Q3 2020 National Energy Services Reunited Corp Earnings Call
Anyone should require operator assistance for technical support Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Mr., Chris Boone Chief Financial Officer. Please go ahead Sir.
Good day, and welcome to <unk> third quarter 2020 earnings call with.
With me today is Sharif, <unk>, Chairman and Chief Executive Officer of any I'm sorry.
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 the question but.
Before we begin I'd like to remind our participants that some of the statements we'll be making today are forward looking these.
These matters involve risks and uncertainties that could cause our results to differ materially from those projected in each state.
Therefore, if you refer you to our latest earnings release filed earlier today and the other FCC filing.
Our comments today May also include non-GAAP financial measures additional details and 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 shrink.
Thanks, Chris.
Ladies and gentlemen, thank you for participating in this conference call.
We're very pleased with another outstanding record performance this quarter.
We grew at 35% year over year, and 7% sequentially, which is a phenomenal achievement given this growth.
Been delivered against the backdrop of computer industry surplus supply.
Compounded by pandemic related effects on the global demand.
I believe we are an outlier in that space.
We're delivering such result.
The rest of the industry, it's contracting with these headwinds.
[music].
Yes. They did we have a jeep that you did this effort of our deep underground we.
We not only have managed to hold the line, but I've learned to thrive in this very tough environment.
I can't speak highly enough or management and operation teams in each of the countries.
I am blessed to have touched talented individuals.
On the operations with an unmatched passion and dedication.
Most of our leadership in the country 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 roads at least in the community.
Just to give you an idea on how where do we have managed 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 one big acknowledge the best service quality provider this quarter by one of our main customers met.
Measured by Nonproductive time or MPT during operation.
[music].
Our main differentiators in our execution ability during the call but 19.
And then Dan income to put some capacity at all times.
We have been very clear that we would handle this crisis bike fundamentally more defined and strengthening our profit.
It's essentially a big emphasis on blinding short and long cycle.
We manage the recent curfews reinstated in some of the country.
The continuation of some board to shut down.
That's because these include changes or importing spreads are kinda goods on time.
Our crisis management team, it's been in full auction and so are the emergency response team in each of the countries.
And yet.
And this new enrollment there's an extra layer of cost you have to bad for corporate preparedness.
[music] [laughter] I, just missed the middle East and was with our customers in different countries.
By the time I finished my trip I have taken for good test and hot water team and couple of what that's for a few days.
I was very pleased to see my dealer clients and friends.
Thanks to our customers the give up the trust and the opportunity to serve them.
All this cost does add up even though we have a large local content in our company.
You also have to carry ambition that backup functionalities and the field in terms of personnel larger inventories some of which our suppliers scary and something we have to.
Meanwhile, you have to black for any eventuality of a second wave and the need to keep all these cost in place to ensure we are not thinking by surprise.
Ensuring the safety of our employees and readiness to our customers.
[music].
Coming to the macro which has evolved in some areas since our commentary last quarter.
I won't spend a lot of time on the demand and supply debate, but.
But as we know global economy is seeing a contraction due to the button that make certain.
Certain sectors like air dropped, but I've been affected severely with longer recovery ahead of them, while others like shipping have recovered much faster I.
Our view is.
Is that the demand would rebound sharply.
The market on their estimate how fast the demand will come back once we have a handle on the box.
The airports I'm not going to be always empty and people are eager to get back to normal life.
Although this one stabilize before we see a vaccine and more clarity on the potential second wave Hello.
The fact is.
Our industry continues to drastically under invest for six years now.
That for most of the rebound in energy needs will come from the Middle East.
As you saw in April I mean, the main players in the region have the capacity to 10 adult.
And meet the demand the most reliable supplier and.
And we believe that wouldn't be the case when the time comes again.
This could be sooner than many expected.
Meanwhile, as I mentioned last quarter, we continue to see the same pattern in the Mena region.
The gold you see markets have been measured and deliberate in their approach, we see more rigs released lately, but overall they run that business for the long term and the health of the countries and populations.
Others, the drop has been significant as expected.
I did this characterized by smaller independent or larger I, you see with significant budget cuts.
Security concern pandemic, three years, well gosh constrained than others.
We are seeing anywhere from 40 to even 80% cut in some of the activities.
Given our size and scale and also our geographical exposure, we are able to manage these activity reductions, but essentially gaining market share to either the same country or moving us into other countries, where do we have gained recent work oh, replacing competition, who can deliver.
On that work scope.
Best example, we managed to mobilize for our recently awarded coiled tubing and bumping contract in Abu Dhabi by marketing most of the resources internally.
This also helps our overall utilization would you have to balance with the need for adequate safety margin during this pandemic.
Last week, we announced that we extended our five main gone products in video for video the Upto nine years.
And we landed on additional contract interlocking, which gives us an option to further expand in that space.
These contracts, which are worth over 1 billion dollar.
Oh, the backbone of our operation in London, and our drilling segments.
It is a tremendous achievement for our money to work.
Working very closely with our customer got cheap and mutually beneficial outcome.
I would like to thank the Ministry and video for their trust and our abilities and for the guidance throughout the process.
This cement our foundations and ensure we can amplify autumn investment to achieve our goals Dumont didn't execute at the highest level of organization and in country value.
We have big plans to export the moneyed dialing to meet the needs of human capital in the region.
Today, we already have on Monday night working in separate countries.
Would be Harding I'm 20, more to ensure we are ready for the future.
As an example today all our thru tubing business across no. It's headquartered in Oman, and they support all our operation across the GCC and the larger me now.
We prove the model works and now we can do even more as we expand our offerings and contract duration.
As you have seen we have heavily invested in the social aspect of our business and engagement in the region and this is as GE an action with a direct consequence on the sustainability of our business.
Another example of net yeah. She commitment it's how we have taken our fracturing operation to the next level.
As you know we continue to break all operation rocket.
In terms of stage efficiency and was delivered.
Meanwhile, we looked with our customer how to continuously improve on the environment and.
[laughter] from smaller projects like solar lights, where our comps insights to our lead this endeavor, where do we have worked with our customer to optimize the frac design with cutting edge technology to effectively reduce the slick water fluid volumes by one third.
This means we are now transporting and pumping one third less water, which is more than half a mini about a month.
This hasn't materially affect in a water stressed area like the Mena region.
In addition, such fluid systems supported the reduction of the Frac fleet got one.
Brent by 30%.
The frac jobs are consequently shorter.
We are working on more initiative with our clients and our partners to implement different technical solutions to the challenges we face.
[noise], just keeping to the what that exactly but we are working very closely to come up with a solution do you as high sulfate water, well frac jobs, which would completely eliminate the usage of over half a million about a freshwater for these jobs.
And the same split it up optimizing and make fractures that Oh, we have recently invested in technology company called deep imaging.
Which we are going to shortly introduced to the region.
This technology allows us to monitor fracs, if they happened downhole in real time.
I knew this electromagnetic I raise on surface the matches the changes and reservoir as the Fracs are happening.
This will allow us to control the fracs in real time, which is the Holy Grail of Frac optimization.
It is estimated from public studies that only 60% of the frac stages produce as expected.
And this measurement technology would allow us to further improve the existing processes.
Another the company would you out Bartlett with developing technology to deploy downward pressure temperature and little bit centers during the frac jobs, allowing us to measure both the frac and flowback before.
Germany all this.
And to give the maximum value to our customers. We have also partner with Bill then cotton and bid been gotten lover arteries.
The Britain, Yeah, there's a bar consultants and has a state of the art laboratory in the unconventional reservoir space.
We are already working with them and the middle East for one of the northeast wanting the planning stage and we will continue to develop this across the region.
So as you see we had on the leading edge of big in the Frac technology into the digital age, which will help reduce both the frac footprint and contribute positively towards the larger edgy goals.
And where they cant boss investment is bearing fruit and this she anything technology is now sold in Gulf of Mexico.
As you May recall, K, BOSSS is making sheet anything around which would enable operators to sharpen the well if everything else has failed and that gives a blow out.
This innovation uses technology used in space programs and military application and applies to a problem in the oilfield environment, which has the potential to take a terrible human economic and environmental whenever things don't work has gone.
As in our norm, we invested in this company and now are in the advanced stages to take it to the region, where the customer wants to apply this technology to use it as a body or in each do s. environment, which when it leaks is known as the silent killer.
We have several other technology investment and partnership in the works, which we shouldn't announce in the near future.
They all have the same purpose.
How to solve our customers' problems using the most innovative technologies, which will help our clients do either produced more from the same reservoir or produce at the lower cost while reducing the overall carbon footprint of the operation.
Lastly, I wanted to give you a quick update on sabbatical, where do we have now fully close the transaction.
The integration is ongoing.
I'd already seeing the benefit of this outside of the men operation in Egypt.
Our customers in Egypt, and outside have received the transaction quite well.
And we have leverage that position to either win some awards orbitz for some tenders, which previously ness would not qualify for.
So a great start and we have big plans to expand that and that's just surface portfolio outside Egypt.
And on that note I will pass the call over to Chris the profit the financial did this.
Thank you. Thank you sorry.
As rich mentioned, we reported another record quarterly.
Revenue record.
Third quarter revenues of 218 million this.
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 quarters contribution from some petco and our new contracts in Kuwait Abu Dhabi.
The 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 integration costs associated with the acquisition of some pascoe and 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 cost related the COVID-19, just as employee testing rotation cost feel lodging catering and standardization.
We consider these costs as normal operations and it made no adjustments to EBITDA for them.
To mitigate the impact of these incremental costs and roofs reduced activity in some markets. We have been successful in finding opportunities to reduce costs in areas such as equipment rentals transportation field facilities.
These supply chain efforts continued in the third quarter with improved pricing relies on certain production related product costs.
Moving to our segments 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.
Sequential and year over year growth is primarily related to frac activity in Saudi Arabia, and the new contracts in Kuwait and Abu Dhabi.
This was partially offset by lower activity in Iraq in North Africa.
Adjusted EBITDA margins for the production group were 29% in the third quarter.
While margins were flat sequentially lower margin pass through revenue associated with Frac activity grew as a percentage of total production revenue in the third quarter.
This impact was mitigated by less contract startup costs for the conventional fleet and other cost reduction efforts.
Separately, our drilling and evaluation segment revenue of $70 million. In Q3 was also a quarterly record of 9% compared to the same quarter last year and sequentially.
The increase over Q2 is primarily related to a full quarter benefit from so pepsico and higher well testing activity in Saudi Arabia.
Adjusted EBITDA margins of 24% in the in the third quarter were down slightly from 25% in the prior quarter, mainly from a less favorable revenue mix.
Depreciation and amortization increased to $32.2 million in the third quarter compared to 34.4 million in the second quarter.
Most of this increase was due to a full quarter impact of DNA from some pascoe.
We expect DNA to increase by approximately $1 million in the fourth quarter compared to the third quarter run rate primarily from new Capex additions.
Interest expense in the third quarter was 3.8 million down slightly from $4.2 million in the prior quarter, primarily from the benefit of lower interest rates on life more.
Our effective tax rate continues to track well below the rate seen in 29 team as we continue to optimize our tax structure.
The reported effective tax rate for the first nine months of 2020 was 21% compared to 23.4% in the first nine months of last year and the full year 2019 rate of 24.9% there.
The increase over the first half rate was primarily due to an unfavorable mix shift of income earned in higher tax jurisdictions.
Based on current full year projections, we expect the full year 2020 effective tax rate to be similar to the year to date rate.
This resulted in reported net income of $11.7 million or 13 cents per diluted share and adjusted net income of $14.2 million or 16 cents per diluted share.
Turning to cash I will initially review the impact on Q3 of the closing of the surpass got transaction.
First we paid 11 million for the closing cash obligation.
Second we made 4 million of post closing installment payment.
Third we paid off 11 million of the 21 million assumed bank debt.
These were funded by available cash from operations.
In the fourth quarter, we expect to make 4 million in additional post closing installment payments plus possible other earn out payments.
The remaining $10 million of assumed bank debt will be paid in the third quarter of 2021.
The issuance of the closing shares will occur in the fourth quarter of this year, but are already included in our share count for EPS.
Switching to operating and free cash flow both were down sequentially, but we were pleased to generate positive free cash flow of 9 million, while still investing in our sequential revenue growth and our capital spending program.
Also since the onset of the pandemic, our cash balances and net debt have remained relatively flat, even with our revenue growth and the funding of this the pepco transaction.
During the third quarter, we added approximately 12 million in net working capital mainly through additional receivables just so to support the 15 million sequential increase in revenue.
And higher VAT receivables in Saudi Arabia, as the V.A.T. rate increased from 5% to 15%.
This was partially offset by a corresponding increase in accounts payable.
Included in the working capital addition, with certain inventory purchases to both support our higher level of activity, but also to ensure we have sufficient supply of production chemicals and spares in case of any disruptions from a second global covert way.
Capital expenditures in the third quarter were 24.8 million. The majority of this cash spend was for payments of Capex received or ordered in 2019.
And the first nine months of 2020, we have only authorized approximately $30 million and new commitments, which is about one third of the original plan for 2020.
We expect free cash flow to increase sequentially as the fourth quarter is typically the highest collection quarter of the year. Additionally, our customers payment processes continue to improve as inefficiency from Covance are mitigated or result.
Net debt increased slightly to $349 million at September thirtyth compared to $342 million at the end of the second quarter.
Net debt increased sequentially, primarily to fund these working capital investments.
As of September Thirtyth, our net debt to adjusted EBITDA ratio was 1.7 flat from last quarter and should reduce to our target level of approximately 1.5 in future quarters.
Also we remained in full compliance with our credit facility financial covenants in the third quarter.
Moving to MSG during the third quarter, we added significant new SD disclosures to the nets or web site.
These disclosures will help our investors and the rating agencies better understand how does or does business and its commitment to MSG.
As we look into next year Nasser will expand as executive compensation disclosers by voluntarily, adding a CEO pay ratio, which we believe will show we have one of the lower sector ratios.
And adding a say on pay votes to our proxy.
As we have highlighted before our executive compensation is highly focused on achieving performance targets with participation in short and long term incentive plans carried down into the organization and not just with the executive team.
And that's where he is doing is not just about achieving certain ratings, but also how we manage the company every day for the sake of all of our stakeholders.
In conclusion, Nestor again strongly outperformed the market in revenue growth and margin so our regional focus and strong operational execution, while still generating positive free cash flow.
Yes, I'd like to pass back to Sri for his final comments.
Thanks, Chris.
In conclusion, I would like to leave you with key takeaways.
We continue to manage the corporate situation better than anyone else and.
And we didn't plan already for wave two just in case.
Ensuring we would 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 and the different segments and deliver on the recent contract awards.
We continued to invest.
Hire and train national talent to fuel our growth maintaining the highest standards and E G commitment.
On that note I'd like to pass it onto the operator for your questions. Thank you.
Thank you, we'll now begin ducking your question and answer session, if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if youd like Trimble good questions from the queue for participants using speaker equipment may be necessary to pick up ahead.
That said before pressing star one one moment. Please what we poll for questions. Our first question today is coming from James West from Evercore ISI. Your line is now live.
Hey, good morning, Sri when Chris.
Hello, Good morning, James.
So sorry, if I wanted to get a quick update on the simulation.
Work you're doing in Saudi.
Number one 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 I didn't catch it but the relationship with deep imaging, which as you know we noticed as well.
Is that already in place is that taking place in Saudi ores that broader to the region and kind of how does that rapid with what you and the next year.
Are doing with the stimulation work in in the region.
Thanks, James So.
For our Frac, we have two frac fleets running and Saudi Arabia today.
We have one dedicated to the gym affordable season, and one does that get it to the Telco award or what do you call.
I think it was basically a frac operation both are running extremely well.
Just with our customer and.
As we said we broke all the records that has been effort and the middle East region, and working very closely with our customers. So.
You know I really really thank them for their trust and 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 is as planned so we should be continuing with this operation.
Blind.
The you know the country has big plans for for the gas.
They always announced that from the path and the keep the same announcement, obviously the will they might dealer. This activity based on the needs and this is definitely up to them.
As for the deep imaging, yet we have a relationship with them we did an investment in the company.
Almost now its most of the year now and we look very very carefully on what they can do and the plan is to take them to the region.
No and showed the client should the customer what what this technology can do.
Definitely they had they had to slow down but because of what happened in the last year, but our plan is to get the crew and to go dead and showed declines what could be done.
Okay. Okay fair enough and then maybe one for Chris on a 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, if that's what the transaction.
Could you maybe talk about what's your expectations are for.
Or where they maybe came in late in the third quarter, where we could see some upside going forward.
Sure I mean.
Obviously, when we when we provided some guidance last quarter we.
Werent, assuming we hit a 218 million revenue. So obviously there was a fair enough build in working capital support today and yes.
Yes, we didn't really.
This product.
Try to go into Super Technical but you know for example, there's VHP rate change that was about 4 million dollar impact on the quarter.
No it's sort of a one time thing is as those balances, there's just some timing impact between receiving and paying the 80.
So those are really the NSN or 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 those are the primary collections were about where we expected we would like to have maybe a beat and a little more on the on our collections targets, but they came in about as we expected.
Fourth quarter as we will eat is usually a very strong quarter in collections and.
We expect a stronger free cash flow.
In the fourth quarter.
Okay perfect.
Looking forward to it thanks guys.
Thanks James.
Thank you. Our next question today is coming from Sean Meakim from Jpmorgan. Your line is alive.
Thanks, Hey, guys.
Hi, Sean.
So on the broader neenah trajectory and and how it will influence your own in the coming quarters. As you said in the prepared comments here.
Expecting a faster return to activity then 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.
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 was in terms of being able to.
Retain that market share in activity recovery.
Okay, Sean so if I if I look at our let's look at for example, our results today. Our Q3 results is plus the 85% year on year.
With a minus.
You can say, 20% to 25% activity drop right. So that's a deviation which is a completely separate or I would say opposite to the market why is it up with the market.
Two main reason first of all it is.
I would say as our scale.
Being smaller than the big the Big guys you can target a lot of the contract that we recently awarded so you can you deliver on them then you're going to gain market share based on your on your side.
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 so anywhere from 5%, 10% just Tom had almost 50% said they own.
We will shut down or they are almost half of that accrues. 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 on board and these competitors could not manage and then we just won a lot of contracts over 2019, and we started to build.
They put 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 fracked business in Twentytwenty. So obviously the difference and that gives you the magnitude and that you can clearly see it from the production so it's a pretty.
It's a three 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 the gosh. Some of the small service company. They didn't buy any any inventory any any chemicals, we were ready.
As Chris mentioned now for example on the free cash flow today I prepared already for we have to.
So if somebody comes and let's see what happens in Europe, and the Middle East, which is God forbid, but it's not going to happen because theyre very actually very brutal it better in their approach in closing borders and nobody is traveling and did the airports are closed so I don't and if you look at the rates. They have today is very very low I mean, you're talking.
A day that's it so if I I don't think they will have a second wave, but let's say they do have a second wave im ready.
So I already bought our our our chemicals, we bought the inventory we have products for more than six month in each of our countries and we would be able to deliver on any product somebody got delivered we would be able to jump in and in addition, we as I said, we won a lot of contracts that we are going to be able to.
But the lights on and that's why I said.
They said what do I see for the future growth and we see similar approach similar growth refied year on year growth sequential growth and you would see this in the coming quarters.
Thanks, not sure if that's really helpful and then I.
Im interested in.
Hearing a little more about the industrial portfolio expansion was supposed to go outside of Egypt.
I'd love to hear about how that can unfold.
What is the addressable market look like are you able to leverage your existing relationships to me to work with new contacts and trying to get a sense for this growth lever and how it out unfolds.
Upstream opportunities are more limited near term.
Hey, Colby will be interesting to hear more about.
Yes, sure so so as.
As you as you know.
So fiscal guys have very amazing track record in Egypt, and the industrial Arena, we took the port for you. Obviously you know we just closed the transaction and we've been working on it since June.
With declines in the different GCC market how to dig.
That qualification and that's what I tried to mention in my remarks, and Dell declines now I have 2030 years experience in that business. So you get qualified and you get to the bid the list that they never even called you before.
And now today, we launched this to all the GCC and to North Africa, Algeria Iraq.
Libya, even now in India opened so.
Now we are qualified so that footprint that we have today that is the best I would say definitely outside the big City, we have the best footprint now in the Mena.
And every country. We have that are presented to every country. We have a gun to direct that every country. We know the clients. So we put that qualification that process that experience to the glide. So now we are invited to the list we are already bidding.
In seven of those projects, so weve bidding in Algeria, we are bidding in Saudi with bidding in Kuwait, we're bidding annuity. So we are bidding on those project what happened why I would say my if you give 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 project, we're the first to be cut from the clients. So if you look at the budget of our main client. They can see the lot of the project mainly on the new project off of downstream and that's the biggest part did you gain from the industrial clean it's actually one.
It's it so if you look at for example in Egypt. The biggest revenue they ever made Tabasco was Dr. field you know when they when they had the discovery.
And it will be an eye for the east Mediterranean guys. They have to do the purging of the pipeline that is within 16 month, because the president of the country wanted to integrate and they wanted to break all the records for having.
That platform on time, and they did that and actually everybody worked on it so thats gone other companies and it was the biggest revenue.
Scheme, So I would say in the time, we would take us in the next three to five months is to make sure that we are in the bid list on all these countries and we will be able to land a couple two three project in Twentytwenty, one and outside Egypt, and that's our target for the guys is obviously much.
Other than that we ask them for 20 project. So let's see how that you can deliver.
Hi, guys marketing, Sean it's $300 million right. So it's quite significant.
Got it thank you very much.
Thank you. Our next question is coming from David Anderson from Barclays. Your line is now live.
Hi, Good morning, Sharif morning, sorry, sorry.
Doing good I am doing good so the middle East rig count down 20% during the quarter. Your revenue continues to Rob you explained before how you have a bunch of contracts coming on and I guess I explain part of it but I was wondering about the rig count in 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 been mostly oil rigs in the fall. So maybe you can talk about kind of the gas versus oil mix.
Mix in terms of drilling and kind of your exposure to that but secondarily really wondering about maintenance spending.
Is that something that's been pulled back.
And is that something that will come back first school here a lot of skepticism over investors about spending in the middle East. It seems to me that general view that there's so much capacity I don't need to do anything for for a long time. So maybe you could kind of talk about kind of a different part of kind of I'm speaking sort of general middle East, but I'm kinda talk in Saudi.
Okay.
So I'll talk middle East so.
If I look at if I tell you the easiest one first.
Oil versus gas I would tell you for our sales net we have absolutely no difference. So we work on both.
The exposure is exactly the same so there is no difference for us its a.
The mix the only make the only difference for us it's really exploration big.
Thank God.
Well like offshore deepwater.
Versus normal land operation. So I would say this is the project that would cut significantly and if you look back.
Just to go to your other part of the question what happened at the Middle East and I said this before they always cut the big nice to have project and they got the downstream that they don't meet right. So thats exactly most of them. That's what they did so if you look at the offshore new project.
They were all pause point, they're not canceled that was pulled their push back you look at grades you look at our mine.
Yes, and others all of these guys. They just push those project to 21 or 22, they don't need them now its exploration for new places and new frontiers. So all this stuff is pushed back. If then you look at what most of declines and I again I would go GCC.
And did they.
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 skepticism about the maintenance et cetera, but the invested here they look at it as if from a like as if it's an independent company. It's not an independent company the National oil company that has a lot of aspect.
On the activity that is it from a social.
Aspect, it's not from a pure economics, if they talk from a pure economics, they can select the rig count by 70% and that produce they don't need anything actually you know they can run with 20 rigs and they would reduce it million bucks.
They do not do that they look at the sustainability of the business. They look at it the employment. They look at so many other aspect if I look at the amount is the same so the rig counts is minus 20 minus 25%, which is quite significant actually for that region, because usually they cut only 5% to 10%. So when you got to minus 20 minus 25% that's what.
They did they would they got more the mightily off another five 5% or so rigs because they will definitely be able to produce.
Now if I look at the guys. The guys again is and then third and then.
Resource for internal consumption, the only outlier to that this Qatar everywhere as the guide is needed for internal consumption. So they will not change any of the project off the gas.
If I look at overall.
Overall, how do I see I see that they are definitely preparing for readiness of the other side if.
The the comeback is much faster if I look at how the spend its flash everyone else in the world If I look at the supply.
Destruction, and and Moon is going to be able to come back I would say in my personal opinion, the only region that would be able to deliver that nobody else would be able to do that if you were not going to go in and invest in a deepwater project in West Africa.
Today, you Didnt do this last year or last three years, you will not do it today, but if I look at the activity and the ability to put back the production is definitely there and that ability as well to put back those rigs is very very fast most of the rigs that were not.
Not deployed in the middle East are warm stacked and not cold stock. So they are very simply able to put them back once they need them. So.
So I would say I don't know if I answered your question, David but I mean, I would say the activity is going to have a come back much faster than what people estimate and that it it looked a lot of social aspect to it and I think if you look at North Africa, and Iraq. It cannot get any lower I mean, Kurdistan is zero Iraq.
Bus route is minus 80% rig count Algeria, Egypt, Libya it's.
Almost minus 50% minus 60% and obviously as you saw Libya is coming back.
And already they produce another million barrel and they have the plan to get back to 1 million butter, which means they need to add 20 rigs or so plus the workover and SP Ginger.
I'm just curious about your plans on the pressure pumping fleet, you've talked about four to five by the end of next year.
How do you feel about that is that number up down sideways.
And maybe just kind of a little update on kind of how.
No the operations the below quite well or if there's any update.
What that's looking like over the next couple of quarters to be great. Thanks.
Thanks, David I would say we see.
The 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 will be adding another one or two.
So today I still see we're going to be four to five fleet by end of two anymore.
[noise] fantastic. Thank you.
Thank you Sir.
Thank you. Our next question today is coming from George O'leary from Tudor Pickering Holt. Your line is now live.
Morning, Sri morning, Chris.
Morning.
Piggybacking on David's Frac fleet question I was going to ask the same one but just.
The expectation 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 fees will go outside Saudi Arabia.
Okay, great. So our plan our plan hopefully and obviously that depends on the client.
But our plan hopefully the additional fleets would work outside Saudi Arabia.
Okay.
Great a quick break any of the answer I appreciate that and then.
Yes.
For just underlying activity in that Mena region in the fourth quarter. Finally, we started the third quarter higher than we ended it given the 22% average decline.
For Q.
Q4.
What's the kind of underlying activity expectation fully realizing that's not necessarily what Nasser, we'll see in their business.
Oh, Okay, I mean, I would say I'd say, if you recall in my first quarter comment I would I always said that the activity first quarter would be the best of the year.
Opposite to previous years, however for US we our plan is to maintain gross.
Growing over the over the over the year like we did before and so far thats. What we are delivering so we're delivering exactly what we said I would say the fourth quarter is similar in the sense.
<unk> activity is not going to get better.
I would say on the country some of the 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 thats. It you know, let's not spend more than what we did.
In our.
Keith I don't see any difference as I said from our trajectory we will have growth.
Sequential.
No we.
We don't see any issue even if that 50 gets dropped further if the activity does not drop 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 these putting any.
Any money.
In the next two month, it's only two months left.
And.
The rest of the GCC is very very stable.
I wouldn't say increase I would say just step stable activity for us we will have an increase.
Okay.
Great that's very helpful and then.
And one more if I if I could just.
M&A and then kind of the pull through of the server 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.
The challenging market that we base that created incremental opportunities for you guys or how would you describe it.
So.
M&A, it's very Uh huh.
I would say in the U.S. definitely we had.
We get the kind of invaded by by opportunity, but we have no interest as.
As we always say except to buy supplies or resources, but we are not planning to do anything here unless the company. 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 Ross It Joe.
In the geography and Thats when we buy a company is there are there upward.
Opportunities there are plenty not like the U.S., but that is separate and those we are negotiating with two or three.
Negotiation and the Middle East Dickstein, what's different is that you need to have due diligence, we do a very detailed due diligence in dose and today, we are not able to do that because there is no profit right. So I don't I don't think we're going to land anything.
And the next quarter or so right.
If I look at what we do in the US you have a two part once you have the technology partnership that we talked about and we do see several today, we have an investment than four companies. So we put money in for companies. We don't buy them, we put money in them to get that technology like if we see so basically I wanted to acknowledge.
For it to be.
To to it to happen at some of the innovation, we want that 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.
Two by 10 cents to the dollar.
But we think that that's capex, we don't think this is eminent.
Very helpful. Thank you Sherri.
Thank you My next question today is coming from.
From BTG Your line is now live.
Yes, good morning, guys.
So you you talked about the significant contract awards.
Any 19 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 the pets go 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 two.
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 as you expand on that portfolio. So the best example is online right. So today we have this.
Fantastic.
An operation and we managed to extend those contract for a decade right. So it's unheard off I mean, the glide never did so today, we have all these contract now for 10 years coming right. So what are you doing these contracts some of them you expand the portfolio and some of it actually.
Ordered that exact same example of a month, we actually added it full scope of drilling contract into our other contracts. So our expectation is to deliver on those in.
Reduced all this technology on 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 month for to have a twod and then you have that to reduce ended there. It has to work and it has to be competitive.
And it does to work as good as the others or even better once you have that you get part of the pie.
So.
The landscape of of work of market is huge.
And I keep repeating this this is a 20 billion dollar market, we are not even 5% of it.
So having that now the infrastructure, having the image having being like I would say the darling of a lot of the nrcs.
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 it.
Tool to make that happen so as I said until our 2 billion dollar revenue Mark is achieved I don't see any problem with the growth trajectory.
Great. That's all that's very helpful and then as far as the fleet that you mentioned the additional fleets.
That would be dual frac outside of Saudi Arabia.
Would they be as profitable as the one that you're adding this year given that they are.
From what I expect not likely to be working on unconventional field leadership for us. So they wouldn't have as many stages per well could you talk a bit about that.
Okay, so outside the whole middle East.
Sure.
Only Jeff for US is a multi pad wells like the U.S. everything else in the middle East our single ones. So any contract you hop any frac business you have will always be single wells is it multistage it did moderate but the it's a multistage middle East rights, which basically some of these wells.
ZAR six stages, some four stages and yes, some of them on one page, which is a single truck right. So the brides prestigious completely different and the structure of the fleet is very different. So I would say you can you can make the same.
You have this improved 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 is stage every two weeks.
So you do do stage with lead by month, but definitely the stage is not a 55 key like you have here in the U.S. right. The stage is like a one and a half million dollar. So it's a totally different structure totally totally different set up.
And each country is different.
Great that is very helpful. Thank you I'll turn it back.
Thank you as a reminder, that star one to be placed in the question queue.
Our next question is coming from Blake Gendron from Wolfe Research. Your line is now live.
Yes, hey, thanks. Good morning. So my first question is on margins they seem to stabilize even though your topline growth trajectory is just on a different level relative to the rest of the sector, it's hard to isolate the segments.
Extra that production services will continue to see stabilized margins, you'll you'll add some frac capacity, maybe there are some cost plus.
Sort of dynamics in there on the other hand, you're going to see some scale absorption and operating leverage in India needs, a little bit tougher to it.
Pinpoint margins it tends to be a little bit lumpier and seasonal but perhaps instances like the PD l. contract will allow you to get.
Higher technology exposure in the realm as we look out 2021 2022, I know your bogey is just flat margins and you're more focused on the topline growth, but what.
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.
Okay.
Okay. So blake thanks.
I would say similar answer if I look at the end.
If you get to be more on the E and more on the higher end of the.
Your margin will improve.
So you are you have to be in a technology provider.
Higher end.
In 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 and some of those services.
Actually our profitability ended the ne is higher than the best guide.
So it's kind of shocking that you are running basically what you used to call in the olden days don't mind, but you have the hybrids profitability then 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 I would I would they see couple of percentage points like we have between 2024 22, maybe sometimes jumps to 26, yeah 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 a higher margin and production when we didn't have the frac and all the revenue.
Fourth we were basically as you know very well all the hauling water land comps all the stuff. We 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 country. The now they see more efficient.
And see they see more the stage count being delivered that better than anyone else I think they might actually see can they do even more right.
The one thing I would say Blake that we have significant costs.
For the covered 90 and I know we are again, maybe the only ones that don't call it off but I make it part of my business.
And I look at it and I just give you. The example, when I was in the Middle East myself I dusted four times, an estimate on how much they spend I mean, it's been just on testing.
And on me right. Every does is 300 bucks to under $50. If I look at how many that I did last month and the company added 2600.
So if I look at how many people do I test today, just to keep working anytime you have suspected case.
On the rig what we do is we go and test every single person they have to quarantine until Thats. The result is negative when they are quarantining, we have to put another crew to operate until they are clear all.
All this we absorb we don't pass this to the customer we picked that cost and we took that cost and our operation as part of our operation. So.
I would say you might we might have.
An improvement year on margins when you dig this cost out, but I don't want to you know to.
To to do I would say.
I just like to stay if Brian if we managed to keep that growth profile and maintain that.
Profitability margin that is my and my in my books I think it's the highest in the industry today I think were very happy.
That's totally fair on that 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.
Just a quick follow up here, if there's time on free cash I want to approach it from a different angle.
Hey, we got a second wave say some of the organic growth opportunities fall by the wayside It next year.
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 competence in the free cash flow elasticities relative to growth would be would be great to nail that 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 rates, we plan on.
Maybe the 70 $75 million range that's.
That's what we've said could it be higher sure, but I would require we win more contracts and have other things to support.
So thats about where we see next year.
So if I if I may add Blake you know.
The best way to look at it is always the rule of thumb of maintenance Capex is 2% to 4% depending on.
On your segments, depending you on the high end low and 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.
It didn't do it to make sure that declines trust, our ability to deliver that if something happened.
And I am I know that a lot of people came in to tell me you are adding all the equipment and I said no I'm not getting a lot of equipment I know, what you're doing because we know the customer very wet so our deep knowledge of the customers unmatched I would say is second to none so and that worked very well for us and Thats. How you see this revenue growth like this.
Hey, with that at a certain level with a certain stability, we would be able to be an amazing way that youre, adding now only for technology and for something to to change and maintaining that growth profile. So I would say next year.
This growth profile of this year, we will only spend 70 75 million Bucks.
If we do if something happened and we don't grow as much that capex would be much lower.
Got it that's that's that's helpful and encouraging I'll I'll turn it back.
Thank you. Our next question today is coming from Jeff federally from Peters and company. Your line is now live.
Good morning, guys. Just a couple of quick follow ups on the Capex side.
What are your commitments at this point for the rest of this year going into 2021.
This is Chris will be obviously, that's part of our our quarterly filing disclosures.
But there are approximately I think we disclosed in the APC, there's about 20 or so million that is committed not were not received now there is some additional LC payments that flowed 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 orders got similar to what you saw this year longer the there will be 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.
Okay and are there any other projects.
So what you're contemplating.
Sure.
Yes, well, obviously we've discussed.
In addition of a third fleet.
So that would obviously be one that it's not in our numbers yet.
Thank you we have reached the end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.
Thank you very much.
Out of time, so we're very very excited about the future. We look forward for a continuation of the of our growth profile.
In the coming quarters next year. Thank you very much.
Thank you 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.