National Energy Services Reunited Corp. Q2 FY2025 Earnings Call

Greetings, and welcome to the NESR Second Quarter 2025 Financial Results Call. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. Blake Gendron, Vice President of Investor Relations. Thank you. You may begin.

Thanks, Melissa. Hello, and welcome to NESR's Second Quarter 2025 Earnings Call. With me today are Sherif Foda, Chairman and Chief Executive Officer of NESR; and Stefan Angeli, Chief Financial Officer. On today's call, we will comment on our second 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, Blake. Ladies and gentlemen, good morning, and thank you for participating in this conference call. Once again, I would like to thank our entire NESR team for delivering another stellar performance in the second quarter, and congratulate our field crews for flawless execution achieving consistent operation records with our key customers while maintaining the highest standard in safety and quality. The NESR growth story is progressing as we had envisioned, and is about to hit a higher gear. Our recently announced contract awards and the expected busy tender activities will serve as a foundational backlog to our journey toward $2 billion in company revenue and position us as a sizable player within the world's best region for upstream activity. On today's call, I will start with the macro and our outlook across the key anchor countries. Then I will discuss our countercyclical investment strategy, update on the recent contract awards and discuss how we see our progress for the coming quarters and years to come. First, on the macro. Coming into the year, we saw the softening upstream environment as a unique opportunity to lean into our countercyclical investment strategy, just as we have done successfully in 2020 and 2021. As evidenced in our second quarter results, this strategy continues to deliver differentiated performance versus the market, not just on P&L growth but also cash generation and debt pay down, despite our sector-leading investment levels, which is consistent with our localized strategy as the national champion of the region. Over the past 10 quarters, we've generated almost $300 million in free cash flow, which is nearly half of our market cap today. Speaking of durability, despite sustained uncertainty in the global macro, oil prices and recent geopolitical events in the region, we see MENA as a bright spot with just a temporary flattish rig count this year. We said previously that oil markets would remain on edge and that activity trends would vary by country. And this continues to be the case with the exception of some countries like Kuwait and key basins like unconventional that will continue to see healthy growth. Market consensus is that oil price will remain challenged for the next 12 months. Despite the 35% decline in U.S. activity this year, crude production remains flat, with continued drilling and completion efficiency gains offsetting lower reservoir productivity. In the non-U.S. non-OPEC supply bucket, growth from Guyana, Brazil and Canada have more than offset stagnating or declining production elsewhere, but in total, this growth has been measured. Above all, caution in the oil market stems from the projected global inventory build through late 2025 into early 2026, driven primarily by OPEC supply. With this backdrop, it is important to reiterate that our customers, the national oil companies are taking a much longer view of oil fundamentals. Encouragingly, the outlook for overall energy demand remains robust, and there is a lot of discussion around the acceleration of data center build-out and AI chip power demand, particularly related to gas development. For crude, the key factor to consider is that oil demand per capita across much of the developing world and in massive countries like China and India lags significantly behind consumption per capita in many Western countries. The demographic shift with global south population increasing much faster than global north means that energy demand overall will be the main driver and will surely seek affordability before anything else. What this means is that the world still needs a lot more oil with some estimates pegging demand growth of 5 million to 7 million barrels per day by 2030. Where will this oil come from without the materially higher oil prices? In the Middle East, this dynamic is driving activity growth across the majority of our anchor countries. In Saudi, maximum sustainable capacity of 12 million barrels per day remains solid. And as stated publicly, the country can easily and quickly flex activity up or down in the coming years as this capacity is absorbed and incremental supply is needed. This is why we are seeing different activity trends across our countries. Right now, there is robust growth in Kuwait and North Africa, and these trends should continue for the foreseeable future. UAE, Oman and Iraq are largely stable for us, and we continue to build on our solid position in those countries as we introduce new technology and pull through other elements of our portfolio. In Saudi, activity is down year-over-year in oil, but this activity, we believe, is bottoming soon. With strong Saudi growth in gas and our favorable position in Jafurah, NESR should be able to bridge near-term softness in oil with absolute growth in Saudi in 2025 and beyond. As we have said in the past and is now abundantly clear across MENA, unconventional resources are emerging as the main engine of upstream growth in the region, mainly around gas development and the overall need for more domestic energy and power. Today, Saudi is leading this charge with clear vision for the long term and busy rig activity deployed to unconventionals to support massive growth in frac stages for the next several years. As has been made clear publicly, Jafurah is the key project among several gas development across the Kingdom to grow gas production 60% from the 2021 baseline by 2030. The gas is needed for domestic consumption and is, therefore, a highly strategic focus of investment. Aramco has revolutionized the play with a deeply scientific approach to the reservoir and to operations with impressive efficiency gains in both drilling the wells and completing them. Back in 2019, NESR had no business in the hydraulic fracturing space. At that time, however, we saw a unique opportunity to leverage our local know-how and open technology platform by importing best-in-class frac capability from the Permian Basin. With the support of our deal client and a collaborative approach with our U.S. partner at the time, we disrupted the status quo by setting early operational records. Given our local footprint, we also maintained fully reliable operation through the pandemic. We are proud to have been and continue to be involved in innovation around frac design, simul-frac, fluid chemistry, dissolvable plugs and notably produced water treatment and mineral recovery within our NEDA segment. Aramco has set a world-class standard across all areas of unconventional resource development. Moving to Kuwait, where we have spent considerable time and focus given the vast growth opportunities over the past six quarters. Today, the rig count in Kuwait is at an all-time high, a record never seen before in becoming the second largest country in the Middle East in terms of rig count. Our successful entry to the country since our birth has been phenomenal. Our growth is on plan with multiple contract awards, several of which we recently announced for key drilling and evaluation product lines. We secured our first entry into slickline and cemented our position in the drilling portfolio. Much of the portfolio import into Kuwait has come from our differentiated drilling offerings into Oman. We have had the unique leadership position for more than a decade, training and developing the local workforce, establishing local manufacturing, building best-in-class drilling machines, and we are now taking this success to neighboring countries. I'm talking here about drilling segments such as tubular running services, downhole tools, fishing & remedials, advanced drilling technology that will form the base for our Roya platform. As we did in Saudi, we are now in Kuwait and have worked seamlessly to make this portfolio pull-through a reality. And we are still in the early stage of this evolution across other countries. We recently announced Ahmadi Innovation Valley, which will also add a layer of research and development to our growing operations in Kuwait and establish a long-term collaboration with our cherished customer. Moving to North Africa, which is another area of growth, we did secure solid new contracts in both Algeria and Libya. These contracts span from three to five years and ensure that we have the runway to continue to invest in human capital and equipment. We have made strides in both countries in the past, and now we want to ensure we scale our position to mirror our size in the GCC countries. As a repetitive strategy, we rely on our local talent pool to execute flawlessly in the different segments. Our aim is to have the top leadership position in the production services. Here, I'm talking about cementing, coiled tubing, nitrogen and pumping, hydraulic fracturing, and industrial services. North Africa's proximity to the European energy market is uniquely positioned to provide the much-needed gas into the pipeline and meet increasing domestic power demand. In addition to increasing oil export capacity, the countries want to enhance their supply buffer in the coming years. Through this shift, we continue to be close to our customers and define the needed resources to fuel that supply growth. To summarize, the tender activities will remain very busy this year, and we are expecting much more to come in the second half. We are focused on building a solid pipeline and securing a robust backlog while maintaining profitable growth and free cash flow generation. And with that, I'll pass the call over to Stefan to discuss the financials in more detail.

Thank you, Sherif. Good morning to our audience in the U.S., and good afternoon, good evening to our audience in the Middle East, North Africa, Asia, and Europe. I'm very pleased to give an update on our financial performance for the second quarter of 2025 and some color on both Q3 2025 and full year 2025. In the three months since we last talked, macro volatility worldwide has persisted. Factors, including trade uncertainty, inflation, lower subsidies to developing countries, fully supplied oil markets, OPEC+ supply releases, and continuing geopolitical uncertainty in the Middle East have all led to range-bound oil prices and lower rig counts in certain countries. As we have heard from our peers, all this has impacted the Q2 '25 results of the broader oilfield services sector and makes forecasting the short-term outlook very difficult. Despite these headwinds, and as Sherif highlighted in his market summary, most of the markets in the Middle East, apart from Saudi, were flat to up both sequentially and year-on-year. We expect to see this trend continue for the rest of 2025. First, let's turn to Q2 '25. Our overall second quarter revenue was $327.4 million, which was up 8% sequentially and up 0.71% year-over-year, outpacing the sector. Sequentially, we experienced growth in Saudi, mainly driven by unconventional activity as well as growth in Egypt and Iraq. Year-over-year, we saw growth in Abu Dhabi, Algeria, Iraq, Egypt, and Jordan, partially offset by lower revenue in Saudi, mainly on the lumpiness of product sales. Now turning to adjusted EBITDA. Adjusted EBITDA for the second quarter of 2025 was $70.6 million with margins of 21.6%, up 95 basis points sequentially. Interest expense for Q2 '25 was $8.6 million, and Q2 '25 tax was $4.3 million, which implies an effective tax rate of 21.9% for Q2 and 22.9% for H1 '25. Turning to earnings per share. Earnings per share adjusted for charges and credits was $0.21 for the second quarter of '25, up 50% from Q1 '25. The charges and credits of $4.9 million impacting adjusted EBITDA and adjusted EPS were made up primarily of four items in Q2 '25 as follows: one, costs associated with the remediation of material weakness controls, which should moderate going forward with the completion of our remediation; two, a small impairment on a small investment; three, a litigation provision; and four, restructuring costs related to headcount. Now we turn to cash flow and liquidity, which has been our strong point over the past several years. As you might remember, our Q1 '25 cash flow from operations and Q1 '25 free cash flow were both below expectation due to seasonal growth in working capital accounts during the holy month of Ramadan. However, we rebounded in the second quarter of '25 with cash flow from operations of $98.5 million. Driving this big improvement was working capital efficiency with better management of all its components, including accounts receivable with lower DSO, accounts payable, and inventory. The free cash flow for Q2 '25 was a spectacular $68.7 million. CapEx was $29.7 million, which was reflective of our countercyclical investment strategy and new technology deployments. For H1 '25, cash flow from operations was $119 million. Free cash flow was $59.1 million, and CapEx was $59.9 million. Free cash flow conversion was a solid 44.4%. As of June 30, our gross debt was $354 million, and our net debt was $223 million. Our net debt to adjusted EBITDA was 0.74x, which remains below our 1x target for a fourth consecutive quarter. On a trailing 12-month basis, our return on capital employed or ROCE was 10.8%, in line with our robust growth investment strategy. Looking ahead, we expect Q3 '25 revenues and EBITDA to be consistent with Q2 '25 results based on the timing of certain tender awards and project start-ups. For H1 '25, revenues were higher by 1.4% versus H1 '24. Despite the overall market headwinds and rig releases in key countries, we still expect full year '25 revenues to be greater than full year '24 revenues following start-ups from recent contract wins and successful technology deployments that we have made and have been highlighted separately. Implied in our outlook is that we expect to exit the year at a record run rate for revenue as our growth is expected to continue through 2026. Margins for Q3 '25 should be in line with Q2 '25 and for Q4 '25 should be slightly higher. We do not expect to be impacted materially by changes in global tariff policy. Full year '25 interest should be around $31 million and full year '25 ETR should be in the mid-20s as previously outlined. CapEx for full year '25 will be in the vicinity of $125 million as previously stated, but may go up slightly, plus or minus $20 million, dependent on the results of some large tenders, which will impact revenues positively in future years. Now on to housekeeping topics. We spent the better part of the last two-plus years reshaping our back office and the company overall with new and updated processes, procedures, and controls as well as implementing the latest software upgrades to our ERP system. As you know, in 2024, we remediated three of our four historical material weaknesses. I'm very pleased to announce the remediation of our final material weakness in our Q2 '25 accounts. As of June 30, NESR can say that all our disclosure controls and procedures and internal controls over financial reporting are effective, and we will be making this disclosure to the SEC. Three comments on capital allocation. First, during July, the company concluded a tender process to convert its outstanding warrants into equity on a 1 share to 10 warrant basis, where we issued approximately 3.5 million shares for 35 million outstanding warrants. The warrant conversion was aimed to clean up the capital structure and remove the overhang originating from the SPAC. Second, the company is currently refinancing its debt facility and anticipates that this will be concluded over the next three months. Third, for the balance of '25, due to market volatility, ongoing debt refinancing, and CapEx commitments associated with the new contract awards, the company will continue to use its excess cash flow exclusively to pay down debt. The outlook for most of the Middle East and North Africa region remains favorable, as we've just discussed, upstream spending remains durable, and NESR continues to be focused on its stated goals of delivering profitable revenue growth, execution efficiency, technology expansion, debt reduction, and working capital efficiency to drive future financial performance. On behalf of management, I'd also like to thank our entire workforce for their outstanding efforts in delivering these results, together with our shareholders and banking consortium for their continued support. The future for NESR continues to look favorable. Now I'll turn the call back to Sherif.

Thanks, Stefan. Let me conclude by reiterating the key takeaways from the second quarter and the outlook. While the macro remains choppy and sentiment remains low, MENA continues to be the most durable market globally. Current activity trends are unchanged from a quarter ago and from our expectation coming into the year, despite the many geopolitical and economic shifts so far in 2025. Activity trends vary by country, but all of our key clients are planning and acting with an eye on robust energy demand growth into the future. Within this market view, NESR continues to outperform through a combination of product positioning, countercyclical investment, and portfolio pull-through. We will continue to invest heavily in 2025 and beyond. We will fuel our production services business to ensure that we achieve top three positions in MENA for each segment. With solid contract awards and backlog that spans to 2030 and beyond, our future is very bright. We don't depend on spot oil pricing or experience activity swings like the U.S. We have a solid long-term vision that is totally aligned with our customers in the region. We invest for the future. We ensure that our local talent is well leveraged and that our field team is well trained to the highest standards in the industry to deliver top quartile safety, service quality, and flawless execution. I'd like to close by thanking all of our employees and their families. They continue to work in the hot summer months in the field. They broke records after records, positioning NESR as the national champion of the region. We will continue to punch above our weight and have big ambitions for the future, not only in contract awards but in innovation and technologies. Our success would not be possible without the steadfast support of our customers, who we know very well, and we are honored to be their trusted partners. With that, we are ready to take your questions. Thank you. Melissa, please open the floor.

Our first question comes from David Anderson with Barclays.

So within the guidance, Stefan, you had said flat in Q3. I was just wondering if you could kind of break that apart a little bit, some of the moving parts. We know Saudi is coming down. I think I heard you say that you think Saudi is kind of bottoming here. Help me sort of understand the different things that are happening in the fourth quarter. Are you expecting a fourth quarter to start picking up in Saudi? Just a little help on some of those moving parts.

You mentioned Q3, which is consistent with Q2. In Q4, we expect an increase. The full year revenue for 2025 is projected to be higher than in 2024. For Q4, given all our recent tender wins and the anticipated wins in the coming months, we believe the revenue will be in a certain range. I expect Q4 to contribute positively to the overall yearly revenue, potentially increasing it by about $40 million. The growth will largely come from Kuwait, with additional potential in Saudi Arabia depending on tender results, along with wins we’ve had in Algeria and Libya. That’s where we foresee the activity arising.

So overall, Sherif, I'm just kind of curious, it sounds like you're going to start seeing some tailwinds into 2026. It feels like all your different regions, if we assume that Saudi is bottom, we should start to see at least Saudi picking up from here. So kind of an early look at '26, if you wouldn't mind, Sherif, in terms of how you're thinking about the MENA region overall?

Thanks, Dave. The MENA region is definitely expected to see an increase in 2026. The countries that reduced rig activity are all planning to ramp up in 2026. Saudi Arabia is frequently in the news due to its size and importance, and they've clearly stated plans to increase their rig count, which is evident from the recent actions of rig companies. Kuwait is also on a growth trajectory; in fact, Kuwait's rig count is at an all-time high. If you take the fourth-quarter rig count and project it over the year, it shows a substantial annual increase in Kuwait. Additionally, Kuwait is currently the second largest country in terms of rig count, exceeding 200 rigs in operation. Iraq is planning to boost its capacity as well, and the UAE is increasing its rig numbers, which is public knowledge due to ADNOC Drilling. Oman remains stable, while North Africa is also expected to grow, showing over a 20% annual increase when you project the fourth-quarter numbers. There are security concerns in Libya, but if those are addressed, rig additions can proceed. Algeria is also emerging positively, with ExxonMobil signing agreements and negotiations happening with Chevron alongside other activities from Total and E&I. Overall, when you consider all these elements, there will likely be a significant increase in 2026 compared to 2025, although we may encounter some delays due to geopolitical factors. Nonetheless, 2026 is positioned to be much stronger than 2025.

Everything sounds like they're trending in the right direction. Can you give us any update on the Jafurah contract announcements? I think we were expecting those to already happen. Any sign of kind of when do you think those are happening? Any reason for the delays that you can share with us?

No. I mean, obviously, Aramco does a fantastic job in floating the tenders, and we all submitted. Aramco is currently in the evaluation phase and will announce the results officially as they did in their midstream. My expectation is that within the next couple of months, everyone will know the results.

Okay. Sorry. And one last one, if I could squeeze in. Stefan, you talked about refinancing, you're clearing the warrant overhang. You're generating a lot of free cash flow. Any consideration about buybacks or any type of returning cash to shareholders at this point? Any thoughts on that or any timing?

Yes. Currently, we want to wait until we finish the refinancing and see the results of all the tenders to understand our capital expenditure. Once everything is completed, which should be by the end of the year, we'll present to our directors our recommendations on how to manage our excess cash moving forward. Stock buybacks will certainly be a consideration.

Our next question comes from the line of Grant Hynes with JPMorgan.

So yes, I mean, I think, obviously, highlighted the Kuwait contract, $100 million or so spanning a number of the Drilling and Evaluation segments. And I think on the last call, you mentioned segments such as cementing, fracturing, coiled tubing. But I guess maybe any color on the Production Solutions side of Kuwait and how this might compare to the scope of the drilling side?

So the Kuwait production obviously is going to be extremely large. These tenders are ongoing. So obviously, we are a much bigger company in production than drilling. And our aim, as I mentioned, that we be the top performer, top three positions in all the countries. So yes, once the tenders will be, I would say, in the next maybe three to six months, all these tenders will be between awarded and finalized, etc., etc. And then depending on the result, obviously, we do announce as we always do, is the award and the size, right? So obviously, we get clearance from our customers, and we do that. So expect huge tender activity in all this in Kuwait. And again, people have to understand that this used to be 60, 70 rigs, now it's 200 rigs. So if you take the services aligned with that, it's going to be quite big.

Appreciate it. And then on the NEDA side of things, I think you have highlighted a pretty significant TAM by the end of the decade with several pilot projects sort of ongoing. But I guess across sort of water, flaring emissions, and CCUS, I guess where is NESR seeing maybe most of the short-term demand pull just for near-term solutions?

This is a broad question regarding our decarbonization efforts in MENA. As you've mentioned, the rig count and work intensity have changed significantly over the last two decades, resulting in higher service intensity per well or barrel, which in turn increases the carbon footprint. Our customers consistently aim to maintain the lowest carbon footprint possible. This is why we established this segment in 2021, and we are now focusing on ambitions related to flare-to-power, heat-to-power, water, and mineral recovery. We are particularly advanced in water management due to a significant scarcity in the region. Currently, the industry produces six to seven times more water than oil, indicating a substantial water availability. Once we can make the economics of our plans viable, I believe the adoption will be rapid. We are investing significantly with our customers in zero liquid discharge initiatives and are currently piloting mineral recovery processes to clean and reuse water for various applications. We've made investments in Salttech and others as well. In summary, I anticipate that in three to six months, we will have clearer insights into the economics of these pilot projects. If they prove economically viable, the demand will greatly surpass our supply capabilities because the market is vast. For instance, producing 100 million barrels of oil results in 700 to 800 million barrels of water, indicating ample availability. We just need to ensure the economics align for power and mineral recovery. I am very excited about this market potential, and I expect our financial performance will reflect this in the coming years, leading us to report this segment separately.

Our next question comes from the line of Derek Podhaizer with Piper Sandler.

Sherif, I wanted to revisit a comment you made at the beginning of the call. You mentioned your goal of reaching $2 billion in company revenue, an increase from the current run rate of about $1.2 billion to $1.3 billion. Could you discuss the factors contributing to this outlook? Is it entirely organic or are there some inorganic elements involved? Additionally, do you have any insights on the timing and any milestones we should watch for to build confidence in achieving this $2 billion target?

Yes. I mean, obviously, we put that $2 billion back since we formed the company, right? So at the time, we were $450 million, and we said we're going to quadruple the company size, right? And we got delayed, obviously, due to COVID, etc. So our plan now is very clear. Why? Because the amount of tenders, contract positioning, and opportunity are immense. So if I go back and elaborate more, we were like two-pronged countries or three countries, right? And then we said, no, no, we need to have anchor countries, which means we have a very strong position from infrastructure, contract awards, and obviously, client relationships. And did we achieve this? Yes, we did. So today, we are, I would say, in six to seven countries that are very significant for us, meaning that we have the majority of the product line, very good infrastructure. In some places, we have research centers, some of the places we have even more kind of industry linkage with different organizations in the country, right? So once you have that, which we do have it now, then you start to pull through the segment from one country to another based on the fact that the tenders are available, right? And again, for people in the U.S. to understand, all work in the Middle East has to be contracted. You cannot do a spot market. You cannot just come and have a PO and work. So this tender work has occurred over the last three or four years. You need to be qualified. Sometimes, you have to have five years of background and experience in those types of work for the client to invite you to tender to those segments. All this has been accomplished over the last five years. So today, I am tendering, and we are trending over the last, obviously, couple of years, and we're starting to see these awards. So I think for the next three to six months, depending on the award size and the amount of contracts we get in those different anchor countries, then the value of this $2 billion is very clear. So if you get multiple contracts in multiple countries, we might be as fast as 18 months to be at that run rate. So it all depends on those contract awards. And once we announce it, everybody will know and then people can make the numbers very easily.

Got it. No, that's really helpful. I appreciate that. Maybe switching back to the margin progress. I know Stefan gave us some good guidance there. And I think on the first quarter call, you talked about being 100, 200 basis points less versus 2024 and 2025, which kind of gets you around that 22% range. I mean, are we still there considering flattish margins quarter-over-quarter and then slightly tick higher from Q4? Maybe just help us understand that margin guide, the working pieces behind that. I understand there's tariff impacts, pricing in the regions. Just maybe a little bit of help around what's driving the margins and where you think you can get them in the full year based on the guidance that was delivered.

Derek, that’s a great question. Nothing has significantly changed since our Q1 update. We reported 20.6% in Q1 and 21.6% in Q2. We expect something similar or flat in Q3, and in Q4, with a higher revenue base, we will likely reach between 23% to 24%, resulting in an overall 22% for the year. The key factor remains the timing of the tenders, when they are awarded, and when the projects we won in the past six months will actually kick off. If we generate additional revenue in Q4, our margins could potentially be more favorable during that period. However, the approximate 22% figure I provided three months ago still stands for the year.

Our next question comes from the line of Jeff Robertson with Water Tower Research.

Sherif, can you talk a little bit about NESR's scale in Algeria in light of the recent contract award that you disclosed a couple of weeks ago and how that scale positions the company to participate in unconventional gas development in the coming years?

Thank you, Jeff. Our site in Algeria began five years ago as a small operation, but we've steadily expanded by securing more contracts and increasing our business footprint. Recently, we've won new contracts that will enable us to provide a wider range of services. I believe that as we begin to implement these contracts, we can bring in significant resources, particularly for hydraulic fracturing and conventional development. This process will take some time, but once we establish our position and scale, we'll be prepared to meet client demands. By next year, our operation should be substantial, potentially placing us among the larger markets, which we define as those generating around $100 million annually. Algeria holds considerable potential, especially given its proximity to Europe and existing gas pipelines, positioning it as a key supplier for European cities. Moreover, the unconventional gas resources in Algeria's basins have been proven over time, potentially matching the size of Vaca Muerta in Argentina. Combined with strong conventional gas reserves, unlocking these resources—either through collaboration with an international oil company or by Sonatrach independently—could lead to significant growth. North Africa, due to its geographical advantages, is poised to become a vital player in meeting energy needs across Spain, Italy, France, Germany, and beyond, especially in light of current geopolitical developments.

And secondly, to follow up on your comments on NEDA and some of the pilots you're working on. Are you seeing interest from some of the other countries in what you're doing there? And if you're successful with those pilots, then you could then maybe start rolling out projects in some of the other countries in the region?

Absolutely. I always try to explain this in detail. The opportunity is tremendous, especially regarding water. The primary focus now is economics. To be straightforward, no one will pursue this solely out of environmental concern; people will engage because they want to see economic benefits. If I can purify water and extract minerals at the same cost as water from a desalination plant, it makes perfect sense to choose that option. That's why we're focusing on the economics, which requires understanding factors like the cost of water, disposal wells, flaring, and power costs in each country. If the economics don’t align, then it won’t be feasible, and frankly, it’s not worth pursuing. We are demonstrating this through our pilot projects. Many countries in the Middle East are aware of climate issues, as highlighted in COP28 and COP27, with initiatives like the methane pledge for zero methane by 2030. Everyone wants to realize these goals, but the economics are crucial. I’m very excited about the ongoing work on flaring across the Middle East, where some nations have achieved zero flaring at times, while companies like Aramco are still working on it. The challenge now is to maximize gas compression and explore the use of flare gas for power generation. We're even considering opportunities related to remote data centers and Bitcoin mining in desert areas. There are many ideas and possibilities ahead, but again, the economics need to be sound, especially regarding water and mineral recovery, which I find particularly exciting.

Our next question comes from the line of Greg Lewis with BTIG.

Just one for me. Sherif, just you guys called out being congrats on the North Africa contract, 3 to 5 years. I guess one of the things that we're wondering is, like as we think about contract durations, how have those kind of been trending? And where do you think those can be trending over the next couple of years? Do we expect durations of some of these service contracts to expand? Or are we kind of at a level where they're probably just going to stay?

Thank you. That’s a broad question since all our customers in the Middle East must have contracts in place, whether they are long-term or short-term. Short-term here typically refers to two years, while long-term can extend up to nine years. We currently have contracts awarded that will remain valid until 2032. Clients opt for such lengthy contracts primarily due to multiple awards; it’s not just one company that receives a contract, but several, varying based on criteria, and they often allow extensions. Clients are quite astute and observe market trends closely. Most current tenders range from three to seven years, with a few exceptional contracts lasting nine or ten years. These contracts consider necessary investments, and clients evaluate various factors, notably the in-country value — how many local employees you have, your nationalization rate, and whether you establish local manufacturing or research capabilities. These softer elements help create a favorable ecosystem for securing contracts. For example, in Kuwait, we've made significant progress from having no presence to building a solid base with good nationalization. We are now investing in a state-of-the-art research center in collaboration with KOC. This demonstrates our long-term commitment, reassuring clients that we are not just in their market for quick profits but are genuinely invested in solving problems and ensuring sustainability. I believe all these contracts will last a minimum of three years, with most likely extending to about five years, as this encourages the service industry to contribute positively to the country.

Our next question comes from the line of Arvind Sanger with GeoSphere Capital.

One question I'm trying to understand is your free cash flow. I'm seeing that your accounts receivables have increased significantly. Revenues in the first half saw only a slight increase. As a result, your free cash flow was flat to slightly down at $59 million. What's happening? Should we expect some reversal? Is there a particular reason the base receivables have expanded this much?

If you go from December, it's expanded because our DSO at the end of December was 70 days. At the end of March, it was 92 days. And at the end of June, we dropped three days. So from a DSO point of view, it reversed three days in Q2, but it expanded because we had extra revenue in Q2 versus Q1. The working capital was better in Q2 versus Q1 because we had better DSO, even though it expanded, as you said, right, and that was because of the revenue growth, right? The inventory came down in Q2 versus Q1. And the accounts payable, in Q1, we paid down a lot of accounts payable a lot faster than we probably should have, and we corrected that in Q2. To be honest, we probably overcorrected it, right? And in Q3 and Q4, I think the free cash flow, subject to CapEx and subject to contract timings, we'll end up the year, as I said three months ago, around the $100 million mark, right? So give or take, Q2 will be less than Q1 due to probably a bit of a correction on the AP, right? But we'll still have a fantastic year. And Q2, even with the slowdown on payables was a fantastic quarter.

I'm trying to understand the potential capital expenditures and get a sense of the availability of free cash flow for the company. What capital expenditures might be necessary if you were to win the Saudi order for fracking in unconventional resources? What would the capital expenditures look like for that?

So as I said in the call, right, our CapEx for the full year will be $125 million, right? Right now, we spent just about $60 million for the first half of the year. And depending on the tender awards and probably the one that you mentioned, we'll probably spend potentially plus or minus another $20 million this year. So we could potentially end up with $145 million of CapEx.

Okay. So then my question is with this kind of free cash flow, even with the incremental CapEx, why is it that we have to wait until April next year, which is when you would probably report your fourth quarter numbers to hear anything about the stock buyback because companies in your balance sheet free cash flow who talk about their stock being undervalued are all, and I repeat, all the companies that we're invested in are returning cash to shareholders and you're strangely reluctant to do that and keep pushing it back and back and back.

We are currently in the process of refinancing with the banks, which requires their approval for stock buybacks. This aspect is being addressed as part of the refinancing process. We need to assess the results of all the tenders and the capital expenditures associated with them, and this evaluation will be completed by the end of the year, as I mentioned three months ago. While there may be an opportunity to take some risks, we have decided to wait until the end of the year to present our findings to the Board. They have expressed the need to see the results before making any decisions.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Foda for any final comments.

Thank you, Melissa. Thanks, everybody, and we really, really appreciate all the support of everyone. And again, I reiterate our thanks to our employees for a fantastic job, all our people in the field. So we'd like to thank everybody. And again, we are extremely, extremely excited about the future, and we're very happy to be here with you. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.