First Capital Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 7 speakers on the call.

Operator

Good day, and welcome to the Nabors Industries First Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon, everyone. Thank you for joining Nabors' Q1 2023 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.com. Instructions for the replay of this call are posted on the website as well.

Speaker 1

With us today, in addition to Tony, William and me, Are 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 1934. 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.

Speaker 1

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 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.

Speaker 2

Good afternoon. Thank you for joining us as we present our results and outlook. Our segments continue to perform well In the face of a challenging environment in Lower forty eight, sequential growth in the drilling businesses drove the increase in EBITDA. For the Q1, adjusted EBITDA totaled $240,000,000 This result was in line with our outlook for the segments on last quarter's call. Our global average rig count for the Q1 declined by 1 rig.

Speaker 2

Growth in the international segment was offset by a reduction in the U. S. Lower 48. EBITDA in Drilling Solutions once again grew sequentially reaching $32,000,000 Combined, our Advanced Drilling Solutions and Rig Technologies Segments accounted for 15% of total EBITDA. In the Q1, we again generated free cash flow.

Speaker 2

We achieved this performance even with semi annual interest payments on most of our debt and seasonally high cash outflows as we start the year. Next, I will update the progress we made on our 5 keys to excellence. Our success executing these strategies Drives value creation across our stakeholder base. The 5 elements include enhancing our leading performance and technology in the U. S, Expanding our international business with innovative solutions, advancing technology and innovation with increasing financial results, improving our capital structure and our commitments to sustainability and the energy transition.

Speaker 2

Let me update each of these starting with our performance in the U. S. Daily rig margins in our Lower forty eight operation expanded in the Q1. This measure reached $16,700 up from $14,600 in the previous quarter. This sequential growth 14% Reflects strong day rates in the quarter, which increased the fleet's average daily margin.

Speaker 2

This performance does not reflect the growing Lower 48 margin from NDS. Combined, that margin is significantly higher. I'll discuss this in more detail in a few moments. Now I'll discuss our international business. Daily margins in this segment increased in the Q1 reaching $15,200 Profitability Improved in several international markets, including most notably Saudi Arabia.

Speaker 2

I'll spend a few moments providing an on the newbuilds rig program in Saudi Arabia. The first two rigs deployed in the second half of twenty twenty two, they are performing well, which is encouraging for the broader newbuild program. SANAD expects to deploy 3 additional newbuilds over the remainder of this year. These rigs have attractive returns with 6 year initial contract terms. We expect construction of the previously awarded 2nd for Entrance 5 rigs to commence in the coming months.

Speaker 2

Next, let me discuss our technology and innovation. The key focuses of our initiatives in these areas include automation, digitalization and robotization. The initial deployment of our revolutionary RAYSR module has been successful. Recall that RAYSR is our robotic rig 4 module, can be retrofitted on any existing rig. RASR advances the standard for consistent drilling performance and control.

Speaker 2

As important, Razer improves rig 4 safety by removing rig hands from the red zone and from the XERIC. In our Drilling Solutions business, quarterly EBITDA increased sequentially to nearly $32,000,000 NDS's growth in the Q1 Was led by managed pressure drilling and performance software. Let me detail the value NDS generates in Lower forty eight market. The combined average daily margin is lower 48 from our Drilling and Drilling Solutions businesses with almost $19,900 in the Q1. Of that, NDS contributed just over $3,200 per day.

Speaker 2

That combined figure increased by 15% versus the 4th quarter. In the Q1, the typical Nabors rig in the Lower forty eight ran more than 6 MDS services. Additional penetration of the MDS portfolio represents a large opportunity. This increase is an important component of our MDS growth strategy. Our focus on automation and digital services is generating results in the market.

Speaker 2

In the Q1, we saw Growth in rig cloud instrumentation installs on both Nabors and 3rd party rigs, including a nearly 30% increase in SmartPlan and broad growth across the SmartSuite portfolio as well as Revit. In the Q1, NDS revenue on U. S. 3rd party rigs Grew by 10% versus the previous quarter. This performance matched the growth rate in the 4th quarter.

Speaker 2

Growth on 3rd party rigs is a key target area for NDS. These results demonstrate the broad appeal of the NDS portfolio across E and P clients and other drilling contractors alike. Recently, we announced in the lines between NDS and Corva. This collaboration will deliver our unique automated drilling solution that will create value to E and P companies and drilling contractors by improving performance outcomes. Next, let me update our progress to improve our capital structure.

Speaker 2

We made several notable accomplishments in this area in the Q1. In the Q1, we generated free cash flow of $37,000,000 as compared to negative $39,000,000 in the Q1 of last year. We also completed the issuance of convertible notes followed by redemption of high coupon notes, which were due in 2025. I'll finish this part of the discussion with remarks on sustainability and the energy transition. Our three focus areas include improving our own environmental footprint, capitalizing on related opportunities and investing in adjacent leading edge companies.

Speaker 2

Today, I will update several impactful technologies, which are focused on reducing our own environmental footprint as well as on third party rigs. First is our PowerTap module, which connects rigs to the grid. We now have 15 of these units deployed, including multiple units on 3rd party rigs. 2nd, our smart power advisory and control system optimizes utilization of the engines and reduces emissions. This solution is currently installed on all of our rigs in the Lower forty eight.

Speaker 2

3rd, the Nano 2 diesel fuel additive Improves engine performance and reduces emissions. We have already successfully treated more than 17,000,000 gallons of diesel to date. Quarterly revenue from this portfolio increased by 68% versus the prior quarter. Clients indicate strong interest in our solutions that reduce fuel consumption and emissions. We are now in field testing for a new technology, which uses hydrogen Economically generated at the well site to reduce fuel consumption, we expect this product to become commercial later this year.

Speaker 2

Although still a relatively small part of our business, our clean energy initiatives are growing at a fast pace. Now I will spend a few moments on the macro environment. The recent volatility in commodity prices, particularly natural gas has impacted activity levels. However, we believe that the current range of spot and future prices for WTI and Brent should continue to be supportive of oil directed drilling activity In the Lower 48. Natural gas remains more challenged.

Speaker 2

While challenges may persist through next year, we believe the pipeline of several large LNG projects expected to come online the next 2 years will support a burgeoning export gas market. Several factors in the current macro environment could impact our markets. On the negative side, demand destruction from higher interest rates and the possibility of a recession looms. On the positive side, there is the potential for an acceleration of economic activity in China. Next, I will spend a few moments on day rates.

Speaker 2

Our first quarter results for the Lower forty eight reflect the pricing environment we saw through 2022. More recently, although day rates for our highest spec rigs remain at historically high levels, we have experienced some softening in the predominantly gas basins. Notwithstanding this interim pressure, we expect average daily revenue in the Lower 48 to be essentially flat with the Q1. In the current environment, we believe prioritizing revenue and margins is prudent. As such, we remain focused on realizing the value that our rigs and services deliver clients.

Speaker 2

In the international market, we continue to see prospects for increases in the activity across many of our major geographies. This increase in demand supports generally higher day rates and margin expansion in both the Middle East and Latin America. Once again, we surveyed the largest Lower forty eight clients at the end of the Q1. This group accounted for approximately 34% of the working rig count. Our survey indicates a modest near term dip in activity followed by an increase in the second half of the year.

Speaker 2

We believe this outlook primarily reflects the decline in natural gas prices balanced by constructive oil prices. Operators in several of our existing international markets are planning increases in their activity levels. We see potential opportunities to add rigs in multiple markets both in the Middle East and Latin America and we will continue adding newbuild rigs in Saudi Arabia. We estimate each new build will generate annual EBITDA of approximately $10,000,000 With the first ten awards in hand, SANAD is on the way to realizing EBITDA of more than $100,000,000 per year from the newbuild program. Let me now wrap up my remarks with the following.

Speaker 2

The near term commodity price volatility may give way to an improving market outlook As we look through and beyond 2023, we expect activity across our markets to increase over the second half of the year. Our advanced services and solutions fill the need for automation, digitalization and improved sustainability. We see excellent prospects for growth across this portfolio. In summary, Nabors remains poised to deliver Year over year improvements in 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.

Speaker 2

Thank you, Tony.

Speaker 3

The Q1 results were encouraging with strong performance in several markets, offsetting a reduction in Lower forty eight drilling activity. As anticipated during prior earnings call, the current environment in the predominantly gas basins in the U. S. Had a noticeable impact on our Lower forty eight rig count during the Q1. As contracts in these areas started to expire, gas rig count dropped over the last several weeks, dragging down the overall rig count for the market.

Speaker 3

Although oil basins have remained supportive and have started to provide incremental activity, These increases have not been enough to accommodate the full redeployment of gas rigs. With the current level of oil prices And the fundamental imbalance between supply and demand, we expect additional increases in active oil rigs through the remainder of the year and a rebound in utilization for the market as a whole. Despite the rig count decrease we've seen in the market, pricing has remained at high levels. Although day rates have decreased in the predominantly gas basins, they have remained fairly firm outside those areas. Consequently, We managed to continue increasing our revenue per day on our drilling margins during the quarter.

Speaker 3

Even with a sequential reduction in average rig count, We delivered significantly higher Lower forty 8 EBITDA than in the 4th quarter. Outside the Lower forty 8, drilling rig markets were strong as was Drilling Solutions, which also benefited from increased penetration and higher pricing in the U. S. Revenue from operations for the Q1 $779,000,000 compared to $760,000,000 in the 4th quarter, a 2.5% improvement despite the shorter first quarter. Most segments, particularly U.

Speaker 3

S. Drilling and Drilling Solutions contributed to the growth. U. S. Drilling revenue increased by $17,800,000 to $351,000,000 a 5.3 percent improvement.

Speaker 3

Lower forty eight revenue grew by almost 7%, reflecting an increase in daily revenue of over $3,700 or 11.4%. Average daily revenue for the Q1 was almost $36,500 up from 32,700 a quarter ago. Revenue from our international segment increased by $2,500,000 to 320,000,000 or about 1% up for the quarter. The improvement was driven primarily by higher day rates and activity as well as performance improvements in Saudi Arabia. In Latin America, one of our Mexico rigs was off revenue due to a long move and the rig we expected to deploy in March for a customer in Argentina Was moved to mid April.

Speaker 3

Drilling Solutions revenue also grew sequentially by $3,700,000 to $75,000,000 A 5.2% improvement. Revenue in our Rig Technologies segment at $58,500,000 was down $4,300,000 or 6.9%. The decrease in revenue came primarily from delayed capital equipment deliveries, partially offset by headway made In our energy transition initiatives, total adjusted EBITDA for the quarter was $240,000,000 $10,000,000 higher than the 4th quarter, A 4.3% improvement. This was a strong performance considering the $5,000,000 unfavorable impact from the shorter first quarter. EBITDA margins of 30.8 percent increased for the 4th consecutive quarter.

Speaker 3

This is a 780 basis point improvement compared to the Q1 of 2022. U. S. Drilling EBITDA of $156,000,000 was up by 12,300,000 or 8.6%. This improvement was driven by our Lower forty eight EBITDA, which rose by $13,000,000 a 10.3% improvement sequentially.

Speaker 3

Buffeting of the gas market drove a 1.8% sequential rig count reduction to 93.3 rigs instead of the slight increase of 1 rig that we expected. Daily rig margins in our Lower forty eight business Increased by $2,090 to $16,700 in the Q1 and higher pricing for our fleet. We exited the Q1 with 88 rigs operating as the reduction in gas activity started to bite and contract expired for various rigs that are currently being redeployed. At this point, the pace of reduction in gas basin activity It's exceeding the incremental opportunities in the oil basins. We expect average rig count in the second quarter to decrease by roughly 3 rigs from the 1st quarter And then to trend back up during the second half of the year as oil activity continues to increase.

Speaker 3

For the second quarter, We project our Lower forty eight average daily margin to continue expanding to a range of $16,900 to $17,000 This is without the additional contribution from our Drilling Solutions business. On a net basis, EBITDA from our other markets within the U. S. Drilling segment remains steady. In the Q2, the combined EBITDA of these two markets should improve slightly as the effect of 1 rig in Alaska rolling to cold stack in late Q1 It's more than offset by a meaningful positive day rate reset on our MODS 400 rate in the Gulf of Mexico.

Speaker 3

International EBITDA of $88,600,000 was essentially in line with the 4th quarter despite slightly higher activity levels and increase margins. Again, the short first quarter impacted the sequential comparison. International rig count improved by about 1 rig With full quarter contributions from the 2nd Nougall rig and the reactivation of a legacy rig in Saudi Arabia, both of which deployed late in Q4. These increases were offset by the Mexico rig move. Gross margin increased by about $300 to over $15,200 per day, principally due to higher in Saudi Arabia related to contract expansions.

Speaker 3

We expect international average rig count in the Q2 to be in line with the Q1. We now anticipate deploying the next Saudi Nougals rig early in Q3. One additional rig is scheduled for late in Q3 and another one before the end of the year. We also expect the start up of an additional rig in Argentina. However, we are now forecasting these increases to be offset by activity reductions in Colombia.

Speaker 3

We project Q2 international daily margins to be between 15,900,16,100. Drilling Solutions delivered adjusted EBITDA of $31,900,000 up $1,600,000 from the 4th quarter. Gross margin for NDS exceeded 52%. We continue to see increased penetration of our advanced solutions, Particularly in 3rd party rigs with the largest contributions to growth coming from performance software and managed pressure drilling in the U. S.

Speaker 3

We expect 2nd quarter EBITDA for Drilling Solutions to increase by approximately 3% over the Q1 level. NDS gross margin per day for the Lower forty eight increased to just over $3,200 a $4.30 increase compared to the 4th quarter. This improvement takes our combined Drilling Rig and Drilling Solutions daily gross margin to $19,900 a sequential increase Over $2,500 per day. For the Q1, Rig Technologies generated EBITDA of $5,000,000 The sequential decline was primarily driven by a reduction in capital equipment sales. For the Q2, we expect RigTech EBITDA to grow between $2,000,000 $3,000,000 Now turning to liquidity and cash generation.

Speaker 3

Free cash flow of $37,000,000 in the first quarter Exceeded our expectation since the Q1 does include higher cash interest payments on our notes. More of our coupon payments fall in the 1st and third quarters. In addition, at the beginning of the year, we paid several large annual items such as property taxes and employee bonuses. Nonetheless, these outflows were led by the higher EBITDA and strong collections. Capital expenditures of $119,000,000 in the Q1 were lower than anticipated.

Speaker 3

This amount included $37,000,000 of investments supporting the SANAD Newbuild program. For the 2nd quarter, We expect capital expenditures of approximately $140,000,000 including $55,000,000 for SANAD newbuilds. We're currently reviewing our capital expenditure plan for 2023 to reflect the current market environment. We expect CapEx reductions the Lower forty eight and Columbia. We are targeting 2nd quarter free cash flow approaching $50,000,000 For the full year, we still expect to deliver free cash flow in the $400,000,000 range.

Speaker 3

Lower capital expenditures And reduce working capital should mitigate any potential reductions in EBITDA. At the end of the first quarter, Net debt remained below $2,100,000,000 During the quarter, we issued $250,000,000 in 1.75 convertible notes due in 2029. The notes conversion share price is $212.51 We used the funds to redeem the 9% notes due in 2025. In addition to improving our debt maturity profile, We also reduced our annual interest payments by more than $15,000,000 Year to date, we have bought back $9,200,000 Our 2024 convertible notes. In the Q2, we plan to repay the $52,000,000 remaining balance on our September 2023 senior notes.

Speaker 3

With that, I will turn the call back to Tony for his concluding remarks.

Speaker 2

Thank you, William. I will now conclude my remarks this afternoon. First, let me summarize our Q1 highlights. Quarterly adjusted EBITDA reached 240,000,000 Free cash flow in the quarter was $37,000,000 Our Lower forty eight daily margins reached a quarterly record of $16,690 and when combined with NDS, that measure is nearly $19,900 In the Lower forty eight, we remain disciplined in our approach to pricing. Current oil prices should eventually lead to higher oilfield activity, which in turn drives rig demand and supports rig pricing.

Speaker 2

In our international segment, the combination of growth in our major markets coupled with pending new build deployments in SANAD should lead to improving performance. In NDS, we remain focused on increasing our service penetration on both Nabors rigs and on 3rd party units. The international markets are also realizing the efficiency benefits from the NDS portfolio. We remain optimistic for material future growth in this segment. For all of 2023, we expect a material contribution from Rig Technologies and we have high expectations for the energy transition initiatives where the early results are very encouraging.

Speaker 2

Driven in large part by our expected free cash flow and with the debt transactions already completed, We are optimistic for material progress to improve our leverage and capital structure in 2023. I'm looking forward To reporting on our performance in the coming quarters. That concludes my remarks on the Q1. Thank you for your time and attention. With that, we will take your questions.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Kurt Hallead with Benchmark. Please go ahead.

Speaker 4

Hey, good afternoon guys.

Speaker 2

Good afternoon.

Speaker 4

Yes, it's a great summary. Really appreciate all level of detail you've gone through. So I guess let's start off With the U. S. Land business, Tony, so you indicated that there's going to some softness in the natural gas basins, you're starting to see that here in the second quarter.

Speaker 4

As you go forward in the second half of the year, You talked about your survey of customers. And are you already getting indications from those customers that they want to start picking up some rigs? And Maybe that's question number 1. And question number 2 is, how many rigs are you going to, if any, are you planning on moving out of gas basins into some of the oil basins?

Speaker 2

Right. Well, let me first let's start with the second question, then we'll get back to

Speaker 3

the first. In terms of

Speaker 2

the gas markets, obviously, we have hit an air pocket here. And in terms of the weakest markets, I would say the Northeast was one of them. Notice we get East Texas Northeast didn't see as large an increased activity when gas prices rose in the 2021, 2022 timeframe because the takeaway capacity and operators stayed within their core acreage and activity levels. With respect to East Texas, however, there was a lot of private operators that came in It drove the activity increase and as we've remarked, when the end of March came along, a lot of those guys just hit the halt And that's what caused the Sare Pocket. So, that was In part ameliorated by people wanting to finish up pads and now you've seen some of that stuff roll off.

Speaker 2

But through all that, I think

Operator

What we've tried to do

Speaker 2

is maintain our pricing discipline and leading edge rates in the gas markets, I would say right now are all in, in the low 30s. And I think the good news as you alluded to and picking up on William's comments is that we are moving rigs from both East Texas and South Texas to West Texas. In some cases in most of the cases actually, the customers paying for all the majority of the move costs into West Texas. So I think That process is underway and we're actively managing that process right now. And longer term, I think for the obvious reasons of LNG export capacity, I think we're constructive on still on the near term and we're not going to be prepared to Going there and increase market share by buying down using our rates to buy down, but we will maintain our position in those markets because we believe The guest markets do have a long term future here.

Speaker 2

So, does that cover those questions for you?

Speaker 4

That's great. Just one incremental thing on that was, so how many rigs are you moving out of the gas basins into the oil basins?

Speaker 2

Right now, 4 or 5, that order of magnitude right now.

Speaker 4

Got you. Okay. Great. And then just one follow-up, if I may. You talked about the newbuild program finally kicking in for Senet.

Speaker 4

And you indicated that was $10,000,000 of EBITDA Per new build and then you've referenced something along the lines of $100,000,000 of EBITDA. Can you just clarify that first, please?

Speaker 2

Sure. So every rig incrementally is $10,000,000 of annual EBITDA. Every new build rig On an annualized basis, dollars 10,000,000 EBITDA. And so we have 2 tranches awarded right now. And as they get all get on stream, there will be 10 rigs, That will create $100,000,000 EBITDA business.

Speaker 2

And as we've outlined, the progression is 2 start up The remaining three end of the first tranche is going to be coming out later this year and then we've been awarded the next 5 and the first of those will deploy The end of the year, at the beginning of next year, and so we should get back to a cadence of 5 a year. But once those first ten get on, you have a $100,000,000 EBITDA business, Well, with long term contracts with a lot of runway after that and with additional upside. So it's a pretty robust story.

Speaker 4

Okay. And then those 10th stakes should be fully up and running by the end of 2024?

Speaker 2

Absolutely. Absolutely. I mean, there'll be like I said, the second five, The first five will be rolled out this year, during this year and then the next five start at the end of this year through 2024.

Speaker 4

Got you. And you indicated now coming back to U. S. Land again just real quick. So you referenced gas pricing and gas basins in Low 30s that must mean that pricing in the oil basins are still went high to high 30s or so?

Speaker 2

Yes. So I'd say the price of the high base is mid to high 30s and I think one of the things you've got to bear in mind here is that the super spec utilization percentage is still around 80% with all this and There is a difference between those rigs and the other rigs and that's giving support to this pricing structure right now. So that's why we're still constructive on the whole environment there. Obviously, when people move some rigs into the basin, it creates some downward pressure. Just by way of background, we had I think we have rigs pricing in the low 40s for just earlier in the quarter.

Speaker 2

So that has come in to the high To the high mid-30s, but it's still very constructive and given the utilization percentage, we still remain

Speaker 3

Pretty satisfied with where things are. So Kurt, just a comment to clarify that. When we talk about day rates, revenue per day It's about $4,000 $4,500 per day higher than those day rates. That includes reimbursables and the add ons But the client may opt to buy or not. So keep that in mind when you're evaluating those numbers.

Speaker 4

That's great. That's awesome color. Thanks guys. Appreciate it.

Operator

Thank you. And our next question today comes from Derek Poudhay with Barclays. Please go ahead.

Speaker 5

Hey, good afternoon. So just continuing on those comments around the day rates, the gas going down to low-30s, seeing a little bit of pressure coming into the oil basins. How should we think about the daily margins as we work towards the back half of the year? You talked about bringing back But then you'll have a mix of repricing rigs, you have a mix of softening rates in the gas markets, Strength in the oil markets and it looks like you have some elevated OpEx per day, just a lot of moving pieces. Should we see a downward inflection And your daily margins or would you expect continued strengthening as you work through the year, just given a lot of the crosscurrents that are going on?

Speaker 2

Well, as you saw in our prepared remarks, Q2, we're actually going to maintain, in fact, go up a little bit. And obviously, we're at the mid-30s there. We're getting a little closer to our average day rate. So it's going to need a little more momentum in the second half, but we're pretty confident in that momentum On the and I'll let William expand on that. But with respect to the cost numbers, bear in mind our costs those costs That you're referring to in the Q1, increase in those costs is actually because of content increasing content, not necessarily cost inflation.

Speaker 2

And in fact, inflation has actually become less of an issue for us as well as labor has become less of an issue for us. We'll give a little more comment about the direction of the pricing for the remainder of the year.

Speaker 3

Yes, I think a lot of the rigs that are moving From the gas markets into stronger markets have been moving at very good day rates. So we do expect the second half To see a continued gradual increase in all activity and certainly in that case, Strength and firm prices for our services. So we think in the second half, we'll continue to go upwards in terms of margins Keep in mind again that when Tony says mid-30s that revenue per day is actually About $39,000 $40,000 per day, right. And our costs have been between $18,000 $19,000 per day. So we still have some running room to go in terms of pricing down the road and in terms of margins as well.

Speaker 3

Now obviously the pace that we've seen in the past three quarters, we won't see that over the next three quarters because we've already brought our average per day to the $36,500 per day level, which we were thinking we would peak around the $40,000 per day level Absent some large increase in utilization. So we're getting closer to the number that we think we were going to get to. So you won't probably won't see the rates that we see $3,000 per day increases that we saw in prior quarters.

Speaker 2

And the only follow-up I'd add to that is, please don't lose sight of the fact that If I had said a year ago that our combined NDS drilling margin rate was going to be $99,000 almost $20,000 everyone on this call would have said we're smoking something. I mean that number is really actually very quite good, quite good. Amazing. Actually, it's amazing. And so that That just gives you an idea of the power of the portfolio and the power of where we're positioned right now.

Speaker 2

So, I think we're really satisfied with where What we have to offer the clients and the response.

Speaker 5

I appreciate all the comments there. Very helpful. Just last one, a quick one from me. Just the $1,000,000,000 EBITDA guide you guys put out, I think it was end of last year. Just you want to readdress that you still feel good about it?

Speaker 5

Any updates that we should be thinking about that target out there?

Speaker 3

We feel very good about it.

Speaker 5

Great. Thanks. I'll turn it back.

Operator

Thank you. Our next question today comes from Keith Mackey with RBC Capital Markets. Please go ahead.

Speaker 6

Hi, good Thanks for taking my questions. I just maybe wanted to start out on the CapEx front. Appreciate you are working through the scenarios For what your 2023 CapEx should now be given the adjustment in activity levels in the Lower 48 in Colombia. But if we were to think about it in terms of a framework, should we be thinking about the adjustment essentially being, Call it $1,000,000 a day for maintenance CapEx for every rig we take out of our model? And then is there some incremental activation CapEx that you think won't have to be spent?

Speaker 6

Or is there another way to think about The levers in what your revised capital spending will approximately be?

Speaker 3

Hey, thanks. That's a great question. Yes, you're right on the $1,000,000 per day In the U. S, Lower forty 8. Internationally, it may be a little bit higher than that.

Speaker 3

I mean, the rigs tend to have more stuff in the international markets. So yes, there will be an automatic adjustment just because of the air pocket that we hit in the Q2, as Tony mentioned. So on the average for the full year, we'll have less operating time and less, I would say, wear and tear Commutative on our rigs, right? So that's part of the answer. We were planning On spending incremental money and reactivation early on.

Speaker 3

However, we do think that by the end of the year, we'll be back on track And some of that money will be spent in 2023, if not all, maybe some of that will be later in the year. So maybe the payments slip into 2024, but most of the cost is based on reduction in average working rigs during the year, Which most of that will be in the first in the second quarter. Got it. Okay. So just And again, $1,000,000 per year is per 1 year per 1,000,000 per year per rig is the right.

Speaker 6

Got it. Got it. Okay. So it sounds like we're talking about a reduction in like the, I don't know $20,000,000 to $40,000,000 range and nothing more, nothing less necessarily. Is that like broadly How that should all shake out or

Speaker 3

I think it's more we haven't finished the analysis and part of it is Colombia. As you know, the government there is not very helpful To our industry and so we don't know what's going to happen there, but certainly not growth that we thought we may have had this year. And so there's some from Colombia, but I think most of it will be in the lower 48 and yes, somewhere in the $20 plus million range is something we're targeting.

Speaker 6

Okay. Okay. That's helpful. Thanks for that. Second question would be just on Not on the price levels, but I guess on the price mechanism, you've got the base rig and then you've got All of the rentals and things, but you've also of course got NDS.

Speaker 6

And so how do you which is of course a high margin, low CapEx Business that you want to grow with more third parties. So how do you think about When you go to market to price a rig, like if you're trying to sell more NDS services on these 3rd party rigs Specifically or on your own rigs as well. How do you think about like pricing the rig Has the desire to bundle some of that in kind of caused some churn on the rig price as well? Or is it Totally separate conversation that you like to have with customers as you price the rigs and get NDS services on there?

Speaker 2

I think the whole reason why we've created NDS was to get away from this concept of bundling content and we believe that what we offer Something unique value and therefore the conversation is about the extra value the NDS package offers. And the fact that We're actually able to offer NDS to 3rd parties, I think further demonstrates the value of that portfolio on a standalone basis. So yes, purposely we've constructed this in a way To give you all some visibility as to what those numbers are rather than putting them all together, there's some other people in our sector The claims put them all together and but I think one of the problems we put things all together is they tend to first Give it away and number 2, not be appreciated what the real value proposition is. And so that's why we've deliberately done it this way because we think it's the best way to prove to ourselves that we're creating value and also show the customer and it's an incentive to make grow that even more because obviously That segment is capital light. I personally believe it deserves a better valuation because of it and for the growth prospects on top of it.

Speaker 2

You're absolutely right. When it comes to 3rd parties, we try to price on a value basis what those tools bring to the party. And you can see from our Corvid announcement, Focusing on third party growth is a core element of our strategy. I mean, Corva Waste Neighbors, I think Corva has the best set of apps For the rigs and also they bring to the table operator workflows. And so by combining forces here, we're hoping to create the industry premier platform Integrate all this up, have one stop shop for operators and we're actually going to offer it also drilling contractors as well.

Speaker 2

I think It's kind of a unique value prop for everybody involved and we're pretty excited about that opportunity. And let

Speaker 3

me just also comment something, Keith, because I think that's a very A relevant question. If you look at the margins of drilling rigs alone without including Other services, but just the drilling rigs, we have had the highest for the last 3 years in the market, barring nobody and by a lot. So we've a couple of $1,000 more than our closest peers And maybe 3 or even more versus some of the Canadian companies. So I'd like to point that out because that proves to you And in addition to the $3,000 plus of NDS that we're getting, we're still getting the highest margins for the drilling rigs alone in the Lower 48 and by a wide margin.

Speaker 6

Perfect. That's very helpful. And you answered my core of Follow-up in that as well. So appreciate the comments. Thank you.

Speaker 3

So thanks for the good questions, Keith.

Speaker 2

Thank

Operator

And ladies and gentlemen, this concludes our question and answer session. Like to turn the conference back over to William Conroy for any closing remarks.

Speaker 1

Thank you all for joining us this afternoon. If you have any additional questions or would like to follow-up, please contact us. Rocco, we'll end the call there. Thank you very much.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation.

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Earnings Conference Call
First Capital Q1 2023
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