Good day, and welcome to the National Energy Services Reunited Q1 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the floor over to Mr.
Chris Boone, Chief Financial Officer. Please go ahead, sir.
Good day, and welcome to NESR's Q1 2021 earnings call. With me today is Sherif Foda, Chairman and Chief Executive Officer of NESR. On today's call, we will comment on our Q1 results and overall performance. 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 This information will be provided upon the filing of our quarterly report with the SEC. Finally, feel free to contact us after the call with any additional questions you may have. Our Investor Relations contact information is available on our website. Now I'll hand the call over to Sherif.
Thanks, Chris. Ladies and gentlemen, thank you for participating in this conference call. I'm very pleased with our sustained momentum and solid start of the year. We continue to solidify our position organically and inorganically in line with our strategy. We grew 7% year on year While the market contracted by around 25% and maintained flat sequentially despite the usual slow start that was evident by our peer average drop Q on Q of 5% to 6%.
We had a solid free cash flow of $37,000,000 on the back of good collection this quarter, which gives me a very positive indication of the year as expected. I would like to thank our team in the field for their dedication, perseverance and efforts to achieve those outstanding results Despite the evolving COVID situation, Middle East is now seeing the effect of the Wave 2 And continue to be in a semi lockdown mood, watching carefully what is happening in neighboring countries like India. We have maintained our 100 percent capacity of operations despite several countries in the region putting specific quarantine requirement, which have certainly made the logistics a very complex exercise. Our crisis management team Continue to be running the show on a day to day basis, and we don't foresee it changing until we have a solid vaccination and ease of movement. Some countries are progressing very well with clear mandated vaccine to people entering their premises and operations.
Abu Dhabi is a very good example where our client provided the vaccine for everyone. On the macro side, on the long term, Middle East continues to cement its place as the pivoted figure in the oil and gas landscape. No one can compete with the lowest cost producers. In addition to the global pressure and speed to move out of fossil fuel And the acceleration of the renewables for power infrastructure, the region has an unmatched reserve and the biggest demand market next door in Asia. The growth market in Asia largely insulated from the dynamics you see here in the Western Hemisphere and will depend on hydrocarbons for many years to come, especially as gas continue to replace coal as a cleaner fuel.
The drive for the region is to concentrate on diversifying and growing the renewable and massive increase In gas production, we meet the local demand, while investing in oil production to meet the global demand. Hence, from our point of view, our existing core business has an inbuilt recession proof baseline growth, which I don't believe The larger market appreciates its magnitude. This will continue for decades, and our aim has always been to turbocharge the growth with accretive strategies as the partner of choice to all our customers. On the short term, we have been saying now for over a year that the oil markets will tighten on the account of U. S.
Shale effect, Not enough discoveries and lack of investment in exploration to offset the natural declines of existing fields globally. The pandemic delayed the onset of this demand tightening. And yes, it also may have structurally changed the demand longer term, But this has only delayed the inevitable. As yet, we don't see alternatives covering for the declines we see in the oil and gas supply. As an immediate effect, we already see our activity now starting to increase and I see double digit activity growth in the second half of the year.
I believe all our peers are also saying the same. Although demand from key markets like India may get affected by the 2nd wave there, I believe we are now firmly in an early stage of an upcycle, which is here to stay for a while. Also with a lot of major advocating reduced investment in oil and gas project or actively talking about exiting markets Or even the space altogether, it gives more responsibility on the NOCs to remain the reliable supplier to the world. And hence all roads lead to the Middle East. Again, if you want security of supplies and long term stability.
Therefore, the Middle East gaining back the position as the swing producer. Our customers are very wise and are already making the right moves to ensure they are able to meet this demand. We at Nest Have seen this coming and have planned accordingly by front loading our capital needs, actually Started planning since the second half of last year. We also have worked with our strategic suppliers to get first in line on some of the long lead Time Hardware, including pre ordering some items with manufacturers to hold them in inventory, which go in the equipment to accelerate our deliveries to catch this growth in H2. We have been evaluating our needs this quarter and deciding to order more equipment and products for the second half and early 2022.
We need to maintain a buffer of resources and be first to act when our customers need us, again as the most reliable partner. To focus now specifically on some of our operations, I wanted to talk about Libya. Libya, as all of you know, has gone through a lot of turmoil over the last 10 years and lately has achieved a breakthrough and amicable political situation that no one has ever dreamed of, which in turn gives the country a good stepping stone for growth. Libya has a lot of potential, And production has dropped to almost 20% of its existing capabilities. As a start, the first 1,000,000 barrel is what I call the easier task.
Then to get back to its full potential, you need a lot of rigs and massive rig less and workover activities. We have been investing heavily since the beginning and now we have a solid base in both the East and the West, enabling us to service all the clients. We are adding product line and enhancing our facilities to ensure we can reliably answer all our customer needs. In addition, we have an almost 100% national Talented team with many years of experience under their belt. They know the customers and the NOC and continue to be very close to them as we were since the beginning in the most difficult times.
We need to provide technology and answer product to swiftly increase the production. Now let me move and talk about the technologies and segments. Here I have to specifically mention our progress in D and E this quarter. We have done very well by growing both wireline and slickline operations. And I'm very happy to say that we did the same amount of revenue for both This quarter, as we did in the whole year prior to the merger, we have deployed new tools to target markets, Have several managed to acquire several operating and wireline slick units at a fraction of their price during the severe downturn last year in the U.
S. It is a continuation of our drive to efficiently use our CapEx dollar and leverage opportunistic purchases as and when they come along. On drilling, we are making great progress operationally. In Kuwait, we have introduced new agitators As part of our Downhole Tools offering, achieving record performance improvement, resulting in significant market share gain in our fishing services. This quarter, we announced our partnership with Phoenix Technology for MWD and Motors.
And I'm glad to report that we have already run these motors in jobs designed and planned by us, and these jobs have significantly outperformed established players and broke ROP records for those sections. Actually, we broke existing records On 60% of the run, which is an impressive achievement. To give you an example, we drilled this section in 30 hours Instead of the field average of almost 60 hours, which means we see the client more than a day in such a small section of the web, We continue to work on identifying key markets and get assigned rigs where we can demonstrate clear differentiation. In addition, we recently announced our partnership with Beyond, and we formed a new JV to operate and implement their market leading managed pressure drilling technology, not only in our core MENA operation, but also in other countries in Asia and Africa. With contracts awarded already in both Malaysia and Ivory Coast, We will be able to demonstrate better reliability, better drilling performance, better cost of ownership.
Beyond has patented technologies that offer customers a more compact and practical full MPD package that takes less time to rig up, Rigdown and is easier to operate, saving time and money for customers. As a result, it has become the leader in MPD market in the U. S. And Canada. Unlike many players in the MPD specific spectrum, Beyond owns the technologies included in their MPD packages From API monogrammed RCDs that outperformed the competition by margins, up to 3 times to specialized state of the art MPD control and design software.
Another technology we are very proud of Being an early investor and we believe is a game changer is Kinetic Pressure Control, who were recently featured on the cover of JPT. You may recall Kinetic or K BOSSS has invented a device which merges next generation materials used in the space programs With military technology to address blowout prevention. Essentially, it acts as an airbag for the drilling operations. They have just completed the test on their drilling and coil BOPs, which have significant consequence on how our customer can safely conduct their operations. As you know, blowouts like Deepwater Horizon have significant negative environmental impacts, And this device pretty much eliminates that possibility, and we are taking the lead in implementing it in the region.
We have now set on the ground, which is shortly going to be qualified and tested, so a great success in the making. As you know, our performance has been achieved by continuing to focus on our execution capabilities, determination for the region, Being the flagship MENA National Champion and our customer centricity. We are working relentlessly to provide a strong platform of technologies to enable our industry to produce efficiently And sustainably. Part of our ESG impact effort is our early investment in ICE, thermal harvesting, which we believe is a very forward looking idea on how to harness the thermal capabilities of the flared or produced gas to provide electricity. We hope a pilot of this technology within a year and implement it in the region.
We have also made considerable progress on firming up on our water specific opportunities and are planning to run a pilot and technology demonstrator with 1 of our main customers. We are also in the final stage towards an offering in the methane detection space And shall be announcing an investment and partnership to that effect shortly. This is something which will hit the ground running, and we hope to run these technologies Immediately. Lastly, I want to convey that subsequent to our recent announcement on our acquisition in Kuwait, we have successfully Closed the transaction and are effectively running the operation as we speak. I want to take this opportunity to thank Sheikh Mubarak and his team Working round the clock with us to help grow this business.
These are accretive contracts from day 1. And given our strength in cement and coiled businesses, we can ramp up this operation significantly in a very short period of time. Secondly, the Drilling Fluids product line, which was a very small offering for us, Now graduates to a sizable part of the business in Kuwait and forms a baseline for our growth in the region. Kuwait is a big story for us as an anchor country that has significant reserves with a savvy NOC. We grew organically securing several contracts in drilling, cementing, testing And now with this Force Multiplier acquisition, we will have a substantial role to play and be part of their vision to transform the oil and gas sector.
Overall, as you have noticed and as promised, we have announced and closed on 2 major transactions in approximately 1 year In the midst of the pandemic, we have largely handled these internal resources to keep the cost in check. More important, we demonstrated our ability To agree on terms and execute the deals with our own cash generated from operations. That ability will even enhance going forward As we will generate more cash and we'll have the capacity for more technology and M and A accretive On that note, I'd like to pass the call back to Chris to talk about the financials in detail.
Thank you, Sherif. Turning to our preliminary results, we have reported quarterly revenue of $212,000,000 This represents an increase of 7 The year over year quarterly increase was primarily driven from the growth of the unconventional product line and new contracts in Kuwait and the UAE. These offset lower activity in other markets and other service lines related to the impact of COVID, which had little effect on our operations in the Q1 of last year. Adjusted EBITDA in the Q1 was $50,000,000 or 24 percent of revenue. This represents a decrease from 26% in the prior year quarter and the prior quarter.
EBITDA adjustments of $2,000,000 For the quarter are mainly for integration costs associated with last year's acquisition, transaction costs associated with our recent acquisition and other restructuring activities. As we highlighted on our last call, we continue to incur significant COVID related labor and supply chain inefficiencies and costs. We are carrying incremental labor costs in anticipation of the expected market recovery. However, NESR will be positioned to react immediately to new customer requests, while our competitors are delayed ramping up their operations. As is our practice, we did not reflect any of these COVID related or other items in EBITDA or EPS add backs.
Moving to our segments. Our production segment revenue for the Q1 was $137,000,000 growing 3% over Same period last year and 1% over the prior quarter. Adjusted EBITDA margins for the production group were 27% in the 1st quarter, down 2% sequentially due to the increased proportion of pass through revenue from hydraulic fracturing operations. Separately, our Drilling and Evaluation segment revenue of $76,000,000 in the Q1 was up 15% Compared to the same quarter last year, but down 2% sequentially. The increase over the prior year quarter is primarily related to higher drilling revenue in Saudi Arabia.
Adjusted EBITDA margins of 24% in the first quarter were up from 22% in the prior year quarter, but down from 20 $31,800,000 in the Q1 compared to $31,000,000 in the Q4 of last year. The prior quarter had a benefit from a fixed asset valuation adjustment for the final purchase accounting of last year's acquisition. We expect D and A to continue in the $32,000,000 range next quarter before of the recent acquisition. Interest expense in the Q1 was $3,200,000 down slightly from $3,400,000 in the prior quarter. Our adjusted tax rate this quarter, which includes the impact of the noted EBITDA adjustments and any potential impact of a change in warrant accounting, was 12.1%.
Excluding the benefit of the release of a reserve on prior year taxes, The adjusted tax rate would have been approximately 20%, which we expect to continue to improve upon going forward. Adjusted net income and EPS, which includes the impact of the noted EBITDA adjustments and any potential impact of a change in warrant were $13,600,000 and $0.15 per diluted share. Switching to free cash flow, we are extremely pleased with the record Cash flow generated this quarter of $36,700,000 up from $32,800,000 last quarter and negative $13,600,000 in the prior year quarter. The sequential free cash flow improvement was accomplished mainly due to another quarter of strong collections and lower capital spending. We continue to improve on our days to invoice, while most customers have returned to normal payment practices.
In addition, we were able to collect retention to lower DSO even further during the year. Capital expenditures in the Q1 were $11,000,000 down from $14,000,000 in the 4th quarter. This reduction was due to the lower new CapEx orders placed in 2020 and improved utilization. In 2021, we continue to expect capital expenditures to be flat with 2020 levels to support planned growth and pay for existing commitments. Free cash flow in 2021 should significantly increase over 2020 due to Flat planned CapEx, continuous improvement on fleet utilization and improved DSO.
Also another positive, Net debt decreased to $302,000,000 at the end of the Q1 compared to $323,000,000 at the end of the 4th quarter. The sequential decline is primarily from higher cash balances from improved free cash flow and net debt payments. As of March 31, 2021, our net debt to adjusted EBITDA ratio was 1.6, flat from 1.6 last quarter and should reduce to our target level of approximately 1.5 or lower in future quarters. Also, we remain in full compliance with our primary credit facility In conclusion, in Q1, we put the company on an even stronger financial footing with our strong free cash flow generation and are better prepared for the expected upcoming market growth and additional inorganic opportunities. With this, I'd like to pass back to Sherif for his final comments.
Thanks, Chris. In conclusion, I would like to leave you with key takeaways. We are focused to be the trusted and reliable partner to our customers and have the capacity and resources to tackle their needs while managing the pandemic and restrictions. 2, we are already seeing activity starting to pick up and I'm confident that we'll have very strong second half. 3, ESG Impact segment is progressing well with our water, flaring and methane detection efforts.
4, we will continue to produce free cash flow and will invest in new partnerships and accretive M and A. And on that note, I'd like to pass back the call to the operator for your questions. Christie?
Thank you. The floor is now open for questions. And our first question comes from David Anderson with Barclays. Please go ahead. Thanks.
Good morning, Sherif. How are you?
Good morning, David. Thanks.
So maybe I'll just start from kind of a bigger question to start with. So operations in the Middle East are heavily dependent upon a lot of labor from Southeast Asian countries, including India. And As you noted at the top, there's a lot of COVID issues still in those areas. I'm just wondering, as we look out into the back part of the year for you at all in terms of the labor situation and how that could play out to the Middle East?
So as an industry, you're absolutely right. Some of the players will get affected, especially the ones that are dependent Or they have a very small percentage of localization. They will get affected, especially with the restriction being put today on travel. I think for us, being again very national and have very high percentage of nationalization workforce, We will not see any of the issues that the others will. I would say in some specific countries Where you still have a half percentage, the industry overall will get affected And we might get affected accordingly because of some of the delays, for example, of rig readiness.
So in some countries, yes, you might not have a rig crew, For example, if the current crew would are being there now already for 7 to 8 months and they will not be able to get a crew change. Definitely, there is a lot of things going on to replace some of those people. But yes, you're absolutely right. If the situation gets aggravated, You might get some delays of those risks.
Ashut, you were talking about sort of the balance between Natural gas and crude oil in the region. And I think over the last 10 years, I guess you could say that kind of Saudi and some of the neighbors have really shifted spending And activity towards natural gas. And if I'm not mistaken, I think around 60% of the onshore recount in Saudi is actually directed towards natural gas, not sure what it is today. But just wondering kind of bigger picture, the oil market is tightening, Otech clearly looking to recapture share. Do you expect this mix to shift back To the more the oil side, do you expect the majority of tenders now to focus on the oil side or does that not actually change because of their capacity situation?
I think you're absolutely right in the second half of your question. It's not going to change. I think Definitely, they have the capacity again to put oil to the market. Let's say if the market gets even tighter And they need to put more than 6,000,000 barrels. Yes, they will you will have some short term shift of some of the rigs going to the oil To get some of this production.
But overall, I mean their vision is to really get the gas In the different countries to be the main fuel for their internal demand. And always remember that Most of this in the countries are done for internal consumption. The only one that has huge capacity to export is Qatar, But the majority of the rest is really using it for internal consumption. So this is not going to change. And you saw, for example, The Saudi leadership is very clear on moving to renewable and to gas All internal consumption and really sparing the production, the oil production for export.
And then my last question, if I can just squeeze one more in. Talked about kind of pre ordering equipment in front of kind of what you're seeing as a ramp up and want to make sure that you've got the capacity while others don't. We've seen the last couple of years, it seems like you've been growing, everybody else has been sort of treading water. I'm just wondering if you just kind of give us an overall sense of the capacity situation. I guess if you're pre ordering equipment, you must be thinking that the capacity situation is pretty tight.
I know everybody's got to kind of look at a little bit different in terms of capacity. But Just from your standpoint and your product lines, could this market really tighten really quickly in the back part of the year? It just seems like you're the only one who's really been spending any money over there.
I would say there is still excess capacity overall, right? What will happen is the readiness of this capacity. So if I want to be a bit more specific, today, I know that the market is going to get tight on some of the product line. For example, readiness of cold shipping fleets. When you have all this rig less activity that is going to Shortly increased and people are not planning for it.
Some people as well have issues with spare parts or equipment they did not prepare. They did not sorry repair during the pandemic and these equipment despite the fact they are physically there, but they are not ready To answer some of the jobs. The jobs as well are getting a bit complicated where the client needs higher specs, Longer reach, bigger pipe, and some of this activity. These equipment are not ready in each country. And that's where I'm saying we front loaded our CapEx.
We looked at this last year. We have obviously I explained it in the prepared remarks. We looked at the opportunity to buy some of the equipment. So we bought actually several of those equipment at a fraction of its price, $0.20 of the dollar and bought slick line equipment, wireline equipment, some of the high pressure equipment And we ship all this to the Middle East and we have that ready green tag, as I call it, ready to be deployed. So It is very important.
I think some of the smaller companies will not get will not be ready at all For this increase, already I see them turning down jobs and we will be able to capture some of their work And some of the others as well, some of the other like I would say competitors, they have issue with cash, right? So either they have a restructuring or something like that. So they are not capable of putting CapEx as we can, right? So and I think this is where The client looks at who has a buffer when they make a call and ask for this. So today, you don't see that visibility, but I am quite confident that this is going to happen in H2, and that's why we are preparing for specific market to have specific equipment For what I think they will need and then I will be able to capture that before the others.
That's a nice opportunity. Thank you, Sherif.
Thank you, sir.
And our next question comes from George O'Leary with TPH and Company. Please go ahead.
Good morning, Sherif. Good morning, Chris.
Good morning, George.
Just curious for a little more color on the shape of revenue throughout the year. Q1 2021 came out much more resilient than all of your competitors and then our Expectations, which was great to see, but I wondered if you could bifurcate a little bit between production and the D and E segment Talk about the progression of revenue Q2, Q3, Q4, just if it's heavier in the back half or if we see a nice ramp in the second quarter. And just curious on the bifurcation between the segments given some of the idiosyncratic factors that play in like the M and A you guys have executed on the partnership Phoenix that can provide a boost to the directional drilling side and already seems to be doing so. Any color there would be super helpful.
Okay, great. So let me start with first the split. I would say that Given again the size of the unconvention, the frac operation, with all the growth that we are seeing on the D and E, I would say the split will not change that much until year end. I would say it's going to start to change maybe from next year, But until year end, I would say you would see more or less the 2 third, 1 third in our business between production and D and E. In addition to that, as I said, the H2 is going to be very strong.
And obviously, some of the countries We want to see some of their riglets and production activity increasing. I would say the demand of some of the production Segments will increase and even with the growth of the D and E, you're still going to get growth or higher growth even in the production segment Because of that. On your second part of the question, I would say H2 over H1 is going to be significant. And as I mentioned, You're going to get a little increase in Q2, but really you would see the real increase in H2. And one of the reason of that, people have to remember During Q2, you have the month of Ramadan, which we are in now, and then you have the holidays.
So this usually comes a bit of a slower Activity due to that. So I would say you're going to see real ramp up in H2, where obviously as well the clients wants to see clarity Of the demand and clarity of the situation of the pandemic and the European opening and then the border, I mean, you see most of the countries now are talking about 1st July, Complete opening, tourism is back. You see there is still lockdown. There is still restriction. Some countries did not open at all and then you cannot even enter them, right, for example.
So what I would say, you're going to see a significant H2 over And that's why I call it always a double digit growth for ourselves, in my opinion, H2 over H1 revenue. I don't know if I answered all your question, I had something.
No, that was great, Sherif. And then just Drilling into the partnership with Phoenix a bit and pun fully intended there, can you it seems like now you're in a good position And to compete with the largest players there and I think back to a conversation you and I had a few years ago when we first met in person in Houston And that was kind of one of the areas you guys were really looking to press forward into and get more exposure to within the Middle East. So does this Do all you guys need to do to compete against the big boys, so to speak, in that Middle East market on the high end of the directional drilling market?
No, the honest answer is absolutely not. This is basically, as they call it, stepping stone on The drilling portfolio. So you have to differentiate the drilling portfolio today is you have the motors, High Spec Motors, MWD Business and then the real rotary steerable market that is the large Part of the business and today that part is with LWD high spec or high end, right. So what we have been doing all along is we are very credible with our customer and we want to only bring partners that are reliable And they make a difference. So what we looked at Phoenix and I was very impressed with what they achieved And here in the Permian and replacing everyone on their high spec Atlas Motors And the velocity with MWD.
So what we said, we looked at the market in the Middle East, we segregated and we said why Nobody is doing that in that market. Why those sections are being drilled with normal motors? And we had a very good agreement With John Hooks with Phoenix, and we agreed let's put those, but let's make sure when we go there and replace Some of the competitors on that on those sections, we have to outperform them. Otherwise, what's the point, right? So we did that And they did an outstanding job.
And almost every single run, we outperformed The existing field average as they called ROP. So I was actually quite impressed yesterday when I looked at the numbers And actually we had an 83 to 84 foot per hour versus the average of 42, right? So basically, they doubled the ROP of that section, which is basically you can drill that section In 50% of the time. So if that section takes you today, 2 days or in for example, the example I put there is 60 hours, we do it in 30 hours. That's day, day and a half.
If the rig count is spread rate in the Middle East cost you around $45,000 to $55,000 a day, A day and a half is significant, right? So you're talking about $70,000 $80,000 And if the price is the same or equivalent, then we already save this client. And that's where We see how can we grow this pie. We have a full blown technology roadmap on the drilling To ensure that we have all those factors, so we'll have high spec motors working on our on the retail, working on MWD, LWD, etcetera. And this is when I would say I have solid portfolio and now I can tell you, yes, I can compete with the big boys for the entire drilling portfolio.
But today, no, we are only specifically targeting that part of the market.
Great. I appreciate the honesty and the color there. That was very helpful context. Let's sneak in one more if I can that the acquisition you guys announced during the quarter was Nice to see and good to see you guys press into Kuwait further. Just wanted to get your thoughts on Pull through opportunities that might emerge from that or is this more a Kuwait focused acquisition?
Do you have opportunities to pull those revenues into other geo markets?
No, I would say, yes, this Kuwait basically make us, as I call it, an anchor country Like the big countries that we have, and this will make sure that we have that presence And breadth, where we can have fantastic infrastructure, they have an amazing facility, 3 facilities. They have the solid, Obviously, relationship and contracts for 5 years, the only part that I would say will make a big difference for us to go outside Of course, on this is the drilling fluids. So today, the drilling fluids they have is a state of the art. They just started that contract. They have A very strong base and we will be able to demonstrate that ability to show some technology partnership that we have Add it to that contract and take that business the way we perform and showcase this to the other countries.
It's exactly like, for example, what we did in the frac business in Saudi Arabia. Today, as we are the leader in that business, We can demonstrate this to all the neighboring countries. They see what we are doing in Saudi and Saudi with their leadership in how they perform this As a client, how did they make this unconventional huge success for them? How can and we were part of it as one of their Provided, now if you do the same thing on the drilling fluids and then show it to the neighboring countries, then you start to gain share on that $1,500,000,000 market that today we don't even touch, right? So this drilling fluids is very good business that we just started now.
Thanks, Sherif. I'll turn it back over.
Our next question comes from Igor Leddy with BTIG. Please go ahead.
Good morning.
Good morning Igor.
On the ESG front, last quarter you talked about plans to convert infield water into drinkable water as well as remove Sulfate from water, so you can use lower quality water for drilling, freeing up higher quality water for drinking. I remember you mentioned, I
think you
were In conversations with 3 customers and thought they may pull the trigger on a project before the end of the year. I wanted to see if you could provide some color on how many customers you're speaking with, if that's still the plan in terms of time line and such?
Thanks, Igor. Yes, absolutely. Very exciting about the water, especially the freshwater And we are in the final stage of designing The pilot is sending it and we will have the pilot In 4 to 6 weeks, I would say, in the country, and we will be able to see the benefit and the results of that Facility with one of our major customers and then definitely this will be a showcase If it works exactly as we said, it will work, being able to remove the solids, being able to and I would say test it at an extreme condition. So what we are working on It's actually taking that technology to a different level. So there is H2S, there is some oil content, there is very high salt And very high solids content and we see we want to see can we design that pilot to be able to remove all this And get fresh water on the other side, right?
So yes, I would say as promised, we will have that definitely before year end. And we are at the same time in parallel negotiation with 2 other customers to make the same thing and Making sure that we have this type of facility or a pilot as well before year end. So we're very excited about the water. And I would say that we should see that. And then obviously, as we explained, we should see then after that big project Making able to convert those pilots to big facility because that's our aim, right?
And the client as well, most of our clients in the Middle East have huge, huge Targets for their ESG and their circular economy. So you can see that they announced a lot of like the 5,000,000,000 trees and There is a lot of activity going on today for this and this definitely would be a huge differentiation.
Great. Thank you. And As a follow-up, could you comment on how your partnership with ICE on the geothermal side will contribute to your Yes, GGOs. Is that something we're going to actually see as well before the end of the year on that front?
No. This is Now early investment, right? So this is basically no, if I give more even color on that. So the partnership we do It's very important to differentiate. So we do some of established companies have proven technology, And we have that partnership like for example we have with Nextyear, like now we have with Phoenix.
We just announced Beyond, which is actually we took Beyond to a joint venture As well to operate with that joint venture into the international market, which is something that We just announced and now we have 2 contracts awarded, so this JV will operate those contracts. And then you have the early stage, what I call, The innovative people that have something that is not proven, right? So it is today, ICE It's an amazing idea. They are working on some patents. They're working on some new technology.
And here, we become an investor. So we put money, so this is like venture capital. So we put money and with other investors and they are going to work on the idea, they work on the technology, They are going to test the technology and then they have an eXp, then they have an E and P and then we commercialize it. So As a small company, usually this cycle can take up to 2 to 3 years. As a small company and a small And very talented people like we have with ICE, we are targeting 1 year, so 12 months for that EXP.
So basically, we put the investment that would be called for an additional investment and then the product will come in a year's time For us to be able to take it and pilot test it, whether we're going to pilot test it directly in Middle East or we're going to pilot test it first in the U. S. Then transfer it to the Middle East, that's yet to be seen. But today, Igor, we have around 4 or 5 of those that we are working on. And then it's again, that's our R and D.
And that's what I always explain. That's our philosophy of open platform. So we target with very innovative People and we give them money to try to start a new project or a new tool or a new idea And that's how we see how it will work and then take that outside. We have some we have one of them that we've been Investing now more than a year and but it's because it's heavy in electronics, I don't see this, for example, until next year. That's why we don't announce about it, right?
But We are working on that. That's our R and D arm and that's how we do it.
Neet, appreciate the color. I'll turn it back.
Thank
you. And our next question comes from Blake Gendron with Wolfe Research. Please go ahead.
Thanks. Good morning. I wanted to follow-up on the unconventional opportunity and really just frac broadly. I think before Where there was more focus when this was ramping up, there was one unconventional fleet in Saudi and then maybe another quasi unconventional slash Conventional fleet in Qatar and maybe rotating between a few countries. What operations look like now and now that we're getting through the pandemic Somewhat here, slowly but surely, what's the ambition to grow that part of the business for Nesser?
Thanks, Lee. So let me just emphasize. We have today 2 fleets in Saudi Arabia. So we have And they are working actively between Jafura Basin and the Salka War. And again, Saudi has been really a pioneer in developing those fields and State of the art, what they have done.
So we are working with them. We are in discussion, as I explained earlier, with 3 Other customers and other countries to start the frac business in those countries. The discussion is very active. We are our ambition is to land 2 of those before year end. So As I explained before, what our aim is to have 4 fleets in the country in those countries Before year end, and my expectation is we're going to have 1 in H1 and 1 in H2, right?
So that's exactly Then obviously you're going to see real revenue in, I would say, in the second half of the year. The client Majority, we have a lot of clients that are working ground the clock around those activities. You have to again differentiate in the Middle East Between unconventional and the convention. They do frac in the Middle East, but they do not frac what you know in the U. S, whatever you have.
The only that style of multi pads, fifty-sixty stage per well is only done today in Jaffora Basin. The rest It's really much smaller footprint. But you have a lot of fracs. You have fracs in Oman, since very long time. They have tight formation.
You saw the announcement of UAE with His Excellency with ADNOC and Total, And they exported they said they exported the 1st unconventional gas from Diab. It was announced. Definitely, they have a huge program In UAE for the unconventional, you have unconventional everywhere, but I think the main activity Or the mature activity is always going to be in, obviously, it's in Saudi because of the size and then you would see more and more coming. So we are in a very, very, I would say, good shape to announce hopefully The awards of those fracs before year end.
That's very helpful. Moving to the back half And the double digit activity increase that you anticipate. It was helpful to hear about the equipment readiness. It was helpful to hear about the split between PS and DE. Just wondering in terms of your market share assumptions, it sounds like you're still going to be able to outmaneuver some of the smaller competitors that are maybe cash strapped.
It was our understanding though that through the pandemic you were able to also maybe outmaneuver some of the larger competitors just because of travel restrictions. Do you anticipate those larger competitors perhaps reestablishing some share in the back half of this year? Or Is it still very much necessary for the taking just given your nimbility and equipment readiness?
So we're obviously Very careful about everybody and we I would say we have a lot of respect to every competitor we have. I would say that we have a path of our growth and our market share. I don't see this hampering or slowing down in the near future. Part of it is what we explained that we Understand the customer extremely well. We have kind of, I would say, visible Activity, what's coming in the second half, we prepare those equipment, we prepare the people.
Honestly speaking, I don't think anybody else is. So there is a lot of constraint on the smaller guys for cash Trap or profitability, etcetera. And some of it you have to really, I would call it, bite the bullet And again, be socially responsible, especially with the pandemic, not to release the people, to make sure that you have your crew ready. Make sure as well you take care of them and their family, etcetera, and this will pay out, right? So we have readiness In a lot of the countries where I see our small competitors not ready, I see again the cash trapped People or some of the competitors or even the international ones, some of them have some issues with the CapEx deployment.
I don't see I'm not saying that the big guys are not ready. They are obviously, but I don't see them being able to take part of Our the growth order that we are forecasting, I see that we are going to have the market share gain that we are planning And I see that we are very confident that we're going to have the second half with double digit on the first half. The path is clear and I would say that we will make our numbers.
That's totally fair. One more housekeeping, if I could squeeze it in here for Chris. It looks like very few charges and credits This quarter, obviously versus last quarter, and it was largely due to the transaction costs, it looks like in this quarter. I know we had previously We talked about logistics costs associated with pandemic and how you included those in numbers and not wanting to adjust those out. But Chris, are those charges and costs Still very much there and do you anticipate those to moderate through the year?
And do you have any visibility into sort of the pace at which those heightened costs moderate for you?
The costs are there. As Sri said, the real key is having the revenue growth that will absorb them It would improve the employee utilization. That's really the key. So it's just getting the leverage back on those employee costs. The cost will stay.
The cost is not going away. They just need to be utilized.
Okay. Thanks. Appreciate the time.
Yes, I mean, if I just may maybe complement what Chris just said. I mean, if you look at our The way we structured our the whole thing of the CMT and crisis management team, etcetera, Yes, we just said that this is part of the business and you just have to live with it. You see what I mean? So your PCR test, Your extra people, your restriction on travel, your airport issues today, for example, I'll just give you an example that if you want to go To one of the countries, they are requiring you if you come from a certain, you have to stay in another country for 14 days. All these people go to that other countries, stay there for 14 days.
And then after that, what they call they are from the green country, Then they will be able to travel to the other one. And all this is part of our business. If I look at our transaction and cost, which we take out We call out that's all due to the nature of acquisition, M and A, lawyer fees, Some of the exit of some people, for example, if we do some restructuring and then all the stuff that we call out like The preparation for SOX and etcetera, etcetera. That's the only cost we call out because that's basically it should stop And going forward, you should not have that, right? So I mean, I would say, you might see it for a while because we are very active in M and A.
So you would see that, but definitely, as Chris explained, the pandemic and all the stuff, I cannot call this out because this might stay for I don't know how long, but definitely as we said, the CMT and the way we operate, We keep it the same way because we don't know how this will last, when it's going to stop, how it's going to work out. We are obviously working very hard with the vaccinating our people, but we do this with the government and with the clients and with the customers in the different jurisdiction, Right. So, trying to I
didn't know if it was a source of upside potentially for you as we move through here. I know you don't call it out and Appreciate that you don't call it out, but, you don't understand that there is a pandemic related cost that's in there. And I just didn't know if it was going to be a source of upside potentially For margins moving forward.
Yes. I mean, honestly, I there is an I wouldn't call it an I mean, Yes, it might be, but I have to as well be quite frank that you have as well we save some costs because nobody is traveling except Couple of people, right? So there is as well some cost avoidance working on a lot of people, especially on the management side, On Zooms, etcetera, right. But yes, it might be.
Thank you.
And I'm showing no further questions from the phone lines at this time. So I'll turn it back to management for any closing remarks.
Thanks, Christy. Thanks, everybody. Very excited again on a solid quarter and I would say very bright future. Quite optimistic actually about the next second half and next year. Thank you very much.
Thanks for your time.
And that does conclude today's conference call. Thank you for attending. You may disconnect your lines at this time and have a great day.