Business Context and Reporting Period
Company: National Energy Services Reunited Corp. (NESR)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter ended March 31, 2020
Business Overview: NESR is a leading oilfield services provider in the Middle East North Africa (MENA) region, offering Production Services (e.g., cementing, coiled tubing) and Drilling and Evaluation Services. Over 98% of revenue is derived from the MENA region, primarily from governmental customers in Oman and Saudi Arabia.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenues | $199,299 | $151,704 |
| Cost of Services | $(158,270) | $(114,497) |
| Gross Profit | $41,029 | $37,207 |
| Operating Income | $18,515 | $20,108 |
| Net Income | $11,367 | $13,174 |
| Diluted EPS | $0.13 | $0.15 |
| Cash and Cash Equivalents (End of Period) | $49,017 | $19,935 |
| Long-Term Debt | $323,244 | $330,564 |
| Net Cash Provided by Operating Activities | $9,949 | $24,832 |
Margins: Gross margin decreased to 20.6% in Q1 2020 from 24.5% in Q1 2019. Operating margin was 9.3% in Q1 2020 compared to 13.3% in Q1 2019.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 31.4% year-over-year, driven by higher coil tubing and stimulation activities in Saudi Arabia, Iraq, and the UAE (Production Services) and increased well testing and drilling services in Saudi Arabia, Iraq, and Algeria (Drilling and Evaluation Services).
- Profitability Decline: Despite revenue growth, Net Income decreased 13.7% to $11.4 million. This was primarily due to a shift in revenue mix toward lower-margin services and increased depreciation expense ($25.3 million vs. $14.5 million in the prior year) resulting from capital expenditures.
- Cash Flow: Operating cash flow decreased significantly to $9.9 million from $24.8 million, largely due to growth in unbilled revenue and changes in working capital. Investing cash outflows increased to $24.0 million due to timing of capital expenditure payments.
- Balance Sheet: Cash balances declined from $73.2 million at year-end 2019 to $49.0 million at March 31, 2020. Total debt remained relatively stable, with the company maintaining compliance with all financial covenants.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 and Oil Price Impact: The filing highlights significant uncertainty due to the global COVID-19 pandemic and the precipitous decline in oil prices (WTI turned negative in April 2020). Management states it cannot currently estimate the scope of the impact on operations or financial condition.
- Operational Response: The company has implemented remote work for office personnel, ceased crew rotation to minimize virus spread, and reevaluated capital expenditure timing and cash flow forecasts.
- Acquisition: In February 2020, NESR announced an agreement to acquire Sahara Petroleum Services Company S.A.E. (SAPESCO) for approximately $49 million in cash and stock, subject to regulatory approval, expanding its presence into Egypt.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of March 31, 2020, due to a material weakness in the control environment regarding income tax accounting (ASC 740) identified in the prior year's audit.
- Capital Resources: The company maintains a $525 million Secured Facilities Agreement with $15 million available under the revolving credit facility and $27.6 million available under the working capital facility.
Investor Verification Checklist
- Cash Burn Rate: Verify the sustainability of the $49 million cash balance given the reduction in operating cash flow and potential revenue headwinds from low oil prices.
- Debt Covenants: Confirm continued compliance with the Net Debt/EBITDA (max 3.50) and Interest Coverage (min 4.00) covenants under the Secured Facilities Agreement amidst potential earnings volatility.
- Internal Control Remediation: Review the specific steps management is taking to remediate the material weakness in income tax accounting controls.
- Capital Expenditure Adjustments: Monitor updates on the revised capital expenditure budget and its impact on future liquidity.
- SAPESCO Acquisition: Track the closing status of the SAPESCO acquisition and the associated cash and stock outflows.