National Energy Services Reunited Corp. Q3 FY2020 Earnings Call

Greetings and welcome to the National Energy Services Reunited Q3 2020 Earnings Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Mr. Chris Boone, Chief Financial Officer. Please go ahead, sir.

Good day and welcome to NESR's third quarter 2020 earnings call. With me today is Sherif Foda, Chairman and Chief Executive Officer of NESR. On today's call, we will comment on our third quarter results and overall performance. After our prepared remarks, we will open up the call to questions. Before we begin, I'd like to remind our participants that some of the statements we'll be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I, therefore, refer you to our latest earnings release filed earlier today and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details on reconciliations to the most directly comparable GAAP financial measures can be found in our press release, which is on our website. Finally, feel free to contact us after the call with any additional questions you may have. Our Investor Relations contact information is available on our website. Now I'll hand the call over to Sherif.

Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. We are very pleased with another outstanding record performance this quarter. We grew 35% year-over-year and 7% sequentially, which is a phenomenal achievement given this growth has been delivered against the backdrop of continued industry surplus supply, compounded by pandemic-related effects on the global demand. I believe we are an outlier in the OFS space for delivering such results when the rest of the industry is contracting with these headwinds. As I have previously stated, we have achieved this due to the stellar effort of our teams on the ground. We not only have managed to hold the line but have learned to thrive in this very tough environment. I cannot speak highly enough of our management and operation team in each of the countries. I am blessed to have such talented individuals who run their operations with an unmatched passion and dedication. Most of our leadership in the country are nationals of the country. And not only do they have an acute understanding of all the nuances of what needs to be done for the business, but they also have stepped up to the roles as leaders in the community. Just to give you an idea on how well we have managed the operations, we have increased our operating hours this quarter. And we have added headcount to manage our growing operations, while the rest of the industry is laying off people. All this while being acknowledged as the best service quality provider this quarter by one of our main customers, measured by nonproductive time or NPT during operation. One of our main differentiators is our execution ability during the COVID-19 and maintaining 100% capacity at all times. We have been very clear that we will handle this crisis by fundamentally modifying and strengthening our processes, essentially a big emphasis on planning short and long cycles. We managed the recent curfews reinstated in some of the countries, and the continuation of some border shutdowns. Difficulties include changes or importing spares or chemicals on time. Our crisis management team is still in full action and so are the emergency response teams in each of the countries. And, yes, in this new normal, there is an extra layer of cost that you have to bear for COVID preparedness and handling. I just visited the Middle East and was with our customers in different countries. By the time I finished my trip, I had taken 4 COVID tests and had quarantined in a couple of hotels for a few days. I was very pleased to see my dear clients and friends. I'm very thankful to our customers for giving us their trust and the opportunity to serve them. All these costs do add up, even though we have a large local content in our company. You also have to carry additional backup functionalities in the field in terms of personnel, larger inventories, some of which our suppliers carry and some we have to. Meanwhile, you have to plan for any eventuality of a second wave and the need to keep all these costs in place to ensure we are not taken by surprise, ensuring the safety of our employees, and readiness to our customers. Coming to the macro, which has evolved in some areas since our commentary last quarter. I won't spend a lot of time on the demand and supply debate. But as we know, the global economy is seeing a contraction due to the pandemic and certain sectors like air travel have been affected severely with longer recovery ahead of them, while others like shipping have recovered much faster. Our view is that the demand will rebound sharply and the market underestimates how fast the demand will come back once we have a handle on the situation. The airports are not going to be always empty and people are eager to get back to normal life, although this won't stabilize before we see a vaccine and more clarity on the potential second wave. However, the fact is our industry continues to drastically under-invest for 6 years now. Therefore, most of the rebound in energy needs will come from the Middle East. As you saw in April and May, the main players in the region have the capacity to turn it on and meet the demand as the most reliable supplier. And we believe that would be the case when the time comes again; this could be sooner than many expect. Meanwhile, as I mentioned last quarter, we continue to see the same pattern in the MENA region. The core GCC markets have been measured and deliberate in their approach. We see more rigs released lately, but overall they run that business for the long term and the health of their countries and populations. Others, the drops have been significant as expected and are characterized by smaller independent or larger IOCs with significant budget cuts, security concerns, pandemic fears with cash constraints and others. We are seeing anywhere from 40% to even 80% cuts in some of the activities. Given our size and scale and also our geographical exposure, we are able to manage these activity reductions by essentially gaining market share in either the same country or moving assets to other countries where we have gained recent works of replacing competition who can deliver on their work scope. The best example, we managed to mobilize for our recently awarded coil tubing and pumping contract in Abu Dhabi by marshaling most of the resources internally. This also helps our overall utilization, which we have to balance with the need for adequate safety margins during this pandemic. Last week, we announced that we extended our 5 main contracts in PDO for a period of up to 9 years. And we landed an additional contract in drilling, which gives us an option to further expand in that space. These contracts, which are worth over $1 billion form the backbone of our operation in Oman and our drilling segments. It is a tremendous achievement for our Omani team, working very closely with our customers to achieve a mutually beneficial outcome. I would like to thank the ministry and PDO for their trust in our abilities and for their guidance throughout the process. This cements our foundations and ensures we can amplify our investment to achieve our goals, to maintain and secure the highest level of harmonization and in-country value. We have big plans to export Omani talent to meet the needs of human capital in the region. Today, we already have Omani nationals working in several countries. We will be hiring and training more to ensure we are ready for the future. As an example, today all our thru tubing business across NESR is headquartered in Oman and they support all our operations across the GCC and the larger MENA. We proved the model works and now we can do even more as we expand on our offerings and contract duration. As you have seen, we are heavily invested in the social aspect of our business and engagement in the region. And this is ESG in action with a direct consequence on the sustainability of our business. Another example of NESR ESG commitment is how we have taken our fracturing operation to the next level. As you know, we continue to break all operation records in terms of stage efficiency and what's delivered. Meanwhile, we looked with our customer how to continuously improve on the environmental impact. From smaller projects like solar lights for our camps and sites to our latest endeavor where we have worked with our customer to optimize the frac design with cutting-edge technologies to effectively reduce the slickwater fluid volumes by one-third. This means we are now transporting and pumping one-third less water, which is more than 0.5 million barrels a month. This has a material effect in a water-stressed area like the MENA region. In addition, such fluid systems supported the reduction of the frac fleet carbon footprint by 30% as the frac jobs are consequently shorter. We are working on more initiatives with our clients and our partners to implement different technical solutions to the challenges we face. Just keeping to the water example, we are working very closely to come up with a solution to use high sulfate water for frac jobs, which will completely eliminate the usage of over 0.5 million barrels of freshwater for these jobs. In the same spirit of optimizing and making fractures better, we have recently invested in a technology company called Deep Imaging, which we are going to shortly introduce to the region. This technology allows us to monitor fracs as they happen downhole in real-time and uses electromagnetic arrays on surface to measure the changes in the reservoir as the fracs are happening. This will allow us to control the fracs in real-time, which is the holy grail of frac optimization. It is estimated from public studies that only 60% of the frac stages produce as expected. And this measurement technology will allow us to further improve the existing processes. Another tech company which we are partnering with is developing technology to deploy downhole pressure, temperature, and flow rate sensors during the frac jobs, allowing us to measure both the frac and flowback performance. To marry all of this and to give the maximum value to our customers, we have also partnered with Will Von Gonten and Will Von Gonten Laboratories, who are the premier reservoir consultants and have a state-of-the-art laboratory in the unconventional reservoir space. We are already working with them in the Middle East for one of the NOCs, who are in their planning stage, and we will continue to develop this across the region. So as you see, we are on the leading edge of taking the frac technology into the digital age, which will help reduce both the frac footprint and contribute positively towards the larger ESG goals. In Drilling, the K-Bot investment is bearing fruit and this shield-anything technology is now sold in the Gulf of Mexico. As you may recall, K-Bot is making shield-anything ramps, which will enable operators to shut in the wells if everything else failed in the case of a blowout. This innovation uses technology from space programs and military applications and applies it to a problem in the oilfield environment, which has the potential to take a terrible human, economic, and environmental toll whenever things don't work as planned. As in our norm, we invested in this company and we are now in advanced stages to take it to the region where the customer wants to apply this technology to use it as a barrier in H2S environments, which when it leaks is known as the silent killer. We have several other technology investments and partnerships in the works, which we shall announce in the near future. They all have the same purpose: how to solve our customer problems using the most innovative technologies, which will help our clients to either produce more from the same reservoir or produce at a lower cost while reducing the overall carbon footprint of the operation. Lastly, I wanted to give you a quick update on SAPESCO, where we have now fully closed the transaction. The integration is ongoing, and we are already seeing the benefit of this outside of the main operations in Egypt. Our customers in Egypt and outside have received the transaction quite well, and we have leveraged that position to either win some awards or bids for some tenders, which previously NESR would not qualify for. So a great start and we have big plans to expand their industrial service portfolio outside Egypt. And on that note, I will pass the call over to Chris to talk about the financial details.

Thank you, Sherif. As Sherif mentioned, we reported another record quarterly revenue record with third quarter revenues of $218 million. This represents an increase of 35% over the prior year quarter and 7% over the second quarter. The sequential and year-over-year growth was driven primarily by the new frac product line in Saudi Arabia, a full quarter's contribution from SAPESCO, and our new contracts in Kuwait and Abu Dhabi that offset market declines in Iraq and North Africa. We also achieved another record quarterly level of adjusted EBITDA in the third quarter of $56 million or 26% of revenue. This represents an increase of 17% over the prior year quarter and 8% over the prior quarter. EBITDA adjustments of $2.5 million for the quarter are mainly for transaction and integration costs associated with the acquisition of SAPESCO in Egypt. Despite the market conditions, we are pleased that our adjusted EBITDA margins remained flat over first half 2020 levels. We have continued to experience increased recurring costs related to COVID-19, such as employee testing, rotation costs, field lodging, catering, and sanitization. We consider these costs as normal operations and have made no adjustments to EBITDA for them. To mitigate the impact of these incremental costs and reduced activity in some markets, we have been successful in finding opportunities to reduce costs in areas such as equipment rentals, transportation, and field facilities. These supply chain efforts continued in the third quarter with improved pricing realized on certain production-related product costs. Moving to our segment. Our production segment revenue for the third quarter was $148 million, another quarterly record, growing 53% over the same period last year and 7% over the prior quarter. The sequential and year-over-year growth is primarily related to frac activity in Saudi Arabia and the new contracts in Kuwait and Abu Dhabi. This was partially offset by lower activity in Iraq and North Africa. Adjusted EBITDA margins for the production group were 29% in the third quarter. While margins were flat sequentially, lower margin pass-through revenue associated with frac activity grew as a percentage of total production revenue in the third quarter. This impact was mitigated by less contract startup costs for the conventional fleet and other cost reduction efforts. Separately, our Drilling and Evaluation segment revenue of $70 million in Q3 was also a quarterly record, up 9% compared to the same quarter last year and sequentially. The increase over Q2 is primarily related to a full quarter benefit from SAPESCO and higher well testing activity in Saudi Arabia. Adjusted EBITDA margins of 24% in the third quarter were down slightly from 25% in the prior quarter, mainly from a less favorable revenue mix. Depreciation and amortization increased to $32.2 million in the third quarter compared to $30.4 million in the second quarter. Most of this increase was due to a full quarter impact of D&A from SAPESCO. We expect D&A to increase by approximately $1 million in the fourth quarter compared to the third quarter run rate, primarily from new CapEx additions. Interest expense in the third quarter was $3.8 million, down slightly from $4.2 million in the prior quarter, primarily from the benefit of lower interest rates on LIBOR. Our effective tax continues to track well below the rate seen in 2019 as we continue to optimize our tax structure. Reported effective tax rate for the first 9 months of 2020 was 21% compared to 23.4% in the first 9 months of last year and the full year 2019 rate of 24.9%. The increase over the first half rate was primarily due to an unfavorable mix shift of income earned in higher tax jurisdictions. Based on current full year projections, we expect the full year 2020 effective tax rate to be similar to the year-to-date. This resulted in reported net income of $11.7 million or $0.13 per diluted share and adjusted net income of $14.2 million or $0.16 per diluted share. Turning to cash. I will initially review the impact on Q3 of the closing of the SAPESCO transaction. First, we paid $11 million for the closing cash obligations. Second, we made $4 million of post-closing adjustments, and third, we paid off $11 million of $21 million assumed bank debt. These were funded by available cash from operations. In the fourth quarter, we expect $4 million in additional post-closing installment payments plus possible other earn-out payments. The remaining $10 million of assumed bank debt will be paid in the third quarter of 2021. The issuance of the closing shares will occur in the fourth quarter of this year but are already included in our share count for EPS. Switching to operating and free cash flow, both were down sequentially, but we were pleased to generate positive free cash flow of $9 million while still investing in our sequential revenue growth and our capital spending program. Also, since the onset of the pandemic, our cash balances and net debt have remained relatively flat, even with our revenue growth and the funding of the SAPESCO transaction. During the third quarter, we added approximately $12 million in net working capital, mainly through additional receivables to support the $15 million sequential increase in revenue and higher VAT receivable in Saudi Arabia as the VAT rate increased from 5% to 15%. This was partially offset by a corresponding increase in accounts payable. Included in the working capital addition was certain inventory purchases to both support our level of activity, but also to ensure we have sufficient supply of production chemicals and spares in case of any disruptions from a second global COVID wave. Capital expenditures in the third quarter were $24.8 million. The majority of this cash spend was for payments of CapEx received or ordered in 2019. In the first 9 months of 2020, we've only authorized approximately $30 million in new commitments, which is about one-third of the original plan for 2020. We expect free cash flow to increase sequentially as the fourth quarter is typically the highest collection quarter of the year. Additionally, our customers' payment processes continue to improve as inefficiencies from COVID are mitigated or resolved. Net debt increased slightly to $349 million at September 30 compared to $342 million at the end of the second quarter. Net debt increased sequentially primarily to fund these working capital investments. As of September 30, our net debt to adjusted EBITDA ratio was 1.7, flat from last quarter, and should reduce to our target level of approximately 1.5 in future quarters. Also, we're going to remain in full compliance with our credit facility financial covenants in the third quarter. Moving to ESG. During the third quarter, we added significant new ESG disclosures to the NESR website. These disclosures will help our investors and the rating agencies better understand how NESR does business and its commitment to ESG. As we look into next year, NESR will expand its executive compensation disclosures by voluntarily adding a CEO pay ratio, which we believe will show we have one of the lower sector ratios and adding a say on pay vote to our proxy. As we have highlighted before, our executive compensation is highly focused on achieving performance targets with participation in short and long-term incentive plans carried down into the organization and not just with the executive team. At NESR, ESG is not just about achieving certain ratings, but also how we manage the company every day for the sake of all of our stakeholders. In conclusion, NESR can strongly outperform the market in revenue growth and margins through our regional focus, strong operational execution while still generating positive free cash flow. With this, I'd like to pass back to Sherif for his final comments.

Thanks, Chris. In conclusion, I would like to leave you with key takeaways. We continue to manage the COVID situation better than anyone else. And we did plan already for wave two, just in case, ensuring we will serve our customers with no interruptions. We aim to continue our growth trajectory and see no deviation in the coming quarters as we expand our offerings in the different segments and deliver on the recent contract awards. We continue to invest, hire, and train national talent to fuel our growth, maintaining the highest standards and ESG commitment. On that note, I would like to pass it on to the operator for your questions. Thank you.

We'll now be conducting your question-and-answer session. Our first question today is coming from James West from Evercore ISI.

Sherif, I wanted to get a quick update on the simulation work you're doing in Saudi. Number 1, the number of spreads you guys are running now? What the expectation is as we go into next year? And then I apologize if I didn't catch it, but the relationship with Deep Imaging, which, as you know, we know those guys well? Is that already in place? And is that taking place in Saudi or is that broader to the region? And kind of how does that wrap in with what you and next year are doing with simulation work in the region?

Thanks, James. So for our frac, we have 2 frac fleets running in Saudi Arabia today. We have one dedicated to the Jafurah Basin and one dedicated to the single well basic frac operation. Both are running extremely well with just our dear customer. And as we said, we broke all records that have ever been set in the Middle East region, working very closely with our customers. So I really thank them for their trust and how they guide us through the whole process to be able to deliver such stellar performance. The future is, as far as I know, is as planned. So we should be continuing with this operation as planned. The country has big plans for the gas. They always announced from the past and they keep the same announcement. Obviously, they might tailor this activity based on the needs and this is definitely up to them. As for the Deep Imaging, yes, we have a relationship with them. We did an investment in the company almost close to a year ago. And we look very, very carefully on what they can do. And the plan is to take them to the region and show the client what this technology can do. Definitely, they had a slowdown because of what happened in the U.S. but our plan is to get a crew and to go there and show the clients what could be done.

I have a question for Chris. Our free cash flow was somewhat below our expectations, mainly due to various factors affecting the quarter, particularly related to the transaction. Can you discuss your expectations for the third quarter and where we might see some potential improvements moving forward?

Sure. When we provided guidance last quarter, we did not expect to achieve $218 million in revenue. There was an increase in working capital support. Additionally, the change in the VAT rate had about a $4 million impact for the quarter, which was more of a one-time issue due to timing differences between receiving and paying VAT. We also built a bit more inventory during the quarter due to concerns about a potential second wave disrupting operations. Our collections came in about as we anticipated, although we would have liked to exceed our targets slightly. As usual, we expect the fourth quarter to be strong in collections, and we anticipate stronger free cash flow during that time.

Next question today is coming from Sean Meakim from JPMorgan.

So on the broader MENA trajectory and how it will influence your own in the coming quarters. As you said in the prepared comments, you're expecting a faster return to activity than many are expecting. But it could be worth maybe just elaborating on how you've been able to perform relative to the larger diversified service companies in this environment? How much of that is product and service mix? How much of it has been your ability to have your crews ready to work in the field despite all the restrictions? And your expectations in terms of being able to retain that market share in an activity recovery.

Okay, Sean. Let’s discuss our results. For Q3, we experienced a 35% year-on-year increase, even amidst a 20% to 25% drop in activity. This difference is contrary to what is happening in the market for two main reasons. Firstly, our scale allows us to target many of the recently awarded contracts effectively. As a smaller player, when we execute well, we can gain market share. Additionally, we faced no disruptions. While I won’t comment on other companies specifically, I can confidently say that none of our competitors in the Middle East experienced zero disruption. Many faced disruptions ranging from 5% to 50%, resulting in significant operational challenges. In contrast, we maintained full capacity and were able to capture a considerable amount of work while others struggled. And then we just won a lot of contracts over 2019 and we started to deliver on them. The biggest one, obviously, is the frac. So if I look today on our frac activity, we did not have frac business in 2019, and we have frac business in 2020. So obviously, the difference in that gives you the magnitude and that so you can clearly see it from the production. So it's a three-way between making up from people that did not have the capacity, they don't have the equipment, they don't have the inventory. A lot of people are short on cash, some of the small service companies. They didn't buy any inventory, any chemicals. We were ready, as Chris mentioned. Regarding free cash flow, I have already prepared for a potential second wave. If the situation in Europe were to occur in the Middle East, it might not unfold since they are very strict about border closures, and travel remains halted with airports shut down. The daily travel rates are extremely low, only a few hundred people. Therefore, I don't expect a second wave, but in case it happens, I am prepared. We have acquired our chemicals and stocked our inventory, ensuring we have supplies for over six months in each country. We can fulfill any product demand, and if others cannot, we will step in to fill that gap. Additionally, we have secured several contracts that we can take advantage of. Looking ahead to the next quarter, I anticipate a consistent approach with similar year-over-year and sequential growth, which you will witness in the upcoming quarters.

Thanks for that, Sherif. That's really helpful. And then I'm interested in hearing a little more about the industrial portfolio expansion with SAPESCO outside of Egypt. I'd love just to hear about how that can unfold. What does the addressable market look like? Are you able to leverage your existing relationships to either work with new contacts? Just trying to get a sense for this growth lever and how it unfolds while upstream opportunities are more limited near term? I think that will be would be interesting to hear more about.

Yes, sure. So as you know, SAPESCO guys have a very amazing track record in Egypt in the industrial arena. We took the portfolio. Obviously, now we just closed the transaction, and we've been working on it since June with the clients in the different GCC market, how to take that qualification, and that's what I tried to mention in my remarks, and tell the clients. Now I have 20, 30 years of experience in that business. So you get qualified and you get to the bidder list that they never even called you before. And now today, we launched this to all the GCC and to North Africa, Algeria, Iraq, and even now Libya is opened. So now we are qualified. So that footprint that we have today is the best, I would say, and definitely outside the big three, we have the best footprint now in the MENA. And every country we have a representative. Every country we have a country director. Every country we know the clients. So we put that qualification, that process, that experience to the clients. So now we are invited to the bidder list. We are already bidding in 7 of those projects. So we're bidding in Algeria. We are bidding in Saudi. We're bidding in Kuwait. We're bidding in UAE. So we are bidding on those projects. What happened, why I would say, if you want to ask me a number, I would say I cannot give you a number today. Why? Because most of those actually pipeline downstream projects were the first to be cut from the client. Our main clients have canceled many projects, particularly in the downstream sector, which is where we typically see significant revenue from industrial cleaning. For instance, in Egypt, SAPESCO's largest earnings weren't disclosed. This occurred when ENI discovered gas in the East Mediterranean, and they needed to purge the pipeline within 16 months due to the President’s desire to inaugurate the platform on time, and they succeeded. It was a collaborative effort involving SAPESCO and other companies, resulting in substantial revenue. I would say that over the next 3 to 5 months, our focus will be on ensuring we are included on the bidder list in all these countries, which will allow us to secure 2 or 3 projects in 2021 outside of Egypt. Our goal for the team is significantly higher, as we are aiming for 20 projects. We'll see how they perform. That market is valued at $300 million, so it's quite substantial.

Our next question is coming from David Anderson from Barclays.

The rig count in the Middle East decreased by 20% during the quarter, yet your revenue continues to increase. You've previously mentioned that you have several contracts in the pipeline, which likely explains part of the revenue growth. However, I'm curious about the rig count and spending in the region. Could you provide some insight on the current situation? Has the decline mainly affected oil rigs? Additionally, I'd like to understand the balance between gas and oil drilling and your exposure to each. On another note, I'm also interested in maintenance spending. Has that been scaled back, and do you anticipate it will rebound sooner? Investors seem skeptical about spending in the Middle East, generally believing that there's ample capacity, reducing the need for immediate action. Could you elaborate on these various aspects, particularly in relation to Saudi Arabia?

I will discuss the Middle East. The simplest comparison is between oil and gas. For us at NESR, we see no difference; we work with both and have the same level of exposure. The only variation lies in exploration, particularly with large gas wells offshore or in deepwater compared to typical land operations. This particular project was significantly reduced. Referring back to your earlier question about the Middle East, it's been noted that they often eliminate larger, non-essential projects and cut back on downstream activities that aren't necessary. Most clients have postponed their offshore new projects rather than canceling them. For instance, in Kuwait, Oman, and elsewhere, these projects have been delayed to 2021 or 2022 because they are not currently necessary. The focus is on exploring new opportunities. Clients, particularly in the GCC, are concentrating on their core businesses and considering long-term needs. While there may be investor skepticism regarding maintenance, they are assessing the situation as if viewing an independent company. It's not an independent company. There are a lot of aspects on the activity that is from a social aspect; it's not from a pure economics. If I talk from a few economics, they can slash the rig count by 70% and they produce. They don't need anything, actually. They can run with 20 rigs, and they will produce the 8 million barrels. But they do not do that. They look at the sustainability of the business. They look at the employment, they look at so many other aspects. If I look at Oman, it's the same. So the rig count is minus 20%, minus 25%, which is quite significant actually for that region because usually, they cut only 5% to 10%. So when you cut to minus 20%, minus 25%, that's what they did. They cut more; they might lay off another 5% or so rigs because they will definitely be able to produce. Now if I look at the gas, the gas, again, is an internal resource for internal consumption. The only outlier to that is Qatar. Everywhere else, the gas is needed for internal consumption, so they will not change any of the project of the gas. If I look at overall, how do I see it? I see that they are definitely preparing for the readiness of the other sites. If the comeback is much faster. If I look at how the spend is slashed everywhere else in the world. If I look at the supply destruction and who is going to be able to come back, I would say, in my personal opinion, the only region that will be able to deliver is the Middle East. Nobody else will be able to deliver. You're not going to go and invest in a deepwater project in West Africa today; you didn't do this last year or the last 2 years, and you will not do it today. But if I look at activity and the ability to put back the production, it is definitely there. And the ability as well to put back those rigs is very, very fast. Most of the rigs that were not deployed in the Middle East are warm stacked and not cold stacked. So they are very simply able to put them back once they need them. So I would say, I don't know if I answered your question, David, but I mean, I would say the activity is going to come back much faster than what people estimate. And there is a lot of social aspect to it. And I think if you look at North Africa and Iraq, it cannot get any lower. I mean, Kurdistan is zero. Iraq Basra is minus 80% recount. Algeria, Egypt, Libya is almost minus 50%, minus 60%. And obviously, as you saw, Libya is coming back. And already they're producing 0.5 million barrels, and they have the plan to get back to 1 million barrels, which means they need to add 20 rigs or so, plus the workover and the ESP change out.

I am interested in your plans for the pressure pumping fleet. You mentioned having 4 to 5 by the end of next year. What are your thoughts on that? Is that figure increasing, decreasing, or remaining the same? Additionally, could you provide an update on how operations are progressing and what we can expect in the next couple of quarters?

Thanks, David. I would say we see the same trajectory towards the end of next year. I would say we should be adding a fleet quite soon. And then depending on the pandemic and who is going to start first, I would say in the second half, we'll be adding another 1 or 2. So today, I still see we're going to be 4 to 5 fleet by end of '21.

Our next question today is coming from George Michael O'Leary from Tudor, Pickering, Holt.

I wanted to follow up on David's question about the frac fleet. Is there an expectation to expand that presence beyond the kingdom? Are there opportunities in other regions, or do you believe most of the fleets will primarily operate in Saudi Arabia?

No. Most of the fleets will go outside Saudi Arabia. So our plan, hopefully, and obviously, that depends on the clients. But our plan, hopefully, is that the additional fleets will work outside Saudi Arabia.

And then for just underlying activity in that MENA region in the fourth quarter, clearly, we started the third quarter higher than we ended it, given the 22% average decline. For Q4, what's the kind of underlying activity expectation fully realizing that's not necessarily what NESR will see in their business?

I would say as, if you recall my first quarter comments, I always said that the activity, first quarter would be the best out of the year, opposite to previous years. However, for us, our plan is to maintain growth over the year like we did before. And so far, that's what we are delivering. So we're delivering exactly what we said. I would say the fourth quarter is similar, in the sense, activity is not going to get better. I would say on the contrary, some of the customers might actually shut down some of the work because the opposite effect will happen this year, which means they are running out of budget or they do not want to spend any more and the government say, shut down, that's it. Let's not spend more than what we did. In our case, I don't see any difference, as I said, from our trajectory. We will have growth sequential and we don't see any issue even if the activity gets dropped further. But if the activity does not drop, we will have even higher growth. But overall, I don't see the activity increasing because nobody needs it except for Libya. Libya would be the only outlier where they're going to increase. I don't see Iraq, any of the IOCs putting any money in the next 2 months. There's only 2 months left. And the rest, the GCC is very stable, but I wouldn't say increase; I would say it's a stable activity. For us, we will have an increase.

And then if I could sneak in one more, if I could. Just M&A and then kind of the pull-through of the sort of product service lines that you acquired via mergers and acquisitions continues to be a big part of the story. Could you just frame kind of what the M&A landscape looks like, given the challenging market that we face? Has that created incremental opportunities for you guys? Or how would you describe it?

M&A is quite active in the U.S., where we are faced with numerous opportunities, but we are primarily interested in acquiring supplies or resources. Our plan is not to pursue any new initiatives unless a company is exceptionally innovative. This represents a different strategy for our M&A activities. I’ve mentioned this before, but I want to emphasize it clearly. For us, M&A is mostly about geography, and that’s when we decide to buy a company. There are certainly opportunities, although not as abundant as in the U.S., and we are in negotiations with two or three companies. Negotiating in the Middle East takes time and requires thorough due diligence, which we have not been able to conduct due to travel restrictions. Therefore, I do not anticipate completing any deals in the next quarter. If I look at what we do in the U.S., you have 2 problems. You have the technology partnership that we talked about, and we do several. Today, we have an investment in 4 companies. So we put money in 4 companies. We don't buy them. We put money in them to get the technology, so it's like a PC. So basically, I want the technology to happen. So basically, I want the technology to be made tailor-made for our Middle East operation, and we put money for this company to make it happen. And the third part is basically a lot of the Chapter 11 guys, and we are happy to look at that equipment if it makes sense to buy 10 cents to the dollar. But we take this as CapEx; we don't take this as M&A.

Our next question today is coming from Igor Levi from BTIG.

So you talked about the significant contract awards in 2019 being a big tailwind. But you also mentioned you expect similar growth in the coming quarters. So could you talk a bit about the drivers of that growth? Of course, we do have, I mean, we know about SAPESCO and the incremental drilling contract in Oman, but is that sufficient? Of course, there's the additional frac fleets. But again, those I think still need to be awarded. So how much of that growth still needs to come in the form of contracts in the coming quarter or two?

Igor, we have secured many contracts that we haven't announced publicly. We're expanding our portfolio with these contracts. A great example is our operation in Oman, where we successfully extended the contracts for a decade, which is highly unusual as our clients typically don't do this. Now, we have these contracts secured for the next ten years. In some cases, we’re enhancing the portfolio, and for Oman specifically, we have integrated a full scope drilling contract with our existing contracts. We expect to deliver on these, implementing the technology and partnerships we've developed in the U.S. over the last 15 to 18 months and putting those technologies into practice. Today, most of those technologies, some of it takes 12 to 18 months to have a tool. And then you have that tool, you send it there, it has to work. And it has to be competitive and it has to work as good as the others or even better. Once you have that, you get part of that pie. So the landscape of work, of market is huge. And I keep repeating this. This is a $20 billion market. We currently hold less than 5% of the market. With our established infrastructure and reputation, being favored by many NOCs, achieving a 10% market share is quite feasible for us. We have the necessary platform to support this goal. It's not essential to secure a contract in every location or for every tool to make it happen. As I mentioned, until we reach our $2 billion revenue target, I am confident in our growth trajectory.

And then as far as the fleet that you mentioned, the additional fleets that would be doing frac outside of Saudi Arabia. Would they be as profitable as the ones that you're adding this year, given that they're not, from what I expect, not likely to be working on conventional fields like Jafurah? So they wouldn't have as many stages per well. Could you talk a bit about that?

Outside of the entire Middle East, Jafurah is the only multi-pad well similar to those in the U.S. All other wells in the region are single wells. Therefore, any contracts or frac business you have will primarily involve single wells. While the process is multistage, the Middle Eastern wells can vary greatly—some have six stages, others four, and some are just single stage with a single frac. This means the pricing per stage differs significantly, and the fleet setup is entirely different as well. In terms of percentages, you may see similar results, but you won't achieve the same revenue or top line as you would with a multistage operation performing 80 to 90 stages a month. So if I look back at my olden days, some of these wells, we used to do a stage every 2 weeks. So you do 2 stages per fleet per month. But definitely, the stage is not 55K like you have here in the U.S., right? The stage is like $1.5 million. So it's a totally different structure, totally different setup. And each country is different.

Our next question is coming from Blake Gendron from Wolfe Research.

So my first question is on margins. They seem to have stabilized, even though your top line growth trajectory is just on a different level relative to the rest of the sector. If I were to isolate the segments to make sure that production services will continue to see stabilized margins, you'll add some frac capacity, maybe there's some cost-plus sort of dynamics in there. On the other hand, you're going to see some scale absorption and operating leverage. In D&E, it's a little bit tougher to pinpoint margins. It tends to be a little bit lumpier and seasonal, but perhaps instances like the PDO contract will allow you to get higher technology exposure in the D&E realm. As we look out 2021, 2022, I know your bogey is just flat margins, and you're more focused on the top line growth. But what kind of levers can you pull? Or what kind of dynamics are in play that could either push the EBITDA margin higher or lower moving forward?

I would give a similar response. When considering D&E, if you focus more on the E and are at the higher end of the D, your margin will improve. It's important to be a technology provider and offer higher-end services to enhance margins. However, if I examine the industry and the pricing, there seems to be significant destruction in some of those services. Interestingly, our profitability in D&E exceeds that of the top competitors. It's surprising that you are operating what used to be referred to as dumb iron, yet you have higher profitability than reservoir sampling. Right? So those margins today are quite strong, but definitely, they can get a bit higher based on the mix. So if I would answer you, do I see this going to 30%? No, I don't. Would I see a couple of percentage points like we have between 20, 24, 22, maybe sometimes jumps to 26, yes, maybe. But definitely, we need some traction to the market to be able to do that, right? If I look at the production, there is a lot of, as we always said, I mean, if I look back, we used to run higher-margin in production when we didn't have the frac and all the revenue fall through, basically, as you know very well, all the hauling, water, land, camps, all the stuff. Today, you have to do that to be able to do the frac because that's part of the business. Do I see the client changing the behavior on that? I don't. I think on the contrary, now they see more efficiency. They see more the stage count being delivered better than anyone else. I think they might actually see, can they do even more, right? The one thing I would say, Blake, that we have significant cost for COVID-19. And I know we are, again, maybe the only ones that don't call it off. But I make it part of my business and I look at it. And I'll just give you the example. When I was in the Middle East myself, I tested 4 times and I stayed in a couple of hotels. How much did I spend? I mean, I spent just on testing $1,000. Every test is $300, $250. If I look at how many tests I did last month in the company, I did 2,600 tests. So if I look at how many people do I test today, just to keep working, anytime you have a suspected case on the rig, what we do is we go and test every single person, and they have to quarantine until their test result is negative. When they are quarantining, we have to put another crew to operate until they are cleared. All this we absorb. We don't pass this to the customer. We take that cost. And we took that cost in our operation as part of our operation. So I would say, we might have an improvement here on margins when you take this cost out. But I don't want to, I would say, I just like to stay. If we manage to keep that growth profile and maintain that profitability margin that is in my books, I think it's the highest in the industry today. I think we are very happy.

That's totally fair. We do appreciate the cleanliness of the numbers and just confidence in the stability of the margins, I think, is the most important, just given the growth trajectory. And just a quick follow-up here, if there's time, on free cash flow. I want to approach it from a different angle. Say we get a second wave, say some of the organic growth opportunities fall by the wayside next year. Where do you think capital intensity goes? I don't want to put you on the spot and guide CapEx. But in terms of maybe giving investors a little bit more confidence in the free cash flow elasticity relative to growth would be great to nail that maintenance CapEx level down.

Sure. So I think we've said our plans for next year probably still be at some sort of growth rate, what we plan on, it would be about maybe the $70 million, $75 million range. That's what we've said. Could it be higher? Sure, but that would require we win more contracts and have other things to support. So that's about where we see next year.

If I may add, Blake, a common guideline for maintenance CapEx is typically between 2% and 4%, depending on the segment and factors such as whether you are at the high or low end or have many inventory items. The remaining portion is for growth. Our situation is different because we have frontloaded our CapEx and included a buffer to ensure that our clients trust our ability to deliver in case of unexpected issues. Although many people mentioned that we are adding a lot of equipment, I assured them that we are not; we know what we are doing because we have a strong understanding of our customers. So our deep knowledge of the customer is unmatched, I would say, second to none. And that works very well for us, and that's how you see this revenue growth like this. At a certain level, with a certain stability, we will be able to be an amazing way that you're adding now only for technology and for something to change and maintaining that growth profile. So I would say, next year, at this growth profile of this year, we will only spend $70 million, $75 million. If something happens and we don't grow as much, that CapEx would be much lower.

Just a couple of quick follow-ups. On the CapEx side, what are your commitments at this point for the rest of this year or going into 2021?

This is Chris. We'll be part of our quarterly filing disclosures. But there's approximately $20 million that is committed but not received. There are also some additional LC payments that flow through CapEx. So I would say there's about $30 million as of right now that would still be for Q4 or next year.

And do you think most of that will come in Q4? Or is that similar to what you saw this year along your data?

Some of it will be, let's call it, approximately maybe $10 million of that will hit in Q4, and the rest will be next year.

And are there any other projects or commitments that you're contemplating before the end of this year?

Yes. Well, obviously, we've discussed an addition of a third fleet. So that would obviously be one that's not in our numbers yet.

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you very much. We're out of time. So we're very, very excited about the future. We look forward to the continuation of our growth profile in the coming quarter and next year. Thank you very much.

That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.