Q1 2020 Earnings Call
[music] greeting and welcome to the National Energy services for United First quarter earnings call at this time all participant.
Turn to listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
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 any answers first quarter 2020 burning school with me today is Sharif soda, chairman and Chief <unk>, Chief Executive officer of any MSR.
On today's call, we will comment on our first quarter results and overall performance. After our prepared remarks, we will open up the colder questions.
Before we begin I'd like to remind our participants that some of the statements will be making today are forward looking.
These matters involve risks and uncertainties that could cause our results to differ materially from those projected any statements.
Therefore refer you to you to our latest earnings release filed earlier today and other FCC 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 without any additional questions. You may have our investor relations contact information is available on our website now hand, the call over to Sharif.
Thanks, Chris.
Ladies and gentlemen, thank you for participating in this conference call.
We are very excited to report on our outstanding result, this quarter.
It's the largest quarter ever and the history of the company.
We grew 31% year over year and 8% sequentially.
This is in contrast to usual seasonal decline from Q4 two Q1.
And it was achieved on the shadow of both a worldwide and the crisis and a once in a generation oil price collapse.
I will touch in details will the challenges.
And our actions related to cope with 19.
As well as the reality of the new oil price environment.
But before that I want to acknowledge the exception that efforts all our employees have put in to support our customers and differentiate ourselves in these challenging times.
That resilient 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 enterprise in group of individuals in our company across all the levels.
I have spent a fair bit of Mycareer indices, and enormous days things of challenging enough.
But to do that under the limitations of this pandemic as 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 dead to speak for themselves.
So how did we enabled 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 would take a few minutes to explain our approach.
With revert early and appointed a crisis management team or CMT, which comprised of all my direct reports and key operation personnel and below it each country has its emergency response team or ERP activated.
This CMT has been meeting daily and reviews the status of our readiness across all aspects of our operation as well as addresses any upcoming or potential issues, we could face in due course.
So we are not only focused on what is happening today, but also simultaneously planning for things to weeks one month.
Two month down the road and also for any eventuality, including if the board there between the countries are completely shut down.
This covers everything from logistics.
Supplier sustainability and how they are handling that on operations.
Customer engagement minimum inventory for spares and chemicals, liaising with our customer and local authority for that elevated and continuously evolving processes.
Navigating through each country regulation on handling current team procedure, while ensuring the health.
Safety and well being of our employees and every thing else, which could and would get affected.
Lastly, we always need to ensure that we go the extra mine to confirm our people underground our while taking care of.
And the CMT set out a serious of initiative do not only take care of our employees that work sites, but also for their families.
One of these initiatives was to offer financial help in the form of prepayment of salaries to the families of employees or either out of the home countries or at the well site for extended periods of time.
And send money to that country of origin.
At those difficult times, we strongly believe it is our duties to support all our employees and their families.
They are making the difference to our customers and maintain our business continuity intact.
Our customers recognize these efforts and have a turn depend on us more and more to cover for any disruptions of their activity on account of some of our competitors inability to manage through the challenges.
In summary, not only were coping with our existing normal work scope, but are actually taking on more work in this period, because we have been able to plan better than others.
And have manage our equipment supply.
And inventories as well as our feedstock.
It is a testament to the culture of performance and customers one that we have built in this.
And all of this reflects the 8% 8% growth sequentially when the overall customer activity has been flattish and I would expand on example later in my comments.
Now, let me take into what is happening on the macro front.
I want belabor on the dynamics of OPEC, Russia, and us land as everybody knows it or has an opinion on it.
But but the key point of relevance to oilfield services, which I want to make is that international low cost per barrel markets are always more resilient in the downturns.
And this especially applies to any and Russia.
From day, one and the reason we formed Ness was to focus in EMEA and our clients.
And that is the exact reason, we opted not to change our mantra.
Now we are going to see why we held the line on our core foundational principle.
That is inherit stability in the region and our main clients our national companies, who have larger objective.
Then to respond to short term oil price gyrations.
They are focused about their country wellbeing maximizing the results of the country as a whole employment and social effects of the industry.
Yes, as priorities change they will move between oil and gas as per the long term direction and yes. They also have to work within the parameters of the oil price environment reality.
But this also provides us an opportunity to innovate on our delivery and the solution, we provided both commercially and technically.
GTC as a whole remains active and had known slowed down in Q1.
Things will change obviously with the upper cuts in Maine, but I see it both as a challenge, but also as an opportunity to strengthen the business.
In my opinion going forward most of the delays will come from new projects.
Seismic.
Exploration cancellation.
Offshore new frontier and additional downstream Mega development.
We pride ourselves on being close to our customers, we understand them and have the bulk of the region and the way we will execute our strategy is be it is by being a giant to react and adapt.
Our relatively small size also helps us re adjusting to any changes.
Outside of the GCC, North Africa, and Iraq, both are affected by these oil prices.
As it is driven by several international and local independent operators.
And this is further compounded by the effect of the Corona virus in an already security and structurally challenged environment.
Drilling new wells will be the most affected especially the large LSD key projects.
But the production activities will get affected by the same scale.
On a marginal basis, they still have a very low cost of production per barrel. So these fields are going to continue to produce and they will maintain production and workover activities rather than drilling new wells.
Outside of the larger Mena region Africa has seen a significant drop and project cancellations.
West Africa will be heavily affected.
And I don't see any new deepwater offshore project being sanctioned in the near future.
Our limited exposure is to chat only when most clients declared fox measure, but in the overall scheme of things is insignificant tonnage.
As in any downturn pricing is going to be a topic of issue.
If not already with our customers and we have to ensure that we adjusted the market realities in the most optimal way.
Similarly, we are working to get the appropriate savings from our supply chain and align our partners and suppliers to the new reality.
All this is happening in parallel but overall, our endeavor is to reduce the total cost of operation and shared those savings with our customers.
Last quarter I talked about how we initiated and started executing our unconventional fleet operation in the affordability in Saudi Arabia.
We broke all records and did all this in a very short period of time.
All with a very innovative Capex light business model with our main partner next year.
I'm very pleased to report.
Yes, we have further consolidated our position and we have been assigned the primary work scope for the unconventional fracturing and Jennifer.
We have consistently outperformed our competition and brought significant innovation, making is similar to us plant efficiency to this very complex and eating offers.
To actually compare on a like for like condition.
Our customer conducted two separate Frac offs, where we went head to head without competition.
I can tell you that each time, we arrived late at the pad and finished before.
And let the pad while the competition was still fracking.
It is a clear testament to our execution capabilities and ability to project manage one of the largest oilfield service project.
Our customers are very wise.
And truly believe and leveraging the best of the words and the open source methodology to create differential outcome for themselves.
And if a local company does it even though it may not have the same pedigree our history as its larger counterpart even better.
And more commendable as that ties into that improving in country capability objective.
I would like to remind everybody that we did all this with truly innovative business models and not just by fleets and hands. This project has been accretive from day one.
We did this by capitalizing on merging our knowledge.
Experience and expertise with our partners, mainly next year for which the structure is also accretive.
If you look at this structure in light of today's environment. It makes even more sense than it already did.
So I'm very pleased with how this has panned out for us and our partners and most importantly, our customers.
And to further build on this we have already shipped a second fleet from next year to the region.
With plans to deploy it before yearend.
We have been in active discussions with our customers to put the framework in place to repeat the same performance and other fields.
Also as we mentioned in previous quarters, we made significant investment in our new countries of operation like Kuwait and to a smaller extend buffering.
Where we have delivered stellar performance.
In Kuwait, we are conducting our cementing contract at full tilt and our activity is more than three times, our exit rig assignment in Q4 of Twentytwenty.
In Iraq, we have started operation on our large integrated service contract with a super major which is commendable effort on the part of the team given the logistical challenge in the current environment.
In Indonesia, we have expanded our offerings by conducting our first cementing and while on operation outside of geothermal wells.
We also conducted a small profit frac operation to one of our clients.
Another great milestone and very close to my heart was the groundbreaking of our technology R&D Center in Saudi with the presence of the president of the universe to gear ppm, and all Aramco senior managements.
The center called Nori, which in Arabic means mine life.
And is set up with our technology partners to lead the way to develop and deploy custom fit solution for our customers.
Today, we have more than 15 technology agreement in place and nobody is going to be the anchor of our innovation strategy. Once we inaugurated in early 2021.
Also as most of you have seen in the announcement of the signing of the agreement to acquire successful one of the largest service company in Egypt, and the oldest oilfield service and region.
I spoke about that in details in the last quarterly conference call. So as an update we are presently working through the modalities of closing the transaction given several regulatory delays.
With this acquisition Nestle will have large footprint in Egypt, and that operation in Saudi Arabia, Uli and Kuwait are directly accretive with no or minimal overlap.
Digital action is also accretive from a cost perspective, as we will leverage the human capital and back office capability, which suppressed go invested a lot.
Chris will delve into the details about the numbers, but briefly before I pass on this the Chris I want to speak about approach to Capex and this brief new words.
Typically because of how our growth mobilization have worked out we have front loaded our capex to ensure readiness of these projects.
But going forward, we have already cut the second wave of Capex as we believe with our better utilization as well as the drop in the activity with a new at plant will present us with opportunities to arrange with partners or preclude the required asset at significant discounts.
With which we can cover to grow.
We are already working on for such deals and consequently, we have cut 30% of our capex for the year.
On that note I will pass the call over to Chris to talk about the financial indeed this.
Thank you Sharif.
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 measure 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 so Tesco in Egypt.
Despite increased costs related to covert 19, we considered all these cost as normal operations and make 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 relatives 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 have taken actions to reduce cost and these impacted markets to align operating costs, but current business levels.
Separately, our drilling in 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, Kuwait, and wireline and well testing activities in Saudi Arabia.
Adjusted EBITDA margins improved to 22% in the first quarter compared to 21% in the prior quarter due to a more favorable mix of revenue.
Depreciation and amortization increased to 29.2 million in the first quarter compared to 28.4 million in the prior quarter.
The majority of this increase was due to additions from capital spending.
We expect DNA to increased by approximately 2 million in Q2, 2020, and an additional 1 million in Q3 from equipment additions.
These estimates do not include any additional depreciation and amortization related to the surpass go transaction.
Interest expense in the first quarter was 4.5 million up slightly from $4.3 million in the prior quarter.
The effective tax rate for the first quarter of 2020 was 18.2% a decrease from the fourth quarter 2019 rate of 37%.
Based on current year full current full year projections, we expect the effective tax rate to stay at or below 20% due to the benefit of certain legal entity restructuring and other tax effects tax efficiency initiatives.
This resulted in reported net income of $11.4 million or 13 cents per diluted share and adjusted net income of $13 million or 15 cents per diluted share.
Turning to cash flows cash flows from operations for the first quarter or $9.9 million.
Operating cash flow decrease from the fourth quarter, primarily due to an increase in total receivables, which include unbilled revenue and retention.
Of $34 million.
Absent this short term increase in receivables free cash flow would've been 20 million in the quarter.
Approximately half this increase in receivables was due to the sequential increase in revenue.
However, we did experience some slowing of collections in March from covered 19 restrictions in the region.
Which were earlier and more stringent than in the U.S.
This impacted field ticket approval invoice processing and customer approvals.
In addition, the processing of the retention release payment of approximately 20 million was delayed but should be paid in the second quarter.
DSL, however, only increased sequentially by approximately seven days to 114 days.
While the collection cycle will continue to be impacted in Q2, there was an improvement in invoice processing in April in most areas.
There is also important remember that most of our customers are in overseas and large AOCF that have always pain, even as a process is a bit slower today.
In the second quarter, we expect to see strong free cash flow as collections, mostly normalized and put us back.
On our cash generation plans.
Capex for the three months ended March 30, Onest 2019 was 24 million.
In the wake up cobot 19 in of impact on oil prices and energy demand, we have reduced our original 2020 cash capex budget of 100 million by approximately 30%.
Net debt increased to $336 million at March 31, 2020.
Compared to $310 million as at December 30, Onest 2019.
Net debt increased quarter over quarter to fund accounts receivable growth and capital expenditures.
Overall debt balances remained relatively flat sequentially.
As of March 30, Onest 2020, our net debt to adjusted EBITDA ratio was 1.7 down from 1.8 last quarter and should reduce our target level of approximately 1.5 in future quarters.
Also we remained in full compliance with our credit facility financial covenants in Q1 2020.
So Tesco transaction is still expected to close during the second quarter.
Currently we finalize their audit of the financials are awaiting final regulatory clearances, which had been delayed the ongoing cobot 19 restrictions. We believe we have sufficient liquidity to fund the transaction with existing cash and credit facility and the transaction will be overall accretive.
Finally in response to current market conditions, we've been taking steps to maintain our financial strength and margin profile.
For smaller markets that have experienced activity declines we are rightsizing, our organization as well as redeploying assets to our growth markets, which will improve our asset efficiency metrics.
In all markets, we are aggressively negotiating and receiving discounts with both global and local suppliers on capex.
Products, such as chemicals spare parts and services such as equipment rentals.
Also as part of our working capital management, we are aligning supplier payment terms with our customer payment cycle.
We've also recently implemented new ERP tools to enhance the visibility of available spare parts across all countries to help reduce inventory levels and enhanced cash flow.
In conclusion, we are pleased with the investments we've made in Capex, new product line and new country entries that will allow measure the opportunity to grow and gain market share in this difficult global market.
With this I'd like to pass back to Sri for his final comments. 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 that 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 conclusion 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 the operator for your question Donna.
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Our first question is coming from David Anderson of Barclays. Please go ahead.
Hey, good morning Sharif.
Sure for a basin thinking might be the only unconventional basins in the wireless actually adding frac crews right now.
I was just wondering maybe you could talk a little bit about the success you've had there you talked about.
Second Frac, often which one that again I think you originate a long term contract and now you have what you call. The primary scope work scope for your force I don't know if there's a difference in that but maybe you could just trying to talk about what the differences here.
And why you were able to win those frac off 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 together. So how do you differentiate in that part of the world and how are you able to succeed there.
So thanks David.
In summary for Verizon is today.
As we all have all of you have seen is the development of.
Huge 200, Tcf hundred 10 billion dollar announced by the Kingdom.
The plan was always to have.
Two frac fleets.
Operating there for the foreseeable future and then it gets increased Wednesday, the drilling rigs.
The put more rigs on the pad and have the development go to the second phase, which is they announced twentytwenty for 2025. So today, what's happening is we answering your question. We had a second frac off basically us on the upside and our competitors fat or they take about than they split.
As into too and they see who perform better.
In delivering the number of stages and finishing properly with the best safety record et cetera, and we won the first one we want the second one which means the that they we were awarded or basically assigned to be the primary contract, meaning that we dig delever.
On completing those wells and if they have extra wells they call the second.
Fleet through the not adding any more fleets to dose to defer a basin and on the country they might slow down some of it but when they slowed down we do not get affected because we are the primary contractors. So the primary contractor meaning is the is the contracted that will not stop for the for the next two years basically so we are.
The primary contractor if that is any slowdown in drilling and the park one frac fleet its will not be us it will be the competitors.
If you want to.
I wanted to dwell on what why they are doing Dot then obviously they are moving between oil and gas periodically they are more than between conventional and unconventional gas for the other ugly as but the business model. So with the opposite cards. The expectation. Some of this project will get some delays so the key for.
For us is to.