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National Energy Services Reunited Corp. (NASDAQ:NESR)
Q4 2019 Earnings Call
Feb 26, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to National Energy Services Reunited, Fourth Quarter 2019 Earnings Call. [Operator Instructions]. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. At this time, I will now turn the conference over to Chris Boone, CFO. Mr. Boone, you may begin.

Chris Boone -- Chief Financial Officer

Thank you, and good day, and welcome to NESR's Fourth Quarter and Full Year 2019 Earnings Call. With me today is Sherif Foda, Chairman and Chief Executive Officer of NESR. On today's call, we will comment on our fourth quarter results and overall performance. After our prepared remarks, we will open up the call for 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 also on our website. Finally, please 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.

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

Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. We are very excited to report on this quarter and our 2019 results, as well as some of the key events since our last call, which will have a significant effect on how 2020 shapes up for NESR. I'm also going to spend a little bit of time talking about our recently announced unconventional operation in Saudi, and our latest announcement to acquire SAPESCO, which generally enhance our position in the region and will open a new market for the Company.

This quarter was a record quarter as we grew our revenue 17% year-over-year and 15% sequentially, despite geopolitical turbulence in North Africa and Iraq. As you have seen recently, tension continue in Libya, whereby the situation has escalated in the last quarter and the production is down significantly. We continue to monitor and adjust accordingly, and we have not changed our view on what we want to do there, and the overall potential for us [Phonetic].

Similarly in Algeria, the political situation is in flux, and this affected the rig activity and efficiency of operations. Again, we continue to be close to our customers and ensure we support them as best as we can in those difficult situation. Overall, NESR grew at an average growth rate of 20% over the last two years and this is on the back of growth across all our portfolio. Chris will cover the details on the numbers, but I want to highlight some key points.

I think we are one of the few, if not the only one which grew at this pace, and are predicted to grow significantly in 2020 and in the near future. We secured most of this growth this year and we have bigger plans for the future. Also, we are proud to deliver on all the promises we have provided last year. For this growth, gain in market share, financial performance needs to be seen in the light of a very competitive, oversupplied and sometimes irrational pricing behavior in the certain industry today.

This is a credit to the resilience of the Middle East market, innovative business model we have developed, and how well we understand our customers and the environment which we operate. Most importantly, all this growth has only been achieved while maintaining stellar health, safety environment and quality metrics as perceived by our customers. As a strongly people oriented and customer-focused organization, we have achieved over 70% reduction in loss time injury frequency rate. Even though, in the same period, our headcount has increased by 25% and overall operating hours increased by approximately 50% [Phonetic].

This is a remarkable safety performance as per the highest international standards. In our business, you'll [Phonetic] see this quality of service delivery is as good as what the customers thinks of you. And I'm very proud that again this quarter, our main [Phonetic] customer ranked us the best service delivery provider when measured in terms of non-productive time. This belief of our customers that we are capable of delivering the stretch goals and beating the best, even though we do not have the history like the others in those business lines.

It's a strong testament to our ability to execute on what we say we are going to deliver. Which brings me to the first main topic. The commencement of our unconventional fracturing operation in Saudi Arabia. I will touch base on the bigger macro picture before I delve in more into the specific of our frac operations. What we are seeing today are seismic shifts happening in the industry in the MENA region.

You recently saw the announcement from UAE of the discovery of the 80 Tcf Jebel Ali reservoir, which is the largest discovery of a gas reservoir since 2005. Followed by a bigger one, the Jafurah basin of Saudi Arabia, which was a record 200 kcf of gas, the size of the Eagle Ford. Saudi Arabia intention is to become a gas and petrochemical exporter. The Kingdom has been investing in gas exploration for a while with impressive results to boost its industrial footprint and increase the gas usage for domestic power consumption.

So how does this affect the oilfield service business and NESR? We think that most of the incremental gas production would come from how fast our customers can bring these unconventional and conventional reservoir online. So a complete reset needs to happen of how they approach this when gas was not the prime focus. Our customers want a break from the old ways and really want to adopt a business model where they are able to leverage the best and the brightest ideas and execution across the value chain to speed up the delivery of the key objectives. This is where NESR has been instrumental in changing the [Indecipherable].

We started discussion with Saudi Aramco in the first half of 2019, on the drilling in North American site high-efficiency fleets as well as duplicating our existing solid performance in coiled testing, site management of our conventional revenue [Phonetic]. We signed a contract with Aramco, brought on NexTier as a partner, shipped [Phonetic] the fleet, as well as other technologies, which we selectively preclude or partnered with and finished the qualification, executed the drive jobs in the second half. And by the way, we broke all the records on stages per day within the first week and the stages in a month within the first full [Phonetic] month of operation.

Needless to say, our customer is very pleased with our groundbreaking performance and has recently decided to award us with a long-term contract for two solid years. All this typically would take years in the previous way of working and landscape. We went from nothing to breaking records in six months.

This does not only reflect our capabilities, but also our customer nimbleness, willingness to think out of the box and imitate [Phonetic] which is extremely commendable considering they are the largest Company in the world. Just to give you the scale of our operation of which fracking is a subset. We take on the wellsites [Phonetic], everything from frac fleets, wireline fracturing, milling and blowback testing until we give the produce and went back to our client.

All of this is part of our root scope. We've also run the site which include the caps, catering, sand [Phonetic] logistics as well as provide all the chemicals. The scale of what we have achieved in terms of cold start is an impressive feat. It is credit to both our teams, NexTier and NESR. And the support of our clients unconventionally. Our innovative business model called for partnership. Rather than procuring a new fleet, we opted to leverage the existing capacity and significant experience of NexTier.

This partnership also allows us to leverage the supply chain of both the Company, resulting in a win-win to both the client and us. Let me illustrate on other countries in the region. We are now at full tilt of our cementing operations in Kuwait, increasing our market share on the back of a solid start-up which our customer complemented us of.

We also deployed assets in Lybia, which we are now working in Q1 toward [Phonetic] qualifying those services. We give competition market share in Iran and won a couple of small contracts in India. In Iraq, we won a large integrated contract with a super major that we never worked with before.

This is a three-year contract, which is a significant milestone for us. And it gives us further diversification of our revenue stream in Iraq. In the fourth quarter, we opened a casing accessory manufacturing facility in Nizwa in Oman. It was integrated in the presence of various dignitaries from the Ministry of Oil and Gas, PDO and other customers. The plant has the capacity to handle all the demand in Oman. This is ESG in action and are one of the key sustainability drivers of the region.

In short, we bring as much of the value chain in the country to generate skills, employment for the nationals. We have previously demonstrated from the -- our investment in the drilling tools and fishing businesses that we can create a large scale manufacturing and maintenance setup and employed a large number of Omanis, essential for in-country value mission.

We are going to continue and grow our efforts in this regard, and we are complement -- completely aligned with the country vision. In Saudi, we just completed the IKTVA 2020 Forum during which we had groundbreaking of our research and innovation center NORI.

Now, I would like to touch on the second major point on the call, which we recently announced. That is our agreement to acquire SAPESCO, the oldest service Company in the MENA region. With operation across Egypt, Libya, UAE, Kuwait, and Saudi Arabia. We have been working on this acquisition for now a year.

As announced, the deal is financially accretive upfront, and allows NESR to enter the last country in the MENA region. In addition, we begin [Phonetic] a new product line industrial pipeline services with a leadership position. Egypt is one of the growth market in MENA with their recent move to be a gas hub for Eastern Med. In addition, several new exploration contracts were signed recently with ExxonMobil, Chevron among others.

Outside of Egypt, SAPESCO has contracts, which we don't have, like [Indecipherable] in Saudi, [Indecipherable]. They have a strong leadership position in industrial service business in Egypt and we plan to take it to our footprint of other countries and operations. We have immediately started partnering with them in countries like Saudi and UAE. NexTier will obviously introduce its business lines which could beat SAPESCO's strong offer [Phonetic] in Egypt like cementing, drilling and downhole tools.

On an unaudited proforma basis, they finished the year with approximately $65 million in revenue and $20 million in EBITDA. So the margins are in line with ours. We expect to close the transaction by April. We have spent the last two weeks in Cairo to finalize this deal, and I can tell you that both sides are super excited with the opportunities it provides to grow. We also held our Board meeting there and we are totally committed to our customers to invest in Egypt. We also had the honor of hosting the Minister of Petroleum, and he was kind enough to share his vision for the Egypt upstream sector and we are proud to be part of this great story.

Chris will talk about the deal numbers in detail. But in summary, we are funding this transaction only by ourselves on the back of our very strong free cash flow generation. And on that note, I will pass the call over to Chris.

Chris Boone -- Chief Financial Officer

Thank you, Sherif. Fourth quarter revenues were $185 million, an increase of 17% over the prior year quarter and 15% over the third quarter. Adjusted EBITDA is $52 million for the fourth quarter of 2019 increasing 8% over the prior quarter. Year-to-date, our adjusted EBITDA is $186 million, which is 15% higher than 2018 for the combined Company.

EBITDA adjustments of $11.6 million for the quarter are primarily for costs associated with the unconventional qualification process, plus integration and restructuring costs. As well, we incurred certain discrete costs consisting primarily of a non-cash actuarial expense due to the impact of lower discount rates on projected employee end of service benefits and a non-cash increase in Algerian tax reserves. We do not expect additional costs for the unconventional qualification process to be incurred in 2020. Also, integration and restructuring costs in 2020 should reduce to primarily include SOX implementation costs and SAPESCO transaction and integration costs.

Adjusted net income is $18.9 million or $0.21 per diluted share as compared to $16.2 million or $0.19 per diluted share reported in the third quarter. Reported net income was impacted in the fourth quarter from increased depreciation of $7 million. Higher sequential depreciation is primarily related to incremental unconventional equipments. The contracted unconventional equipment with NexTier followed capital lease accounting and is depreciated.

This higher depreciation rate will continue in 2020 with quarterly depreciation also increasing sequentially each quarter by approximately $1 million to $2 million as our 2020 capex program is capitalized. In addition, once the transaction is closed, SAPESCO will add $3 million to $5 million in annualized depreciation and amortization, depending on final purchase accounting.

Moving toward segments, our Drilling and Evaluation segment revenue for the fourth quarter is $64 million, growing 8% over the same quarter last year. Year-over-year results for D&E were led from our continued expansion of our D&E service lines from our market leading position in Oman to other geographies.

Adjusted EBITDA margin fell sequentially due to an unfavorable segment mix. Separately, our production segment revenue for the fourth quarter is $121 million growing 23% over the same period last year from multiple product lines. Adjusted EBITDA margin for the production group were approximately 33% with a sequential decline primarily related to the impacted activity in North Africa.

The effective tax rate for the fourth quarter of 2019 is 37%. The fourth quarter rate was impacted by a non-cash Algerian tax reserve. As adjusted for charges and credits including qualifying and other start-up costs, the fourth quarter tax rate was approximately 17%. As we enter 2020, the effective tax rate should show improvement from the reported 25% effective tax rate for the full year of 2019 due to the reduced impact of start-up costs on pre-tax income and lower non-cash tax reserves.

In addition, we are actively exploring several tax planning strategies that we believe will positively impact our effective tax rate in future periods. Looking at the balance sheet and cash flows, free cash flow for the fourth quarter was $26 million. Operating cash flow improved significantly for the third quarter due to improved accounts receivable collections offset partially by new receivables from revenue growth during the quarter.

Gross collections were $207 million, that's a 34% increase over the third quarter of 2019. The Companywide focus on improving our billing processes to limit payment delays and increased customer outreach on past due invoices produced positive results. Companywide days sales outstanding improved from 128 days in Q3 2019 to 110 days in Q4 2019.

During the first quarter of 2020, we expect to see further improvement in collections, including the release of delayed retention payments and other older receivables of approximately $20 million. Capital expenditures for 2019 were $111 million as part of our efforts to invest in our growth opportunities.

In 2020, we expect the capex spend of approximately $100 million, but it could trend upwards depending on the timing of cash payments. Cash and cash equivalents increased to $73 million as of December 31st 2019 while net debt decreased to $310 million or a decline of $20 million since September 30th, 2019.

The decrease in net debt was primarily driven by improved working capital. Interest expense decreased slightly from $5 million to $4.3 million. As of December 31st, 2019, our net debt to adjusted EBITDA ratio was approximately 1.7, but should reduce to our target level of approximately 1.5 in future quarters as collections continue to improve and we see [Phonetic] returns from our capital spending investments. We will see a short term increase in net debt from the SAPESCO transaction as we fund the $27 million cash portion of the purchase, repay certain debt of $22 million and assumed some additional short-term liabilities of $8 million.

We will fund the $49 million of cash needed at closing from our existing cash balances in credit facilities. We are excited to continue our journey as the national champion for the Middle East as we enter 2020. We closed 2019 on a high note generating record revenue while at the same time significantly strengthening our balance sheet by improving collections and reducing net debt.

With this, I'd like to pass back to Sherif for his final comments.

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

Thanks, Chris. In closing, 2019 has been a very eventful year. We grew significantly in our core countries and started in various charges [Phonetic], added several technologies to our portfolio and invested in some unique start-ups. We brought all efficiency records from the unconventional in Saudi and finalized an increase in M&A transaction which had opened a new market and a new product line for us. All of this while maintaining stellar service quality, capital discipline and thinking out of the box for business models and partnerships.

I'm very proud of the team and fully realize the pace at which we operate and make decision is extremely dynamic and is a key to our success. And looking forward to 2020, all I would like to say, the best is yet to come. And 2019 was just a trailer to what you will see in this year. We expect to grow at a more accelerated pace than the previous years.

On that positive note, I would like to pass it on to the operator for your questions. Thank you. Operator?

Questions and Answers:

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question is from the line of Sean Meakim with J.P. Morgan. Please proceed with your question.

Sean Meakim -- J.P. Morgan -- Analyst

Thanks. Hi guys. So Sherif, I'd like to start by talking about how you see the margin trajectory in 2020, you know, Chris highlighted some of the start-up cost that impacted 2019 results. So some lapping of lower numbers there should help, but specifically, can you talk about the mix in D&E that drove that lower margin in the quarter and how we should think about that trajectory through 2020?

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

Yeah, sure. So Sean, the D&E, as we mentioned previous quarters always had a mix of drilling and evaluation. And the drilling business that we have is the -- majority of it has to do with fishing and remedial work, it actually fluctuates by month to month. So in terms of sometimes you have a very big, I would say huge work and job in that arena that comes with very profitable and sometimes you have more of the rental business that is less profitable than the others.

The evaluation business when you have a month with more evaluation warrant, then you get the more profitable month than the others, so the D&E segment makes more or less that's why I always say, if you look at it over a year, more or less will be stabilized on that rate, I don't expect it to go to 30%-plus like the production.

So, but quarter-on-quarter, the flux [Phonetic] between them is always the mix between the Drilling and Evaluation. And inside the drilling, you have the mix of the segment.

Sean Meakim -- J.P. Morgan -- Analyst

Right. So we got some mix or shift quarter-over-quarter for D&E in particular and I guess bringing that back to the overall Company margin trajectory, we've had also some mix as you've taken in some of the cost plus work that's impacted by some of the larger projects that you won.

How do we -- we roll that altogether, how should the margin trajectory look year-on-year or exit to exit. How should we think about how that trend to keep growing, you know, volumes will keep growing, there's not much dispute there, but then I think people were trying to get better handle on how the margins progressed given all these moving pieces of the business.

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

Yeah. So our plan is to keep the growth on a profitable ground. And we always believe that, as we said before, we are in the upper 20s. So when you think about the mix of the Company and you think about what's going to happen with all the new contracts that we've been awarded, I would say you will -- you will get maybe a better, I would say growth rate and you will lose one or two point on the margins.

So if you -- we are always within the window as I always say between the 25% or 35%, some of the contract would still run above the 30% and some of the contract we are at the 25%. So the mix should always be within that 25% and 30% and definitely, when you have more of the cost plus that gets you some of the quarters where you basically do a lot of this cap and catering etc., at a the cost plus [Phonetic] which is basically a bit of intuitive to your overall margin, but our dollar value is accretive.

So I would say, to give you a number, we always want to maintain in the high 20s numbers, which is, anytime between 28%, 27%, 26%, 29% and this is where it's always -- have -- we always believe our quarters are, and how 2020 will be at.

Sean Meakim -- J.P. Morgan -- Analyst

Right. Okay, thank you for that. And then just the capex spend ran a little hot in the year-end, perhaps or front-loading a bit for some of the growth initiatives for 2020. Working capital saw some improvements, some of the ongoing effort you know, Chris made some helpful comments there about early in 2020 maybe there is some catch-up coming. Just how do we think about balancing growth with preserving those margins like we just talked about? And then, generating more cash than we consume in 2020?

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

So if I look at overall -- and maybe I'll let Chris comment more. But if I look overall, our commitment is to keep growing at this, up plus 20% year-on-year and we are expecting to do better even in 2020. Our plan is a lot of the capex has been spend [Indecipherable] as a lot of these contracts we already contracted. So we know, we upfront capex, we knew that we will have to be ready, if I -- all the products we talked about being able to do all this kind of projects in six months, obviously, you have to have a lot of equipment in testing, coiled tubing, logging etc. And we are not in the capex [Phonetic]. And we see already that revenue stream coming.

So -- and that's why we are going to have, including the acquisition of the SAPESCO, we maintained $100 million cap on our 2020 spend. Chris, you want to comment more?

Chris Boone -- Chief Financial Officer

And as I said, sometimes you may see a movement from one category to another between our net debt and capex as I said, it's sometimes it's a decision of when we choose to pay things, we have the cash we may pay for them. If I don't, then we can just short-term borrow it and that delays the capex cash. So as we said the numbers can fluctuate a bit. We have a general target that over an amount of time it will -- it will be the same, but it can be plus or minus that $5 million or plus and I think we had a little bit of extra capex to support the unconventional which we didn't necessarily guide to you last quarter.

Sean Meakim -- J.P. Morgan -- Analyst

Right. Okay, thank you for that feedback.

Operator

Thank you. Our next question is from the line of Igor Levi with BTIG. Please proceed with your question.

Igor Levi -- BTIG -- Analyst

Thank you. Hey, guys. So you first talked about the unconventional opportunity in Middle East extensively about a year ago. And since then, you now have one of the two unconventional fleets operating in Saudi, so that's a pretty big achievement. The question is how much bigger could the unconventional service requirement be in Saudi? And do you see any near-term opportunities for unconventional work in other Middle East markets?

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

Yeah, sure. I mean if you look at the announcement of our clients between both in UAE and Saudi and you can see the scale is quite much bigger than what we've talked about before, right. So if you talk about today of Saudi Arabia and Jafurah basin, which the Crown Prince mentioned last week, it's enormous, right? So it's the size of Eagle Ford. And as we said, based on the performance we manage to achieve in Saudi Arabia, now we know that actually less fleet can accomplish a number of stages because we managed to break into the efficiency at the same rate at what you see today as the Permian, which was never achieved over the last six years to seven years in the Middle East, and today you have that scale. So you know that you can do this number of stage per day and per month. So if I look are they going to add? For sure they're going to add, depending on the drilling performance so they are adding today. They are adding ways to develop Jafurah basin and meanwhile, you saw that Abu Dhabi is having the same, I would say, big, big discovery and definitely you will see more activity in that space. Today, we are engaged as we said before, in our last quarter, we are engaged with the three countries and we are qualifying our equipment and our services. And what we are saying is once we see the opportunity at the right time to deploy the fleet, we will deploy the fleet and we have a very strong agreement with NexTier with ready equipment, and we'll push the button when we know that we're going to get the contract. And we believe we can have the same success that today we have in Saudi Arabia. I mean, you're talking about the scale that is much bigger than anyone will have ever thought.

Igor Levi -- BTIG -- Analyst

Great, that's very helpful. And where do you see the biggest risks in your 2020 expectation is it North Africa, you had a few announcement there, but there has been some unrest there or is it Saudi where you're having some of the biggest, fastest ramp up we've seen for your company?

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

This is Sherif. And again this is a long term. You have to always remember this has nothing to do with North America. This is the region for long-term. So even you have today the coronavirus and you tell me, is there any activity drop, zero. There is zero activity drop. So the whole thing -- this is, all these countries they develop and they plan their business for long term. So the big that you have for the activity is usually a risk on the security or geopolitical risk. So today, for example, as I mentioned you have a big area of the production now down to what, 200,000 barrels and almost shut down. So that thing is still there but obviously much slower than what expected. Some of the efficiency of North Africa and the rigs as well is effected. So, I would say to answer for your question, North Africa and Iraq will always be the number one higher risk than other GCC countries because of security concern. So you might -- that some of the clients maybe will not resume work until they feel it is mainly secure. And that's mainly is the case.

If you look at macro view and if the global demand will drop by another million barrels something right, yeah, definitely declines will adjust, but that will be across the entire group right. But today, if you look at the plan and our plan and against that is small. So we know that even we will not get affected like if you have -- if someone has like a 40% market share, we today, we do not see risk on our 2020 numbers, except some small pockets in North Africa and in Iraq.

Igor Levi -- BTIG -- Analyst

Great. Thank you very much, I'll turn it back.

Operator

Thank you. The next question is from the line of Greg Colman with National Bank Financial [Phonetic]. Please go ahead with your question.

Greg Colman -- National Bank of Canada -- Analyst

Hey, thanks. Hi guys, congrats on a good looking quarter. I hate to harp on margins, but I'm going to. So I'd like just to come back and focus on that for a little bit and talk about -- and talk about the mix. [Technical Issues] phone problems, now I'm back. If we look at the margins, which we saw EBITDA margins in Q4 were down 300 bps year-over-year and sequentially down as well, but the production services revenue was actually up 25% sequentially. So I'm just trying to reconcile that, because you know per your earlier comments Sherif, we always view Production Services has being the highest core margin part of the business. So that's kind of point one, I'm just trying to understand the rising Production Services contribution with declining margins.

And then number two, is just more factually, your next year JV that partnership, is that in production services as well? Is that where you keep that and is that additive or dilutive to that segment's margin contribution?

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

Okay. So if I take the first JV. I think your -- the mix of margins. So if you look back at the last four quarters or so, you will see how this, there is always fluctuate in of the D&E margin, that's actually quite big. I mean 500 basis point or so. So again, same answer I gave to Sean and because of the mix we do and because of the contracts we have, right. So it's more of the fishing remedial, downhole tools etc., some month it is going to get fantastic month with very high margins if the most of the activity is rented in type of base of business, if most of your evaluation work is slickline basic business, you will get to the lowest end of the margin or the higher end of Margin, right. So this is always going to be the case. And it's not going to really be any different in the near future.

If you look at the production now definitely all the gains that we had significantly on the contracts wins where majority of which came actually from the production business. So we won a lot of North Africa well intervention which is coiled-tubing contract, we won couple all of this is new geographies like Kuwait, like Chad, which head into production arena and definitely now you have announced our unconventional business that is this is quite huge. So today it's been entire thing production [Indecipherable] and then you have the margin that you some dilution to it is the cost plus. So you have the cost plus because you do the catering, you do the trucking, you do the sand, and all the stuff that is used to improve margin. The expectation should be that the practice is when it goes to a full-fledged site, you will have maybe a couple of points less than you are left of the production division because of all the cost plus that you do with it. So with that, but if you grow that business for another 20%, 50% and you loose couple of points, it is quite acceptable.

Greg Colman -- National Bank of Canada -- Analyst

Okay, that's very helpful. Just to make sure I understand here correctly. The production services is higher margin contribution versus the drilling and evaluation. But the drilling and evaluation margins itself can vary greatly from quarter to quarter. So even though we saw production services revenue up 25% sequentially, the margin pressures was because in D&E, that's where that variability sits.

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

Correct.

Greg Colman -- National Bank of Canada -- Analyst

Got it. And then and just finally, and I might have missed that in there. As we see the ramping of the unconventional work as we see I'd seen budget expansions tripling of Saudi commitment toward some of the larger reservoirs. I think you mentioned in your opening comments, but I can't remember if you did or not, we would expect to see a larger percentage of your business in that segment as well where were the margin profile of that style of work sort out on this -- on the spectrum that we're looking at from sort of the low 20s into the 25 of the D&E, and then up to as high as 35 for the production services. Where would that specific bucket of what seems to be more meaningful work for the coming couple of few years sit that margin create scale?

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

So if you look at the production and you look at the unconventional the fracturing business, it's entirely depending on the efficiency of what you do. So if your very efficient and you perform the number of stages like USA as what we're doing with the pricing, it can go above 30% margins. So if you go in a month where the efficiency is a bit below for a number of reason, for readiness of well, for some of debt gain, for some of plant, yes, you are going to really [Indecipherable] margin more or less right. So mix weighed on month-to-month, but our expectation of our philosophy of that contract is to be within that range, which is below the production today about 30%, but not to go to be always in the 20s and depending on the month of efficiency you can fluctuate that month and that quarter respectively.

Greg Colman -- National Bank of Canada -- Analyst

Got it.

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

I hope that answered your question.

Greg Colman -- National Bank of Canada -- Analyst

It does. And I appreciate it. And then just one last one from me. Switching gears entirely on the M&A side, every time I look at my screen things just keep getting cheaper over here in North America. With the oversupply of frac equipment here some of the companies are trading, not necessarily just on frac, maybe expanding in technology. I know you just execute on probably your largest purchase to date, but are you seeing an increased opportunity to pick up assets either asset purchases or whole company purchases in some of the North American stuff basically playing between the weakness in the market here and the strength in the market in where you're operating or is it kind of unchanged on the M&A front? I'm basically trying to figure out are we going to see a pick up in your M&A activity in the coming sort of six months to nine months because of where asset prices are here.

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

Again I go back to -- this for me, I don't count it as acquisition or M&A. I count it as capex. So if we find, which we discussed with several Canadian and US companies, if we find they have good assets and we can buy it at $0.20 [Phonetic] or below, why not? We are open, we look into it. After that we'll very good condition and it has to be fit for purpose for Middle East. Because a lot of those equipment do not fit the Middle East operation and that's number one. Number two, I'm not really focus on getting some of our, I would say, the old-type equipment in a high-end operation we have in the Middle East. So you have to balance this as well. Having to acquire a company as a whole and then M&A in North America and bring it over to the Middle East, today I don't think about it maybe if strong opportunistic technology and that's where we will even partnership or we could put investment in some what they call innovative technology, some like very unique IP, very unique state of the art technology that we can take it make it fit for purpose. It's like a start-up like PC type of things like we did with Carnetix [Phonetic] for the go ahead. So this is something we like and we are interested in. Otherwise, we don't see any value to bring some model or capacity and buy company. And definitely, as we always said, we are not planning to operate in North America. So there is no market for us in North America.

Greg Colman -- National Bank of Canada -- Analyst

Got it. And then just one more thing that your comments spurred one more question, which is you just viewed as capex, which is whether you're spending capex on organic or capex on acquisitive, just more from a clarification perspective is the money you're deploying for SAPESCO part of your $100 million capex budget or outside of that i.e. your capex budget is 100 [Speech Overlap] is part of it?

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

So we have the capex reduction from last year because as I said earlier we upfronted a lot of our capex in operating, we already deployed and more capex is coming for more growth, but at the end of the day, the capex that we planned are already is included in our $100 million. As you -- as I said earlier in my remarks, we've landed a year ago. So we've been in negotiation for a year. So we know exactly what are the equipment we need to add to the portfolio to be able to take it overall for the Middle East and that includes in $100 million.

Greg Colman -- National Bank of Canada -- Analyst

Got it. I'm glad I asked. Thank you very much. That's it from me.

Operator

Thank you. The next question is from the line of Blake Gendron with Wolfe Research. Please proceed with your question.

Blake Gendron -- Wolfe Research -- Analyst

Hey, good morning. Thanks for taking my questions. My first is on Greg's line of questioning is just on the overall market and maybe some of the behavior of your peers at this point. You mentioned pricing being irrational at times. I'm just wondering, just given the sheer deterioration in the oil price that we've seen and coronavirus may or may not be impacting operations in the MENA region broadly, I don't suspect they are at this point. But what is the risk, if we see further fallout in US land that your larger peers start to rotate capacity into the region, is it your sense there is some downside I guess to the way that they're behaving or they're already behaving somewhat irrationally at this point and there is not much to go further down?

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

I would say Blake it's -- it's again is a mix. Most of, without obviously mentioning names, but you have some of the -- of the big guys are disciplined and they look at the returns and they look at deploying the assets only when it make sense and when it is accretive to their place, which is very good time and they are doing that. And some others are not, but overall you can see as well that lot of the [Indecipherable] deliver on. So the clients are very aware of that.

Blake Gendron -- Wolfe Research -- Analyst

Okay, that's helpful. And then certainly back on D&E for a second here. I'm just wondering the progress that you've made in pulling through the GES portfolio elsewhere in the region, have you found that it's been easier to pull through more of the drilling product lines or are you getting some traction on the evaluation side as well. I would imagine that some of the -- some of the friction on margin, maybe is due to pulling labor throughout the region and kind of spreading the portfolio out that way?

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

It's really -- it's really the Gulf Energy again to put it into perspective more -- the Gulf Energy strength is drilling portfolio, it has no -- really strength more than ever. The drilling portfolio was very strong in Oman and you take this outside of that so you want contract country, but that these contracts in that portfolio type of work is lower margin than normal in the drilling portfolio. So when we start in all these countries, you definitely do not you get of some of those contracts. You get that amount of those drilling rental type of margins and once you again and you become more trusted partner to the customer and you grow scale, then your margin improve. So the margins are better it's usually [Indecipherable] is very strong set of that they have over the last several years. When you grow this into Algeria, Saudi, Kuwait, Iraq etc. the start-up is definitely is not as profitable because you are adding a lot of actives on the capex because that business of fishing the mid-year downhole you have that's so many equipment all and basically on all when the customer has a problem. So in a way, it's not the business where it is like you are there, all the time because customer has problem all the time. Right. So that is why there is -- that's why all this fishing [Indecipherable] work if not for everybody, right. It's a tough business but overall, if you look at the margin compared to the industry it is actually normal. Because that margin, as you know and many other places planted. So we don't -- when you grow our business at 16% to 20% it is still good, right. So, and you have to start like this because it's small until it become big enough to operate and have a scale to improve your margins. But as I always been saying, do not expect it to be [Indecipherable].

Blake Gendron -- Wolfe Research -- Analyst

Got it. That's helpful. And then one more if I can slip it in here on the M&A side, it was a pretty slick deal that you structure with SAPESCO. I'm wondering, just given that equity prices across the border and be challenged here in the foreseeable future. Some opportunity as was mentioned earlier on the call, but if you have to now go forward with mostly cash and debt transactions. I'm just wondering if there is a maximum leverage that you guys would be comfortable with not going above essentially and if that potentially limits, I guess the near-term M&A opportunity for you in the region now?

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

I mean obviously as we said we don't want to ever go above two and we see -- we have been -- we are in discussions with several that we already managed to enter all the countries and two of them we are planning to do an M&A we didn't need to because we predicted that out. This one, as you saw the numbers is accretive very solid and so you get two birds with one stone I would say. You get [Indecipherable] what is the last country, which in Egypt and you get this industry of community service or industrial pipeline service that we don't have. And today, just to give you a scale when they did in the [Indecipherable] project, which was the largest gas project I think worldwide that went from exploration to production in 22 months to now produce 2.7 Bcf a day and they have now similar projects between -- the four countries and their deep plant, they need all of them to meet that services and the best who managed to do that because they have that leadership position. And as of now, we are bringing that experience and that number of years into all the countries. Just to give you a flavor. Most of these, when we try to do this ourselves or even our at the previous company alone, NPS and Gulf Energy, they could not because the clients, which require 10 year to 15 year experience for you to be in this business. Because obviously they are very worried that you work on the EPC business and have an issue. So the requirement is what is your timeline, what is your experience. Well, we got the company in our fourth year in experience. So these guys are approved and qualified in Saudi and Kuwait and UAE and all these countries. They didn't do it, because they didn't want to spend the capex in all these companies to enter. Today, most of the equipment I have, but I need the expertise and the know-how and the number of years. So all of the sudden I have all these countries open and are allowed to bid for all of them. So it's very obvious why it makes sense, because again, once you have an M&A that has almost no overlap, it's the most accretive. There is no -- there is no problem because we develop working interest and business partners has a very strong [Indecipherable]. So it's a very strong position. If I do get others, we would definitely look at others. I do not foresee anything that would require us to change our leverage in the interim.

Blake Gendron -- Wolfe Research -- Analyst

That's really helpful perspective. Appreciate the time. I'll turn it back.

Operator

Thank you. [Operator Instructions] The next question comes from the line of Andre [Indecipherable] with Evercore ISI. Please proceed with your question.

Andre -- Evercore ISI -- Analyst

Hi Sherif, Hi Chris. So, this question pertains to the SAPESCO acquisition. And if I think about the past one year to two years, your team heavily been working on optimizing the back office, ERP systems, internal controls of your company, how will SAPESCO's operations fit into that and how you think about the operational risk profile of the company? I guess my, my question related on top of that is, do you plan to leverage your new footprint in Egypt to rethink back office and corporate footprint of your company?

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

So obviously one of the very strong strength of SAPESCO, which we didn't mention before is they have talent. So they adopted the SAP and they have a very strong 10 years experience and for the system and they have a full on back office in-house to deploy. So as a matter of fact we -- that's another part of we love about the acquisition is we are actually going to adopt and look into it. Obviously, we need to study it and Chris, has the full team to look at that. How is this -- how can we take that should we take it across the country, the team ready to deploy it And that's one of the biggest advantage. The other advantage obviously of having back office for others in Egypt is definitely the low cost, right. So it's a very cost competitive, the country and we will be able to deploy many of our like remote sensor, our driving some of the stuff we will capitalize a leverage their strength there. Plus the ease of performance again over 40 years to try to take it to other country.

Andre -- Evercore ISI -- Analyst

Okay, great. Thank you for that. And then my second and last question is I need to believe in the point on margins, but let me just try to approach it a different way. So if I read through the proxy that you guys filed in early November, and I appreciate that you disclose your compensation goals and pay for performance framework when you are not really required to do that at this point. So thank you for doing it. For your short-term compensation goal, Sherif, I see that you have different targets for revenue, EBITDA and you kind of have a target, you have a superior targeting you have an exceptional target right with different implied EBITDA margins reached, but I think in the exceptional targets that you set for yourself last year, which is implied like 33% EBITDA versus the target, which is like 20%, 29% and what would have to happen in your business in order to get to those target margins? I mean what kind of things that we have to see right and is really needing that 28% to 29% level you target implied EBITDA margin for your short-term goals is that maybe more appropriate way to think about things going forward?

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

So, OK. I mean, obviously, I don't want to give guidance. But if I look at -- if I look at the growth profile. If I want to manage -- If I want to go into 32% margin exempt for us we can, right. I mean there is obviously it will limit some of the growth that you do. So if I take my core business, for example I go in production business and I remove all the add-on, and I remove all the add-ons on the D&E, the catering, and IBM type approach integrated at the -- at that margin, so at the end of the day, we are now going through etc. like for example, what I do to unconventional I'm doing this basically there is only one company from a major service company that is in that project and me. And basically we are reaching them for the last two months and just talking.

So the idea now our new team has been observing that business, you have to take on the full on business of the size, of the cap, of the catering, of the sand, that this [Indecipherable] it will take to 27% or 26% depending on how many you did this month. is this the business? Yes, I will keep doing that because as long as you do not -- you do not take the company down If I could, because if you can grow plus 30% year-over-year for surely you are going to take couple of points down on your margins and respond. Right, it's accretive gain on the dollar, but it will affect the fixture margin based on the profile of the projects you are taking. We are taking now as I said before and people locally appreciate that you're taking a full on large-scale development project in Jafurah that is size that is like Eagle Ford. There is only two companies operating there and we are very proud that we are one of them. So that is the scale and the magnitude and the potential for the future of this activity once it goes to the levels that Saudi Aramco announced.

Andre -- Evercore ISI -- Analyst

Great, thanks for elaborating on that. That was all the questions I had now. I will turn it back to the queue.

Operator

Thank you. At this time, we have reached the end of our allotted time for question and answers and I will turn the floor back to management for closing remarks.

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

Thank you very much. And we're very, very proud of -- proud of -- of the year and looking forward to a very successful 2020 with much more growth than the previous year. Thank you.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Chris Boone -- Chief Financial Officer

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

Sean Meakim -- J.P. Morgan -- Analyst

Igor Levi -- BTIG -- Analyst

Greg Colman -- National Bank of Canada -- Analyst

Blake Gendron -- Wolfe Research -- Analyst

Andre -- Evercore ISI -- Analyst

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