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 and Year-to-Date ended September 30, 2021
Business Overview: NESR is a leading oilfield services provider in the Middle East North Africa (MENA) region, operating in over 15 countries. The company provides Production Services (e.g., hydraulic fracturing, cementing) and Drilling and Evaluation Services (e.g., drilling rigs, wireline). The company is an "emerging growth company" under the JOBS Act.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Revenue | $218.0 million | $218.4 million | $665.3 million | $621.0 million |
| Gross Profit | $31.9 million | $40.5 million | $111.0 million | $120.4 million |
| Gross Margin | 14.6% | 18.5% | 16.7% | 19.4% |
| Operating Income | $8.1 million | $19.0 million | $38.2 million | $55.4 million |
| Net Income | $1.9 million | $11.7 million | $21.2 million | $34.1 million |
| Diluted EPS | $0.02 | $0.13 | $0.23 | $0.38 |
| Cash from Operations (YTD) | $114.8 million (2021) vs $86.1 million (2020) | |||
| Cash & Equivalents (Sep 30, 2021) | $101.0 million | |||
| Total Debt (Sep 30, 2021) | $427.0 million ($330.6M Long-term + $96.5M Short-term) |
Material Changes vs. Prior Period
- Revenue Stability: Q3 2021 revenue remained flat compared to Q3 2020 ($218.0M vs $218.4M), while YTD revenue increased 7.1% ($665.3M vs $621.0M). This growth was driven by a 19% increase in Drilling and Evaluation Services revenue, offset by a 7% decline in Production Services revenue due to lower hydraulic fracturing activity.
- Margin Compression: Gross margin declined from 18.5% in Q3 2020 to 14.6% in Q3 2021. This was primarily due to a change in revenue mix and higher costs, including procurement and labor expenses.
- Profitability Decline: Net income dropped significantly, falling 83% in Q3 2021 compared to Q3 2020 ($1.9M vs $11.7M) and 38% on a YTD basis. Operating income decreased due to higher costs and increased SG&A expenses related to M&A transaction costs and system implementations.
- Acquisition Activity: In May 2021, NESR acquired specific oilfield service lines of Action Energy Company W.L.L. ("Action") for a preliminary consideration of $60.6 million. Action contributed $9.1 million in revenue and $1.5 million in net income for the quarter ended September 30, 2021.
- Accounting Restatement: The company revised prior period financial statements (2020) to correct the accounting treatment of Private Warrants, reclassifying them from equity to liabilities. This resulted in a $0.6 million gain in YTD 2020 net income.
Guidance, Outlook, and Risks
- Refinancing: In Q4 2021 (subsequent to the reporting period), NESR entered into a new $860 million Secured Facilities Agreement, replacing existing debt. This includes a $430 million term loan, a $350 million working capital facility, and an $80 million revolving credit facility. No term loan payments are due until Q1 2023.
- Liquidity: Management believes cash on hand, operating cash flows, and credit facilities are sufficient to meet working capital needs and fund capital expenditures. Available borrowing capacity was $19.7 million as of September 30, 2021.
- Market Risks: The company faces risks related to the cyclical nature of the oilfield services sector, geopolitical instability in the MENA region, and fluctuations in oil prices. While 98% of revenue comes from MENA, the region's low break-even production costs provide some insulation against price volatility.
- Contingencies: The company has outstanding letters of credit ($22.9M) and guarantees ($107.2M). There are ongoing legal proceedings in the ordinary course of business, but management does not expect a material impact.
Investor Verification Checklist
- Debt Refinancing Terms: Verify the final terms and covenants of the new $860 million credit facility announced in Q4 2021.
- Margin Recovery: Monitor future quarters for stabilization of gross margins, specifically regarding the mix of Production vs. Drilling services and cost control measures.
- Acquisition Integration: Assess the financial performance and integration progress of the Action Energy acquisition.
- Capital Expenditures: Review the $41.5 million in committed capital expenditures and the impact on future cash flows.
- Geopolitical Exposure: Evaluate the impact of regional political stability on operations in key markets like Iraq, Libya, and Egypt.