Greetings, and welcome to the National Energy Services Reunited First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Boone, Chief Financial Officer. Thank you, sir, you may begin.

Good day, and welcome to NESR's First Quarter 2020 Earnings Call. With me today is Sherif Foda, Chairman and Chief Executive Officer of NESR. On today's call, we will comment on our first quarter results and overall performance. After our prepared remarks, we will open up the call to questions. Before we begin, I'd like to remind 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, Chris. Ladies and gentlemen, thank you for participating in this conference call. We are very excited to report on our outstanding results this quarter. It is the largest quarter ever in the history of the company. We grew 31% year-over-year and 8% sequentially. This is in contrast to a usual seasonal decline from Q4 to Q1, and it was achieved under the shadow of both a worldwide pandemic crisis and a once-in-a-generation oil price collapse. I will touch in details both the challenges and our action related to COVID-19 as well as the reality of the new oil price environment. But before that, I want to acknowledge the exceptional efforts all our employees have put in to support our customers and differentiate ourselves in these challenging times. The resilience, hard work and extended stays in the different countries and at the work sites is the reason we are considered the trusted partners by our customers. It's an outstanding team effort, and I'm very thankful to be blessed with such an enterprising group of individuals in our company across all the levels. I have spent a fair bit of my career in the field. And in normal days, things are challenging enough. But to do that under the limitations of this pandemic adds a layer of complexity which only the best can handle. Our teams on the ground have come out with flying colors, and the results are there to speak for themselves. So how did we enable our organization to go and gain market share, deliver growth and exceed our customer expectation in such circumstances? And how we are going to go ahead with this, I will take a few minutes to explain our approach. We prepared early and appointed a Crisis Management Team, or CMT, which comprised of…

Thank you, Sherif. First quarter revenues were $199 million, an increase of 31% over the prior year quarter and 8% over the fourth quarter. The sequential growth was driven primarily by the new unconventional product line in Saudi Arabia. This, coupled with most of our other new contracts now being active, puts NESR in the strong position going into the second quarter. Adjusted EBITDA was $51 million for the first quarter of 2020, increasing 25% over the prior year quarter. EBITDA adjustments of $1.7 million for the quarter are primarily for transaction and integration planning costs associated with our pending acquisition of SAPESCO in Egypt. Despite increased costs related to COVID-19, we considered all these costs as normal operations and made no adjustments to EBITDA for them. Moving to our segments. Our Production segment revenue for the first quarter was $133 million, growing 45% over the same period last year and 10% over Q4 2019. The sequential growth is primarily related to unconventional completion activity in Saudi Arabia. This was partially offset by lower activity in Iraq and North Africa from the initial impact of the global oil price environment as well as shutdowns and security challenges. Adjusted EBITDA margins for the production group of 31% were down sequentially from 33%. Margins were impacted by the higher proportion of pass-through revenue associated with unconventional activity and the impacted markets. The company has taken actions to reduce costs in these impacted markets to align operating costs with current business levels. Separately, our Drilling and Evaluation segment revenue for the first quarter was $66 million, growing 11% over the same quarter last year and 3% sequentially. The sequential growth is primarily related to drilling services in Oman and Kuwait and wireline and well testing activities in Saudi Arabia. Adjusted EBITDA margins improved…

Thanks, Chris. So to conclude, going forward, we plan to navigate and be ahead of the curve to ensure we continue to capture the growth, mainly market share gains by demonstrating readiness with our customers and executing flawlessly when others are struggling or trying to keep their head above water. We are an execution machine, and we strongly believe we can continue on our growth path with appropriate adjustments. And I go back to our original thesis, Middle East is going to be the last man standing when it comes to oilfield services. And we are in a great position to leverage our execution capabilities, in-country knowledge and deep customer relationships to capture the opportunities which the market presents to us. On that note, I would like to pass it on to the operator for your questions. Donna?

[Operator Instructions] Our first question is coming from David Anderson of Barclays.

Sherif, Jafurah Basin, I think it might be the only unconventional basin in the world that's actually adding frac crews right now. I was just wondering maybe if you could talk a little bit about the success you've had there. You talked about a second frac-off in which you've won that again. I think you originally had a long-term contract and now you have what you call the primary scope -- work scope for Jafurah, so I don't know if there's a difference in that. But maybe you could just kind of talk about what the differences is here? And why you're able to win those frac-offs so convincingly? I mean I think most of us as we've been looking at unconventional plays, particularly pressure pumping, it's hard to differentiate from one player to the other. So how do you differentiate in that part of the world and how are you able to succeed there?

So thanks, David. In summary, Jafurah Basin today, as all of you have seen, is the development of huge 200 tcf $110 billion announced by the Kingdom. The plan was always to have 2 frac fleets operating there for the foreseeable future and then it gets increased once the drilling rigs -- they put more rigs on the pad and have the development go to the second phase, which is they announced 2024, 2025. So today, what's happening is we -- answering your question, we had a second frac-off, basically us on a pad and our competitor on a pad or they take a pad and they split it into 2. And they see who performed better in delivering the number of stages and finishing properly with the best safety record, et cetera. And we won the first one. We won the second one, which means that we were awarded or basically assigned to be the primary contract, meaning that we take the lead on completing those wells. And if they have extra wells, they call the second fleet. So they're not adding any more fleet to those -- to the Jafurah Basin. On the contrary, they might slow down some of it. But when they slow down, we do not get affected because we are the primary contractor. So the primary contractor meaning is the contractor that will not stop for the next 2 years, basically. So we are the primary contractor. If there is any slowdown in drilling and they park one frac fleet, it will not be us. It will be the competitor. If you want to want me to dwell on why they are doing that, then obviously, they are moving between oil and gas periodically. They are moving between conventional and unconventional gas periodically as…

Okay. So when you think about how Jafurah gets developed over the years, and you said there's a time line out to '24, '25 right now, what's the limitations on it right now? I know there's like a processing. I think there's some processing that they're building there, which has nothing to do with you. But you obviously have a lot of wells that have to be in front of you to have an efficient field. So is it part drilling? Is it part processing? I don't know if you can share with us kind of how that...

There are no delays. I would say, there are no delays at all. I mean they have the plan as is. You have the natural delays, right? So what the natural delays is, because of what happened in the restriction, the Middle East were actually one of the first to completely shut down borders and flights and everything. So a lot of this is just going to get 6-month natural delays. On top of it, it's compounded by the oil price and what's happening. Obviously, Saudi was producing 12.3 million barrels in March and in April. So there was a lot of associated gas, right, that comes with this production. So they did not need to have the convention, but the plan is as is. Now are you going to add more rigs at the same pace in the current environment, that's yet to be seen. They will decide on that. And that's why I think that was very important for us to be, again, the primary because then if there are any delays, and the delays will come from number of pads ready by the current rig count. So they have the same rig count on those in Jafurah Basin, but will they add more rigs in the current environment or they delay it a bit? That's yet to be seen and obviously, I am sure some of the downstream projects going to get some delays naturally because of what's happening.

Look, Sherif, that was my final question. I just want to ask you, it's kind of more of a general take on Aramco. We saw a couple of months back, Aramco comes out and talks about lowering their upstream -- sorry, not their upstream, but their overall CapEx budget by 25%, 30%. What's changed in the field from your standpoint? Is that just a shift from kind of gas to more rigorous work on the oil? Is it more of a downstream mix? Can you just kind of help us understand a little bit without getting into details. I don't want to put you much in a bad spot. But just kind of a general standpoint, what are the changes that are going on in Aramco? And where do we see that budget cut?

I think one of the big, I would say, misunderstanding, people always take the budget cut from what they were planning to, right, not from the previous year. So yes, obviously, if you go to the $35 million or to further $40 billion, people see a huge cut. But if you take it from year-to-year, to be able to come back to your question about activities, what was the spend in 2019? And what will be the spend in 2020? And you see that, and then you get a much -- a modest less cut. It's not as 30%, 40% as people say because that's from the budget. So if you go from $29 billion to go to the $25 billion or the $20 even billion, you're talking now about 15% to 20%. What you -- the cut, what you see today, again, you have 4 months of natural delays because of the COVID-19. So a lot of this will come from the mega projects. You have all this mega development. You get all this gas processing, all this $5 billion, $6 billion, $7 billion, that already gets delayed by 4, 5 months. And some of it, they will postpone it as well. So you're going to get a big shift from that. And then you get your upstream budget, and the upstream budget today from the field, 0 changes. But obviously, they -- it will happen. You will see changes, and the changes will come, in my past experience, it comes on 2 fronts. The projects that are, you want to call it, nice to have or exploration, gets postponed for a year and the projects that are offshore complicated gets postponed. And then you will get -- what you will get is a price discount. So they will ask everybody for the price discount. And overall, all this gives you the activity or the budget drop. So the upstream activity will not drop as people think. Remember, Saudi always maintain their [ MSCT ], which is -- and they always do it, and they prove to the whole world for all these people that are skeptical that they cannot produce 10 million, they did produce 12.3 million barrels. So -- and they will always maintain that. So they are always looking at the long term, and they will maintain the activity for that.

Our next question is coming from Sean Meakim of JPMorgan.

I appreciate all those details. There's a lot to show on there, especially in Saudi. So with the 30% cut to CapEx, it doesn't necessarily sound like you're dialing back your growth plans again. So if anything, maybe you're being opportunistic in terms of how you pay for the equipment or how you get it, can you maybe just give us a consolidated view of the top line opportunity set for NESR in terms of 2020 on a medium-term basis? Are there any risks to the 20% CAGR?

No, I think so far, I would say, obviously, there's always risk, right? So would you get the second wave of coronavirus, will you get another shutdown. So for our plans, we are going ahead, as I explained. And you can see that we spent already our $24 million CapEx in Q1. So we front loaded. We added all our CapEx. What we see today, we have a lot of opportunities with our partners to get equipment for the second growth or the second half of the year at much bigger discount or a different business model like we did with the frac. And therefore, we are going to get the same amount of equipment but we are going to spend 30% less. So today, our target, if we had -- if we spend $107 million in 2019, we will not spend more than $75 million in 2020 but we're going to get the same amount of equipment. We have the same growth plans.

Got it. Well, I think that, that capital efficiency should certainly resonate even in this environment. Could you maybe just talk about which markets seem most prone to delays or kind of slow playing activity versus those that should be more resilient? Just any risk of certain markets which you can see volumes decline in '20 or '21?

Okay. 2020, I would say, as I said in the previous call in the remarks, North Africa and Iraq will definitely see an impact. We see it already, right? We saw it in Q1. I think it's going to get worse for sure in Q2, right? Because this is either -- if you are in Iraq, you have to separate Iraq between 2. You have Kurdistan and you have Basrah, right? You have the south and the north. So the Kurdistan, this is like you had planned. They're going to go to 0, right? Because this is like independent operator. They need the cash flow. At this oil price, they won't trade. So they're just going to wait until next wave. Then you go to the IOCs that have the big contract with BOC with a bunch of oil company, and they're going to drill it. So what will they do? Today, if you are the big super major, you will not drill new wells. You would just stop and that's exactly what they're doing. And that's why I said, the biggest drop you would see is drilling new wells. And that's why the effect on us is so much less. I'm not saying that we are like so much better. It's just because we are not into these projects. That's a -- we are just -- we can put it, we are lucky, right? We are not an LSTK. We are not in drilling new wells in Iraq because it's all lump sum. So these projects is going to get slashed by 70%, at least, right? Then how they make their money? They make their money because they have producing fields. And the producing fields, you get the fee per barrel. That's the contracts in Iraq. So if you…

Our next question is coming from George O'Leary of Tudor Pickering Holt.

I just wanted to kind of expand on the last question and a comment you made earlier in the prepared remarks. You talked about the opportunity to strengthen the business in a downturn, and my read on that is playing a little bit of offense while a lot of other folks are just kind of in defense mode, which screams one, intriguing, and two, smart in this type of environment. So you talked about it a little bit with respect to maybe opportunistically adding some equipment at cheaper than previously anticipated costs, but -- and I realize you have a big transaction that's still ongoing. But could you describe kind of the M&A landscape, and just broadly that kind of opportunity to go on offense while everybody is going on defense? Is there anything in the M&A landscape that has cropped up as a part of that?

Sure. So 3 -- I would say, 3 main angles to the answer. The #1 is organically continue to secure market share because we are ready and others are not. They are struggling, we are not. So there is a great line here of -- if you like, envision, right? So I'm ready. I can deliver. The customers trust us, and we are getting more work. And that's exactly what happened in Q1, and that's why you see this growth from Q4 to Q1, and we are expecting to keep doing the same. And what does this do, #1 is we gain market share, gain their trust and get more complicated projects, and that compensates for the countries that are going down significantly. And that's, again, the key is to be agile and be able to send equipment from Country A to Country B, despite you have pandemic, you have restriction. And all this is what's the agility of the organization to move when everybody else is struggling, right? And that's what we did. So we are moving equipment from one country to another because we know that this country will not need a lot of the stuff in the future, right? So that's the corner, if you like, or the anchor, and that's what we keep doing. The second part, almost similar, is today, I have a very good agreement, for example, on the frac with my partners. So why don't we elaborate more on this agreement to make it with other stuff? Why don't we make it with some coil equipment? Why don't we do it with some wireline equipment? And if I get the proper contract and we have a nice framework, we go with this equipment and attack. And we did this attack already on the…

That was very helpful color, Sherif. And then secondarily, just as you talk about market share opportunities and just kind of core organic growth, there's a lot of -- it feels like kind of myopathy going around now. Everyone is focused on the very near term. But if you think about the next 24 -- 18, 24, 36 months, kind of a longer-term time frame, which geo markets do you think offer you the greatest organic growth opportunities over that time frame?

It will be the same, GCC. GCC will definitely be the biggest. And I believe you're going to get a very big upturn coming. I'm a strong believer with the, I would say, the destruction of the -- all the deepwater projects in West Africa, et cetera. And then once the oil demand goes back to normal, I mean the Middle East is going to be the biggest provider of that additional oil. Definitely, Saudi is going to be the clear winner. They have the capacity, and there will be a lot of project going. And that's why our strengthening our core to a certain degree. And now getting that trusted partner flagship and being able to do a project like Jafurah replacing an international service company and proving that we can do this better, gives us -- give them as well the -- give us the credibility and give them the trust that they can rely on us on giving us big projects. And that's exactly what we want, which is our path to the 10% market share of MENA and get into a $2 billion revenue.

Our next question is coming from Greg Colman of National Bank Financial.

I wanted to dive into sort of normal -- this is not a normal year, and I want to talk about normal Middle Eastern seasonality. In past years and following some of your competitors in the region, we tend to see sort of escalation over the course of the year as spending and the move through the budget rises from Q1 to Q2 through into Q3 and Q4. However, this is not a normal year. We have borders closing, we have commodity issues. Should we expect the normal seasonality to trump any of the near-term hiccups? Or are pricing discussions, logistical issues, sort of hiccups here and there going to sort of more flatten the activity for NESR over the course of the year, and we should be a little more cautious as to the quarter-over-quarter growth rates going into subsequent quarters?

Yes, the latter. Yes, you're absolutely correct, Greg. This is not a normal year. I think Q2, you will see the activity will start dropping. So far, we are in a good shape. But definitely, people will start dropping because you get OPEC cut, they have to cut, right? I mean there is a lot of these countries, if it's not for employment, they could cut 70% of the rig count, and they would produce the OPEC quotient. They don't even need to drill wells. I mean these fields are very perfect, and they can produce without doing anything. So -- but it's because of employment, because of the business, because of, again, it's a national oil company with the government. So to strictly answer your question, definitely, you will not see that seasonality of Q1 to Q4. You would see more moderate Q1 to Q4. The difference we'll have is what happened in Q3, Q4 of the demand. If the demand picks up then some of these drop, if you like, that we expect maybe -- might not happen, and you get another strong Q3, Q4, right? But overall, I agree with you. It will be more of a flattish approach because some of the growth of the market share would be competitive with some of the pricing you have to give away and some of the drop of some of the other countries that I think going to slash more and more of their budget plus some of the super majors that are in the Middle East. But they announce another budget cut, I'm sure they are going to cut their operation like the likes of Oxy, all these guys for sure they're going to cut some of that activity.

Got it. That makes sense. That's pretty consistent with what we were looking for. And then I had some technical issues earlier, so apologies if you already addressed this. But you were talking about border closings. You were talking about moving people. You have, obviously, your crew in place to deal with challenges regarding the pandemic. Can you talk to us about the percentage of your capacity which has fallen off as a result of sort of the challenges with moving either people and logistics now? If pre-COVID, if, call it, whatever, Q4 or early Q1 was 100% capacity, what have you pulled back to now? And what are you going to be sort of sitting at as we go through this period of more challenged border control and logistics?

So I will answer you, but I mean the whole idea of the CMT and what we did is to maintain 100% capacity. And we maintain 100% capacity. So it's shocking for some people, but the way you do it is you make sure that you negotiate with everybody. So obviously, we have a lot of local workforce, right? And that's how the strength of the company. But then the people that are rotating is we went one by one. That's again the beauty of being small. We get one by one and told them, okay, you cannot go -- you want to go now, for example, to the field, you might stay 4 months. So you agree to stay 4 months. If you are staying 4 months, the people replacing you are not be able to come. And after that, we're going to manage your rotation schedules. And then we did a lot of, if you want, soft part, which is taking care of their families, sending money, et cetera. Obviously, the guys, they did not complain a lot because they cannot go home anyway. So if they are not on the work site and they go to a hotel, they cannot go home because the flights are shut down, right? So this -- but a lot of people did not prepare as well as that. So they had a lot of gaps. So today, I am running all my equipment and fleet intact. And that's why we are capturing all this market share. That's why we grew 8% quarter-over-quarter. So would this last for another 6 months, yes, we'll have a problem for sure because the guys are not going to last forever. But I believe it's already -- you can see the clients, we are working with the clients in a couple of countries where they are saying, guys from next month, let's start to think about crew change. And all the people that already took 3 months off will be expected to come back and they want to come back and stay 3 months on. So I mean it sounds a bit -- but we are 95%, 100% in capacity.

Our next question is coming from Andres Menocal of Evercore ISI. Andres Menocal;Evercore ISI: So just 2 questions from me today. The first one is, as we kind of think about the opportunity set that's expanding for you guys in the region, and I would say even outside of the region, is you're going to be one of the clearly surviving and thriving players through this downturn. My question is if just thinking outside of the cash you have on the balance sheet and liquidity, like if you need to get some kind of large form of deal done, can you kind of talk through what kind of strategic financing levers that you'd be able to pull? And what's at your disposal if you want to ramp things up to take advantage of an opportunity?

Look, I mean I don't see anything when you say large. We are not doing anything large, right? I mean it's all going -- in the ME it's always going to be bolt-on. So we will be able to always finance with our cash because all the agreements will always be cash and share like we are doing with SAPESCO, or it will be something similar. If something is going to be completely different scale, which there is not much really in the region at that different scale, yes, we can look at completely different. We have a lot of our core investors want to come on a much bigger scale into the story, especially now with such a price. So there will be many other avenues that we can capitalize on. Again, leverage, we want to maintain our leverage. We are not going to exceed it. So a lot of the banks are obviously offering us to raise more debt and being able to do that, but we are not going to do that. We want to maintain our covenant and our leverage, which we always said is in the 1.5 to 2. So our cost of capital is very small. It's very -- so we want to maintain it. And we've reduced enough cash flow, I mean, obviously, this quarter, you saw we took some because we had some retention issue with the customer, which we know it, right? I mean this is our very deep customer, very strong. And we know that the whole logistical issue of people not going to the office and not releasing, it's okay. I mean we can wait for this quarter, Q2, to release the retention. And then if it was, we would have had $20 million of free cash flow, right? So we have so much to do and so much activity to capture and a lot of business to do, which is the good thing, right? I mean a lot of people don't have something to do, right? Andres Menocal;Evercore ISI: So yes, that's -- it's definitely a high-class problem to have. Second question and the last one for me, and this was alluded to earlier, but can you try to describe the process kind of philosophy as to how you arrived at the newly revised CapEx number? Like what was the thinking behind that? Obviously, a lot of that is due to the decline in oil and gas activity. And I don't want you to -- I want to be sensitive to any customer commercial issues, but just kind of curious to see how much of that is due to lower activity versus what you think is going to be a new changing landscape for how you decide to spend in order to generate revenues?

This is Chris. So obviously, it's -- when you, again, look at cash CapEx, it's -- some of our is just paying off CapEx we've already purchased. But then looking forward, I think Sherif has already said, the whole point right now is to take a quick break in CapEx, understand the market, but especially where can we take advantage in the future of acquiring CapEx differently than we might have a month or 2 ago. We're looking at how can we -- are there different create as we talked about. Can we find ways with other U.S. people to partner, use their underutilized equipment or find it at a much lower price. So we're taking advantage of being able to move our equipments, where we have, as we said, some lower utilization in some markets, move that equipment, make sure we're at full utilization of all of our equipment everywhere before we buy anything else. But then we'll reassess sometime in the second quarter what it looks like around the world, and we may then reactivate some of the CapEx plans.

Our next question is coming from Blake Gendron of Wolfe Research.

Appreciate the helpful color on all the volume puts and takes here throughout the region. I wanted to focus on pricing a little bit. It sounds like your 15% to 20% growth bogey is still intact. You're offsetting maybe some of the pricing pressure with share gains, so on volume. For modeling purposes, we basically build up your top line by your legacy activity and then your SAPESCO and then thirdly, the unconventional contract. So focusing in on the legacy work. I'm just wondering if you've gotten the pricing call yet broadly. I know it's not homogenous across all of the region. But could you help quantify the magnitude of pricing and maybe the net impact on margin here moving forward? And then for specifically cost-plus, and I would consider the unconventional contract is cost-plus. If we do see some pricing pressure in that contract specifically, do you have any pricing leverage, I guess, on the other inputs that you're passing through and maybe blunt the net impact of pricing there? Appreciate any color on that.

Thanks, Blake. So pricing is an issue that is going to come. Obviously, I'm not going to instigate it. So the smart thing to do is to be the last man asked. So far, if you deliver very well, they ask you the last, and that's exactly our plan. Do I feel what will be the impact? In my history, usually, the impact will be in the 10%, right? And this is the Middle East. So they ask you for 50%, you end up with 20%, but then you have some lines that you discount, some lines you don't discount. Some stuff you can pass it through with your partners and suppliers. Some you cannot. So overall, it gets you around the 10% effect. Now if you ask me about your other question on the cost-plus side. The Jafurah Basin or the frac is not a cost-plus. Blake, it's a pure -- like the U.S., it's a per stage, very, very strong business. The thing we have in that contract is a lot of cost-plus. Why? Because we do the camp. We do all the stuff, which is a huge cost-plus and that dilutes your margins, correct? So you rightly said that the unconventional growth that we obviously had in Q1 created a big cost-plus to us in the production, and that's why you see the production percentage, and not as a dollar, but percentage, if it had dropped from the 32% to 30% because obviously, you had a lot of pass-through. What we are doing without even the client asking, we -- that's why we're maintaining our intact and the lowest impact on our bottom line is to ask for this discount ahead of the game. And we started this already in February. So a lot of this is already to make sure that we can maintain our profitability intact despite the fact that we have a lot of increase of costs. By the way, we mentioned a lot on this call, but you have to see that we have a clean quarter. I mean a lot of people don't have that, right? We have nothing in our quarter because of COVID-19, and we did not. We took all the extra costs and measures and we absorbed it in our P&L and our structure. You have to remember, now all these camps have a single occupancy. It's a huge cost. You have to put a -- every person who's alone now in a room; before it was 4. Yes, there is no more catering that is a huge mess hall and everybody eats together because of social distancing. Everybody eats alone, and you have to provide this alone. So there is a huge increase of cost that we absorbed in our operation and still delivered the results.

That's totally fair. On the third piece of the model here, the SAPESCO deal, it sounds like it's going to close on schedule. Wondering what your outlook is for the Egyptian market specifically. And whether or not we should rejigger our assumptions for top line growth as a result of that contribution, that would be helpful.

Egyptian market gets affected like North Africa. Egyptian market is characterized by a lot of small independent, by a lot of -- they have IOCs. They have NOCs. It gets affected by the oil price. People will delay drilling, so it will get affected. And that's part of the negotiation we are talking that the earn-outs that they have, the second earn-out has to be linked to that because I cannot pay you earn-out when the activity is going to go down, right? And we are in discussion on that. If you look at their business outside, it's going to be with us. And it's -- so far, it's intact. So the Saudi, UAE, Kuwait, it's intact. Their business in Libya will be obviously intact -- will be completely affected like ours, but the Egyptian market will not be the same. We'll definitely get a decline year-on-year.

That's helpful. One more if I can sneak in here. I know we're past the hour. D&E, typically, 1Q, I would have thought would have been seasonally weak especially on the margin, but it sounds like -- or it looks like rather in the clean quarter that you drove margin improvement. Was it a mix tailwind there in the first quarter in D&E? Or are you starting to see some cost leverage potentially on the portfolio pull through the endeavoring?

It's a mix, Blake. No, it's a purely mix. So you had more evaluation this quarter like the last. So we had a very strong -- we replaced a lot of the guys in the testing segment. So our testing did a phenomenal job as usual, and they replaced almost 5 competitors this quarter. So the other guys could not deliver, and they had a lot of issues. Despite our cost increase to be able to maintain all these crews, they did absolutely phenomenal job, and that's why you see that. So you get more evaluation, you get better results at August. And going forward, I think the drilling, as I kept trying to say, you have to think exactly opposite of North America. People in North America, say, okay, now I have to do an activity, let me drill well, but I'm not going to produce it. They do exactly the opposite in the Middle East, right? So they will stop a lot of the drilling, and that's why you're going to get some of that impact and the drilling segments. Obviously, we are -- we don't have direction drilling, we don't have this stuff. So it doesn't really affect us.

[Operator Instructions] Our next question is coming from Igor Levi of BTIG.

So you talked about being able to gain share in becoming the primary contractor on frac work based on your performance. But in the release, you also talked about gaining additional jobs and your competitors had significant disruptions due to COVID-19 related logistical issues. So could you elaborate a bit about the second point? What were the circumstances where you were able to overcome these logistical issues that your competitors had? And then what happens when they're able to return to work? Do they get that work right back? Or do you keep that market share?

So it's a mix, I would say. But to make it a bit simplified, there is a lot of those market share gains, you do it. It's not -- is a call-out business. So the client calls you like -- I give you the example of the testing. So the testing are ready. Some of the other guys were not ready. Why they are not ready, because they did not plan their people, so their crew did not come. They had -- maybe they had -- they -- one of them had a couple of cases of the corona. So the customer shut down their crew. Or they did not have spare parts, the border shut down, they did not ship the spare parts. Part of the working capital as well that we don't elaborate on, but we prepared ourselves to get 6 months of inventory of chemicals and spares into the countries before the shutdown. We took that risk and did that. So we have chemicals and spares to keep us running for 6 months, even if the border is shut down, right? Nobody does this, right, and especially some of the other small competitors. So we replaced them. Let's say, after 3 months, they are ready. Yes, for sure, you are going to -- you're not going to replace them forever. They will take some of this back to -- the customer will take that back. So -- and the other part of the market share gain that could be permanent is exactly like what I said in Jafurah, right? So in Jafurah, we won. We are the better provider. We went from being a trial last year to take 10% of the market to be a primary. Primary means you can be 100%. You can be the only player in the Jafurah business. That's what it means, primary. You become the primary and the other becomes the secondary. So you just moved to the [ ladder ] that whatever happens, you are going to be operating and frac-ing until the end of the project. Obviously, unless you have a service quality issue.

Our next question is coming from Jeff Fetterly of Peters & Company.

Just a couple of quick follow-up questions. On the frac side, the second crew that you're bringing into Saudi, you mentioned that crew will be working in Saudi?

Yes.

And what sort of visibility or contract structure do you have to support that crew going in?

We have, I would say, strong discussion with our customer. And let me just tell you this way. I know the customer pretty well. I trust them. So I am confident that we will be able to put this crew to work. We obviously send the equipment without people because there is no people that can go. So the fleet is purely frac equipment, et cetera. We have our own team -- NESR team basically in Saudi, Saudi people that will be able to operate that once it opens because, obviously, today, there is no people going between the U.S. and Saudi.

And your comment earlier about broadening the scope of some of the partnerships that you have or are looking at. For this second frac crew, will you also have additional services, whether it's coiled tubing, wireline or other?

Yes. Always. You always do the everything, yes.

But is that equipment coming from the U.S. as part of the NexTier partnership? Or is that equipment that you have in-country or you're building yourself?

I have in-country. I have in-country, and I manage through the better utilization. We are increasing utilization by almost 12 points across the group now. Since we put the company together, obviously, at the beginning, you become -- you are a bit less, I would -- let's put it this way, less aggressive in utilization number because people need to get to know each other and like each other. And after that, you start to become a bit more aggressive in demanding what time the fleet has to be out of the base and out of the maintenance and operating. So with that improvement, we're already being able to gain a lot without adding more equipment. And you have to remember, we invested a lot. We did a lot of investment ahead of time. So we -- our vision was always to add and front-load our CapEx and ensure that we are ready for the growth and capture it. And that's how we plan better than anyone else. And when the client said, I need to do that, I said I'm ready, and are you serious, and they said, yes. And that's why I'm repeating a bit, but that's why I could replace 4 or 5 testing companies that are not able to deliver, I replace them. And the client was like surprised that you could do that during the pandemic event.

And a clarification on the CapEx side. So if you end up spending $70 million or $75 million in 2020, is your expectation that the revenue capacity of the business will be similar to what you previously expected when you had budgeted $100 million of spend this year?

Yes.

Okay. And last thing, in terms of the sustainability and your contingency plans, you mentioned if this goes on for 6 months, you obviously won't be able to sustain it. But is this something -- could you maintain your 100% capacity through the second quarter? Or if these restrictions are in place through the second quarter, do you start to see some deterioration in your productive capacity?

I can sustain it in the whole second quarter. We already have agreements with every single person and expectation that the borders does not open up, and we will still be able to maintain our capacity intact for the second quarter.

But the expectation is you'll start to see some improvement in accessibility or logistics in the third quarter?

Correct. From June, we should be able to see -- after Ramadan, my expectation after Ramadan and the holidays, you would start to see ease of opening up borders for spares and some flights for movement of people.

This brings us to the end of our question-and-answer session. I would like to turn the floor back over to management for closing comments.

Thank you very much. I know that we took more of our time. So I really appreciate your time, and we are very, very excited about the quarter and looking forward to further success in Q2 until the end of the year. Thank you very much.

Ladies and gentlemen, thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.