Nabors Industries Ltd. (NBR) Q2 2021 Earnings Report, Transcript and Summary

Good day. And welcome to the Q2 2021 Nabors Industries Ltd. Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining Nabors’ second quarter 2021 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. With us today, in addition to Tony, William, and myself, are Siggi Meissner, President of our Global Drilling Organization and other members of the senior management team. Since much of our commentary today will include our forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 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 free cash flow. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA, as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, references to cash flow mean 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 to GAAP measures. With that, I will turn the call over to Tony to begin.

Good morning. Thank you for joining us as we review our results for the second quarter of 2021. This morning, I will begin with overview comments. Then I will follow with highlights from the quarter and the discussion of the markets. William will discuss our financial results. I will make some concluding remarks before opening up for your questions. Let me start by saying our operations performed quite well in the second quarter. We also made significant progress across multiple strategic initiatives. Adjusted EBITDA in the second quarter topped $117 million. Execution across all of our segments was strong. Our global rig count for the second quarter increased by seven rigs driven by growth in the U.S., drilling an International segment. Once again, we made progress on our priorities to generate free cash flow and reduce net debt. Free cash flow in the quarter approached $70 million after funding CapEx of $77 million. These results for the second quarter exceeded the expectations, which we laid out on our last conference call. Net debt improved by $58 million in the second quarter, driven by our free cash flow. I am very pleased with our financial performance through the first half of 2021. I am looking forward to reporting further progress over the balance of the year. Next, I would like to highlight five key focus areas as you think about Nabors. First, our leading daily margin performance in the Lower 48; second, the upturn in our International business; third, improving outlook for our technology and innovation; fourth, progress on our commitment to delever; and fifth, our progress in ESP and the energy transition. Let me start with Lower 48 drilling margins, the margin performance in this core business remains strong. Daily margin once again achieved $7,000 mark. Clients realized value from our leading fleet capabilities and field performance. We maintained our disciplined approach to pricing as we deployed rates. This unique combination is responsible for these robust results. Another way to look at our performance is to combine our drilling margin with the market generated by NDS in the Lower 48. That increment amounts to approximately $1,900 per day. So we’re generating almost $9,000 per week per day on this basis. As you compare results and business models from our peers across the industry, we think it’s important to consider this point. Next, our International business, our financial results benefit from our historic pricing discipline and our performance in the fields. Coming out of the pandemic, significant improvements have occurred in Argentina, Colombia and Russia. These markets collectively account for approximately 25% of our International rig count. Saudi Arabia has seen an upturn in activity. We currently have 38 rigs working in the Kingdom. There’s potential we have a few additional rigs before the end of the year. In addition, our standard joint venture has been awarded five newbuildings today. These five units are expected to be deployed at approximately one per quarter starting in Q1 of 2022. They’re estimated to contribute approximately annualized EBITDA exceeding $50 million. As you know, there’s a long-term plan by Saudi Aramco to add successive generations of five rigs per year for an additional 45 rigs. The Saudi Aramco procedure this plan, we expect a similar EBITDA contribution in each successive year. These newbuild rigs and their economics were one of the main attractions for our participation in the joint venture. Next, technology and innovation. Our technology pipeline remains full. NDS’ penetration on our all Lower 48 rigs with at least five services exceeded 70%. On third-party rigs, we are seeing strong growth and penetration. Revenue on third-party rigs increased sequentially by more than 50%. Growth occurred across most of the service lines. The third-party rig market remains fertile for NDS. We are investing to ensure that our products are rig agnostic, even though the full potential of the NDS product suite is still maximized when run on Nabors rates. For NDS in total, we are expanding our digital platform and expect to see greater penetration of these products across the market. Now, let’s discuss delevering. We had quite a bit of significant news on this topic recently. We completed the program of distribution of equity warrants to our shareholders. This innovative structure places value in the hands of our equity holders. The warrants can be exercised with cash or certain of our outstanding notes. This transaction could result in substantial delivering of our capital structure. We also signed an agreement to sell our Canadian drilling assets. This sale will result in cash proceeds of approximately $94 million, plus we will liquidate the working capital in the business. With this deal, we pull-forward multiple years of free cash flow, which we can deploy into our strategic priorities. In summary, we’ve made material progress even through the downturn. We look forward to making additional headway in the future. I’ll finish this discussion of our highlights with ESG and the transition. We continue to refine and enhance our focus on ESG. We recently updated our Annual ESG Report with additional disclosure. This drove a 2-point improvement in our environmental score from ISS. In addition to the environmental performance, we also recorded improvements in several categories of our social score. Our position in the energy transition also began to take firmer shape. Our strategy here is fully supported by the Nabors’ Board and our investors. The scale of the energy transition opportunity is potentially huge. We believe it holds very attractive prospects for Nabors in two broad areas; first, to optimize the environmental footprint of our own operations; and second, to drive the transition in adjacent markets. Significantly, we believe our global footprint, technology and scale can be applied to drive initiatives in the transition space. For example, we are working both to reduce our own carbon footprint and to acquire expertise in the border energy market. We have exclusive agreements to market multiple fuel additives, which materially reduce fuel consumption and emissions of our own large diesel engines, as well as other fleets. We have also identified adjacent areas which we think are synergistic with our core operation. These include, investing in several early-stage geothermal energy companies. We believe the geothermal market holds enormous promise as a source of baseload renewable power. These ventures will enable us to deploy our expertise into this burgeoning field. We expect to realize investment returns to measure with the opportunities. We recently agreed to license innovative IP in the carbon capture area. The target markets are in drilling, as well as other verticals. We’re excited about the technology, which we see ultimately reaching beyond the oilfield, so stay tuned. We are evaluating a variety of investment structures in the energy transition. Our intent is to enable our participation across the spectrum of investment opportunities. We are confident in our ability to participate in and ultimately help drive the energy transition. We think this is a compelling opportunity. Now, I will spend a few moments on the macro environment. The quarter began with WTI just below $60. But early June WTI broke above $70. Since then it has climbed to mid-$70s and fluctuated between there and the high $60s. This range should be conducive to increases in drilling activity across markets. Next, I’ll review the rig count. Comparing the averages of the second quarter to the first quarter, the Baker Hughes Lower 48 land rig count increased by 16%. According to Inverness [ph], from the beginning of the second quarter through the end, the Lower 48 rig count increased by 31 or approximately 6%. The growth rate amongst smaller clients significantly outpaced the growth in larger operators at 8% versus 2%. With our focus across the spectrum of clients, our average working rig count in the second quarter increased by 21%. This comparison excludes rigs stacked on rate. Our total average rig count increased by seven rigs, while the number of rigs stacked on rate declined by four. Once again we survey the largest Lower 48 clients. This group accounts for approximately 35% of the working rig count. In comparison, on the last call, the same group accounted for 40% of the working rig count. Our review of the clients show a modest uptick in activity plan for the balance of 2021. In our international markets we saw demand increase about as expected. In our served markets we gained incremental share in the second quarter, as activity levels in those markets continue to recover from their pandemic lows. To sum up, commodity prices have risen significantly as global economic activity increased. In the current range, oil prices generate acceptable operator economics in virtually all areas where we operate. With that in mind, we remain vigilant to the potential impact of a resurgence of the virus. That risk, notwithstanding, the current commodity environment remains conducive to increased drilling activity. Now, let me turn the call over to William who will discuss our financial results and guidance.

Thank you, Tony, and good morning, everyone. The net loss from continuing operations of $196 million in the second quarter represented a loss of $26.59 per share. Results from the quarter included a net loss of $81 million or $10.80 per share related to one-time impairments, which were largely attributable to the sale of our Canada Drilling assets and to reserves for tax contingencies in our International segment. Second quarter results compared to a loss of $141 million or $20.16 per share in the first quarter. Excluding the previously mentioned one-time items, the $26 million quarterly improvement primary reflects better operational results, as well as lower depreciation and income tax expenses. Revenue from operations for the second quarter was $489 million, a 6% improvement compared to the first quarter. Revenue continues to increase quarterly with a higher commodity prices. Revenue for all of our segments increased substantially both domestically and internationally, with the exception of Canada, which experienced its normal seasonal downturn. Total adjusted EBITDA expanded by almost $10 million to $170 million for the quarter. This was significantly higher than we anticipated, primarily reflecting the strong increase in revenue across our markets. This quarterly improvement is part of a trend that we expect to continue during the second half of the year. U.S. drilling adjusted EBITDA of $59.8 million was up by $1 million or 1.7% sequentially on a 14% increase in revenue. Although, our rig count increased, our average margins fell in the Lower 48 market. Lower 48 performance was in line with our expectations. Daily rig margins came in at $7,017, falling within our expected range. Nonetheless, leading edge day rates have inflected and high quality regularization continues to increase with markets tightening for those rigs. For the third quarter, we expect average daily rig margin to remain stable with second quarter, as market day rates continue to grind upward. Second quarter Lower 48 rig count averaged 63.5, a quarterly increase of 13%, which was somewhat above our expectations. Currently, our rig count stands at 67. We forecast an increase of four to six rigs in the third quarter versus the second quarter average. Adjusted EBITDA from our other markets within the U.S. Drilling segment improved moderately. For these markets in the third quarter, we expect to remain at the second quarter levels. International adjusted EBITDA gained almost $9 million in the second quarter or 14% sequentially. The improvement came primarily from higher activity markets with larger rigs, principally Saudi Arabia and Colombia, and generally strong operational performance in the eastern hemisphere. In the quarter, as anticipated, we experienced some headwinds in Mexico that we expect to persist into the third quarter. We continue to move rigs between platforms to accommodate modifications to the activity profile of our customer. We believe these changes in activity are linked to the higher commodity price. The unfavorable impact to our margins from these moves was $3.7 million in the second quarter and is forecast at $6 million in the third quarter. Also, we lost $1.9 million of revenue in the second quarter related to the general strikes and unrest in Latin America. Despite this friction, International delivered a strong quarter. Average rig count increased in line with expectation by 3.5 rigs to 68.3 or 5%. Current rig count in the International segment is 68. Daily gross margin for International increased by over $500 to 13,420 in the second quarter, beating our expectations by more than $900. The second quarter included approximately $900 per day in loss margin from the moves in Mexico and unrest in Latin America. Turning to the third quarter, we expect International rig count to decrease slightly by one to two rigs, as two of our rigs move between clients. We forecast our average daily rig margin to remain in line with the second quarter. Our third quarter forecast includes approximately $1,000 in early termination fees from one of our rigs offset by additional loss margin from the moves in Mexico. As anticipated Canada adjusted EBITDA of $3 million, fell by $6.7 million, reflecting the seasonal spring breakup. At this point, we expect to close the divestiture of our Canada Drilling assets by the end of the month. In the third quarter, we will include one month of activity for our Canada Drilling operations before the closing of the transaction. Drilling Solutions adjusted EBITDA of $12.8 million, was up $1.3 million in the second quarter and a 10% revenue increase, trending positively in all product lines. Most notably, improved performance software and casing running services. Penetration of the performance drilling software in the Lower 48 and TRS internationally strengthened, driving the improvement. Lower 48 gross margin for Drilling Solutions segment totaled $8.9 million for the second quarter. This comes on top of our Lower 48 Drilling gross margin of $40.5 million. We expect adjusted EBITDA in the third quarter to improve on the strong second quarter results. Rig technologies generated adjusted EBITDA of $2 million in the second quarter, an improvement of $2.6 million on a 34% revenue increase. The growth was primarily related to higher repairs and equipment sale. For the third and fourth quarters adjusted EBITDA should move gradually upward on improved capital equipment sales. Now, I will turn to review our liquidity and cash generation. In the second quarter, total free cash flow was $68 million. This compares to free cash flow of approximately $60 million in the first quarter. Our cash generation was driven by improved collections and lower semiannual interest payments, offset by higher capital expenditures and other outflows, mainly annual insurance premiums. Capital expenses in the second quarter of $77 million were up from $40 million in the first quarter. These amounts include investments for the SANAD newbuilds of $32 million and $8 million for the second quarter and first quarter, respectively. In the third quarter, we forecast $80 million in capital expenditures, including $35 million for SANAD newbuilds. Our targeted capital spending for 2021 continues to be around $200 million, excluding approximately $100 million required for Saudi newbuilds. Free cash flow for the third quarter should total around $10 million to $20 million, excluding proceeds from the Canada divestiture and moderate strategic transaction outflows. At the end of the second quarter, our cash balance closed at $400 million and the amount drawn on our $1 billion credit facility was $558 million. Our net debt on June 30 was $2.4 billion, down from $2.9 billion at the start of the pandemic. We will continue to prioritize our future cash generation to debt reduction until we reach our leverage targets. We previously announced the distribution of warrants to shareholders. By the end of the quarter we had seen a small amount of the warrants exercised with notes. This transaction is another demonstration of our commitment to delevering. Putting things in perspective, the last 15 months have probably been some of the toughest Nabors has faced. Activity dropped across the globe driven by industry fundamentals and COVID shutdowns, our rig count plummeted and our leading edge pricing dropped. Despite that, we maintained our EBITDA at levels higher than the combined EBITDA of our three closest public competitors. These results were the fruits of absolute focus and cost control and capital discipline. While we have also benefited from our overall strategy of maintaining the highest quality fleet with leading drilling performance, driven by our investments in automation, software, remote operations and data infrastructure. As a result of our new revenue profile, our capital expenditures as a percent of revenue have dropped. In addition, our international business has delivered once again, by helping us to much better absorb the sharp drop off in U.S. activity in comparison to our competitors. Together with our superior operational results, we generated meaningful cash flow for the past 15 months, while also reducing our net debt by $500 million during the period. Despite the headwinds at the beginning of last year, just before the pandemic, we also issued $1 billion of new long-term debt to address near-term maturities. And we then renegotiated our credit facility during the worst of the pandemic to avoid potential covenant breaches and allow us to complete a material debt exchange transaction at the end of last year. I am convinced we have been good stewards of our shareholders capital during the toughest of times. As we now launch a significant new initiative into the rapidly expanding field of new energy, we will maintain our commitment to absolute capital discipline and continued debt reduction. As you may have seen from recent announcements, despite the scope of our initiatives, we have limited our cash deployed into these activities. We have restricted ourselves to placing minority investments with companies adjacent to our own business. And we have signed alliance agreements with these companies to help them develop their technologies. In concluding, I would like to emphasize something, despite our aspirations to develop our clean energy initiatives into a significant portion of Nabors’ portfolio over time. We will retain our capital discipline, as well as our focus on cash generation and debt reduction. With that, I will turn the call over to Tony for his concluding remarks.

Thank you, William. I will now conclude my remarks this morning with the following. These second quarter results on the top core [ph] performances in the first quarter reinforced that our strategy is working and we’re making progress toward our goals. Once again, we made significant headway to delever. At the same time, we advanced our imperative to provide better execution with our portfolio of leading edge technologies. The resilience of our financial results through the depths of COVID and now into the recovery is testament to our robust portfolio of businesses. This process began years ago, as we continually reevaluate the portfolio. We sold assets and businesses, pressure pumping and well servicing most notably, and now we’re investing in digitalization and automation and the transition. This act of management has served us well and we expect it to continue. We have entered a new phase in the evolution of the global energy industry. Nabors has played a key role throughout the development of the drilling industry. We are investing now to extend this leadership in the future. That concludes my remarks this morning. Thank you for your time and attention. With that, we will take your questions.

Thank you. [Operator Instructions] Our first question comes from Taylor Zurcher with Tudor, Pickering, Holt. Please go ahead.

Hey, everyone. Thanks for taking my question. My first one is on International, the guidance for Q3 was pretty clear from an activity perspective. But as we think in the back half of the year, you talked about a couple more rigs in Saudi, excluding the newbuilds potentially going back to work and as OPEC Plus starts to rollback some other production curtailment? I suspect activity in some of the core GCC countries is likely heading higher into the back half of the year. So just curious if you could frame for us, maybe thinking into Q4 and beyond, just any high level thoughts on how we should be thinking about the cadence of international activity and momentum from here?

Well, what we currently have some visibility as we reported last quarter, in Saudi I think toward the end of the year there should be an additional three rigs and possibly two more earlier in 2022. I think it’s fair to say, given today’s climate and the decline in prices, we are seeing a lot of robust activity across the region there, particularly in the Emirates, as well as in places like Kazakhstan. So activities generally is picking up, it’s all conducive to entering in 2022 with an uptick in activity, places that’s across the Board, both in the Middle East, as well as in South American as well. So I think all the signs are positive looking forward to 2022. And as I said, we have visibility on several rigs right now looking towards the end of the year.

And I think one thing we have noticed in the market right now is that there’s been an uptick in tendering activity by clients. So we have more tenders and some of them quite significant, outstanding that we had. We’ve had in a long time.

Okay. Understood. Thanks for that. And my follow-ups around the newbuilds the $10 million of annual EBITDA contribution is pretty clear, and certainly, probably, our margin accretive to the current business. My question is more around NDS and how that might fold into some of these saw on newbuilds? Is -- do you have the ability to fold in some of the various products and services around NDS into those newbuilder rigs moving forward? And maybe just more broadly speaking, how do you think about the pathway from here for further international penetration within NDS?

Yeah. It’s excellent point. I think the expansion of NDS is now on our target radar for international really, it’s very hot for us right now. And it’s going to be two-fold. One, on -- in Saudi Arabia, in particular, our existing rigs, the NDS needs the platform, those existing rigs to be upgraded and we’re looking at that as the base case. And second, the newbuilds will provide a platform to add the NDS services to them. So Saudi, in particular, is a target market for NDS, but regionally I think as well, there’s a high degree of interest from other players in the region to duplicate the scale and optimization been going on in the U.S. And a lot of the operators in the -- in particularly the LCs [ph] want to get to a level of performance that duplicates that and NDS is viewed as a key element of that. So that’s one thing that we’re pushing really well. We’ve had some success with NDS already in Argentina. We’re working for a super major down there and NDS on some of the rig they have produced incredible performance gains for them. So NDS, as you know, particularly with our latest automation, our SmartDRILL application basically allows operators to automate the entire rig sequence from slip-to-slip, not just off bottom. So it’s a -- it’s something that the other products in the marketplace don’t do and plus it allows the other services to be integrated into a rig. So we think for International markets in particular, these things could really offer a high degree of value for the operator, and obviously, upside for us. So it’s a very high on our priority right now.

All right. Good to hear. Thanks for the answer.

Your next question comes from Dan Kutz with Morgan Stanley. Please go ahead.

Hey. Thanks. Good morning.

Good morning.

Good morning.

Hey. So I just wanted to ask, appreciate the color on pricing and activity in the press release and on the call so far. I was just wondering if you could kind of characterize or kind of juxtapose what you’re seeing in terms of pricing traction in the U.S. versus International markets, and kind of what your outlook is for those two markets moving forward?

Well, I think, the good news is in the U.S. it’s grinding higher on all fronts right now across all the regions. I think it’s fair to say the leading edge rates are moving to high-teens the low 20s. And as you see, we’re getting convergence between our average working rig rate today and the leading edge, which suggests that crossover should occur in the near-term. In the sector as a whole, as you know, you don’t get to a point of inflection till roughly 70% utilization. I think we and others, I think, we’re probably the highest in terms of utilization, super spec rigs right now, I think, we’re at like 61% today. I think some of our competitors are a little less than that. But as we all march toward that 70% utilization number, I think, we will approach the point of inflection on pricing, which is quoting maybe to another round 500 rig count roughly. So, hopefully, we will get there. In the meantime, I think, we had together with the other players was showing some good discipline in the market and they, as you know, constructive. The market in the U.S., obviously, given where we are today, it’s on the market where you’re going to lock up on term anytime soon given where things are. So which actually helps us right now in terms of being able to move our pricing up as things roll march forward. On the other hand, the International market, as you know, the good thing about International is, you have term coverage, so we have a portfolio of contracts in place, and therefore, you’re not going to see the same, you don’t see the same hockey stick up nor the same downside down, which as a company that served us really well in the downturn as we’ve marked, you looked at our combined -- our EBITDA compared to the combined EBITDA of our three largest competitors, we were exceeded that and that’s because of our International portfolio, which doesn’t have that volatility. So the prospect for pricing increases when they are -- your groups don’t termed out to -- at the average to move that quickly, it’s not going to happen. But that’s actually a good thing. That’s robust thing. But I think the good news is as the market does heat up, the quality -- the quantity of available good rigs to come into the market internationally doesn’t exist, in general. In other word, if you want to a new -- if you want to guess rig with all the bells and whistles today 3,000 horsepower rig, those rates do not exist, which means basically, it’s going to force the market to replacement cost pricing, which we think is constructive. So looking out for the International, I think, it directly it’s going to be higher in terms of translating to meaningful numbers is at the margins can be a creative and meaningful, but obviously, the ability to price up our whole fleet is going to be more limited.

But I will point out that all the contracts that were signed recently, internationally are coming in significantly higher prices than the prior signings of say maybe a couple quarters ago.

Got it. Thanks for all that color. And then so just to touch back on SANAD -- quickly on this SANAD newbuild program. So appreciate all the color you guys have shared in terms of capital spending plans this year. Just wondering if there is any kind of range that you could give us in terms of what CapEx might look like on a quarterly basis moving beyond 2021? Like is kind of the second half $35 million per quarter CapEx number, a decent run rate or could there be upside or downside to that, assuming the newbuild program moves on that five rig per year plan pace moving forward?

So the five rigs a year and this time it is relatively easy to estimate, but it does hinge on Aramco providing those drilling contracts, right? So for now, it’s fully based on that, it’s not fixed. We have a guaranteed growth roadmap going forward, how much of CapEx is going to be. We are planning however, so we’re assuming in our plans we’re going to be adding five rigs a year over the next several years and that piece is pretty stable. We know how much the rig cost and how many rigs per year. The rest of our portfolio is really running very reasonably. That’s we said about a $200 million a year in -- for everything exceeding those newbuilds. Now, the CapEx, of course, is also linked to the number of rigs that are operating, we expect those to go up. So certainly next year, the numbers should be somewhat higher than $200 million, but in line with a rigs. We don’t have any major programs to increase our rig footprint. We have sufficient idle rig capacity to continue expanding next year without having to invest in additional rigs exceeding those in Saudi Arabia.

Got it. Understood. Thanks for the color. I’ll turn it back.

Your next question comes from Karl Blunden with Goldman Sachs. Please go ahead.

Hi. Good morning. Congrats on the strong results again this quarter on both EBITDA and the cash flow side.

Thanks, Karl.

Just one question on your slides here, it looks like for the U.S. Lower 48. You mentioned there 64 rigs on revenue of, which high spec are 55. So when I look at that sequentially, it looks like most of the growth is coming outside of high spec. But you’re also reporting increased utilization of the high spec rig. So I was just hoping you could give a bit more color on that dynamic both the sequential change and then what you expect going forward, please?

I don’t know what you’re actually looking at, the rigs -- all the rigs we’re operating today are high spec. So we actually -- and today the rig count is 67 rigs and we have 110 high spec rigs. So it’s 67 out of 110, which is 61% today. They’re all high spec.

Got you. Maybe I’ll follow offline just to make sure I understand the numbers there. With regard to the warrants, you mentioned that a small amount of the warrants were exercised using bonds during the quarter. When you think about this longer term, and obviously, depending on where the share price is. Could you talk a little bit about the conditions under what you’d consider committing the warrants to essentially encourage them to the exercise and accelerate debt reduction?

Well, I think, we need some time to let the mechanism work. So got to step back a second understand what this is all about. Basically, it was a means to allow the discount of the bond to be captured and to be shared with the shareholders. As you know, there is no market available where debt can be easily swapped with equity, don’t have it really happens in bankruptcy and that exchange usually results in the equity guys getting the short end of the stick. So what this really is a way of doing is allowing our shareholders in a normal fashion to be given the opportunity to capture that bond discount themselves through the exercise of the warrants. Now for that to be meaningful, what you got to do is do the calculations with the shares and updates where the exercise price, you get the bonus number of shares, you got to calculate the amount you value of the shares you get if you exercise using the value of the warrants of the bond at face amount. When you do the math, you’ll see that there is a lot of upside for debt holders for debt is trading at a discount to in effect get a premium to that current market price through that exercise. The good news is since it’s been announced there has been a really a huge volume of trading in the warrants. In fact, if you compare our warrant transaction to one that was done by us, I think the first day of trading we would double the amount of activity and volume compared to them. And so I think the warrants are now being put in position where the person owns whether it’s a shareholder, there is always some who is going to think about buying bonds or bondholders for the warrants. I think it’s being positioned that way the stock price gets into the zone, where it’s economic and where there’s upside, that they’ll be positioned to exercise. So we’re obviously not there yet. But as we march when we look at the matrix, once that happens that we’ll see. Once that happens then we’ll assess what the future of the warrants is, but we expect a good portion of the warrants we exercise to capture this discount.

That’s very helpful and certainly in line with the debt reduction goals. Is there any kind of timing element around that and exercise their relative to extending the bank facility or those two disconnected transactions?

That’s a great question. Obviously, we’d like to see where we end up with a warrant transaction and see where our balance sheet stands. We think we’ll be in a better position than we are today. In addition, we have the proceeds from Canada coming in and we think we’ll have a strong second half in terms of free cash flow generation. So I think all those dynamics will help us have a better more constructive discussion with our lenders. So I think -- I don’t think you should expect to see anything with respect to our credit facility within the next couple three months. There’ll be something more towards the end -- towards the fourth quarter, the end of the year. In addition to that, we will also explore options for issuing additional longer term debt to take care of the short-term maturities and maybe term out some of the expanding on a revolver. So those are some of the things you could expect, all that remains open. But, obviously, having a bit of benchmark, once the warrant transaction is completed will give us a better sense of what is achievable.

Thanks. You anticipated a bunch of my questions. Really appreciate the time.

Thanks, Karl.

[Operator Instructions] Our next question comes from Andrew Ginsburg with R.W. Pressprich. Please go ahead.

Hi, guys. Thanks for the color you provided so far. Most of my questions were answered. One clarification I wanted to make was around the proceeds from the Canadian Drilling segment. You guys mentioned that you guys are in use it for key strategic initiatives. Do you have any color on what proportion that’s going to be used for debt reduction versus other key initiatives?

The overriding strategic initiative in terms of cash utilization is debt reduction. So…

Okay.

So that -- we have made a couple of investments, minority stakes in some geothermal companies, but that’s a pretty single-digit number for those investments and -- single-digit in terms of millions. So…

Sure.

… that’s easily accommodated within our existing cash flow. So I would say that the proceeds of Canada are fully going to be used to reduce debt.

Perfect. Thank you. That’s the only outstanding question I had. Thanks for your time guys.

Thank you.

Thank you.

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

Thank you everyone for joining us this morning. That’ll wrap up our call. If you have any follow ups please contact us at Nabors and we’ll end the call there. Thank you.

Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.