Q3 2021 Nabors Industries Ltd Earnings Call
[music].
Good day and welcome to the Nabors Industries LTV Q3 earnings teleconference call, all participants will be in listen only mode.
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After today's presentation there'll be an opportunity to ask question.
Please note this event is being recorded.
I would now like to turn the conference over to William Conroy VP Investor Relations. Please go ahead. Good morning, everyone. Thank you for joining Nabors third quarter 2021 earnings conference call.
Today, we will follow our customary format with Tony Petrello, Our chairman, President and Chief Executive Officer, and William Restrepo, Our Chief Financial officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect nabors to perform in these markets.
In support of these remarks, a slide deck is available both as a download within the webcast and in the Investor Relations section of Nabors Dot com.
Instructions for the replay of this call are posted on the website as well.
With US today in addition to Tony William and myself are Siggi Meissner President of our global drilling organization and other members of the senior management team.
Since much of our commentary today will include our forward expectations. They may constitute forward looking statements within the meaning of the Securities Act of 1933, and the Securities Exchange Act of $19 34.
Such forward looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission.
As a result of these factors our actual results may vary materially from those indicated or implied by such forward looking statements.
Also during the call we may discuss certain non-GAAP financial measures such as net debt.
<unk> operating income adjusted EBITDA and free cash flow.
All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise mean adjusted EBITDA as that term is defined on our website and in our earnings release.
Likewise, unless the context clearly indicates otherwise references to cash flow mean free cash flow as that non-GAAP measure is defined in our earnings release.
We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures with that I will turn the call over to Tony to begin.
Thank you for joining us this morning, as we review our results for the third quarter of 2021.
I will begin my remarks with some overview comments, then I will detail the progress we made on our five key excellence and follow with a discussion of the markets William will discuss our financial results.
I will make some concluding remarks, and we will open up for your questions.
Our operating performance in the third quarter was strong all of our segments met or exceeded the outlook. We gave a quarter ago on top of that we completed several milestones across our strategic initiatives.
Adjusted EBITDA in the third quarter reached $125 million, we maintained our execution at a high level. While we grew the overall business our global average rig count for the third quarter increased by two rigs excluding the impact of the sale of our Canadian drilling assets.
This rig count growth was driven by an increase in U S drilling activity.
Volumes in our drilling solutions and rig tech segments, both grew quarter on quarter.
That drove sequential increases in both revenue and EBITDA in those operations.
The third quarter again marked progress in our twin priorities to generate free cash flow and reduce net debt.
Free cash flow in the quarter exceeded $130 million, including the Canada sales proceeds without those proceeds and the funding for our geothermal investments, we generated free cash flow of $55 million.
This result was significantly above our expectations.
In line with the cash generation net debt decreased to $2 3 billion in the third quarter driven by the combination of our strong operating performance.
Disciplined capital spending improved working capital and our strategic capital allocation evidenced by the Canadian sale.
I am pleased with our financial performance, both in the third quarter and year to date.
Last quarter I highlighted five key themes that we believe support the neighbors investment thesis. These.
These drivers include our leading performance in the U S. The upturn in our international business, improving results and the outlook for our technology and innovation, our commitment to sustainability and the energy transition and our progress on our commitment to Delever.
Let me start with the U S performance.
Our margin performance in the lower 48 remains strong.
As we expected for the third quarter, we held daily margins above the 7000 dollar Mark.
This accomplishment was in line with our second quarter and with the outlook, we gave last quarter.
We believe our value proposition leads the industry, specifically in operational excellence advanced technology top safety performance and sustainability.
Our financial results validate this.
Next our international business, we bring the same elements that support our lower 48 business to our international segment are.
Our financial results are benefiting from outstanding performance in the field and highly disciplined capital spending.
Daily drilling margin in this segment remains robust.
As you look through the end of the year and into next we have visibility to reactivation of three more rigs in Saudi Arabia.
This is in addition to the to restart that recently occurred currently we have 40 rigs working in Saudi Arabia.
The ink Kingdom rig Newbuild program is progressing.
Based on the manufacturers delivery schedule, we expect to deploy the first of Senate five awards in the first quarter of 2022.
The balance should come at approximately one per quarter.
We expect each of these rigs to contribute annual EBITDA of approximately $10 million.
<unk> long term plans call for a total of 15, new bills over 10 years.
Each successive generation of five rates today of $50 million annually.
Through the end of 2022, we have excellent visibility to growth it sounded from expected rig activations and new builds with that expected growth our international EBITDA could increase by 20% versus the third quarter just reported.
Let me next turn to technology and innovation.
Our advanced technology is one of the key drivers of our industry, leading performance our portfolio continues to gain traction in the market.
Quarterly EBITDA in our drilling solutions segment increased sequentially by 22% this.
This business has scale and is an earnings multiplier on top of our drilling business.
Beyond this performance our technology pipeline remains full.
Penetration on Nabors, lower 48 rigs and on third party rigs increased revenue on third party rigs improve sequentially by more than 20%.
We continue investing in apps and products that are deployable on third party rigs notwithstanding that feature the full potential of this portfolio is maximized on nabors rigs.
In the third quarter, 74% of our rigs in the lower 48, we had five or more Mds services.
This compares to 62% in the second quarter for.
<unk> in total we are committed to expanding our digital portfolio further over time, we expect to see greater penetration of these products across the market.
Next I would like to highlight a significant technology breakthrough.
During the quarter, we deployed the industry's first fully automated land rig the pace of our 801.
Earlier this month regained one reached total depth of 20000 feet on its initial well.
This range incorporates a number of innovations.
It features our fully automated robotic drilling package. It also incorporates leading edge controls as smart suite drilling software.
The rig run casing automatically with a high degree of precision and without the need for a separate casing crew and equipment.
With this design, we have removed the rig hands from the rig floor with less physical labor required regain one has the potential to greatly expand the pool of talent available to work on our rigs by removing people out of Harm's way. We're confident this rig will experience a step change improvement in safety performance.
With all this figure has to offer we've already seen interest from other operators.
Now, let's discuss delevering.
The third quarter marked significant progress to improve our capital structure.
Free cash flow in the quarter was strong.
We remain committed to a multifaceted approach to de lever. The primary focus is to continue delivering free cash flow.
Our results thus far this year demonstrate our commitment and illustrate our success.
But we're not finished we look forward to reporting additional progress in the future.
I'll now finish this discussion of our themes with sustainability and energy transition.
We continue to refine and enhance our focus on sustainability.
We made additional progress on our environmental and social scores from ISS.
We remain on track for an additional 5% reduction in greenhouse gas emissions in the U S in 2021 or.
Our employee safety record measured by tier IR has improved each quarter. This year. This TR IR performance leads our industry.
We also made progress in our energy transition initiatives. We are currently testing prototypes of our carbon capture and hydrogen technologies. These results have been encouraging we have several more projects underway as these proceeds will be reporting the results.
During the third quarter, we completed investments in three early stage geothermal companies. We now have a portfolio that covers a spectrum of innovative geothermal technologies, we view geothermal as immediately adjacent to our existing business.
Each of these companies will benefit from our asset platform as well as our engineering and manufacturing expertise.
We are excited to help drive the widespread development of this source of renewable Baseload energy, we will help these companies cut down the time required to reach their respective commercial stages, our global presence technology at scale will be applied to drive these and other initiatives in the transition space.
We are taking a three pronged approach to the transition.
We reduced our own carbon footprint by applying new technologies, we can expand these technologies to other verticals.
And we can take advantage of the opportunities in areas adjacent to our activity by investing in these companies and helping them to reach scale.
Now I will spend a few moments on the macro environment.
The quarter began with WTO you're above $70.
At the end of September <unk> was in the mid seventies. Since then it has reached the $80 Mark where it remained recently this range should be conducive to increases in drilling activity across markets.
Next I'll review, the rig count comparing to the averages of the third quarter to the second quarter. The Baker lower 48 land rig count increased by 11%.
According to Inverness from the beginning of the third quarter to begin to lower 48 rig count increased by 47% or approximately 9% smaller clients accounted for nearly all of this growth.
Once again, we surveyed the largest lower 48 clients at the end of the third quarter.
This survey group accounts for approximately a third of the working rig count.
Our survey indicates an increase in activity approaching 10% for this group by the end of the year. This outlook is consistent with E&P spending increasing going into the end of the year. It was very encouraging as we look into 2022.
We also see potential activity increases in our international markets in particular, we have visibility to reactivation of suspended rigs in Saudi Arabia.
We recently added an additional rig in Latin America, and we are optimistic for additional rigs beginning early next year.
I'll wrap up this macro discussion with an update on our labor availability and the global supply chain.
For labor, we have been successful at recruiting and staffing to support our increases in activity recently this has become more difficult, particularly in the lower 48.
As a consequence, we raised compensation in this market during the last quarter. This increase has helped and we are monitoring whether additional steps will be necessary.
Now, let me address the supply chain, we continue to see moderate cost inflation and lead times have stretched significantly with our global systems were able to maintain operational continuity.
I would also like to point out that we have delivered on our margins.
Cost increases we have experienced have been offset by similar increases in our day rates for the fleet.
To sum up commodity prices have continued to rise as global economic activity has increased.
In their current range oil prices generated favorable operator economics in virtually all areas, where we operate.
Natural gas prices have increased to levels not seen in more than 10 years.
We have observed early signs of increased interest from operators, which could benefit from these higher prices.
With that in mind, we remain vigilant to potential disruption from the virus and challenges in the economy.
Those risks notwithstanding the current commodity environment supports an increase in the level of drilling activity.
Now, let me turn the call over to William who will discuss our financial results and guidance.
Thank you Tony and good morning, everyone.
The net loss from continuing operations was $122 million or $15 79 per share. The third quarter included a $13 million after tax nonrecurring expense or $1 63 per share related to the purchase of technology in the energy transition space.
This compares to a loss of $196 million or $26 59 per share in the second quarter.
The second quarter results included charges of $81 million after taxes, mainly for an impairment of assets on the sale of our Canada drilling rigs and a tax reserve for contingencies in our international segment.
Revenue from operations for the third quarter was $524 million, a 7% improvement compared to the second quarter, Excluding Canada revenue increased by 9% with all of our segments, providing strong contributions both in the U S and internationally.
Rig technologies and drilling solutions were particularly strong growing by 22% and 17% respectively.
The constructive commodity price environment has continued to drive additional rig awards throughout our markets.
In the lower 48, we are seeing increased rig demand from larger public customers. In addition to continued expansion for private operators.
<unk> awards in the Bakken point to increased activity in that basin.
In addition to the steady growth we have experienced in the southern regions of the U S.
Internationally, we expect continued expansion in Latin America, and the Middle East.
Total adjusted EBITDA of $125 million increased by $8 million or 7%.
Early termination revenue in international and improved activity in the U S more than offset lower rig count in Latin America, and lower margins in Mexico.
U S drilling EBITDA of $62 1 million was up by $2 3 million or 4% sequentially or.
Our lower 48 rig count increased by $4. One from 63 five in the second quarter to 67 six in the third quarter.
Daily rig margins came in at $725 in line with the prior quarter.
As utilization for high spec rigs continues to improve increases and leading edge day rates have accelerated significantly.
Although this price momentum has translated into higher average revenue for a fee.
The resulting quarterly improvement was offset by wage increases for our rig crews.
For the fourth quarter, we expect average daily rig margin to remain in line with the third quarter.
Market day rates to continue to move upward as the market tightens.
While we expect further wage adjustments for our rig crews.
Although these wage increases are largely recovered from our customers.
The compensatory day rate increases normally come with a lag.
Currently our rig count stands at 72, we forecast an increase of 5% to six rigs in the fourth quarter versus the third quarter average.
On a net basis EBITDA from our other markets within the U S drilling segment remained in line with the second quarter.
For the fourth quarter, we expect to add one rig in Alaska. However, the EBITDA impact of this increased activity will be offset by expected downtime related to re certifications on our largest offshore rig.
International EBITDA gained almost $5 million in the third quarter or 7% sequentially.
Is $7 million in early termination revenue more than compensated for a move related decrease in Mexico.
Daily gross margins for international increased by almost $1000 to 14375.
Early termination revenue added $1100 per day to our margins, but the Mexico moves offset some of the improvement.
In Mexico performance should improve in the fourth quarter, but we expect rig moves and idle time between contract expiration and renewal to still affect the fourth quarter margins.
Without the early termination revenue and with the anticipated improvement in Mexico, the fourth quarter daily margins should come in between 13000 and $13500 per day.
International average rig count came in at 67 rigs, a one rig reduction as compared to the second quarter.
The lower rig count reflected incremental rig count and Saudi Arabia, offset by idle time between contracts in Latin America.
Current rig count in the international segment stands at 69.
Turning to the fourth quarter, we expect international rig count to increase by four rigs as additional rigs are reactivated in Saudi Arabia, and Latin America.
Drilling solutions EBITDA of $15 6 million.
It was up $2 8 million or 22% in the third quarter.
Penetration improved across all of our product lines with the largest contributions coming from performance software in the U S and casing running services globally.
Activity in the lower 48, generally improved taking our combined drilling rig and drilling solutions daily gross margin to $8900.
This translates into a $1900 per day contribution from our rapidly growing solutions segment.
We expect adjusted fourth quarter EBITDA for this segment to further improve on our strong third quarter results.
Rig technologies generated adjusted EBITDA of $3 million in the third quarter, a $1 million improvement.
The growth was primarily related to higher equipment sales.
In addition to the already increasing spare parts repairs and certification revenue, we're starting to see additional sales for rig components.
We believe that rig upgrades as well as upgrade cycles for specific components like top drives and catwalk should drive higher capital equipment sales going forward for.
For the fourth quarter EBITDA should continue to improve on higher capital equipment sales and repairs.
In line with the stronger results liquidity and cash generation exceeded our expectations.
In the third quarter total free cash flow reached $133 million.
This compares to free cash flow of $68 million in the second quarter.
The third quarter included a net benefit of $78 million from strategic transactions.
Namely the sale of our Canadian business or <unk> $94 million.
Partly offset by several investments in geothermal and other energy transition initiatives.
Outside of these transactions, our free cash generation of $55 million.
Reflected the strong operational results.
Disciplined capital spending and continued progress on working capital reductions.
Free cash flow for the fourth quarter should reach 80% to $90 million. This.
This translates into a total 2021 free cash flow of around $350 million.
Capital expenses in the third quarter of $62 million.
Including $19 million for Newbuild were down from $77 million in the second quarter.
The $50 million reduction reflected 13 million lower spend for the <unk>.
In the fourth quarter, we now forecast roughly $80 million in capital expenditures, including $30 million for the Senate Newbuild or.
Our forecast capital spending for 2021, it's approximately $270 million, including $90 million for Saudi new builds.
Our net debt on September 30 was $2 3 billion, a reduction of $120 million in the quarter.
And the start of the pandemic, our net debt stood at $2 9 billion.
We have reduced our net debt materially despite the challenging environment.
The third quarter was a further demonstration of Nabors meeting operational performance both in the U S and internationally with a potential for meaningful growth in the year ahead.
Our strong operational performance is also translating into robust free cash generation, allowing us to reduce our debt materially.
We expect further net debt reductions in the fourth quarter and in 2022.
With our rapid progress and technology introduction, our modern industry, leading fleet and our close relationships with customers across the globe Nabors has never been stronger operationally.
And with our deleveraging efforts over the last five years, our capital structure and debt profile a considerably stronger than they have been in a long time we.
We believe we are much better positioned to reach our leverage targets while.
While taking advantage of the numerous opportunities presented by the improving industry environment.
With that I'll turn the call back to Tony for his concluding remarks.
Thank you William I will now conclude my remarks this morning with the following.
These third quarter results on top of performance in the second quarter reinforce our conviction that we have the right strategies to reach our goals, we made significant progress to improve our capital structure.
At the same time, we advanced both the development and deployment of multiple impactful technology solutions. We are committed to responsible hydrocarbon production as we pursue initiatives to support the energy transition.
In the face of the challenges brought on by the pandemic Nabors has demonstrated material progress along both fronts.
As well our financial results have proved resilient.
Demonstrating the value embedded in our global portfolio of businesses with although we have achieved so far I am confident the best is yet to come that concludes my remarks. This morning. Thank you for your time and attention with that we will take your questions.
Okay.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our.
Our first question comes from Taylor <unk> with Tudor Pickering.
On hole <unk>.
Hey, guys. Good morning, and thank you. My first question on International you mentioned, a number of different regions, where you are.
You're seeing some improved.
Rig add opportunities in the.
Presentation, you called out, Argentina, Colombia, Kazakhstan, Kuwait, and Oman, and maybe if we just exclude Saudi for amendment, which obviously is going to be a strong growth market for you. Both in Q4, and certainly in 2022 and beyond.
But excluding Saudi for a moment I'm, just hoping you could kind of compare and contrast, what you're seeing from a.
Rig tendering environment perspective, or backdrop perspective in both Latin America, and the middle East and the Middle East feels like some of these tenders and have continued to be delayed due to COVID-19, but are starting to now re emerge at some of the COVID-19 issues that have died down a bit Latin America seems to be gaining a lot of momentum. So I'm. Just curious if you could compare and contrast, those two markets as we think.
About 2022.
I think you hit it all right on I think Latin America in particular, Colombia, and Argentina, we are seeing some visibility into <unk>.
Rig increases next year in both in both markets there.
Obviously <unk> was a big factor in Argentina in particular.
But our rig count in Colombia, I think we're at seven rigs right now and I.
I think we see visibility for several additions during the course of next year. There are achieved at the same in the Middle East Youre absolutely right. Kuwait. For example has been on everyone's talking this for years in terms of tenders, but again, we're seeing some solid activity, suggesting that we're actually you'll see some real steps taken in that market.
Similarly in eastern Hemisphere, as well, Kazakhstan as well so.
I think.
You can't ever say things are well.
We will happened later, there seem to be given COVID-19, given extra knowledge, but I think the tenor of the market has changed and I think people are making concrete plants and steps in each of those areas that gives us a robust view of international for next year and that of course is on top of our.
Our position in Saudi where the visibility is very clear in terms of what there as we said in the remarks two rigs just started in the at the end of the third quarter that we will have a full two quarters a full quarter in the fourth quarter for those two rigs and we have two additional rigs existing rigs to go back to work to our rig count will get to 43 by.
The second half of 2022, and plus the Newbuild starts and.
The illustration of that.
Potential activity is that with the new builds in 2022 that that should add about $20 million EBITDA on top of the $75 million exceed $75 million run rate roughly in the last quarter that $300 million, that's a pretty healthy increase and by the first quarter of 2023.
That number is about $50 million center, almost a 17% increase in that market alone and by the following year. When you have additional rigs hitting the mark in 2023 that goes up roughly $70 million. So you have extraordinary double digit growth there on top of the other markets, we talked about that too.
Why we think international.
Our position internationally I think it's actually second to none right now and the visibility is pretty clear obviously in Saudi Arabia, it depends on things not in our control.
<unk> has been pretty clear about their desire to increase that.
Capacity from $12 million to $13 million 12 to 4 million barrels for $30 million.
13 million barrels and given that.
I think all signs point into in the right direction, but obviously, it's going to be up to a record with the paces and how fast it's going to happen.
Alright, good to hear thanks, Thanks for that and my follow Up's on Mds.
The business continues to gain strong momentum I think you said revenue from third party rigs is up 20% sequentially, which is a really strong.
And.
The strategy you outlined at the analyst day, a number of years ago, and it seems to be playing out pretty well.
My question is as we think about growth opportunities on the international growth is obviously one but.
Question on the current portfolio I think you made the comment Tony on on the call that you are continuing to improve your digital sort of portfolio or capability and <unk> just curious more color on the digital side of things and <unk>.
Whether it would be well construction services or other types of services that you can offer on the rig and the other parts of the portfolio that you're not in today or that you are small in today that you see.
Being a good opportunities for growth in 2022, and beyond whether organically or inorganically within Mds.
That's a mouthful of question.
So let me take it far away first of all I think as we said in the prepared remarks, there's a lot of room for additional penetration not only in U S and internationally. If you take the international the U S. Number is $91 per day per rig additional margin equivalent in the U S internationally that number's 40, Undrawn today, that's 0.1.
Two even with the existing portfolio expanding some additional content with the stuff we have in the pipeline right now those margins could actually double in terms of content.
What existing technologies, we have available today and so there's a double hockey stick here, one is to increase penetration and two to move into some other additional services that are in our portfolio and that combination is what we're focused on right now I think on the automation front in general I think we've invested a lot as you pointed.
We kept the decision back in the analyst day, when we talked about automated directional drilling back then.
What we're talking about today, and we're trying to imitate us and do it.
I think.
The robotic rig that you heard about today has had extraordinary spinoff applications is sort of like what happens with the Moon project, when Massa, which developed stuff that actually helped us develop a robotics sequence the engine, which caused us to have process automation today on our rigs and that process automation is driving a lot of the growth and our goal is.
To make that available to third party rigs, which may sound crazy to some people, but we view that the industry needs. This is therefore, we're committed to actually making it available including the competitors similar to way our philosophy on Ken Rick as you know Ken right, even though we're vertically integrated we commit to provide.
Equipment to third parties in my view is that that challenges us to be best in breed by doing that because we have to demonstrate we can beat out the competition today when I compare my top drive to the leading top drives the market leading manufacturer I should say size wise.
I think ours is second to none in fact, our newest tough driving I think beats everybody in the marketplace hands down is as we are rolling out the new top drive so that philosophy is coloring, our Mds philosophy, and we've had some conversations with operators, which you can see third party growth growing where people realize we all need to this automation and maybe it's better to work.
Together to expand it as opposed to everybody, creating their own and are similarly in Orange Street, we've historically been bad about that if you compare us to the technology industry like Apple Microsoft their competitors.
You see Microsoft word or the office works on Apple platform and they have no problem doing that in our industry, we seem to be reluctant to try to do things like that but we are committed to try to grow the third party market as well as the as our own our.
Our own basis, well, so that's part of the strategy and that we think gives us a great opportunity.
Got it thanks for the sponsor very helpful.
So I think I'll add to that I mean.
Our rig technology segment was two thirds of our sales are outside neighbors.
That's not the case that aid Mds. So we think the potential is enormous outside the nabors rigs. So as Tony mentioned, we're going to increase penetration within nabors rigs, we're going to continue introducing new products and but the biggest market is really outside <unk> and thats, a big part of our strategy.
Obviously theres customers.
Don't want to focus solely sole source orders with one operator with one drilling contractor.
And at the same time, they have robust automation needs and technology needs and so for those customers in particular, everyone knows getting there is a big journey and it's hard to do that in our bidding strategy. So people will be choosing technology partners to help advance that we think we can.
Help them along that regard by making that automation available to our competitor rigs, even though they're not using only nabors rigs and thats part of the logic here because we know we are not going to own the whole market in terms of ire, but if we can make mds stuff available on more rigs that helps everybody. It helps the operator in terms of standardizing what their desires are at.
Helps us gain share and frankly it helps.
Third party drilling contractors that haven't made those investments to be more efficient quickly.
<unk> still got some slice of that action as well out of the out of the rollout. So that's the concept.
Awesome, all lots of interesting things going on there. So you got to stay tuned moving forward. Thanks for the answers that's it for me.
Okay.
Our next question comes from Connor Lynagh with Morgan Stanley. Please go ahead.
Yes. Thanks.
I was wondering if we could just talk sort of broadly about pricing.
Obviously your thoughts around the U S would be great, but would also just depreciate, it and understanding of where things stand internationally.
At a global level, how much do you think you need to raise pricing to offset the cost inflation dynamics that youre talking about specifically is labor.
<unk> pass through in your contract structure or do you need to raise pricing.
To address so I'll, let <unk> address the pass through cost stuff.
Yes.
The vast majority of our contracts in the U S.
<unk> adjustment clauses.
Sure for labor, which are kind of automatic we have to ask for them of course, but so there is a bit of a lag and you missed one one or two months.
<unk> of higher cost versus increases right, but that is kind of automatic and it's part of the.
The accepted practice in the U S.
Internationally, not so much but we're not seeing the same dynamic.
Our compensation increases internationally that what we're seeing in the U S.
So I think we have we think because we have been in this COVID-19 and in distress kind of environment for for over a year.
We think our compensation fell somewhat behind other industries. So there's a bit of a catch up going on now and I don't mean, our neighbors I mean hours in the drilling industry. So so youll see a little bit of that where we bring our compensation to levels that make us competitive across industries.
But those I don't think those numbers are tremendously high we probably we saw an impact somewhere in the range of $300 per day in the in the third quarter, which we offset with that with price increases and the actual compensation increases on the day rate having.
And yet so.
Those will come in the pricing I'm, referring to is actually the pricing in the U S, which has gone up and I can tell you we are.
I'm always cautious when I when I try to look forward in terms of pricing in and not assuming the best.
Outcome, but I can tell you that based on all the contracts that we have signs lately.
Our rates now are solidly mid 20, K environment before in the second quarter. It was kind of hard to get above 20 now the latest contracts were asking customers for 'twenty, two K and theyre not flinching. So I think the environment has changed has changed materially and is changing in favor of the drilling.
Contractors.
Internationally, our pricing did not fall nearly as much as what we saw in the U S. In fact, you can see that our margins throughout the downturn really stayed around the 13 and $14000 range, where they remain today, so pricing increases or not really.
And it's not really the same dynamic pricing really didnt really full.
<unk>, we saw in the U S.
I think international margins also will depend a lot on mix as well as <unk> as well as depending on the size of rigs et cetera. The other point I'd make is that if you look at the average day rate Youll see.
It was up $300, which represent the fact that leading edge rates are crossing the.
The average of the fleet as we have said so we are pushing in the low twenties right now.
And the point is if.
If our estimates are correct that we intend to exit the quarter close to 80 rigs that will be about 70% of our super spec.
Fleet and as you well know as you get to 70%, that's where the hockey stick in the industry starts affecting pricing. So I think all that is very constructive suite, where we are but obviously as we have said there has been we have this compensation stuff that's working its way through et cetera, but I think it's very constructive booking for next year by the way next year in terms of the <unk>.
Macro the operators.
Obviously facing a great environment right now obviously, the Supermajors, probably will we be reporting a record quarter probably record.
Record incentive bested about 10 years and that sets up nicely at the same time. However, I think everybody has to be measured here I think capital discipline is here I don't think it's going to necessarily go away.
Immediately at all if at all and you'll see some operators emphasized that in terms of being innovative with new structures. One operated particularly came up the fix.
Of the fixed variable dividend to emphasize their commitment I think other operators trying to figure out ways to reinforce that as well. So I think all that sets up for a constructive environment going forward.
And in terms of talking with them it looks like about half of them that we have talked to that have indicated plans already somewhat.
Increased connection or modest others that are doing going through acquisitions are still digesting their plants in terms of acquisitions what effect. They are having under rollout for next year, but all that sets up I think we are deliberate increase for next year given the macro.
Yeah.
Got it that's helpful context, maybe turning to the balance sheet sort of a two part question here, but the first part is just a simple clarifying question, which is just what drove the increase.
And debt levels in the quarter it was that a revolver draw or what and then just thinking through 2022.
How should we think about your ability to delever in spite of the needs to increase capex. Okay.
Okay I'll answer the first question, which was that the.
Yes, you saw the total debt went up $2 52.
But the cash also went up 372, <unk> net debt to emphasize went down $120 million and thats because free cash flow in the quarter was $1 33, It was 55 X Canada.
The energy transition investments.
I think you pointed out exactly what occurred there was a drawdown on the revolver that occurred in the at the end of the quarter that revolver balance is down to you will see in the Q that number was nine a quarter and that number is now 595, so yes basically.
Basically that management issues. So we move cash around we do legal entities.
Yes.
Cash closeout in cycles and comes back in normally we do this during the middle of the quarter, we had a time sensitive.
And then and then halfway.
On the first week of October the revolver balance was down again by $300 million.
The important parties net debt went down by $120 million in the quarter and we expect to continue reducing it in the fourth quarter and we did pay down the $82 million of the September maturities.
Add on I would like to make is given what we're seeing this morning some comments.
I just wanted to clarify our EBITDA for the quarter.
The number we reported was 125 I just want to make sure you understand that.
The net of the early termination international early termination in Mexico, and other onetime items was actually a net positive of three so if you actually back that out the adjusted number for the quarter ex one time items was actually $1 22, which is about five.
<unk> 5 billion above the 117 consensus I think some people got confused by the reference to the $7 million thinking that was all that was a gross or net number but it's not the net number is actually $3 million. So the ongoing number for the quarter ex those onetime numbers was actually 122.
Okay.
Alright, Thanks ill turn it back here.
Okay.
Okay.
Our next question comes from Aaron.
<unk> with J P. Morgan.
Please go ahead.
Yes. Good morning, good afternoon, Arun <unk> from JP Morgan.
Tony I want to go back to some of your comments on some of the increasing engagement youre seeing from public companies.
So I just wanted to get your thoughts on obviously the publics have been in a very very disciplined in.
In 2021, and haven't really changed Capex. Despite the strong commodity prices, but what are your sense as we get into 2022.
The public's could do next.
Next year I think we're modeling kind of a mid 20% increase in U S land activity, but I wanted to get your thoughts on how you see the market.
Evolving next year.
I think as I said I think the.
When you look at I mean, obviously from a from a balance sheet point of view of the situation is improving quite a bit but I don't think theyre going to put foot to.
The pedal.
In the past and based on our conversations I think we're seeing modest increases and I think that number's probably towards the upper range driven.
Out of the box I think people really deliberate in terms of what they do right now I think one of the first priority for these people are going to be as tier one operators in general come back to work I think quality of operations, it's going to be a big a big part of their thinking now people are all aware now to execute better and we want to execute better you got to focus on your existing quality.
So I think in the operators, we're looking at in terms of our pipeline I think a lot of them want to basically high grade some of their existing.
Contractors as opposed to necessarily immediately go into increasing fleets and so youll see some replacement as operators decide to focus more on automation they pick a strategic partner for that they're going to want to upgrade to pick a person that can be a partner to take with them I think that's going to be the first step on the journey and then and then depending on the success rollout.
I'll put.
Foot to the pedal.
<unk> dramatically but.
I am not I don't want to tout the survivors to create the speed got rocket take off in the first of the year.
But let's not.
Understated either I think we are looking somewhere in the range of 15% growth for our activity next year, which is not.
And insignificant.
15% from the from the year end exit rate or year over year net correct, yes, yes.
Fair enough fair enough okay.
Great and then just my other question you guys have highlighted how kind of leading edge rates are eclipsing the 20 K per day.
And I wanted to get a sense of.
How would you characterize the demand patterns.
From high spec versus more standard equipment or are you seeing a bifurcation in rates between different rig classes.
Well if you look at our existing working fleet is all 100% high spec and I think thats at least the operators we're focused on.
That's where the value prop is for us in particular, and Thats, where I think the market is particularly those people as I said I want to focus on quality and getting the best returns out of their operations.
The value prop from that is so clear and therefore, that's what's going to drive things I think obviously, the privates are more commodity oriented and different dynamics in terms of their economics. So I think theres going to be a whole other rigs are not going to disappear in the market. They never have there's always going be a legacy tale of those other rates, but the high spec.
Rates are.
<unk> today fully utilized thats, where we see the growth go forward.
In terms of data of idle idle capacity still in the Super specs in the market in general.
That starts to tightened we may see more increases in non high spec rigs as well, but there's still enough high spec rigs out there that that's going to be the first pool.
That clients will try to sign up.
And how would you guys gauge cut reactivation cost. So if you go from 80 to 90 9100.
A sense of those reactivation costs right.
Right now I think we've done a great job of stacking out our procedures second order rates. So I think the return back to work for us is that going to be very disruptive costly to do that we don't see that as being a big hurdle.
So we were discussing this earlier and there's a lot of demand we have the rigs the rigs that are in great shape I think the challenge for the industry will be the accrued right. If we're all trying to increase at the same time.
Yes, that's going to be the bottleneck I think.
Everything else should be fine.
That's great color. Thanks, a lot guys.
Our next question comes from Carl Blendon Lynch Goldman.
Goldman Sachs. Please go ahead.
Hi, good morning, Thanks, very much for the time I appreciate it.
I just wanted to follow up on the balance sheet. I think you provided some color on the debt draw at the end of the quarter from the revolver and the cash increase.
I was interested is there any connection there with that and you mentioned some debt management issues and.
Potential flexibility it might give you as you think about liability management and debt reduction goals over time, which you have been progressing on and you have some more more priorities in the coming quarters.
No I mean, we there is a lot of circular movement between legal entities like I said, it's usually happen in the middle of the quarter.
We had a time sensitive one that we have to do and have the transaction was in Q3 have the transaction at the beginning of Q4, but the net of it is zero so thats really.
There's really nothing there.
Understood.
You had good progress on on free cash flow. Some of that has been from working capital I'd be interested is there more you can do from a working capital standpoint in <unk> and then also into 2022.
I really do think thats low hanging fruit.
We still have a lot of ideas and we're working on not only the team is extremely motivated and have done a great job on the collections.
I'm extremely proud of what the guys have done because a lot of what we've seen over the last two years has come from being much better on our working capital management, but now we have some ideas in terms of automating some of our processes.
And putting more incentives on the true. So we think we will continue to see that in 2022 to the point that the growth in activity Thats coming will be offset largely by a lot of those initiatives that are already started and will continue to bear fruit in 2022.
So if I can squeeze just one more on the cash front in terms of the funding strategy at <unk> is it still the.
The base plan to just fund organically from sign ups from the cash that's there plus free cash flow thats generated at the entity or could there be other.
Ways you approach the.
The growth capex needs in the region.
Got it.
<unk> forecast and I think with a realistic pace of additions of rigs over the next several years.
Given the fact that they've managed to accumulate a bunch of cash.
Due to delays in Saudi Arabia is really not that stressed in terms of the ability to fund organically.
Obviously.
There is potential there too to stock more cash out of China.
And by by doing some sort of an asset financing within China, but thats not really in the cards today and I think by 2024.
Simon will turn around and the new rigs plus the legacy rates will will generate enough cash to not only pay for the new rates that are being built but also to allow for dividend to the shareholders.
All very helpful. Thanks very much.
Your next question comes from Grant <unk> with Bank of America. Please go ahead.
Hey, good morning, guys, it's Greg Brody.
I was wondering if you could just.
Address.
Plans are right now for the revolver.
The process stands in terms of.
Renewing it.
So that process is always under discussion.
We like to do things early so obviously.
We've we've already amended the revolver multiple times.
We will continue to do so as needed.
Yeah.
I'm not going to telegraph right now because obviously there are multiple options on what we could do with a revolver, but you can be sure that's something that it's on my radar screen and it's at the top of my radar screen. So so.
So that's as far as I'll go.
Got it.
Won't push anymore I'm sure, we'll hear about that.
And then the next quarter.
I saw that that numbers in the presentation. Just curious if you can tell us.
The warrants if there were any exercises that were that were paid for with that that was part of the debt reduction.
How much of that you've seen to date.
Well I think the warrant.
It has some specific requirements.
To create the <unk>.
Arbitrage opportunity for the bondholders to exercise those warrants and and submit their debt.
And those conditions haven't yet been met one of MSS certain level of share price, but in another one we have to trade.
With a 6% improvement over the past three days, so those conditions need to be met somewhat simultaneously, we haven't met him yet.
So we haven't seen exercises yet, but the fact that our that the bonds that are in <unk>.
Eligible for exchange are trading at <unk>.
Very very high levels indicates that there is a compressed demand to do that and some a lot of the bondholders have piled onto those bonds because they see the arbitrage opportunity. So once those conditions are met I think we will see a lot of movement.
There has been some exercise by bondholders to test the process because it's obviously a unique structure. So we have had some sub testing of the process with a minor amount of bonds, but as William said now that stock is in the 125 area. So.
Wasn't a 125 area throughout the range where.
In trade and you've qualified incentive shares that combination makes it very attractive for the debt for debt holders convert we think 120 is a trigger point yet.
But then you need to meet the condition of the 6% trading so so that's yes.
I think as we move forward.
It's very likely that that these warrants we will become a factor.
Alright. Thank you for the time guys I appreciate it.
Our next question comes from Andrew Ginsburg with.
<unk>. Please go ahead.
Hi, guys. Thanks for taking my questions.
One thing I wanted to get a better idea. So we're talking a lot about on this call some of the.
Labor inflation and labor pool being some of the bottlenecks do you see that as being a large demand driver of some of the automated services you guys are providing.
Well I think obviously one of the things is to attract people in our industry to our industry and frankly be speaking very frankly, when people think of a drilling rig they think of a person that is <unk> covered with mud and has had an accident with a finger missing right as to what are the reasons why we're so.
Interested in automation is to change that mindset and to make a driller sitting in the <unk> on a rate be like a profession for a pilot and a <unk> five.
That's the long term goal here to actually change the skill.
His skill set change what's required to operate these rigs and upgrade upgrade.
It makes the job of our more interesting job by removing some of these every labor skills and making available actually two women as well to work at rates as well thats. Another priority of ours. So that's that's part of the logic behind our.
Our drive to automation.
So I think a lot of those people that you see on the rig today hauling iron on the deck floor.
Instead, we will be doing other stuff like other services that we provide that adds value and incremental revenue rather than just.
Moving moving equipment around and pushing stuff into the whole right that that's what this escalation. So so yes, I mean, I think compensation will help us, but it's not something that's going to happen overnight.
I think it's something that we have.
In addition to the RMP rig we are developing a modular piece of equipment that can automate not only rigs idle rigs as well and I think over time, that's what you will see in the industry that will be.
Like the top drive that will be a requirement to drill in the future.
Okay. So is the point and that the demand is kind of just going to already be there and getting that higher.
Tallying labor pool will help kind of drive that help meet that demand or 88, a little bit of both.
Globally, both speak for the existing people, who make the existing pool make the industry more attractive work in obviously the concerns of our safety get ameliorated by this move on Matt <unk> management on the floor and then it opens up a pool of people that historically, we haven't had the ability to access at the rig site in terms of their ability to be productive.
That value enhancing at the rig site. So it's both of those things I would say.
Okay. That's really helpful. And then just kind of pivoting back towards the balance sheet. I know you guys talked a little bit about the revolver.
From the perspective of the remaining unsecured notes.
<unk> capital.
Structure is there a preference on how you guys are looking to address some of the securities or the issues in the balance sheet in terms of maybe trying to tackle some of the higher cost debt first or really just the front end maturities are at their highest priority above that.
Listen I mean, obviously again that those issues are our top of my list.
And the whole team. The team is very focused on debt profiles maturity maturity walls. The revolver. That's just business as usual that's just tactical debt management that we do all the time, so and it depends on many conditions, we have plan ABCD and depending on what the environment gives us.
And yes to answer your question, Yes, we are looking at those high cost, but we're looking at everything as the globe. That's no different from the last five years, where we've been managing tactically and strategically all of these pieces of our capital structure that will continue I think we havent disappointed our shareholders or bondholders, yet and we don't.
We intend to do so in the future.
That's great. Thank you for that color exited on Brian.
This concludes our question and answer questions I would like to turn the conference back up care William.
William Conroy for any closing remarks.
Thank you for joining us. This morning, if you have any additional questions or wish to follow up please contact us well under the call. They are Sarah Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.