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

So I'd like to introduce Mr. Sherif Foda, Chairman and CEO of NESR. NESR is the only pure-play Middle East oil service provider, providing production services and drilling and evaluation services. Sherif has been Chairman and CEO since the company's inception, which came together in June of 2018 with the acquisition of 2 leading regional Middle East companies. He's been in the oil and gas business for 25 years, the majority of which he spent at Schlumberger, where he served as senior adviser to the Chairman and President of the Production Group among several other duties. Sherif, thank you very much for joining us today.

Thank you, sir.

So maybe let's just start with your recent earnings. You recently released your first half results, an important milestone to get your stock relisted. Maybe we can just talk about kind of the process and the time line -- and the time line in terms of what are you seeing in terms of the relisting. Let's just start there. What do you think? What needs to be done? How close are we? Have you kind of hit all the milestones that everybody is looking for?

So what we believe is there is a kind of like a checklist that obviously our folks in the listing department go through. And part of it is like you had an SEC inquiry. You closed it. You finished your account on time, which is -- was the reason not to be delisted, which we did. And first time it was the end of December. Then we did end of April. Then we just now finished our H1. So we are totally current. We are going to go to quarter from next quarter, quarter reporting as we used to do before. So we strongly believe, absent to any other question they might have, it's just a matter of administrative timing. And that administrative timing could be just days or weeks to be able to close that chapter.

Good. Great to hear. So in your results, your first half '24 revenue is up 16%. It's on track to hit at least 15% overall compared to 2023. So how have the results lined up with your expectations for the year? Is it largely in line, a little bit better, a little worse?

I think it's as per our expectation. We believe we kind of -- obviously, we live there. We are very close to the customer. So we know what they spend, when they release rigs, when they add rigs. So I think the only thing I would say, the mix of the increase per country, I would say it was a bit different than expectations. So some countries were more up. Some countries were a bit down. But overall, it's the same, what we expected. We expected -- and we did the same thing with our expectation for the following year. So we kind of very -- because the Middle East in a way, you have a very good visibility that is different than like the U.S., whether it's the spot market or the thing or month-to-month. There, you have multi-years, so you kind of know what will happen. And then the difference becomes geopolitics or some sudden difference in direction. But the contracts are long term.

What were the countries that surprised you to the upside this year?

I think Kuwait because of, obviously, we knew with the new leadership and the objectives. But I think just to make sure, as it has been slow on uptaking that growth versus the Saudi and the UAE, and I think this year, obviously, we saw that they executed on their program. And I would say the down was mainly the -- some of the geopolitics or some securities. So it was less than our expectation. Example, Libya was supposed to be solved. And we -- I was there, and we met with the NOC Chairman and, we met with the leadership of both East and the West. And everything was supposed to be closed, and they had the budget of $7 billion to be distributed to the companies, but it did not happen, right? So I think Libya was a negative. Some delays in Iraq because Kurdistan did not come back. They still -- they were supposed to agree on the production with Basrah, with the South, but they did not agree. So then definitely, that activity still shut down. So that's the mix, I would say.

So on balance, aside from any kind of geopolitical issues that might come up, what's your thought today as to where kind of Middle East upstream spending will be in '25 -- actually this year -- first maybe '24. What do you think '24 is going to end up versus '23 overall?

10%. 10%.

Any thoughts on kind of '25? Similar?

5%, 6%.

5% to 6%.

Yes.

Is the slowdown just oil price related or...

Oil price related, delay in projects. And obviously, we did not forecast the amount of jack-ups that we released in Saudi. It's going to be compensated with the upside of the unconvention. But overall, the budget, I think, of Saudi will be kind of flattish to up by 5% or so. Unless the oil price goes -- remains in the 80s, then definitely, they will -- they have the capacity and the capability to bring this upwards. Kuwait will be a huge increase for the coming years, at least until the end of the decade. And I think it was announced very elegantly by the Deputy CEO. And he said we are going to drill 6,187 wells until 2030, and we're going to spend KWD 10.6 billion, which is, what, $58 billion. So it's a very clear commitment. And the rigs are coming because the rigs are in the country. They did the tender, a huge tender, which just got awarded. And they are -- they have as well -- they started elastically on the land, which is lump sum 20. And they invited newcomers.

So what was the driver behind the inflection in Kuwait? I know we've been waiting on this. I know that Kuwait has gone through the KOC Chairman changeover. The energy minister also. Is it just bureaucratic things just all finally lined up to move ahead? Or what's been -- what's sort of the story in country for Kuwait?

It's really -- the program was always there, right? And they had the program for, back in the day, 4 million barrels by 2030. Then it was pushed to 2035 and 2040. Obviously, with the Chairman who was coming, [indiscernible] and KOC, they put this into action. And they managed to get all the tender documents done. Rig tendering happened, did occur. Commitment is there. They strongly believe that they should get to the vision of now 2035, which is basically -- that's why the action is happening, right? I think very strong leadership in Kuwait today and a very big ambition. Plus they just had, as you saw, a fantastic offshore discovery, which means that Kuwait will have an offshore play. So it's going to start to be a jack-up. The plan is to finish the 6 wells currently that they have, and then they are going to tender for jack-ups. And obviously, it's going to be typical jack-ups and services. It's not going to be lump something. It's just going to be both, and based on the size, it could be a big play.

[indiscernible] there's going to be plenty of available jack-ups for...

Absolutely.

We'll get to that in a second. You talked about your core anchor countries on your call, and you made a comment about guiding to a consistent measured growth through 2027. You just kind of laid it out, the case in Kuwait. But how should we think about some of the other countries, where you have the visibility? What gives you that confidence out to 2027? That's probably more visibility than most companies could walk about.

Yes, because we have a very good visibility on 2 things, right? First of all, these are objective of countries, not companies. And I think that's what people in the U.S. have to differentiate. This is not a company working in the Permian, based on the cash flow, based on the return, based on what investor tells them. This is a GDP of a country where the entire export, the entire dollar, the entire thing comes from oil and gas. So nothing is going to change there because it's going to be there for at least the next 20 years, right? So now each one of them have a certain program that is government related with an objective. So ADNOC, for example, very clear. I want 5 million barrels. It was 2030. I moved it to 2027. Now that program is extremely successful, and I might even reach it before. And I have 140 rigs run by my arm that is a service company, and these rigs, we're going to increase to 150 rigs. Now can they -- and now I have a gas program that I want to do another unconventional gas like Saudi. So all this is a growth, but nothing is going to change it even if the oil price goes to $50, right? Some of you have announced very clearly, and I see we don't need the 13. We keep the 12. We have -- we're going to stop the oil burning. We're going to be able to give 1 million barrel additional now to exports. So all these programs. Kuwait is the same. So I think the one that you don't -- or managed but is stable, has been stable between PDO, Oxy or BP, other body working there. I think the one that always have a question mark and you do not know is the people where there is a geopolitics related to it. So today, for example, Iraq, it's a geopolitics. Libya, it's geopolitics. So this, yes, if they could have a program like. If you recall, Iraq was supposed to be 7 million barrels back in 2013 or whatever. Never going to happen, right? Because I mean it's not only that. There is a lot of other factors. And a lot of companies have to come and be able to drill, and the infrastructure and the gas, which -- you know now Total, for example, took that contract where they take all the gas flared and convert it to power with renewables. But the rest of the guys are very convinced, and that's why I'm saying until 2027, it's very crystal clear what's going to happen. The only difference would be the countries with geopolitics. Maybe they will not make the numbers. The GCC are very adamant what they couldn't do.

So your largest customer is Aramco. There's a lot of investor concern about what's going on there. We saw earlier this year they pulled back on [indiscernible]. We know they have Jafurah coming up. Rigs are being dropped. Maybe help us sort of pull all that apart to help us understand. I think the latest thing we've been hearing about is letters being sent that seems to -- has gotten people kind of nervous about what's going on at the margin. So maybe start with the letters. What's real? Some people have got them. Some people haven't.

No. We didn't get it is not saying the truth. Everybody got it. So no, seriously, there is nothing new here. I think it's a bit out of this -- you have a long-term contract with the customer. And there is some activity drops. There are some rig drops. So they are telling everyone, you have the opportunity until the end of '25 or whatever to -- if you want to elect to give a discount, an additional discount, a special discount. It's not the first time. And honestly, there is nothing wrong with it. I mean if I were in their shoes, I'll do the same because I can. Because you have -- some of the rigs are out of contract or some of the rigs increased the price dramatically. So maybe I get back the price I used to get before. So I think it's across the board. And again, I tried to explain for the rig companies where you had a significant price increase based on inflation, based obviously on the new build and everything, which is rightly so, now you have a market that is different than before. So the ball is in not in your court, right? So now I am the client. That is 10 jack-ups available. I'm going to check the market. Nothing wrong with it, right? I think for the service industry, we did not get any price increase. We had to absorb significant inflation during the post-COVID. We had a huge diesel fuel increase in majority of the Middle East countries. A lot of it actually made it free market like UAE. So we have to put all diesel and all the equipment. There is no gas. I mean everybody is looking for gas. It's opposite to the U.S., right? So -- and you have the inflation that happened in the shipping. We have now the Red Sea issues with the disruption. So our cost increased significantly. So we do not have any room to do anything. It is not like you don't want. We love to work with our customer and be able to share when things are good, right? But it's just -- there's nothing, right? So -- and I think that's the majority of the service industry needs. So that's the discipline.

Neighbors said something like 30 land rigs were dropped. Does that sound right to you? I was surprised to hear that number. That seemed a little higher than...

It's basically -- when we say it dropped, in the Middle East or in Saudi?

It was Saudi. Sorry, it's Saudi comment, yes.

No. What happened in the Saudi, so Saudi basically -- again, back to -- I think that's always the question obviously. You had 12 million barrels. Today, Saudi can produce easy, without -- no problem. And they opted to go to 13 because they said the world needs 13 million. The oil price is $100, and I am going to take that initiative to invest $30 billion, $40 billion to bring that offshore. 800,000 came from the increment offshore, 200,000 comes from the land. And then as the whole macro changed and China growth tamed down, the import is less. So they said, we don't need to do this now, which is absolutely a smart thing to do. Let's -- we have the reserves. We have the oil. We do this whenever we want. We don't need to do it now unless we need the additional jack-ups we got for that increment, which was around 25 jack-ups. And that's what -- they sent 22 first, and then now they're sending [ 5 4 ] that is next, right? They -- on top of it, with their ESG, they are going to 50% renewal and 50% gas by 2030. So they said, okay, let's go full on, increase our production of the gas and add rigs to the gas dramatically. And that's mainly Jafurah obviously because that's a pad drilling, which is now an amazing performance like the Permian. They frac 20 hours a day, et cetera. So it's the top. The improvement on the rig and the lateral is almost a factor of 3x. So these wells used to take plus 40 days. Now they are in 14, 15 days. So they did a remarkable job. So that's it. So now some of the -- what we call the easy oil comes with some land rigs. They release them. So I do not know about that number 30, how come. But I think maybe -- I think sometimes people get it out of context because it's rig days, not rig count. So basically, what around -- what the client does as well a lot is there is this cost of extended maintenance. So I need -- for example, there is maintenance that happened to the rig with the drill work, the wellhead equipment, top drive, et cetera. And they say, okay, it takes 60 to 90 days to do it. Go ahead and do it. And that rig goes to maintenance. So -- and they can do that now because they don't need oil, right? So I think the overall effective utilization of the rigs, some of the rigs that they only been used for 7, 8 months, a year or 9 months, then they take the effective. Then they make the -- but there are the 30 rigs. They threw them out of the door because some of the rigs came and some of the rigs left.

So let's talk about Jafurah a little bit. You were one of the keys to unlocking that play in the first place about 5 years ago or so. You've been very active there for the last several years. So where are you today in that field? I know there's been a lot of tenders being announced. So where are you today? Do you have an expectation of how much of this you want and kind of -- or different parts you want? How are you thinking about this opportunity?

Yes. So Jafurah, as you rightly said, back in the days in 2019 when we -- within Aramco and I saw my dear friends there and how they are just doing 2 stage a day, 3 stage a day. And they were working obviously with -- at the time with one of the multinational guys and said, I mean, we can do so much better. And we did the team with next year at the time, got them to the U.S. And then in a couple of months, we managed to do 10 stages a day, right, and then above, above. And since then, the industry -- after that, obviously, this was re-tendered. This was tendered in '21. And we got another multinational and ourselves to do the Jafurah. And both of us are doing very well with Aramco, right? So Aramco is happy. Aramco has well worked with us extremely well. They are a very good customer in the sense of let's optimize the lateral, let's optimize the fluid that we pump, let's optimize the dissolvable plugs. So we do a lot of science into that project, right? And now we are consistently pumping à la U.S., right? So we just celebrated 22.9 hours or 23 hours pumping like 19 stage a day. So they are very happy. But -- so both of us are doing very well on that project. So obviously, that Jafurah today is around 8,000 stage this year. It's going to go to 25,000 stage into the peak, right, when all the rigs are on all the pads. It's a 10,000-foot lateral, so they're going to get a much better efficiency or basically lateral frac year-on-year. So definitely, they are going to get a new player as well with us. So I think the pie is going to get bigger. So I would say my hope is the guys are going to be disciplined, so then -- because everybody could have enough work for the future. So this is going to come, I would say, sometime next year.

Interesting. And just in terms -- if I just isolate Jafurah for you, how much do you think your revenue will grow from that field from today's level in like 12, 18 months? Is it like 20% growth?

Minimum. Yes.

Minimum. Okay. Just starting...

Because you have direction drilling as well.

Right.

So Aramco decided to tender the direction drilling. I think they announced it publicly when they did the 25 billion award with the EPC and et cetera. And they awarded 2 tiers, Tier 1 and Tier 2. So we will have -- we'll participate in that, too. So then overall, our position becomes stronger. We got awarded as well some cementing work for the additional rigs. So overall, that business is quite significant. And as you know Aramco, as you saw it last time you were there, the uniqueness of it is the immediate -- the unit within Aramco. So they give it a lot of free hand to award, to contract. All these contracts are separate from your MSA. So you have an MSA, and no, you have to have the budget and a contract for it, and they package as well. Sometimes I tell you, okay, 10 new units are coming. Let's tender the cementing for those 10 rigs. And we all put a price very quickly. Not 9 months, no. Let's put the price, what will be the price per -- and then they say, okay, now X, Y, Z gets this contract for these additional 10 rigs. So I think a very close coordination with Aramco on that. And I think that's why the success of the Saudis in this field is quite remarkable. From the start when they look -- did the exploration with a lot of science, spend a lot of money to be able to make sure that when the development phase, it becomes an execution. And a Lean Six Sigma has to get the best out of it from rig manufacturing, from efficiency, from people, from water, from sand. Imagine. This is enormous, right? That's why we are involved, for example, with them on how to make sure that, for example, how can we eliminate waste, get -- how to get water for all these 25,000 stages in a place like Saudi, right? So can we just recycle the water? Can we get these minerals and do something with it? So we don't have to dispose what -- and we could start this all in this Saudi Green Initiative, COP. So they want to get to like innovative way to develop the field differently.

So before I get into some of these new products that you're bringing to Jafurah and then just Saudi, just curious on the pressure pumping side. You were in a partnership with NexTier several years ago. You ended up buying out that equipment, right?

Yes.

What do you do for it? Do you want to get bigger in pressure pumping? How do you do that? DO you -- where you get the equipment? Or is it a partnership? Do you buy it?

No, no, I buy now with CapEx. So I did the partnership with NexTier not because of equipment. Because I wanted the know-how. I wanted that, and that's what I told at the time Aramco. I remember in 2019 when we went together to the Permian. I said, you need those guys. You need those -- the frac master that has 3,000 jobs on his belt, and he's 24 years old. You need the 300 years to do this in the Middle East. So we need those guys to be our frac master. And then we train. So now our crew is 90% Saudi. And they do this, right, because they train with those guys. Now all the additional equipment, we buy that equipment. We bought -- so today, we're run about 4 fleets approximately between the -- so we have another in Saudi. We have in Egypt. So this is basically you're buying equipment from everybody.

You own 4 fleets now? I didn't know.

Yes.

Okay. Frac master. I haven't heard that term before.

He is the lead -- they call it sometimes here the treater.

The what?

The treater, the guy that treats the...

So just talking about some of your technology offerings. That's been a big initiative of yours last few years to directional drilling. I know it's one of them. You're talking about the water side, the water treatment in that business. Just talk a little bit -- so the directional drilling side, so just give me your first kind of commercial offering of this new tool. Is it Saudi with Jafurah, as you just mentioned? Or are you already...

We already run it. So we launched it. And I mean what we call soft commercialized it in February in IPTC during the Saudi forum and then the Omani forum. And then we run it in Oman. We run it in Saudi. We run it in Kuwait, right? So now what we're doing is all this, what we call the first jobs to be able to get it. They get it. We feel comfortable that the tools can drill as we want them to drill. We want to make sure the MWD runs exactly what we say, real time, and LWD, logging while drilling. So we have basically triple combo plus, plus. That is unique because it's one color that has the 3 measurement plus the [indiscernible] as well. And we have that and we run it. We have contracts already in place signed with those customers. So now it's a matter of proving the technology to be able to get more rigs. It's a deployment story now. I don't need to win a contract. I want the contract. Now I need to deploy it. And the way we do it is we do it extremely, I would say, conservative in the sense of ensuring that what we say can happen, can execute. We don't say it will drill at a 25-degree double edge. No. We say what we can do. And then we start to taking wells that are, I would say, easy to drill or not abrasive to make sure that we prove ourselves, prove the tool, get the reliability and then making sure because we kind of know that journey is very complicated. A lot of people failed before. Obviously, we have a very strong technical team that worked on that tool since 2019. So yes, so that's where it is. But that's an addition, and that's why we've already talked about it a lot. Excited because it's something we don't have and we're going to have and it's internal. It's ours. The partnership -- the other partnership we have which we established very strong people that we have a very good partnership with them, we bring them. They don't have presence in the Middle East. We bring them together with us. We have exclusivity. They do whatever they want in the rest of the world. But in the Middle East we run together, but we run as a conjunction because we have amazing infrastructure, bases, yards, obviously, local content. We have a local company. So we can bring them easily and operate. And that's Cactus. That's Phoenix. That's all these guys. So this is going ahead. And more and more, we are talking. So now we're talking to someone new on the snubbing, for example, because all of a sudden, a couple of the companies want to do snubbing à la U.S. So we're looking at it, right? So that's how -- I'm not going to start a snubbing business, but I can bring someone from here that is like very good and say, okay, let's go there and partner together and to execute that work.

Makes sense. Yes, makes a lot of sense. On your recent call, you talked about a new segment called NEDA, kind of how is the water methane and new energy product lines. Can you just talked about the water side? Is water going to be kind of the leader of that group for now?

Yes, I believe so because of the scarcity and no existing of freshwater. And it is so valuable, and everything in the Middle East is our -- everything. So all your golf courses, all, everything, your houses, this is all on our plants. So you should keep that to this kind of activity, but at least ourselves, we should recycle the oil and gas water, not to take -- our order is to inject, to make more oil, right? So I think that's why we are focused on it. Because as well, we got technology outside of oil and gas adopted to the oil and gas. But it is with the ESG impact segment that we called it. We rebranded. Now we become sizable. And as I said always, this means call to action. So after the -- all the COP27, COP28, let's take some action, right? Let's measure, measure the emission. Let's stop flaring. I think the industry itself should do that, should walk the talk, right?

Well, I think we're on the verge of an emerging -- reemerging story here in NESR. Looking -- very much looking forward to the next 12 to 18 months. I'm sure you're going to do well, and hopefully, relisting very soon.

Very soon. Hope for that.

Thank you very much.

Thank you.