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 June 30, 2019 (Successor Period)
Business Overview: NESR is a regional provider of oilfield services in the Middle East, North Africa (MENA), and Asia Pacific. The company operates through two segments: Production Services and Drilling and Evaluation Services. The financial statements reflect the "Successor" basis of accounting following the June 6, 2018 business combination with NPS Holdings Limited and Gulf Energy S.A.O.C.
Key Financial Metrics
| Metric (in thousands, except per share) | Q2 2019 (Apr-Jun) | YTD 2019 (Jan-Jun) | YTD 2018 (Predecessor) |
|---|---|---|---|
| Revenues | $159,899 | $311,603 | $137,027 |
| Gross Profit | $43,006 | $80,213 | $32,785 |
| Gross Margin | 27.0% | 25.7% | 23.9% |
| Operating Income | $21,995 | $42,103 | $12,806 |
| Net Income | $11,356 | $24,530 | $6,736 |
| Diluted EPS | $0.13 | $0.28 | $0.02 |
| Cash and Equivalents (End of Period) | $69,643 | $69,643 | $31,656 |
| Long-Term Debt | $361,234 | $361,234 | $225,172 |
| Operating Cash Flow (YTD) | $24,172 | $24,172 | $20,826 |
Material Changes vs. Prior Period
- Revenue Growth: YTD 2019 revenue increased significantly to $311.6 million compared to $137.0 million in the comparable 2018 predecessor period. This growth was 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: Net income rose to $24.5 million YTD 2019 from $6.7 million in the 2018 predecessor period. Gross margin improved to 25.7% from 23.9% due to a favorable revenue mix and cost savings from the business combination.
- Debt Refinancing: In May 2019, the company entered into a $525 million Secured Facilities Agreement, replacing legacy debt. As of June 30, 2019, the company had drawn $300 million on the term loan and $65 million on the revolving credit facility, increasing total long-term debt to $361.2 million from $225.2 million at year-end 2018.
- Amortization: Amortization expense increased to $8.0 million YTD 2019 from $10,000 in the 2018 predecessor period, reflecting the valuation of acquired intangible assets from the 2018 business combination.
Guidance, Outlook, and Risks
- Outlook: Management expects cash on hand, operating cash flows, and available credit facilities to provide sufficient liquidity for working capital, capital expenditures, and strategic acquisitions. The company plans to pursue strategic acquisitions but notes timing and success are uncertain.
- Market Risks: The company is exposed to cyclical oil and gas prices, which drive customer spending. While MENA operations have lower break-even prices, global E&P spending trends impact demand. Foreign currency risk exists for operations in Algeria, Libya, and Iraq, though contracts are largely denominated in USD.
- Internal Controls: The company disclosed that disclosure controls and procedures were not effective as of June 30, 2019, due to material weaknesses identified in the prior year regarding income tax accounting and cash flow preparation. Remediation efforts include hiring personnel with U.S. GAAP expertise and modifying reporting processes.
- Legal Proceedings: The company is involved in ordinary course legal proceedings but does not believe any will have a material impact on financial condition.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the new Secured Facilities Agreement covenants (Net Debt/EBITDA max 3.50, Interest Coverage min 4.00).
- Internal Control Remediation: Monitor progress on fixing material weaknesses in internal controls over financial reporting, specifically regarding tax and cash flow.
- Customer Concentration: Assess exposure to major government-owned customers (e.g., Saudi Aramco, Petroleum Development Oman) and potential payment delays.
- Capital Expenditures: Review the $44.9 million in committed capital expenditures and the impact of the $56.5 million in actual CapEx on future liquidity.
- Segment Performance: Analyze the sustainability of revenue growth in the Production Services segment, which accounts for 60% of total revenue.