Greetings and welcome to the National Energy Services Reunited Q3 2020 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Mr. Chris Boone, Chief Financial Officer. Please go ahead, sir.

Good day and welcome to NESR's third 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 third 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 pleased with another outstanding record performance this quarter. We grew 35% year-over-year and 7% sequentially, which is a phenomenal achievement given this growth has been delivered against the backdrop of continued industry surplus supply, compounded by pandemic-related effects on the global demand. I believe we are an outlier in the OFS space for delivering such results when the rest of the industry is contracting with these headwinds. As I have previously stated, we have achieved this due to the stellar effort of our teams on the ground. We not only have managed to hold the line but have learned to thrive in this very tough environment. I cannot speak highly enough of our management and operation team in each of the countries. I am blessed to have such talented individuals who run their operations with an unmatched passion and dedication. Most of our leadership in the country are nationals of the country. And not only they have an acute understanding of all the nuances of what needs to be done for the business, but they also have stepped up to the roles as leaders in the community. Just to give you an idea on how well we have managed the operations, we have increased our operating hours this quarter. And we have added headcount to manage our growing operations, while the rest of the industry is laying off people. All this while being acknowledged as the best service quality provider this quarter by one of our main customers, measured by nonproductive time or NPT during operation. One of our main differentiators is our execution ability during the COVID-19 and maintaining 100% capacity at all times. We have been very clear that we will handle…

Thank you, Sherif. As Sherif mentioned, we reported another record quarterly revenue record with third quarter revenues of $218 million. This represents an increase of 35% over the prior year quarter and 7% over the second quarter. The sequential and year-over-year growth was driven primarily by the new frac product line in Saudi Arabia, a full quarter's contribution from SAPESCO and our new contracts in Kuwait and Abu Dhabi that offset market declines in Iraq and North Africa. We also achieved another record quarterly level of adjusted EBITDA in the third quarter of $56 million or 26% of revenue. This represents an increase of 17% over the prior year quarter and 8% over the prior quarter. EBITDA adjustments of $2.5 million for the quarter are mainly 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 first half 2020 levels. We have continued to experience 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 costs in areas such as equipment rentals, transportation, and field facilities. These supply chain efforts continued in the third quarter with improved pricing realized on certain production-related product costs. Moving to our segment. Our production segment revenue for the third quarter was $148 million, another quarterly record, growing 53% over the same period last year and 7% over the prior quarter. The sequential and year-over-year growth is primarily related to frac activity in Saudi Arabia and the new contracts in Kuwait…

Thanks, Chris. In conclusion, I would like to leave you with key takeaways. We continue to manage the COVID situation better than anyone else. And we did plan already for wave two, just in case, ensuring we will serve our customers with no interruptions. We aim to continue our growth trajectory and see no deviation in the coming quarters as we expand our offerings in the different segments and deliver on the recent contract awards. We continue to invest, hire, and train national talent to fuel our growth, maintaining the highest standards and ESG commitment. On that note, I would like to pass it on to the operator for your questions. Thank you.

We'll now be conducting your question-and-answer session. [Operator Instructions]. Our first question today is coming from James West from Evercore ISI.

Sherif, I wanted to get a quick update on the simulation work you're doing in Saudi. Number 1, the number of kind of spreads you guys are running now? What the expectation is as we go into next year? And then I apologize if I didn't catch it, but the relationship with Deep Imaging, which, as you know, we know those guys well? Is that already in place? And is that taking place in Saudi or is that broader to the region? And kind of how does that wrap in with what you and next year are doing with simulation work in the region?

Thanks, James. So for our frac, we have 2 frac fleets running in Saudi Arabia today. We have one dedicated to the Jafurah Basin and one dedicated to the [indiscernible] or what do you call, single well basically, frac operation. Both are running extremely well with just with our dear customer. And as we said, we broke all the records that has been ever in the Middle East region, working very closely with our customers. So I really thank them for their trust and how they guide us through the whole process to be able to deliver such stellar performance. The future is, as far as I know, is as planned. So we should be continuing with this operation as planned. The country has big plans for the gas. They always announced that from the past and they keep the same announcement. Obviously, they might tailor this activity based on the needs and this is definitely up to them. As for the Deep Imaging, yes, we have a relationship with them. We did an investment in the company almost close to a year now. And we look very, very carefully on what they can do. And the plan is to take them to the region and show the client, show the customer what this technology can do. Definitely, they had a slowdown because of what happened in the U.S. here. But our plan is to get a crew and to go there and show the clients what could be done.

And then maybe one for Chris. On free cash flow was, I guess, a bit less than we were looking for, but there were a lot of puts and takes during the quarter, especially with the transaction. Could you maybe talk about what your expectations are for -- or where they maybe came in light in the third quarter and where we could see some upside going forward?

Sure. I mean, obviously, when we provided some guidance last quarter, we weren't assuming we'd hit a $218 million revenue. So obviously, there was some build in working capital support. And, yes, we didn't really -- I don't try to go into super technical, but for example, this VAT rate changed, that was about $4 million impact on the quarter net, sort of a onetime thing as those balances, there's just a timing impact between receiving and paying VAT. So those are really the -- and as I said, maybe we build a little more inventory as we -- during the quarter as we more and more risk of a second wave potentially disrupting. So those were the primary collections were about where we expected. We would like to maybe have beaten a little more on our collections targets, but they came in about as we expected. Fourth quarter, as we've said, well, it's usually a very strong quarter in collections and that we expect a stronger free cash flow in the fourth quarter.

Next question today is coming from Sean Meakim from JPMorgan.

So on the broader MENA trajectory and how it will influence your own in the coming quarters. As you said in the prepared comments, you're expecting a faster return to activity than many are expecting. But it could be worth maybe just elaborating on how you've been able to perform relative to the larger diversified service companies in this environment? How much of that is product and service mix? How much of it has been your ability to have your crews ready to work in the field despite all the restrictions? And your expectations in terms of being able to retain that market share in an activity recovery.

Okay, Sean. Let's look at, for example, our results. Today, our Q3 results is plus 35% year-on-year with a minus, you can say, 20% to 25% activity drop, right? And that deviation, which is a complete separate or I would say opposite to the market. Why is it opposite to the market? Two main reasons. First of all is, as I always say, is our scale. Being smaller than the big guys. You can target a lot of the contracts that we recently awarded. So you can -- and you deliver on them, then you're going to gain market share based on your size. And the other part, we had zero disruption. So I don't want to talk about others, but I can tell you, not a single competitor we have in the entire Middle East had zero disruption. Everyone had anywhere from 5%, 10% to some had almost 50%. So they almost shut down or they almost had half of their crews they cannot operate. So we had zero. So basically, we have 100% capacity. So we managed to take a lot of the work when these people or when these competitors could not manage. And then we just won a lot of contracts over 2019 and we started to deliver on them. The biggest one, obviously, is the frac. So if I look today on our frac activity, we did not have frac business in 2019 and we have frac business in 2020. So obviously, the difference in that gives you the magnitude and that so you can clearly see it from the production. So it's a 3-way between making up from people that did not have the capacity, they don't have the equipment, they don't have the inventory. A lot of people are short in cash, some…

Thanks for that, Sherif. That's really helpful. And then I'm interested in hearing a little more about the industrial portfolio expansion with SAPESCO outside of Egypt. I'd love just to hear about how that can unfold. What does the addressable market look like? Are you able to leverage your existing relationships to either work with new contacts? Just trying to get a sense for this growth lever and how it unfolds while upstream opportunities are more limited near term? I think that will be would be interesting to hear more about.

Yes, sure. So as you know, SAPESCO guys have very amazing track record in Egypt in the industrial arena. We took the portfolio. Obviously, now we just closed the transaction and we've been working on it since June with the clients in the different GCC market, how to take that qualification, and that's what I tried to mention in my remarks, and tell the clients, now I have 20, 30 years experience in that business. So you get qualified and you get to the bidder list that they never even called you before. And now today, we launched this to all the GCC and to North Africa, Algeria, Iraq, now Libya -- even now Libya is opened. So now we are qualified. So that footprint that we have today, that is the best, I would say, and definitely outside the big 3, we have the best footprint now in the MENA. And every country we have a representative. Every country we have a country director. Every country we know the clients. So we put that qualification, that process, that experience to the clients. So now we are invited to the bidder list. We are already bidding in 7 of those projects. So we're bidding in Algeria. We are bidding in Saudi. We're bidding in Kuwait. We're bidding a UAE. So we are bidding on those projects. What happened, why I would say, if you want to ask me a number, I would say I cannot give you a number today. Why? Because most of those actually pipeline downstream projects were the first to be cut from the client. So if you look at the budget of our main clients, they canceled a lot of the project mainly on the new project of downstream. And that's the biggest part that you gain from the industrial cleaning is actually when -- so if you look at, for example, at Egypt, the biggest revenue they ever made, SAPESCO, was [ not revealed ]. When they had the discovery in ENI for the East Mediterranean gas, they had to do the purging of the pipeline. They had to do it in 16 months because the President of the country wanted to inaugurate and they wanted to break all the records for having that platform on time, and they did that. And actually, everybody worked on it, SAPESCO and other companies. And it was the biggest revenue scheme. So I would say the time we will take us in the next 3 to 5 months is to make sure that we are in the bidder list on all these countries and we will be able to land a couple, 2 or 3 projects in 2021 in outside Egypt. And that's -- our target for the guys is obviously much harder than that. We ask them for 20 projects. So let's see how they can deliver. That market, Sean, is $300 million, right? So it's quite significant.

Our next question is coming from David Anderson from Barclays.

So the Middle East rig count down 20% during the quarter. Your revenue continues to grow. You explained before how you had a bunch of contracts coming on. And I guess that explains part of it, but I was wondering about the rig count and spending in the Middle East. If you could maybe just sort of categorize what's going on over there. I'm wondering what's happening with that rig count. Has it been mostly oil rigs that have fallen off? And maybe just kind of talk about kind of the gas versus oil mix in terms of drilling and kind of your exposure to that. But secondarily, I'm really wondering about maintenance spending. Is that something that's been pulled back? And is that something that will come back first? Because we hear a lot of skepticism from investors about spending in the Middle East. It seems to be the general view that there's so much capacity. They don't need to do anything for a long time. So maybe you could just kind of talk about kind of those different parts of -- I'm speaking sort of generally in Middle East, but I'm kind of talking Saudi.

Yes, okay. So I'll talk Middle East. So if I look -- the easiest one first is oil versus gas, I would tell you, for ourselves, at NESR, we have absolutely no difference. So we work on both. The exposure is exactly the same. So there is no difference for us. It's the mix. The only difference for us is really exploration, big gas wells like offshore, deepwater versus normal land operations. So I would say, this is the project that was cut significantly. And if you look back just to go to your other part of the question, what happened in the Middle East, and I said this before, they always cut the big nice-to-have projects and they cut the downstream that they don't need. Right? So that's exactly -- most of them, that's what they did. So if you look at the offshore, new projects, they were all postponed. They are not canceled, they're pushed back. So you look at Kuwait, you look at Oman and others, all of these guys, they just pushed those projects to '21 or '22. They don't need them now. It's exploration for new places, new frontiers. So all of this stuff is pushed back. If then you look at what most of the clients, and again, I would go GCC. And this they look at their core business, what exactly they need to do, and they look at the long term. They don't look -- I know that the investor's skepticism about the maintenance, et cetera, but the investor here, they look at this as from -- like as if it's an independent company. It's not an independent company. It's a national oil company. There is a lot of aspects on the activity that is from a social aspect, it's not from…

I was just curious about your plans on the pressure pumping fleet. You've talked about 4 to 5 by the end of next year. How are you feeling about that? Is that number up, down, sideways? And maybe just kind of a little update on how -- I know the operations have been going on quite well or is there any update on kind of what that's looking towards the next couple of quarters would be great.

Thanks, David. I would say we see same trajectory towards the end of next year. I would say we should be adding a fleet quite soon. And then depending on the pandemic and who is going to start first, I would say, in the second half, we'll be adding another 1 or 2. So today, I still see we're going to be 4 to 5 fleet by end of '21.

Our next question today is coming from George Michael O'Leary from Tudor, Pickering, Holt.

Piggybacking on David's frac fleet question, I was going to ask the same one, but just -- is the expectation that you expand that frac presence outside of the kingdom? Or are there opportunities in other geographies? Or do you expect most of those fleets to go to work in Saudi Arabia?

No. Most of the fleets will go outside Saudi Arabia. So our plan, hopefully, and obviously, that depends on the clients. But our plan, hopefully, the additional fleets will work outside Saudi Arabia.

And then for just underlying activity in that MENA region in the fourth quarter, clearly, we started the third quarter higher than we ended it, given the 22% average decline. For Q4, what's the kind of underlying activity expectation fully realizing that's not necessarily what NESR will see in their business?

I would say as, if you recall my first quarter comments, I always said that the activity, first quarter would be the best out of the year, opposite to previous years. However, for us, we -- our plan is to maintain growing over the year like we did before. And so far, that's what we are delivering. So we're delivering exactly what we said. I would say, the fourth quarter is similar, in the sense, activity is not going to get better. I would say, on the contrary, some of the customers might actually shut down some of the work because the opposite effect will happen this year, which means they are running out of budget or they do not want to spend any more and the government say, shut down, that's it. Let's not spend more than what we did. In our case, I don't see any difference, as I said, from our trajectory. We will have growth sequential and we don't see any issue even if the activity gets dropped further. If the activity does not drop, we will have even higher growth. But overall, I don't see the activity increasing because nobody needs it, except for Libya. Libya would be the only outlier where they're going to increase. I don't see Iraq, any of the IOCs putting any money in the next 2 months. There's only 2 months left. And the rest, the GCC is very stable, but I wouldn't say increase, I would say, it's a stable activity. For us, we will have an increase.

And then if I could sneak in one more, if I could. Just M&A and then kind of the pull-through of the sort of product service lines that you acquired via mergers and acquisitions continues to be a big part of the story. Could you just frame kind of what the M&A landscape looks like, given the challenging market that we face? Has that created incremental opportunities for you guys? Or how would you describe it?

So M&A is very -- I would say, in the U.S., definitely, we have -- we get kind of invaded by opportunity, but we have no interest, as we always say, except to buy supplies or resources. But we are not planning to do anything here unless the company is so innovative that we take it over there. And that's different approach to our M&A. So just let me -- I said this before, but I just wanted to be very clear. So the M&A for us, it's in the geography. And that's when we buy a company. Are there opportunities? There are plenty, not like the U.S., but there is several. And those, we are negotiating with 2 or 3. Negotiation in the Middle East takes time. What's different is you need to have due diligence. We do a very detailed due diligence in those. And today, we are not able to do that because there is no travel, right? So I don't think we're going to land anything in the next quarter or so, right. If I look at what we do in the U.S., you have 2 problems. You have the technology partnership that we talked about, and we do several. Today, we have an investment in 4 companies. So we put money in 4 companies. We don't buy them. We put money in them to get the technology, so it's like a PC. So basically, I want the technology to be -- to happen. Some of the innovation we wanted to be tailor-made for our Middle East operation, and we put money for this company to make it happen. And the third part is basically a lot of the Chapter 11 guys, and we are happy to look at that equipment if it makes sense to buy 10 cents to the dollar. But we take this as CapEx, we don't take this as M&A.

Our next question today is coming from Igor Levi from BTIG.

So you talked about the significant contract awards in 2019 being a big tailwind. But you also mentioned you expect similar growth in the coming quarters. So could you talk a bit about the drivers of those growth? Of course, we do have, I mean, we know about SAPESCO and the incremental drilling contract in Oman, but is that sufficient? Of course, there's the additional frac fleets. But again, those I think still need to be awarded. So how much of that growth still needs to come in the form of contracts in the coming quarter or 2?

Very, I would say, Igor, we have a lot of contracts that were awarded. We don't announce everything. And a lot of the contracts that we have today, what you do on them is you expand on that portfolio. So the best example is Oman, right? So today, we have this fantastic Oman operation, and we managed to extend those contracts for a decade, right? So it's unheard of. I mean, the clients never did this. So today, we have all this contract now for 10 years coming, right? So what you do in these contracts, some of them you expand the portfolio. And some have -- and actually, for that same example of Oman, we actually added a full scope of drilling contract into our other contracts. So our expectation is to deliver on those, introduce all this technology and partnership we did in the U.S. over the last 15, 18 months and put those technology to action. Today, most of those technology, some of it takes 12 to 18 months to have a tool. And then you have that tool, you send it there, it has to work. And it has to be competitive and it has to work as good as the others or even better. Once you have that, you get part of that pie. So the landscape of work, of market is huge. And I keep repeating this. This is a $20 billion market. We are not even 5% of it. So having now the infrastructure, having the image, having -- being like, I would say, the darling of a lot of the NOCs, for us to be able to be 10% of that market share is not that hard. And we have the platform to be able to do that. You don't have to win a contract in each place, in each tool to make that happen. So as I said, until our $2 billion revenue mark is achieved, I don't see any problem with the growth trajectory.

And then as far as the fleet that you mentioned, the additional fleets that would be doing frac outside of Saudi Arabia. Would they be as profitable as the ones that you're adding this year, given that they're not, from what I expect, not likely to be working on conventional fields like Jafurah? So they wouldn't have as many stages per well. Could you talk a bit about that?

So outside the whole Middle East, Igor, only Jafurah is a multi-pad well like the U.S. Everything else in the Middle East are single wells. So any contract you have, any frac business you have will always be single wells? Is it multistage? It is multistage. But it's a multistage Middle East, right, which basically, some of these wells are 6 stages, some are four stages. And, yes, some of them at one stage, which is a single frac, right? So the price per stage is completely different. And the structure of the fleet is totally different. So I would say, you can make the same, you have the same -- as a percentage, but you will not have definitely the revenue or the top line like you have with a multistage doing 80, 90 stage a month, right? So if I look back at my olden days, some of these wells, we used to do a stage every 2 weeks. So you do 2 stages per fleet per month. But definitely, the stage is not 55K like you have here in the U.S., right? The stage is like $1.5 million. So it's a totally different structure, totally different setup. And each country is different.

[Operator Instructions]. Our next question is coming from Blake Gendron from Wolfe Research.

So my first question is on margins. They seem to have stabilized, even though your top line growth trajectory is just on a different level relative to the rest of the sector. If I were to isolate the segments to make sure that production services will continue to see stabilized margins, you'll add some frac capacity, maybe there's some cost-plus sort of dynamics in there. On the other hand, you're going to see some scale absorption and operating leverage. In D&E, it's a little bit tougher to pinpoint margins. It tends to be a little bit lumpier and seasonal, but perhaps instances like the PDO contract will allow you to get higher technology exposure in the D&E realm. As we look out 2021, 2022, I know your bogey is just flat margins, and you're more focused on the top line growth. But what kind of levers can you pull? Or what kind of dynamics are in play that could either push the EBITDA margin higher or lower moving forward?

I would say similar answer. If I look at the D&E, if you get to be more on the E and more on the higher end of the D, your margin will improve. So you are -- you have to be in a technology provider, higher end on some of the services to be able to improve the margin to that level. But, however, by the way, now if I look at the industry and I look at the pricing, I would say, destruction almost in some of those services. Actually, our profitability in the D&E is higher than the best guys. So it's kind of shocking that you are running basically what you used to call in the olden days dumb iron, but you have a higher profitability than reservoir sampling. Right? So those margins today are quite strong, but definitely, they can get a bit higher based on the mix. So if I would answer you, do I see this going to 30%? No, I don't. Would I see a couple of percentage points like we have between 20, 24, 22, maybe sometimes jumps to 26, yes, maybe. But definitely, we need some traction to the market to be able to do that, right? If I look at the production, there is a lot of, as we always said, I mean, if I look back, we used to run higher-margin in production when we didn't have the frac and all the revenue fall through, basically, as you know very well, all the hauling, water, land, camps, all the stuff. Today, you have to do that to be able to do the frac because that's part of the business. Do I see the client changing the behavior on that? I don't. I think on the contrary, now they see…

That's totally fair. We do appreciate the cleanliness of the numbers and just confidence in the stability of the margins, I think, is the most important, just given the growth trajectory. And just a quick follow-up here, if there's time, on free cash flow. I want to approach it from a different angle. Say we get a second wave, say some of the organic growth opportunities fall by the wayside next year. Where do you think capital intensity goes? I don't want to put you on the spot and guide CapEx. But in terms of maybe giving investors a little bit more confidence in the free cash flow elasticity relative to growth would be great to nail that maintenance CapEx level down.

Sure. So I think we've said, our plans for next year probably still be in the -- at still some sort of growth rate, what we plan on. It would be about maybe the $70 million, $75 million range. That's what we've said. Could it be higher? Sure, but that would require, we win more contracts and have other things to support. So that's about where we see next year.

So if I may add, Blake. The best way to look at it is always rule of thumb of maintenance CapEx is 2% to 4%, depending on your segments, depending, are you on the high end, low end, a lot of inventory items, et cetera, right? So -- and then the rest is growth. So we have a different profile because we frontloaded our CapEx. And plus we added this buffer to make sure that the clients trust our ability to deliver if something happen. And I know that a lot of people came to tell me, you are adding a lot of equipment, and I said, no, I'm not adding a lot of equipment. I know what we're doing because we know the customer very well. So our deep knowledge of the customer is unmatched, I would say, second to none. And that works very well for us, and that's how you see this revenue growth like this. At a certain level, with a certain stability, we will be able to be an amazing way that you're adding now only for technology and for something to change and maintaining that growth profile. So I would say, next year, at this growth profile of this year, we will only spend $70 million, $75 million. If something happen and we don't grow as much, that CapEx would be much lower.

Our next question today is coming from Jeffrey Fetterly from Peters & Company.

Just a couple of quick follow-ups. On the CapEx side, what are your commitments at this point for the rest of this year or going into 2021?

This is Chris. We'll be -- obviously, that's part of our quarterly filing disclosures. But they're approximately -- I think we disclosed in the AP, there's about $20 or so million that is committed, not received. Now there're some additional LC payments that flow through CapEx. So I'd say there's about $30 million as of right now that would still be for Q4 or next year.

And do you think most of that will come in, in Q4? Or is that similar to what you saw this year along your data?

Some of it will be, let's call it, approximately maybe $10 million of that will hit in Q4 and the rest will be next year.

And are there any other projects or commitments that you're contemplating before the end of this year?

Yes. Well, obviously, we've discussed an addition of a third fleet. So that would obviously be one that's not in our numbers yet.

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you very much. We're out of time. So we're very, very excited about the future. We look forward for continuation of our growth profile in the coming quarter and next year. Thank you very much.

That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.