Nabors Industries Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the Nabors Industry First Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to introduce William Conroy, Vice President, Corporate Development and Investor Relations. Please go ahead.

Speaker 1

Good afternoon, everyone. Thank you for joining Nabors' Q1 2024 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President and Chief Executive Officer and William Mostrepo, 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 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.

Speaker 2

With that, I will turn the call over to Tony to begin. Good afternoon. Thank you for joining us today as we present our results and outlook. Total adjusted EBITDA exceeded our expectations in the Q1. Daily margins in the U.

Speaker 2

S. Lower 48 remained strong and our 2 technology segments performed well. I would like to start my detailed remarks with comments on our international markets. The strength of the international expansion continues to surprise us. It's been over a decade since I've seen an environment as robust as this one.

Speaker 2

We have a unique opportunity to strengthen our international footprint. On our previous conference call, I mentioned we had scheduled the deployment of 7 international rigs in 2024, 3 in Saudi Arabia and 4 in Algeria. In the Q1, we started 2 of the rigs in Algeria. And so far in the Q2, we started the 3rd Algeria unit. That's the update on our previously expected deployments.

Speaker 2

In addition, we have also been successful with recent negotiations for 3 rigs in Argentina. We expect 2 of those to go to work in 2024. That leaves a total of 6 more rigs slated to start up over the remainder of 2024. The 3rd Argentina rig should commence operations in early 2025. I would like to point out that all three of these awards in Argentina have long term contracts with favorable pricing and high rates of return.

Speaker 2

Additionally, we have been shortlisted for 3 rigs to go to work in the Middle East. These rigs would also have multiyear term contracts with favorable economics. In the Lower forty eight, industry activity has been disappointing. We had hoped for a moderate increase during the Q1. From beginning to end, the Lower forty eight Industry Land rig count declined by 4 rigs.

Speaker 2

The average Lower 48 Industry count was essentially flat. Nonetheless, leading edge pricing for the high performance technology focused rigs in the Lower 48 was stable. This helps support our own daily rig margin. Once again, our expense control in the Lower 48 was outstanding. Daily operating expenses declined.

Speaker 2

In the Q1, total adjusted EBITDA for Nabors was $221,000,000 Our global average rig count grew by 4 rigs. This increase was spread across our operations. Our Drilling Solutions and Rig Technologies segments together generated EBITDA of $39,000,000 Combined, they accounted for more than 17% of total EBITDA in the quarter. Next, let me make some comments on 5 key drivers of our results. I'll start with our performance in the U.

Speaker 2

S. Daily rig margins in our lower 48 rig fleet exceeded our expectations. The market for our rigs remains strong. At slightly above $16,000 daily margin in the Q1 was higher than we expected. Revenue was better than our projections.

Speaker 2

Expenses declined. I am pleased with this performance. These results demonstrate our team's ability to execute at an impressive level in this market environment. We are working diligently to maintain, if not improve this execution. The industry rig count was essentially flat in the Q1.

Speaker 2

Our own rig count increased, but it was below our target. As we have said before, pricing discipline remains our priority. Our reported Lower 48 daily rig margin reflects financial results of just our drilling rigs. The Drilling Solutions portfolio NDS generates significant margin on top of that. I'll discuss this in more detail in a few moments.

Speaker 2

Now I'll review our international drilling business. As I said earlier, this international market is the strongest we have seen in a decade. It is providing us with multiple high return opportunities to reactivate rigs. We see tangible evidence in tendering and negotiating activity, rig awards and deployments. During the Q1, we deployed 2 rigs of our 4 rig award in Algeria.

Speaker 2

A third rig has since started. We have also been awarded 3 incremental rigs in Argentina. These awards across multiple operators should commence operations around the end of the year, 2 in the Q4 and 1 in the Q1 of 2025. All three of the rigs are currently idle in the U. S.

Speaker 2

We plan to transfer them to Argentina. This redeployment is an excellent use of our existing assets. In Saudi Arabia, the 6th new build is currently finishing its acceptance procedure. It should begin drilling imminently. 2 more will be deployed this year.

Speaker 2

Another 5 are scheduled for 2025 and the final 2 of the existing awards should start in 2026. Finally, we were shortlisted for 3 rigs in a large market in the Middle East. The rigs that we bid are already in country. This opportunity would cement our position in this important geography. With these developments, it is clear our prior optimism was well placed.

Speaker 2

I am confident we will report even more progress on this front. For the Q1, daily margin in our international segment was impacted by labor unrest in Colombia involving 4 rigs. Looking forward, we expect deployments and operational improvements to generate daily margin of approximately $17,000 by the end of the year. Let me finish my remarks on our international business with a few comments on our activity in Saudi Arabia. Several offshore drilling contractors in the kingdom have announced the temporary suspension of operations on a number of rigs.

Speaker 2

As for SANAD's outlook, we are bullish. Aramco's development of the natural gas resource is expanding. Its focus on the unconventional land reserves is increasing. Ascenton's fleet overwhelmingly targets gas. Moreover, the recent new build awards are for rigs capable of drilling for gas.

Speaker 2

The international expansion for Nabors still has legs. Beyond our announcements today, we see prospects for additional rigs in international markets. These include units in Kuwait, more opportunities in Algeria, rigs in Argentina, Mexico and elsewhere in the Eastern Hemisphere. Next, let me discuss our technology and innovation. NDS' revenue grew sequentially on Nabors' own Lower 48 rigs and on international rigs.

Speaker 2

This growth was offset by a decline in Lower 48 third party market. Overall, NDS EBITDA exceeded our expectations. From a product line perspective, managed pressure drilling and rig cloud drove the segment's 1st quarter performance. Next, I will detail the value that MDS generates in Lower forty eight market. The average daily margin in Lower forty eight from our drilling and drilling solutions businesses combined was $19,440 in the Q1.

Speaker 2

Of that, NDS contributed more than $3,400 per day. This incremental margin is significant. We generate this margin with limited capital spending, so the returns are impressive. In the Q1, penetration of MDS' services on Nabors rigs in the Lower 48 remains high. On 3rd party rigs, we saw growth in SmartSlide Directional Steering, our Revit 6 foot mitigation and our SmartSlide SmartNav Directional Guidance Software.

Speaker 2

NDS's 1st quarter results demonstrate the value of board portfolio and its focus on both Nabors owned and 3rd party rigs. Looking ahead, we are making significant inroads with smaller contractors interested in adding neighbor solutions to their portfolios. At the same time, international clients are increasingly recognizing the performance improvements in the U. S. They too are accelerating their adoption of Nabors advanced technology.

Speaker 2

Next, let me make some comments on our capital structure. Early in the Q1, we redeemed the notes that were due in 2024 2025. We accomplished this with the proceeds from the $650,000,000 of notes issued at the end of 2023. Our next maturity is in 2026. As we look ahead, our first priority for free cash flow remains reducing net debt and improving our credit ratings.

Speaker 2

I'll finish this part of the discussion with remarks on sustainability and the energy transition. Our energy transition initiatives, as you know, focus on improving operational efficiency and reducing emissions intensity. These technology solutions made a significant contribution to our Rig Technologies segment results. The most impactful remains our PowerTap module. This unit connects rigs to the grid, greatly reducing diesel fuel consumption as well as related emissions.

Speaker 2

With the appropriate availability of grid power, operators can realize cost savings by employing PowerTap. In a significant development, the 1st PowerTap unit deployed outside the U. S. Is running in Argentina. This unit incorporates a frequency converter for international applications.

Speaker 2

We have additional units under construction, including 2 destined for international clients. Interest in our energy transition portfolio remains strong in the U. S. On top of that, we see growing opportunities overseas. Next, I will discuss the rig pricing environment.

Speaker 2

1st quarter results for our Lower forty eight operation reflect continued stability in leading edge market Our approach to Lower forty eight market is to exercise pricing discipline and support activity levels while delivering superior value to our customers. NDS is an integral element in this approach. In the international market, we have growing visibility to additional near term rig deployments. Pricing on these pending deployments is attractive, reflecting the strong conditions we see across the international domain. We surveyed the largest Lower forty eight clients at the end of the Q1.

Speaker 2

Our survey covers 17 operators, which accounts for approximately 45% of Lower 48 working rig count at the end of the quarter. The latest survey indicates this group's year end 2024 rig count will be modestly lower than the total at the end of the Q1. Essentially, all the projected decline relates to announced merger activity. From our past experience, combined activity usually drops immediately after the merger is completed. Over time though, we have generally seen a return to prior activity levels for the combined companies.

Speaker 2

We anticipate the same behavior by our customers following this latest burst of mergers. Aside from the mergers, we believe the clients remain cautious about their plans for 2024, particularly in gas focused basins. Our view of the international market is bullish. With the international additions now in hand, we would increase our international rig count for all of 2024 by 9 rigs. That's up by 2 versus the 7 we had previously announced.

Speaker 2

So 7 is now 9 for 2024. And for 2025, we have 6 expected deployments, including 5 in Saudi Arabia and 1 in Argentina. The prospective Middle East rigs would add 3 on top of that 2025 total. Next, I will share other notable recent highlights and accomplishments in addition to the rig awards in Argentina. Canrig received an order from an existing client in the Middle East for 6 land drilling packages.

Speaker 2

This order demonstrates Canrig's outstanding reputation in the international land markets. It also evidences the wide breadth of the international expansion. And in the Lower forty eight, a drilling contractor has begun standardizing its entire fleet to Nabors Rig Cloud Platform. This development is a significant endorsement of Rig Cloud and it clearly demonstrates the value of Nabors' 3rd party strategy. Let me finish my remarks with the following.

Speaker 2

Our performance in the Q1 exceeded our expectations. We are making meaningful progress capturing the significant opportunities in our international markets and for advanced technology. Now let me turn the call over to William, who will discuss our financial results.

Speaker 3

Thank you, Tony, and good afternoon, everyone. During the Q1, our global markets continued to diverge with a strong expansion driving international markets, while the U. S. Maintained its flat to downward trend. Our international rig count improved as we deployed rigs in Saudi Arabia and Algeria.

Speaker 3

At the same time, we were awarded 3 rigs in Argentina and in another tender in the MENA region, pending finalization of the technical review, we were successful commercially in an additional 3 rigs. The U. S. Market somewhat disappointed with fewer rigs added than we targeted, but pricing was higher than we anticipated. And despite the weakening industry rig count in the Lower forty eight market, Drilling Solutions and Rig Technologies beat our forecast.

Speaker 3

Revenue from operations for the Q1 was $734,000,000 compared to $726,000,000 in the prior quarter, a 1.1% improvement. U. S. Drilling revenue increased by 2.3 percent to $272,000,000 primarily driven by additional activity in Alaska. Lower forty eight drilling and offshore drilling also contributed to the increase.

Speaker 3

Our average rig count in the Lower forty eight was 71.9, an increase of 1.6 rigs sequentially. Average daily revenue held at approximately $35,500 Revenue from our International Drilling segment was $349,000,000 a 1.9% improvement over 4th quarter results. This increase was driven by a new build startup in the 4th quarter and operational improvements in Saudi Arabia, as well as deployments of the first two of 4 rigs awarded in Algeria. Revenue from Nabors Turning Solutions declined sequentially by $1,500,000 due to lower activity in the U. S.

Speaker 3

Lower 48 market. Despite flat average industry rig count in the U. S, we grew NDS sales on Nabors rigs by 3.6%. We also expanded our presence in international markets by almost 2%. Rig Technologies revenue decreased by $9,100,000 or 15.4 percent following strong seasonal year end deliveries.

Speaker 3

Turning to EBITDA and the outlook. Adjusted EBITDA for the quarter was $221,000,000 compared to $230,000,000 in the 4th quarter. EBITDA in U. S. Drilling increased to $120,000,000 from $118,000,000 a 2% gain compared to the prior quarter, driven by higher activity in Alaska and higher Lower 48 rig count.

Speaker 3

However, a slight reduction in daily margins somewhat offset these gains. Lower 48 drilling EBITDA decreased slightly. The Lower 48 results demonstrated the ongoing trends of the 4th quarter. Average rig count of 71.9 reflected an increase of nearly 2 rigs from the prior quarter in a market that is continuing to exhibit high levels of activity churn. Ultimately, the pending E and P mergers should result in a healthier and more sustainable Lower forty eight environment.

Speaker 3

However, in the short term, these consolidations have put pressure on the total rig count as operators absorb their acquisitions. In addition, gas focused drilling has continued to weaken. We anticipate our rig count in this market to average approximately 70 for the Q2. The leading edge price environment continues to be stable and our average daily revenue held up well. Our efforts to limit costs remain effective.

Speaker 3

Average daily rig margin at $16,011 was a moderate $2.29 below the prior quarter. For the Q2, we project our average daily rig gross margin at approximately $15,500 With leading edge revenue per day in the low to mid $30,000 range, the expected sequential reduction reflects repricing of renewals. On a net basis, Alaska and the U. S. Offshore businesses performed better than we anticipated.

Speaker 3

In the Q1, the combined EBITDA of these two operations was $21,400,000 an increase of $2,700,000 This improvement was primarily driven by activity in Alaska. Combined EBITDA for Alaska and U. S. Offshore in the second quarter should be similar to 1st quarter levels. International EBITDA decreased by $3,000,000 or 2.9 percent to $102,500,000 Average rig count increased to 81 in the Q1 from 79.6, reflecting the start up of a new build in Saudi Arabia and the commencement of 2 rigs going back to work in Algeria late in the quarter.

Speaker 3

The gain in rig count was offset by a $600 deterioration in daily margin reflecting a union strike in Colombia. During the quarter, we saw the commencement of recertification work for several rigs recently renewed in Saudi Arabia. Process normally results in some lost revenue. For the Q2, we project international average rig count to increase between 2 to 3 rigs, driven by the full quarter impact of the recent additions in Saudi Arabia and Algeria as well as start ups for incremental rigs in those countries. For average daily gross margin, we are targeting approximately $15,700 The anticipated modest decrease as compared to the Q1 primarily reflects an increase in lost revenue from continued recertification activity in Saudi Arabia.

Speaker 3

Drilling Solutions adjusted EBITDA declined by 7.9 percent to $31,800,000 in the first quarter. The Q4 of last year was particularly strong with several projects that came to an end late in the year. Gross margin for NDS was almost 52%. While we saw some softness in the Lower forty eight, we continue to see increased penetration in international markets. Internationally, NDS EBITDA grew by over 7% sequentially.

Speaker 3

We expect 2nd quarter EBITDA for Drilling Solutions to come in essentially in line with the Q1. Rig Technologies generated EBITDA of $6,800,000 a $2,000,000 decline versus the Q4 mainly related to lower capital equipment and parts sales. Normally these items are seasonally strong at the end of the year. We expect Rig Technologies EBITDA in the 2nd quarter to increase by approximately $2,000,000 Now turning to liquidity and cash generation. In the Q1, free cash flow as we anticipated was slightly above breakeven.

Speaker 3

As I have mentioned previously, the Q1 for Nabors has the heaviest cash outflows. In the Q1, we incurred several annual payments, including property and other taxes, as well as employee incentive bonuses. Together, these payments, which did not recur during the remainder of the year, amounted to approximately $23,000,000 In addition, interest expenses on our senior notes are higher in the 1st and third quarters of the year. Capital expenses of $112,000,000 including $35,000,000 for the SANAD Newbuild program were a bit lower than forecast, but collections of customer receivables in certain large international markets were sluggish and offset the lower CapEx. For the Q2 of 2024, we expect capital expenditures of approximately $190,000,000 including roughly $70,000,000 for SANAD newbuilds.

Speaker 3

We had expected the Q1 to be the high watermark for CapEx for this year. However, some of the spend anticipated to occur in the Q1 for Latin America, Saudi Arabia and the U. S. Started lower than we had targeted. For 2024, we anticipate full year capital spend to total approximately $590,000,000 The increase as compared to 2023 reflects higher maintenance CapEx and increased international rig count and preparation expenditures for a significant number of international awards from recent tenders and negotiations.

Speaker 3

Although CapEx from these recent awards should weigh on our free cash flow for 2024, we expect these long term contracts to add over $50,000,000 in EBITDA over a full year. In addition, Saudi Arabia EBITDA is expected to increase by another $50,000,000 to $60,000,000 per year as the new build program proceeds. In concluding, I would like to point out that in addition to the international rigs we're planning to deploy in 2024 2025, we still have a number of open international tenders and active negotiations. It's increasingly evident that the remarkably robust international segment should continue to provide us with many more opportunities to redeploy existing rigs. These are coming with high returns and with very short payback periods.

Speaker 3

That being said, we intend to remain prudent. We will remain focused on generating free cash flow and reducing our net debt. 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. As we look ahead, we see significant opportunities. From today, we have 6 rig startups over the remainder of 2024. More are on tap for 2025.

Speaker 2

This group should contribute significant incremental EBITDA over their multiyear contracts. The DPL remaining deployments as of today, we have 10 in Saudi Arabia with 3 in 2024 followed by 7 over 20252026, 3 rigs in Argentina with 2 in 2024 and 1 in 2025 and 1 more in Algeria in 2024. Altogether, these add up to 14 pending deployments. On top of these 14, we have the prospect for an additional 3 in 2025. This magnitude represents a rare opportunity, one that we are committed to capturing.

Speaker 2

Our investment in this environment now provides the foundation for increased free cash flow and greater financial returns in the future. Looking ahead, we are evaluating additional opportunities in Latin America, the Middle East and elsewhere in the Eastern Hemisphere. Each of these opportunities will contribute significant free cash flow. As I've said before, we are able to use existing rigs to capitalize on this environment. In tandem with these rigs, we see very attractive prospects to materially expand the NDS business with limited incremental investment.

Speaker 2

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

Operator

We will now begin the question and answer session. The first question today comes from Dan Koot with Morgan Stanley. Please go ahead.

Speaker 4

Hey, thanks a lot and good afternoon.

Speaker 5

Sorry.

Speaker 4

I just wanted to come back to the free cash flow comments and I appreciate that this year you're kind of at the full run rate for the not new build program. There's a lot of investment required for the wave of deployments that you have of rig deployments that you have coming and you also mentioned the higher maintenance CapEx. But I was just wondering if you can help us think through some of the other components that might impact free cash flow conversion this year outside of the CapEx guidance that you gave us, whether it's working capital expectations, cash taxes, even just if I look over the last 5 years, I think your average net free cash flow conversion is in the kind of 30%, 35% range. Should we be thinking about significantly below that this year? But is that a potentially achievable target in the coming years?

Speaker 4

Just anything you could share to help us think through the free cash line and free cash conversion?

Speaker 3

Thanks. Thanks Dan. That's a good question. I think a lot of people are hoping for some answers on the free cash flow for 2024. So as you know, we had to wait a little bit because we had a few or several important tenders to be decided and certainly needle moving in both EBITDA and CapEx.

Speaker 3

So we hesitated to give something until we had more visibility on those tenders. But what I can do is tell you a little bit the main components of free cash flow for the full year. And the most important is EBITDA. And so we do think that the rigs in the U. S.

Speaker 3

Lower 48 will fall some 6 rigs versus the prior year. We were hopeful to retain the same average rig count in 2024 as we had in 2023, but that just didn't happen. The market just moved down instead of going up as we thought. So that has some significant impact. And in addition, we do think that as contracts roll into the leading edge pricing, which has stabilized fortunately, but as they roll into those new leading edge prices, we're going to see maybe an erosion of $600 year on year.

Speaker 3

And if you look at that, that just math that gives you somewhere in the range of $15,000,000 reduction year on year in terms of the U. S. Fortunately in terms of Lower 48, I'm sorry, but in terms of Alaska and then offshore markets, we're going to see an increase of about $5,000,000 so year on year. So that's a CAD45 1,000,000 reduction for the U. S.

Speaker 3

Internationally, we hope to increase by roughly CAD50 1,000,000 and that's partially due to these new awards, but also the Saudi Arabia increase in activity. So drilling overall on a global scale, it's going to be about $5,000,000 higher than the prior year. Then we think NDS is probably going to be about 5% higher versus the prior year with the U. S. Market being a bit of a drag, but the international market performing very, very strongly.

Speaker 3

And finally, RigTech is going to be like a $10,000,000 improvement year on year. And that is based on the fact that internationally we are expanding quite a bit. Tony mentioned some of the awards we've seen recently, but also energy transition is going to contribute to that number. So all in all, we think that we're going to beat last year's $915,000,000 and the range that we can offer at this point and again take these numbers with a grain of salt. The uncertainty in the U.

Speaker 3

S. Is still high. So we don't really have fantastic visibility given the shortness of the contracts that we have today. And that's a trend for the whole market. But we think $920,000,000 to $930,000,000 is an EBITDA range that we'd be comfortable with.

Speaker 3

And then if you look at the CapEx, interest expense is going to be about $180,000,000 our cash tax about $50,000,000 that takes you somewhere into $100,000,000 plus for the company as a whole. But in that number we have a negative $60,000,000 for SANAD, right. So we're looking to about $160 plus 1,000,000 outside of SANAD for the company as a whole for those numbers alone. Then we expect working capital to provide tailwinds to our free cash flow this year. And of course, I haven't mentioned the prefunding that we get on our CapEx as well that is paid in 2024.

Speaker 3

So if I were to put a number out there, I would say that our free cash flow for the company as a whole would be somewhere between $100,000,000 $200,000,000 in 2024. Now keep in mind that we do have some $60,000,000 that are going to be consumed in Saudi Arabia, in Sanat. So outside of Sanat that number would be somewhere between $160,000,000 $260,000,000 So that's the range of free cash flow that we would have available to bring down our debt in 2024. Does that answer your question, Dan?

Speaker 4

It does. And I think it probably answered a lot of potential subsequent questions as well. So thanks for the super helpful color there. Maybe just a question on international contracts rolling and just I'm trying to think through outside of Sanad and outside of the idle rigs that you're redeploying for the rest of the international fleet that's working right now, I'm basically driving at is 2024 or some year in the future a year where a big percentage of those rigs roll and would have the opportunity to kind of mark to leading edge in those international markets? Or are there years that you call out as being, I guess, significantly above or below, what would be like a normal contract roll if just for argument's sake, the average international contract is 4 years, then 25% of the rigs would roll a year.

Speaker 4

Would you point to this year or any of the coming years as being above or below what the normal contract roll periods would be?

Speaker 2

Looking forward for the next year, we're looking about 20% actually of the rigs are rolling right now. And I think the good news is with that number that given the market and given the amount of tenders out there, I think in terms of repricing, it does offer the prospect of maybe moving up leading edge pricing because all these contracts do require capital and all the capital is going to be at market prices and some of these projects are significant amounts of capital. So I think the whole sector is actually being pushed internationally up to market pricing and that's good for us. So that right now that would be a number I would refer to about opportunity to reprice about 20% of the fleet.

Speaker 4

Awesome. That's exactly what I was driving at. Thank you very much. I'll turn it back.

Operator

The next question comes from Keith Mackey with RBC Capital Markets. Please go ahead.

Speaker 6

Hi, good afternoon and thanks for the color on the EBITDA and free cash flow, definitely super helpful. First question is just in Argentina, so you've got the 3 new rigs you're sending over there. Can you just discuss what you're seeing in that market generally? Where are rig counts trending and activity levels trending and what is the spec of rig you're sending down to Argentina?

Speaker 2

Well, I think Archie has been a great success for us because we've exported our technology in the U. S. Today. And right now the rigs that are going down are what we call the F rigs, which are 1500 horsepower rigs with a higher hook load than a normal 1500 horsepower rig. And the performance there has been outstanding.

Speaker 2

And so that has gained us a great credibility in the marketplace there. I think the good thing about the Argentina awards is the fact that the next 3 are going to be redeployed out of the U. S. So that obviously shrinks the asset base here and shows that we have other advantages, other ways to redeploy that capital. And the second point is these contracts actually are going to have a significant component in U.

Speaker 2

S. Dollars, which is also a big change in terms of where we are to make makes us even more optimistic about the market down there. So in terms of the RCC contracts in general, I think the backlog for those those three contracts would be about revenue backlog about $230,000,000 just to give you a frame of reference. And as I said, I think the performance that we've demonstrated down there, we've now oriented the whole marketplace to NDS as well, which has really been a good driver for us. So it's not just the rig, but also our software applications and managed presser drilling and casing running integrated into the rig are actually gaining a lot of traction there.

Speaker 2

And I think we have really good market positions on both those in the country. And that's a real success story. It's a real conversion from this for a way that the markets looked at a drilling contractor. And that's what's driving some of the move to shift the stuff to work to Nabors.

Speaker 6

Awesome. Appreciate the comments there. Just sticking with the international markets, so the guidance for daily margin in Q2 is about $15,700 per day. I think you made a comment about getting that to 17,000 by end of the year. Can you just give us a bit of a bridge in terms of how you get there?

Speaker 3

So Keith, as I'm sure you've learned by following our results, When you have a significant burst of deployments, you have to automatically be a little bit cautious on what sort of guidance you put out there for the margin because it's always shakedown periods and things like that and that hurt the margins a little bit. So we are trying to be a little bit cautious. We do have some more deployments coming and some recent deployments. A lot of rigs are being added to our fleet in the first and second quarter. So that's part of that.

Speaker 3

But there is also the fact that we renewed contracts in Saudi Arabia recently. And as part of that commitment, we have to do some recertifications of multiple components in the rig and that takes a couple of weeks away from each of those rigs in terms of revenue generation. So we are being in this in the first half of the year, we do have some things that are going to disappear in the second half as all those deployments are completed in Saudi Arabia and Algeria. And at the same time, the rigs in Saudi Arabia do have significantly higher margin potential than our legacy rigs. They tend to be on the near the top of margin generation, particularly the new rigs that we're deploying as part of our agreement with Saudi Aramco.

Speaker 3

So those are the main drivers. So we do have a little bit of extra cost in the first half. And secondly, the rigs coming in, in the second for the full year, they're going to be fully impacting our results in the 2nd part of the year do have higher profitability than our legacy rigs.

Speaker 6

Okay, thanks very much. That's it for me.

Operator

The next question comes from Kurt Hallead with Benchmark. Please go ahead.

Speaker 5

Hey, good afternoon everybody. I appreciate all that color and detail on the EBITDA and the free cash flow. So I guess, look, the international markets, right, are clearly strong and you have a lot of opportunities as you look out into 2025 and 2026. I'm just trying to reconcile something you guys said about $50,000,000 to $50 plus 1,000,000 of incremental EBITDA. Again, this is more like going out into 2025 than what you just said for 2024.

Speaker 5

So, Kate, just to kind of help out in that context, you've got 5 new Saudi rigs and those 5 rigs could add $50,000,000 in EBITDA and then you got another handful of rigs outside the Saudi that could add another $X,000,000 of EBITDA. Can you just kind of help connect those dots?

Speaker 2

Let me just do some gross calculus here, put it this way. So the Argentine rigs, what the Algeria rigs represent about $300,000,000 in backlog. And just by way of background, those the investments there and those rigs have around a payback of about a 2 year payback, okay, on those rigs. Then when you layer on top of that, the Saudi rigs, which have a backlog of about $1,100,000,000 and the shortlist assuming we got the shortlist that's $230,000,000,000 $230,000,000 rather that represents the backlog. The entire package of all those rigs combined when they're all on board would be an EBITDA run rate of at least $125,000,000 by the end of 2025.

Speaker 2

That's why we're so excited. That's great.

Speaker 5

And that $125,000,000 obviously on top of your base of whatever you're going to do in 2024. Okay? Correct. Yes. All right.

Speaker 2

Obviously, it depends on the market stays stable and all the stuff is truly incremental, but yes, that's all these things are incremental. So yes.

Speaker 5

Okay, great. And then, so in the context of the prospects of taking idle rigs and moving them internationally, how many just in aggregate, right, if take beyond even what you already know you're potentially going to be moving, but how many idle U. S. Rigs or feasible options to be upgraded and sent internationally?

Speaker 2

I think at the kind of numbers that we're talking about, I mean, I think if you listen to what I just said, our payback on adapting these rigs is less than 2.5 year payback to move our rig into the international, these type of rigs. And I think we have another 10 of those available. So depends of course on the market, depends on every market is different and every market has different BOP requires which drive this cost higher. But generally, we have about 10 more rigs that fit easily into the international marketplace from the U. S.

Speaker 5

Okay. That's great. And it kind of gets to the crux of the question, Tony, which was then beyond those 10, it would then require, I would assume, it would require some element of new build, right? And number 1, it's

Speaker 3

not true. No, I know, sir.

Speaker 2

I'm just giving you the numbers as a low hanging fruit. I think we have a bunch of iron out there and the pending one that we've we're in process hopefully of concluding right now the 3 that I'm talking about, those rigs are actually in country. So it makes it even easier for those. So yes, we have additional assets internationally as well, not just in the U. S, but U.

Speaker 2

S, it depends on the opportunity. Some if it's deep gas with heavy BOP stuff, then you needed an existing international rig. If it's something more like a version of the unconventionals like in Argentina, then we could take one of our prime U. S. Rigs and move it down there without a lot of incremental expense.

Speaker 2

So it's really different. You can't just it's not a one size fits all kind of concept. It's more complicated than that.

Speaker 3

And by the way, it's not that the rest of the rigs could not be transferred. The reason where we say 10 is because the remainder of the fleet is more adapted and has been adapted to U. S. Drilling. So we wouldn't want to transfer those at this point.

Speaker 3

But the other ones can also perform very well in the U. S, but have some characteristics that make them more adaptive and easier to move to international markets.

Speaker 5

That's great. I appreciate all that. Now one follow-up, so there's been a lot of discussion about the prospect of incremental rigs needed in the U. S. To satisfy the LNG export capacity coming on at 2025.

Speaker 5

And then there's been a lot of discussion here late about incremental gas demand needed for the data center build out. You guys got any rough numbers as to what the incremental rig demand could be from those two factors?

Speaker 2

I would say at this point is pure speculation. I mean, we believe in the thesis that the export market is real on LNG. We believe in the macro thesis about the drivers for gas globally and in particular for growth in non OECD countries and particularly in terms of gas in particular for AI, I mean, if you look at the electricity production in the U. S. For the past roughly 15 years, I think it's been relatively flat and that's because we've been able to rely on efficiencies in use of electricity to offset the demand.

Speaker 2

But with this new AI stuff that's coming out is so intensive that I think the only clear answer is actually for base load power is in fact gas. The announcement today about Amazon, I think on the data centers that they're doing and these data centers are going to be huge consumers. And therefore, we think we as I said, these are all reasons why we really strongly believe in it. And we've been disappointed that it has happened earlier. But we think as you go through this year, we think it should become more visible.

Speaker 2

And obviously, we're well positioned to handle that. Our gas picks have obviously moved dramatically from where we were back in beginning of last year to today. And that market today is probably that the Haynesville and the Northeast are the 2 most challenged markets in terms of Lower 48 right now in terms of activity. And but for the reasons you're identifying, I think the prospects are bright going forward.

Operator

That's great.

Speaker 3

I appreciate it. Even with all the transfers that we have made and are making of rigs out of the U. S, we still have a significant number of rigs that we could ramp up in the U. S. With very limited costs and very short lead times.

Operator

Appreciate that guys. Thanks. The next question comes from Derek Podhauser with Barclays. Please go ahead.

Speaker 5

Hey, I just was hoping you guys could refresh us on your exposure in the Saudi Arabia market, specifically gas versus oil and more specifically the unconventional gas, given this looks like an area of growth in the kingdom. So just maybe some more comments around your growth prospects in that unconventional gas play that's being built out there.

Speaker 2

Okay. Well, today we have roughly 80% of our rigs are in gas and of that 80%, about just doing the cat phantom head here, about 20% of the 80% is in the unconventionals today of what we have and that the unconventionals, obviously, all the new builds that are being built are all can be yes directed, it's up to a ramp or where they want to put them. So far they haven't moved many of them to be unconventional because they have so many other needs right now, but obviously we can easily handle that. So of the footprint for us today, 80% is in gas and the market as a whole, I think the numbers were onshore today, conventional is 84 gas, unconventional is 22 and exploration 37, oil is 70. So it gives you an idea of what how the market breaks down right now.

Speaker 3

Let me make a comment though on the 20%, most of those could be redeployed to gas activity. We really do have the strongest fleet in terms of gas capabilities and deep high pressure wells in the kingdom.

Speaker 5

Got it. That makes sense. So no issues as far as being able to move your existing equipment over there to unconventional fields, if that's where the demand pulls you, those rigs are ready to go and just then it could be slotted either conventional or unconventional?

Speaker 2

Absolutely. Absolutely.

Speaker 5

Okay. Great. That's helpful. And then a question for you, William, on the $590,000,000 of CapEx, any could there be any upside to price of that? Does that feel contained at this point?

Speaker 5

Or how should we think about potential moving pieces that could push this higher outside of maintenance CapEx with activity, but anything on the horizon that's behind the scenes that could surprise to the upside?

Speaker 2

Obviously, international basket, like I was referring to is robust still. I think at the end of the third quarter, I told people there were about 55 opportunities in the marketplace that we were looking at, sorting through. And at the end of the Q4, that number was around 53, a little bit decline. Today that number is 30. So there's still 30 out there.

Speaker 2

And obviously, we sort through them and we'll see if anything really fits. And like the last person that asked the question, obviously we have some equipment that could be really deployed attractively. But right now, our hands are pretty full of what we got, but we'll still be evaluating that. But the good news is that, that pipeline does show the robustness of the market and that number outstanding demonstrates how broad it is. And as I said in my remarks, I think the Canrig award is another example of that showing how deep this recovery is in the international rep cycle is.

Speaker 3

And in terms of the pricing on the CapEx, I think the fact that we manufacture a lot of those components, those have relatively long lead times. We are pretty much set for the pricing this year. We were not that concerned about pricing increases on CapEx components at this point.

Speaker 5

Got it. Appreciate the color guys. I'll turn it back. Thanks.

Speaker 2

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to William Conroy for any closing remarks.

Speaker 1

Thank you everyone for joining us today. If you have any questions, please follow-up with us. Betsy will wrap up the call there. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Nabors Industries Q1 2024
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