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, 2020
Business Overview: NESR is a leading oilfield services provider in the Middle East North Africa (MENA) region, offering Production Services (e.g., hydraulic fracturing, cementing) and Drilling and Evaluation Services. The company operates in over 15 countries, with significant revenue concentration in Saudi Arabia and Oman.
Key Financial Metrics
| Metric (in US$ thousands) | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Revenues | $218,423 | $161,606 | $620,971 | $473,209 |
| Gross Profit | $40,470 | $40,280 | $120,405 | $120,493 |
| Operating Income | $18,987 | $19,762 | $55,360 | $61,865 |
| Net Income | $11,666 | $11,110 | $33,569 | $35,640 |
| Diluted EPS | $0.13 | $0.13 | $0.38 | $0.40 |
| Cash and Equivalents | $50,487 | $43,082 | - | - |
| Total Debt (Long-term + Current) | $363,488 | $345,564 | - | - |
| Operating Cash Flow (YTD) | - | - | $86,054 | $45,290 |
Margins (YTD 2020 vs YTD 2019):
- Gross Margin: 19.4% vs 25.5%
- Operating Margin: 8.9% vs 13.1%
- Net Margin: 5.4% vs 7.5%
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 35% quarter-over-quarter and 31% year-over-year, driven primarily by increased hydraulic fracturing activities in Saudi Arabia and additional activity in the Drilling and Evaluation segment.
- Margin Compression: Gross margin declined from 25% to 19% year-over-year. Management attributes this to a change in revenue mix between business lines with lower and higher margins, alongside increased depreciation expenses from capital expenditures made in late 2019 and early 2020.
- Acquisition of SAPESCO: On June 1, 2020, NESR acquired Sahara Petroleum Services Company S.A.E. (SAPESCO). The preliminary consideration was approximately $40.6 million (cash and stock). This acquisition contributed $11.2 million in revenue for the quarter and $15.1 million year-to-date.
- Debt Structure: Total debt increased slightly due to the assumption of debt in the SAPESCO transaction ($21.0 million CIB Long-Term Debt and $2.6 million CIB Short-Term Debt). However, interest expense decreased year-over-year due to lower interest rates obtained in the May 2019 refinancing.
- Cash Flow: Operating cash flow improved significantly to $86.1 million YTD 2020 from $45.3 million YTD 2019, aided by better accounts payable management and higher non-cash depreciation. Investing cash outflows were $85.8 million, primarily for capital expenditures and the SAPESCO acquisition.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management believes current cash, operating cash flows, and credit facilities are sufficient to meet liquidity needs. The company plans to pursue strategic acquisitions but notes that timing and success are unpredictable.
- COVID-19 Impact: While the pandemic and oil price volatility have not significantly impacted operations to date, management notes that future results depend on factors beyond their control, including the duration of the pandemic and government responses.
- Internal Control Weakness: The company disclosed that disclosure controls and procedures were not effective as of September 30, 2020, due to a material weakness in internal control over financial reporting regarding income tax accounting (ASC 740). Remediation efforts include engaging third-party tax resources.
- Unusual Items:
- Share Issuance: NESR expects to issue 2,237,000 ordinary shares to SAPESCO selling shareholders in Q4 2020.
- Related Party Transactions: Notable transactions include rental income from Mubbadrah Investment LLC and purchases from Nine Energy Service, Inc. and Basin Holdings US LLC, involving company directors.
Investor Verification Checklist
- Margin Sustainability: Verify if the 19% gross margin is a new baseline or temporary due to the specific revenue mix in Q3 2020.
- Internal Control Remediation: Monitor progress on the material weakness regarding income tax accounting and the effectiveness of the new third-party tax resources.
- SAPESCO Integration: Assess the full financial impact of the SAPESCO acquisition once the purchase price allocation is finalized in Q4 2020.
- Liquidity Position: Confirm the utilization of the $508.8 million Secured Facilities Agreement, noting that the Revolving Credit Facility (RCF) was fully drawn ($65.0 million) with $0.0 million available as of period end.
- Customer Concentration: Review the risk associated with over 98% of revenue coming from the MENA region and the reliance on governmental customers.