National Energy Services Reunited Corp. — 2019 Annual Filing
Reporting period: Fiscal year ended December 31, 2019. This is an annual Form 20-F, not a standalone fourth-quarter report; the filing does not provide clear standalone Q4 financial results. Amounts below are in U.S. dollars. The company reports under U.S. GAAP.
Business context and comparability
NESR provides oilfield services across the Middle East and North Africa (MENA) and Asia Pacific, through Production Services and Drilling and Evaluation Services. It operated in 15 countries. The 2019 results include NPS and GES for the full year; 2018 is split between pre- and post-acquisition accounting periods. The company aggregates those periods for comparison, but cautions that the different accounting bases limit comparability.
Financial performance
| Metric | 2019 | 2018 aggregated comparison |
|---|---|---|
| Revenue | $658.4 million | $485.6 million |
| Gross profit / margin | $151.6 million / 23% | $132.2 million / approximately 27% |
| Operating income | $71.8 million | $66.2 million |
| Net income | $39.4 million | $41.7 million |
| Operating cash flow | $89.1 million | $61.7 million |
| Capital expenditures | $107.9 million | $33.1 million |
- Revenue rose about 36% versus the aggregated 2018 periods, driven by higher coiled-tubing and stimulation activity and increased well testing, logging and drilling services. Production Services generated $405.7 million; Drilling and Evaluation Services generated $252.7 million.
- Gross margin declined from approximately 27% to 23%. Management cited a less favorable mix of business lines and startup costs on new contracts. SG&A was $63.8 million, or 10% of revenue, compared with $56.7 million, or 12% of aggregated 2018 revenue; integration savings and revenue growth reduced the expense ratio.
- Net income was lower than the $41.7 million aggregated 2018 amount. 2018 included a one-time gain related to settlement of an NPS earn-out. 2019 interest expense was $19.0 million and income-tax expense was $13.1 million.
- Cash from operations increased, but investing cash outflow was $107.3 million, primarily reflecting $107.9 million of capital expenditures. Operating cash flow less reported capital expenditures was approximately negative $18.8 million.
Financial position and liquidity
- At December 31, 2019, cash was $73.2 million, total assets $1.52 billion, total equity $886.5 million and long-term debt, net of issuance costs and current installments, $330.6 million. The debt note reports $345.6 million of gross long-term borrowings and $38.0 million of short-term borrowings. Management cited total borrowings of $383.5 million.
- Current assets were $403.2 million and current liabilities $228.1 million. Accounts receivable was $98.8 million; unbilled revenue was $76.3 million.
- May 2019 refinancing established a $525 million secured facilities package, including a $300 million term loan due 2025, a $65 million revolving facility due 2023 and a $160 million working-capital facility. The term loan and revolver carry floating LIBOR-based rates; the reported rate was 4.3% at year-end. The company reported compliance with its financial covenants.
- Unused availability at year-end included $15.0 million under the revolving facility, $25.8 million under the secured working-capital facility and $6.3 million under legacy facilities. Management believed cash, operating cash flow and available facilities would be sufficient for the next 12 months.
- Off-balance-sheet support included $21.2 million of letters of credit and $99.1 million of guarantees and surety arrangements. Contractual obligations totaled $601.1 million, including debt principal, interest, leases, capital commitments and employee benefits.
Material changes, outlook and risks
- Operating activity expanded: MENA rig count reported by Baker Hughes increased to 495 from 459 in 2018. Brent averaged $67.77 per barrel at year-end, versus $50.57 at year-end 2018. The company secured and expanded core Saudi contracts for more than five years and began work under a significant Saudi unconventional-gas stimulation contract.
- Management gave no numerical earnings or revenue guidance. It described plans to pursue strategic acquisitions and said it expected available resources to support near-term needs. In February 2020, NESR announced a proposed acquisition of SAPESCO in Egypt, subject to approvals and closing conditions; consideration includes $27 million cash, repayment of $22 million of SAPESCO debt and share-based earn-outs.
- The filing discusses COVID-19 and the sharp oil-price decline beginning in March 2020. Management said the duration and financial impact were uncertain and that customers or suppliers could reduce activity or seek price concessions. These developments occurred after the 2019 reporting period.
- Key exposures include oil-price and customer-spending volatility, geographic and customer concentration, political and currency risks, floating-rate debt, contract cancellation and collection delays. Four customers represented 45%, 16%, 8% and 6% of 2019 revenue; the two largest accounted for 61%.
- Goodwill was $574.8 million, with no impairment recorded. A significant impairment could reduce assets and earnings. Tax is also a material uncertainty: unrecognized tax benefits were $12.5 million, excluding $1.8 million of accrued interest and penalties, and tax returns in major jurisdictions remain subject to examination.
- Management identified a material weakness in internal control over financial reporting related to accounting for certain income taxes; disclosure controls were therefore ineffective at year-end. Management said weaknesses involving cash-flow preparation and U.S. GAAP expertise were remediated, but tax-control remediation required further testing. The auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- Legal proceedings arise in the ordinary course. Management stated that losses could not be reasonably estimated and that, based on its current assessment, a provision was not required because it did not expect a material impact.
Important facts for investors to verify
- Assess the sustainability of revenue growth and the gross-margin decline, including the profitability of new contracts and segment-level results.
- Review receivables, unbilled revenue, collection timing and customer concentration, particularly exposure to the largest customers.
- Confirm debt balances, floating-rate sensitivity, covenant headroom, scheduled repayments and the availability and terms of working-capital facilities.
- Track remediation and independent testing of the income-tax control weakness, as well as developments in tax examinations and unrecognized tax benefits.
- Verify subsequent developments affecting COVID-19, oil prices and the SAPESCO transaction, including funding, closing conditions and potential dilution from earn-outs.