Q2 2022 Nabors Industries Ltd Earnings Call

[music].

Good afternoon, and welcome to the Nabors Industries second quarter 2022 earnings Conference call.

All participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by T. Rowe.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star and then one on your Touchtone phone.

So much for all your question. Please press Star and then two.

Please note this event is being recorded.

I would like to turn the conference over to William Conroy, Vice President of Investor Relations and corporate development. Please go ahead.

Good afternoon, everyone.

Thank you for joining Nabors second 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 <unk>.

Instructions for the replay of this call are posted on the website as well.

With US today in addition to Tony William and me or 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.

<unk> 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.

Good afternoon. Thank you for joining us as we present our results for the second quarter of 2022.

We will follow our usual format.

I will begin with some overview comments, then I will detail. The progress we have made on our five keys to excellence and follow with a 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.

In the second quarter, all operating segments performed well exceeding the expectations, we laid out last quarter.

This performance reinforces our strategy.

Adjusted EBITDA in the second quarter totaled $158 million or 21% increase over the first quarter.

Our operational execution remains strong across our global markets our average rig.

Rig count for the second quarter increased by eight rigs. This rig count growth was primarily driven by increases in our U S and middle East markets.

Adjusted EBITDA in our drilling solutions segment increased by nearly 14% sequentially.

Looking at drilling solutions together with rig technologies adjusted EBITDA from these two innovation engines totaled more than $26 million.

This amount comprised over 60% of our consolidated EBITDA.

In the second quarter, we made additional progress to reduce net debt our net debt declined to less than $2 2 billion a $33 million improvement.

Adjusted free cash flow was $57 million.

This free cash flow was before strategic investments supporting the energy transition these investments totaled $70 million in the quarter.

Next I will highlight our progress on the five keys to excellence that we believe support the investment thesis on neighbors.

These include our leading performance in technology in the U S market.

Expanding and enhancing our international business.

Advancing technology and innovation with demonstrated results, improving our capital structure and reducing leverage.

And our commitment to sustainability in the energy transition let.

Let me update each of these starting with our performance in the U S.

We finished the quarter with 92 rigs running.

Big margins in the lower 48 continue their upward trend.

The average daily margin there increased by more than $1000 in the second quarter and <unk> $8700.

We have been progressively repricing the fleet towards the current leading edge with our pricing and contract duration strategies, we have been very successful in recovering cost increases and expanding our margins.

The results demonstrate progress on both fronts.

The rig market remains highly focused on premium rigs in performance. We also have an unmatched portfolio of technologies and our drilling solutions business. This portfolio is one of the keys to our drilling performance and an important differentiator I will discuss this in more detail in a few moments.

Next let's discuss our international business.

Daily margins in this segment improved significantly this measure increased by nearly $200 to $14331. Our performance was strong across our markets financial results of this segment comfortably exceeded our prior outlook, Saudi Arabia, and Latin America were particularly strong.

In Saudi Arabia, San is our joint venture with Saudi Aramco deployed and enhance them 1200 series range.

This is our most advanced rigging the country. It includes our proprietary operating system for AC capability as well as an upgrade at mast and substructure we.

We expect this rig performance will showcase in the region the full potential of Nabors advanced technology portfolio, especially in unconventional development.

Satish first in Kingdom Newbuild rig was commissioned during the second quarter the rig spud its first well in early July . This is an important milestone for the joint venture we expect to add new bills at approximately one per quarter going forward.

Each new build should contribute annual adjusted EBITDA of approximately $10 million during their initial six year contracts.

With these economics and the deployment of the first rig we are now firmly on the growth trajectory that initially attracted us to this venture.

Now lets discuss our technology and innovation.

There is no question that our advanced technology is one of the cornerstones of Nabors future success. Our focus areas include automation digitalization and mobilization.

Once again in the second quarter the performance of drilling solutions improved.

Adjusted EBITDA increased sequentially by 14%, reaching nearly $23 million. The combined average daily margin in the lower 48 from our drilling and drilling solutions businesses reached nearly $11000 of that Mds contributed more than $2200 per day.

The typical nabors rig in the lower 48 runs six Mds services. This metric has increased steadily and reflects the strong value proposition of the portfolio.

Among automation and digital services, we saw a significant step up in the penetration of smart drill. We also saw strong growth in smartphones smart NAV as well as rig cloud analytics.

In the second quarter, we continued to make progress targeting the third party rig market drilling solutions lower 48 revenue from this client base grew sequentially by 7%.

I'll wrap up my comments on our technology with a brief update on our robotics offering as mentioned previously we are rolling out new robotic modules to retrofit existing rigs. This builds on our triage with robotic rate we plan to make them available on third party rigs. This strategy enables us to deploy these technologies at a small fraction.

Are the costs for new build it also significantly increases the addressable market for these innovations.

Next let's discuss our progress to improve our capital structure.

In the second quarter, we again reduced net debt.

Primarily by excellent free cash flow, we drove net debt below the $2 2 billion Mark.

We remain focused on generating free cash flow as we continue to delever, the capital structure and improve the balance sheet.

I'll finish this part of the discussion with remarks on ESG and the energy transition.

We remain committed to our strong environmental stewardship in line with this strategy. We continue to progress along our three focus areas. These are reduce our environmental footprint.

Capitalize on adjacent opportunities and invest strategically in leading edge companies and accelerate the achievement of scale.

Since the beginning of the second quarter, we completed investments in three high potential companies.

The first focus is our monitoring and measuring ph D and other emissions.

The second focus is on the sodium based battery technology.

And the third is developing ultra capacitor solutions.

We believe these companies will have significant synergies with our existing platform.

And create offerings in our own sector as well as in the other verticals.

In our lower 48 field operations in 2022 we're targeting another improvement in greenhouse gas emissions intensity. We have also made advances in our carbon capture and hydrogen injection technologies commercial product should be available this year.

Now I'll spend a few minutes on the macro environment.

The second quarter began with W. T. I just above 100 by early June and reached 122 <unk>.

The quarter closed with W. T I above one O five.

Since then the prices retreated into the low to mid nineties.

<unk> prices W. Ti 24 months out stands at 77 level.

This is 20% higher than its priced 24 months out from December of last year.

This pricing outlook provides returns that would incentivize operators to increase their drilling activity. Accordingly, we saw the quarterly average industry rig count increased by 13% in the second quarter.

Once again, we surveyed the largest lower 48 clients at the end of the second quarter. This group accounts for 30% of the working rig count.

Our survey indicates a plan to increase the activity of more than 11% for this group by the end of the year was at 75% of these operators plan to increase activity.

None anticipated dropping rigs during the remainder of the year we.

We expect these rig additions to be weighted more heavily to the fourth quarter.

The pricing environment for rigs remains bullish or average daily revenue increased by more than $2500 sequentially.

This was an 11% increase and took our average daily revenue to nearly 25000 and $600 per day.

Our own leading edge day rates are now approaching the mid thirties with the potential demand indicated by our survey, we see pricing continuing to increase as industry utilization climbs through the end of the year.

As utilization increases and margins widen the cost to activate incremental high spec rigs will also grow.

This puts additional upward pressure on day rates and margins.

For our idle high spec rigs, we see reactivation capex and spending ranging from an average of $2 million for the next 12 and up to $6 million for the last five beyond these rigs we have over 40 M five fifties, which could be upgraded to super spec.

We upgraded seven of these a few years ago.

Today, the cost to upgrade one of these rigs would likely totaled $13 million at that level, we would require a term contract with day rates into the high thirties as for new bills. We estimate the capital cost survey, we would build today exceeds $30 million such a rig would incorporate a full suite of advanced.

Allergy that investment would be required term and day rates in the mid Forty's.

We are focused on maintaining well defined metrics and discipline regarding high spec capacity additions.

As you can see it would be a difficult if not financially irrational decision for the industry to build new rigs into the current market as such we expect the market will remain capacity constrained for some time to come.

In our international markets, the strong commodity prices and expected production increases are driving oilfield activity higher we expect we had rigs in several markets in particular, we have visibility to additional Senate newbuild to Saudi Arabia.

Tendering activity has also picked up across markets in the middle East, notably for Nabors in the Gulf countries. This potential growth will likely require higher capability rigs, which should be favorable for pricing and presenting a significant opportunity for Ken rates.

We also remain optimistic for rig additions to Latin America clients. In these markets are plenty increases in activity and we have the rigs and relationships to support those plans.

We have seen increased interest by international clients to add our NDS services as an example automation software and managed pressure drilling are gaining traction.

Looking forward there are a few issues that could impact our industry.

Recent events in the credit markets.

Eitan fears of a recession and a contraction in global oil demand are all potential risks to industry fundamentals.

We have not seen any changes in our customers' behavior. Following recent moves by the fed we remain however, vigilant to the impact these factors could have on the forward outlook.

The labor market in the U S remains tight timely.

Timely crewing for additional rigs we raised an area of focus we have taken a number of steps to attract employees and increased retention.

We continue to see some upward pressure on cost across our supply chain as well as extended lead times for certain materials, our internal manufacturing operation continues to pay dividends, we can lever its global sourcing network to help ensure operational continuity, both for nabors rigs and for our third party customers.

To sum up signals in our markets point to increased drilling activity globally.

Higher oil price environment and limited spare capacity for oil production are incentivizing clients to increase activity.

Operators appear to remain confident in a constructive commodity price outlook.

With the disruption from the conflict in Ukraine, we see a reorientation of international natural gas markets. This could spur additional activity as well.

Now, let me turn the call over to William who will discuss our financial results and guidance.

Thank you Tony.

Second quarter results were significantly better than we expected across all our segments.

Kris pricing higher activity levels, and strong operational performance more than offset cost pressure in certain markets.

In the second quarter, the net loss from continuing operations was $83 million, an improvement of $101 million as compared to the prior quarter.

Both periods had noncash charges related to the mark to market accounting treatment of Nabors warrants.

The second quarter results included $22 million as compared to $72 million in the first quarter.

Adjusted operating income for the second quarter of negative $4 million improved by $30 million sequentially. We expect this operational profitability metric to turn positive in the third quarter.

Revenue from operations for the second quarter was $631 million compared to $569 million in the first and 11% improvement.

All of our segments contributed to the growth.

U S drilling revenue increased by 16% to $253 million.

Lower 48 revenue grew by more than 20% on higher rig count and an increase of over $2500 in average daily revenue in.

An 11% increase from the first quarter.

Coming into the second quarter, almost all of our fleet in the lower 48 was working on a short term contracts.

Virtually all of our fleet has already repriced or lower price before the end of the year.

Higher activity also drove revenue increases for our international segment.

Revenue of 296 million improved by $17 million or 6%, reflecting an increase in rig count up to three rigs in Saudi Arabia, and Latin America.

Drilling solutions in rig tech moved up sequentially as well with the latter segment delivering 23% growth.

For the company in total we expect the upward revenue trend to continue in the third quarter at a rate close to what we experienced in the second quarter.

Total adjusted EBITDA for the quarter was $158 million compared to $131 million in the first quarter, an increase of almost $28 million or 21%.

All of our segments delivered strong sequential growth, which resulted in EBITDA margins of 25% an improvement of over 200 basis points.

Yeah, Sterling EBITDA of $87 $4 million was up $13 1 million or 18% compared to the prior quarter.

This increase primarily reflected higher margins and expanding activity in our lower 48 drilling business.

The lower 48 drilling EBITDA rose by $12 7 million to $64 4 million at 25% improvement sequentially.

Our average rig count in the lower 48 increased to $89 three rigs up approximately six rigs in the first quarter.

Daily margin came in at $8706 up more than 1000.

Rig count continues to move up on the strong commodity price environment, while our day rates increase with a higher utilization for our high spec rigs now at 81%.

Our most recent contracts averaged approximately $33000 per day for a rig segment alone.

For layering on the contribution of our drilling solutions offerings.

For the third quarter, we project, our lower 48 margin at 10400 to $10600 per day, as we continue to roll our rigs under contracts with higher pricing.

We anticipate an increase of three to four rigs in the third quarter versus the second quarter average.

Our international drilling segment delivered EBITDA of $82 4 million, an improvement of $11 2 million or 16% over the first quarter results.

International average rig count increased by $2 three rigs while.

While daily margin improved to $14331 up 1200 or nine 1%.

This margin improvement reflects the strong operational performance in Saudi Arabia, and Latin America.

As well as favorable currency movements in certain markets.

We expect <unk> in the third quarter to remain approximately in line as the rig additions in Saudi Arabia, and Colombia should be offset by the end of the contract for one of our Capex 10 rigs.

The first sign of Nobel commenced operations in early July and we anticipate a second Nobel to start late in the third quarter.

We project daily margin for the third quarter roughly in line with the second quarter.

Joining solutions EBITDA continued on its upward trajectory delivering $22 8 million up 13, 8% from the first quarter.

Gross margin for Mds was nearly 52% for the quarter up from 49%.

This is an all time high for the segment.

We continued to see increased penetration, particularly in third party rigs with the largest contributions coming from performance software in the U S.

Overall drilling activity in the lower 48 improved taking our combined drilling rig and drilling solutions daily gross margin to $10935.

This includes at 2228 dollar contribution from our solutions segment, which is another high.

We expect third quarter EBITDA for the drilling solutions segment to increase by approximately 12% over the second quarter level.

Rig technologies returned to a positive EBITDA contribution generating $3 4 million in the second quarter.

The $4 4 million sequential improvement reflected primarily increased rentals and aftermarket sales.

For the third quarter the segment should deliver additional EBITDA growth of approximately $2 million ongoing capital equipment sales.

Cash generation exceeded our expectations.

In the second quarter, adjusted free cash flow reached $57 million and $96 million improvement compared to the first quarter.

Our cash generation was driven by increased EBITDA from operations.

Quarterly interest payments and a reduction in our working capital despite higher activity levels.

DSO improvement drove the working capital decrease.

Capital expenditures in the second quarter were $98 9 million.

This amount included investments supporting the Senate <unk> of $27 4 million.

For the full year, we're still targeting capital spending of $380 million of.

Which 150 million support the China Newbuild rigs.

Our planned investment projects and require sustaining activity remain unchanged.

Nonetheless, as a result of some inflationary pressures on our rig spares and components.

We may have to cut back on some existing projects to meet our annual Capex target.

We expect breakeven free cash flow for the third quarter as higher EBITDA will likely be offset by increased capex and interest payments as well as by headwinds in working capital related to the expected growth in our business.

For the full year, we are targeting free cash flow comfortably above the $100 million Mark.

We remain focused on addressing our leverage and expect to continue reducing our net debt during the second half of 2022.

The strong acceleration of the global drilling market has exceeded even our most optimistic assumptions.

2022, and 2023 projections, we provided investors last December .

Look significantly short of what we now expect for the two year period.

Our expected lower 48, and international third quarter Daily margins are already at the levels, we only anticipated seeing midyear 2023.

Drilling solutions, our rig technologies are also well ahead of our projections.

Before the end of 2022 once our budget process is complete we would expect to provide updated projections for 2023 more in line with the current reality.

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.

The benefits of our strategic initiatives are increasingly apparent with the growth. We expect this quarter annualized EBITDA in our nabors drilling solutions should reach the $100 million Mark we.

We see significant expansion potential from increased penetration on nabors rigs growth of the third party business and further additions to the Mds portfolio.

In our international segment centers deployment of the first in Kingdom Newbuild rig marks a key achievement.

The scale of this 50 rig Newbuild program has no equal and dwarfs other capital deployment opportunities in the global land drilling business.

As additional rigs or industries tenants fleet, the joint Venture's free cash flow should improve that will draw us closer to the expected commencement of significant regular distributions from standard to the partners.

Our lower 48 drilling metrics continued to improve with focus and technology. We are approaching daily margin levels last seen in early 2020 with a path to further increases.

As for the capital structure, we have successfully navigated difficult markets and significantly improved our leverage since the peak in 2014, we have reduced net debt by more than $1 $6 billion. We have established a track record of progress to restore our financial flexibility.

Our sights are set a more advancement the goal is to reach leverage metrics consistent with investment grade debt ratings.

With the continued dedication of the entire neighbors workforce I'm convinced the best is yet to come.

Look forward to reporting that progress.

That concludes my remarks today. Thank you for your time and attention with that we will take your questions.

We will now begin the question and answer session to ask a question you May Press Star and then one on your Touchtone phone.

If you are using a speaker phone please pick up your handset before pressing the keys.

And to withdraw your question. Please press Star then two.

At this time, we will pause for a moment.

Oster.

Our first question today will come from Derek Pate, Sir of Barclays. Please go ahead.

Hey, good afternoon, guys I was hoping you could spend some time talking about your view of the overall supply side of the market specifically, how many idle super specs are out there and the related cost to bring those after effects then beyond that how many upgradable rigs are out there that would cause that 50% of newbuild or less.

Just trying to get a better gauge of the supply side, because I know you gave us great detail and ran down your fleet, but just curious from an overall market standpoint to help us on the supply side.

Well, our guess is there's probably about 150 rigs out there that are capable of being upgraded to super spec and the cost will vary greatly in terms of which operators. They are what the stated so I can't give you a specific number but those numbers could range from <unk>.

Several million dollars to up to up to almost $15 million, depending on operator, and which category of rig so but there is about 150 of those so that's why we've said that.

New builds should be a very very far distanced way because the cost of a newbuild resume plus $30 million with the metrics I identified which would require day rates in the mid forty's, So and a term contract and maybe some upfront money as well so given all that I don't see new builds happening and the depth of the market in terms of.

That potential market I think it's pretty concentrated as well and a bunch of people and therefore I see a lot of discipline amongst everybody right now I think our priority as I said is to rollout what we have today and as I mentioned, we have in the pipeline we have a path for a bunch of rigs that are relatively inexpensive to keep.

Keep rolling out we're at 91 rigs today, I said, three or four rigs next quarter and the second half will probably drift.

Try to shoot for an exit and exit number of around 100, and the cost that is relatively minor around as I said, the first 12 weeks of roughly around $2 million to make the change so relatively inexpensive for us on the back end of last five on March two.

Adding 22 or 2091 rigs would be about $6 million. So again.

It does step up but not substantially and then for US we do have 40, plus M rigs and we have another maybe another dozen on top of that and those can be substantial capex, but again less than 50% of the cost of a new build so that's why I think the market is pretty constructive right now I think the focus on everybody is too.

Focus on the existing install base and push pricing as much as you can.

Got it no that's helpful. I appreciate the color.

Follow up.

The 40, plus M rig that you talked about it it sounds like you exited at 100 grants this year.

Gonna reached 111 at some point next year can you talk about when you expect to reach that level and then lighting line of sight to win rig 112, 112, one being one of those 40 M rigs come out when we can see that.

And is it supply chain in place, where you can get that rig out if it's going to be a second half next year that just just thinking about the timing and cadence.

When we move from exhausting your super spec into reaching into one of those analytics.

Okay, we exhaust our super spec at one at 111 and so.

Uh huh.

Hoping that we expecting maybe toward the first half of 2023 second half of the.

At the end of <unk> ended the first half ended the second quarter of 2023, we should hit that.

That's the goal and depending on what we monitor that and depending on what happens and where we are on pricing et cetera, and where the market is then we'll judge whether it makes any sense to even think about the enbridge or upgrading additional rigs, but as I said right now our focus is on maximizing the existing capital an existing investment capital get.

The returns up as much as we can right now that's where the focus is and we have because of our integration we can quickly pull that.

The lever on adding upgrading rigs that's one of the benefits of Nabors, given the fact that all the long lead items, which is smart components of the rig the top drive the DFT. The draw works the wrench all those things that nabors built itself and therefore, we have a lot of control over supply chain, we do have a bunch of inventory and spare parts that we have in the normal course of things.

To support our existing customer base as you know and the top drive market. For example, nabors today is 40% of the world's top drives in the world.

So we have a pretty a pretty robust supply chain and ability to deliver our things up so that that would be a high class problem. When I would say it but right now our focus is on maximizing the cash flow from existing assets.

Great I appreciate your thoughts and I'll turn it back.

Our next question today will come from Karl Blunden of Goldman Sachs. Please go ahead.

Hi, good afternoon, and thanks for the time.

I noticed that you're guiding to a pretty sizable increase in lower 48 margin.

Four three Q could you discuss a little bit more about what you gave some drivers in the prepared remarks.

Is is there a large proportion of contracts resetting or is there something else underlying this big.

Big step change Youre seeing there.

Well as you as you know from our prior conference calls we made a tactical decision last year to go very short on our on our contract length. So that put us in a position now that we have price re openers on a large portion of our fleet I think 70% of our existing rigs. We haven't we haven't believed between now and the beginning.

Next year to reprice, and so that so we're going to take advantage of that given the fact that the market has moved quite a bit.

And that's the goal and that's the strategy to do that so that that's exactly where it comes from when you're absolutely right and today.

I said in the prepared remarks that number is about $8000 above.

Our second quarter average so very substantial so.

In the third quarter will be focusing on and try to get as many of those as we can as I said, 70% of the fleet by the by the first quarter next year can reprice and that's what that is.

Strategy to take advantage of that window.

That's helpful with regard to capital allocation. It sounds like we should continue to see debt reduction as our primary focus I was wondering if you opened also to accelerating that debt reduction with equity linked transactions.

I think at this point are there are more attractive ways to handle our liquidity and our maturity profile.

But you know nothing is off the table.

Thank you.

Our next question today will come from John Daniel with DSO Energy Partners. Please go ahead.

Hey, good morning, guys or afternoon I just have two quick questions on the 70% of the rigs that will have the ability to reprice.

Is there any I mean, I know the objective is to hitting their pricing closer to leading edge, but is there any reason that you wouldn't expect that 70% to be comfortably in the low low thirty's when they re price.

Got it that's exactly where thats exactly what the goal would be to do that.

8% about as I said at $8000 above 25, you're already at the MIT graduate the mid low thirties already so and if the market keeps on accelerating at those openings come up we will try to take advantage of that as well, but yes, you hit it right now in the head and the mid low thirties already.

Yeah, I mean, it just seems to me and I know you don't want gifts for guidance too far out but there's.

It seems very nothing else changes from a macro perspective that you guys get comfortably be north of $15000 that cash margins by second half next year.

Yeah.

Youre trying to push it higher but there's no there's no second half and the second in the second half yeah.

Yes.

I mean at 8000 type of twenty-five youre approaching 50%.

On just the base rig and then just remember for Nabors numbers. Please bear in mind, we have additional margin from Mds on top of that okay. So all of those numbers go up an additional tranche on top of that as well, so that's where the extra juices.

So I think one of the things that Tony pointed out John is that you know we have a lot of potential for re pricing.

Would even like to see prices above where they are right now leading edge pricing. So the 8000 is if we reprice everything at today's meeting edge.

We think there is some potential for further increases in pricing during the remainder of the year. So 15, K. If we don't get that before the second half of next year I'd be very disappointed.

Okay.

Monkey math as I'm driving here, it's very impressive. So thank you for let me just make sure I'm not smoking anything funny.

Thanks, guys.

Take care.

Our next question today will come from David Smith of Pickering Energy Partners. Please go ahead.

Hey, good afternoon, and thank you for taking my question.

Sure.

I just wanted to follow up to the first question on the call. Today, you mentioned, the 100 and cookie Super spec upgrade candidates across the industry.

If I understand correctly that would probably include you know about 40, something you wanted to try to reframe that question to ask your view.

You know how many super spec upgrade candidates you see out there that arent owned by the Big three U S contractors.

I don't know maybe I think the $1 50 was the remaining idle.

Hi, Spanx and potentially Upgradable right.

It is not upgraded to super spec to be clear.

Okay.

I appreciate that.

<unk>.

On the theoretical upgrade to Super spec question I understand your focus is put in all.

111.

The high spec rigs to work, but yes, if we just step back talk theoretically.

What kind of lead times could you be looking at and maybe you know what what is that.

Pace of upgrades that there could be you know realistically achievable.

Operator demand was there.

Well I mean for us to go from the 91 to 111.

That's just day to day stuff for us.

As I mentioned the amount the cost of that is relatively inexpensive for us to do that so.

As I said, where we're thinking.

Targeting exiting the year around 100.

Nine more from where we are today and by the second half of 2023 that would be another roughly 10 or so and so all of that we don't see any herculean efforts, we don't see any supply chain issues, nor do we see a big capex for us to do that that's one of the advantages we have.

I don't really see that being a big deal and as your prior question guys referenced and during that process in the second half what we will monitor to see whether the market has a need and appetite for them, whether we're interested in supplying that additional an additional layer, which then does move us to a oh.

Higher cost number and also higher lead lead lead time, but we will not we will have that will have visibility on that several months in advance to try to mitigate the lead issues with that.

Okay I appreciate it.

Our next question today is going to come from Dan.

Organ Stanley. Please go ahead.

Thanks, just wanted to ask and sorry, if I missed it but just wondering if you guys had come down or explain on any comments you made in terms of pricing trends that you're seeing across international markets.

Okay.

Yeah, we are seeing.

The prices have steadied up and continue to steady I mean in certain markets like in Latin American markets, we have seen.

Increases in pricing versus prior and better conditions on the contracts with respect to our exchange rate and such.

You know, we're hoping to see some.

Increases in prices in the middle East as well in our biggest market.

And in General you know the market is a little bit more dynamic.

More tenders coming up and you know the market is tight internationally as well. So we are seeing some increase but obviously not to the levels. We've seen in the U S.

International markets, we're seeing more like 5% to 10% as compared to the U S where we're seeing basically.

Over almost 80% increases in pricing at this point.

Got it that's really helpful and.

And then Tony I think you've kind of alluded to.

Pension risks in the prepared remarks.

That's definitely a big debate.

Debate is the extent to which a recession maybe call. It a mild recession would actually impact you know oil.

Oil and gas development activity. So I'm just wondering what your guys thoughts are.

So we do go into a recession.

What would be the implications.

Activity, maybe in the U S and in international markets at least your thoughts.

Well I mean, given given volatility of job that we've lived with it for so long we're constantly aware of that so we do everything to prepare for the downside. So we're not getting over our skis on any commitments were trying to maintain our cost structure, even though there's a lot of pressure on it right now.

As activity goes up we're trying to be vigilant about adding to a body count et cetera, all because.

I'm keenly aware of the macro there and I want to make sure I'm not locked into something and I'll respond to it with the same speed and swiftness I did in the last downturn that you saw neighbors that first quarter. We did we did cuts dramatic compared to most of our competitors as well, where we took 20% as the SG&A et cetera will be.

Found it really quickly so we are doing everything to keep the culture of <unk>.

Maintaining.

Our whole infrastructure in a way that maintains our flexibility given the fact that other things are going on in the world that we can't control.

Got it thanks, very much guys I'll turn it back.

Our next question today will come from Keith Mackey of RBC capital markets.

Please go ahead.

Hi, there. Thanks for taking my questions I think we have a much better understanding of where you expect the topline on the U S daily rig revenue per day to trend through the end of this year and into next year, but I did want to get a little bit more color on how you how we should be thinking about opex.

Per day, we've seen that sort of come up a little bit as well just what is the base level of Opex, we should be thinking about with the with the existing rigs running and then any any.

Opex startup costs on these extra rigs as you get up to the 111 would be helpful.

On the startup cost the numbers I gave you include Capex and startup cost in that 2 million number.

Clear about that that's what I'm, saying, our rollout of those rigs for the next 12 is relatively painless that the point I'll make on the operating expense itself. There's a few categories. There's there's obviously labor friction we do have cost pass throughs with the contracts, but there is labor friction given the fact that competition adjustments of having.

To be made the past six months, given the market and labor shortages and tightness on everything and then we have we do have some R&M.

Cost increases as well obviously in the industry in general given things like AR and materials side things with high metal content steel and copper et cetera.

All that stuff has subject to cost escalation, probably the R&M component probably about 8%. There I was just that one component and then of course in our cost numbers. There is a bit of churn because as you as you press rates.

You're not doing a good job unless you lose some as well. So there is some churn there as well so we have those three things, but on top on top of it I'll, let William address the operating expense.

<unk> com again, so so about Tony.

Tony highlighted the biggest one which is compensation and the one that's gone up the most over the last six months or so and compensation today is about 70% of aerobics.

So that has some components that are permanent like the salary increases.

Those that cost us about $600 per day. This particular quarter others are more transitory that are more related to churn you know when you when you push a client to increase prices.

As Tony mentioned most of the time, we're going to get it we're going to be successful, but there is still a significant amount of churn where you have to move to another client but of course, you would keep the people the cruise stays on and you may be a month.

Down. So so you have more people really then than probably you need for a time and that we're going through that right. Now. So we are just south of $17000 per day, right now including Reimbursable.

Which are about $500 per day.

We think that number has.

Have some transitory elements that will take us to the low 1700 next quarter.

But again, we are going to be working on bringing back those costs.

For a more traditional level, we think hope into 17, K or slightly below range.

Got it thanks for the thanks for the color and just to follow up the <unk>.

Survey that you did with some of the some of the customers and they are expected to rig additions through the end of the year certainly does point to some incremental rigs going to work by the end of the year, just curious what youre thinking as far as contract lengths and durations on rigs that will go go go to work in 2023 do you think it'll still be shorter term.

Or will we start to see some longer term contracts get signed.

So I think that's as pricing goes up typically youll see operator interest.

Operators interested in longer term contracts and in my prepared remarks, I made reference to that fact, and we will be looking at that as well I think.

As I said, 70% of the contracts have primary openers in the next.

First quarter next year that means we have we have room to move that remaining 30% up and we'll be focused on that opportunistically as we move forward, but I don't want to set a specific.

Target number of term contracts, but we are looking at it and depending on the customer and.

The term contract make sense for us, particularly if a customer is focused on technology and is committed to that because that's a win win for both of us because technology. We added to our rig requires a long term commitment and if we can find rigs placed rate with those kind of customers that'll be a win win for us. So that that's kind of the priority for us So term matters, but also the right term with the right kind of cuts.

Equally important to us.

Alright, Thank you very much for the color and that's it for me.

Again, if you have a question. Please press Star then one our next question will come from Arun <unk>.

<unk> of J P. Morgan. Please go ahead.

Yeah.

Yeah good morning.

Good afternoon pardon me.

Tony I wanted to get your thoughts if if the neighbors share of the U S land rig count you know basically using a baker Hughes as the denominator around 13% 14%.

If the U S land demand increases by a hunter or incremental rigs over the next few.

A few months, what's your expectation around <unk>.

<unk> is market share would you expect to grow your market share just based on your you know.

Sure.

Your Super spec in building upgrades Super spec rigs just getting your thoughts on that.

Well.

I'm not really a market share guy I mean, I'm really guide.

Looks at return so I'm more interested in getting proper returns and growing that.

Now if you looked at the numbers I gave you I said, 10% for the market as a whole and then I point to the fact that neighbors at 91 rigs I said, we're gonna be at 100, hopefully at a 100 targeting for this year. So that's kind of in line and then.

Second half next year will be another 10% so.

That could yield incremental market share improvement, but again my priority is more make sure. These ratio places with the right customers and maximize my technology and my maximize my return on investment, that's where my priority as opposed to market share on Mds I think there the growth is not just on nabors rigs on third party rigs.

We're still in the first day first or second inning of that ball game and I think that that's one of the attractions of Mds because it does have the potential to grow beyond nabors rig market share and the economics of that are such that it's a capital light model. So the returns on capital even more attractive. So that's an equal priority for us right now.

Our main partner in Mds that to grow penetration.

As opposed to pricing, our pricing actually stood up pretty well during the past.

Covid downturn, so right now our goal.

To garner penetration both on Nabors rigs on third party rigs. So there you go specifically to grow market share because we think we have some really unique things to add value to.

Great and I know, it's early but I just wanted to get your preliminary thoughts as we sharpen our pencil around.

2023, Capex I'm, just trying to think if theres any things that you could maybe give us some color on maintenance capex per rig Synod newbuild capex et cetera, just thinking about the market next year.

So so you highlighted the two important pieces, one is finite and that's going to be.

Somewhere in the 150 or so million.

Per day.

One one dependent depending on the deployment of data per day I'm, sorry for the year for the year $150 million so that that is.

Sort of baked in and it all depends on the pace that the local manufacturer can maintain and so that is a little bit of a very digital numbers could go up by $30 million to $40 million or may be down.

For me, but that's the that's one piece the other piece our rig count is increasing it is increasing.

From this year to next year.

And.

Probably the cost of.

Maintenance Capex.

Per rig per year.

Has gone up a little bit. So so we do expect some increase in that piece of the business our maintenance Capex should go up.

Maybe towards the.

Closer to the $1 million.

Mark versus the 800 that we've traditionally seen in the past. So it's a combination of both so to give you a number well we expect to exceed 400 next year and.

By how much I'm not sure yet.

That does include <unk>.

Yeah.

Great. Thanks, a lot.

Ladies and gentlemen at this time, we will conclude our question and answer session I would like to turn the conference back over to William Conroy for any closing remarks.

Thank you all for joining us. This afternoon, if you have any additional questions or wish to follow up please contact us Allison will end the call. There. Thank you very much.

And thank you. The conference has now concluded we thank you for attending today's presentation you.

You may now disconnect your lines.