National Energy Services Reunited Corp. — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; quarterly financial results are not clearly provided in the supplied filing text. Financial statements are prepared under U.S. GAAP and reported in U.S. dollars.
Business context and period comparability
NESR provides oilfield production, drilling and evaluation services, primarily in the Middle East and North Africa. It acquired Sahara Petroleum Services Company (SAPESCO) effective June 1, 2020. Because acquisition accounting created a new reporting basis in 2018, comparisons with periods before the 2018 business combination are not directly comparable.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $834.1 million | $658.4 million |
| Gross profit / margin | $155.4 million / 18.6% | $151.6 million / 23.0% |
| Operating income / margin | $67.5 million / 8.1% | $71.8 million / 10.9% |
| Net income | $50.1 million | $39.4 million |
| Basic and diluted EPS | $0.56 | $0.45 |
| Cash from operating activities | $133.5 million | $89.1 million |
| Capital expenditures | $90.3 million | $107.9 million |
| Cash and cash equivalents at year-end | $75.0 million | $73.2 million |
| Total assets / equity at year-end | $1,687.1 million / $944.4 million | $1,522.4 million / $886.5 million |
At December 31, 2020, reported borrowings were $398.5 million, versus $383.5 million a year earlier; current available borrowing capacity was $29.1 million. The balance sheet showed $359.4 million of current liabilities and $742.6 million of total liabilities. The filing reports $47.5 million of long-term debt principal due in 2021 and $42.4 million of short-term debt and interest obligations due within one year.
Material changes versus FY2019
- Revenue increased 26.7%, mainly from higher hydraulic-fracturing activity in Saudi Arabia and additional drilling and evaluation activity there. SAPESCO contributed $26.5 million of revenue from its acquisition date.
- Cost of services grew faster than revenue, rising to $678.7 million from $506.8 million. Gross margin contracted to 18.6% from 23.0%; management attributed the change primarily to revenue mix. Depreciation within cost of services rose to $105.0 million from $72.2 million.
- Operating income declined 6.0% despite higher sales. Net income rose 27.2%, aided in part by $9.1 million of other income, primarily the reduction in estimated SAPESCO contingent consideration. Interest expense declined to $15.9 million from $19.0 million.
- Operating cash flow rose by $44.4 million. Investing cash outflow was $103.6 million, including capital spending and SAPESCO acquisition payments; financing cash flow was a $28.1 million outflow, compared with a $66.6 million inflow in 2019, when the credit facilities were refinanced.
- Unbilled revenue increased to $158.5 million from $76.3 million, while accounts receivable rose to $116.8 million from $98.8 million. Management cited increased unbilled revenue as an offset to operating cash flow improvement.
Outlook, risks and unusual items
- Liquidity outlook: Management believes cash on hand, operating cash flows and available credit facilities will be sufficient for working capital, contractual obligations and planned capital expenditures over the next 12 months. This is management’s assessment, not quantified earnings guidance.
- Customer concentration: Four customers represented 76% of FY2020 revenue; the largest accounted for 57%. The business is also geographically concentrated, with 98% of revenue from MENA. Many contracts may be cancelled or renegotiated.
- Market and operating risks: COVID-19, oil-price volatility, lower customer capital spending, geopolitical and currency risks, operating hazards, regulation, environmental and ESG developments, and dependence on skilled staff and suppliers could affect demand, costs and operations.
- Debt and liquidity risks: Borrowings carry floating rates; the filing identifies $395.5 million of LIBOR-indexed loans and discusses the planned benchmark transition. Credit agreements impose leverage, debt-service-coverage and interest-coverage covenants. The revolving facility was fully drawn at year-end.
- Acquisition and accounting items: SAPESCO purchase consideration was reported at $40.6 million, including cash, shares and estimated earn-outs. The acquisition added $46.2 million of goodwill. Total goodwill was $620.9 million; no goodwill impairment was recorded. Management estimated reporting-unit fair value at $1.4 billion in its October 2020 test, versus market capitalization of $544.2 million on that date.
- Contingencies and controls: NESR disclosed ordinary-course legal disputes for which losses could not be reasonably estimated; management said a provision was not required and expected no material impact. Management concluded disclosure controls and internal control over financial reporting were effective and reported remediation of a previously identified tax-accounting material weakness. SAPESCO was excluded from the year-end internal-control assessment; it represented about 3.2% of revenue and 5.7% of assets.
- Shareholder returns: The company does not expect to pay cash dividends in the foreseeable future. There were 87.8 million ordinary shares and 35.5 million warrants outstanding at year-end.
Important facts for investors to verify
- Whether the increase in unbilled revenue is being converted into invoices and cash, and the collectability and aging of receivables.
- Customer contract renewals and exposure to the largest customer, alongside the concentration of revenue in MENA.
- Debt maturities, facility availability, covenant headroom, floating-rate exposure and LIBOR transition terms.
- SAPESCO integration, final earn-out settlements and the assumptions supporting goodwill and other acquired assets.
- The margin effect of service mix and higher depreciation, and the sustainability of operating cash flow relative to capital needs.
- Progress in incorporating SAPESCO into internal controls and any developments in tax examinations or legal contingencies.