Q3 2021 National Energy Services Reunited Corp Earnings Call
Greeting.
Welcome to the L. E S. Our Q3 earnings call at this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to your host Christopher Chief Financial Officer. Thank you you may begin.
Thanks, Alex and good day and welcome to <unk> third quarter 2021 earnings call with me today is <unk>, Chairman and Chief Executive Officer of any MSR.
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.
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 reconciliation 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.
It is available on our website now I'll hand, the call over to <unk>. Thanks.
Thanks, Chris.
Ladies and gentlemen, good morning, and thank you for participating in this conference call.
The global commodity outlook is stronger than it has been in nearly two decades.
On the on site as predicted more than a year ago, all the under investment and supply gap, along with North America capital discipline will lead to significant supply deficit, which will consequently cogs activity increases starting later in 2021.
And this is what we are seeing now.
As we have been very vocal about it Mena region will carry most of the load primarily because our customer always have taken the long view and have invested in spare capacity as well.
Stunned that nobody but them, we'll be able to fulfill this demand, especially in the short term and they can sustain it longer than anybody else.
This would put pressure on the talent and equipment from service providers to deliver on these needs, which as you know is a function of the health of the service industry.
And that had been doing since the beginning of the pandemic.
Always wanted it to be physically with our customers listen carefully to their plans and needs and feel the pulse of the evolving energy dynamics.
This quarter is no different.
I spend a lot of time and the fees and the different countries like Saudi and UAE, Oman, Egypt and Libya.
Additionally, we started to have face to face industry forums, and I'm glad that I was able to attend and present in most of them.
I can tell you that everyone without exception is extremely bullish on the activities. They want to secure adequate resources to ensure deliverability of their objectives and also very focused on meeting their ESG goals and commitments.
They are reviewing and discussing the service industry strengths and weakness and running proper sensitivity analysis on the different scenarios.
This again reminds me of the 2005 Super cycle.
I also led leadership visit to Libya to see all the customers in the entire country.
We spend a solid week with the NRC and all the operators and visited the remote field locations. We wanted to ensure we are therefore them at the highest level and we understand what is needed to restore the production to previous country Hot.
We are discussing together multiple approach and new business model, given the nature of the activities and the fastest way to revive the production from shut in wells.
Additionally, we are reviewing how to have a paradigm shift and using the existing resources enhancing them capitalizing on the fact, we have 100% national trained workforce that understand the subsurface and the facility constrained.
We have placed a multi disciplined team to look at the entire value chain and proposed solution to our customer.
Meanwhile, we are looking into the water scarcity using flare gas and how could we produce in the different fields and this is a sustainable manner.
Overall, we are completely aligned with our customer in the region for fast activity increases in the coming quarters and this feedback from recent customer meetings gives me confidence that.
Outlook is very strong as we had predicted previously.
No. It is on us to demonstrate our industry, leading localization and execution at <unk>.
National champion of Mena.
Since we front loaded our capex as I have said before.
<unk> remains ready and nimble to meet the demands of our customers, who will look to push activity and production capacity to new heights in the coming year.
We continue to invest in human capital and equipment as we are convinced that this cycle will last for several years and the talent gap will truly be felt very soon in the industry.
Next I want to turn to the ongoing cop 26 climate summit and how the industry can be a total game changer and pushing the word than humanity for the energy transition.
Clearly governments around the world are elevating the important issue of climate change, which will most likely result in laws and regulations that further incentivize green spending, particularly in Europe and North America.
What the market may not appreciate is how our forward thinking customers in the Mena region are also taking leadership roles in the energy transition.
We have all seen the Saudi Green initiative, demonstrating its commitment to its people entered the word.
I was impressed with the level of details they laid out their plans.
Aramco again as the World leader explained how committed they are to achieve net zero and how they walk the talk and put credible targets and how they will achieve it.
<unk> you also saw a recent announcement from the kingdom on their plans for using the gas from <unk> for generating blue hydrogen.
And as you know neon already has aimed to build the largest green hydrogen facility in the world.
The key now is to remain pragmatic on how best we use our resources to achieve what is best for the humanity. We do not want just to pass the emission from one area to another what we want is to lower the overall carbon footprint and how to achieve that while looking at all other angles from eliminating waste.
And elevating the lives of people under the poverty lines.
As I spoke in my Habergeon panel during the future investment initiative in Riyadh last week.
S can play a major role in actually realizing this vision by.
By taking the produced water and using the electricity generated from heat from the producing gases and facilities along the gas feedstock to provide the essential ingredients for this endeavor.
Our thesis is that the industry can leverage existing infrastructure and production streams to support the production of new energy like hydrogen.
We have invested in technologies to delivered part of this workflow.
And I personally see a great opportunity by leveraging all this new tech and measured with our existing footprint technical Knowhow and more importantly project execution capabilities.
This is where the next ESG impact comes in after we launched this new segment in January of this year <unk> partnerships and investment in separate technologies.
In particular in the water space, where I strongly believe our industry can play a vital role, especially in a water starved regions like the middle East.
I believe once we prove the economics and separate project. This segment will be as big or even bigger than our other two segments.
Our esteemed customers play an enormous role in the existing economies and they are all and will be at the forefront of development and adoption of Green technologies.
Which will enable the transition with the aim of not only the largest oil and gas companies, but also the largest full spectrum energy companies in the world.
On the water side following the previously announced and ongoing water pilots in Iraq, and Saudi we have been in continuous dialogue with customers enquiries and proposals for additional projects in the region.
A key feature of this water market is that we are bringing new technologies in front of oil and gas producers.
So it's a market that we are essentially creating alongside our tech partner that today do not exist.
And emission detection witnessed this need by analyzing the Mou with another IP partner, which we should announce shortly at the back.
To bring CHD, an edge to edge detection capability to the region that is moving quickly to both quantify and reduced scope, one and two emissions and normal upstream operation.
Similarly, we are also moving quickly and they're in a flare management and elimination and I believe that there are fantastic bundling opportunities with both emission detection and flaring.
Progress across all ESG impact sub segment is being driven both bottoms up by nuts, and continuously canvassing and evaluating the new energy technology landscape and also top down from forward thinking customer partners.
Net flexibility and nimbleness is key and having this discussion and in bringing new ideas to the table.
Our open technology platform much like it has enhanced our oilfield service portfolio is also the key element in bringing new innovations to the EOG impact discussion.
Now I want to turn to another key theme.
It is driving both our strategy and our positivity for the future, which is the progress we have made in our <unk> segment with a number of key technology investment breakthroughs and partnership.
That will completely transform our capability in this segment.
So far in 2021, we have announced marquee technology alliances and the direction drilling tools with Phoenix Energy Service company that continues to break records in them and now doing the same in EMEA.
And altera the U S leader in drill bit technology.
Over the last couple of years, we decided to invest ourselves with some of the most innovative minds in the industry to come up with new state of the art Downhole technologies.
One of these investment is around rotary steer, but technologies and what could we what you could we bring to the industry.
Historically typical development cycle has been in the range of several years five to seven normally.
Our aim was to do that in less than three years.
And I'm glad that we have recently tested our innovative artist as tool with one of our customers and we managed to deliver do well ahead of time with superior performance.
We continue to test the tool with other customers and we believe we will have a commercially viable leading edge Rss in the very near future.
The tool is designed to have minimum maintenance cycle and greater dogleg than existing tools in the market.
This will complete our portfolio of drilling technologies and enable the company to enter that space.
So with a market leading motor.
Market, leading bit the latest generation Rss, we feel fairly confident that we can offer our customers alternatives with the same quality and service delivery they have witnessed from us in the production space.
Recently, a new contract awards highlight the strategic focus of ours.
During the third quarter, we announced more than $150 million and D&A awards across Black line tubular running services and testing with several key NOC partners.
In terms of innovative breakthroughs, we decided to increase our investment in <unk> pressure control.
They had successfully.
<unk> deployment in deepwater and it's receiving multiple order from several clients. We have implemented successfully multiple trial in Saudi for the fit for purpose device for continuing operation. This technology is relevant in all the basin globally. As this is essentially a true environmental ESG technology too.
Take the probability of blow out to zero.
We see ample opportunity to put this technology through in areas with higher to us.
And those approximate to local communities given the clean safety and reliability feature of this technology for.
For some of our customers. This is transformational as it now allows them to access reservoir, which were off limits before.
Another seed investment we have done is ice settlement harvesting, where do we add a significant shareholder and will form an anchor for our offerings around the hydrogen opportunities.
This has now progressed with patents being granted and is generating significant interest from not only oil and gas, but industrial and power generation space.
In one study by utilizing the heat generated by power plant. This technology was able to deliver an additional 10% to 15% power versus what was previously being generated.
To summarize.
Our industry fueled the growth of the world and is the most reliable energy source.
Along side the oil production, we do generate associated gas, sometimes wished it and with each barrel of oil we produce the reservoir water that is again not use all the time and we generate a lot of heat from the well all the way along the Pacific chain to bring this product to market.
We are everywhere in this chain and we can take these raw materials to help our customers deliver the plans and properly reduce the carbon footprint.
Carbon capture and storage is absolutely essential.
Furthermore to the industry has the infrastructure. It just made economical technologies and the regulatory framework to put all these together and deliver on the ground.
On that note I will pass the call back to Chris to talk about the financials.
Thank you Sherif.
Turning to our results we reported quarterly revenue of $218 million. This was flat over the prior year quarter and 7% down over the second quarter the sequential.
The decline was primarily driven by lower unconventional frac activity.
Really offset by higher activity in Kuwait.
Adjusted EBITDA in the third quarter was $49 million or 22% of revenue.
This represents a decrease from 26% in the prior year quarter and 23% in the prior quarter.
The sequential decline was primarily driven by the leverage impact of lower production revenue.
EBITDA adjustments of $5 million for the quarter were mainly for head count restructuring costs non capitalized bold project startup costs in certain markets.
Transaction and integration costs associated with our recent Kuwait acquisition.
Non capitalized <unk> SAP and.
And Sox implementation costs, and certain noncash FX charges due to currency weakness in Libya and Algeria.
Moving to our segments. Our production segment revenue for the third quarter was $138 million declining 7% over the same period last year and 10% over the prior quarter.
The sequential decrease was primarily driven by lower frac activity.
Adjusted EBITDA margins for the production group were 26% in the third quarter down from 27% in the prior quarter.
As we maintain our current manpower structure in anticipation of improved markets in upcoming quarters as clearly highlighted by <unk>.
Separately, our drilling and evaluation segment revenue of $80 million in the third quarter was up 13% compared to the same quarter last year, but down 3% sequentially.
Adjusted EBITDA margins of 21% in the third quarter were flat sequentially.
Depreciation and amortization increased to $36 7 million in the third quarter compared to $35 1 million in the second quarter of this year the.
The sequential increase was primarily related to additional DNA from the recent Kuwait acquisition as well as the impact of additional employee equity grants.
We expect DNA to be in the $38 million range next quarter.
Interest expense in the third quarter was $3 7 million up from $3 2 million in the prior quarter due to higher debt levels.
The reported tax rate for the first nine months of 2021 was 19, 7% excluding the net benefit of adjustments of reserves on prior year taxes, our reported tax rate would have been 22, 9%.
The sequential increase in our tax rate is due to an unfavorable shift in income across tax jurisdictions.
We expect to approve upon this rate going forward as the income mix shifts more favorably and through the benefit of certain tax planning initiatives.
Adjusted net income and EPS, which includes the impact of the noted EBITDA adjustments were <unk> 7 million and <unk> <unk> per diluted share.
Switching to free cash flow, we are pleased with another quarter of positive free cash flow generation of $17 million. This brings the year to date cash generation to 64 million compared to $11 million in the first nine months of last year.
While we continue to improve in our invoicing and collections.
<unk> increased by nine days over the prior quarter level.
Still bringing the year to date DSO down 18 days, a strong accomplishment by the whole nesser organization.
This sequential increase was primarily driven by the impact of summer holiday processing delays, we expect to see the DSO levels improve in the fourth quarter.
Capital expenditures in the third quarter were $18 million down slightly from $21 million in the second quarter.
In the fourth quarter capital expenditures should increase to approximately $45 million in line with our full year estimate of capital expenditures near $100 million.
We continue to expect free cash flow in 2021 to significantly increase over 2020 levels due to flat planned capex continuous improvement on fleet utilization and improved DSO.
Net debt decreased to $326 million at the end of the third quarter compared to $335 million at the end of the second quarter.
The sequential decrease was primarily from higher net cat cash balances from the free cash flow generated in the quarter.
As of September 32021, our net debt to adjusted EBITDA ratio was one 6% flat from one six last quarter.
Also we remained in full compliance with our primary credit facility financial covenants in the third quarter.
As was noted in the press release, we're extremely pleased with the refinancing that was recently completed this quarter.
We are proud to have entered into a green loan facility as part of the broader refinancing which is based on certain sustainability key performance indicators encompassing environmental social and governance metrics.
With the addition of two additional banks to the syndicate and increased commitments from our existing lenders, we have expanded the term loan capacity by $175 million.
Our revolving credit facility or Rcs by $15 million and the working capital facility by $140 million.
We will utilize the additional term loan funds to repay the current $65 million Rcs balance.
$10 million of term debt acquired through the <unk> transaction and $36 million of short term debt, leaving approximately $64 million of additional cash plus the full $80 million Rcs to fund additional growth opportunities in 2022 or pay down additional short term debt.
We will not be required to make any term loan amortization payments until the first quarter of 2023 and the term loan repayment period has been extended by two years.
The increased working capital facility will provide us more capacity to issue Lcs for contract bids and awards.
Also we are pleased with the progress we have made in our SAP project we.
We have implemented the system in countries, representing approximately 80% of our revenue.
We expect all of our operations to be using the new system for 2022 transactions.
This will provide us a common and enhanced platform that will facilitate sox compliance in 2022 and provide opportunities to enhance financial reporting and analysis.
In addition, we will be able to improve our back office efficiency by centralizing certain functions that were impractical went on multiple ERP systems.
Lastly, as you've already heard from most reporting companies the activity bottlenecks from supply chain impacting our short term growth are transitory and we believe that burgeoning capacity tightness will give away to service pricing improvements in 2022 and beyond if the Oss industry as a whole states disciplines.
In the interim as we've shown with our margin performance, we will stay vigilant on cost control and equipment deployment will be prioritized to margin accretive opportunities.
Also we will continue to strategically invest in our <unk> segment as part of our long term growth and portfolio strategy.
We believe strongly that the next six months will be an inflection period and conversations. After this period will be dramatically different than what we've had in the last two years for the industry.
And ESI has drilled strongly grown through the tough times for the industry and we firmly believe that the next leg will come from how well we deliver on our core as well as new endeavors. We are squarely focused on this.
In conclusion, we are very pleased with even stronger finance or health of our balance sheet and the financial markets' appreciation for our strategy and outlook I will now turn the call back to Sri for his closing remarks. Thanks.
Thanks, Chris.
To conclude the Mena region will be an even more prominent engine for oil and gas.
Particularly given detailed and favorable feedback from my most recent visit to the GCC and North Africa.
Secondly, as we have heard and seen from Cop 26.
And decidedly Green initiative transition is here and although oil and gas will be an integral part of the global energy picture the industry as a whole has to view this as an opportunity to evolve.
And our customer our whole heartedly embracing this leading the change within our industry.
For net with steady progress in our ESG impact segment, we can clearly see how we can leverage existing energy infrastructure and expertise to not just pass emission from one spot to another but to totally reduce the carbon footprint of the industry for the benefit of the word and humanity.
Third and finally I am extremely excited about the progress and result of our investment in the drilling and evaluation portfolio, especially our Rss given this was delivered in a record time.
Meanwhile, our investment with our partners have been well timed for the coming Super cycle.
And now I would like to pass the call to the operator for your question.
Thanks.
Thank you.
At this time, we'll be conducting a question and answer session.
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Our first question comes from the line of James West with Evercore. Please proceed with your question.
Hey, good morning, guys.
Good morning.
Sure.
We've heard from some of the larger service companies about their outlooks for 2022, you are clearly in the your business clearly the focal point of where the growth will be at love to hear your thoughts on.
Both spending growth in the Mena region, and 22, and what that means for equipment tightens.
And then of course, but I guess that leverage on the pricing.
Thanks, James Absolutely the region is going to go as I said as they spend on their spare capacity and as they are looking forward in 'twenty two 'twenty three you're going to see a very sharp increase in my in my view and my visit that.
My talks I am talking about the significant double digit I mean, it might go in some countries above 30%, 35%, so while it depends where you start.
Some of those are for example, obviously the bigger ones will have a less percentage and the smaller ones will have a much higher percentage than the one that had problems will have a very significant so if I look for example countries like Libya I wouldn't be surprised of our more than 100% growth year on year, because youre talking about.
<unk> the shut in wells, adding rigs.
Trying to get the budget approved and then obviously with this oil price.
These guys make some serious money right. So so.
It's going to be seen as for the service industry.
You wouldn't see the same.
Growth pattern, Unfortunately, because of pricing so pricing discipline is not there yet.
What are you just going to see as you are going to see the pricing happening after the equipment tightness, so and that's why I predicted last quarter. It usually takes six months for the equipment and talents to dry up and caught up with the activity increase then you would see pricing capturing all of the large tenders.
Today has seen a price deterioration.
And sometimes in the $25 50%.
Okay, Okay understood and then perhaps.
Somewhat unrelated follow up but you touched on.
Saudi and then Blue hydrogen initiative and I know that you're all over this and how you guys can leverage your skill set.
And to help some of these.
He is in countries move forward with their hydrogen plans could you maybe elaborate.
A bit more because this is a I think this is a huge theme and something that's underappreciated by the market the oil service companies roll in.
The burgeoning hydrogen economy.
You're absolutely right and I was very fortunate to have that have been in the panel during the FYI, Saudi great future investment Forum and initiative and I was with the CEO of Aramco and <unk>.
That panel, we discussed actually how the hall as you rightly said the market totally under appreciate that the whole infrastructure of having the.
The gas infrastructure that today exist for example, in Saudi and how you're going to dig this either if you go to the blue hydrogen with the feedstock and then separated and how you do the carbon capture all of this comes to to what to do how to understand the subsurface how to inject.
<unk> how to put this into.
A lot of activities. If you look at the Green and this is what I'm advocating that region starved of water. There is no way I'm going to use our own plant and use electricity to get water to be able to make green hydrogen I mean, that's basically again, we're passing from the emission from one spot to the other what you have.
Need to do rise again, the energy sector itself use that water and can we use the heat from all the facility et cetera to harness it and make something out of it. Besides obviously the renewal, but it's not this to replace this but we can use the infrastructure I think the service.
Company will play a big role in that and Thats why we are advocating and we are discussing and definitely as I said, Saudi really has a very big leadership in that.
Great. Thanks, Rick.
Yeah.
Thank you. Our next question comes from the line of David Anderson with Barclays. Please proceed with your question. Thanks.
Thanks Al Good morning Sharif.
So expanding unconventional gas developments didn't kind of one of the more prolific elements of your growth strategy growth story in the middle East that <unk> been talking about kind of adding fleets in Saudi in Oman.
On our call a couple of weeks ago Schlumberger talked about how they had won a large unconventional tender in Saudi and another one in Oman.
Question on a lot of People's minds, just kind of what this means for your growth strategy can you just kind of talk about that and kind of just address that issue head on please thank you.
Sure So as I explained earlier.
And calls what we have on what the market is having in the middle East and is it growth.
<unk> growth in the unconventional the fracturing business and have been.
I mean, even in your conference I think I explained that this is going to go five to 10 X right. What it is so if today what did we do for ourselves as nuts we.
I said, we're going to have three to four fleets before the end of the year and Thats, what we have today I have four fleets running.
Have.
Two fleets in Saudi the third fleet are actually going to start. This started are going to start in the next week and we have a fleet and Oman working for our clients as we are awarded a contract.
In Oman, and we are actually fracking as we speak so today, we have four fleets in the region.
Three in Saudi and one in Oman.
We predicted the difference here what people misunderstand or underappreciated is the size and the scale. So the big feed is definitely the <unk> and this is where it is very equivalent to the North America type of fleet, which is obviously, what we have accomplished with <unk>.
Our with.
With our client with a ramp over the last couple of years is a breakthrough is together we managed to get to this 10 to 12 stages a day that that is unheard of in the previous slide of all the company. So a ramp obviously lead that in a big way what is what's happening and obviously I'm not commenting on others.
Comments are awards, but I can tell you what happened is the Saudis, obviously decided that this is going to be a huge contract and multiple awards as they did in the last bid has to be awarded so multiple companies were awarded that scope. So the same <unk> that is come.
<unk> now for a huge scale up.
Announced publicly multiple companies were awarded indefinitely.
I mean declines are very smart so they manage to to get to a very solid price concession to be able to because of the scale.
Okay. So the pie is getting bigger in unconventional it's not that you're not getting shut out by any stretch. Your just the scope is getting bigger in other words I would imagine your slice of that pie is going to get bigger as well.
Yeah, they're basically the whole contract.
Is much bigger and as you know I mean this contract people have to understand is what what we have been doing over the last couple of years was a multiple award as well it was not one yards. It's just because of the performance we managed to be the sole provider and the scope was available for if you like for one provider now the scope as much.
Much bigger and they managed to slice it a separate right. The issue becomes the scale becomes the difference of the who gets bigger pie.
It was usually sometimes it's the cheapest one right so.
And then that scale the prices as I said the ramp was very smart so they they managed to get a very good price concessions.
That's not surprising thank you very much for clarifying that.
A little bit more specific though on the Saudi rig count I was wondering if you could just kind of provide a little bit insight.
We don't have a ton of.
The numbers I don't really trust on the Saudi rig count numbers that we see can you just kind of tell us what's going on on the ground I think we're expecting kind of <unk>.
Some rigs to come into September and maybe kind of a slug of more coming on by year end can you just kind of bring us up to speed on kind of what youre seeing on the ground in Saudi in terms of the pace of that ramp up and is it kind of what you were expecting is a little slower just any kind of insight onto that that youre comfortable sharing will be really appreciate it. Thank you.
Obviously, I mean, I would comment obvious debit that Saudi as a public company and they would definitely announced wherever they would like to announce what they will tell you.
Is on the <unk>.
The activity is very evident.
The plans.
I always do is.
It's very long term and they know exactly which increments.
Where to put the rigs the facility et cetera. They do this in a very coordinated manner.
And I would say they are world class in that so what we are preparing ourselves.
Preparing again for that increase of activity to ensure that we have the equipment in the ground. So on the ground. So I ordered a lot of those equipment at the beginning of this year and as you have seen from our Capex number. Despite the fact that you don't see it because theyre all the delay of the supply.
Gene that happen and the way the accounting works, we're going to dig the capex only when it arrives so we don't see that you don't see it in our capital, but everything I ordered already was order then January February March. So we're going to have we're going to take delivery of all of this equipment in the fourth quarter and the first quarter of next year.
Which is basically RMB I'm ready for that sharp increase of activity. So whether this gets delayed a bit because of COVID-19.
There is some shifting here and there, but at least I know I'm ready because I know activity is going to increase.
So it sounds like you think we're sort of on the precipice of sort of a little bit of a timing issue, but it's pretty clear to you that this is coming.
Absolutely okay. Thank you.
Thank you.
Our next question comes from the line of Arun <unk> with Jpmorgan. Please proceed with your question.
Yes, sure if good morning.
I wanted to maybe start clearly nesters engaged.
On the new energy opportunity set in Mena.
And so I was wondering if you can maybe help us frame.
The near term versus the longer term topline opportunity set for you over the next.
Couple of two or three years.
Thanks, everyone.
Thank the immediate.
The new segment, what you will see because obviously these projects as you know it takes time.
If you look for example at the hydrogen and et cetera people are talking about 'twenty six 'twenty seven until you really materialize and see those project into into into motion. What I think from a service company from US I would see that you will see the top line.
Very evident on the water project, because thats I think in my opinion no brainer people.
The industry has to do this immediately it's really we have to do that you would see this in the flaring youll see this in the <unk>.
Emission.
<unk>, Inc.
And with the geothermal so I am very excited with the geothermal as well.
The latest patent that we got with ice is impressive.
The that's happening and I would say in 'twenty, two and more into 'twenty three 'twenty four you would see more of the carbon storage and all the other activity that comes through the whole value chain of the new energy and again im repeating them here talking.
A lot of it has to come that the existing oil and gas needs to be greener.
And that is so much to be done for for that I mean, you just saw the cop 26 with the minus 30% methane. How are you going to do that you would need to stop all of this.
Pop up balls, and flaring and some of the operation.
At a time, where it's 80% of that comes during that period and if we have the tools to stop that and monitor. It immediately you have a quick win right and that is I think where we are very focused and that's why we have so many partnership and we did invest a lot of money for the last now two years and I see.
This is going to happen from next year. So the two pilot project will be paid in Iraq, and Saudi so that will be already revenue from 2022.
Great and just my follow up is I know, it's Sri if you and your team had some boots on the ground in Mena.
And so I'm just trying to as we think about our modeling over the next you know.
Six to eight quarters trying to think about some of the.
Near term pressure.
Pressures you faced on Covid, and just general inflation and then your point about the business hitting an inflection point at some point in.
2022.
Any sense of how the margin progression could trend and maybe about.
In terms of timing when would you expect to hit that inflection point.
Okay, So definitely COVID-19.
As an issue right and defense of.
Moving instead, incent and sense of.
Extra cost and as we said in a couple of quarters, we still carry that.
It didn't go away and we still carrying it testing.
A lot of it.
It used to be paid by the government now it's paid everything is paid by the companies. There is no more subsidy on that.
We still have the hotels, we still have the.
For some of the time, so you'll have to test the people every week when they are on the rig side et cetera et cetera. So all this cause I think experiencing some technical difficulties. Please standby.
Okay.
Yeah.
Yeah.
Yeah.
Ladies and gentlemen, we apologize for the technical difficulties. Please standby our conference will resume momentarily again, please standby the conference will resume momentarily.
Hello.
Hello, Sir you think Chris you May proceed.
Should I go ahead Arun.
Your line is over and you may continue I apologize for any inconvenience.
Yes sure. If this is a rune again hopefully you can hear me I was just.
I wanted to get your thoughts on that.
I heard your question, Okay, great I want to make sure I'm answering I don't know if you heard my answer.
You got cutoff, just maybe midway between the and the second question. So okay. Okay. So so what I was saying just to try to.
We're saying that yes, the COVID-19 cost is there and yet the supply chain bottlenecks are severe youll see a 300% cost increase for our the containers from China for example on a lot of our suppliers.
The <unk> and the rest of the word the pipe is ridiculous.
The cost inflation.
So between transportation and raw material is very significant.
The increase obviously, we manage it we talked to the long term partners to manage this properly, but the key again I mean, let's not be there's no secret here. The key for all this inflation and all of this increase of calls and all of this is to align the pricing.
You have to understand that the industry has been dropping prices since 2014.
That is seven years of dropping prices. So now when there is a big tender that is the sort of this <unk> type contract and you know that your cost is increasing but then the leader of the industry grow and dropped the price by 30% don't expect there would be any margin improvement.
Right. So the key difference the difference would be that the industry itself has to be able to recoup some of this cost inflation, because you cannot push your supplier and your provider or any any any more right and honestly speaking some of the shipping companies today.
<unk> very clearly take it or leave it I mean this is the new price and if you don't like it we have so many other industry that is requiring shipping. So just wait at the bottom of the line. So that's I think what is the key for US we are going to be as we said very selective.
And maintaining the discipline to ensure that we can.
Keep growing but without deterioration our margins.
Great. Thanks, a lot.
Yeah.
Our next question comes from the line of Taylor Zurcher of Tudor Pickering Holt. Please proceed with your question.
Hey, good morning, Sharif and Chris and Thanks for taking my question. My first one is on <unk>.
The technology a partnership strategy that you continue to make a lot of progress on in recent months, you've announced a couple of cactus and Altera and I guess I'm curious where you sit in this.
Sort of strategy moving forward, you've got a number of them under the fold now and you know moving forward should we expect you to continue to explore additional avenues with respect to incremental technology partnerships to kind of round out the portfolio or are we kind of in the latter innings. When it comes to these sorts of arrangements.
Yeah.
Thanks, No definitely youre spot on we are very very very focused in our strategy since the beginning of the company the established well run companies in North America.
Solid credible execution.
Solid credible technology, we will partner with them to go to the Mena region and proposed dose fit for purpose technology to our customer.
And I always repeat that we are not an agent we are not.
Water right. So this is we had a technical company, we look at this technology and and check them check. This person has what this company has what does it fit for the phase in of the Middle East where from that bids and this would fit and we look at this technology and proposed and then put something.
Locally so well done to be able to execute it and it is well need in the sense of I want to be sure that has a localized people trained et cetera et cetera look at our so.
So Phoenix is.
Been doing a great job in North America, I think they are almost.
<unk> has a leadership in helping the U S land.
Jared the same with the drilling bids we are we are dead now offering this to our customer.
Cactus with again with the leadership position they have and we are they have the trees rigged up and the frac in Saudi and we're getting them to other countries et cetera. So that is the type of partnership and we keep exploding. This all the time now we are discussing and some of the.
The companies with new energy and other stuff and obviously, we don't announce until we signed everything so the agreement has to be credible people.
And it works for both of US transparently very equally for example, let's look at I will look at my friend, Robert and next year. So we decided to do that together in in Saudi and we decided to do that in other places and then.
Very very smartly met for example, they are getting extremely extremely busy.
And in the U S and we decided together.
Let's have a new arrangement, where basically you take over the fleet financially. So I don't have to keep it basically I buy the fleet from you and we keep all the workflows all the training we trained all the national people they've been doing a great job people go back and forth between North America, and Saudi and.
And we have all the set of software all of that Knowhow, we don't want to reinvent the wheel right to everything that is whatever the latest technology comps, we work together and again very very solid partnership and and then we decide maybe after that for example, like next year or I want to deploy.
For the time being I'm very busy pricing is getting traction in North America, I'm extremely happy and now, but you're right. We'll keep the partnership and when do we do it next this is the type of partners and the type of technology, we want to do what to me just two two.
To conclude it.
What is so important for us with what we wanted to do in house as well and Thats why I am like Super Super excited when I went and visited our Rss.
Our Rss is going to be something new like really something new and I don't want.
Once we have.
A track record of commercial one and then we are going to make now a very viable alternative solid RFS tool to the industry and that is what is the key. So then you can complete the portfolio go to the customer with Ed with the things that are well established but did something.
New to the table New innovation, then we tell them by the way we have a rotary steer but that can go to this dogleg can have a low maintenance hour and can drill the wells faster.
And very professional and this is where we want to be so partnership with solid people and innovation when it's something that I know that they can do get something new to the customer and it's not just the me too then I go and tell them, we have a full portfolio.
Good to hear and that's a good segue into my follow up which is on our rotary steer bowls.
The rotary <unk> market I imagine is largely dominated by I don't know if that's big.
Big Boys in the Middle East and.
It's not like you're new to competing with those guys but.
For Rss certainly at the higher end of the technology spectrum. So I'm just curious if you could frame.
Frame for us what sort of features with your tool might be a little bit different than what's currently out on the market and I tend to think of Rss is requiring some some element of R&D investment on an ongoing basis just to stay competitive with.
Sort of the leading edge technology curve and I'm, just curious if you'd agree there and who how youre thinking about potential incremental R&D investment for our assessment before.
So obviously without giving all the secret sauce. So what we did is we put that investment two years ago and with the with partners.
And the way. It works is we have a setup, where 100% you have to continuously invest and improve the tool.
On the ongoing basis, and that's why the way we do it is not our our innovative R&D setup is basically we have the setup here in North America, we have the partners.
We are small I would say part of equity holder of the company itself and we have the tools to use it in our in our middle East and they are they can sell and they can run the jewel in North America, and others and that's how the whole setup works what features the stool will have.
Lee it's.
No secret, what's rotary steer but.
Today. The difference is is it what type of mechanisms do to steer how can you stay within.
Is it.
A couple of feet, what how you get a very solid and homogeneous hole to be able to have a good <unk> and good casing running after that and then the dogleg right. So our tool will have a superior feature and any and every single.
Piece of that once we commercialize so and my expectation is in six months. So we should have the tool commercialized launched in six months as a commercial tool and this will allow us to go after that market in the middle East, which is a couple of billion.
<unk>.
Got it good to hear thanks for the answers.
Okay.
Our next question comes from Igor Levi with BTG. Please proceed with your question.
Good morning.
So to start could you provide a little bit.
Additional color on how the two water contracts.
Our contract in Saudi and the Brian contracts in Iraq are progressing.
Progressing.
And as.
As far as the revenue ramp up from that into next year.
So.
Ireland in Saudi is.
Rigged up as we speak.
And we are going to run the pilot.
And as soon as then it proves the scalability than definitely then we see which.
Which part.
That we should start with on the on the scalable.
Set up right. So I would say the revenue would come from January but.
It's obviously to start at a very small small number and then until you get the scalable plant on the Brian contract in Iraq.
With our with the one of the Supermajors.
Is.
Today is being constructed so the revenue will come maybe in Q1.
When it's a.
Fully functional and as I said this is very innovative in the sense that it's real.
Real EOG and action, that's what we really like which is basically you are going to replace what used to be done for years and years with something so innovative removing all you don't need to truck the salt you don't need to truck.
All this wasted energy and take the produced water and takes the aquifer unused water, if you like and make Brian and send it to the different fields. This is I think is going to get so much bigger because of the increase of activity.
And in the different fields in Iraq, I mean, now with the oil price.
It's a no brainer that you know they will you will see a significant increase of activity in Iraq going forward.
Great and.
You also mentioned that ESG could be bigger than the two other segments.
What is your roadmap to get there what has to happen and do you think youll be there by 2030, we're at 50 plus percent of your sales are driven by the ESG segment.
Yeah, I mean, if you're talking.
With all what you heard in the last couple of days and Cop 26, with all the infrastructure that the <unk>.
The sector has to do.
To leverage and capitalize on what they have existing and if I look at the amount of carbon capture and storage the amount of emission control.
Again, nobody talks about that but I'm still very.
My personal opinion. This is the low hanging fruit is the water.
Projects and if I look at all of this in addition.
I am <unk>.
My personal opinion this is going to be bigger than the other two segments by by 2030.
Great. Thank you I'll turn it back.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Shari photo for closing remarks.
Thank you. Thank you. Thanks, Alex Thanks every one.
We are again extremely excited.
<unk>.
Remember this is a super cycle whoever were around in 2005, and this is going to repeat itself. So good time to be in this industry. Thank you very much.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.