Good day and welcome to NESR's Fourth Quarter and Full Year 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 fourth 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.

Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. We're very pleased with our continued solid performance this quarter. We are extremely proud to see how we expanded in 2020, delivering a record growth of 27% year-over-year in full contrast to the industry. As a matter of fact, this is the highest year-on-year growth since the inception of the company or any other previous year for the combined businesses. As a reminder, we did grow in 2019 at 19% versus 2018. This demonstrates our ability to weather the market, the industry, even in the presence of a worldwide pandemic. As I have mentioned in the past, I believe these results and our accelerated growth reemphasize that we are an outlier in the OFS space when compared to the rest of the industry. Our focus and execution capabilities, determination to the region, our flagship as the MENA national champion and our customer centricity allow for a clear path to continue to grow at this pace for the foreseeable future. The Middle East was and is going to be the center of the oil and gas industry going forward. And all this development further reinforces this narrative, and I believe we have the front row seat in capitalizing on our unique positioning on the ground, strength, and customer relationships. I would like to really thank our troops in the field who have managed to achieve all that despite the pandemic. We never turned down a single job for any of our clients. We have maintained close proximity to our customers and worked faithfully with them to manage the work schedule, planning of personnel and equipment, spending significant resources, testing facilities, expanded accommodations, and special flights. We absorbed all these costs and did not ask for any compensation due to these unforeseen circumstances. Yes, we do understand it did cost us a significant strain on our people being away from home for a long time, working long hours, quarantining in advance to be ready to go to jobs, and an increase in our cost of operation. However, we truly believe that this is our duty and obligation as the trusted adviser and partner to our clients. We need to be there for them as the first reliable source of services. I'm extremely proud of our field crews and honored to be one of them, serving our clients as best in class in the industry. I spent the majority of the time in the Middle East in September, and I can tell you from personal experience how tough it is logistically, as I had to be PCR tested about 35 times to travel between all the different countries. I did manage to visit the majority of them, and I was very fortunate to be able to see my dear customers and have plenty of face-to-face time with the senior management.

Thank you, Sherif. As Sherif mentioned, we reported quarterly revenue of $213 million. This represents an increase of 15% over the prior year quarter and a 2% decrease over the third quarter. For the full year, revenue increased 27%, a significant achievement in light of market conditions. The sequential decline in revenue was primarily driven by lower production activities in several markets late in the year, as Sherif has mentioned. This was partially offset by higher evaluation services. The year-over-year quarterly increase was primarily driven by the addition of the unconventional product line and associated services. This was partially offset by decreases in other markets related to lower commodity prices. Adjusted EBITDA in the fourth quarter was $55 million or 26% of revenue. This represents an increase of 6% over the prior year quarter and a decrease of 2% over the prior quarter. EBITDA adjustments of $1.9 million for the quarter are mainly for integration costs associated with the recent acquisition and other restructuring activities. Despite the market conditions, we are pleased that our adjusted EBITDA margins have held steady. We incurred additional costs this quarter, primarily related to non-cash charges for actuarial end-of-service benefit liabilities of nearly $3 million and significant COVID-related costs, specifically COVID-related labor and supply chain inefficiency costs. With the onset of the second wave in Q4, we experienced extra costs related to additional testing, transportation, lodging, and labor mobility. Despite the increasing level of vaccinations in many markets, COVID restrictions have increased during the fourth quarter. We don't expect these costs to mitigate until later in the year. COVID and end-of-service costs were offset by a gain of $9.6 million on earn-outs from the recent transaction as the final amount paid was less than originally estimated and provided for. These are real savings to cash and issued shares, and lower our basis in the transaction. This was achieved primarily from increased business levels and the improvement in our share price. As is our practice, we did not reflect any of these COVID-related or other items in EBITDA or EPS add-backs. Moving to our segments. Our Production segment revenue for the fourth quarter was $136 million, growing 12% over the same period last year, but declining 9% over the prior quarter. Full-year revenue was up over 37%. Adjusted EBITDA margins for the Production group were 29% in the fourth quarter, flat sequentially. Associated pass-through revenue was at the same level as the prior quarter. Separately, our Drilling and Evaluation segment revenue of $78 million in the fourth quarter was another quarterly record, up 21% compared to the same quarter last year and 11% sequentially. Full-year revenue increased 10%. The increase over the third quarter is primarily related to higher evaluation activity in Saudi Arabia. Adjusted EBITDA margins of 25% in the fourth quarter were up from 24% in the prior quarter due to the favorable mix of evaluation services and leverage on higher revenue. Depreciation and amortization decreased to $29 million in the fourth quarter compared to $32.2 million in the third quarter. Most of this decrease was due to a fixed asset valuation adjustment from the final purchase accounting of the recent acquisition. We expect depreciation and amortization to run in the $31 million to $32 million range per quarter in the first half of 2021. Interest expense in the fourth quarter was $3.4 million, down slightly from $3.8 million in the prior quarter. Our effective tax rate continues to track well below the rate seen in 2019, as we continue to optimize our tax structure. The reported effective tax rate for the full year of 2020 was 17.6% compared to the full year 2019 rate of 24.9%. Excluding the benefit of this quarter's earn-out gain, which is non-taxable, the full year 2020 rate would have been 20.9%. We expect the 2021 effective tax rate to run in the lower 20% range. This resulted in reported net income of $16.5 million or $0.18 per diluted share and adjusted net income of $18.5 million or $0.20 per diluted share for the fourth quarter. Switching to operating and free cash flow. We are extremely pleased that we were up significantly sequentially, with operating cash flow increasing to $49.3 million from $33.5 million last quarter and free cash flow increasing to $33.3 million from $8.7 million last quarter. For the full year, free cash flow was $44 million, a meaningful improvement over the negative free cash flow of $19 million in 2019. The sequential operating cash flow improvement was accomplished mainly due to higher collections of over $25 million from the hard work of many employees. However, we did experience less collections than expected in the final weeks of December as many customers closed their payment processes earlier than expected. This was offset through our own supplier payment management. These collections were caught up in January. Capital expenditures in the fourth quarter were $16 million, down from $25 million in the third quarter, which also helped the improvement in free cash flow. This reduction was due to the lower new CapEx orders placed in 2020 and approved utilization. A big portion of our cash capital expenditures in 2020 were for CapEx ordered in 2019 and not received or paid until 2020. In 2021, we expect capital expenditures to be flat with this year to support planned growth and pay for existing commitments. Free cash flow in 2021 should significantly increase over 2020 due to flat planned CapEx, continuous improvements on fleet utilization, and improved days sales outstanding. Also a positive note, net debt decreased to $323 million at the end of the fourth quarter compared to $349 million at the end of the third quarter. The sequential decline is primarily from higher cash balances from improved free cash flow. As of December 31, 2020, our net debt to adjusted EBITDA ratio was 1.6, down from 1.7 last quarter and should reduce to our target level of approximately 1.5 or lower in future quarters. Also, we remained in full compliance with our primary credit facility financial covenants in the fourth quarter. In conclusion, NESR again strongly outperformed the market in revenue growth and margins in 2020 through our regional focus and strong operational execution, while still generating positive and strong free cash flow. We expect the same momentum and more going forward. 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, and we maintain very close contact with all our customers. We are very optimistic about 2021 and believe we will have another stellar growth and performance year. We continue to invest and hire, and we see no delays in the coming quarters. We're very proud to launch our ESG Impact segment and focus on contributing to the new mindset change in the industry. On that note, I would like to pass the call back to the operator for your question. Thank you.

Our first question is from Sean of Meakim with JPMorgan. Please proceed with your question.

Thank you. Hi, good morning.

Good morning, Sean.

So Sherif, I think the ESG initiatives are really encouraging. Could you maybe just talk about how this influences your prior five-year plus 20% CAGR goal that we had a few years ago? Does this help sustain that growth rate? Does it layer incremental growth? I'm trying to think about when this could become material to overall financials. And then how should we just think about the need for capital deployment, whether it's CapEx or M&A to help you deliver these services to your customers?

Thanks, Sean. So it will be incremental. The idea there is, as we clearly put it, that we have our core business that should continue to grow at that pace or higher. The ESG Impact segment should be incremental to that. I would say taking into account the size and the acceptance from the customers, taking a project to implement, especially with all this COVID restriction on delivering, you would see something towards the end of this year, and then you start to see the materiality from the following year. That’s why we started going to report this separately. Now for your second question on CapEx, I mean, obviously, we are producing solid free cash flow. We will continue to do this, and we will do much better this year than last year. So we don't have any issue funding all our growth organically. If we have a big M&A coming or something, we definitely have many options to issue shares, etc., or do something. There are a lot of ways for us to be able to do that if we need to. Our covenant, and Chris talked about this in detail, we are in a very strong position. Our interest rate is still at 2.5%, which I think is the lowest in the industry. So we have plenty of room to grow there.

Thank you for that. I think that's helpful. So then just to follow up on your comments right there, Chris noted you're expecting a significant increase in free cash flow in '21 with flat CapEx, improving working capital, and cash amounts otherwise getting better on a higher growth rate. It's also worth noting that your equity currency is a lot stronger than it's been in the past year. So in that context, whether it's the ESG initiative or more broadly, how should we think about the uses of cash and potential M&A in '21?

So yeah, we have, as I had mentioned earlier, we have very good plans for M&A. The discussions are ongoing. Let's put it this way. Definitely, again, the COVID situation prevents some of the work, like due diligence, sending auditors, sending lawyers, etc., so that kind of delays things a bit. However, I'm still very optimistic about closing a deal, hopefully, this year. And definitely, there will be a lot of uses for this cash.

And Sean, this is Chris. As a reminder, assuming no other type of refinancing to change the payments, we'll have about $45 million, $50 million of debt payments required this year. So that will also be a use of free cash flow.

Understood. Thanks.

And our next question is from David Anderson with Barclays. Please proceed with your question.

Hey. Good morning, Sherif.

Good morning, sir.

So I wanted to get your perspective on the cadence of upstream spending in the Middle East over the next, say, 12 to 18 months, and kind of how you're seeing it today. Are your customers still largely in sort of a wait-and-see mode with respect to global demand? We're not hearing a lot about big tenders other than your Oman award, which you talked about. So should we be thinking this is a steady ramp-up in light of, say, the excess supply in Saudi and the like? Or could we see an early inflection that's more substantial? Your larger peers talked about second half pickup. I'd just like to know how you kind of see things playing out?

I agree. It's the second-half pickup. The way it works, David, as you know very well, most of the NOCs are very long-term and savvy. They understand there might be spikes in demand. They understand as I explained - try to explain on the macro that nobody else is investing in any big projects. No one is doing any new discoveries. People are not replacing their reserves. There is obviously some sentiment of negativity on some other places outside the Middle East. So they understand that when spikes happen, they need to be ready. Obviously, Saudi has the biggest capacity and surplus that they can put to the market at very short notice. But everybody, if you look at their activity, they are flat. They are not decreasing, and they are picking up the rigs as I said. So the rigs are being picked up. Today, if I look at what happened at the exit of Q4 to already now, we are at the end of February, you already have some increase in rig count in several countries. And this is going to continue. My personal opinion is that people are underestimating the spike. I think H2 is going to be much stronger than what people think. I think the NOCs will put rigs into motion because they will be needed to get some production around. So at this point, the big NOC will see an increase in activity. If you look at the market where it's oil price dependent, we are going to see a significant, almost very sharp increase in activity, especially when it went almost to zero. Places like Erbil in north Iraq, some areas in Egypt, some places in Libya will see significant contributions. At $60, these operations are very profitable. So you will see a pickup in rigs. So overall, I would say that yes, they are looking into the global market and global demand. Definitely, everybody is looking for the vaccine. If things turn positive and in summer you see a clear line of sight with the vaccination and people start to travel again and open borders, I would expect higher activity than what people anticipate. That's why we are preparing for that. We are preparing through investments in people, CapEx, front-loading as well as some equipment to ensure that if the customer says in two weeks they need two or three more fleets, I am ready.

That was actually my next question there, Sherif. So a year from today, you're going to be a lot busier. So I'm just wondering how you are thinking about the number of people you need to add, the equipment you have on hand. I don't know if there's a way. We don't usually think about service companies in terms of utilization, but maybe just sort of sense where you are there. And because one thing you're starting to see with some of the OFS companies in North America is you're starting to see some friction costs from labor and equipment, I think it goes back to work. So if you start ramping up over the next 12 to 18 months, could this potentially be a bit of a headwind on your margins? Or do you need to kind of see improved pricing to offset that?

I'm going to be very honest; no, I won't see any improved pricing. I don't think there will be improved pricing. I would say that what will happen is some people are not ready at all and they are extremely squeezed. They released a lot of people, and I did not. I did not release anyone. We planned for our activity, and we actually, even when the customer closed the tabs, for example, in December, I did not release the people. I knew that people traveled and couldn’t go back because the borders closed in some countries. We kept the costs, hotels, and all others in January. That’s how you maintain a close relationship with your people. I know it costs us money, but that’s how we are ready, and others will not be. I do not see a problem with our operation. If the customer adds significant needs for crews, etc., I will be ready on a very short notice when others will not.

Great. Thank you very much.

Our next question is from George O'Leary with Tudor, Pickering Holt & Company. Please proceed with your question.

Morning, Sherif. Morning, Chris.

Good morning.

Morning, George.

I wanted to start off, piggyback on one of Sean's questions and somebody else's comments on free cash flow. I think Chris said up materially in 2021. So kind of a two-part question. Any color on the magnitude of the free cash flow jump year-over-year in 2021? And should we expect that to be distributed evenly throughout the year or second-half weighted, given the earnings growth likely occurs in the back half? How do you think about magnitude and shape of that free cash flow throughout the year?

So, I mean, obviously, we're not giving specific guidance, but I think with a reasonable growth rate. And with the metrics we've said, something in at least the $75 million, $80 million range should be very achievable. We'd like to exceed that as well. But as a starting point, we think that's a good starting point for that number. As far as timing, I'd say it might be a little more second-half weighted. It really depends on collections; they're always a little spiky from one quarter to the next. But I wouldn't say it's going to be significantly different, one quarter over another.

Okay. Great. Very helpful. And then you guys have talked to increasing in the last few quarters about some technology investments you've made and some partnerships on the water side on this call and also the climate change or GHD in methane emission side. Just curious if you could update us on those technology efforts, things like deep imaging, key bars again, you already hit water and GHD, but those other investments that they all start to talk about a quarter or two ago. Any update there would be helpful.

Yeah. I mean we had a very, I would say, unfortunate delay. That’s the biggest unfortunate of COVID actually is the new technology implementation because of the people that are not there to set it up, sending all the people, equipment, etc. And the client, obviously, always puts these things on the back burner because it's usually a trial for something new. So they say, okay, let's put the new technology after everything. Now it's about strictly business essential, right? So I think the delay in some of these initiatives did happen. I would say that the key bars would be number one once it opens up and we can send crewmembers to start field trials with customers. That should be prioritized. I would say that deep imaging would be the last because that's how the clients perceive this seismic. I know how I'm going to see that and where to fracture, etc. Usually, that gets the last part of the equation. We do not still declare their names for confidentiality, but we invested in two companies with some very unique technology. We are very excited about it. Our efforts to keep investing never stopped. I think that’s why we keep saying that we are different from everybody else, and we are an outlier because we keep investing while others are tightening their belts.

Thank you very much.

Our next question is from Igor Levi with BTIG. Please proceed with your question.

Hi. Good morning, guys. So in the last two quarters, we saw you win a major renewal in Oman and some new work in Oman and Kuwait. Could you talk a bit about the timing of any other upcoming renewals that you guys have?

So renewal or tendering our existing work, we have a good pipeline. Some of it is coming next year, some of it coming in '23, '24. So it's kind of well laid out between the different countries. Some contracts are coming, for example, this year that are very crucial because it's binary. So you need to win or you have to be there. Otherwise, there's only one awarded supplier. The rest of it is going to just be renewed. Now are you going to be the number one, or number three or number four, that's the difference, right, because it's a multiple award with multiple companies. We're more excited actually on, as I tried to explain, that we are tendering a couple of nice major contracts, and we are expecting the awards in the next couple of months. The indication is very positive. So I'm very excited about it, and this is going to make it a new entry or a much larger size in some countries for the current position of the company. So it’s very important for us to get that because the key for us is to expand outside the two strongest countries. The very positive part obviously was Oman because we have that until 2031, 2032. We don't have to worry about it for some time. Plus, we have very solid initiatives with the government and customer to implement some very ESG initiatives that are extremely important for the country. We are very proud to be part of this that will make a difference, again, not just for our business but for the country itself. I would say, Igor, just to summarize that, yes, we are very comfortable with our contract position.

Great. Thank you. And on the ESG segment, could you talk a bit about the economics behind the water processing technology that would really make this initiative take off? I mean how much lower do you need to bring down cost of processing water to make it either drinkable or in the case of the sulfate water usable in wells?

So if I, obviously, without giving any confidentiality here. Just to give you a factor, it's a factor of six. So just imagine that today, the technology that exists costs six times, that’s why it’s totally uneconomic. Today, as I said, 200 billion barrels, 100 billion of it is just thrown away, which is a crime, I would say. There is a lot of work happening, why? Because there is no economic metric that makes the water usable. Today, the cheapest way is to leave it to evaporate, costing you nothing. But if you look at it from the whole ESG perspective, what is this for the community? What is this for the environment? Is any of the solids dissipating into the aquifer going to the ground? Then you say today, the technology to make it, if it costs you, let’s say $6, this technology will cost you $1. So taking that cost by a factor of six makes it economically viable. If I look at all parameters of the city and where you are located, instead of constructing a pipeline or using disposable wells, etc., it presents itself as an economic solution. This is not everywhere, but in many cases, it is economic. If we look at offshore, for instance, in Norway, where you are not allowed to drop anything, it’s zero PPM, it’s very economical in that case. It depends greatly on your location. I think it’s a breakthrough, and we should have two solid projects hopefully by year-end.

Thank you. That's very helpful. I'll turn it back.

And our next question is from Blake Gendron with Wolfe Research. Please proceed with your question.

Yeah, thanks. Good morning, guys. Chris, I want to come back to the equity earn-out impact on margins. It seems like a $10 million gain has offset about $3 million end-of-contract payments. It seems. Now on the one hand, EBITDA margins across the segments probably would have been appreciably lower without the equity earn-out. Remember, it's just not sure how one-off it really is. On the other hand, you enumerated a number of COVID-related costs that you do include in results. So I'm just trying to level set what you think the - if you strip out everything, what you think the segment margins are and adjusted EBITDA margin is now. And then in terms of those COVID costs rolling off in 2021, what the timing and kind of magnitude of that would be? Thanks.

Sure. For the fourth quarter, if you netted all of those together, we probably ended up with a net gain of a few million. So there was a little bit of an EBITDA boost because of that versus our reported. Without going into all the minutiae of all the calculations, you can run your math. It was pretty even across both segments.

Okay. That's helpful. And then just coming back to the growth here. So obviously, ESG and SAPESCO are newer discrete items that we're going to keep up with and try to model separately to the degree of disclosure that you gave on that. I want to come back to frac, because frac was sort of the first incremental addition to the story a year plus ago. As we normalize here, I know the focus is still on natural gas development in some of the key basins. You had some perhaps oil exposure as well with some of the conventional frac spreads. Where does your frac operations stand today? And how do you think you see it scaling up as we normalize here out of the pandemic?

So Blake, I would say, the frac has been doing an outstanding job, more than outstanding; I am very proud of it. It's working around the clock. On my last visit in Saudi, for example, I visited the location, the team, everybody is very motivated. The crew is on plan. Our efficiency matches US efficiency, and I’m proud as well to work with my dear friend Robert next year. Everything is on plan, and the development of the unconventional gas in the kingdom never changed. The commitment, energy transition to gas and renewable power is extremely strong, and the kingdom has an amazing plan for renewable hydrogen. You might have seen some of the commitments that by 2030, they will be exactly like Germany. They have a huge commitment towards all these initiatives. Our plan is to have a big part of that and remain a reliable supplier for them for the Jafurah and others. We have two fleets running in Saudi and are in discussions to expand that outside the region, meaning inside Saudi. I am optimistic and planning to have a fleet in H1 and a fleet in H2. I am planning to have two fleets in 2021 working in the region for a total of four. So I am very excited. Nothing has changed in Saudi. If I may just give you more color, some of the newer projects in other countries have gotten delayed because of the global situation. Everybody is looking at demand – is this exactly what you need because they are still in the exploration phase. But you saw, for example, the announcement in the UAE with Total on the first delivery of unconventional. Everybody is working on it, and the region is not shifting its course on energy transition.

That's encouraging. Thanks. I'll turn it back.

And our next question is from Andres Menocal with Evercore ISI. Please proceed with your question.

Hey. Good morning, guys. And thanks for taking my questions. My first one was going to be maybe more on a regional basis. I understand some of the key drivers of activity within your main areas of doing business. Thinking about Saudi, Iraq, Algeria, Egypt, Africa, can I get your updated views on how you think activity might pan out in these areas?

I would say you would see significant increases in places like Libya due to geopolitical agreements between the East and West. Erbil in the Kurdistan region should also see a sharp increase due to the nature of the PSAs. Egypt should have some uptick from very depressed numbers, but it will take more time. Again, at this price level, all these operations are very economical. The key becomes how many of the E&P companies are encouraged to invest money into projects, like in Egypt, towards H2. For companies like Apache, how much will they invest in their projects? The national oil companies will have plans for Q4 exits that will be positive year-on-year, ranging from flat to 5% to 10%. Our growth commitment in Africa remains strong, but the COVID impact is still significant due to travel, contracts, and geopolitics, creating many delays. I don’t expect an uptick in Africa until 2022.

Great. Thanks a lot for that. My second question relates to ESG. It seems like we think about the risk appetite for new technologies may be shifting towards ESG. If we consider the rising focus on emissions reduction, do you think there could be a risk for the Middle East in terms of natural gas? What role do you think that NESR could play in supporting the region in meeting higher environmental standards?

If I answer this, I will take an hour to answer you. I’ll give a very short response. There is no change from the national oil companies on their energy transition focus and commitment towards gas. They aim to export liquid to market and use the most gas for internal consumption. They are aware of the need for higher environmental standards, and they pride themselves on having the lowest carbon footprint per barrel of oil in the world. They are carefully evaluating how to meet these metrics.

Hi, Sherif. Congratulations to you and the team on another great quarter. I hope you all in Houston were well during the recent weather issues. My question relates to ESG. Given the advances you have made in ESG, do you think you are developing a structural advantage that will help you win new contracts, bringing capabilities to the table that are superior to your competition?

Thanks, Mike. Yeah, absolutely correct. The approach that we have and when we launched this in January in Riyadh is to ensure we have the tools and technologies to enable customers to meet those metrics that seem impossible but are just uneconomic. Most customers walked away from these solutions because the technology exists. We just have to ensure the economic viability to our customers; that’s the differentiation. That’s why we want to package this as a whole portfolio for customers to look at the water, climate, etc. Many people are also focusing on hydrogen and other initiatives. However, we should ensure current oil and gas production is more environmentally friendly. I believe we can do that, and smart customers will evaluate our technology and partnerships versus competitors, recognizing that we have a significant advantage. I'm very excited about it; not only for business but also because, as part of humanity, we must have a responsibility to make an impact in the communities where we operate. Thank you very much, and I appreciate the time. We are extremely excited about 2021, and we look forward to our next calls and more meetings. Thank you so much.

And we have reached the end of the question-and-answer session. I will now turn the call over to Sherif Foda for closing remarks.