National Energy Services Reunited Corp. (NESR) Earnings Call Transcript & Summary

I'm Sean Meakim, the oilfield services and equipment analyst at JPMorgan. Welcome back to the JPMorgan Energy Conference. Next up, we have an emerging company with a unique story. National Energy Services Reunited is a pure-play oilfield services provider in the Middle East, North Africa and Asia, or MENA region, formed through a stack that combined 2 companies a few years ago. Sherif Foda is here to represent NESR, and he has served as NESR's Chairman and CEO since its inception. Even that, he used to undersell his role. As to my mind, NESR is very much Sherif's unique vision. Sherif had a long career with Schlumberger, ran several regions, including the Middle East, prior to establishing NESR. Sherif, great to see you. Thanks for joining us. Let me turn over to you, and I'll come back on towards the end.

Thank you, Sean. Thanks for your kind introduction. So good morning, everyone. I'd like to go through, like, 10 minutes or so on the slides and then open up for questions and have the chat with Sean. So as some of you might know, in the first slide -- and I'll go -- I'll try to do a second slide, a third slide, so then you know exactly where we are. So NESR is basically the largest indigenous company today in the Middle East and North Africa. And we are representative in more than -- now we are 15 countries after the Egyptian acquisition. And we are, I would say, around more than 5,000 employees. We work with all the major national oil companies and all the IOCs. We have a very good, I would say, reputation. Today, very well recognized in most of the countries and very well-established in the region, which is, again, the most resilient region in the downturn. And if you go to the next slide, and I show you how we made sure that we maintain 100% capacity during the COVID-19. And that's very, very important. And as you all have seen and see, obviously, with the pandemic and the effects on the energy sector and the demand, and it was very important for us to make sure that the safety of all our employees are intact and that we maintain the capacity to serve all our clients without any interruption. And I am very, very pleased with the phenomenal job that our team had done, and we made sure that all our operations, all our countries, have maintained that 100% capacity. And this is very, very detailed work that took place to ensure that we have the spare parts, we have the inventory, we talk to every single person of our more than 5,000 employees, as I said, and ensuring that they are safe, they are ready to overstay. Some of these people stayed more than 3 months today on the operation. And there is a total almost lockdown in some of the countries, and the guys have done a phenomenal job of performing the work. And taking that, we ensure as well that we take care of their families. We take care -- when they cannot travel, how are they taking care of their mortgage, how are they taking care -- take care of their parents. We talk to their parents. We send them money in their country of origin if they cannot travel. So we took care of all of this, and that's resulted in us actually gaining market share. So it's very, very important. And again, I would thank all our team that managed to do that. If I go to the macro, and if you follow -- look at the slide, the Middle East remained the strongest activity region. If you look backwards in the last 3 to 4 downturns, it has always been the case. And as you have seen in Saudi Arabia and the region managed to be -- to continue to be the most reliable supplier to the world. And you saw the, I would say, the outstanding job Saudi did in April and producing more than 12 million barrels. So they are always maintaining the capacity and maintaining to be, again, the most reliable supplier. And if you look overall in the region, what the region believes that the spend is going to decline this year by 13% -- 12% to 14%, which mainly, if you look at it from a big picture, a lot of it comes from all the nice-to-have exploration projects that is going to get delayed. Once you delay that, and if you look '19 over '20, and then you're going to get almost flattish to minus 5% upstream spend because you have 4 months of the COVID-19 where you have almost a total lockdown, and this meaning that a lot of the downstream project gets naturally delayed. So any construction or new project that you have is going to get delayed by that factor of 1/3 of the year. So even if you do nothing and you maintain your budget intact, you are going to get a decline of at least 30% of your budget because people are not able to do their job. And that's why I would say a lot of people have a misunderstanding on the activity. The activity from an upstream, especially if it's on the production side, remain intact and almost untouched. If I look at it more of what starts from the reason to separate between the GCC and the rest, and if you follow the next slide, and you can see that the growth story or the big story on the GCC remained the same. And this is countries where the GDP and -- is mainly on oil and gas story. The national oil company that controls the majority of the production remains at a long-term view for employment, for what they are doing for their people. And then that's how they look at how I'm going to maintain the space and I would say to swing producer back to what they used to have back before the U.S. shift. And I think they are very adamant to make sure that that's the case, and they all have programs to maintain that. If you look now at the other part of the equation, which is -- and that is Iraq, for example, it's completely different because that's characterized with IOCs, the BP, the ExxonMobil, and you have a complete different structure for the payment. So you're going to get -- you get the fee per barrel. And why would I drill new wells and do an LSTK project. When it's a cost recovery, then I wait for the production to add, when my OPEC quota is to tell me cut the production of your field by 100,000, 150,000 barrels. And that's where you see a significant reduction in LSTK or new wells being drilled. But the production is maintained from workover, slickline, culturing activity, and that's where we, for example, have the majority of our revenue stream. If I look at the North Africa in the following slide, and you see then you have now a security in addition to the reduction. So you have a security issue. For example, Libya, you still have a war between the East and West. And really, the production is shut down. So nobody is putting any rigs or any production so then you're going to get a significant decline. Algeria is the same. Algeria, without a war, but you have a reduction of budget. The story there is mainly gas that is produced and exported to Europe. But the oil, they are following and they're respecting the OPEC quota. And therefore, you see the activity drop by almost 50%. The exploration is almost going to 0. And you see, again, if you are in that domain of seismic exploration, you will see a significant decline on your activity stream. Egypt, which we just entered to Egypt, we're going to get a decline less severe than Algeria and Libya. But still, you're going to -- it's characterized by almost a lot of the small independent -- small companies. So definitely with the oil price what it was, they cut their budget and they cut their drilling. I would say 20% to 30% is the expectation of their activity year-on-year. So overall, the region is very focused on gas and the gas story for the internal consumption. So if I look at the following slide, and you see what happened on the unconventional. And a lot of people asked about that question before, is definitely it's long term. And some of the countries actually when they cut their budget, the only thing they did not cut is the unconventional exploration or unconventional development. So the U.A.E. is going ahead with their program. Saudi definitely have a leadership position there because they started this years ago, and they did the job extremely well by, first, exploration appraisal. They put basically a lot of science into the shale or into the unconventional they have of the tight sand to ensure that it's produced on a larger scale and sustainably. And as you may know, we went into Saudi into last year with our asset-light model, with our partner NexTier from the U.S. We shipped the largest frac fleet in the region to Saudi Arabia. And that fleet was extremely successful. And today, we have a very, very strong business into the Jafurah Basin in Saudi Arabia with Saudi Aramco that we are very, very proud of. And again, the operation remains intact and we have a very, very successful operation. What we did after that, we said we are going to see can we send a second fleet. And I said in my later -- or earlier call in this month -- or last month that we expected to have that crew ready to operate before year-end. And the good news is that crew is already operating. So despite the COVID-19, if you look at the following slides, and all the restriction of travel, we managed to secure a campaign for the conventional sites and started operating already with 100% national crew. And that's very, very remarkable. Those crews were basically into the shadow program that we put from the beginning of the unconventional. And today, they are operating that fleet very, very successfully despite the fact that no one can travel, the airport is still closed and we have all kinds of restriction. And that's back to our -- how did we prepare, how did we prepare our chemistry, our equipment, our people to ensure that we can do that. And definitely, it's a very strong testament to our ability to manage projects at that site. So if I go to the following slides, and I look at -- I'll touch base on the SAPESCO acquisition. We closed that as we announced publicly in June. And when I say closed, meaning that all parameter on the SPA is agreed upon. And with the -- we have all the verbal agreement from the government. And now we are just working through the logistics of the notary, et cetera, et cetera. So we took control of the company 1st of June, and the company now we are integrating into our business in Saudi Arabia, in the U.A.E., in Libya, in Kuwait. And Egypt is now is a new country where we operate. We are discussing with the clients how to operate and how to grow our business. Definitely, it's an accretive acquisition from day 1. It's -- as you saw, we had the negotiation on the deal to drop a bit the price and to pay as well on to manage the working capital. So we are paying that over the coming 6 months until we end. And we added some earn-outs for receivables that they have to collect. And in addition to that, we maintained our stance that we only issue equity at $10 a share, regardless of what's the share price, and that's exactly what we're doing. And because of SAPESCO and the ownership, they believe the story and they know how valuable our stock is, they accept it and they took the share price at $10. So a significant synergy. The company has an amazing SAP platform, and that is the platform that we are launching and taking the entire company into that new ERP system. So if I go to and touch base and update you on our ESG, which is the core and our belief on the whole local content story of the region, that is the whole reason for having NESR and having the largest indigenous company that deliver on its promise. So if you look at the following slides and you see what did we do on the corporate basis. It's very, very important that if you are part of that national content and part of this responsible company to the community that you play a big role during the COVID-19. And it's part -- the first thing is we kept 100% of our crew intact, we did not release anyone. And in addition, we are actually hiring when everybody else are releasing people. We maintain the safety of our employees and try to explain to them, help them to do the same thing with their families. We donated into all the initiatives in the different countries to ensure that we contribute positively to the environment where we operate, and we are responsible citizens. And this was very, very well respected, obviously, by our customer, by the community. And again, it's an obligation, being part of the community. If I look on the other side on the diversity, and I look at where we are a strong believer of, that the world is definitely equal between both gender. And we ensured that even the Middle East where stereotype is saying that the women do not play a big role, it's actually the opposite. And you can see that our senior management, we have more than 30% women in leadership. Our General Counsel is a lady, our Controller, et cetera, et cetera. And we make sure as well that this translates into the entire population. And we have a strong position everywhere, in every country. And the best is Saudi Arabia. The head of our -- the whole Director of Supply Chain is a lady, a very prominent lady, a very young lady as well. And that's where we want to make sure that the entire company is one with the same diversity and inclusion in everywhere we work. So if I now move to the -- what I call always the undervalued story of NESR and why it's not reflected into the company, and you look at the growth. If you look at that slide, look at Slide #16, and you look at where we were in the last downturn. So when we were not in charge and the company were 2 separate companies, Gulf Energy and NPS, they grew in one of the worst downturns in '15, '16. Again, it's the resilience of the Middle East and the strength of these companies being local companies and their small size. When you're small, it's actually better in the long term because you can still maintain to grow while everybody else is shrinking because you are not everywhere. You are not part of the exploration, so you don't get hammered by the decline. You're not part of LSTK, so you do not get any effect of the cancellation of the project. If you look now, the 9% CAGR that happened to these companies over the past, from '13 to '17, now as soon as we took over and we took all the synergy and we added all the segments, we took the company to 20%. So we maintained the 20% growth trajectory in the last couple of years. And this year, as it's looking so far, is the same. So despite the fact everything happening around us, we believe we will maintain the growth story. We will grow when everybody else is shrinking. And I would say we might actually -- it's looking so far that it's even better than expected in the last quarter. So it's going to be opposite to everybody else. And if I look at the following slide, and you can see that, again, the trading of the company is definitely, I would say, extremely cheap. So -- and if you look across the globe, across all the diversified, the equipment, et cetera, we would be the only company as far as the analysts are concerned, from '20 over '19 and '21 over -- and from the valuation from a growth, we will definitely have the only growth story across the entire OFS structure. So with that, I would like to open up, Sean, for any -- for the question. And I think we have a discussion for any more details about the macro. Thank you.

Sherif, great. Thank you for that overview. So to start, I'm thinking about beyond the near-term disruptions that we're seeing in the oil markets. One of the key debates we've been walking through this morning has been the role of shale and delivering incremental barrels over the coming cycle. I mentioned there will be a call in the upstream again, and the upstream need to fill that call with incremental barrels. Can you just talk about your confidence in terms of the long-term demand for activity in the Middle East region? And I think about that both from oil and gas perspective, to the extent that the incremental barrel is getting more service-intensive. And you mentioned this earlier, but we want to really reemphasize the importance of tight gas in terms of meeting the long-term strategic objectives of a number of these countries in the Middle East. Can you maybe just talk through that a little bit?

Yes. Sean, the Middle East, I think everybody agrees with that, it's going to be the last drop of oil, right? There is absolutely no question about it. The last drop of oil will come from the Middle East region. It's the lowest-cost producer, and it will always be the lowest-cost producer. Whether is it going to stay at $1 or $2 or $3 or $4, no, it's going to move up because of the high intensity. So you're going to get more intensity and more brownfields, which is actually good for the service company because then you're going to get more work done per well or productivity. So it's going to move from the average of $6 to $8 to the $18 to $20 on the long term. But definitely, when they are on that scale, everything else is going to be in the $50, $60. So they will be until the end, the last drop of oil produced will come from that region. If you look at the demand, any -- by any means, even with the electrical vehicle, even with everything you can imagine, definitely, the world would need at least 60 million to 80 million barrel a day, right? So even at the worst case scenario, the Middle East will always be producing oil and gas. And that's where they look at that from a long-term perspective. I think the shift that happened in the region over the past 5 to 6 years was that mindset shift of "I want this to be in the ground, and I'll produce it for the next 100 years" to a shift to "Why don't I monetize part of it, and I'd use that money to do something and diversify my economy," I think that's the shift that happened over the last 5 to 6 years, which is basically getting the sovereign well formed to be much bigger and to getting -- to diversify the economy while you are still producing. So basically, get -- maybe that oil and gas is going to be a story until 2050, not 2100, right, or 2200, right? So -- and I think that's what it is. This gas is definitely a huge internal consumption story. You know the region gets extremely hot in summer. The air condition, they burn a lot of crude historically just for internal cooling. And that's where they want to make sure that they don't. Part of it because of ESG and decarbonization, they do not want to have any burning of crude. And part of it is definitely for getting the oil to be exported, right? So they found these huge fields of shale or unconventional, which is tight gas, like we have in Oman with the success of the Khazzan with BP, with the Mabrouk. You have now in Saudi, the Jafurah, the South Ghawar. There is so many fields, the Sahara sand, the tight sand. So you see a lot of activity, a lot of success lately with people saying, okay, the shale -- the U.S. shale were extremely successful in getting gas at a very low price. The technology completely changed the ecosystem with the horizontal drilling, the fracking. Why don't we do the same? And I think that's where the whole shift of the shale or the unconventional in the Middle East, which is going to be huge work. This is -- the largest growth that's going to happen in the future is the unconventional. If you get 3, 4 fields with the same success of Saudi, you're going to get -- you're talking about 10x in magnitude. I mean if you look at what we're doing today in Saudi -- if I look back in my earlier life, in 2010, I would have never thought in my wildest dream that we would be able to do 8 to 10 stages a day of fracking in the Middle East, what we do in the Middle East, impossible even to think that. For people, some of the audience, we used to do a stage every week. It's per week we do a stage. So to do 10 a day, that's like unheard of, right? So definitely, the whole economics becomes different. And for the customer, they see that today, I can produce those reservoir exactly like the United States managed to do.

Well, that's a good segue. And I wanted to touch more on the next year JV -- or the next year arrangement, I should say. Second crew already operating, really impressive. You're going up against formidable competitors who have a lot of experience in the region but also back in the U.S., most certainly, when it comes to pumping. Just to elaborate on that, what is the addressable scale of that business for you in the medium and long term?

If you continue with a very modest growth this year in the unconventional arena, I would say, you can have 2 -- like our 2 fleets now would be running in full without any interruption. Once things open up and demand is back and the travel restriction is lifted, I would see a third fleet going to the region very early by year-end or Q1 next year. So having that infrastructure, having that delivery, having that performance, I would say we would be one of the major provider of fracturing in the region, significant. So I would say people would be looking at not 3 providers but would look at 4 providers.

Yes, so that's clearly an important opportunity. As I think about the next year arrangement, I think about the SAPESCO acquisition. As you look across your opportunity set for the next 1 to 2 years, which area is seen the most fertile in terms of the strategy your taking, technology in the U.S., exporting it into the MENA region and then also just these other opportunities that are maybe M&A-related in these areas where you can either expand product lines or geography, which specializes in both of those things? Just curious at how you look at those 2 grounds as kind of maybe less organic opportunities and how those may unfold the next 1 to 2 years.

Well, so if I look at it, I would say the unconventional becomes -- is the largest because if you replicate Saudi Arabia times 3, it's quite big, right, in the size. M&A continues to be better, looking better. And the sense of it is take the advantage of the overall climate of dropping of activity, of pricing, people getting to realization that the ask that I have before is not going to happen, I need to get more moderate in my multiple and I need to get more of an M&A with the same price and same kind of style of SAPESCO. People are getting -- so the Middle East, they are all into the 10, 12 multiple. And I think now they saw that how we closed the SAPESCO deal, they should -- that's the expectation. Their expectation as well -- if I take share, it's not going to be less than $10 despite the fact -- because we are undervalued. So I think equity is going to have to be at that price, and they have to take the risk. And they believe that the stock is going to go at a much higher price. And I think they are getting to that realization, and I see a lot of it. On the third panel -- or the third, sorry, pillar, we see the acceleration of the partnership next year. So today, we are negotiating 3, 4 other deals, different technology. The people, they are seeing that being with us is much better than trying to go there alone because going there alone is an almost impossible task to achieve. Navigating around the region and to be well -- to even land the contract is almost impossible. But having to deal with us in a win-win and a very transparent and, if you want to call it, honest and equitable arrangement is much better, and that's exactly what we do. And we always -- as we tell all our partners, we want -- we wanted to make money and we want to make money, we want to make sure it's beneficial mainly to the customer, that's number one, and then both of us has to benefit. And we are not -- if we do not have something to offer that differentiate us and make us something different, we should not do it. So getting something in the U.S. that has no value in the Middle East, despite I get -- we get so many companies knocking the door, we tell them we have no interest because you bring no value. We know our customer. You do not make any difference. Or the technology is so advanced or so complicated that we know we are not ready, we do not take the risk because we want to maintain that trusted partner slogan with our customer that -- basically, I want to pick up the phone and tell my customers this thing would work, they trust me without even checking. And I -- this is too important, to maintain that accord with the customer.

Sherif, we're about out of time. So that's a good place to leave it. Sherif, thanks again on behalf of JPMorgan. Great to have you here today. Thanks, everybody, for joining this session and have fun with the rest of the conference.

Thank you so much, Sean, and appreciate the time. Thank you.