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 September 30, 2018
Key Event: On June 6, 2018, NESR consummated a business combination acquiring 100% of NPS Holdings Limited (NPS) and Gulf Energy S.A.O.C. (GES). NESR is the accounting acquirer ("Successor"), while NPS is the accounting predecessor ("Predecessor"). Financial results prior to June 6, 2018, reflect only NPS operations; results from June 7, 2018, reflect the combined entity.
Key Financial Metrics
All figures in thousands of U.S. dollars unless otherwise noted.
| Metric | Successor Quarter (Jul 1 - Sep 30, 2018) |
Successor Period (Jun 7 - Sep 30, 2018) |
Predecessor Quarter (Jul 1 - Sep 30, 2017) |
|---|---|---|---|
| Revenues | $145,580 | $190,566 | $70,453 |
| Gross Profit | $43,231 | $51,162 | $19,902 |
| Gross Margin | 29.7% | 26.8% | 28.2% |
| Operating Income | $25,895 | $23,267 | $12,230 |
| Net Income | $16,157 | $12,190 | $10,680 |
| Net Income Attributable to Shareholders | $16,110 | $12,362 | $11,238 |
| Diluted EPS | $0.19 | $0.14 | $0.03 |
| Cash and Equivalents (Sep 30, 2018) | $67,560 | ||
| Total Debt (Sep 30, 2018) | $355,272 (Short-term: $71,940; Long-term: $266,964) | ||
| Operating Cash Flow (Successor Period) | $14,431 |
Material Changes vs. Prior Period
- Revenue Growth: Revenue for the Successor Quarter ($145.6M) increased 107% compared to the 2017 Predecessor Quarter ($70.5M). This is primarily driven by the inclusion of GES operations and increased activity in coiled tubing and well testing services.
- Profitability: Net income increased 51% year-over-year for the quarter ($16.2M vs. $10.7M). Operating margins improved due to a favorable revenue mix and integration cost savings.
- Amortization: Amortization expense rose significantly to $3.6M in the Successor Quarter from $0.2M in the prior year quarter, reflecting the fair value adjustment of intangible assets (customer contracts, trademarks) acquired in the business combination.
- Interest Expense: Net interest expense increased to $6.2M from $0.7M, driven by new borrowings (Hana Loan, APICORP, SABB facilities) used to finance the acquisition and higher LIBOR rates.
- Balance Sheet: Total assets nearly doubled to $1.34B from $620M (Dec 31, 2017) due to the acquisition. Goodwill increased to $532.4M, and intangible assets to $140.9M.
Guidance, Outlook, and Risks
- Outlook: Management expects to benefit from the business combination, targeting growth in offshore drilling in the MENA and APAC regions. The company anticipates higher amortization expenses going forward due to the acquisition accounting.
- Liquidity: The company maintains $67.6M in cash and has access to credit facilities totaling over $280M. Management believes current resources are sufficient to meet working capital needs and fund capital expenditures for the next 12 months.
- Key Risks:
- Geopolitical Instability: 95% of revenue is derived from the MENA region; operations are exposed to political instability, sanctions, and currency fluctuations in countries like Algeria, Iraq, and Yemen.
- Oil Price Sensitivity: Demand is cyclical and tied to global oil prices and E&P spending.
- Customer Concentration: Three customers accounted for 71% of consolidated revenue in the Successor Quarter. Two major customers (Saudi Aramco, PDO) are state-owned and may delay payments.
- Debt Covenants: The company must maintain specific financial ratios (e.g., debt-to-capitalization, debt service coverage) under its credit facilities.
- Unusual Items: The filing includes significant non-recurring transaction costs ($17.2M) and earn-out mechanisms valued at $16.2M contingent on 2018 EBITDA performance.
Investor Verification Checklist
- Acquisition Accounting: Verify the final purchase price allocation, as the current figures are preliminary and subject to adjustment within one year.
- Debt Maturities: Review the maturity schedule of the $50M Hana Loan (due Dec 2018) and other short-term borrowings to assess refinancing needs.
- Earn-Out Targets: Monitor 2018 EBITDA performance to determine if the $16.2M equity earn-out to NPS sellers will be triggered.
- Customer Concentration: Assess the creditworthiness and payment timelines of the top three customers, particularly regarding government-owned entities.
- Intangible Asset Valuation: Review the assumptions used for the $146M in intangible assets (customer contracts, trademarks) and their amortization periods (8-10 years).