Business context and reporting period
National Energy Services Reunited Corp. (NESR), a British Virgin Islands company headquartered in Houston, provides oilfield services primarily across the Middle East and North Africa (MENA). Its two reporting segments are Production Services and Drilling and Evaluation Services. This is the annual report for the fiscal year ended December 31, 2022, filed December 29, 2023; it does not provide a clear set of standalone fourth-quarter results. Financial statements are prepared under U.S. GAAP.
Key financial metrics
Amounts below are in U.S. dollars; comparisons are full-year 2022 versus 2021 unless stated otherwise.
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $909.5 million | $876.7 million |
| Gross profit and margin | $65.5 million; 7.2% | $2.8 million; 0.3% |
| Operating loss | $0.9 million | $43.3 million |
| Net loss; diluted loss per share | $36.4 million; $0.39 | $64.6 million; $0.71 |
| Cash from operating activities | $92.6 million | $127.7 million |
| Capital expenditures | $122.4 million | $107.1 million |
| Cash and cash equivalents at year-end | $78.9 million | $205.8 million |
| Borrowings at year-end | $535.1 million | $595.8 million |
| Available borrowing capacity | $183.9 million | Not stated here |
| Total assets / total liabilities at year-end | $1,828.3 million / $1,026.0 million | $1,831.3 million / $1,010.3 million |
Revenue increased about 3.7%. Production Services generated $567.2 million and Drilling and Evaluation Services $342.3 million. Approximately 98% of revenue came from MENA. The largest customer represented 40% of 2022 revenue; four customers together accounted for 63%.
Material changes versus the prior comparable period
- Gross margin improved substantially as utilization and operating efficiency improved, pandemic-related and supply-chain cost pressures eased, and certain fracturing-fleet depreciation declined. Saudi Arabia fracturing contract transition costs and chemical supply shortages partly offset the improvement.
- Both segments moved from operating losses in 2021 to segment operating income in 2022: Production Services reported $28.7 million versus a $1.9 million loss; Drilling and Evaluation reported $33.5 million versus a $1.2 million loss.
- Despite lower net loss, operating cash flow fell by $35.2 million, primarily because cash collections declined. Cash decreased by $126.9 million during 2022; investing outflows were $146.7 million and financing outflows were $72.8 million.
- Net interest expense rose to $34.1 million from $15.2 million as floating borrowing rates increased. Reported 2022 other income included a nonrecurring $4.2 million gain related to a WDVGE investment derivative.
- Receivables rose, and the allowance for credit losses increased to $12.7 million from $2.1 million, including $9.4 million associated with adoption of the expected-credit-loss standard.
Outlook, risks, contingencies and unusual items
- Management cited rising oil prices and increased MENA rig activity in 2022 and expects strong national oil company upstream investment to continue in coming years. No quantified revenue, earnings, cash-flow or capital-spending guidance is provided.
- Liquidity requires close attention: year-end current assets of $537.8 million were slightly below current liabilities of $544.1 million. Management said cash, operating cash flow and credit facilities should fund needs, but cash fell materially and collections were weaker. Contractual cash requirements totaled $821.6 million, including $247.2 million due in less than one year; these are estimates and include debt principal and interest, leases, capex commitments and employee benefits.
- The company reported $535.1 million of borrowings, principally floating-rate debt. Its credit agreement includes leverage, debt-service-coverage and interest-coverage covenants. Lenders had granted waivers for certain financial and nonfinancial covenants from April 30, 2022 through the filing date; the company said it expected to regain compliance upon filing. Confirm the actual post-filing status. The filing also describes restricted subsidiary distributions and refinancing/default risks.
- Financial statements for 2020 were restated for errors, primarily incomplete accounts payable and accrued liabilities in Saudi Arabia and the UAE, as well as warrant-accounting and expense-classification errors. Management said it did not plan to amend previously issued statements. The 2022 and 2021 statements received an unqualified audit opinion, but the auditor issued an adverse opinion on internal control over financial reporting.
- Management found material weaknesses in the control environment, account reconciliations, accounts payable controls and financial-reporting IT access controls. Remediation steps were underway, but the filing says controls must operate effectively and be tested for a sufficient period before weaknesses can be considered remediated.
- The company was subject to an ongoing SEC inquiry relating to the reporting matters and said it could not predict the outcome; it stated management did not believe the proceeding’s loss risk would materially affect financial condition. The filing also identifies uncertain tax positions of $61.1 million, plus $2.9 million of accrued interest and penalties, and notes that ultimate tax liabilities could exceed recorded amounts.
- Nasdaq delisted the ordinary shares and warrants effective April 28, 2023. At filing, they were quoted on the OTC Expert Market on an “unsolicited only” basis. NESR planned to seek broader OTC quotation and relisting, but gave no assurance of success. No cash dividends are expected in the foreseeable future.
- Other notable exposures include concentrated MENA operations and major-customer dependence, political and currency risks, customer payment delays, safety and environmental liabilities, and $132.4 million of bank-issued guarantees and surety bonds. Management said the off-balance-sheet arrangements were not expected to materially affect the financial statements.
Most important facts for investors to verify
- Whether internal-control remediation has been completed, independently tested and found effective, and whether financial reporting remains current.
- Current covenant compliance, the status of prior lender waivers, available facility capacity, debt maturities and the ability to service floating-rate borrowings.
- Cash conversion and collections, receivables aging and recoverability, and the adequacy of the increased credit-loss allowance.
- Developments or outcomes from the SEC inquiry, tax examinations and recorded uncertain tax positions.
- Current trading venue and liquidity, progress toward public OTC quotation or exchange relisting, and any resulting financing constraints.
- Reliance on the largest customer and MENA markets, including contract renewals and any material changes in customer activity or capital spending.