National Energy Services Reunited Corp. — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; the supplied filing does not provide clear Q4-only financial results. Amounts are in U.S. dollars unless otherwise noted.
Business context and reporting basis
NESR provides oilfield services and equipment, principally in the Middle East and North Africa (MENA), with additional Asia-Pacific operations. Its businesses are reported in Production Services and Drilling and Evaluation Services.
NESR acquired NPS and GES on June 6, 2018. The filing presents pre-acquisition NPS results as the “Predecessor” and post-acquisition consolidated NESR results as the “Successor,” using a new fair-value accounting basis after the transaction. Consequently, the periods are not directly comparable. The combined 2018 figures below are simple sums of the two reported periods, not a single comparable audited annual presentation.
Financial performance and position
| Metric | 2018 reported periods | Comparable reference |
|---|---|---|
| Revenue | $348.6 million Successor period plus $137.0 million Predecessor period; $485.6 million combined | 2017 Predecessor: $271.3 million. Acquisition and differing reporting bases limit comparison. |
| Net income | $35.0 million Successor plus $6.7 million Predecessor; $41.7 million combined | 2017 Predecessor: $28.4 million. Net income attributable to shareholders was $35.1 million and $7.6 million, respectively. |
| Operating income | $53.4 million Successor plus $12.8 million Predecessor | 2017 Predecessor: $40.2 million. |
| Gross margin | 29% Successor; 24% 2018 Predecessor | 2017 Predecessor: 26%. Period and acquisition accounting differences affect comparability. |
| Operating cash flow | $40.8 million Successor plus $20.8 million Predecessor; $61.7 million combined | 2017 Predecessor: $83.2 million. |
| Investing cash flow | Cash used of $66.6 million Successor plus $7.9 million Predecessor; $74.5 million combined | 2017 Predecessor: cash used of $52.0 million. |
| Financing cash flow | $50.6 million provided by Successor; $5.7 million used by Predecessor | 2017 Predecessor: $32.1 million used. |
| Cash and liquidity | Year-end cash $24.9 million; current assets $299.6 million and current liabilities $223.1 million | Year-end 2017 cash: $24.5 million. 2018 working capital was approximately $76.6 million. |
| Debt | Balance sheet loans and borrowings included $270.3 million of total long-term debt before current installments, $45.1 million current installments, and $31.8 million short-term borrowings | Management described borrowings as approximately $300 million. Debt is principally floating-rate and subject to covenants. |
At December 31, 2018, total assets were $1.343 billion and total equity was $831.0 million. Goodwill was $570.5 million and acquired intangible assets were $138.1 million, making impairment assumptions relevant. Segment EBITDA, a non-GAAP measure used by management, was $102.3 million for the Successor period and $30.5 million for the Predecessor period.
Material changes versus prior periods
- Reported 2018 revenue includes GES only after the June acquisition. Management said combined-period revenue excluding GES would have been $389.2 million, versus $271.3 million in 2017.
- Higher coiled tubing and stimulation activity supported Production Services; stronger well testing and logging activity supported Drilling and Evaluation Services.
- Successor gross margin was 29%, versus 24% in the 2018 Predecessor period; management attributed the change mainly to business-line revenue mix. Successor SG&A was 11% of revenue, versus 15% in the Predecessor period, reflecting integration savings and revenue growth.
- Interest expense rose to $14.4 million in the Successor period, compared with $4.1 million in the 2018 Predecessor period and $6.7 million in 2017, reflecting higher rates, additional facilities and acquisition financing.
- Investing cash use increased, driven by the Business Combination and higher capital expenditures. Combined 2018 operating cash flow was lower than 2017, primarily due to working-capital movements and other net-income reconciliation items.
Outlook, risks and unusual items
- Management described 2019 international E&P spending, particularly in the Middle East, as potentially stronger than 2018, but cautioned that lower commodity prices and customer capital discipline create uncertainty. No numerical company guidance was provided.
- Management reported integration actions after the acquisition, including expanded customer contracts, integrated field operations, support-staff rationalization and supplier re-tendering.
- Customer concentration is significant: the filing says two major customers generated approximately 59% of revenue, and more than 75% came from five major customers. In the Successor period, four customers represented 42%, 17%, 10% and 5% of revenue. Contract cancellations, delayed collections and customer budget cuts could affect results and liquidity.
- Operations are concentrated in MENA and exposed to oil and gas prices, political and economic instability, sanctions, foreign currency restrictions, regulatory and tax changes, safety and environmental incidents, and customer credit risk. Most customer contracts may be cancelled or renegotiated.
- Floating-rate borrowings expose the company to higher interest costs. Debt agreements include financial covenants; the company reported compliance at December 31, 2018. Contractual obligations included $270.8 million of estimated debt principal payments and $65.2 million of estimated interest payments.
- Management and the auditor identified a material weakness in financial reporting controls involving income-tax accounting and preparation and review of cash-flow statements. Disclosure controls were reported ineffective at year-end; remediation was in progress. The auditor issued an unqualified opinion on the financial statements.
- The acquisition generated $570.5 million of goodwill and substantial acquired intangibles. Purchase-price allocation was preliminary, and no goodwill impairment was recorded for the periods presented. A $10.5 million NPS earn-out liability was settled with 1,300,214 shares in February 2019; the remaining $10.0 million Hana Loan balance was repaid in January 2019.
- The company reported $41.4 million of performance guarantees and $10.3 million of letters of credit outstanding. Management said the guarantees were not expected to have a material effect. Ongoing legal disputes were disclosed, but the company said it could not reasonably estimate their financial effect and did not consider a provision necessary.
Important facts for investors to verify
- Review the full audited statements and notes to distinguish Successor and Predecessor results; do not treat the summed 2018 periods as a directly comparable annual result or infer Q4 results from this filing.
- Assess customer concentration, contract renewal and cancellation terms, receivable aging, and the collectability and billing timing of the $95.1 million in unbilled revenue.
- Verify progress and effectiveness of remediation for the material weakness in tax accounting and cash-flow preparation.
- Reconcile total debt, maturities, floating-rate exposure, available working-capital facilities and covenant headroom; note the January 2019 Hana Loan repayment.
- Evaluate the assumptions supporting acquisition goodwill and intangible-asset values, as well as the final purchase-price allocation and future impairment risk.
- Consider the limitations of management’s 2019 market outlook, the absence of quantified company guidance, and the risks from regional, regulatory, tax and operational exposures.