National Energy Services Reunited Corp. Q1 FY2021 Earnings Call

Good day, and welcome to NESR's First Quarter 2021 Earnings Call. With me today is Sherif Foda, Chairman and Chief Executive Officer of NESR. On today's call, we will comment on our first 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. Also, as noted in our press release, the company is still reviewing the potential impact of the recent SEC guidance on accounting for warrants issued by SPACs. Certain GAAP financial information that could be subject to adjustment will not be discussed on the call today. This information will be provided upon the filing of our quarterly report with the SEC. 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 hand the call over to Sherif.

Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. I'm very pleased with our sustained momentum and solid start of the year. We continue to solidify our position organically and inorganically, in line with our strategy. We grew 7% year-on-year while the market contracted by around 25% and maintained flat sequentially despite the usual slow start that was evident by our peer average drop Q-on-Q of 5% to 6%. We had a solid free cash flow of $37 million on the back of good collection this quarter, which gives me a very positive indication of the year as expected. I would like to thank our team in the field for their dedication, perseverance and efforts to achieve those outstanding results despite the evolving COVID situation. The Middle East is now seeing the effect of the second wave and continues to be in a semi-lockdown mood, watching carefully what is happening in neighboring countries like India. We have maintained our 100% capacity of operations despite several countries in the region putting specific quarantine requirements, which has certainly made logistics a very complex exercise. Our crisis management team continues to run the show on a day-to-day basis, and we don't foresee it changing until we have a solid vaccination and ease of movement. Some countries are progressing very well with clearly mandated vaccines to people entering their premises and operations. Abu Dhabi is a very good example where our client provided the vaccine for everyone. On the macro side, on the long term, the Middle East continues to cement its place as the pivotal figure in the oil and gas landscape. No one can compete with the lowest-cost producers. In addition to the global pressure and speed to move out of fossil fuel and the acceleration of renewables for power infrastructure, the region has unmatched reserves and the biggest demand market next door in Asia. The growth market in Asia is largely insulated from the dynamics you see here in the Western Hemisphere and will depend on hydrocarbons for many years to come, especially as gas continues to replace coal as a cleaner fuel. The drive for the region is to concentrate on diversifying and growing renewable energy and increasing gas production to meet local demand while investing in oil production to meet global demand. Hence, from our point of view, our existing core business has an in-built recession-proof baseline growth, which I don't believe the larger market appreciates in its magnitude. This will continue for decades, and our aim has always been to turbocharge the growth with accretive strategies as the partner of choice to all our customers. On the short term, we have been saying now for over a year that the oil markets will tighten due to the U.S. shale effect, not enough discoveries, and lack of investment in exploration to offset the natural declines of existing fields globally. The pandemic delayed the onset of this demand tightening, and yes, it also may have structurally changed the demand longer term, but this has only delayed the inevitable. As yet, we don't see alternatives covering for the declines we see in the oil and gas supply. As an immediate effect, we already see our activity now starting to increase, and I see double-digit activity growth in the second half of the year. I believe all our peers are also saying the same. Although demand from key markets like India may be affected by the second wave there, I believe we are now firmly in the early stages of an up-cycle, which is here to stay for a while. Also, with many major companies advocating reduced investment in oil and gas projects or actively talking about exiting markets or even the space altogether, it gives more responsibility to the NOCs to remain the reliable supplier to the world. Hence all roads lead to the Middle East again if you want security of supplies and long-term stability. Therefore, the Middle East is regaining its position as the swing producer. Our customers are very wise and are already making the right moves to ensure they are able to meet this demand. We at NESR have seen this coming and have planned accordingly by front-loading our capital needs, actually starting planning in the second half of last year. We also worked with our strategic suppliers to get first in line on some of the long lead-time hardware, including preordering some items with manufacturers to hold them in inventory, which go into the equipment to accelerate our deliveries to catch this growth in H2. We have been evaluating our needs this quarter and deciding to order more equipment and products for the second half and early 2022. We need to maintain a buffer of resources and be the first to act when our customers need us again, as the most reliable partner. To focus now specifically on some of our operations, I wanted to talk about Libya. Libya, as all of you know, has gone through a lot of turmoil over the last 10 years and lately has achieved a breakthrough and amicable political situation that no one has ever dreamed of, which in turn gives the country a good stepping stone for growth. Libya has a lot of potential, and production has dropped to almost 20% of its existing capabilities. As a start, the first 1 million barrels is what I call the easier task. Then to get back to its full potential, you need a lot of rigs and massive rigless and workover activities. We have been investing heavily since the beginning, and now we have a solid base in both the East and the West, enabling us to service all the clients. We are adding product lines and enhancing our facilities to ensure we can reliably answer all our customer needs. In addition, we have an almost 100% national talented team with many years of experience under their belt. They know the customers and the NOC and continue to be very close to them as we have since the beginning in the most difficult times. We need to provide technology and enhance the product to swiftly increase production. Now let me move and talk about the technologies and segments. Here, I have to specifically mention our progress in Drilling & Evaluation this quarter. We have done very well by growing both wireline and slickline operations. I'm happy to report that we had the same amount of revenue for both this quarter as we did in the whole year prior to the merger. We have deployed new tools to target markets and managed to acquire several operating and wireline slick units at a fraction of the price during the severe downturn last year in the U.S. It is a continuation of our drive to efficiently use our CapEx dollar and leverage opportunistic purchases as they come along. On drilling, we are making great progress operationally. In Kuwait, we have introduced new agitators as part of our downhole tools offering, achieving record performance improvement, resulting in significant market share gain in our fishing services. This quarter, we announced our partnership with Phoenix Technology for MWD and motors. I'm glad to report that we have already run these motors in jobs designed and planned by us, and these jobs have significantly outperformed established players and broke ROP records for those sections. Actually, we broke existing records on 60% of the run, which is an impressive achievement. To give you an example, we drilled the section in 30 hours instead of the field average of almost 60 hours, which means we save the client more than a day in such a small section of the well. We continue to work on identifying key markets and get assigned rigs where we can demonstrate clear differentiation. In addition, we recently announced our partnership with Beyond, and we formed a new JV to operate and implement their market-leading managed pressure drilling technology, not only in our core MENA operations but also in other countries in Asia and Africa. With contracts awarded already in both Malaysia and the Ivory Coast, we will be able to demonstrate better reliability, better drilling performance, and better cost of ownership. Beyond has patented technologies that offer customers a more compact and practical full MPD package that takes less time to rig up, rig down, and is easier to operate, saving time and money for customers. As a result, it has become the leader in the MPD market in the U.S. and Canada. Unlike many players in the MPD spectrum, Beyond owns the technologies included in the MPD packages, from API monogram RCDs that outperformed the competition by margins of up to 3x to specialized state-of-the-art MPD control and design software. Another technology we are proud to have been an early investor in and believe is a game-changer is Kinetic Pressure Control, which was recently featured on the cover of JPT. You may recall Kinetic, or K-BOS, has invented a device that merges next-generation materials used in space programs with military technology to address blowout prevention. Essentially, it acts as an airbag for drilling operations. They have just completed tests on the drilling and coil BOPs, which have significant consequences on how our customers can safely conduct their operations. As you know, blowouts like the Deepwater Horizon have significant negative environmental impacts. This device pretty much eliminates that possibility, and we are taking the lead in implementing it in the region. We have now a set on the ground, which is shortly going to be qualified and tested. So great success is in the making. As you know, our performance has been achieved by continuing to focus on our execution capabilities, determination for the region, being the flagship MENA national champion, and our customer centricity. We are working relentlessly to provide a strong platform of technologies to enable our industry to produce efficiently and sustainably. Part of our ESG impact effort is our early investment in ICE Thermal Harvesting, which we believe is a very forward-looking idea on how to harness the thermal capabilities of the flare or produce gas to provide electricity. We hope to pilot this technology within a year and implement it in the region. We have also made considerable progress in firming up our water-specific opportunities and are planning to run a pilot and technology demonstrator with one of our main customers. We are also in the final stages towards an offering in the methane detection space and shall be announcing an investment and partnership to that effect shortly. This is something which will hit the ground running, and we hope to run these technologies immediately. Lastly, I want to convey that subsequent to our recent announcement on our acquisition in Kuwait, we have successfully closed the transaction and are effectively running the operation as we speak. I want to take this opportunity to thank Sheikh Mubarak and his team, who are working round the clock with us to help grow this business. These are accretive contracts from day one. Given our strengthened cement and coil businesses, we can ramp up these operations significantly in a very short period. Secondly, the drilling fluids product line, which was very small for us, now graduates to a sizable part of the business in Kuwait and forms a baseline for our growth in the region. Kuwait is a big story for us as an anchor country that has significant reserves with a savvy NOC. We grew organically securing several contracts in drilling, cementing, testing, and now with this force multiplier acquisition, we will have a substantial role to play and be part of their vision to transform the oil and gas sector. Overall, as you have noticed, and as promised, we have announced and closed two major transactions in approximately one year in the midst of the pandemic. We have largely handled these internal resources to keep the costs in check. More importantly, we demonstrated our ability to agree on terms and execute the deals with our cash generated from operations. That ability will only enhance going forward as we will generate more cash and will have the capacity for more technology and M&A accretive deals. On that note, I'd like to pass the call back to Chris to talk about the financials and details.

Thank you, Sherif. Turning to our preliminary results, we reported quarterly revenue of $212 million. This represents an increase of 7% over the prior year quarter and flat over the fourth quarter. The year-over-year quarterly increase was primarily driven by the growth of the unconventional product line and new contracts in Kuwait and the UAE. These offset lower activity in other markets and other service lines related to the impact of COVID, which had little effect on our operations in the first quarter of last year. Adjusted EBITDA in the first quarter was $50 million or 24% of revenue. This represents a decrease from 26% in the prior year quarter and the prior quarter. EBITDA adjustments of $2 million for the quarter are mainly for integration costs associated with last year's acquisition, transaction costs associated with our recent acquisition, and other restructuring activities. As we highlighted on our last call, we continue to incur significant COVID-related labor and supply chain inefficiencies and costs. We are carrying incremental labor costs in anticipation of the expected market recovery. However, NESR will be positioned to react immediately to new customer requests, while our competitors are delayed in ramping up their operations. 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 first quarter was $137 million, growing 3% over the same period last year and 1% over the prior quarter. Adjusted EBITDA margins for the Production group were 27% in the first quarter, down 2% sequentially due to the increased proportion of pass-through revenue from hydraulic fracturing operations. Separately, our Drilling and Evaluation segment revenue of $76 million in the first quarter was up 15% compared to the same quarter last year but down 2% sequentially. The increase over the prior year quarter is primarily related to higher drilling revenue in Saudi Arabia. Adjusted EBITDA margins of 24% in the first quarter were up from 22% in the prior year quarter, but down from 25% last quarter due to varying activity levels and product line mix. Depreciation and amortization increased to $31.8 million in the first quarter compared to $31 million in the fourth quarter of last year. The prior quarter had a benefit from a fixed asset valuation adjustment from the final purchase accounting of last year's acquisition. We expect D&A to continue in the $32 million range next quarter before the impact of the recent acquisition. Interest expense in the first quarter was $3.2 million, down slightly from $3.4 million in the prior quarter. Our adjusted tax rate this quarter, which includes the impact of the noted EBITDA adjustments and any potential impact of a change in warrant accounting, was 12.1%. Excluding the benefit of the release of reserve on prior year taxes, the adjusted tax rate would have been approximately 20%, which we expect to continue to improve upon going forward. Adjusted net income and EPS, which includes the impact of the noted EBITDA adjustments and any potential impact of a change in warrant accounting, were $13.6 million and $0.15 per diluted share. Switching to free cash flow, we are extremely pleased with the record cash flow generated this quarter of $36.7 million, up from $32.8 million last quarter and negative $13.6 million in the prior year quarter. The sequential free cash flow improvement was accomplished mainly due to another quarter of strong collections and lower capital spending. We continue to improve in our days to invoice, while most customers have returned to normal payment practices. In addition, we were able to collect retention payments earlier than expected, which boosted overall collections. Overall, DSO improved by 16 days over the prior quarter level, a strong accomplishment by the whole NESR organization. Additional actions are in process to lower DSO even further during the year. Capital expenditures in the first quarter were $11 million, down from $14 million in the fourth quarter. This reduction was due to the lower new CapEx orders placed in 2020 and improved utilization. In 2021, we continue to expect capital expenditures to be flat with 2020 levels 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 improvement on fleet utilization, and improved DSO. Also another positive, net debt decreased to $302 million at the end of the first quarter compared to $323 million at the end of the fourth quarter. The sequential decline is primarily from higher cash balances from improved free cash flow and net debt payments. As of March 31, 2021, our net debt to adjusted EBITDA ratio was 1.6, flat from 1.6 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 first quarter. In conclusion, in Q1, we put the company on an even stronger financial footing with our strong free cash flow generation and are better prepared for the expected upcoming market growth and additional inorganic opportunities. 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 are focused on being the trusted and reliable partner to our customers and have the capacity and resources to tackle their needs while managing the pandemic and restrictions. Two, we are already seeing activities starting to pick up, and I'm confident that we'll have a very strong second half. Three, our ESG impact segment is progressing well with our water, flaring, and methane detection efforts. Four, we will continue to produce free cash flow and will invest in new partnerships and accretive M&A. And on that note, I'd like to pass back the call to the operator for your questions. Christie?

And our first question comes from David Anderson with Barclays.

So maybe I'll just start from kind of a bigger picture question to start with. Operations in the Middle East are heavily dependent upon a lot of labor from Southeast Asian countries, including India. And as you noted at the top, there's a lot of COVID issues still in those areas. I'm just wondering, as we look out to the back part of the year and we're all kind of seeing this ramp-up, is there any concern that this situation could delay anything? Is that a concern for you at all in terms of the labor situation and how that could play out in the Middle East?

So as an industry, you're absolutely right, some of the players will get affected, especially the ones that are dependent on having a very small percentage of localization. They will get affected, especially with the restrictions being put today on travel. I think for us, being again very national and having a very high percentage of a nationalized workforce, we will not see any of the issues that the others will. I would say, in some specific countries where you still have a high percentage, the industry overall will get affected and we might get affected accordingly because of some of the delays, for example, of rig readiness. So in some countries, yes, you might not have a rig crew, for example, if the current crew has been there for seven to eight months and they will not be able to get a crew change. Definitely, there are a lot of things going on to replace some of those people. But yes, you're absolutely right; if the situation gets aggravated, you might get some delays of those rigs.

Now Sherif, you were talking about sort of the balance between natural gas and crude oil in the region. And I think over the last 10 years, you could say that Saudi and some of the neighbors have really shifted spending and activity towards natural gas. And if I'm not mistaken, I think around 60% of the onshore rig count in Saudi is actually directed towards natural gas; I'm not sure what it is today. But just wondering, kind of bigger picture, the oil market is tightening, and OPEC is clearly looking to recapture share. Do you expect this mix to shift back to more towards oil? Do you expect most tenders now to focus on the oil side? Or does that not actually change because of their capacity situation?

I think you're absolutely right in the second half of your question. It's not going to change. They definitely have the capacity again to put oil on the market. Let's say, if the market gets even tighter and they need to put more than six million barrels, yes, you will have some short-term shift of some of the rigs going to oil to get some of this production. But overall, I mean, their vision is to really get the gas in the different countries to be the main fuel for their internal demand. Always remember that most of this in the countries is done for internal consumption. The only one that has huge capacity to export is Qatar, but the majority of the rest are really using it for internal consumption. So this is not going to change. And you saw, for example, the Saudi leadership very clear on moving to renewables and to gas for all internal consumption while really sparing the oil production for export.

And then my last question, if I could just squeeze one more in. You talked about kind of preordering equipment in front of kind of what you're seeing as a ramp-up and want to make sure that you've got the capacity while others don't. We've seen the last couple of years, it seems like you've been growing while everybody else has been sort of treading water. I'm just wondering if you can just kind of give us an overall sense of the capacity situation over there. I guess if you're preordering equipment, you must be thinking that the capacity situation is pretty tight. I know everybody's looking at it a little bit differently in terms of capacity. But just from your standpoint and your product lines, could this market really tighten quickly in the back part of the year? It just seems like you're the only one who's really been spending any money over there.

I would say there's still excess capacity overall, right? What will happen is the readiness of this capacity. So if I want to be a bit more specific, today, I know that the market is going to get tight on some of the product lines. For example, readiness of coil tubing fleets. When you have all this rigless activity that is going to sharply increase and people are not planning for it. Some people as well have issues with spare parts or equipment they did not prepare, or they did not repair during the pandemic, and this equipment despite the fact they are physically there but they are not ready to undertake some of the jobs. The jobs are also getting a bit complicated where the client needs higher specs, longer reach, bigger pipe, and some of this activity. This equipment is not ready in each country. And that's where I'm saying we front-loaded our CapEx. We looked at this last year. We have explained this in the prepared remarks. We looked at the opportunity to buy some of the equipment. We bought actually several of those equipment at a fraction of its price, 20 cents on the dollar, and bought slickline equipment, wireline equipment, some of the high-pressure equipment, and we shipped all this to the Middle East. And we have that ready, green-tagged, as I call it, ready to be deployed. So it is very important. I think some of the smaller companies will not be ready at all for this increase. Already, I see them turning down jobs, and we will be able to capture some of their work. Some others, like, I would say, competitors, have issues with cash, you know? So either they have a restructuring or something like that, so they are not capable of putting CapEx as we can. So I think this is where the client looks at who has a buffer when they make a call and ask for this. So today, you don't see that visibility, but I am quite confident that this is going to happen in H2. That's why we are preparing for a specific market to have specific equipment for what I think they will need, and then I will be able to capture that before the others.

And our next question comes from George O'Leary with TPH & Co.

Just curious for a little more color on the shape of revenue throughout the year. Q1 '21 panned out much more resilient than a lot of your competitors and even our expectations, which was great to see. But I wondered if you could bifurcate a little bit between production and the D&E segment and talk about the progression of revenue Q2, Q3, Q4, just if it's heavier in the back half or if we see a nice ramp in the second quarter. And just curious on the bifurcation between the segments given some of the idiosyncratic factors that play in, like the M&A you guys have executed on, the partnership with Phoenix that could provide a boost to the directional drilling side, and already seems to be doing. So any color there would be super helpful.

Okay. Great. So let me start with the split. I would say that given, again, the size of the unconventional and the frac operation, with all the growth that we are seeing on D&E, I would say, the split would not change that much until year-end. I would say it's going to start to change maybe from next year. But until year-end, I would say you will see more or less a 2/3, 1/3 split in our business between production and D&E. In addition to that, as I said, the H2 is going to be very strong. Obviously, some of the countries will want to see some of their rigless and production activities increasing. I would say the demand for some of the production segment will increase. Even with the growth of D&E, you're still going to get growth or higher growth even in the production segment because of that. On your second part of the question, I would say H2 over H1 is going to be significant. As I mentioned, you're going to get a little increase in Q2, but really you would see the real increase in H2. One of the reasons for that, people have to remember that during Q2, you have the month of Ramadan, which we are in now, and then you have the holidays. So this usually comes with a bit of slower activity due to that. So I would say, you're going to see significant H2 over H1, and that's why I call it always a double-digit growth for ourselves, in my opinion, H2 over H1 revenue.

That was great, Sherif. Regarding the partnership with Phoenix, it seems like you're now well-positioned to compete with the largest players in the field. I recall our discussion a few years ago when we first met in Houston, where you mentioned your focus on expanding your presence in the Middle East. Do you have everything you need to compete effectively against the major players in the high-end directional drilling market there?

No. The honest answer is absolutely not. This is basically, as they call, a stepping stone on the drilling portfolio. So you have to differentiate the drilling portfolio today; you have the motors, high-spec motors, MWD business, and then the real rotary steerable market that is the large part of the business. Today that part is with LWD high spec or high end. So what we have been doing all along is we are very credible with our customers, and we only want to bring partners that are reliable and that make a difference. We looked at Phoenix, and I was very impressed with what they achieved here in the Permian, replacing everyone on their high-spec Atlas Motors and their Velocity with the MWD. We said, we looked at the market in the Middle East, we segregated it and we asked, why is nobody doing that in that market? Why are those sections being drilled with normal motors? We had a very good agreement with John Hooks from Phoenix, and we agreed, let's utilize those, but let's make sure when we go there and replace some of the competitors on those sections, we have to outperform. Otherwise, what's the point, right? So we did that, and they did an outstanding job. Almost every single run, we outperformed the existing field average that they call ROP. I was actually quite impressed yesterday when I looked at the numbers. We had an 83 to 84 per hour versus the average of 42, right? So basically, they doubled the ROP of that section, which means if drilling that section takes you two days — for example, the example I put there is 60 hours, we do it in 30 hours. That's 1 day, 1.5 days. If the rig count and spread rate in the Middle East cost you around $45,000 to $55,000 a day, 1.5 days is significant, right? So you're talking about $70,000, $80,000. If the price is the same or equivalent, then you already save this client. That’s how we see we can grow this part. We have a full-blown technology roadmap on the drilling to ensure that we have all those factors. So we have high-spec motors working on MWD, LWD, et cetera, and this is when I would say I have a solid portfolio. Now I can tell you, yes, I can compete with the big boys for the entire drilling portfolio. But today, no, we are only specifically targeting that part of the market.

Great. I appreciate the honesty and the color there. That was very helpful context. I'd sneak in one more if I can. The acquisition you guys announced during the quarter was nice to see, and good to see you press into Kuwait further. Just wanted to get your thoughts on pull-through opportunities that might emerge from that. Or is this more of a Kuwait-focused acquisition? Do you have opportunities to pull those revenues into other geo markets?

No. I would say, yes, this Kuwait acquisition basically makes us what I call an anchor country, like the big countries that we have. This will ensure that we have that presence and breadth where we can have fantastic infrastructure. They have an amazing facility, three facilities. They have solid relationships and contracts for five years. The only part that I would say will make a big difference for us to go outside of Kuwait on this is the drilling fluids. Today, the drilling fluids they have is state-of-the-art. They just started that contract. They have a very strong base, and we will be able to demonstrate the ability of advanced technology partnerships that we have added to that contract and take that business the way we perform and showcase this to other countries. It's exactly like, for example, what we did in the frac business in Saudi Arabia. Today, as we are the leader in that business, we can demonstrate this to all the neighboring countries. They see what we are doing in Saudi, and Saudi with their leadership in how they perform this as a client, how they made this unconventional a huge success for them, how can — and we were part of it as one of their providers, now if you do the same thing on the drilling fluids and show it to the neighboring countries, you start to gain share in that $1.5 billion market that today we don't even touch. So this drilling fluids is a very good business that we just started now.

Our next question comes from Igor Levi with BTIG.

On the ESG front, last quarter you talked about plans to convert infield water into drinkable water as well as remove sulfate from water so you can use lower-quality water for drilling and bring up higher-quality water for drinking. I remember you mentioned you were in conversations with three customers and thought they may pull the trigger on a project before the end of the year. I wanted to see if you could provide some color on how many customers you're speaking with. Is that still the plan in terms of timeline and such?

Thanks, Igor. Yes, absolutely. I'm very excited about the water, especially the freshwater part. We are in the final stage of designing the pilot, sending it, and we will have the pilot in 4 to 6 weeks, I would say, in the country. We will be able to see the benefits and results of that facility with one of our major customers. This will definitely be a showcase if it works exactly as we said it would, being able to remove the solids and able to test under extreme conditions. So what we are working on is actually taking that technology to a different level. There is H2S, there is some oil content, very high salt, and very high solids content. We see that we want to see how we can design that pilot to be able to remove all this and get fresh water on the other side, right? So yes, I would say as promised, we will certainly have that before the year end. At the same time, we are in parallel negotiations with two other customers to make the same thing and ensure that we have this type of facility or a pilot before year-end.

And as a follow-up, could you comment on how your partnership with ICE on the geothermal side will contribute to your ESG goals? Is that something we're going to actually see before the end of the year on that front?

No. This is now an early investment, right? So this is basically — no, if I give more even color on that. The partnership we do is very important to differentiate. Some of the established companies have a proven technology. With that partnership, for example with NexTier, now we have with Phoenix. We just announced Beyond, which is a joint venture to operate with that joint venture into the international market, which is something that we announced, and now we have two contracts awarded. This JV will operate those contracts. Then you have the early stage, what I call the innovative people, that have something that is not proven, right? Today, ICE is an amazing idea that they are working on some patents and new technology. We become an investor. We put money like venture capital. We put money with other investors, and they are going to work on the idea they work on technology, test the technology, then have an EXP, and then we commercialize it. For a small company, usually, this cycle can take up to 2 to 3 years. For a small company with very talented people like we have with ICE, we are targeting one year, so 12 months for that EXP. We basically put the investment, and there will be a call for an additional investment, and then the product will come in a year's time for us to pilot-test it. Whether we will pilot-test it directly in the Middle East or pilot-test first in the U.S. and then transfer it to the Middle East, that's yet to be seen. We are working on around 4 or 5 of those. That's our R&D. That's our philosophy of the open platform. We target very innovative people, give them money to start a new project or tool or idea, and we see how it will work, and then take that outside. We have one of them that we've been investing in for more than a year, but because it's heavy in electronics, I don't see it, for example, until next year.

And our next question comes from Blake Gendron with Wolfe Research.

I want to follow up on the unconventional opportunity and really just frac broadly. I think before where there was more focus when this was ramping up, there was one unconventional fleet in Saudi and then maybe another quasi-conventional/conventional fleet in Qatar and maybe rotating between a few countries. What do operations look like now? Now that we're getting through the pandemic somewhat here, slowly but surely, what's the ambition to grow that part of the business for NESR?

Thanks, Blake. So let me just emphasize. We have today two fleets in Saudi Arabia. They are working actively between Jafurah Basin and South Ghawar. Saudi has been really a pioneer in developing those fields and what they have done state-of-the-art. We are working with them. We are in discussions, as I explained earlier, with three other customers in other countries to start the frac business in those countries. The discussions are very active. Our ambition is to land two of those before year-end. As I have explained before, our aim is to have four fleets in those countries before year-end. My expectation is we're going to have one in H1 and one in H2, right? That's exactly — and then obviously you're going to see real revenue in the second half of the year. The clients, the majority, are working round the clock on those activities. You have to differentiate in the Middle East between unconventional and conventional. They do frac in the Middle East, but they do not frac what you know in the U.S. The only — that style of multi-pad, 50, 60 stage per well is only done today in Jafurah Basin. The rest are really much smaller footprint. But you have a lot of fracs. You have fracs in Oman since a very long time. You saw the announcement of the UAE with His Excellency, with ADNOC and Total, and they exported — they said they exported the first unconventional gas from Diyab. This was announced. They have a huge program in UAE for the unconventional.

That's very helpful. Moving to the back half and the double-digit activity increase that you anticipated, it was helpful to hear about the equipment readiness. It was helpful to hear about the split between PS and DE. Just wondering in terms of your market share assumptions, it sounds like you're still going to be able to outmaneuver some of the smaller competitors that are maybe cash-strapped. It was our understanding, though, that through the pandemic, you were able to perhaps outmaneuver some of the larger competitors just because of travel restrictions. Do you anticipate those larger competitors perhaps reestablishing some share in the back half of this year? Or is it still very much NESR's for the taking just given your nimbleness and equipment-readiness?

So we're obviously very careful about everybody, and we have a lot of respect for every competitor we have. I would say that we have a path for our growth and our market share. I don't see this hampering or slowing down in the near future. Part of it is what we explained, that we understand the customer extremely well. We have kind of visible activity that's coming in the second half. We prepare these equipment. We prepare the people. Honestly speaking, I don't think anybody else is. There is a lot of constraint on the smaller guys for cash-strapped or profitability, et cetera. Some of these have to be socially responsible, especially with the pandemic, not to release people, to make sure that you have your crew ready. You have to take care of them and their family. This will pay off, right? We have readiness in a lot of the countries where I see our small competitors are not ready. I see again, the cash-strapped people or some of the competitors or even the international ones, some of them have issues with CapEx deployment. I don't say that the big guys are not ready, they are, obviously. But I don't see them being able to take part in our growth. I see that we are going to have the market share gain that we are planning. I see that we are very confident that we're going to have the second half with double-digit growth over the first half. The path is clear. I would say that we will make our numbers.

That's totally fair. One more housekeeping question if I could squeeze it in here for Chris. It looks like very few charges and credits this quarter, obviously, versus last quarter, and it was largely due to the transaction costs in this quarter. I know we had previously talked about logistics costs associated with the pandemic and how you included those in numbers and not wanting to adjust those out. But Chris, are those charges and costs still very much there? And do you anticipate those to moderate through the year? And do you have any visibility into sort of the pace at which those heightened costs moderate for you?

So the costs are there. As Sherif said, the real key is having the revenue growth that will absorb them and improve the employee utilization. That's really the key. So it's just getting the leverage back on those employee costs. The costs will stay. They're not going away. They just need to be utilized.

If I just maybe complement what Chris just said, I mean if you look at our structure, the whole thing of the CMT and crisis management team, et cetera is that we just said that this is part of the business, and you just have to live with it. Your PCR test, your extra people, your restriction on travel; today, for example, if you want to go to one of the countries, they require you, if you come from a certain country, to stay in another country for 14 days. All of these people have to stay in those countries for 14 days, and then after that, what they call they are from the green country, then they will be able to travel to the other one. This is all part of our business. If I look at our transaction and costs, which we take out, those are all due to the nature of acquisition, M&A, lawyer fees, some of the exits of some people, for example, if we do some restructuring, then all the stuff that we call out, like the preparation for SOX and etc. That's the only cost we call out because it should stop. Going forward, you should not have that.

I didn't know if it was a source of upside potentially for you as we move through here. I know you don't call it out and appreciate that you don't call it out, but understand that there is a pandemic-related cost that's in there. I just didn't know if it was going to be a source of upside potentially from these moving forward.

Yes. I mean, honestly, I — I wouldn't call it an upside. I mean, yes, it might be. But I have to also be frank that we have saved some costs because nobody is traveling, except a couple of people, right? So there is also some cost avoidance, working on — a lot of people, especially on the management side, on Zooms, etc. But yes, it might be.

And I'm showing no further questions from the phone line at this time, so I'll turn it back to management for any closing remarks.

Thanks, Christie. Thanks, everybody. I am very excited again about a solid quarter and I would say, a very bright future. I'm quite optimistic actually about the second half and next year. Thank you very much. Thanks for your time.

And that does conclude today's conference call. Thank you for attending. You may disconnect your lines at this time, and have a great day.