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National Energy Services Reunited Corp.  (NASDAQ:NESR)
Q2 2019 Earnings Call
Aug. 07, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to National Energy Services Reunited Corp. Second Quarter 2019 Financial Results Conference Call.

[Operator Instructions]

I would now like to turn the conference over to your host, Mr. Chris Boone, CFO. Thank you. You may begin.

Christopher L. Boone -- Chief Financial Officer

Good day and welcome to the NESR Corp.'s second quarter 2019 earnings call. With me today is Sherif Foda, Chairman and Chief Executive Officer. And we are hosting this call from London where we just concluded our second quarter Board Meeting. On today's call, we will comment on our second quarter results and overall performance. After our prepared remarks, we will open 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, some of you may be calling today for the first time, so please feel free to contact us after the call with any additional questions you may have. Our Investor Relations contact information is available at www.nesr.com.

Now I'll hand the call over to Sherif Foda. Sherif?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thank you, Chris. And welcome to your inaugural call.

Ladies and gentlemen, thank you for participating in this conference call. We are excited to report on another quarter of tremendous result and continuous progress. We grew our revenue 22% year-over-year, which is more than double the industry average operating in the MENA region. This remarkable growth is due to continuous and sustained spending of our customers, while NESR continues to properly execute and take more share on our existing contracts. We are expanding our footprint as well as introducing new business lines in our operating countries. I would also like to highlight our stellar financial performance this quarter, which Chris is going to discuss in detail later. Adjusted EBITDA of $46 million is 12% higher sequentially, and 33% higher year-over-year. Adjusted net income of $16 million, grew approximately 13% sequentially.

We saw strong performance in both our Production as well as Drilling and Evaluation segment with Production growing revenue by 10% year-over-year and D&E growing by 45% for the same period. We shall see activity strengthen as we go further into the second half, same as the previous years. Now I would like to talk about the details of the MENA activities and our plans going forward. As most of you have heard many times, and this is something I have been very vocal about, the market overall is underestimating the magnitude of activity growth in the MENA region. All the estimates out there were in the mid-single-digit range, for '19 versus '18. We have been consistently saying that the actual growth rate is at the high end of that range to lower double digits. As you may have noticed this narrative is now being validated by the recent commentaries you are hearing by the other players in these markets. We are very close to our customers. We understand their long-term goals and how they want to achieve them and what is happening on the ground. Continued activity growth in the MENA region is here to stay.

As I mentioned in the previous quarter, we grew 20% in '18 versus '17. In the first half of this year we grew more than 25% over the same period last year. And we aim to have a higher rate through the year-end. We obviously have done an excellent job at capturing share over and above the activity growth to produce these results, and we have continued to execute and win more contracts in this quarter. We continue to bid for new work and our customers want to have new players and ensure the business is given to the most reliable and responsible supplier. They obviously look at the prices, however more focus is on in-country value, service quality and proper setup. Most of you saw our recent announcement for the awards in Saudi Arabia. These awards are key for us as they are the foundational contracts in the Kingdom. Notably, the expanded scope, total term of up to seven years for these contracts, gives us the runway to invest locally, further build our capabilities. With the increased scope and revenue, the clients want to entrust you with managing a larger pool of services taking a igger role in the value chain executing on those contracts.

We also announced multiple awards for well intervention services in Bahrain which will allow us to enter another growing market in the region. Today, we do not operate in Bahrain. And with these awards across multiple product lines, we will have a foothold to start expanding. With the discovery of the Khalij Al-Bahrain Basin, the E&P industry is poised to take a big leap forward. This high-quality tight oil and gas reservoir will require a newer approach, will need higher intensity and more complex services and we believe we are in a good position to leverage these awards, and become a key partner for the Ministry in Bahrain during the execution phase.

In addition to these announced awards, we have had quite a bit of success in bidding for tenders across our different countries of operations. In North Iraq, we got awarded multiple contracts by various independents including an integrated services contract, water treatment and a Nitrogen Services contract. In South Iraq, we further consolidated our position by deploying a flareless testing package for one of our clients. In addition, we renegotiated an extension to some of our well intervention work. In India, we won another coil tubing contract. In Oman, we won a casing accessories contract and also did the first Well testing job for one of our clients. Here is the case of us taking the expertise of what the Company is very good at outside of Oman, which is testing services, to Oman. Also, we ran heavy weight coil tubing in high-pressure high-temperature well for our main client. This is a first for Oman and for the client, and shows our technical capabilities to plan and then execute complex operations.

Also, in Oman as part of a JV initiative, we have started manufacturing casing accessories. This project has been in work for quite a while and I am glad to see it getting off the ground. This is a very unique initiative and we are one of the first service company to invest in manufacturing in Oman. The objective of this is to become the major supplier of these casing accessories to all our customers in Oman and then in the broader region.

In most countries, we are actively engaged with our customers to qualify new services and products. This process can take up to two years. However, we are demonstrating our capabilities and moving on a much faster pace to get several of those business lines approved. This will allow us to bid on different product lines and the faster-growing unconventional gas projects across the region. On the operating side, in this quarter, we have been in full mobilization mode for several of our contract wins. These include cementing in Kuwait, coiled tubing in Chad. Both are starts from scratch operations and the client is pleasantly surprised with the level of our preparation for both projects. We should start seeing revenue from both during Q3. We were also recognized as the best service quality provider for cementing services by one of our major customers.

I am very proud with the effort the whole team has put in ensuring we continue to deliver stellar service quality to our customers as that is our backbone to remain their reliable partner. Last quarter, I commented on the on geopolitical turbulence in the region. Specifically for Libya, we are holding to our initial assessment and continue to work toward building our business. The ongoing issues have not affected the oilfield areas where we work, nor our operations. We are taking all the contingency measures where we mainly have local crews who understand the environment and deal properly with the situation in close coordination with our clients. We met with NOC and ensured them of our commitment to build a solid base to support their ongoing operations. As previously mentioned, we are constantly looking for innovative technologies, which we believe will provide our customers solutions as well as a step change in how they operate. And we may employ a flexible approach in how we partner with these companies.

This may span from just being an exclusive service provider, forming JV or taking an equity stake and providing development capital to these innovative inventors or companies. In this light, we made our first investment in probably the most innovative company in well control space, Kinetic Pressure Control. Kinetic is working on developing a path breaking BOP which will go in the middle of a normal BOP stack and its innovative shear blade design activated by an explosive charge will pretty much shear anything, It is like a guillotine built inside a BOP and you will have 100% guarantee that in the event of a well control, you will be able to shut and isolate the well. The company has already several marquee investors and NESR would be taking a nominal minority position as part of a Series A Investment round. We are very excited to partner with them and we already introduced them to our clients in the MENA region.

As I previously discussed, this would classify into an opportunistic category, as today we don't do much in the wellhead or BOP space. We do have a very small offering in Oman, but this technology provides us an opening to do something special for our clients and we can build on this to expand into this business line. We are always keenly looking out for such technology companies which will augment our product offering and allow us to solve key customer challenges. Once we have identified, we want the customers to buy into that vision as it adds significant value to them. In parallel, we continue toward working on qualifying more services to work with our clients which will enable us to deploy these innovative technologies as we are doing with Kinetic.

I hope with this brief summary, all of you have a better understanding of where we are and how we are progressing throughout 2019. With this I will pass the call over to Chris to talk about the financial in details. As most of you know, Chris joined us recently and I'm glad to say that he has hit the ground running and very happy he is part of the team. Chris?

Christopher L. Boone -- Chief Financial Officer

Thanks, Sherif. I'm excited to be part of NESR and all its growth opportunities, as well as all our highly motivated and professional employees. Earlier today we filed our earnings release reporting our results for the second quarter. Second quarter revenues were $160 million, an increase of 22% over the prior-year quarter, primarily from continued growth from our Drilling and Evaluation segment.

Adjusted EBITDA was $46 million for the second quarter of 2019, an increase of 33% over the same period last year for the legacy companies, driving incrementals of 40%. Our EBITDA growth demonstrates that we can continue to be able to profitably grow revenue that will yield future additional cash flows for both organic and inorganic growth opportunities. Year-to-date, our adjusted EBITDA was $86 million, which is 32% higher than the first six months of 2018. We anticipate continued growth in the second half of 2019, which is traditionally a more active time period for oilfield service companies as oil companies spend their remaining capital budgets for the year. EBITDA adjustments of $2.9 million for the quarter are primarily for integration, restructuring, and new country and product line start-up costs.

Adjusted net income was $16.4 million, or $0.19 per diluted share. Prior year comparisons are not relevant due to predecessor accounting. In addition to previously mentioned EBITDA adjustments, we incurred adjustments to net income that primarily include exceptional interest and tax charges, which will be discussed later in my remarks.

Moving to our segments, our Drilling and Evaluation segment revenue for the second quarter was $65 million, growing more than 45% over the same period last year. We continue to expect D&E to grow during the second half of 2019, mainly enabled by the continued cross selling of the drilling portfolio into our other operating locations from our leading position in Oman. Additionally, we are very pleased with the expansion of our evaluation business in Saudi Arabia, which has contributed significantly to our D&E segment growth in the second quarter of 2019 as compared to the prior year quarter. D&E adjusted EBITDA was $16.3 million, or 25.3% of revenue, an increase of 69% over the same period last year for the legacy companies. As these product line expansions into new markets achieve scale and operating efficiency, we are able to realize improved profitability. This was a key driver in generating additional segment EBITDA in the second quarter of 2019.

Our Production segment revenue for the second quarter was $95 million, which grew 10% over the same period last year as we continued to gain market share in multiple regions. The previously discussed new contract awards will be drivers of future growth as well as other contract awards we are hopeful of winning in the second half. Adjusted EBITDA for this segment totaled $34 million, growing 30% over the same period last year. Improved product line mix and cost reduction projects helped drive the EBITDA improvement year over year.

Depreciation increased sequentially by approximately $2 million as we continue to deploy new capital expenditures. We note that our net income both now and in future quarters, will include amortization charges coming out of the purchase accounting of last year's business combination totaling $3.8 million for the second quarter of 2019. The year-to-date effective tax rate was approximately 19% excluding the discrete reserve this quarter related to prior year taxes of approximately $500,000 and other pre-tax adjustments. This increase over the Q1 rate is primarily driven by a change in the estimated mix of earnings to higher tax jurisdictions. The second quarter rate was impacted by a true-up to this new rate estimates. We continue to aggressively explore tax restructuring activities and believe they will positively impact the tax rate in the future.

Looking at the balance sheet and cash flow, for the first six months of 2019, operating cash flow was approximately $24 million. Operating cash flow has been impacted by delayed collections in several markets, primarily related to slower invoice approvals and delayed retention repayments due to short-term contract extension of approximately $35 million. We expect these delayed collections to be received during the second half of 2019.

Capital expenditures for the first half of 2019 were $56.5 million, as we continue to invest in our growth opportunities. Most capex for the year was ordered in the first half and will be funded throughout 2019. As was discussed last quarter, we successfully refinanced our debt in the second quarter, which expanded the capacity, simplified the structure and improved tax efficiency. Cash and cash equivalents increased to $70 million as of June 30, 2019 while debt increased to $367 million, yielding a net debt increase of $20 million since December 31, 2018. Elevated cash levels, drawn from our facilities, were needed to transition certain bank guarantees temporarily from the prior credit facility to the new facility. The incremental net debt was used to finance the temporarily elevated level of receivables.

Interest expense was impacted by both the write-off of unamortized costs of the prior facility as well as the debt to fund guarantee transition and receivables. As of June 30, 2019, our net debt to EBITDA ratio was 1.6 but should reduce in the second half as working capital reduces. We are very optimistic as we enter the second half of 2019. We continue to aggressively pursue new market share with our existing service lines as well as explore opportunities to provide new service lines to our existing customers.

With this, I would like to pass back to Sherif for his closing comments.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thanks, Chris. Before I open for question, I would like to discuss a very important topic. What NESR is doing on ESG, which was discussed extensively in our recently concluded Board meeting in London. We have stated from the beginning that we are committed to maximizing the social and economic value we bring to the communities we operate in, especially that we are the national champion of the MENA region. We are also committed to minimizing the negative impact of our operations on the environment. In order to maximize our positive impact in the region and create shared value, we developed a corporate ESG strategy that allows us to leverage our core strengths and capabilities, and the interests of our people, to address the community needs of the MENA region.

Our ESG initiatives will focus on the economic empowerment of the communities in which we operate and on promoting equal opportunities for all. This is particularly important in the MENA region where gender diversity in the oil and gas industry is low, and employment opportunities for people with disabilities are limited. We intend to address these problems through strategic initiatives that empower women and people with disabilities at NESR and beyond. At the same time, we will leverage our HSE expertise to promote safe practices and environmental stewardship. We are also about to start building our R&D center in Saudi Arabia, where we will host the brightest minds to develop technologies that will help the communities of the region.

Finally, we are building a strong and healthy corporate environment in order to become the industry's employer of choice in all the countries we operate in. We believe that we have a role to play in the development of the communities of the MENA region and that in doing so, we will enhance the sustainability of our business. We currently have many initiatives that are being undertaken in different countries to support our environmental and social commitment. However, we thought it best that we bring on a professional in this sphere who can then focus and expand our ESG efforts in a uniform manner and maximize the benefit for the communities we are part of. In that light, Hawazen Nassief joined us recently as part of the corporate team to lead this function. She has extensive experience in this area and being a Saudi national, she understands the region very well. I'm very happy she is sitting with us here as we speak during this call. We look forward to sharing with you more information about our ESG activities in the coming quarters.

In closing, Q2 was another great quarter and I'm happy that we are on the path to deliver on our objectives this year and for the future. The international market is heading for strong recovery. MENA in particular, will have a solid 2019, and I'm confident in our ability to at least double the growth rate of the region.

With this, I would like to take this opportunity to thank everybody for joining this earnings call and if there are any questions, we would be happy to address them now. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Greg Coleman with National Bank Financial. Please state your question.

Greg Coleman -- National Bank Financial -- Analyst

Hey, thanks a lot. Great quarter, everyone. Congratulations.

Christopher L. Boone -- Chief Financial Officer

Thanks, Greg.

Greg Coleman -- National Bank Financial -- Analyst

Just had a couple of questions here. Wanted to start with margins. We saw margins EBITDA specifically expand 250 basis points year-over-year or 150 bps sequentially. Can you give us a little bit of color there? Is this a seasonality and we should continue to expect to see those margins grow for the balance of the year? Was it synergies working through the system? Was it customer service, geography mix or something else? Just trying to understand how we should be thinking about margins for the balance of the year.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Yes, thanks, Greg. As we discussed before, if you look at our D&E segment, and we repeated this various times, you have always the mix of the revenue between drilling and evaluation services. And once you have, like this quarter, you have more evaluation and you will have always better margins. So, the mix of those internal segments makes a difference in our overall margins. The countries, as well, makes a difference. So, some of these contracts have a better margin in some countries than others. So overall, you would expect, as we said many times, this range of margins or the contracts we are having between the 25 to 35 and the more you have on the -- obviously, on the 35 or plus-30 gets you overall better margins. So that range which we have today is what you expect that to be in for the foreseeable quarters.

Greg Coleman -- National Bank Financial -- Analyst

Got it. And the mix of your activity in the countries you're operating in, as we look to the back part of 2019, is it comparable to what you saw in the back part of 2018 or is it trending toward some of the higher margin activities?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

I would say it's more or less what we're doing now.

Greg Coleman -- National Bank Financial -- Analyst

Got it. Okay. On the capital spend here, in prior commentary you've got it toward about $100 million in capex for 2019. You're just past the halfway point there. It's about $56 million at halfway through the year, so not too far off the full spend. Is $100 million still the plan or has that number crept up at all with recent contract wins?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

No, that's our plan. And we always had in mind that we're going to front load our capex for the year to be ready with the customer contracts. As I mentioned, we have two countries where we started from scratch. We are ready. We are actually the only new company ready in this country. So -- and the customers are extremely happy with that and that's why we're starting operating. And everybody else basically that got a new award is not going to be ready for another six to nine months. So, this was the plan. And we front-loaded and actually you will see even in the coming quarter this kind of pace. So, we want to have all the equipment ready, shipping to the customer, be on location, rig up to start getting the revenue from Q3. And we are already now in August and we saw already the revenue start to coming.

Greg Coleman -- National Bank Financial -- Analyst

Got it. Okay. So still thinking about that $100 million.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Yes, absolutely.

Greg Coleman -- National Bank Financial -- Analyst

The last one for me, and then I'll pass it back. It's been an interesting reporting season from our chair with really good results from our international companies, yourself included and really challenging results from our North American focused or centric companies. Is that dynamic creating any opportunities for you to deploy capital and source equipment from North America where it's struggling and then move it through to your growth opportunities in the Middle East? Are you seeing either asset or whole company acquisition opportunities rise because of this disparity globally?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Yes, obviously, we are in very -- we are in dialogue with many of our, I would say, partners, other companies, looking at all the opportunistic opportunity for like equipment acquisition at a much better rate. And we are always looking at these things. To give you a flavor, it's exactly what we like we did last year when we bought the assets in Canada at a much lower $0.20 almost [Phonetic]. We definitely looking at things of that nature.

Greg Coleman -- National Bank Financial -- Analyst

But there's nothing near term that we should be expecting or focusing on, it's just still steady as you go?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

I mean, nothing we can really talk about now.

Greg Coleman -- National Bank Financial -- Analyst

Okay, fine. No worries. I will pass it back. Thanks a lot. And congrats again.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thanks, Greg.

Operator

Our next question comes from the line of Igor Levi with BTIG. Please state your question.

Igor Levi -- BTIG -- Analyst

Hey, guys, great quarter.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thanks, Igor.

Igor Levi -- BTIG -- Analyst

This year, it looks like you've entered three new markets, Kuwait and Chad earlier in the year and most recently, Bahrain. You mentioned that the first two contracts will begin to generate revenue in the second half. Could you give us an idea of how large of an impact they will have in the second half or even in 2020? And then also, maybe touch on how the size of the contract in Bahrain and when that's expected to start up?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

So Bahrain, obviously we did not get a -- we cannot talk about the numbers exactly because we did not talk about this with the client, but you will not see a -- it's not going to be significant for H2 because it's the preparation stage, it's the start. We will have work this year, but the activity as such in Bahrain is going to increase from next year. So, as you may know, this type of reservoir will require a complete different scope of rigs, activities, they are even talking the -- His Excellency talking about a lot of new contract mechanisms. You have, obviously, the local company [Indecipherable] there. So, there is a lots of activity going on, there is a lot of discussion how they're going to develop that reservoir. So the expectation that, obviously, the revenue is going to increase and then this is going to become one of our core countries as well. So today, we should have -- I mean we've got awarded like three contracts, which is very good contracts, which is very good, but they give us the foothold and that you would see revenue is significant for your models, etc I would say from next year.

Igor Levi -- BTIG -- Analyst

Great. Thank you. And then, it looks like you've renewed four of the five main contracts in Saudi Arabia thus far. And the last that are remaining, I believe, those cased hole wireline. When could we expect to hear about it? And how large is it compared to the other contracts?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Okay, so I am not sure about the five. We have much more than five. We have a lot of contracts actually in Saudi Arabia. We today, the core contracts are all, as you rightly said, extended or awarded. So the biggest one, obviously, is the one which we just got now. And that has a scope to even get much bigger, right? So, this contract is for all the pumping, well services, coiled tubing, cementing, stimulation as well some -- even an avenue for fracturing. So, its a much bigger scope than what we used to do before. And we as you know, last year as well, we -- as I said, we extended another couple. But we have many other contracts. So, we were awarded drilling business in last year, this -- beginning of this year, we had as well two casing and running services etc. So, we have multiple contracts in Saudi. If you talk, now, specifically about the wireline -- what you call the wireline or cased hole, we have a contract today and it is valid for some time.

Igor Levi -- BTIG -- Analyst

Okay, great.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

It's not for retendering for the coming couple of years.

Igor Levi -- BTIG -- Analyst

Okay. Thank you. And one more if I could.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Sure.

Igor Levi -- BTIG -- Analyst

You talked a lot about new markets that you've entered. You've renewed the Saudi contract. I mean, are there additional product lines that we could think about that could strategically fill the gaps and help you expand even faster?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Yeah. I mean, it's absolutely right. I mean, as you saw, we are a very strong production company today in all the countries, like we have a very strong presence in all the GCC, North Africa, in all the production business lines, right? And this production business line or completion business line, you can talk about eight, nine product line in it, right? But there is couple, obviously, as well, we don't do much in it, like artificial lift, we don't do much here. If you look now on the other side on the D&E, as we always said, this is where we are very, very, very strong in Oman and very small in other countries, right? And this is what we are deploying, approving. And that's why you saw we have a 45% growth sequential on the D&E. The previous quarter looked like almost 69% [Phonetic] year-over-year.

So this is growing at a much faster pace. And our aim is to actually double that, right? So for us, it's like a start-up, right? So if you want to now to go to specifics, definitely that's what we're doing. So, we're approving and qualifying a lot of like the direction drilling, bigger portfolio of the wireline, going to even new business lines, like we just mentioned about our investment in Kinetic, which is -- basically give us now a space of the well control, but in an innovative manner. And we don't want to go to something that is -- like it is very commoditized, very low pricing, we don't want to be there. We want to do something when there is a differentiation. And where we have a strong presence, we enlarge that footprint exactly like we're doing now with all the fishing, remedial, downhole tools, etc where we are like designated pioneer in Oman. I mean, some of this business in Oman, we almost hold 80% market share, right? So we have a huge room to grow in the other countries for all this business.

Igor Levi -- BTIG -- Analyst

Perfect. That is extremely detailed and helpful. I'll turn it back.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Sean Meakim with JPMorgan. Please proceed with the question.

Sean Meakim -- JPMorgan -- Analyst

Thanks so much guys.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thanks, Sean.

Sean Meakim -- JPMorgan -- Analyst

So I was hoping if you could dial in a little more on the margin performance. The expansion in D&E was impressive. So I was hoping we could maybe just go into the moving pieces there. Could you give us a sense of how we should think about the influence of operating leverage, pricing for new contracts, the impact of our mix of cost-plus work that's adjacent to the core contracts? You already mentioned the influence of country mix. Just where do we come out on normalized margins for D&E as the segment scales? Can it get a free handle like production -- sorry, free handle margin like production? Or is mid-20s the right level, somewhere in between? How do we think about all those influencing factors toward a normalized margin profile for D&E over time?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thanks, Sean. So just to -- OK, if I go one by one to your question, if you look at the activity and the tendering, similar to what I said last quarter, you see some company with disciplined approach in tendering, we're very glad to see that, and some unfortunately do not. So the customer is still going after, looking at bigger scope in some of those tenders. And when they go to a huge scope, and they add a lot of other stuff on it like LSTK, obviously you will see zero discipline from the international player.

If you look at the service per product line, it's a mixed bag. And again, when the contract is huge, people obviously tend to be like worried understandably to lose that footprint because there is a lot of newcomers or the clients are inviting new people. But so far, it's manageable. I think the margins when -- if you're small like us, and you can choose where you want to be, definitely our aim is to maintain this type of margins in both Production and D&E.

Now if I move to D&E and say why the mix goes back and forth between quarter, unfortunately, it's the nature of the business if you want to -- because this is a lot of segments and a lot of a mix between the countries. So in some places -- and as we obviously get bigger, you will tend to do more of the -- the client will give you more of this cost plus stuff to do, right? So, and you cannot say no because you are -- if you become Top 3 provider of that segment in the whole country, you will be providing camp and road, et cetera. Again, it does not dilute the overall, but dollar value it's an addition, right? So I would say it's going to be all those in there, maybe 10% of our business can be in that cost line.

So the margin of the D&E, I'm sorry I did not give you a good answer, or crisp number to put it in your model. But it's -- I cannot tell you, yeah, I mean obviously what we are aiming for is to be in that mid-20s -- mid-to-lower 20s I would say. It will not go to the margin of the production for the foreseeable future because all this fishing remedy and downhole tools, rental stuff does not operate at that margin.

Sean Meakim -- JPMorgan -- Analyst

Right. That's exactly what I'm looking for. I've been trying to get that gauge relative to the production segment is helpful. So then, as you're working toward this cross-pollination strategy between the two segments, D&E is really the key in terms of the growth. So as you think about -- where would you say you are in that strategy? So in other words, obviously, the business should continue to grow with D&E growing faster than production, but over time, what's the optimal business mix you'd like to see between the two?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

I think we're going to grow both, or D&E is going to grow obviously on a faster pace. The key is to maintain the mix between -- within D&E between evaluation and drilling, to not to dilute obviously the overall margins. But I think the production is going to get another kick on growth because of the larger scope of contracts we are working on and as well adding couple of product line into three [Phonetic] countries. So the mix will end up the same.

So despite the fact that the D&E is going to grow faster pace, but because of the baseline of the production is bigger and it's going to get big contracts in the coming quarters, so you will see that the mix between both will not change much between our Company between what we're doing in completion and what we're doing in drilling and evaluation. Definitely we will -- might be pleasantly surprised that our drilling if we go to more of the I would say direction drilling, bigger scope might actually become a bigger pie. But for now, I think the mix will be -- as a percentage between both would be more or less similar.

Sean Meakim -- JPMorgan -- Analyst

That's very helpful. Thank you for that. And then just to clean up a little more detail on the capex discussion, so as you think about the balance of capex that you have committed to for the year, you should have better EBITDA at the back end of the year, along with improved collection seasonally. How does that set you up for free cash flow for full-year 2019?

Christopher L. Boone -- Chief Financial Officer

Sean, this is Chris. So again, that $35 million should hopefully flip back, again a little bit less capex. So with that, and as you said an improved EBITDA, our expectation is we keep active free cash flow positive in the second half. It's hard to be as specific because again we're -- it's hard to be exact on all the collections.

Sean Meakim -- JPMorgan -- Analyst

Okay.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

So if you look -- if I comment more on this, if you look at the collection in H1 or in this quarter, and I'm sure you heard it from all the other commentaries from the big guys, it's -- it was a challenged quarter because we had -- the client basically delayed some of the payment, but this is like -- these are the best clients in the world. So we have absolutely no issue. It just -- they delayed a lot of the payments for the quarter. So -- which is fine, right? I mean, as long as you manage obviously the payables and everything, but this is -- as Chris mentioned, we had in a couple of countries some delayed collection like everybody else.

Sean Meakim -- JPMorgan -- Analyst

Understood, yeah, more of a timing issue. Okay. Thank you very much.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Byron Pope with Tudor, Pickering, Holt. Please proceed with your question.

Byron Pope -- Tudor, Pickering, Holt -- Analyst

Good morning guys.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Morning.

Byron Pope -- Tudor, Pickering, Holt -- Analyst

As you guys pointed out in the press releases, you've recently celebrated NESR's one-year anniversary. And so, Sherif, my question is qualitative in nature. Could you just provide some context around where you feel the Company is today with regard to the integration plan everything from the geo market structure? Just where are you relative to where you want to be? And what's left to be done with regard to how you think about the integration plan?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Yeah, very good question. So, look, I mean, we put a very detailed plan on the integration mentioned the last couple of quarters of co-locating, adding obviously because the two companies again, they were not overlapping, it's complementary. So the only thing we really made sure that when they had their small footprint, we made sure that they are in the same place. But then we enlarged, enhanced dramatically the infrastructure so to show the client that we can take such a big role in some of this business.

So as we have just developed in Saudi, we did the same thing in Algeria, we did the same thing in UAE. We basically we made sure that we have a very strong and a proper setup, so when the clients come and say are you serious you can do D&E in that scale? We said please come and visit us. It's not only what we have in Oman, which is a state-of-the-art facility. No, please come and see what we have in those countries. And both -- or the three countries, the client -- especially in Saudi and Algeria, the clients are extremely, extremely pleasantly surprised with our setup now, right?

So we have a full-blown infrastructure. I mean, I don't want to go through much, the technical detail, but like all the overhead crane, certification D&E, etc, etc. ISO -- we got an ISO, we get an API too. So we have all the structure and the infrastructure to take now bigger role and to be very professional in what we do in D&E. And we maintain this discipline that we do not take a job when we are not ready. So even if the client want us to push us, let's take this, you can do the -- this [Indecipherable] gas or something, we maintain, no, we want to do the job when we do it absolutely perfect.

So in that end, I think we are done. We are almost there with the infrastructure. We have a country director on each one that is very visible. The client knows that the person is the VP or the GM of NESR in all its segment in that country, very well respected. The last piece that we are working on, and we said this will take time and we are working on it diligently, is the back-office ERP system. So this is what we want to make sure we get it right. And obviously from our experience between Chris and myself, we know that this was wrong in so many countries and so many times. So we need to make sure which software we're going to use, how we make sure that everybody is happy with it, how to make sure it's a SOX compliant, etc, etc. And that's what we are working on.

It's going to be work-in-progress. And today, we have two system running, but we want to make sure that we have one system that everybody is happy with and it's at the right level of growth of the Company because obviously our expectation that this Company is going to be so much bigger than where it is today, right? So we have to have a system that is expandable to this type or size of segment, of number of headcount, etc. I mean, we are already today at 4,000 people, right? So we need to make sure that we are at that level and that is the work in progress. Everything else I would say, customer branding, image, infrastructure is taken care of. I'd like to add one additional, Byron, to that list, for example, we just rolled out a common equipment utilization platform across both company platforms, so that we now see equipment across all countries and really see the utilization so that as we see new opportunities, we can move things more easily between countries and optimize our capex and equipment utilization. So just small -- lots of small things like that that we continue to work on to optimize.

Byron Pope -- Tudor, Pickering, Holt -- Analyst

Very helpful. Thanks guys. I appreciate it.

Operator

Our next question comes from the line of Blake Gendron with Wolfe Research. Please proceed with your question.

Blake Gendron -- Wolfe Research -- Analyst

Hi. Thanks. Good morning for taking my question. Just honing in on the technology partnerships for a second, just wondering what the ideal equity versus cash split would be from your perspective, and maybe what you're sensing as far as appetite on the part of these technology start-ups? And then I noticed that Kinetic Pressure Control recently signed a partnership with Transocean. Just wondering how you think about exclusivity when you enter into these agreements? Is it regional exclusivity that you're striving for a country level? Or are you just trying to be an open platform for whatever technology provider wants to get an in with a large upscale service provider in the MENA region? Thanks.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thanks, Blake. So it's very specific to every technology and it's very specific to the country or what exactly we want to do. And we said we have so many options where we do. So today, we have more than a dozen almost agreement. So we have on chemicals, we have a chemical agreement with two suppliers and we provide -- we have exclusivity on some of the products we did together. And we supply this to the customer, to the country and we have an infrastructure obviously facility that we -- that they use our facility, we import the chemicals we provided to the customer.

So there is a lot of models. And increasing -- it's an open platform for innovation. And once we have something that is -- adds value and we are credible in front of the customer, we go and say we think this is very good for you because we developed A, B, C, D right? So we just -- we are not an agent and we are not here just to facilitate them getting there. We are just making sure that technology-wise this is something that adds value to the customer.

Now the business model is obviously depending on the company, depending on the size of the company, depending on the investment. So now if I talk about -- specific about Kinetic, which as we announced, because we had an agreement with them, we decided -- we think it's extremely innovative, so we wanted to put money in it as well. So we invested in, so we're now a shareholder like all the other shareholder obviously on a much smaller scale. As much we think -- specifically -- we have specifically with the customer for our business in that region.

We are not here -- we want them -- obviously they're going to grow everywhere. Some of the stuff we don't do, so we are not going to -- they can do this -- we are not in deepwater, we are drilling offshore, they can do this definitely without needing us, right? So what we facilitate and what we help and what you have the facility with is this -- is the MENA region and what interest us. And definitely when we talk about BOP, you're talking here about three types, right? You have the wireline, slickline, you have the coiled tubing and then you have offshore and you have the land and you have the deepwater, right?

So there is a lot of scope within that when you say -- when you define exactly what exclusivity you are operating at in those countries, right? So we are again open platform because that -- our whole philosophy we're not building our own R&D. We have an R&D facility that is going to integrated in Saudi where we're going to have a lot of companies already that booked space that's going to deal with us in that facility and we're going to have joint research team between us, them, the client and the university to develop those technology specific for the reservoir of the MENA region.

Blake Gendron -- Wolfe Research -- Analyst

That's really helpful color. Then if you look into the pipeline of both technology JV and M&A opportunities, any chance you can give us somewhat of a size of that and maybe a timeline? Are they a lot of smaller deals or should we expect a couple of bigger deals here in the near to medium term? And then just in the interest of share liquidity, what is your sense for the appetite as you enter into these conversations of your partners taking equity when you do enter a JV or something like that?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Yes, look, again, the very mix, it's obviously very generic and I don't want to give you a lot of grey answers, but if you look at the technology, we are working on three or four very unique I would say very highly IT type of technology that it goes to the second level of innovation in some of those technology. For obvious reason, I cannot mention them. The second part is the well-established technology companies we are working mainly on no equity and no financing because obviously these companies are very well established, very big. They're purely -- it's going to be a model of deploying in that region with exclusivity contract. So there is no financial part here in that way. The key obviously is we are working on all this on consignments, right? So it's very good for our cash flow, it's very good for our working capital because all these agreements we make with big companies, they are all on consignment basis, so we do not buy anything, we do not pay for anything, we do not keep inventory. We ship everything to that country and then once we operate we get paid, we pay ourselves and we pay them, right.

So on the M&A front, we are working on couple. I don't know the timing, I cannot give you the timing, but it is something that we definitely want to reconclude on them. It's always going to be a regional type of companies to add to the portfolio, to add to the geographical and to add to the strong footprint. Obviously we're going to be very opportunistic on the timing and on the stock price, right. And today definitely we will never issue equity or give equity to anybody at this level. And we have the capability and the capacity to do any transaction we want to do with cash, right.

So at the right time, we will be able to issue share price is at the correct level, right. And these companies are extremely happy to take either, but we are the one, obviously, driving what can they take and what they cannot take.

Blake Gendron -- Wolfe Research -- Analyst

Yep, understood. That makes sense. And then just one more if I can put it in quickly. You mentioned ESG. Is this basically interwoven with your in-country value initiatives that you have with some of the larger countries that you operate in? Or is it driven by specific companies in countries and what kind of resources are out there so we can get a better understanding for the thresholds for an ESG I guess qualified company in that region? And maybe some of the identifiable steps you're going to take over the next several years to achieve the goals?

Christopher L. Boone -- Chief Financial Officer

Yeah, it's a huge -- obviously, it's a very extremely important topic, in the sense morally, and obviously, from a business sense. So it is in line with in-country value, and all the initiatives each country has. So if you look at each one of them, Saudi Arabia, Qatar, UAE, Oman, everyone has a very specific program, very detailed and we are working always on that with them to make sure that if you're out there calling yourself the national champion, you better be sure that you are the forefront or the leader of that. But in addition, what we wanted to make sure that we understand and all our team understand and all our people, is our commitment to the environment, to social and governance. So, what are we doing as exact concrete steps in each to impact the communities where we operate? It doesn't have to be only the client. It just has to be what are we doing, for example, for gender diversity? What is our employment rate? What is the -- how amount of -- ladies in a leading position in the company in the countries? And we know, as we are working in the Middle East, gender diversity in the oilfield is not the best, right?

So, this is what's all we're going to be proving and showing ourselves as taking a leading role in that space. We're looking at the impact of our employees and their families. Today, when you look at our health, safety environment, you look at our driving records, our recycling, etc. We are a leader in that but we want to make sure as well that our employees, we get that to their families, impacting the communities, and then we have a sustainable impact toward work. And that's why, obviously, we made sure that we have a professional doing that. And that's why Hawazen joined the team and she actually gave an unique presentation to our Board to make sure that they understand exactly the steps and the long-term vision we are taking in one year, two years, five years, 10 years, what exactly we can achieve with each step, with milestone, with the deliverable, and it's just not just talking. That's exactly what we're going to do, budgets put in place and people to be able to execute on that vision.

Byron Pope -- Tudor, Pickering, Holt -- Analyst

Thanks for all the time. I'll turn it back.

Operator

Our next question comes from the line of Jeff Fetterly with Peters & Co. Please state your question.

Jeff Fetterly -- Peters & Co. -- Analyst

Hi all. Follow-up to that ESG. Are you seeing contract tenders or opportunities require this type of ESG structure in place or a policy or is this something you're doing in advance or of anticipation of some of these things coming in?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

No. So far, there is no contracts or any that requires a specific like score or what you're doing in ESG. It's not framed like this. Today, all the contracts, the companies, the clients are basically asking, or the tenders is required based on what they have at in-country value score for that business. And today, this is either an ownership structure, it's either amount of national employees you have, it's a local content, basically. It's very similar to the Norwegian, to the Brazilian, the Petronas, the Malaysian, all these companies have done. Today, there is no like specific oil sector ESG. What we did, this is an initiative from us. And I think we should take a leadership role of being with the communities without being specific to any customer or any country. We should be in the leadership role in that.

And I'm sure it's going to help. But if you look at this specific -- just to make sure I'm clear, if you look at the specific program of those countries for their in-country value, it already touched on all these aspects of environment, social, governance, etc. So, that's that. But we are -- so we're taking care of that, but we want to as well to have a very concrete plan for our Company at our corporate, what exactly we are doing for ESG.

Jeff Fetterly -- Peters & Co. -- Analyst

On the Saudi side, with the contract renewals you announced last week and your comment earlier about allowing you to make additional investment in the region, what types of things would that additional investment entail and scope-wise?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

What we planned already. I don't want to say that we look at the figures, but what we planned already since last year, we planned very clearly that we're going to be very aggressive because we are going to get awarded multiple contracts. And our ambition is not what we want, our ambition is bigger, right? So we have bigger ambitions and bigger contract we are working on. So you have to build the infrastructure to make sure that when it comes you deliver. You cannot say, oh, I got the contract, I want two years to deliver.

I want to -- I get the contract, I get three months to deliver, right? So we are building the infrastructure in the sense of the space, the employment, the training, the R&D, the [Indecipherable] and that's why the capex that you're using, right? So we order a lot of stock to be there on time and we're going to build -- besides the fact that we have the Techno Valley which we are building, as you saw we made an announcement last year we were one of the core partner of the SPARK, the King Salman Energy Park, and we will have state-of-the-art facility in that space.

Jeff Fetterly -- Peters & Co. -- Analyst

And so the investments that you're making either on a capex basis or infrastructure basis, is that to support the contract renewals and expansions? Or is that entirely for future opportunities?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

For both.

Jeff Fetterly -- Peters & Co. -- Analyst

Okay.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

It's more than double the size of the company in a year, so you have to make sure that you continue to do that to -- if your plan is to continue to do this growth profiling for the coming years.

Jeff Fetterly -- Peters & Co. -- Analyst

The $100 million capex target for '19, how much of that would be committed and allocated to these contract renewals or call it deployments in the second half of '19?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

They are all committed. I mean the $100 million will be all -- if you look at the month of contracts we have, we won and not announced yet, but we are aiming to win, those will be for all these contracts.

Jeff Fetterly -- Peters & Co. -- Analyst

Because that's what I'm trying to understand...

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Not everybody -- not everything was announced basically.

Jeff Fetterly -- Peters & Co. -- Analyst

So as you announced additional contract awards, is that encompassed within or incorporated within the $100 million target spend this year? Or would those come from incremental capital?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

No, it's already in the plan.

Jeff Fetterly -- Peters & Co. -- Analyst

Okay. And so for you to increase the capital spending for this year, would it be derived predominantly off of M&A?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

No. As I said we have the capex for plan. The $100 million is for all the contracts we are awarded and all the contracts we will be awarded. And we do not need an incremental capex to deliver on both. If we need something else, it's -- I mean, cash, that's what we're going to use for M&A if at the right time we see how is the mix of equity and cash. At this level of equity, we will never issue equity above -- I mean a debt number.

Jeff Fetterly -- Peters & Co. -- Analyst

And on the M&A side, your comments earlier, is your focus more on acquiring assets in North America similar to what you've done and moving them into the region and into contracts? Or would be buying stand-alone businesses that either expand your scope or scale from a business line standpoint?

Sherif Foda -- Chairman of the Board & Chief Executive Officer

No, the M&A is -- yes, it's twofold basically. I mean obviously when I talk about M&A, for me I'm talking mainly M&A as you buy a company in that space, in the region or buying something like we did in Canada, where we have lot of assets. But if you just buy assets at a lower price, I think this is capex.

Jeff Fetterly -- Peters & Co. -- Analyst

Great. Thanks for clarity.

Operator

Our final question comes from the line of Greg Colman with National Bank Financial. Please state your question.

Greg Coleman -- National Bank Financial -- Analyst

Hey, thanks for the follow-up. I know it's dragging on a bit here. Just really quickly on the AR side, the $35 million, can you tell us is that a single customer or a handful of customers? And then related, Chris, can you give us an idea on the working capital side based on your view on the second half, do you have an idea of how big the working capital or lease could be in dollar terms? And that's it from me.

Christopher L. Boone -- Chief Financial Officer

Sure. It's probably more the issue of -- it is spread among several customers and countries, but it's probably more the mix of what's tied up with contract retention and releases versus just like on a slow pay, it's probably about 50-50 of the number I provided. So the contract retention releases are more lumpy, rather than incremental Level-C, hopefully out of some improved processes that we're working on with our customers to expedite payment processes.

That's the best I can tell you.

Greg Coleman -- National Bank Financial -- Analyst

And then the quantify what number target...

Christopher L. Boone -- Chief Financial Officer

We have pretty good line of sights on the release -- the largest retention releases that's probably more like Q4 and the payments we're hoping will be -- I can't claim they're all going to come in magically into Q3, but we think they'll -- we'll get another part of it back into the second half, probably even across Q4.

Greg Coleman -- National Bank Financial -- Analyst

And then a shot at quantifying the magnitude of that release?

Christopher L. Boone -- Chief Financial Officer

Well, I said we think we are -- as I said on the call there is about $35 million that we said was certainly very identifiable that we know where it's -- we had to lay it in and so that's about the number. Like I said, some of that's retention, it will be more lumpy, but half of it is retention. Probably that's more of a Q4 and then the other half's slower pay and that will probably get caught up pretty evenly across Q3 and Q4.

Greg Coleman -- National Bank Financial -- Analyst

Okay. Thanks.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session. And now I would like to turn the call back over to Sherif Foda for closing remarks.

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Thank you very much, and thanks to all of you. I know it's getting late, so we look forward to updating you on the progress next quarter. Thanks so much.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Christopher L. Boone -- Chief Financial Officer

Sherif Foda -- Chairman of the Board & Chief Executive Officer

Greg Coleman -- National Bank Financial -- Analyst

Igor Levi -- BTIG -- Analyst

Sean Meakim -- JPMorgan -- Analyst

Byron Pope -- Tudor, Pickering, Holt -- Analyst

Blake Gendron -- Wolfe Research -- Analyst

Jeff Fetterly -- Peters & Co. -- Analyst

More NESR analysis

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