Q4 2022 Nabors Industries Ltd Earnings Call
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Yeah.
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Good afternoon, and welcome to the Nabors Industries fourth quarter 2022 earnings Conference call.
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Please note that this event is being recorded today.
I would now like to turn the conference over to William Conroy, Vice President of corporate development and Investor Relations. Please go ahead Sir.
Good afternoon, everyone.
Thank you for joining Nabors fourth 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 those markets in.
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 and.
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 1933, and the Securities Exchange Act of $19 34.
Such forward looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission.
As a result of these factors our actual results may vary materially from those indicated or implied by such forward looking statements.
Also during the call we may discuss certain non-GAAP financial measures such as net debt 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.
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 and adjusted free cash flow as 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 present our results we've.
We made several notable accomplishments during 2022.
The year culminated on a high note with an impressive fourth quarter performance.
Each of the operating segments in our portfolio again performed well.
Adjusted EBITDA in the fourth quarter totaled $230 million. This marks the third consecutive quarter of sequential EBITDA growth above 20%.
Consolidated revenue increased 10% sequentially.
Our global average rig count for the fourth quarter increased by $3 four rigs.
This growth was driven by increases in both U S and international markets.
Drilling solutions, EBITDA accelerated and exceeded $30 million.
Combined our advanced drilling solutions and rig technology segments accounted for over 16% of total EBITDA.
This contribution is more than double their share back in 2020.
In the fourth quarter, we again to reduce net debt.
Net debt stands below $2 $1 billion.
I am pleased to report, we again made progress on our five keys to excellence. These critical objectives, comprising the investment thesis for Nabors include.
Maintaining 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.
And finally, our commitment to sustainability in the energy transition.
Let me update each of these starting with our performance in the U S.
We averaged 95 rigs in the fourth quarter up three from the third day.
Daily rig margins in the lower 48 stepped up very materially in the quarter. Our average daily margin grew by more than 30% to $14600 when including the contribution from NDS. Our margin is even higher I'll discuss this in a few moments.
Both the industry and Nabors rig counts rebounded in recent years, we purposely kept our contract duration short.
This strategy has enabled us to realize pricing in margins that increasingly reflect the outstanding value we consistently deliver.
We have added term to our lower 48 backlog when we believe it is value enhancing.
The lower 48 market remains concentrated on the most capable rigs and premier field performance.
Neighbours differentiated approach to this market include best in class rig technology, and the industry's broadest portfolio of advanced complementary solutions.
Our vision of the rig as a platform for drilling and the delivery of related services has gained significant market traction.
We generate from our technologies leads the industry, we will cover this in more detail in a few minutes.
Now I'll discuss our international business.
Daily margins in this segment increased in the fourth quarter, reaching $14900.
Profitability improved in most of our markets in Saudi Arabia, the better results reflect improved pricing on the recent contract renewals.
Also in Saudi Arabia.
<unk> deployed the second in Kingdom Newbuild rig in late December at.
At the same time sounded reactivated and additional existing rate.
So that it expects to deploy three additional new build during the remainder of the year each new builds will be contracted for six year initial term followed by a four year renewal further the new builds generated a full cash on cash return on the Newbuild capex maintenance Capex unallocated G&A within the initial contract term.
We expect additional awards that are catered to five per year.
Now lets discuss our technology and innovation.
Our focus areas include automation digitalization and robot as nation here at Nabors, we continually strive to push the envelope in terms of innovation and advanced technology during.
During the fourth quarter, we set a major industry milestone by deploying a first of its kind robotics module on an existing rig.
Razor as the module zone will be a game changer on two important fronts first performance, where monetization brings a step change improvement and consistent precision and control.
Next safety razor removes people from the most hazardous area of the rate the Red zone and one last important point to make razor is modular so it can be retrofitted onto existing drilling rigs with their neighbors or a third party.
In the fourth quarter drilling solutions EBITDA increased sequentially by 18%.
Margin increased in the fourth quarter to a record 52, 8%. This high margin high free cash flow business grew by more than 50% year on year. This is the type of growth. We expect from a technology centric business, we expect similar growth in 2023.
Let me illustrate the value NDS generates the combined average daily margin in the lower 48 from our drilling and drilling solutions businesses were 17372 hours in the fourth quarter of that N. D. S contributed nearly $2800 per day that combined figure increased by 28% versus the.
Third quarter.
The typical nabors rig in the lower 48, where it's about six and a half NDS services. This penetration increased again in the fourth quarter you have seen a consistent quarterly increase in the services count reflecting strong market adoption of the portfolio.
Among the automation and digital services, we saw a.
A near doubling of smart plant installations.
Broad growth across the performance tools portfolio, including rocket rabbit and smart drill.
In the fourth quarter NDS revenue on U S third party rigs grew by 10% versus the previous quarter.
This market segment is a key focus area for and yes, and we continue to increase penetration there.
Next let me update our progress to improve our capital structure.
In 2022, we reduced net debt by 186 million.
This improvement was driven primarily by excellent free cash flow, resulting from the strong profitability of our operations excellent working capital performance and disciplined capital spending we expect even greater improvement in 2023.
I'll finish this part of the discussion with remarks on sustainability and the energy transition.
As I've said previously our three focus areas include reducing our own environmental footprint.
Capitalizing on adjacent opportunities and investing strategically in leading edge companies with clear adjacencies to our core activity today.
Today I'll highlight several specific technology initiatives, which are currently underway.
First is our power tap module.
This connects rigs to the grid we.
We have recently deployed 14 of these units, including multiple units on third party rigs.
Second our smart power advisory and control system optimize utilization of the engine and reduces admissions. This solution is currently installed in more than 75 rigs.
Third the nano to diesel fuel additive improves engine performance and reduces emissions, we have already successfully treated more than 10 million gallons of diesel today.
I am very enthusiastic about power flow our energy storage system. This technology enables us to incorporate innovative storage solutions into our engine management systems. This.
This technology uses super capacitors in place of lithium batteries are first unit is currently deployed in one of our rigs in the Bakken.
We have expectations for very strong growth from these initiatives in 2023.
Margins in this portfolio should be highly accretive to the company average over time.
Now I will spend a few moments on the macro environment.
With the spot and future prices for W. T. I in the current range. We believe the outlook for continued increases in drilling activity in the lower 48 is still constructive.
We expect these increases to materialize as we move throughout the year.
Several factors in the current macro environment could impact our outlook foremost. Among these is the possibility of a recession, which reduces the demand for oil in the U S. Labor availability has begun to improve in part from the easing of the pace of rig additions.
As for the broader supply chain inflation has declined in key areas, namely metals and metal sub assemblies that said lead times for certain components remain extended our vertical integration and global supply chain continue to enable us to satisfy the demands of customers. Notwithstanding these factors energy commodity markets we.
Main constructive, giving us confidence in our outlook through 2023.
Next I will spend a few moments on day rates are lower 48 results demonstrate the unprecedented robust pricing environment average daily revenue in lower 48 increased by more than $3500 sequentially or 12% up to 32000 and $700. We have recently signed contracts with revenue.
Per day above $40000, and that's before adding NDS content.
We have a material portion of the fleet remaining to reprice to the current market. Therefore, we expect daily revenue and margins to continue to decline.
We and the lower 48 industry have inventories of high spec rigs, which can be reactivated.
Importantly, the cost to reactivate these rigs is significant.
For our idle rigs, we see total reactivation spending of more than $2 million for the next seven or so units for the following eight that price tag moves up to about $6 million.
We believe the lower 48 drillers have a limited appetite to incur this level of expense speculatively.
This puts a lid on the ready supply of additional rigs.
In the international market, we see steady increases in activity across many of our major geographies. This increase in demand supports generally higher day rates and margin expansion.
Once again, we surveyed the largest lower 48 clients at the end of the fourth quarter.
This group accounted for approximately 34% of the working rig count.
Our survey adjusted for one outlier in a special situation.
Indicates essentially net flat activity for the group through the end of the first quarter. We believe this trend primarily reflects some weakness in natural gas prices.
Despite the resulting market churn, we have been able to shift return rigs from gas to oil drilling.
Further inquiries for additional rigs in the Permian basin have been increasing.
These positive signals, along with refreshed budgets and better availability of casing suggests potential growth in 2023.
Operators in several of our existing international markets are indicating increases in their activity, we see potential opportunities to add rigs in multiple markets. Both in the middle East and Latin America.
And we continue adding new built in Saudi Arabia, Santa recently received awards for five more new builds bringing the total so far to turn these rigs are impactful of the initial five which were previously awarded we expect to deploy the three remaining rigs at one per quarter beginning this quarter. The second five should rollout beginning.
It's really at the end of 2023.
We estimate each new build will generate annual EBITDA of approximately $10 million with the first 10 awards in hand decided it is under way to realizing EBITDA of more than $100 million per year from the Newbuild program.
Let me wrap up my remarks with the following we expect activity across our markets to increase this year with our advanced portfolio of rigs services and equipment Nabors is ideally positioned to capitalize on this environment.
In summary, Nabors remains poised to deliver improving financial results, increasing free cash flow and greater returns to our investors now let me turn the call over to William who will discuss our financial results and guidance.
Thank you Tony fourth quarter results were significantly better than we anticipated both U S and international segments experienced sustained pricing momentum and steady increases in rig count.
N D. S continued on its growth path with improving results across its business lines and rig tech had its best quarter in a long time with signs of strength across its portfolio of offerings.
Although the first quarter is a bit shorter than the fourth we continue to ride favorable trends and expect to deliver meaningful sequential EBITDA growth this quarter.
Average pricing for our U S fleet continues to expand international rig count and pricing also continues to improve and we expect N D. S to provide further momentum towards total results in the first quarter.
For the full year 2022 revenue from operations was $2 $7 billion. This compares to 2 billion for 2020 one.
32% improvement year over year.
All of our segments grew significantly during 2022.
But lower 48 drilling and N D. S globally led the way with revenue increases of 78% and 41% respectively.
International drilling 2022 revenue increased by 15%.
We experienced an acceleration towards the end of last year and expect 'twenty to 'twenty three to deliver similar year on year growth as our international markets appear to be picking up steam.
For the fourth quarter of 2022 revenue from operations was $760 million compared to 694 million in the third quarter, a 10% improvement.
U S drilling revenue increased by 12% to $333 million.
Lower 48 revenue grew by almost 16%, reflecting higher rig count and an increase in daily revenue of over $3500 or 12%.
Average daily revenue reached 32000, and $700 up from $29200 in the third quarter and.
We expect it to continue to increase over the coming quarters.
Over the past year day rate increases have accelerated as compared to the increases of the prior year in the fourth quarter of 2021, leading edge revenue per day was in the low $20000 range and we are now seeing contracts with revenue per day and the low forties.
We expect average pricing for our feet to maintain its upward trajectory and although leading edge pricing has remained stable over the last few months depend.
Depending on the evolution of rig count over the next couple of quarters, leading edge pricing could continue to expand.
Despite the potential for further day rate increases we believe we should return to our traditional long term contract coverage in the lower 48 of around 20% to 30%.
Over the last few months, we have been more focused and adding more term onto our portfolio of contracts.
Revenue from our international segment also increased to $318 million or about 4% for the quarter.
The improvement was driven primarily by higher activity and improved day rates in Saudi Arabia and Colombia.
As well as by our impactful Papua New Guinea rake going on full operating rate in November .
Revenue from billing solutions and rig technologies also grew sequentially by 15 and 24% respectively.
This quarter outpacing the brisk growth enjoying great revenue.
Total adjusted EBITDA for the quarter was $230 million compared to 191 million in the third quarter, an increase of $39 million or 21%.
EBITDA margins improved by almost 280 basis points to over 30% that equates to incremental margins of over 59%.
A $30 million increase in U S drilling EBITDA was driven by an improvement in lower 48 drilling margins.
Lower 48 drilling EBITDA rose by almost $33 million or 37% improvement compared to the prior quarter, primarily related to sustained pricing increases.
Average rig count in the lower 48 increased to 95 rigs up approximately three rigs from the third quarter.
And daily margin came in at $14600 up by almost $3500 per day.
31% increase daily.
Daily operating expenses held steady around the $18000 Mark.
At the end of the fourth quarter Nabors utilization of high spec rigs was at 86%.
South, Texas and East, Texas.
Each had only one high spec rig available.
And in the northeast all nine of Nabors high spec rigs were working.
We did see some weakness in gas markets with multiple rigs returned by smaller players.
However, we were able to place each week's expeditiously with other customers for predominantly oil focused activity.
Our rig count has held steady during the month of January .
But given the continued uncertainty in the price of natural gas, we expect further churn during the remainder of the quarter.
This has had an impact on our expectations for rig count growth in the first quarter.
Consequently, we are currently projecting a rig count to increase by one rate versus the average of the fourth quarter.
On the other hand the pre.
<unk> trends have continued to develop even stronger than we initially expected.
We currently anticipate our daily gross margin to land between 16000 $116300 in the first quarter.
This is without the additional contribution from our solutions business.
International met our expectations in terms of both rig count and margins.
Our international segment delivered EBITDA of almost $89 million.
An improvement of $2 9 million or three 4% over third quarter results.
International rig count improve with the deployment of the second Newbuild rig and the reactivation of our legacy rigs in Saudi Arabia, both late in the quarter.
As well as one more rig in Colombia.
Gross margin increased by over $300 to $14900 per day due to higher day rates related to contract extensions in Saudi Arabia, and better cost performance in Latin America.
Average rig count in the first quarter should improve by one to two rigs sequentially, reflecting a full quarter of operations from the recent startups.
We now anticipate deploying the Mexican Kingdom Newbuild at the end of the first quarter with one additional rig scheduled for both the second and third quarters.
Project International Daily margins to be in line with the prior quarter.
The incremental rig count should offset the reduction in calendar days in the first quarter as compared to the fourth.
Drilling solutions continued making significant strides by delivering EBITDA of $33 million in the fourth quarter up 18% sequentially.
Gross margin for NDS was almost 53%.
We continue to see additional improvements in both the domestic and international markets for all of our business lines.
In the U S. There has been ongoing success in growing our penetration of services of Nabors rigs as well as on third party rigs.
Our software and digital solutions continued to generate strong results.
We expect first quarter EBITDA for drilling solutions to increase by approximately 6% over the fourth quarter level.
NDS gross margin per day for the lower 48 increased to about $2800.
When evaluating our lower 48 business on a combined basis looking at the contributions from both N D. S. In drilling we achieved a gross margin of almost $17400 per day.
A sequential increase of almost $3800.
For the fourth quarter rig technologies generated EBITDA of $7 6 million a 57% increase.
This improvement primarily reflected very strong aftermarket demand and higher capital equipment sales.
For the first quarter, we expect we've take EBITDA to be in line with the fourth quarter results.
Adjusted free cash flow for the quarter reached $101 million compared to free cash flow of $35 million in the prior quarter.
This result exceeded expectations by about $20 million.
It really is a better EBITDA.
Somewhat lower capital expenditures and strong year end collections.
For the full year of 2020 to Nabors generated free cash flow of $154 million.
We continued to deliver industry, leading results together with sustained cost and capital discipline.
We expect first quarter free cash flow to be moderately positive.
The first quarter forecast includes a higher interest expense payments on our notes.
More of these coupon payments fall in the first and third quarters in.
In addition at the beginning of the year, we paid several large annual items, such as property taxes insurance premiums and employee bonuses.
Capital expenditures in the fourth quarter were $103 million, including over $60 million for Senate Bill bills.
For the full year 2022, capex totaled $382 million, including 19 1 million for the Senate bills.
Although we spent more than we had forecast on reactivating lower 48 race.
By their supplier for assignment nobody else outside the incremental U S capex.
We are targeting capital expenditures of approximately $150 million in the first quarter, including approximately 45 million for Senate Bill.
Our forecast capital spending for full year, 2023 is approximately $490 million, including $118 million for the Senate bills.
This sign of investment will be funded from our joint ventures cash balances and its forecast operating cash flow generation.
The increase in annual Capex, excluding the Saudi new bills, mainly relates to the growth in average 2023 rig counts over the prior year level.
In the fourth quarter net debt declined to less than $2 $1 billion driven by positive free cash flow.
During the quarter, we retired $50 million of senior notes.
In addition, our Saudi joint venture distributed a total of $20 million to its partners.
Given what we're seeing in our various markets globally, we maintain our targets for 2023.
We expect to deliver EBITDA above $1 billion and free cash flow exceeding 400 million.
With that I'll turn the call back to Tony for his concluding remarks.
Thank you William I will now conclude my remarks this afternoon.
First let me summarize our fourth quarter and 2022 highlights.
Orderly adjusted EBITDA increased sequentially by 21% and exceeded $700 million for the full year.
In the quarter, we once again generated free cash flow, while reducing net debt net debt at the end of the year should below the $2 $1 billion level.
Our lower 48 daily margins reached a quarterly record with an outlook for a double digit increase in the first quarter.
And N D S annualized EBITDA exceeded $120 million in the fourth quarter.
Credit must go to the neighbors team for its outstanding performance in 2022.
The team stepped up.
To overcome the challenges brought by the large number of rig activations and persistent supply chain issues. There are efforts enabled us to make significant progress on our key focus areas. Looking ahead, we expect to improve further in 2023.
In the lower 48, our pricing and the value we provide to clients are better aligned than they have been in many years with our current contract portfolio, we expect to realize higher average rig rates and margins progressively through the year.
In our international segment, the combination of growing markets in the pending newbuild deployments and sounded should lead to even better financial performance.
In Mds, we remain focused on increasing penetration on nabors rigs and in the third party market the international business and MTS is gaining momentum. This combination should drive further growth in this high margin high return segment.
For the first time in several years, we expect a material contribution from rig technologies. The increase in industry activity is leading to growth in the aftermarket and we have high expectations for the energy transition initiatives.
Yes.
Building on our performance in 2022, we expect material improvements in our free cash flow and in our progress to reduce net debt our priority to delever has been successful so far and there's more to come I am proud of our accomplishments in 2022, I'm looking forward to reporting even better performance for 2023.
That concludes my remarks on the fourth quarter and 2022.
You for your time and attention with that we will take your questions.
Yeah.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
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To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question here will come from Derek part Hazer from Barclays. Please go ahead.
Hey, good afternoon, everyone. So I wanted to expand on the gas markets first and then that's where the biggest debate lies in the lower 48, you talked about.
Moving your rigs over to oil there based on some of your smaller customers dropping rates were being able to be picked up by other larger customers can you maybe give us some color around how much lower does natural gas really have to get to see a meaningful drop in rates just trying to understand the impact on both day rate and daily margins, what do we need to see the draconian scenario.
So to see that day rate move down significantly because I think that's a big threat. That's out there that investors are trying to assess so he may expand all of it more about how many rigs need to drop what's your expectations do the right players hold the line on pricing I think it'd just be helpful to get an understanding of the negative impact with gas markets.
Yeah.
Okay.
Morpheus question or difficult question I would say.
I think obviously below two but it would be a problem.
You also bear in mind, a bit the gassy markets are not all home of G&A. It's I would say so for example in east, Texas. There is churn there and the operators are pushing forward their plans, where we had some plans for people taking rigs in the first quarter. They are pushing them out to the second half of the year waiting to see what happens.
But you can guess who pays like northeast.
There is all basically all guests.
There the market hasn't been insensitive and.
In part because of the cost structure and in part we project the neighbors in part because of the quality of our rig fleet up there. So it's not all homogeneous I would say.
In South, Texas, there has been churn in south Texas in part because I think as we roll the condensate down there.
But again.
I think right now what we've been trying to do is move the rigs from those plays to the oily customers. We have had some pick up of rigs in West Texas. This quarter for example in West, Texas. There is some churn as well even with the with the fluctuation in oil price in West, Texas, I would say that those fluctuations.
In connection with the private operators, the smaller guys who come on to the market quickly and also exit quickly so.
There has been some of that but by and large we've been able to deal.
Deal with all that.
Okay, Great that's helpful.
Just wanted to switch over to your repricing effect, you're talking about repricing two thirds of the fleet, obviously, a big pick up.
In the daily margins as expected for the first quarter, how much law, how long would it take to replace reprice. Your remaining third of your fleet. When you talk about increasing day rates and daily margins city or just just given some color on the cadence of where you expect this to go in if everything was repriced what what do we see on a daily rig revenue level is it in the high Thirty's.
Low 40, just to give us an idea of how we work through the year and that's the power of repricing and a moderating rig activity would be helpful color.
Sure well I think I think in terms of timeframe. We're looking at it over the next two quarters ideally we could we can do affect the repricing of large substantial portion of the number of the fleet in terms of actually come up with a specific number.
The distance between the 33 number that you saw.
The average width and be above 40 number that we're at now.
And where we land on that hopefully closer to the higher end of the range rather than the middle of the range, but it's going to be a function of how fast we can move and what the market's like so beyond that I don't want to be more specific.
Got it okay I appreciate the comments I'll turn it over.
Our next question will come from Kurt <unk> with benchmark. Please go ahead.
Okay.
Hey, good afternoon, I guess, the only thing.
How are you doing good to see you bad alright, Thank you hey, good to be back and to do that.
So yeah, a lot of a lot of business momentum for sure are behind you got a lot of tailwind that's awesome.
So maybe my question here the focus a little bit more now on the on the international side of the business.
You've got these Saudi rigs that are coming on here for for this year, but you also mentioned you know opportunities in other areas of the middle East and in Latin America. So maybe you can give us some context as to what kind of increase in activity you could expect outside of the sand that joint venture and you talked about some inflection in pricing there and maybe give us some context of what the.
Pricing it looks like international versus the U S.
Sure. Okay, let me try to recap because there's a lot of ground to cover let me just reiterate Saudi Arabia, So it's clear to everybody.
You know the initial newbuild the first one starting in the third quarter and then we added a second one in the fourth quarter and then we said we added an additional rig in late in the fourth quarter as well.
We're expecting another three of the new builds to go.
On the payroll during the during the first three quarters, so that that's where that stands.
In addition, as we mentioned it's another five awarded to bring the total awards to 10, but those five we don't move impactful for 2023, but away from Saudi Arabia. That's the interesting thing right now I would say I said, if you add up the eastern hemisphere, and a bunch of countries at four or five countries. We think we have about 37%.
Tenders, mostly amina and we have another four or five tenders in Argentina and again, none of these numbers include rates to be precise right Yep Yep.
These numbers include the new built in Saudi Arabia, and currently in the pipeline in terms of committed incremental stuff, including what I just talked about we have five and a half rig years already.
We have visibility for that already for this this year. So I think it's a pretty full cadence of opportunity right now.
In terms of margins we said.
We're guiding the first quarter similar to the fourth quarter, but I think what's going to happen is all these all these incremental rigs are going to put us on panther, they're accretive to existing existing day rates existing margins I think.
Towards the end of the year, it's going to put us on a path of a margin increased to $617000 by the end of 2023.
I think there's just a lot of good stuff happening in international right now.
Not to mention Nabors drilling solutions, such as expanding really fast in the international markets. We had talked about it in prior in prior quarters about the international expansion for NDS.
Actually starting to see that now.
Okay, that's great color and maybe one thought yes, sorry, Tony Scott.
You can say a follow up on that but we have said one thing that I'm really happy about amongst others with MBS to 30% of their of their portfolio of revenue based on what's coming from international So.
It reflects the fact that the push we're putting there as well to grow that part of the business. So.
As a.
Deliberate part of our strategy.
Okay, Great and then maybe a follow up for William and are you there.
In the press release as well as your commentary that you're going to reduce net debt.
From $2 1 billion to around $1 7 billion.
That's the same amount of free cash flow, you're going to generate so are you actually going to reduce debt or just reduce the net debt.
We're going to do both.
Curt I think we obviously need to address.
2023, and 2024 maturities and thats going to be done.
This year of course with the cash flow.
We're also probably going to take care of the 2025, 9%.
Soon this year and we can call those and then we will use the rest of our cash flow also to start.
Nick in a way at the other 2025, so that is going to go down.
That is going to go down as well.
Okay, Great I appreciate that color thanks, guys.
Our next question will come from Keith Mackey with RBC capital capital markets. Please go ahead.
Hi, good morning, Thanks for good afternoon, rather and thanks for taking my questions I just wanted to start on the Nabors drilling solutions, you mentioned, the nabors rigs about six and a half services per rig can you just talk a little bit more about the third party rigs what is the average rig look like in <unk>.
<unk> visit an AC rig and SCR rig et cetera, and how many average services.
Do you have on those rigs in and could you ultimately see that getting closer to that $6 five number as well.
Okay.
Okay, So with respect to third parties.
Let me just start and say that.
Yes, like I mentioned the good thing about it is yes, it's becoming a balanced portfolio like I said, it's 70 30 split between USA in international and in the U S. I'd say, 25% of our of our revenues coming from third party rigs right now so.
And when you when you drive down more than six are on Nabors rigs in terms of third party that's about answered that so yeah.
Thank you Tony So the approach that we have is that we have more than 100 rigs that are running some element of NDS software, which is primarily focused on drilling optimization and we have in mid to high teens third party rigs that are running.
Our full suite of our automation platform, Smartwater, west, which enables multiple smart products and any rig floor automation that that'd be able come up beds. During 2023, so our portfolio.
In the U S and international continues to grow based on both individual services that we can deploy on third party rigs and the complete automation platform that can be deployed primarily on AC rigs.
And what we're seeing what we're seeing Keith is that even for those people have a AC rigs, they're 80 configurations aren't necessarily robust enough to handle the suite of products and so were in discussion with number of contractors are actually converting over to our smart hoist system, which gives them the robustness that they need to actually run the stuff. So.
We have a conversion methodology, that's very cost effective compared to anybody else as alternative out to the marketplace.
Help them convert over to a platform that enables them to grow that part of their business and here I hear I would say is the reason why we're doing this is nabors recognizes with number of rigs we have we can't service the whole world here. Obviously, so that's why we're committed to making this technology available to on third party rigs and we're actually.
Joining up with contractors on a on a cooperative basis not on a conference agent station base, even though where we compete in some areas.
Operators a lot of contractors recognize that.
Since we've been down the path why reinvent the wheel and since we're willing to let them access the good stuff.
It's like a win win proposition. So that's the concept that we've accelerated our accelerated on that's what we're going to push.
Part of on both here in the U S and internationally.
And I think the bottom line of all this stuff is as you can see from the numbers the growth has been pretty dramatic but most importantly, the cash conversion rate is one of the things I, particularly like the cash conversion rate in Mds given idea is 80%.
This year, 80%.
Got it.
That's very good color. Thanks for that just to follow up on the international rig tenders. I think you said 37 tenders in Mena. Another four to 37 tenders for 37 rigs got it 37 tenders for 37 rigs and no not 37 tender no no no.
No Barry.
770, <unk> yeah yeah.
Got it so the question is.
Uh huh.
How many of those tenders.
Tenders and the success of those tenders are embedded would you say in the $1 billion plus guidance for for.
For 2023, and then the free cash flow guidance as well are those are those.
Is it an incremental 37 rigs to what youre running now potentially.
And then if that there'd be some activation.
Cost, presumably in some cash component to that or maybe if you could just help us think through that a little bit more as well so.
That's a great question in reality, what we have embedded is.
Growth that that is already achieved.
As Tony mentioned, so that includes Saudi Arabia.
The standard <unk> plus a couple of other rigs that we've added in other places. So that's already embedded those things are embedded in what is not embedded is any potential success on these tenders and again, we're not handicapping anything.
But in these types of businesses are these types of markets.
The client tends to help significantly with the upgrade and re certification and mobilization costs.
We don't think that the impact on our cash flow.
On a negative basis, therefore for reactivating these rigs should be significant.
Got it thanks very much that's it for me.
Again, if you have a question. Please press Star then one.
Our next question will come from Waqar Sayed with ATB capital markets. Please go ahead.
Thank you for taking my question a question on Sunday.
In terms of total capital spending I understand $180 million is going to be for newborns, what's the total capital spend of incentives for 2020 three.
Hmm.
That's a great question.
About $2 60.
Okay, Saudi Arabia and without it.
That is for Saudi Arabia, a little bit of that will be incurred by my neighbors itself, but yeah. That's that's a Saudi Arabian capex, including those new Bill.
Okay, and then what it would it be fair to say that your guidance of 400 million plus free cash flow in 'twenty. Two 'twenty three all of that free cash flow will be generated outside of Senate.
Well actually signed that will consume cash.
So the cash generation outside.
Of course, because they are building $180 million.
Our total of Capex are up to 40, or so I guess the internal Susannah.
It's more than the generation personna from one year.
However outside.
Outside China that cash consumption, which we think is going to be somewhere in the maybe $40 million range is included in our consolidated number that implies.
That the 400 that I mentioned or more than 400 that I mentioned is going to for.
The pieces outside of Sana, who is going to be higher by about $40 million to $50 million.
Okay Fair enough yeah, what I was trying to understand is.
In third quarter, the cash on the balance sheet incentive it was about $300 million substantive substantial part of your full 50 kind of cash in the balance sheet was in sunlight.
But but given most of the free cash flow is going to be outside of sudden add next year in 2023, yeah all of it all of it and more.
All of it and more automated more yeah, absolutely so you've got ability to pay down debt and all the other good stuff that you can do your flexibility improves considerably in 2023.
That's correct exactly.
Exactly right and I know you said it better than me actually.
The only thing I'd add to that is that as as we get to steady state on the new builds with Saudi Arabia.
Well, the five cadence there'll be a point where.
That becomes self sustaining as well because the cash from the.
The rigs that are built online than short to underwrite the new newbuild and actually become accretive as well on a cash on cash basis.
At that crossover point will come within two years or.
Roughly that maybe sooner.
Okay.
Great well.
It looks like there are good days ahead and.
So best of luck. Thank you very much for yoga, Yeah your answers.
Thank you Luca.
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And with no remaining questions. This will conclude our question and answer session.
I would like to turn the conference back over to William Conroy for closing remarks.
You all for joining us this afternoon.
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So we'll end the call there. Thank you very much.
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