NESR Q1 2026 Earnings Call Transcript

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DATE

Monday, May 11, 2026 at 8 a.m. ET

CALL PARTICIPANTS

- Chief Executive Officer — Sherif Foda

- Chief Financial Officer — Stefan Angeli

Full Conference Call Transcript

Sherif Foda: Ladies and gentlemen, good morning, and thank you for participating in this conference call. The world and particularly the Middle East has experienced a seismic geopolitical shift over the past several months. I want to start the call by sincerely thanking all our employees and their families, not only for delivering fantastic results in the face of unprecedented challenges but also for their focus on safety, supporting our customers and outstanding operational readiness. Beyond the strong results, I'm most proud to report that all our team members and their families remain safe, our operations remain unimpacted, and our commitment to our customer remains undeterred during these tough times.

We see this as our obligation to stand alongside our customers, ensure their operations are not impacted, delayed or interrupted. I have two key messages for today's call. First, I want to report on what I personally saw on the ground in the Middle East from the very outset of the conflict to today. While some of the global media is the reporting in Middle East paralyzed by conflict and constrained, what I have seen myself is a region that has rallied around a singular focus of resilience, an unstoppable operation. Second, I want to zoom out to discuss the differentiated positioning of NESR and the substantial post-conflict opportunity set that I see on the horizon.

Energy security, localized capacity and infrastructure diversity are now resounding themes in the energy sector. To reiterate the key message, we remain uniquely aligned and stand shoulder to shoulder with our customers. We've had zero evacuation. Our local workforce has committed to safely ensuring no turndown of any jobs and 100% reliability. We've implemented a 30-60-90 supply chain program to maintain uninterrupted flow of materials and spares. Our crisis management team ramped up its oversight seamlessly, and we stand ready with extra capacity to effectively meet the evolving needs across the region. Just as in the COVID pandemic, our countercyclical investment strategy is not just a slogan, but it's Nest's commitment to step up in times of crisis.

In that spirit, let me relay some key observations from the region since landing in Saudi on March 1. My goal was to ensure close contact with our customers and employees. And what I came away with was a deeper admiration for the resilience of regional leadership and field crews throughout the value chain. From our largest customer in the Gulf, the message was clear. Safety, contingency planning and operational flexibility. This is not the first time the region has grappled with security and shipping challenges. And that fact was on display in the way our biggest clients have courageously maintained core operations and adapt supply routes and storage.

As can be expected, Saudi Arabia is leading these efforts extremely proficient and pragmatically with an unwavering eye on the future. As stated publicly, they are bringing on three of the largest and lowest cost upstream project globally and are pushing ahead with two more mega projects over the next several years to enhance a diversified crude mix. Exploration continues apace with six new fields and two new Arabian oil reservoir that add multi-decade visibility to upstream development. The same goes for the natural gas program in the kingdom. If anything, the recent impact on global LNG market has only involved Saudi gas development.

Likewise, Kuwait has exhibited an exceptional level of resilience, which clearly shows that the growth plans message in February conference, COGS, are among the most durable in the region. Our recent contract announcement and my discussion over the past several weeks understood that the tender pipeline remains robust and that activity today remains closely aligned with capacity expansion decoupled from near-term oil flows. My visit to UAE and Oman were similarly constructive as land base activity has been essentially unimpacted, and expansion continues across both oil and gas.

This discussion truly punctuated the view that massive infrastructure investment will be needed and that more local service capacity with proven track record of quality and robust supply chain will be needed to support this investment program. As just announced, ADNOC pledged to spend $55 billion on new projects over the next 2 years, again, confirming the commitment to massive investment. I had a couple of stops in North Africa, starting with Egypt and Libya and ending with Algeria. The takeaway was unambiguous. North Africa has untapped existing capacity for undisrupted export to Europe.

The authorities and the clients recognize that now is the time to enhance their resources and increase the spending to substantially increase the production and use the untapped excess pipeline capacity that already exists to meet urgent global demand. Algeria and Libya are at the forefront of this, and both countries represent colossal frontier for both conventional and unconventional resources. This is why NESR has invested in and deepened our footprint across North Africa. The reshuffling of global supply chain plus the entry of key IOCs has the potential to supercharge the growth outlook in this part of the world.

Energy security, localized capacity infrastructure diversity -- all three dominated my discussion with customer industry leader since the outbreak of the conflict. Let me sum up in brief why each will contribute to an even stronger multiyear [ INAP ] cycle that previously conceived. Number one, energy security will only accelerate oil capacity expansion with enhanced flexibility across areas of production. Domestic gas is more crucial than ever for growing power needs. Number two, localized capacity. NESR already plays a central role and we will surely be called upon to expand further, leveraging our fully localized workforce, equipment and resilient supply chain. Number three, infrastructure diversification will ultimately drive and orient the upstream capacity build-out, particularly in the Gulf countries.

Now let me turn to Nestle differentiated positioning in this macro landscape. Best described as the saying it is better to be lucky than smart. Honestly, our project exposure and activity mix are uniquely favorable given the impact of the conflict in the region. As an example, we have limited exposure to places that have experienced the greatest disruption and force majeure and in the key LNG export hubs in Qatar. Additionally, our offshore exposure to exploration or to some of the suspended rigs are much less than others and is not significant in comparison to our entire operation.

The bulk of our business is land-based and concentrated in the solid GCC countries that have shown remarkable resilience and keep the upstream sector active. Jafurah is also particularly and uniquely positive for NESR. And I'm pleased to report both an acceleration in the overall project and also flawless execution with many more to come in the future. We are extremely proud and honored to be really the trusted partner of our beloved customers. On the supply chain front, we quickly established and executed a 30-60-90 days of blueprint strategy which essentially buckets inventory level across all our projects to ensure that we are identifying supply routes smartly and with an overall eye on operational continuity.

This work for NESR during the COVID pandemic, and this proactive approach is giving our customer confidence in net readiness. As I always tell our team, never missed an opportunity to convert crisis into continuous improvement for the future, like we have on supply chain, secure inventory step into the voice, safely and closely deliver when our clients need us most. Predictably, we've had to absorb extra freight and logistic to ensure our readiness at all time. However, it pays off. The trust we continue to build with our customer is an invaluable asset that will endure well past the current conflict and short-term expenses.

With that, let me pass on to Stefan to discuss our solid results and update on our capital allocation plan. Stefan?

Stefan Angeli: Thank you, Sheri. Good morning to those joining us from the United States, and good afternoon or good evening to participants across the Middle East and North Africa, Asia and Europe. We appreciate you taking the time to be with us today. I'm pleased to provide an update on our financial results for the first quarter of 2026 and to share our perspectives on the outlook for the year. Let's start with our first quarter performance. Revenue for the quarter was $404.6 million, an all-time high, increasing 1.6% sequentially and 33.5% year-over-year.

Sequential growth was driven primarily by Saudi Arabia, reflecting the continued ramp-up of the Jafurah contract, partially offset by lower activity in Egypt, Oman and Iraq, the latter of which was due to regional disruptions during March. On a year-over-year basis, growth was supported by a full quarter contribution from Jafurah and increased activity across Kuwait, Algeria, Libya and Egypt. Shifting to profitability. Adjusted EBITDA for the quarter was $76.7 million, representing a margin of approximately 19%.

This reflects typical Q1 seasonality combined with key contract ramp-ups and two, incremental freight logistics costs associated with the regional geopolitical disruption which is estimated to be around $4 million, which covered special airfreight charters and other like measures to ensure zero interruptions to our client operations. Despite this, the margins remain resilient due to strong cost discipline, improved operational execution and our lean overhead structure. Adjusted EBITDA included $2.9 million of charges and credits primarily related to ForEx losses of $3.6 million in North Africa, partially offset by favorable items. Consistent with prior commentary, we continue to expect charges and credits from restructuring and contract mobilization related costs to be minimal going forward.

Net income for the quarter was $23.8 million, more than doubling sequentially and increasing 129% year-over-year. Adjusted diluted EPS was $0.26. This performance reflects strong operational flow-through as activity scales, particularly in our unconventional completions and testing service lines.. Turning to cash flow and liquidity, which remain key sources of resilience in our model. Operating cash flow for the quarter was $30.7 million. Working capital was a headwind in Q1, primarily due to seasonal DSO increase driven by Ramadan and Eid, which were anticipated; and two, the unforeseen impact of geopolitical events in March across the region. Free cash flow was negative $5.3 million, an improvement versus Q1 '25.

CapEx for the quarter was $36 million, aligned with our stated countercyclical investment strategy as we continue to deploy capital into recently awarded contracts and position the business for the next phase of growth. Moving to the balance sheet as of March 31. Gross debt was $287.4 million. Net debt was $194.4 million. Our net debt to adjusted EBITDA ratio remains at 0.66x, well below our 1x target. Return on capital employed improved to approximately 10.9%, reflecting continued disciplined capital allocation and improved asset utilization.

Looking ahead for Q2 2026, we expect a continued robust year-over-year growth driven by the Jafurah ramp-up and recent contract awards. two, sequential margin improvement consistent with normal seasonality; three, interest expense to be around $6.5 million; and four, tax to be at the 22.5% ETR. From a cost perspective, the primary impact from current geopolitical conditions remains freight and logistics, which we have planned for. We also expect Q2 operating cash flow and free cash flow to rebound similar to Q2 '25 in the normal seasonal pattern.

As we highlighted in the last two quarters, we continue to see a clear path to our $2 billion target and maintain our margins despite the increase in costs due to the recent present conflicts in the region. We will continue with our countercyclical investment and CapEx will be around $180 million for the full year of '26 reflecting increased activity and a strong pipeline of contract awards. We continue to expect strong operating cash flow with free cash flow conversion of approximately 35% to 40% of adjusted EBITDA on a full year basis.

As the company enters a new phase of growth, we are formalizing our capital allocation framework to ensure we continue to deploy capital in a disciplined and value-accretive manner. Our approach is grounded in a clear set of priorities. First, we'll continue to invest in high-return growth opportunities, including recent contract awards and technology-led expansion across our core markets. These investments remain the primary driver of long-term value creation. Second, we remain committed to maintaining a strong balance sheet with a target net leverage ratio at or below 1x providing flexibility through cycles and supporting our growth strategy.

Third, and as a new feature, I'm very pleased to announce that we're now in a position to begin returning capital to shareholders in a consistent and sustainable manner. Accordingly, we plan to initiate a quarterly dividend beginning in Q4 '26 at $0.10 per share or $0.40 annually. This reflects our confidence in the durability of our cash flow generation and our intention to establish a sustainable and growing base dividend over time. In addition, we are launching a $50 million share repurchase program over the next 12 months. This program provides us with flexibility to opportunistically return capital when we believe our shares are trading below intrinsic value, while continuing to prioritize investment in the business.

Taken together, this framework balances growth, financial and shareholder returns and positions the company to deliver consistent long-term value creation. To conclude, despite ongoing [ ledial ] uncertainty, the outlook across the Middle East and North Africa remains very positive with the region expected to lead the next phase of global activity growth, as Sherif highlighted in his remarks. NESR remains focused on delivering profitable growth, strength seen in operational execution, expanding technology capabilities and maintaining disciplined capital and working capital management. On behalf of management, I'd like to thank our employees for their continued dedication and performance at our shareholders and banking partners for their ongoing support.

NESR in 2026 has strong momentum and a clear durable path to continued growth. I will now turn the call back to Sherif.

Sherif Foda: Thanks, Stefan. Let me conclude. I hope first quarter res