCO's strong offer in Egypt like cementing, drilling and downhole tools. On an unaudited pro forma basis, they finished the year with approximately $65 million in revenue and $20 million in EBITDA. So their margins are in line with ours. We expect to close the transaction by January. We have spent the last 2 weeks in Cairo to finalize the deal, and I can tell you that both sides are super excited with the opportunities it provides to growth. We also held our Board meeting there, and we are totally committed to our customers to invest in Egypt. We also have the honor of hosting the Minister of Petroleum, and he was kind enough to share his vision for the [ inter upstream ] sector, and we are proud to be part of this great story. Chris will talk about the deal numbers in detail, but in summary, we are funding this transaction only by ourselves on the back of our very strong free cash flow generation. And on that note, I will pass the call over to Chris.

Thank you, Sherif. Fourth quarter revenues were $185 million, an increase of 17% over the prior year quarter and 15% over the third quarter. Adjusted EBITDA is $52 million for the fourth quarter of 2019, increasing 8% over the prior quarter. Year-to-date, our adjusted EBITDA is $186 million, which is 15% higher than 2018 for the combined company. EBITDA adjustments of $11.6 million for the quarter are primarily for costs associated with the unconventional qualification process plus integration and restructuring costs. As well, we incurred certain discrete costs consisting primarily of a noncash actuarial expense due to the impact of lower discount rates on projected employee end-of-service benefits and a noncash increase in Algerian tax reserves. We do not expect additional costs for the unconventional qualification process to be incurred in 2020. Also, integration and restructuring costs in 2020 should reduce to primarily include stocks implementation costs and SAPESCO transaction and integration costs. Adjusted net income is $18.9 million or $0.21 per diluted share as compared to $16.2 million or $0.19 per diluted share reported in the third quarter. Reported net income was impacted in the fourth quarter from increased depreciation of $7 million. Higher sequential depreciation is primarily related to incremental unconventional equipment. The contracted unconventional equipment with NexTier follows capital lease accounting and is depreciated. This higher depreciation rate will continue in 2020 with quarterly depreciation also increasing sequentially each quarter by approximately $1 million to $2 million as our 2020 CapEx program is capitalized. In addition, once the transaction is closed, SAPESCO will add $3 million to $5 million in annualized depreciation and amortization, depending on final purchase accounting. Moving to our segments. Our Drilling and Evaluation segment revenue for the fourth quarter is $64 million, growing 8% over the same quarter last year. Year-over-year results for D&E were led from our continued expansion of our D&E service lines from our market-leading position in Oman to other geographies. Adjusted EBITDA margins fell sequentially due to an unfavorable segment mix. Separately, our Production segment revenue for the fourth quarter is $121 million, growing 23% over the same period last year from multiple product lines. Adjusted EBITDA margin for the Production group were approximately 33% with a sequential decline primarily related to the impacted activity in North Africa. The effective tax rate for the fourth quarter of 2019 is 37%. The fourth quarter rate was impacted by a noncash Algerian tax reserve. As adjusted for charges and credits, including qualifying and other start-up costs, the fourth quarter tax rate was approximately 17%. As we enter 2020, the effective tax rate should show improvement from the reported 25% effective tax rate for the full year 2019 due to the reduced impact of start-up costs on pretax income and lower noncash tax reserves. In addition, we are actively exploring several tax planning strategies that we believe will positively impact our effective tax rate in future periods. Looking at the balance sheet and cash flows. Free cash flow for the fourth quarter was $26 million. Operating cash flow improved significantly from the third quarter due to improved accounts receivable collections, offset partially by new receivables from revenue growth during the quarter. Gross collections were $207 million, a 34% increase over the third quarter of 2019. The company-wide focus on improving our billing processes to limit payment delays and increase customer outreach on past due invoices produced positive results. Company-wide, days sales outstanding improved from 128 days in Q3 2019 to 110 days in Q4 2019. During the first quarter of 2020, we expect to see further improvement in collections, including the release of delayed retention payments and other older receivables of approximately $20 million. Capital expenditures for 2019 were $111 million as part of our efforts to invest in our growth opportunities. In 2020, we expect a CapEx spend of approximately $100 million but could trend upwards depending on the timing of cash payments. Cash and cash equivalents increased to $73 million as of December 31, 2019, while net debt decreased to $310 million or a decline of $20 million since September 30, 2019. The decrease in net debt was primarily driven by improved working capital. Interest expense decreased slightly from $5 million to $4.3 million. As of December 31, 2019, our net debt to adjusted EBITDA ratio was approximately 1.7 but should reduce to our target level of approximately 1.5 in future quarters as collections continue to improve and we see returns from our capital spending investments. We will see a short-term increase in net debt from the SAPESCO transaction as we fund the $27 million cash portion of the purchase, repay certain debt of $22 million and assume some additional short-term liabilities of $8 million. We will fund the $49 million of cash needed at closing from our existing cash balances and credit facilities. We are excited to continue our journey as the National Champion for the Middle East as we enter 2020. We closed 2019 on a high note, generating record revenue while at the same time significantly strengthening our balance sheet by improving collections and reducing net debt. With this, I'd like to pass back to Sherif for his final comments.

Thanks, Chris. In closing, 2019 has been a very eventful year. We grew significantly our core countries and started in various geographies, added several technologies to our portfolio and invested in some unique start-ups. We broke all efficiency records for the unconventional in Saudi and finalized an accretive M&A transaction, which has opened a new market and a new product line for us. All this while maintaining stellar service quality, capital discipline and thinking out of the box for business models and partnership. I'm very proud of the team as we realize the pace at which we operate and make decisions is extremely dynamic and is a key to our success. Looking forward to 2020, all I would like to say is best is yet to come and 2019 was just a trailer to what you would see this year. We expect to grow at a more accelerated pace than the previous years. On that positive note, I would like to pass it on to the operator for your questions. Thank you. Operator?

[Operator Instructions] Our first question is from the line of Sean Meakim with JPMorgan.

So Sherif, I'd like to start by talking about how you see the margin trajectory in 2020. Chris highlighted some of the start-up costs that impacted 2019 results, so some lapping of lower numbers there should help. But specifically, can you talk about the mix in D&E that drove that lower margin in the quarter and how we should think about that trajectory through 2020?

Yes. Sure. So Sean, the D&E, as we mentioned in previous quarters, always had a mix of Drilling and Evaluation. And the drilling business that we have is -- the majority of it has to do with fishing and remedial work, it actually fluctuates by month-to-month. So in terms of -- sometimes, you have a very big, I would say, huge work and jobs in that arena that comes with -- very profitable. And sometimes, you have more of the remedials business that is less profitable than the others. In the evaluation business when you have a month with more evaluation work, then you get a more profitable month than the other. So the D&E segment makes more or less. That's why I always said, if you look at it over the year, more or less, it will be stabilized on that rate. I don't expect it to go to the 30%-plus like the production. So -- but quarter-on-quarter, the flat between them is always the mix between the Drilling and Evaluation. And inside the drilling, you have the mix of the segment.

Right. So you've got some...

[ It's right here. It's right there. ]

Quarter-over-quarter for D&E in particular. And I guess bringing that back to the overall company margin trajectory, we've had also some mix as you've taken in some of the cost-plus work, that's impacted by some of the larger projects that you've won. How do we -- we roll it all together, how should the margin trajectory look year-on-year or exit-to-exit? How should we think about how that trends? You keep growing -- volumes should keep growing. There's not much dispute there. But then I think people are trying to get a better handle on how the margins progress given all these moving pieces of the business.

Yes. So our plan is to keep the growth on a profitable path. And we always believe that, as we said before, we are in the upper 20s. So when you think about the mix of the company and you think about what's going to happen with all the new contracts that we've been awarded, I have to say you will get maybe better, I would say, growth rate and you will lose 1 or 2 points on your margins. So if you are always within the window, I'll say, always there between the 25% and 35%, some of the contracts will still run above the 30% and some of the contracts we are in the 25%. So the mix should always be within that, between 25% and 30%. And definitely, when you have more of the cost-plus, that gets you some of the quarters where you basically do a lot of discount and catering, et cetera, at a cost-plus, which is bit diminutive to your overall margin, but our dollar value is accretive. So I would say, to give you a number, we always want to maintain in the high 20 numbers, which is anytime between the 28%, 27%, 26%, 29%. And this is where it's always -- have -- we always leave our quarters and our 2020 will be up.

Right. Okay. And then just the CapEx spend ran a little hot into year-end, perhaps we were front-loading a bit for some of the growth initiatives for 2020. Working capital saw some improvement, still an ongoing effort. Chris made some helpful comments there about early in 2020, maybe there's some catch-up coming. Just how do we think about balancing growth with preserving those margins like we just talked about and then, generating more cash than we consume in 2020?

So if I look at overall and maybe I will let [ Carl ] or Chris comment more. But if I look overall, that's -- our commitment is to -- if you keep growing at this plus 20% year-on-year and in the year, you're expecting to do better even in 2020, our plan is alot of the CapEx that's been spent is going to take a view as a lot of these contracts we already contracted. So we know we upfront the CapEX. We knew that we will have to be ready. If I give all the stuff that we talked about, being able to do all these kinds of projects in 6 months, obviously, you have to have a lot of equipment in testing, coiled tubing, logging, et cetera. And we are part of that capital. We see already that revenue stream coming. So -- and that's why we are going to have -- including the acquisition of SAPESCO, we maintain $100 million cap on our 2020 spend. Chris, do you want to comment more?

And as I said, sometimes it's -- we may see a movement from one category to another between our net debt and CapEX. As we said, sometimes it's a decision of when we choose to pay things, we have the cash. We may pay for them. If I don't, then we can just short-term borrow it and that delays the CapEx cash. So as we said, the numbers can fluctuate a bit. We have a general target that over amount of time, it will be the same, but it can be plus or minus that $5 million or plus. And I would say, we had a little bit of extra CapEx to support the unconventional, which we didn't necessarily guide to you last quarter.

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

So you first talked about the unconventional opportunity in the Middle East extensively about a year ago. And since then, you now have 1 of the 2 unconventional fleets operating in Saudi. So that's a pretty big achievement. The question is, how much bigger could the unconventional service requirement be in Saudi? And do you see any near-term opportunities for unconventional work in other Middle East markets?

Yes. Sure. I mean if you look at the announcement of our clients between both the UAE and Saudi and you can see the scale, it's quite much bigger than what we talked about before, right? So if you talk about today on Saudi Arabia, the Jafurah basin, which would -- the conference mentioned it last week, it's enormous, right? So it's the size of the Eagle Ford. And as we said, based on the performance we managed to achieve in Saudi Arabia, now we know that actually less fleet can accomplish a number of stages because we managed to break into the efficiency at the same rate at what you see today at the Permian, which was never achieved over the last 6 to 7 years in the Middle East. And today, you have that skill. So you know that you can do this number of stage per day and per month. So if I look, are they going to add? For sure, they are going to add depending on the drilling performance. So they are adding today, there have been ways to develop that Jafurah basin. Meanwhile, you saw that Abu Dhabi is having the same, I would say, big, big discovery. And definitely, you will see more activity in that space. Today, we are engaged. As we said before in our last quarter, we are engaged with the 3 countries. And we are qualifying our equipment and our services. And what we are saying is, once we see the opportunity at the right time to deploy the fleet, we will deploy the fleet. And we have a very strong agreement with NexTier with the ready equipment, and we will push the button when we know that we're going to get the contract. And we believe we can have the same success that today we have in Saudi Arabia. I mean if you're talking about the scale, that is much bigger than anyone would ever thought.

Great. That's very helpful. And where do you see the biggest risk in your 2020 expectations? Is it North Africa? You had a few announcements there, but there's been some unrest there. Or is it Saudi where you're having some -- the biggest, fastest ramp-up we've seen for your company?

Well, we -- this is a vision again in the long-term. You have to always remember, this has nothing to do with North America. This is a vision for long term. So even you have today the coronavirus and you tell me, is there any activity drop? Zero. There's zero activity drop. So the whole thing -- this is -- all these countries, they develop and they plan their business for long term. So the difference that you have for the activity is usually a risk on the security or geopolitical risk. So today, for example, as I mentioned, you have in Libya, you have the production now down to what, 200,000 barrels and almost shut down. So that thing is still there but obviously much slower than what expected. Some of the efficiency of North Africa on the rigs is -- as well is affected. So I would say, to answer your question, North Africa and Iraq will always be the #1 higher risk than the other GCC countries because of security concern. So you might -- that some of the clients we -- maybe will not resume work until they feel it's very secure. And that mainly is the case. If you look at the macro view and you say, oh, global demand will drop by another million barrel or something, right? Yes. Definitely, the clients would adjust, but that will be across the entire group, right? But today, if you look at the plant, on our plant, and again that's small. So we know that even we are not yet affected like if you have -- if someone has like a 40% market share, we today, we do not see risk on our 2020 numbers, except some small pockets in North Africa and in Iraq.

The next question is from the line of Greg Colman with National Bank Financial.

Congrats on a good-looking quarter. I hate to harp on margins, but I'm going to. So I'd like just to come back and focus on that for a little bit and talk about the mix. I'm sorry, [ my phone cuts ].

Do you want the margins?

Phone call is there, I'm back at you. If we look at the margins, which we saw, EBITDA margins in Q4 were down 300 bps year-over-year and sequentially they were down as well. But the Production Services revenue was actually up 25% sequentially. So I'm just trying to reconcile that because per your earlier comments, Sherif, we always view Production Services as being the highest -- higher margin part of the business. So that's kind of point one. I'm just trying to understand the rising Production Services contribution with declining margins. And then number two is, just more factually, your NexTier JV, that partnership, is that in Production Services as well? Is that where you keep that? And is that additive or dilutive to that segment's margin contribution?

Okay. So if I tackle first the D&E, I think you're -- the mix of margins. So if you look back at the last 4 quarters or so, you would see all of this -- all the fluctuation of the D&E margin, that's actually quite big. I mean 500 basis points or so. So again, same answer I gave to Sean, it's because of the mix we do and because of the contracts we have, right? So it's more of the fishing, remedial, downhole tools, et cetera. Some months, you're going to get a fantastic month with very high margins. If the most of the activities, the renting-type of base -- of business, if most of your evaluation work is slickline basic business, you will get to the lowest end of the margin, not the higher end of the margin, right? So this is always going to be the case, and it's not going to really be any different in the near future. If you look at the production now, definitely, all the gain that we have significantly on the contracts wins where majority of it came actually from the Production business. So we won a lot of North Africa well intervention, which is coiled-tubing contract. We won a couple of -- they attributed to the new geographies like Kuwait, like Chad, which are gains in the production arena. And definitely, now we have announced our unconventional business that is quite huge. So today, this business is entirely production, except [ the park ] has had a surface 1 testing. And then you have the margins, there's just some dilution to it in the cost-plus. So you have the cost-plus with -- because you do the catering, you do the trucking. You do the sand and all the stuff that is used to beat your margin. The expectation should be that the frac business when it goes to a full-fledged site, you will have maybe a couple of points less than the overall cost of production business because of all the cost-plus that you do with it. So that -- but overall, if you grow that business for another 20%, 30%, and you lose a couple of points, it's [ pretty negligible. ]

Okay. That's very helpful. Just to make sure I understand here correctly. The Production Services is higher margin contribution versus the Drilling and Evaluation. But the Drilling and Evaluation margin itself can vary greatly from quarter-to-quarter. So even though we saw Production Services revenue up 25% sequentially, the margin pressure was because in D&E, that's where that variability sits?

Correct.

Got it. And then just finally, and I might have missed that in there. As we see the ramping of the unconventional work, as we see -- we've seen budget expansions tripling of Saudi commitment towards some of the larger reservoirs. I think you mentioned in your opening comments, but I can't remember if you did or not. We would expect to see a larger percentage of your business in that segment as well. Where would the margin profile of that pile of work sort out on this -- on the spectrum that we're looking at from sort of the low 20s into the 25% for D&E and then up to as high as 35% for the Production Services? Where would that specific bucket of what seems to be more meaningful work for the coming couple of few years sit on that margin-grade scale?

Yes. So if I dissect the business like this, if you look at the production and you look at the unconventional, the fracturing business, it entirely depends on the efficiency of what you do. So if you are very efficient and you perform the number of stages like, I would say, as we are doing with the pricing, it can go above 30% margins. So if you go in a month where your efficiency is a bit below for a number of reasons for readiness of well, for some of testing, for some of the trucks, yes, you're going to move into 20 margin more or less, right? So it's a mix based on month-to-month. But our expectation on our philosophy of that contract is to be within that range, which is below the production today, above 30%, but not to go -- to be always in the 20s. And depending on the month of efficiency, you can fluctuate that month and that quarter, respectively. I hope that answered your question.

It does. I appreciate it. And then just one last one from me, switching gears entirely on the M&A side. Every time I look at my screen, things just keep getting cheaper over here in North America. With the oversupply frac equipment here, some of the companies are trading not necessarily just on frac, maybe expanding in technology. I know you just executed on probably your largest purchase to date. But are you seeing an increased opportunity to pick up assets, either asset purchases or whole company purchases, in some of the North American stuff? Basically playing the yard between the weakness in the market here and the strength of the market and where you're operating? Or is it kind of unchanged on the M&A front? I'm basically trying to figure out, are we going to see a tick up in your M&A activity in the coming sort of 6, 9 months because of where asset prices are here?

Yes. Again, I go back to this. For me, I don't count it as acquisition or M&A. I count this as CapEx. So if I -- if we find -- which I discussed with several Canadian and U.S. companies, if we find they have good assets, and we can buy in the $0.20 to the $1 or below, why not? We are open. We look into it. The assets have to have very good conditions and it has to be fit-for-purpose for Middle East. Because a lot of those equipment do not fit the Middle East operation. And that's number one. Number two, I'm not really focused on getting some of, I would say, the old size equipment in a high-end operation we have in the Middle East. So you have to balance this as well. Having to acquire a company as a whole, as an M&A, in North America and bring this over to the Middle East, today, I don't see value. Maybe a strong opportunistic technology, and that's where we will -- either partnership or we could put the investment in some, what they call, innovative technology. Some like very unique IT, very unique state-of-the-art -- [ some have ] technology that we can take it and make it fit for purpose. It's like a start-up like a PC type of thing. Like we did with Carnetics for the [ bore head. ] So this is something we like and we are interested in. Otherwise, we have a -- we do not -- we don't see any value to bring some [ multiple of ] capacity and buy a company -- and definitely, as we always said, we are not planning to operate in North America. So there is nobody to tell us about anybody in North America.

Got it. And then just one more thing. Your comments for the -- one more question, which is you just view it as CapEX, which is whether you're spending CapEx on organic or CapEx on acquisitive. Just more from a clarification perspective, is the money you're deploying for SAPESCO part of your $100 million CapEx budget or outside of that, i.e., your CapEx budget is $100 million plus SAPESCO?

It's part of it.

It's part of it. So your...

Yes. It's part of it. So we had a CapEx reduction from last year because, as I've said earlier, we upfronted a lot of our CapEx. We already planned it. We already deployed it. And more CapEx is coming for more growth. But at the end of the day, the SAPESCO CapEx that we planned for it is included in our $100 million. As you -- as I said earlier in my remarks, we planned this a year ago. So we've been in negotiation for 1 year. So we know exactly what are the equipment we need to add to the portfolio to be able to take it overall for the Middle East, and that includes in the $100 million.

The next question is from the line of Blake Gendron with Wolfe Research.

My first, just one on Greg's line of questioning, is just on the overall market and maybe some of the behavior of your peers at this point. You mentioned pricing being irrational at times. I'm just wondering, just given the sheer deterioration in the oil price that we've seen and coronavirus may or may not be impacting operations in the MENA region broadly, I don't suspect they are at this point. But what is the risk if we see further fallout in U.S. land that your larger peers start to rotate capacity into the region? Is it your sense that there is some downside, I guess, to the way that they're behaving? Or are they already behaving somewhat irrationally at this point and there's not much to go further down?

I would say, Blake, it's -- again, it's a mix. Most of -- we're not obviously mentioning names. But you have some of the big guys are disciplined and they look at the returns and they look at deploying the assets only when it makes sense and when it's accretive to their [ base ], which is fairly good sign. And they are doing that and some others are not. But overall, you can see as well that a lot of the contract that has been taken into the site did not deliver on. So the clients are very aware of that.

Okay. That's helpful. And then circling back on D&E for a second here. I'm just wondering the progress that you've made in pulling through the GES portfolio elsewhere in the region, have you found that it's been easier to pull through more of the drilling product lines? Or are you getting some traction on the evaluation side as well? I would imagine that some of the friction on margin maybe is due to pooling labor throughout the region and kind of spreading the portfolio out that way.

It's really the Gulf Energy. Again, to put it into perspective, more of the Gulf Energy strength is related to portfolio. It has no really strength, wasn't ever. The drilling portfolio was very strong in Oman, and we take this outside of that. So we won contracts in several countries. But that -- these contracts in that portfolio type of work is lower margin than normal, right, in the drilling portfolio. So when you start in all these countries, you definitely do not gain -- you get some of those contracts. You get done with the drilling remedial type of margins. And you -- once you gain, you become more trusted partner to the customer and you grow scale, then your margin improve. So the margins are better. It's usually [ at least in Oman region, this is the ] present but there's very strong setup that they have over the last 10 years. When you grow this into Algeria, Saudi, Kuwait, Iraq, et cetera, the start-up is -- definitely is not as profitable because you are adding a lot of assets, a lot of CapEx. Because that business of fishing and remedial, downhole, yes, there are so many equipment on-site. And basically, our [ call was the customer of ] the company. So in a way, it's not the business where it's like it's you are there all the time because your customer has some -- all the time, right? So -- and that's why those work, all those fishing and remedial work, it's not for everybody, right? It's a tough business. But overall, if you look at the margin compared to the industry it's actually unheard of. Because that margin, as you know, in many other businesses [ is limited ]. So we don't -- when you drive this at 15%, 20%, it's still good, right? So -- and we have to start like this because it's small until it become big enough to operate and have a scale to use to improve your margins. But as I've always been saying, do not expect D&E to be at 30%.

Got it. That's helpful. And then one more, if I can slip it in here. On the M&A side, it was a pretty slick deal that you structure with SAPESCO. I'm wondering, just given that equity prices across the board are going to be challenged here in the foreseeable future, some opportunity, as was mentioned earlier on the call. But if you have to now go forward with mostly cash and debt transactions, I'm just wondering if there's a maximum leverage that you guys would be comfortable with not going above potentially. And if that potentially limits, I guess, the near-term M&A opportunity for you in the region now.

Yes. I mean, obviously, we definitely don't want to ever go above 2. And we see -- we have been -- we are in discussion with several that we already managed to enter all the countries. Two of them, we were planning to do an M&A, we didn't need to because we [ put it without. ] This one, as you saw, the numbers, is accretive, very solid. So you get 2 birds with 1 stone, I would say. You get 200 -- what is the last country, which is Egypt. And you've got this industrial community service or industrial pipeline service that we don't have. And today, just to give you a scale, when they did the [ Filburn ] project, which was the largest gas project, I think, worldwide, that went from exploration to production in 22 months to now produce 2.7 Bcf a day. And they have now similar projects between the 4 countries and their deep plant, they need all of them would need that services. And SAPESCO managed to do that because they have that leadership position. Imagine now, we are bringing that experience and that number of years into all the countries. Just to give you a flavor, most of these -- when we try to do this ourselves or even our -- at the previous company alone, NPS and Gulf Energy, they could not because the clients, which require 10- to 15-year experience for you to fit in these businesses because obviously they are very worried that you work on an EPT business and have an issue. So they require, what is your timeline? What is your experience? Well, we got a company now with 40-year experience. So these guys are approved and qualified in Saudi, in Kuwait, in UAE and all these countries. They didn't do it because they don't want to spend their CapEx in all these companies to enter. Today, most of the equipment I have, but I need the expertise and the know-how and the number of years. So all of a sudden, I have all these countries open and now allowed to bid for all of them. So it was very obvious why it makes sense. Because, again, once you have an M&A that has almost no overlap, it's the most accretive. There is no -- there is no problem because we do a lot of work in Egypt and their business partner has a very strong I don't have. So it's a very strong position. If I look at others, we would definitely look at others. I do not foresee anything that would require us to change our leverage in the near term.

[Operator Instructions] The next question comes from the line of Andres Menocal with Evercore ISI. Andres Menocal;Evercore ISI;Analyst: So this question pertains to the SAPESCO acquisition. And as I think about the past 1 to 2 years, your team has heavily been working on optimizing the back office, ERP systems, internal controls of your company. How will SAPESCO's operations fit into that? And how you think about the operational risk profile of the company? And I guess my question related on top of that is, do you plan to leverage your new footprint in Egypt to rethink the back office and corporate footprint of your company?

So actually, one of the very strong strength of SAPESCO, which we didn't mention before, is they have talent. So they adopted the SAP, and they have a very strong 10-years experience into the system. And they have a full-on back office in-house to deploy it. So as a matter of fact, we -- that's another part of -- we love about the acquisition is we are actually going to adopt and look into it. Obviously, we need to study it. And Chris has the full team to look at that, how is this -- how can we take that? Maybe should we take it across the country? Is the team ready to deploy it? And that's one of the biggest advantage. The other advantage obviously of having back office for other regions is definitely the low cost, right? So it's very cost competitive as a country, and we will be able to deploy many of like a remote center and in our drive in. Some of the stuff, we will capitalize and leverage their strength there plus the years of performance, again, over 40 years to try to take it to the other countries. Andres Menocal;Evercore ISI;Analyst: Okay. Great. And then my second and last question is I need to belabor the point on margins, but let me just try to approach it a different way. So if I read through the proxy that you guys filed in early November, and I appreciate that you disclosed your compensation goals and your pay-for-performance framework when you're not really required to do that at this point, so thank you for doing it. For your short-term compensation goals, if I see that you have different targets for revenue and EBITDA and you kind of have a target. You have a superior target. I mean you have an exceptional target, right, with different implied EBITDA margins reach. But if I think of the exceptional targets that you set for yourself last year, which has implied like 33% EBITDA versus the target, which is like 20%, 29%, what would have to happen in your business in order to get to those target margins? I mean what kind of things do we have to see right? And is really maybe that 28% to 29% level, your target implied EBITDA margin for your short-term goals, is that maybe the more appropriate way to think about things going forward?

So okay. I mean, obviously, I don't want to give guidance. But if I look at the growth so far, if I want to go to 32% margin, et cetera, we can, right? I mean there is obviously -- it will limit some of the growth that you do. So if I take my core business that, for example, like the one in Production business, and I remove all the adds-on and I remove all the adds-on on the D&E. I want the catering camp and IBM-type approach integrated at the -- at that margin. So at the end of the day, we are now going through a setup like, for example, when I do the unconventional, I'm doing this. Basically, there is only one company from a major service company that is in that project and me. And basically, we are beating them for the last 2 months. I'm just talking. So the idea now, our new capability in that business, you have to take on the full-on business of the site, of the cap, of the catering, of the sand. That [ this is is huge. Yes, it does get huge ], 33%. It takes it a 27% or 26%, depending on how many stages is this month. Is this the business? Yes. I will keep doing that because as long as you do not take the company down, if I did -- if I -- because if you're going to grow at plus-30% year-over-year, for sure you're going to take a couple of points down on the margin and benchmark, right? It's accretive particularly on the dollar, but it will affect potential margin based on the profile of the projects you are taking. We are taking now, as I said before and people locally appreciate that, you are taking a full-on large-scale development project in Jafurah that is the size that is like Eagle Ford. There's only 2 companies operating there. And we're very proud that we are one of them. So that is the scale and the magnitude and the potential for the future of this activity once it goes through the leverage that Saudi Aramco announced.

At this time, we have reached the end of our allotted time for question and answers, and I will turn the floor back to management for closing remarks.

Thank you very much, and we're very, very proud of our -- of the year, and we are looking forward to a very successful 2020 with much more growth than the previous year. Thank you.

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