Greetings and welcome to the National Energy Services Reunited Corp. Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Mr. Chris Boone, Chief Financial Officer. Please go ahead, Mr. Boone.

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

Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. We are very excited to report on our continuous outstanding performance this quarter. This is the first time we have surpassed the $200 million mark in revenue. We grew 27% year-over-year and 2% sequentially despite all the turmoil around the globe, especially in the energy sector that is the most affected. This achievement speaks about the strength of our field personnel on the ground, the resilience, dedication, commitment and the top operational management team. At the time of crisis, you can determine the real differentiator when the results defied the norm. We are basically swimming against the current and still outperforming the entire OFS industry. Our best-in-class, talented employees know how to score the top position in everything they do. We have been essentially 6 months into the pandemic. Yet, we maintained 100% capacity. We have seen the situation change and evolve continuously. We are always ready, agile and adapt real-time on the spot to the condition of each country. The Middle East has seen strict and stringent action to control the spread of COVID-19. This has included curfews, severe travel restrictions on both land and air, quarantines, testing and tracking protocols. The strictness varied from country to country. And consequently, we developed a detailed country-specific strategy early in the cycle. In addition, we have developed our protocols, which are required to be followed by all employees. All this has essentially increased the complexity as well as the cost of ours and our customer operation. They greatly value the company that supports them and keep the operations intact. It is a credit to our operating teams that an environment of increased cost, we have managed to maintain our operating margins. We are not releasing anybody or taking…

Thank you, Sherif. As Sherif mentioned, we reported our highest quarterly revenue ever, with second quarter revenues of $203 million. This represents an increase of 27% over the prior year quarter and 2% over the first quarter. The sequential and year-over-year growth was driven primarily by the new unconventional product line in Saudi Arabia and our new contracts in Kuwait and Abu Dhabi that offsets market declines in Iraq and North Africa. The second quarter also received the benefit of 1 month of SAPESCO revenue. We also achieved another record in the second quarter as adjusted EBITDA was also the highest quarterly amount we have ever reported. Adjusted EBITDA was $52 million or 26% of revenue, increasing 13% over the prior year quarter and up $1 million over the prior quarter. EBITDA adjustments of $1.8 million for the quarter are primarily for transaction and integration costs associated with the acquisition of SAPESCO in Egypt. Despite the market conditions, we are pleased that our adjusted EBITDA margins remained flat over the first quarter. We have experienced increased recurring costs related to COVID-19 such as employee testing, rotation costs, field lodging, catering and sanitization. We consider these costs as normal operations and have made no adjustments to EBITDA for them. To mitigate the impact of these incremental costs and reduced activity in some markets, we have been successful in finding opportunities to reduce other costs. For example, we've been aggressively negotiating and receiving discounts in our supply chain, especially in product costs, equipment rentals, transportation and field facilities. Moving to our segments. Our Production segment revenue for the second quarter was $139 million, another quarterly record, growing 46% over the same period last year and 4% over Q1 2020. The sequential and year-over-year growth is primarily related to unconventional completion activity in…

Thanks, Chris. In conclusion, I would like to leave you with 4 key takeaways. Number one, we have managed the COVID-19 situation, and our readiness is better than anyone in the industry, maintaining 100% capacity at all times. Number two, we continue to plan for the worst and hope for the best, targeting more market share and remains a trusted adviser and reliable partner to all our customer. We've prepared already for potential Phase 2 of the pandemic and the eventuality of further restrictions. Three, we aim to continue our growth in the coming quarters and enhance our offerings in the different segments. Number four, we continue to look for opportunistic M&A, especially in the current environment. And on that note, I'd like to thank you and pass back the call to Jerry for your question.

[Operator Instructions] The first question is from Sean Meakim, JPMorgan.

Sherif, as you look at the back half of the year, I'm hoping to just talk a little bit more about revenue expectations. You've got some markets that look more resilient. Others are more challenged with COVID and production cuts. You have the SAPESCO impact in the third quarter. You got a full quarter there. There's typically some seasonality in the third quarter. When you add all that up, could you just give us a sense of how your top line is trending for the back half of the year?

Thanks, Sean. So the way we look at it is very similar to Q2, is that we would manage better than everyone else the COVID-19, the restriction, et cetera. If you look at the different customer, I don't see a drop in any of their activity in the core GCC. I think the North Africa and Iraq will remain depressed. It might get a bit worse in those 2 markets. But overall, I would say, more or less of the same of Q2. So you put this together, and as you rightly mentioned, the SAPESCO addition for the full H2, we should see a better run rate than Q2.

Okay. That's helpful. And I guess a similar question on the margin profile. So you noticed -- you noted that you're experiencing some COVID-related costs, that's not a surprise. You've got some more pass-through mix coming. It seems, well, the full quarter impact of SAPESCO. So in terms of margin expectations for the back half of the year, can you maybe just help us assess where you think things go from there?

Yes. So as you have seen, Sean, we decided that the COVID-19 situation is not like 1 or 2 quarters. It is something that we'll have to live with it, right? So we decided that this is not a part that we take off from our results. It's part of doing our business. So we decided that this is part of the business. We believe that it should be part of our cost. So we have an increased cost due to the fact of you have to charter flight in some countries when you want to send the crew. You have to -- as we said before, you have to separate the people and the accommodation. You have to add a lot of sanitizing the bases, the protocols, but it's part of our business. So all this increase of cost would remain in our results. And as you have seen, we maintained the results, we maintained the margin, thanks to the resilience of our team. And we believe that we will continue to do that. As I keep saying, don't get tired of doing a good job. So I do not believe that we will have any effect in the coming quarters due to that because it's already part of our costs. It's already part of our results and we did not make any exception on it. And the pass-through, you're absolutely right. And that's what we said in a couple of quarters ago that the Production segment, plus 30%, when you see this type of growth of almost 50% year-over-year, definitely, there is a lot of pass-through revenue, right? So when you start to do these projects, today, we have 2 fleets running. Those fleets have camps, have trucking, have hauling, have water, have all kind of pass-through. All this, obviously, are revenue coming. It's accretive still because it comes with plus 10%, but it's not the same when you run it as plus 30%, right? So saying all that, if we -- if I would take a guess, I would say that we would maintain our margin profile of Q2 going forward.

The next question is from George O'Leary, TPH & Co.

You guys have done an impressive job on the margin front given all the factors you've just listed related to COVID and the associated logistics problems that, that presents the other side. And I think one of the items that folks are worried about is just pricing on incremental contracts. Can you give us a sense as we think out to the 2021 time frame where that pricing sits, how discussions are going? Any color there would be helpful for us to think about margins on a longer-term basis.

Yes, sure. So if you look overall -- because I'll try to give you a bit more of color of the pricing. So our customers are very, very smart and very savvy of the situation, understanding extremely well what's happening in the world and what's happening with the increased costs. So when you are very close to the customer and you are engaged ahead of time with them, the discussion becomes very, I would say, mutual between both of us. So we explain our costs. We explained that we are not going to increase any of our support costs or pass-through, et cetera, that we continue to negotiate with our suppliers. So we make sure that we do not increase their cost of operation. We absorbed all our internal costs without passing them anything. And that kind of conversation is very healthy. And I would say our big customer, the national oil company, especially in the big countries, are very, very understanding. And when we perform better than everybody else, including the big guys, they really appreciate that. And I would say they kind of shield you from a steep price negotiation. Definitely, if something that we come forward with, how to reduce the overall cost. And that is what is the key for our interaction with our customers. So if you are doing -- just for the sake of argument, if you're doing a remote, let's say, coil tubing testing operation, we come upfront to the customer. We tell them we could rig up differently now. We do not need this amount of equipment. We do not need this amount of people. We can do the things differently. This will overall reduce the cost and it's much better number than reducing some line items from my contract. And they…

Yes, very helpful color, Sherif. And then you mentioned the Saudi gas yield wireline win in the second quarter. I noticed that some case for logging and TTS helped the D&E margins during the quarter. Longer term, is there the opportunity to continue to enhance margins in that D&E segment? And is there any way to frame kind of a longer-term target for that D&E segment for you guys?

I wish, actually. I have to tell you, I have to be honest, no, I cannot. Definitely, the D&E segment is what we keep doing is we try to always keep high-grading to the higher-tier services. But I cannot -- you have to do the other part. You have to do all the rental -- all this type of segment that have a very low margin because that's a lower-margin business. And still, this is our -- the majority of our work. So every quarter, you will, fortunately or unfortunately, see that kind of fluctuation. It's a part of the business. And if we have large campaign and -- of very strong logging, very strong as we did this quarter, thru tubing very successful, we are -- I mean a lot of people don't know, but I mean we are a real leader in that business, in the thru tubing business. We almost own it in Oman. And when we look at this in the different parts of the world and it's very successful because we have now a very good and solid, large footprint of coil tubing. So if you have the coil tubing and you have your thru tubing very successful and you start to add new technology, you keep enhancing those margins, right? So I wish I could tell you that the Q2 would remain and improve from there, but then I would not be saying the truth. It's basically -- it will really depend on the mix of D&E. It's, again, a very large pool of segments in that bucket that had a huge difference of margin profile. And if you look at the big guys, for example, this is huge difference between them as well, right? So if you look at open hole logging, exploratory type of nature, which obviously we do not play in that, this is very high margin. And compare this to drilling tool rental, it's completely irrelevant, right? So I would say we obviously would love to keep adding those segments and that's what we are working on. And if you have noticed in our prepared remarks, we already put the investment in 2 of those unique, I would say, drilling high grade or high level of technology with some innovative folks here in North America. And this is the other type of business we do. So we put the investment. We pay -- we put seed money, and hopefully, those technology come to fruition. And then this will upgrade -- keep upgrading your D&E portfolio to have higher-margin type of work.

Very helpful, Sherif. Just sneak in one more, if I could. If you think about discussions with customers over the next couple, 3 years, call it, 2021 through 2023, where is the dialogue most active? Who's kind of mulling over, adding the most longer-term projects? Said another way, which countries do you expect might drive the next leg of organic revenue and earnings growth?

So definitely, the NOC and the GCC will always be the most resilient, as we say, and in the long term. These -- those guys are there for the long term of the country. This is, again, the majority of the GDP, the majority of the foreign exchange, everything comes from GCC from the national oil company. So we -- our growth definitely will always be with them. We are very, very linked to all the Saudi, Kuwait, UAE, Oman. And definitely, this is -- these guys do not plan for 1 or 2 years. These guys plan for 20 years, 30 years. So they look at what they need to do. And they don't look at costs, and that's what people have to understand. It's so completely irrelevant to North America. They look at what do they need, for example, for internal consumption by 2026, 2028, right? So I need to develop this type of gas fields. It's unconventional. It costs me more, but I will develop it because it's better for the environment. It's better for the country. So I would do it. Even if it costs me more, even today at this oil price, I can burn oil and it's cheaper than developing unconventional gas. But I won't do it because I'm responsible for the environment, and I want to have the lowest carbon footprint. So I will develop those fields, and they have a plan all the way for 10 to 20 years. So if you look at a country, let's say, for example, Kuwait, they have 2040 plan. And that plan calls for which fields, how they're going to develop it, when they're going to start the drilling and when they're going to start the production. So definitely, our growth will be in the core GCC, and all our plans is done accordingly.

The next question is from Blake Gendron, Wolfe Research.

I wanted to follow up on the frac operations. We have a pretty good idea as to how revenue and EBITDA generative. That first fleet was in the unconventional gas field. It's our understanding that the second fleet, well ahead of time line is perhaps, by nature of the configuration of the work, a little bit less revenue generative. So can you just help us quantify, I guess, or qualitatively understand the difference between the 2? And then as we revisit the pumping opportunity in the region broadly, it doesn't seem like scalability is an issue for you since you're training local crews with some of the expats in the U.S. partially. So can you talk about the overall opportunity, how you see it evolving over the next several quarters or years? And then your plan of attack, so to speak, in maximizing your capture of that opportunity in light of the scalability successes that you've had?

Thanks, Blake. So the Jafurah Basin or the unconventional fleet is -- you have to think about that like North America. So this is very similar to the Permian, the Eagle Ford, et cetera. So it's a pad, horizontal wells, multistage. You can be extremely efficient because you are not moving between wells. You are on the side, and you can -- sometimes they have 3-well pads, 2-well pads, 4-well pads, which means it enables you to do a lot of -- a number of -- high number of stages, which is eventually higher revenue. If you -- anything else in the region, it's completely different. It's a Middle East type of fleet. Middle East type of fleets are single wells. The well has 6 to 7 to 8 stages. You go there, you do the well, then you have to rig down and mobilize to another site, rig up and start there. So if you can normally do 2 to 3 wells a month, you are good, right? So this is the complete different scale and scope of all the fleets in the region versus that unconventional, I would say, high-grade or high-intensity type of work that is very similar to what people used to because that's what they kind of know of in North America. Middle East, Blake, if you go back 20 years ago, you used to do one stage a month per fleet, right? So it's totally different because there was one frac, which is one zone, you frac it and leave and go to the next one. Now you have more and more of the higher intensity. So if I look at it from the angle back to your maybe second part of the question, what is the future, the future is huge because you…

That's helpful color. And then the flip side, on the unconventional gas side, I guess gas development broadly in the region is, of course, an infrastructure. You picked up an industrial pipe cleaning business with SAPESCO that you, I think, had mentioned is 10x the addressable market in the entire region versus what SAPESCO is doing locally in Egypt and offshore. Can you talk about maybe the time line for that opportunity? I understand it's longer-term tendering, obviously. You're working with E&C companies as opposed to your typical upstream contacts. But I would imagine the pull-through of this specific segment through the broader region where you have an upstream platform is potentially pretty impactful. Can you just talk about that opportunity and sort of the time line around it?

It's -- definitely, obviously, with what's happening now in the world, this is type of -- some type of work that sometimes people would delay it as well, right? Because there is a lot of projects of E&C that got delayed due to the COVID-19. So people -- majority of those new projects comes from Southeast Asia. And they were planning to start some of these big projects in Q1, Q2 2020, got delayed until end of the year or to the following year. However, we are -- as we said, we are tendering. That cycle would take 6 to 9 months in tendering. Once you get awarded, then you start the work. I would say that, hopefully, we will see 1 or 2 awards towards the next year at 2021. And if we get 2 of these projects next year, we will be very, very happy, right? So I would say that market is more or less in the $300 million. So capturing, I would say, 10% of it would be a very good start. Again, some of this work is getting delayed just purely to the fact of no travel. People have to understand that the Middle East is still lockdown. Their airports are not open until now. So all this trouble we do here in Texas, et cetera, we cannot even go there until now. So it's very restricted. So there is no travel. There is no equipment. And that's -- again, back to my comments, that's why we were very pleased and blessed with our guys that managed to maintain 100% capacity despite all these restrictions.

The next question is from Andres Menocal, Evercore ISI.

So my first question is actually around R&D. Can we get an update on the research and technology center, NORI? I'm just curious to hear if there's been any key updates since we last connected in 2Q and what the pipeline might look like in terms of new technology introductions through this year.

So obviously, with the restriction, we are working on the building. So it will be delayed, I would say, maybe 1 or 2 quarters due to the fact that people are not going. So as I mentioned, you cannot travel. So all the labs and all the work that we put together is still intact. The construction and making the lab and sending the team with our partner companies are delayed until Saudi opens the border and I'm able to send the folks down there to put the fleet -- sorry, to put the equipment and the setup together. So I would say it's going to get delayed maybe 6 months.

Okay. Fair enough. And then my next question is more on just the competitive landscape. So obviously, we've seen your company respond commendably to coronavirus and just this downturn, and just a lot of issues that have come up, you guys have obviously proven that out. Just curious to hear how the service quality from your competitors has either worsened or improved and if you think that, that is sustainable and what that could do to potential M&A opportunities down the road.

So I would say that we -- obviously, I cannot speak about them. I would just tell you that we, today, score the #1 or #2 in everything we do. So all the segments, we definitely have the top position, which was always our goal. And very happy to see that, actually, for the second quarter, we scored almost #1 in so -- in most of our -- the service that we are involved in, right, which means that we obviously overtake the big guys in some of those segments. And in others, the -- I would say, the smaller local companies, we are way far from them, right? So we are -- as we put the company together, and we said this from 2018, we are not here to look into are we competing at the -- what we call the second-tier level. We are here to be the top of the industry, meaning our service quality is impeccable. So when we go on location, we have an NPT, and we have an efficiency of 99.7%, 99.8%. That's how we measure ourselves. We measure ourselves in HSE, in service quality, in everything, compared to the best in the industry, not compared to this country or these local guys, right? So -- and that's the whole philosophy of the setup is how can a national company become the best-in-class in everything they do. Definitely, the service quality overall in the industry has deteriorated with a lot of the competitors or the landscape due to the fact of COVID-19, right? So people that depended a lot on some of the expertise on the rotational scale, they cannot get those guys. So they have issues. And some of the people have stranded 4, 5, 6 months. There is a limit to people how much they can take, right? So overall, that's how we manage to keep replacing some of the competitors in some of the countries, and that's how our revenue keep growing. And our plan is to keep growing in the following quarters. It's because we plan it. We know exactly where and how we're going to manage it. And we plan as well, which is not a small task, all the spare parts and inventory and everything. And that means that we maintain a buffer to ensure that we can cope when somebody else cannot.

We have a question from Igor Levi, BTIG.

So as the number of daily COVID cases in Saudi and UAE are now down about 75% from fleet levels, are we seeing any type of opening up? And is there some path to improvement around logistical constraints in the region? And could this possibly have a positive margin surprise once it happens?

I would say, obviously, knowing the countries, they are doing an amazing job, all of them, the GCC, outstanding. So definitely, they have calculated how they're going to do that. I would say, UAE is already -- Dubai is already softening and have very clear rules how can you get in. They even -- for even for tourists, they can come in. But with the very clear, they have to test before leaving and they have to test as soon as they land. If they test negative after 48 hours, then they can leave the hotel, et cetera, et cetera. I would say that things will ease up. I wouldn't say open up, they will ease up. You remember, they still have curfews driving in some countries. So saying positive margin, I wouldn't say so, no. I don't think so. I think, as I said, we absorbed all these costs as part of our business. I know others take it outside the results. But I would say you are not -- even if when they ease up, I'm not going to, all of a sudden, put now 4 people in an airport cab and -- or change the protocol of the sanitization or change the way we make our [ patience ]. So we are keeping the protocols. We are keeping costs. And we said it is going to be part of our business, part of our results. So I do not see any difference in margins.

And as we start to model SAPESCO, has SAPESCO performed in 2020 similar to 2019 levels like the rest of the company? Or have they seen more of a decline? How should we model that for the second...

No, definitely, they see a decline because they had -- they are North Africa, right? So the same level. So they performed like our part of the business in this part of the world, which is North Africa and Iraq is the worst in the MENA region, right? So -- and Egypt is part of that, right? So definitely, they have the same drop exactly like ours in that part of the world. So North Iraq is the worst, let's put it this way, because it's like North America. So these guys dropped 80%, 90%. But the North Africa is the same drop that we always say. We manage better and SAPESCO did the same because we are a smaller company. So we don't go to this minus 50%, minus 60%. But definitely, we have the minus 30%, yes, at least.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back over to Sherif Foda for closing remarks. Please go ahead, sir.

Thank you very much. I'd like to thank you all for your patience and your time. And we're looking forward for another solid quarter going forward. Thank you very much.

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