Q1 2022 Nabors Industries Ltd Earnings Call
Good day and welcome to the Nabors first quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask question to ask a question you May Press Star then one on your Touchtone phone and towards your all your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. William Conroy, Vice President of Investor Relations. Please go ahead Sir.
Good afternoon, everyone.
Thank you for joining Nabors first quarter 2022 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 Manmade, or Siggi Meissner, President of our energy transition and industrial automation 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 $19 33, 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 adjusted operating income adjusted EBITDA and adjusted 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, adjusted free cash flow.
That non-GAAP measure as 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.
Good afternoon. Thank you for joining us as we review our results for the first quarter of 2022.
This afternoon, we will follow our usual format I will begin with some overview comments, Dan will detail. The progress we made on our five key two excellent and follow with the discussion of the markets.
We will comment on our financial results I will make some concluding remarks, and we will open up for your questions.
Okay.
Our performance in the first quarter marked solid progress on each of our five key initiatives.
Our strategies are paying dividends at the same time, we benefited from the increasingly constructive markets for our services adjust.
Adjusted EBITDA in the first quarter was $131 million our.
Our operational execution remains strong, especially in our key markets. Our results reflect minor impacts from disruptions in our operations in Russia, as well as ongoing challenges to the supply chain.
Our global average rig count for the first quarter increased by 10 rigs. This rig count growth was mainly driven by increases in our U S drilling activity revs.
Revenue momentum in our drilling solutions segment remained strong increasing by nearly 5% sequentially.
EBITDA is a technology leader reached the $20 million Mark its highest level since the start of the pandemic.
In the first quarter, we made significant progress to reduce net debt.
For the quarter EBITDA less capex totaled $47 million.
Typical working capital needs in the first quarter were exacerbated by supply chain constraints inventory and the growth in the business.
Net debt improved by $55 million in the first quarter driven by exercises of our warrants which were issued in 2021.
Next as I have outlined for the past few quarters I will highlight our progress on the five key drivers that we believe support the investment thesis our neighbors.
These drivers include our leading technology and performance in the U S market.
Expansion of our international business.
Improving results for our technology innovation.
Improving our capital structure and reduce leverage and our commitment to sustainability in the energy transition.
Let me update each of these starting with our performance in the U S.
Daily rig margins in the lower 48 improved yet again, we exited the quarter with 87 rigs running.
In the first quarter, our daily margin increased by $533 and was just under 7700.
The continued growth in our margins demonstrates the market's demand for our value proposition and our ability to price to value.
I'm convinced this leadership is driven by the quality of our assets and the level of our execution.
But let's be clear the technology leadership, we bring to the market to nabors drilling solutions as equally important in helping our rigs to deliver best in class drilling performance.
We remain committed to delivering the industry's best performance and most advanced technology, while leading in safety and sustainability.
Let's discuss our international business.
We performed well in our financial results in this segment were consistent with our outlook.
Operational execution that field was excellent.
That is first in Kingdom, Newbuild rig, which was anticipated before the end of the first quarter is now expected to deploy.
The rest of the five new builds which had been awarded should come at a rate of approximately one per quarter.
Given the terms of the JV agreement, we estimate each of these new rigs will generate annual EBITDA of approximately $10 million.
With the JV as long term plan for 50 Newbuild units over 10 years, the prospects for significant future growth are outstanding.
Now lets discuss our technology and innovation, we believe the development and deployment of advanced technology are key to the neighbors future success. Our focus areas include automation ditch.
Digitalization and robot <unk> <unk>.
Again in the first quarter, our market position improved quarterly EBITDA in our drilling solutions segment increased to $20 million, we use the combined daily margins in the lower 48 from both our drilling and drilling solutions businesses to evaluate our business on an apples to apples basis versus peers.
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In the first quarter drilling solutions, yet at more than $2100 per day with this contribution our combined daily rig margin figure amounts to more than $9800 per day.
Yeah.
One of the core elements of Mds the strategy is to target the third party rig market.
This approach to the business expands our addressable market well beyond nabors own rates we.
We have made progress on our goal to expand penetration of the Mds portfolio into this third party universe.
Last quarter third party customers accounted for more than 20% of Mds is lower 48 revenue.
I'll wrap up my comments on technology with a brief update on our fully automated rig or 801.
This rig was our smart suite of performance automation tools as well as integrated casing running.
We are in the process of using lessons learned from this rate and applying them across the rest of our fleet. We have identified certain automation modules under rate that can be exported in component form to replicate functionality of our eight O. One we.
We are now ready to install one of these automation modules on one of our Permian rigs, we expect that over time. These automation modules will be deployed most of our existing high spec rig fleet.
In addition, we also intend to make them available on third party rigs.
In this way, we intend to exploit these new technologies without the need for a new rig build cycle and broadened the knowledge and acceptance for these solutions.
Now, let's discuss our delevering efforts and the steps, we've completed to de risk our capital structure.
In the first quarter, we made significant progress to reduce net debt in particular exercise of our warrants contributed a reduction of net debt exceeding $120 million and a commensurate increase in equity.
Recognizing our improved near term debt maturity profile as well as the completion of our new revolving credit facility in February one of the major debt rating agencies raised its issue level ratings across our notes.
I'll finish this discussion with remarks on our key value driver of ESG and the energy transition.
Building on our industry, leading tier IR performance in 2021, we're looking to improve on that further in 2022.
Less visible in the TR IRR statistic is the significant progress in the severity of the incidents reported.
Our incident severity rate improved by 44% in 2021, we expect a further advanced in 2022.
Both of these measures demonstrate the positive emphasis we placed on employee safety.
On the environmental front in our lower 48 field operations in 2022.
We are targeting a further seven 5% improvement in greenhouse gas emissions intensity on top of the 10% we delivered in 2021.
We made additional progress across our initiatives supporting the energy transition as well.
We further build out the organization, adding support for carbon capture and hydrogen injection technologies, we hope to have commercial products available this year.
Most recently, we announced an investment in another advanced geothermal company GAA drilling.
This addition to our existing portfolio enhances our position to help drive next generation geothermal technology.
Since then we also invested in a company focused on monitoring and measuring ghd and other admissions.
To reiterate our approach to the transition is comprised of three pillars.
Reduce our own environmental footprint by applying new technologies and best practices.
Capitalize on opportunities in areas adjacent to our core activity using our global footprint and existing expertise.
Investing companies, both adjacent neighbors and other verticals and accelerate their achievement of scale.
As you can see we're making significant progress on each of these fronts.
Now I will spend a few moments on the macro environment.
The first quarter began with WTO I, just above $75 and climbed steadily to late February .
Since the onset of the war in Ukraine, the price has been more volatile quarter.
Quarter closed with WT I just over $100.
Crude oil prices remained above the pre war level, let alone above the $60 Mark we highlighted in our December analyst meeting.
Since that meeting the forward market has improved as well the futures price Adobe Ti 24 months out from now stands 20% higher than probably 24 months out from the December of last year.
In this range oil prices provide returns that would incentivize operators to increase their drilling activity above our previous expectations in response to improving operator economics drilling activity for the industry will materially higher in the quarter Nabors quarterly average rig count increased by 12% in the first quarter.
Once again, we surveyed the largest lower 48 clients at the end of the first quarter. This group accounted for nearly 30% of the working rig count.
Our survey indicates an increase in activity of more than 15% for this group by the end of the year.
Nearly every operator, among the 15 clients plans to increase activity.
The pricing environment remains bullish our average daily revenue exceeded $23000 in the first quarter, which was up nearly $300 or 6% sequentially.
Our own leading edge day rates are the high twenty's with the potential activity increase indicated by our survey, we see pricing continuing to increase as industry utilization climbed to over the balance of the year.
Turning next to technology in Mds, the first quarter's EBITDA exceeded the exceptionally strong performance of the previous quarter.
This continued growth reflects the strong value proposition of the portfolio.
Fully 82% of our lower 48 rigs when five or more NDS services.
This metric is up by eight percentage points versus the previous quarter and represents record high penetration.
<unk> specific services, we saw notable growth in the penetration of smart drill and rig cloud and our related analytics.
Australia, a focus on third party rig opportunities Mds revenue from third party contractors, who more than 10% sequentially.
In our international markets strong commodity prices and expected production increases are driving oilfield activity higher.
For Nabors, we expect to add rigs in several markets in particular, we have visibility to decided newbuild in Saudi Arabia with the first appointment and expected next month.
In addition in Saudi Arabia, we will be deploying a flagship break from our M 1200 series, which will incorporate our most modern technologies.
Tendering activity has picked up across other markets in the middle East, notably in the Gulf countries. This growth will likely require higher capability rigs, which should be favorable for pricing and presents an opportunity for can rate.
We are also optimistic for additional rigs in Latin America.
Clients there are planning increases in activity and we have the rigs have relationships to support those plans.
Let me wrap up on this macro discussion with updates on several other areas, Russia, Covid and interest rates labor availability and the global supply chain.
In light of the conflict in Ukraine, we've been.
Main concern for the welfare of citizens there and throughout the region.
We currently operate three drilling rigs in Russia under contracts that require us to continue performing for a period.
While maintaining compliance with all applicable sanctions, we are refraining from making additional investments and from introducing new technologies into the country.
Recent events in the credit markets, coupled with the resurgence of Covid in China.
Joe Loom as potential risks to global energy demand, we remain vigilant to the impact of these factors could have on the forward outlook.
Where labor the Thai market, we experienced through the end of last year as these somewhat timely staffing for additional rigs remains challenging we addressed compensation levels to remain competitive and those steps have been successful notwithstanding the increasing costs profitability has continued to improve.
Finally, let me address inflation in the supply chain, we have seen higher costs across our supply chain, including materials and logistics.
We have been able to offset a significant portion of the pressures on our supply chain with our internal manufacturing infrastructure.
We and the industry continue to experience significantly stretch lead times. This challenge has forced us to increase our inventories to ensure we can deliver without disruptions rig components and spare parts to our customers and internally to nabors.
We remain committed to maintaining our operational tempo.
To sum up we are seeing indications for continued drilling activity increases globally.
Our latest survey of the larger lower 40 operators indicates a slightly higher 2022 exit rate rig count than expected just a quarter ago.
This reflects that notwithstanding some hype at least for now operator plans appear to remain largely based on the pre war commodity outlook.
We see opportunities emerging in our larger international markets. We are also seeing a significant increase in gas prices in many countries reassessing their hydrocarbon needs focused on natural gas. These factors could spur additional activity as well.
Inflation and supply chain constraints remain present.
At Nabors, we have demonstrated our ability to grow our business, while improving our financial results and our capital structure I fully expect this performance to continue in the coming quarters now let me turn the call over to William who will discuss our financial results and guidance.
Thank you Tony.
The net loss from continuing operations for the first quarter was $184 million or $22 51 per share. This.
This compares to a loss in the prior quarter of $114 million or $14 60 per share.
In the first quarter the conflict in Ukraine led to a significant devaluation of the Russian currency.
Restructuring and operations.
These challenges resulted in a reduction in our adjusted EBITDA of approximately $2 million and charges to other expenses of close to $3 million for a combined impact after tax of $5 million or <unk> 61 per share.
Our first quarter results also include a noncash charge of $72 million or $8 63 per share.
Made it to mark to market treatment of Nabors warrants.
Because the warrants initially included in incentive shares feature the number of warrants is not always equal to the number of shares obtained for our warrant exercise.
So this disparity accounting rules required that we mark to market the warrants based on their fair value at the end of the quarter.
The quarterly gains or losses, resulting primarily from the fluctuations in our common share price will add some volatility to our earnings as long as the warrants remain outstanding.
However, they think of our expense will have more cash impact.
And then the cumulative effect on our equity will be reversed at the end of the life of the world.
Revenue from operations for the first quarter.
It was $569 million, a 5% sequential improvement more than offsetting a 2% reduction in available days versus the fourth quarter.
In general our results continue to transfer the fourth quarter, namely strong overall running results, particularly in the lower 48 market.
Revenue from U S drilling and drilling solutions was up significantly, reflecting improving pricing and higher rig count.
The lower 48 market for drilling rigs searched ahead.
While rig count increased by 12% revenue was up 16%.
Average day rates for the fleet continue to improve.
Higher activity in international markets also drove revenue increases for our international segment.
Total adjusted EBITDA of $131 million decreased by $1 1 million or 0.9%.
The fewer days available in the quarter versus before affected our operational EBITDA of approximately $3 $7 million as compared to the fourth quarter.
The Russian headwinds further reduced our EBITDA by approximately $2 million.
These reductions were almost offset by longer term trends in our results.
U S drilling EBITDA of $74 $3 million was up by $5 million or 7% compared to the prior quarter.
This improvement was driven by our lower 48, EBITDA, which rose by $8 million at.
19% improvement sequentially.
Our average rig count in the lower 48 increased in the first quarter to 83, four rigs up approximately nine rigs from the fourth quarter average.
Daily rig margin came in at $7694.
$533.
This improvement resulted from a $1291 increase in revenue per day.
$900 all of which were from higher average day rates for the fleet.
These price increases were partly offset by higher labor expenses and costs related to start ups.
Rig count continues to move up on the strong commodity price and pricing continues to improve on the higher utilization for high spec rigs now approximately 80%.
During the quarter, we saw leading edge pricing and the high twenty's for rigs alone.
Without layering on any of our NDS offerings.
That's our fleet with prices to market, we expect this favorable rate trend to India.
For the second quarter, we project, our lower 48 average daily margin to continue expanding.
And reach approximately $8500 per day.
Given the current level of customer interest and existing commitments we.
We forecast an increase of six to seven rigs in the second quarter.
First is the first quarter average.
On a net basis EBITDA from our other markets within the U S drilling segment.
Leased by a few million dollars. Despite the addition of one rig in Alaska.
The reduction reflected primarily lower deferred revenue in one of our offshore contracts.
In the second quarter, the combined EBITDA of these two markets showed.
Should improve by $1 million to $2 million on higher day rates in Alaska.
International EBITDA of $71 $2 million in the first quarter.
Sequentially by almost $2 million, driven primarily by our operation in Russia.
Despite the Russia impact International Daily margin at $13134 remained in line with the prior quarter.
Driven by solid results in the Middle East and strong performance in our South American markets.
Rig count at 72 rates increased by just over half a rig over the fourth quarter average.
Current rig count in the International segment is 73.
We expect rig count in the second quarter to improve by nearly two to three rigs versus the first quarter average.
Primarily from deployments of the first Saturday Kingdom right.
As well as an advanced M 200 series rig in Saudi Arabia.
We expect further rig additions in Saudi in Latin America coming in the following quarters.
For the second quarter Daily margin is targeted between 12000 $713000 with performance in Russia remaining challenged.
Drilling solutions delivered EBITDA of $20 million up from $19 6 million in the first quarter.
Gross margin for Mds with nearly 49% for the quarter.
We continue to see increased penetration, particularly in third party rigs.
With the largest contributions coming from performance software in the U S.
Activity in the lower 48, generally improved taking our combined drilling rig and drilling solutions Sandy gross margin to $9818.
This includes a 2000 and $100 per day contribution from our rapidly growing solutions segment.
The combined gross margin for lower 48 drilling solutions reached $73 $7 million.
Or approximately 36% of revenue.
We expect second quarter EBITDA for the drilling solutions segment to increase by more than 5%.
Rig technologies reported negative EBITDA of $1 million in the first quarter.
Due mainly to a delay of shipments into the second quarter and a significant reduction in Russia.
The second quarter the segment should deliver a couple of million of EBITDA unimproved capital equipment and aftermarket sales.
Now turning to our liquidity and cash generation.
Net debt improved by $55 million largely due to exercises of warrants.
With equity issued in exchange for outstanding notes.
These warrant exercises reduced the face value of amount of notes outstanding by $131 million.
After accounting for deferred financing cost and the equity component of our retired convertible notes.
Reduced our reported balance sheet debt for notes by $121 million.
During the quarter, we also incurred approximately $4 million in costs related to the extension of our credit facility.
Free cash flow totaled negative $48 million in the first quarter.
As expected the quarter was challenging in terms of cash flow generation since we normally paid several material annual items, including property taxes and employee bonuses.
These payments will not recur during the remainder of the year in.
In addition, the growth of the business and longer lead times for our inventory items led to a substantial increase in working capital of approximately $48 million from accounts receivable and inventories.
Although we expect that the revenue increase and its negative impact on accounts receivable.
We also expected lower DSO than what we actually achieved.
In addition inventories expanded as a result of higher expected can't rig activity in the quarters to come as well as the need to compensate for significantly longer lead times.
Some of these inventory increases were also related to camera shipments that were delayed into the second quarter.
Capital expenses for the quarter totaled $84 million.
This included 33 million to fund our Newbuild program for a joint venture in Saudi Arabia.
Looking ahead, we expect second quarter Capex to land between a 110 and $120 million, including approximately 45 million for Sonat and Kingdom newborns.
For the full year, we estimate capital spending will remain within our prior guidance of $380 million of which 150 million support the summit <unk> rigs.
We are targeting breakeven free cash flow for the second quarter, reflecting the higher EBITDA.
Lower cash interest expense.
The absence of material annual payments.
And lower outflows from working capital buildup.
We are committed to deliver well above $100 million of free cash flow in 2022.
We remain focused on addressing our liquidity and leverage.
In the first quarter, we took significant steps in improving our debt maturity profile we.
We closed on a new revolving credit facility maturing in 2026 with a principal amount of $350 million.
Facility to replace our previous revolver maturing in 2023.
With the closing of our credit facility. We have also increased our senior priority guaranteed notes capacity to over $400 million together.
Together with our remaining capacity on our priority guaranteed notes, we have nearly $1 billion available for future debt refinancing using our combined guaranteed node layers.
Those actions, we are well positioned in terms of liquidity and debt maturity profile with only $260 million in notes maturing before the end of 2024.
With that I will turn the call back to Tony for his concluding remarks.
Thank you William I will now conclude my remarks this afternoon with the following.
With neighbors leadership in the development and deployment of advanced drilling technologies, we are well positioned for the current environment.
Operators prioritize automation and digitalization.
Our industry, leading solutions in those areas enable them to achieve their goals.
More recently, an additional priority has emerged namely the need to improve environmental impacts.
We are developing a pipeline of technology, both at the well site and beyond to enable clients to achieve their environmental targets to responsible hydrocarbon production.
Ultimately those solutions may grow into significant businesses.
All of this is occurring as we continue to improve our capital structure and materially Delever.
Our focus and progress on our five key value drivers are producing significant benefits across our stakeholder base.
We are very encouraged by the growing adoption of our advanced automation both in the U S and in our international markets and we're confident there is more to come I Hope you share my excitement for the future I look forward to sharing our progress with you.
That concludes my remarks today. Thank you for your time and attention with that we will take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you touched home phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
Okay.
Yeah.
And the first question will come from Karl Blunden with Goldman Sachs. Please go ahead.
Hi, good afternoon, thanks for the time.
Yes.
Just had a.
First question on the utilization rates have been picking up very nicely, particularly in the U S. Lower 48 high spec area could you give us a sense of where you think that might be able to Max out what kind of utilization can you support and then.
What happens from there when we get to that type of level is it additional capex spike in day rates, maybe some of the non high spec rigs getting some business, but just be curious in your thoughts.
Sure. So as we said from the survey you saw that we said there is a increase of about 15% expected by the market in general.
That's about 100 rigs.
Remainder of the year and looking at Nabors I think we can look at an exit rate maybe of a rig count exiting at over 100, which.
Would mean, adding a bunch of rigs now for Nabors, we have 23 additional super spec rigs in various stages. The first five we can bring out with very little capital. The next 11 for capital less than a million Bucks and then the remaining seven.
As you go into the seven deeper and deeper so we have some firepower there to get to to get that rig count above 100 by the end of the year and so that's our plan right now in terms of new builds obviously the market pricing doesn't support new builds yet I think the newbuild price, it's going to be obviously greater given core.
Cost inflation that's occurred in the meantime, as well so I don't think we're anywhere near new builds but the pricing environment is robust as we've said it applies to all markets.
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Move fast anytime I've ever seen in my 30 years at Nabors, you've never seen it move this fast.
Okay. That's very helpful and then the activation costs in particular.
With with regard to the warrants point.
Pointed out $131 million of deleveraging in one queue.
I know that the warrant website has some information, but I wonder if you could comment on how warrant exercise has trended so far this quarter.
Given the exploration of the.
The incentive shares for example in our strong stock price movement.
More broadly when you think about addressing your near term debt just be interested in your priorities around doing that with through warrant exercise, which will come as the stock is strong versus.
Potentially just kind of waiting for free cash flow or even doing some new guaranteed thoughts.
That's a mouthful.
Yeah, I think in terms of the war and I think the warrant has served its purpose in terms of.
Generating in a non dilutive form.
Pay down of debt, which was what it was designed to do now we issued a notice that would terminate the right of the bondholders to use bonds to exercise the warrant we did that because we wanted to benefit to stay with the shareholders and we thought the extra benefit with too much extra benefit was going to go into bondholders frankly above their face amount. So we don't want to do that anymore. So.
The bonds as they currently are.
Our outstanding debt only exercisable for cash and.
Debt.
Yes, the only exercisable for cash and.
We will see and have seen some cash exercises roll in and obviously at the price of 168, that's attractive right now.
Amir of going forward in terms of additional financings I'll, let William talked to.
To that but as I said the warrant transaction served its purpose.
I think when we remove the incentive shares.
That basically took the bonds out of the equation, we formerly eliminating the convertible bonds, we still could use the 25, but it's just not financially.
Advantageous because the bonds don't have really a big discount anymore. So so we expect all our future exercises to happen for cash a couple of million dollars have come in this quarter somewhere in that range.
In terms of using those warrants in the future I mean, that's certainly possible.
Obviously with a with a strike price at 167.
It provides.
An interesting way.
Way to continued deleveraging, but we.
We haven't decided if thats the best step or if we.
Issue more equity in the future or if we issue other types of notes in the future.
We will continue evaluating the market.
We think there's potential for more.
More high yield in the future again, we will continue evaluating all the options and today's where share price stands where coupons are today in our yields.
We have a lot of options as compared to some time in the past. Thanks.
Thanks for addressing all of that I appreciate it.
The next question will come from Dan Kutz with Morgan Stanley . Please go ahead.
Hey, Thanks, guys.
So I just wanted to ask.
Thinking about how lower 48 margins trend beyond the second quarter or just kind of at a high level.
It's it's the prior cycle peak kind of where you think that we can get to can we get above that level I think it was you know.
$10000 a day and you know obviously appreciate the patient dynamics changing kind of ball <unk>.
<unk> revenue per day casuals, but just wondering if theres anything you can do to help us think about where you could see margins going.
Sure. So as we've said in the prepared remarks, the base rate right now is that the high Twenty's, let's say 28 already.
And if you add on the add ons that make up the normal and I'm right. That's another roughly $3800 on top of that.
And.
So at those numbers I think as you said for Nabors from neighbors.
That's a pretty attractive.
Attractive number from where we stand today as we said for the second quarter, it's $8500 and I think we've made clear.
One of the good things about what we've seen happen is the fact that in December when we did the analyst day, you'll recall, we laid out a plan to get to $800 million EBITDA and so the way we think about it is that plan, which some people had some head scratching about back in December I think only.
It only supports and reinforces our conviction that we're going to get there and that that plan relies on a $10000 a day margin per rig and that.
And that's what we see happening by the end of the year. It will be we'll be well poised to do that.
Got it thanks, a lot longer longer term, if you look at where our rates leading edge day rates are today, and if we assume our fleet rolls into those rates and we execute on all of our contracts.
You know that that would imply a margin of $15000 per day at some point.
Obviously, we need to execute and we need sufficient time for them for our contracts rolling to those kinds of day rates and we have we do have some long term contracts still that are not anywhere close to those rates. So it'll take us a while to get there, but that certainly is the potential.
And the other thing just to remember is all the stuff that we talked about we talked about drilling doesn't include Mds, which is you have to add that margin on top of it which in this quarter that was about $22200 a day so.
On an apples to apples basis, when you compare compares to other PPA who's happy at the Mds margin on top of it because we break it out.
That's all really helpful. Thank you and then maybe on the point of.
You said that you have some longer term contracts that will it'll take a while to roll.
And that you know there's still a lot of the fleet is.
He was on contracts that was like you said it.
Leading edge spot rates of $5000 above the <unk> average. So can can you just help us think through the timeline for.
When the majority of the fleet will be able to reprice at higher levels or anything that you can do to help us think through that progression.
In the U S. The majority will be is poised to reprice, taking advantage of what's happening now that's what I would say internationally on the other hand.
The international market as you know is the term market and the other duration average duration is the year to year and a half out and the only thing I can say there is that if you look at our rigs away from Saudi Arabia.
Slide the ended the year half of those rigs are going to be in position to have price re openers. Okay. So so.
So there is a great potential not only in the U S. But also international to capture to capture the pricing movement as we head there obviously it depends on the international markets heating up the way they have in the U S, but given the macro and you can judge that as well as I can.
All signs are pointing in that direction.
That's all really helpful. Thanks, again, I'll turn it back.
The next question will come from Taylor Zurcher with Tudor Pickering and Holt. Please go ahead.
Hey, Tony William Thanks for taking my question.
Tony I actually wanted to follow up on on your prior response, there on some of the.
International contract re openers you have outside of San odd over the balance of the year as I said when you ask me I agree with your pricing momentum has really gone through the roof and surprise at least me to the upside.
And trying to think about the case for a similar outcome internationally.
The caveat being that the ethics capacity utilization internationally is not is not as great in the labor dynamics much different internationally as well. So I'm just curious for more color on those contracts are reopening and you have the ability to reset pricing I mean, what what's going to be the driver of pricing improvement from the existing pricing rate for those international contracts is it now.
Labor tightness is it supply demand tightness or something else.
I think it's we supply demand tightness in general I mean, there are labor issues as well there to meet cost inflation is that unique to the U S. It applies internationally.
Particularly given the travel situations, we've all been dealing with so.
But I think the supply demand if you look at the activity away from Saudi I think the market set.
In that region are or have some tendering possibilities would be Kuwait and Oman in particular and.
The rigs the rigs out there one of the things that will drive pricing as well as some of the some of those projects are going to require rigs actually don't exist today in the sense that some of the configurations requires such high specs that.
Required replacement capital to go onto on those projects and Thats going to uplift not only the new projects with the existing rigs as well. So I think that's one of the dynamics that work here so as those contracts open up.
There is a need for additional equipment that need that is going to be.
Pete with existing rigs that meet those specs as well as new rigs that require higher capital, which in turn will drive the whole pricing scenario up so.
That's the upside I think.
So one thing that Tony pointed out is the middle east, but the reality is the international market is not homogeneous. It's it's a bunch of different markets with different drivers and most of the markets. We are.
Focusing on our we're experiencing tightness in rigs that can give you examples like Argentina, where vaca <unk>, requiring higher spec rigs and there just aren't any country.
In Colombia, we're seeing expansion of drilling activity by Ecopetrol and others and then in Mexico. We are seeing some some rebirth on land activity that again require some fairly high spec rigs. So all of that is happening in multiple countries, where the supply of rigs is just not there. So so we are seeing a little.
Bit of tension on the pricing and on the positive sense are we at the park.
The pricing power seems to be solidly in the hands of the drilling companies today, even in the international markets.
Yes, good to hear and I on the margin front it sounds like there'll be some Russia related headwinds for international in Q2.
You can just help us think about if that's gonna be a lingering impact over the back half of the year or if it's just too soon to say and then yeah.
If I compared your forecast there.
'twenty 'twenty forecast at the analyst day.
Well on your way to exceeding the U S piece of the forecast International Peace.
With the Russia impact in the near term.
Just a little bit unclear to me if you can get to the margin guidance you gave for 2023. So I'm just curious if you still feel comfortable about that.
I'll, let hillary.
I'll, let <unk> answer that but before he does I just wait.
<unk> comment on our quarter.
Our internal number was 132 actually and you saw what the numbers, where we delivered and that obviously was impacted by Russia for a couple of million dollars. We also had saudi slipped into another quarter and and we also had some cost inflation that it sure.
So that we're able to absorb the cost inflation and still make progression on the margin.
And on top of it.
<unk> had an order I'm, bringing this up because it relates to international carrier had an order, which slipped into next quarter and that order was for an international project and is typical when the problems with internationalists, there's always lots of things out of your control in this case the client did some changes to their schedule and even though the camry had ready to deliver the equipment. They wanted to defer it.
Because the back end of the project wasn't ready so but in the context I wanted to just give you an idea. So that those are all things that were kind of set off from our bottom line results.
All in it's a pretty good quarter. When you look at that from that point of view and some of those things are are onetime things so with that I'll, let William followed through on the the roll forward to 2023, so so yeah and good coming from cotton.
We're very happy with it.
For the quarter with the U S was very strong international was very strong with the exception of Russia.
The only hiccup I would say would be rig technologies with the camera delays in.
And shipments and even with the Russia, we kind of absorbed that fairly well, it's not a huge amount, but it does accounting the international margins. So we think that the.
The second quarter, we will see a little bit of a.
The impact from Russia still things have stabilized there we're running off some of those contracts. So we are forecasting similar to the first quarter, but obviously, we are being cautious and then in Saudi Arabia, we are deploying to.
Two brand new rigs that are <unk>.
Highly.
A highly competent and highly advanced and.
And we will have a material impact, but there could be some startup costs. So we put a lever.
A little bit of caution in our guidance for the second quarter.
Throughout the remainder of the year, Russia will not even be a factor you will not see any will disappear and I think Saudi will continue to growth to grow really very materially over the next three quarters. So so we feel very comfortable about the guidance that we gave for 2023, if anything I feel very.
I feel we will do better than that guidance not only in the U S, but international as well.
Alright, good to hear thank you.
The next question will come from Derek Todd Hazer with Barclays. Please go ahead.
Hey, good morning, guys. So we're believers in a multiyear up cycle as we talked about exiting the year over over 100 rates for 2022, and you move into 'twenty. Three 'twenty. Four you can quickly sold out of your Andrea 11 Super spec rigs. So I just wanted to ask beyond that 111 can you talk about the different options that you have.
Upgrading some of the less about 16 legacy rigs you have maybe for a newbuild economics or even an acquisition of a smaller rig operator, just sure one of the levers and how do you view that if we can kind of sold out over the next couple of years.
Yes, I think we have an installed base of about 45 rigs that are candidates for an upgrade we already have upgraded about five or six of those rigs to what we call. The <unk> 750, and we have a formula for that and the and the upgrade cost of that platform. Even in an escalated environment will be no more than 50% the cost of a new rig.
We have 40 of them. So we have we have at our at our disposal a pretty large inventory of additional rigs to work from.
To draw down on it that would obviously be the one that won the choices second choice, obviously would be too.
To do new builds on our M. One thousands which is the flagship I think it's the best rig in the marketplace. Today No question about it and that would be the alternative second alternative do a newbuild there in terms of acquisitions, yes, we always look at acquisitions.
There you have to measure what you get you have to measure the difference the homogeneity of the of the fleets et cetera, but we always always keep our eye out for that as a possibility.
But to be clear, we have we have in forecasting our capex building any M. One thousands or upgrading any of those other rates.
Part of our guidance for results offer capex today.
Right no that makes sense I was speaking more about beyond into the next few years.
They call their switching over to the new energy Angola geothermal obviously, you guys are very active.
And the investments along with some of your other drilling peers.
And then some time what's the.
What's the outlook there with the goal of how these investments can materialize into earnings potential for Nabors. If you just think about over the next five to 10 years, what's the outlook. There. It seems like this is a natural crossover industry for the drillers and you guys are on the leading edge of it. So just love to get some more expanded color and thoughts around how you see that materializing into.
Potential earnings power.
So when I first joined Nabors 30 years ago, we actually had a pretty big segment that the geothermal including in places like Japan, and then later Costa Rica and parts of Africa, as well, obviously in California. So.
We've always been active in the historically and obviously the debt.
Push against geothermal is a niche play and our proposition is that.
With technology is there a way to make it be something that's scalable that can do multiple places and then use our footprint to exploit that and that and that's what's drove the.
So a combination of investments we've made and we've identified these four companies, which we think in the marketplace. Today has the best chance of unlocking one of those scalable solutions and Thats and Thats what were doing and.
Geothermal is the only source out there that's both baseload and renewable and we think if one can do what we're talking about it's going to be a could be a huge game changer and.
The companies, we bought oil approach it from a different vantage point Nabors was chosen enough for just money on these things were part and parcel of the R&D, that's going on with each of the companies to make the technologies come to market faster and more more robust in the marketplace. So we've got anything to add yes, I think we're very excited about it.
We just we think the companies on their own are good investments, but the reality is that we're going to be partner partnering with these companies and then the amount of geothermal wells. If we're successful in developing this technology is going to be staggering I mean, we we.
Yes.
I envisaged.
Sometime in the next five years, or so where a quarter of our business could be coming from some of the synergy transition initiatives, including GSM.
That's helpful. Appreciate the color. Thanks.
The next question will come from Avon J Ram with J P. Morgan. Please go ahead.
Yeah.
Yeah. Good afternoon, Tony I was wondering if you could discuss kind of your contracting strategy at this point in the cycle still feels a bit early cycle, but.
Talk to us on you know.
What you're thinking about in terms of locking in term versus spot.
Also as you are capturing higher and higher margins could you talk a little bit about.
The level of customer churn.
Youre seeing today, and maybe compare and contrast that to different vehicles that we've been through.
Sure. So during the downturn, obviously with the exit of some of the large publics to super majors as the market obviously, the private truly stepped up and today the private play a big role in the marketplace. As you know and we've tried to satisfy both both groups demand I think it's fair to say, though over the last six months, if you actually analyze our.
Customer base, you will see a shift of already has occurred about 10% from away from the private portion of our customer base back to the publics and that represents something that's probably going to continue in terms of a trend in large part because of the nature of the contracts. Those are the public's usually have longer term contracts, but more importantly, the RMB.
<unk> of technology, and so the value prop for nabors ability to use the stuff that we can bring to the table and make a big difference applies and so I think you'll see that in our strategy going forward and you'll see that shift at work in terms of specifically term term contracts. Obviously, we went we went short during the downturn.
We wanted it to be poised for the upturn and have the <unk>.
Freedom to reprice, and and I think we're in that mode now and as I said, the pricing has moved pretty robustly and it is true that right now given where we are today as well as where operators now see the forward curve looking which I think is equally important over the next 18 months there has been dialogue with operators about.
Trying to capture and locked in some term and we are part of those discussions, but I'm not going to give you my strategy is to percentages or anything, but obviously, we will start looking at it right now.
Great and then just a follow up is internationally.
Tony Post the Russia, Ukraine conflict.
The question, we're getting is where.
Whereas you know globally.
How is the world is going to make up for.
Some of the.
Barrels from Russia, which as you know.
Could that be impacted by lower production and then there's.
The marketing of those barrels are more problematic today, but can you give us any sense of any areas then.
But then your global footprint, where you're starting to see some.
The acceleration in terms of activity youre pulling our projects forward.
Well obviously.
Here's the logical first choice in terms of making things happen, but.
Theres a few hurdles one of which is to preserve the financial discipline by the operators and to see who's going to actually back. These programs to provide for long term long term progress. So people can make sure they make a.
Our return on their money.
We have seen in the past 60 days the whole world's perception of everything has radically shift Mr. Putin has done done done in 60 days with people, who made that you have been able to do which convince people that the.
Renewables are not yet ready to poised to take over Baseload demand anywhere and so that's set in but the question is how long is that mindset is going to continue and I think theres going be reluctant as a lot of people to actually invest on just a just a promise right now so I think there are.
There are areas, where there is capacity to ramp up obviously, the number one area away from U S and Saudi Arabia.
<unk> has been committed to increase their production capacity by 1 million barrels.
And also they're making a big commitment on the unconventional away from our Newbuild, there's actually interest in there and adding to their unconventional rig activity and and they have the ability to actually add up.
A lot of incremental gas so I think the opportunity exists out there. The question is who's going to who is going to put pen to paper and actually.
Due to the long term commitments that we all can invest in that we could build the rigs against that the operator can be surely is a proper take off contract et cetera to do at all that's really the question.
Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to Mr. William Conroy for any closing remarks. Please go ahead.
Thank you all for joining us. This afternoon, if you have any additional questions or wish to follow up please contact us we will end the call there Chuck Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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